Ipstar Australia Pty Ltd v APS Satellite Pty Ltd

[2018] NSWCA 15

Court of Appeal

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:

Ipstar Australia Pty Ltd v APS Satellite Pty Ltd [2018] NSWCA 15

Hearing dates:

29-31 August 2017

Date of orders:

14 February 2018

Decision date:

14 February 2018

Before:

Bathurst CJ at [1]; Beazley P at [268]; Leeming JA at [269]

Decision:

(1) Grant the appellant leave to amend its notice of appeal in terms of the draft amended notice of appeal dated 30 August 2017.

 

(2) Order the appeal be dismissed.

 (3) Order the appellant pay the respondent’s costs of the appeal.

Catchwords:

CONSUMER LAW – Competition and Consumer Act 2010 (Cth) – Australian Consumer Law – unconscionable conduct – whether conduct of an experienced commercial party in imposing a price increase on another experienced commercial party was in all the circumstances unconscionable

  CIVIL PROCEDURE – Commercial List, Technology and Construction List – Procedure – whether reply to commercial list response forms part of pleadings – whether pleaded case encompassed claim for statutory warranty for defective equipment regardless of cause of defect

Legislation Cited:

Australian Securities and Investment Commission Act 2001 (Cth)
Competition and Consumer Act 2010 (Cth)
Competition and Consumer Legislation Amendment Act 2011 (Cth)
Trade Practices Act 1974 (Cth)
Uniform Civil Procedure Rules 2005 (NSW)

Cases Cited:

A v B1 (No 2) (2012) 271 FLR 122; [2012] WASC 383
Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349
Attorney-General of New South Wales v World Best Holdings Ltd (2005) 63 NSWLR 557; [2005] NSWCA 261
Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51; [2003] HCA 18
Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90
Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132; [2005] FCAFC 226
Banque Commerciale SA en Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279
Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558; [2001] NSWCA 187
Canon Australian Pty Ltd v Patton (2007) 244 ALR 759; [2007] NSWCA 246
Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd [2017] FCAFC 75
Commonwealth Bank of Australia v Kojic (2016) 341 ALR 572; [2016] FCAFC 186
Dare v Pulham (1982) 148 CLR 658
Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] ATPR 41-703
Jenyns v Public Curator (Q) (1953) 90 CLR 113
Medtel Pty Ltd v Courtney (2003) 130 FCR 182; [2003] FCAFC 151
Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199; [2015] FCAFC 50
Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28
PT Ltd v Spuds Surf Chatswood Ltd [2013] NSWCA 446
Re Baden's Deed Trusts (No 2) [1973] Ch 9
Stewart v Atco Controls Pty Ltd (in liq) (2014) 252 CLR 307; [2014] HCA 15
Thorne v Kennedy (2017) 91 ALJR 1260; [2017] HCA 49
Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389
United Group Rail Services Ltd v Rail Corporation New South Wales (2009) 74 NSWLR 618; [2009] NSWCA 177

Category:

Principal judgment

Parties:

Ipstar Australia Pty Ltd (Appellant)
APS Satellite Pty Ltd (Respondent)

Representation:

Counsel:
A S Bell SC / M Sealey (Appellant)
D L Williams SC / R Glover (Respondent)

  Solicitors:
Norton Rose Fulbright Australia (Appellant)
Thomson Geer (Respondent)

File Number(s):

2016/384969

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity

Citation:

[2016] NSWSC 1898

Date of Decision:

22 December 2016

Before:

Rein J

File Number(s):

2011/380786

HEADNOTE

[This headnote is not to be read as part of the judgment]

Ipstar Australia Pty Ltd was a wholesaler of satellite broadband services. It supplied bandwidth to its customers using a satellite in geostationary orbit. A proprietary user terminal (UT) needed to be installed to connect premises to the satellite. Ipstar did not manufacture the UTs but imported them into Australia. APS Satellite Pty Ltd, known as SkyMesh Pty Ltd at the relevant times, purchased bandwidth and UTs from Ipstar pursuant to an agreement made in 2007 and then onsold the bandwidth and UTs to end users. From 2009 onwards, SkyMesh purchased UTs from Skybridge (Australia) Pty Ltd, which had been appointed as Ipstar’s distributor and was unrelated to SkyMesh.

Two defects affected the UTs supplied to SkyMesh between 2009 and 2011, referred to in the judgment as “the water ingress problem” and “the firmware problem”. Either problem would prevent a UT from connecting to the satellite. Ipstar was aware of both problems from its retailers at least by 2010. SkyMesh began complaining about the problems at around the same time after receiving complaints from end users. SkyMesh bore the cost of repairing or replacing a defective UT after receiving a complaint from an end user. SkyMesh claimed that Ipstar was required to indemnify SkyMesh against these costs by reason of the Trade Practices Act 1974 (Cth) (the statutory warranty claims). SkyMesh provided information to support its statutory warranty claims at the end of 2010.

During early 2011, Ipstar reviewed the statutory warranty claims submitted by SkyMesh but made no payment, even in respect of claims which it considered to be valid. It purported to reject the entirety of the claims on the basis that insufficient information had been provided for some claims. At the same time, Ipstar commenced negotiations with SkyMesh for the price of bandwidth for the next 12-month period of their agreement. In March 2011, Ipstar made a final offer which represented a 15% increase on the price which SkyMesh was paying at the time. Ipstar had calculated this price increase by estimating the cost of meeting SkyMesh’s statutory warranty claims. Ipstar did not inform SkyMesh of how it calculated the increase and did not impose a similar price increase on its other retailers. SkyMesh accepted the offer, but protested that it could not operate at a profit with such a price increase. Despite increasing the bandwidth price, Ipstar did not make any payment to SkyMesh in respect of its statutory warranty claims.

In the proceedings at trial, SkyMesh claimed that Ipstar, as importer of the UTs, had supplied goods which were not fit for purpose or which were of unmerchantable or unacceptable quality (the defective goods claim). SkyMesh also claimed that Ipstar had engaged in unconscionable conduct during negotiations for the price increase (the unconscionability claim). Ipstar was said to be liable to compensate SkyMesh for both claims. The primary judge found in favour of SkyMesh and awarded it compensation for both claims.

The issues on appeal were:

1.   Whether the primary judge erred in finding that Ipstar had engaged in unconscionable conduct (Grounds 1-5);

2.   Whether the primary judge erred in assessing the amount of compensation awarded to SkyMesh for the unconscionability claim (Grounds 5A-5B);

3.   Whether the primary judge erred in determining that SkyMesh’s pleaded case on the defective goods claim was wide enough to permit it to claim compensation for defective UTs which it could not prove were affected by the water ingress or firmware problems (Ground 6);

The Court (Bathurst CJ, Beazley P and Leeming JA) held, dismissing the appeal:

Unconscionable conduct (Grounds 1-5)

(i) Section 22 of the Australian Consumer Law, as in force at the time of the alleged contraventions, was not limited to unconscionable conduct within the meaning of the unwritten law. However, the approach taken in cases dealing with unconscionable conduct under the unwritten law is of assistance in determining whether conduct is unconscionable under s 22: [182], [199] (Bathurst CJ); [268] (Beazley P); [269] (Leeming JA).

Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132; [2005] FCAFC 226, considered.

Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51; [2003] HCA 18; Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28, referred to.

(ii)   It is unhelpful to seek to redefine the statutory concept of unconscionability. However, the use of terms such as “moral obloquy” may be of assistance to the extent that they emphasise that what is required is such a departure from accepted community standards as can objectively be seen to be against conscience: [195] (Bathurst CJ); [268] (Beazley P); [269], cf [275]-[278] (Leeming JA).

(iii)   Whether certain conduct is unconscionable does not involve an idiosyncratic determination of what is “fair” and “just” in a particular case. Rather, it involves a consideration of all the circumstances to conclude whether or not the conduct in question falls below acceptable norms, standards or values such as to warrant it being determined to be unconscionable. It is appropriate to take into account the terms of the statute, the approach taken by the courts in dealing with cases under the unwritten law, and judgments in related areas involving lack of good faith in considering this question: [196]-[197] (Bathurst CJ); [268] (Beazley P); [269]-[270] (Leeming JA).

Attorney-General (New South Wales) v World Best Holdings Ltd (2005) 63 NSWLR 557; [2005] NSWCA 261; Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389; A v B1 (No 2) (2012) 271 FLR 122; [2012] WASC 383; Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90; PT Ltd v Spuds Surf Chatswood Ltd [2013] NSWCA 446; Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199; [2015] FCAFC 50; Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28, considered.

Jenyns v Public Curator (Q) (1953) 90 CLR 113; Commonwealth Bank of Australia v Kojic (2016) 341 ALR 572; [2016] FCAFC 186; Thorne v Kennedy (2017) 91 ALJR 1260; [2017] HCA 49; Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd [2017] FCAFC 75, referred to.

(iv)   Ipstar had engaged in unconscionable conduct. Ipstar imposed a price increase based on an estimated accrued liability whilst taking steps to avoid payment of that liability, in circumstances where Ipstar regarded at least some of the claims made by SkyMesh as valid, where the reason for the price increase was concealed from SkyMesh, and where SkyMesh was at a commercial disadvantage in dealing with Ipstar due to its business model: [200]-[201], [210]-[217] (Bathurst CJ); [268] (Beazley P); [269], [271]-[274] (Leeming JA).

Assessment of compensation (Grounds 5A-5B)

(v)   The trial judge did not err in assessing the amount of compensation awarded to SkyMesh for the unconscionability claim. SkyMesh was entitled to claim compensation for Ipstar’s unconscionable conduct calculated as the difference between what it actually paid to Ipstar after the price increase and what it would have paid had the price increase not occurred. The amount of compensation was not limited to the amount awarded to SkyMesh for its defective goods claim: [225]-[227] (Bathurst CJ); [268] (Beazley P); [269] (Leeming JA).

SkyMesh’s pleaded case (Ground 6)

(vi)   A commercial list statement and a commercial list response stand in the place of pleadings in proceedings in the Commercial List of the Supreme Court. Where a reply to a commercial list response has been permitted, that reply also forms part of the pleadings: [260] (Bathurst CJ); [268] (Beazley P); [269] (Leeming JA).

(vii)   SkyMesh’s pleading in the present case adequately put Ipstar on notice that SkyMesh was contending it was entitled to compensation for defective UTs irrespective of the cause: [263] (Bathurst CJ); [268] (Beazley P); [269] (Leeming JA).

Dare v Pulham (1982) 148 CLR 658; Banque Commerciale SA en Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279, referred to.

Judgment

1. BATHURST CJ: The appellant, Ipstar Australia Pty Ltd (Ipstar), is a wholesaler of satellite broadband services. The respondent, APS Satellite Pty Ltd, formerly known as SkyMesh Pty Ltd (SkyMesh), was at the time of the events the subject of these proceedings, a licensed telecommunications carrier.

2. In 2007, SkyMesh and Ipstar entered into an agreement whereby Ipstar sold bandwidth to SkyMesh at a price per megabytes per second (Mbps) per month. The agreement was varied on three occasions. The first, on 1 August 2008 by a document described as the “First Addendum”, the second, by an agreement reached some time in May 2010 varying the price payable for the services, and the third, by a document executed on 27 April 2011 described as the “Second Addendum”. The Second Addendum increased the price payable for bandwidth to $2,933 per Mbps per month. SkyMesh paid that amount for bandwidth from 1 March 2011 to 31 July 2016.

3. SkyMesh claimed that the price increase insisted upon by Ipstar in the Second Addendum involved conduct which was unconscionable in contravention of s 22 of the Australian Consumer Law (schedule 2 to the Competition and Consumer Act 2010 (Cth)) (ACL) as in force at the time of the entry into the Second Addendum (the unconscionability claim). SkyMesh claimed that it suffered loss and damage as a result. It claimed as damages the difference between the price it paid for bandwidth immediately prior to 1 March 2011 and the price it paid thereafter. Alternatively, it sought that the Second Addendum be varied to provide for the payment of the pre-existing price.

4. SkyMesh also claimed that the equipment supplied by Ipstar was defective. It claimed that Ipstar was required to indemnify it for the loss it suffered as a result of the defective equipment supplied by virtue of s 74B, s 74D and s 74H of the Trade Practices Act 1974 (Cth) (TPA) until 1 January 2011, and thereafter by virtue of the provisions of s 54, s 55 and s 274 of the ACL (the defective goods claim). The TPA and ACL state in s 74K and s 276 respectively that the provisions relied upon by SkyMesh in the defective goods claim are not capable of exclusion by contractual provisions.

5. The primary judge found in favour of SkyMesh on each of these issues. He gave judgment in favour of SkyMesh in respect of the unconscionability claim in the amount of $3,482,367, together with pre-judgment interest in an amount of $856,074.49. He gave judgment in favour of SkyMesh in the defective goods claim in the amount of $1,837,792, together with pre-judgment interest in an amount of $779,602.08 on that claim.

6. Ipstar has appealed against these orders.

Background facts

7. Because of the issues raised in this appeal, it is necessary to have regard to the background facts in some detail.

8. As I indicated, Ipstar was a wholesaler of satellite broadband services. It is a wholly owned subsidiary of a Thai telecommunications company, Thaicom Public Company Ltd (Thaicom). It supplied bandwidth through two “Earth Stations”, being large satellite dishes located in Kalgoorlie, Western Australia and Broken Hill, New South Wales. Those dishes sent signals to Thaicom’s satellite “IPSTAR-1” in geostationary orbit above the Earth. The orbiting satellite relayed signals to and from smaller Ipstar satellite dishes located on the premises of end users.

9. The service provided was proprietary. All users were required to have a proprietary user terminal (UT). The equipment could only send or receive signals from the Thaicom satellite, and terminals supplied through providers other than Ipstar could not communicate with that satellite. This has significance because any retailer who sold broadband services to end users could only change to another broadband service provider by changing the UTs which it supplied to its end users.

10. The UT consists of an outdoor unit (ODU) connected to an indoor unit (IDU) by two coaxial cables. The ODU consists of a satellite dish and a satellite radio frequency transceiver assembly. Having regard to the issues raised in this appeal, it is unnecessary to describe further details of the technical makeup of the ODU.

11. For present purposes, the IDU can simply be described as a modem connected to the end user’s computer.

12. The initial agreement between Ipstar and SkyMesh was entered into on 27 September 2007. The agreement was for a period of three years, expiring on 27 September 2010. There was no right of renewal. The agreement was for the supply of services and products, the services being the supply of bandwidth and the products being the UTs. Appendix A to the agreement provided a bandwidth price of $3,972 per Mbps per month and a separate fee for the provision of the UTs. Clause 2.1 of Appendix C to the agreement provided a limited warranty in respect of the UTs for the period of 12 months from the date of delivery.

13. These arrangements were varied in 2008 by the introduction of Skybridge Pty Ltd (Skybridge) as the distributor of the UTs on behalf of Ipstar. On 16 January 2008, Skybridge and SkyMesh entered into an agreement whereby Skybridge agreed to supply and install the UTs for the fee set out in section S4-Table 1 and S4-Table 2 of schedule 4 to that agreement. A 12-month warranty was given in respect of the products installed in section S4-2.1 of schedule 4.

14. As I noted in [2] above, the agreement between Ipstar and SkyMesh was varied on 1 August 2008 by a document described in these proceedings as the “First Addendum”. The document is itself entitled “Addendum to the Bandwidth Service Commercial Terms and Conditions”. It provided for a bandwidth price on a sliding scale depending on the amount of Mbps utilised. The price ranged from $3,372 per Mbps per month when 0-9 Mbps were utilised to $2,686 per Mbps per month when in excess of 200 Mbps were utilised.

15. At some time in May 2010, the parties agreed to vary the bandwidth price to a fixed $2,550 per Mbps per month.

16. Until the Second Addendum, which was dated 27 April 2011, there were no further relevant changes to the terms of the agreement.

17. On 17 March 2009, SkyMesh and Skybridge entered into a further supply agreement expressed to be for the duration of the current funding deed with the Department of Broadband Communications and the Digital Economy (the Department).

18. Part of the business model of SkyMesh was to take advantage of the Australian Broadband Guarantee Programme administered by the Department, which, at the relevant time, subsidised the cost of the provision of internet services in rural and regional areas of Australia. In return for funding from the Programme, an internet service provider such as SkyMesh entered into contractual arrangements with the Commonwealth to provide services to a customer for three years on guaranteed terms and conditions. SkyMesh entered into three funding agreements under the Programme. The Programme ended on 30 June 2011.

19. Revenue received from the Programme provided a significant portion of income derived by SkyMesh. In 2009, it received subsidies under the Programme of $21,157,172 against total revenue of $24,734,886. In 2010, it received subsidies totalling $19,462,467 against total revenue of $26,756,032. The cost of goods sold in each of 2009 and 2010 was $17,343,819 and $14,708,223 respectively.

20. The business conducted by SkyMesh expanded rapidly. In 2008, it supplied 3,133 active terminals, being 6% of the total number of terminals using the Ipstar facilities. By 2011, the number of active terminals supplied by or on behalf of SkyMesh had increased to 28,302, being 38% of the total number of terminals using the Ipstar facilities. By 2014, the number of terminals which it supplied had declined to 9,725 active terminals, but the percentage of the total number of active terminals had declined only slightly to 36%.

21. There was no dispute between the parties that a number of the terminals were defective in two respects, although issue was joined as to the extent of the problem. The first defect, described in the Court below as the “water ingress problem”, arose from the fact that ODUs located on the satellite dish outside the end user’s premises were frequently not adequately sealed against rain.

7. The second problem related to the modem. Some of the modems were prone to what was described as “drop out”, “freezing” or “hang” issues. The primary judge noted at [27] that this was a result of “firmware issues”. The primary judge described “firmware” as “software embedded in a product such as a modem which enables the product to function or communicate” with “a network or other devices”. If the modem “hangs”, “freezes” or “drops out”, it prevents the UT being used as intended. For convenience, I will describe this defect in the balance of the judgment as the “firmware problem”.

8. The effect of either of these problems was that the UT was unable to access the Ipstar satellite system.

9. The water ingress problem was identified by at least January 2008. In an email of 18 May 2010 from Ms Lisa Cutts of Skybridge to Mr Paul Rees of SkyMesh, Ms Cutts confirmed this to be the case. In a slide presented at a “forum” meeting with service providers held by Ipstar on 26 February 2010, it was stated that the problem was first raised by a service provider in July 2007.

10. It is not entirely clear when the firmware problem first arose. It was clear it was an issue by the time of the “forum” meeting held by Ipstar on 26 February 2010.

11. On 15 May 2009, Ipstar and Skybridge entered into a memorandum of understanding concerning faulty ODU replacement and compensation. The memorandum recorded that, from time to time, ODUs “may become subject to water ingress” and, as a result, “are considered faulty”. The memorandum provided for Skybridge to submit water ingress problem reports on a weekly basis, indicating the number of faulty ODUs which had been discovered the previous week. Clause 3 stated that a claim for replacement could only be made in accordance with the procedures specified in the “Return Mechanism Authorisation” (RMA) documentation and that faulty ODUs had to be returned in the manner in which they were installed. Clause 7 acknowledged that the warranty applicable to a replacement faulty ODU would be 12 months.

12. From at least early 2010, SkyMesh commenced complaining about the defective condition of the UTs. In an email of 14 January 2010 from Mr Paul Rees, a director of SkyMesh, to Mr Laurence Dusan of Ipstar, Mr Rees requested Ipstar to voluntarily recall all ODUs susceptible to water ingress installed at their customer sites. He stated that they had “a major problem with customer outages due to water ingress” and a “lack of spare parts to repair the faults”. He stated that each day SkyMesh got “at least one complaint from [the Department] on behalf of a customer whose service is taking in excess of the agreed 10 days to be repaired”. Mr Rees inquired whether Ipstar would pay Skybridge to replace the ODUs.

13. In response, Mr Dusan, in an email of 18 January 2010, stated that Ipstar had “a current process in place for water ingress testing, service calls and replacements” and would not be changing the process. The email stated that, where water ingress was found, the arrangement with Skybridge would cover the cost of service calls and that Ipstar assumed that Skybridge was “back-to-backing this” with SkyMesh and that, therefore, “there should not be any cost to end users”. On 19 January 2010, Mr Rees inquired of Mr Dusan whether, if ODUs which had failed out of warranty were found to have water ingress, Ipstar would reimburse SkyMesh for the full cost of replacing them. By a later email to Mr Rees of the same day, Mr Adam Leeflang of Ipstar confirmed that that was the case.

14. I have referred at [24] above to the “forum” meeting with service providers held by Ipstar on 26 February 2010. Mr Rees of SkyMesh attended that meeting. The first item on the agenda in a slide presentation given at that meeting was the scope of the technical issues affecting the UTs, reference being made to “ODU water ingress” and “IDU issues”. The second item was the resolution of those issues.

15. One of the slides presented at the “forum” meeting outlined steps that Ipstar stated that it had been taking with service providers to deal with the water ingress problem. It included a reference to the memorandum of understanding, to which I have referred at [26] above, and to the fact that UT replacement and claims issues were being dealt with as per that memorandum. It also referred to corrective action being taken to minimise IDU failures.

16. The slides also referred to compensation methods. In relation to what was described as a “Skybridge model”, a slide stated that Ipstar would issue credit notes to cover compensation, Skybridge would in turn credit the service providers and the service providers would handle their customers.

17. On 16 April 2010, Ipstar issued a circular entitled “Drop-Out Issue”, which was said to be a follow-up of the “forum” meeting held on 26 February 2010. The document noted that service providers were observing an increasing trend of drop-out complaints from end users. It suggested that possible causes were “ODU water ingress” and “UT software hanging stage etc”. It was suggested that the latest firmware would solve the problem.

18. I have been through this material in some detail to show that at least by the early part of 2010, Ipstar was aware of the water ingress problem and the firmware problem. Further, the material to which I have referred suggests that Ipstar was accepting responsibility for those problems. It is necessary to keep that in mind when considering the subsequent conduct of Ipstar for the purpose of the unconscionability claim.

19. SkyMesh commenced to complain about the manner in which Ipstar dealt with the problems from about May 2010. Mr Rees was a director of SkyMesh and the principal correspondent with Ipstar during this period. Mr Rees mainly corresponded with four officers of Ipstar: Mr Supoj Chinveeraphan, Mr Robert Gibbons, Mr Adam Leeflang, and Mr Phil Cross. Mr Chinveeraphan was Ipstar’s general manager in Australia, Mr Gibbons was its chief financial officer, Mr Leeflang was its operations director and Mr Cross was its sales director.

20. Mr Rees sent an email on 19 May 2010 to Mr Chinveeraphan, which attached a formal letter of 18 May 2010. The letter stated that Ipstar’s response to the water ingress problem was “not acceptable”. It also stated that Mr Rees knew that 75% of the faulty ODUs tested had been proven to be affected by water ingress. In a later formal letter of 1 September 2010 to Mr Chinveeraphan, Mr Rees complained that he had not received any formal response to his letter of 18 May 2010. He stated that the Department had made SkyMesh “go ahead and have the equipment repaired at its own cost and attempt to recoup the costs from the customer” months after the repairs had taken if SkyMesh had been advised by Ipstar that the ODUs were not affected by water ingress.

21. On 2 September 2010, Mr Chinveeraphan responded to Mr Rees by email. He stated that Ipstar would “not accept any dispute regarding non-water ingress claims” and that Ipstar had a “normal RMA process” to deal with such problems “as long as the units that are said to have failed are within warranty”.

22. In relation to the water ingress claims, Mr Chinveeraphan stated that Ipstar was formulating a formal response to all service providers and the Department. He said that he would like to “emphasise that Ipstar agreed to manage the problem through Skybridge”. He stated that “SkyMesh should not withhold any monies from our monthly bandwidth account” and that, if it did, Ipstar would “take appropriate action to recover any and all such amounts due”.

23. Until this point in time, the parties appeared to have been proceeding in ignorance of the statutory warranties in the TPA, to which I have referred to at [4] above, which form the basis for SkyMesh’s defective goods claim in these proceedings. On 21 October 2010, Mr Rees wrote to Mr Chinveeraphan by email, referring to the provisions of s 74H of the TPA. He stated that it gave SkyMesh “the right to pursue a course [sic] of action against Ipstar as the manufacturer or importer of the goods” and that this right included “not only our water ingress costs” but “our costs associated with the drop outs caused by bugs in the firmware”. I will refer to the claims for compensation under the TPA which SkyMesh made during this correspondence as the “statutory warranty claims”, to distinguish them from the claims made in these proceedings.

24. On 17 November 2010, Mr Chinveeraphan emailed Mr Rees, stating that “Ipstar has now agreed to provide a retrospective three year parts warranty”. However, he stated that Ipstar would not agree to an on-site labour warranty which “would have the effect of making Ipstar liable for all warranty and non-warranty repairs”. Mr Chinveeraphan further stated that, after delivering equipment to Skybridge, Ipstar had “no visibility” with regard to its installation. Further, he stated that, based on the statistics he received from Thaicom, 18% of the ODUs which were returned to Thailand for testing had no fault. He described this as a “high percentage”.

25. Mr Chinveeraphan stated in the email that Ipstar was “well aware” of its TPA obligations and would “honour all warranty repairs”. He stated that the problem was distinguishing between cases of warranty and non-warranty repairs and that neither SkyMesh nor Ipstar had any process in place to deal with it.

26. Mr Chinveeraphan also referred to a “without prejudice” offer made by Mr Rees not to withhold bandwidth payments if a three-year parts and labour on-site warranty was provided. He stated that outstanding charges should be paid and that the question of the warranty was irrelevant to that fact. In relation to modem drop out issues, he stated that Ipstar was trying to remedy the problem.

27. Mr Rees responded by email on 18 November 2010, stating that, if Ipstar acknowledged that the equipment provided had a statutory warranty of three years for parts and on-site labour, the only repairs for which Ipstar would be liable would be warranty repairs. He complained that Ipstar was making a “50% margin on the sale of equipment that isn’t fit for purpose”. He stated that the equipment was “failing in large numbers” and that Ipstar had an obligation under the TPA to repair or replace it at no charge to the customer or the retailer. He rejected the proposition that Ipstar had “no visibility” as to the installation of the equipment, stating that there was no evidence of poor quality installation and that Ipstar had had the opportunity to audit 50 sites in conjunction with Skybridge, 42 of which had faulty ODUs.

28. Mr Rees also suggested in the email that it was easy to distinguish between warranty and non-warranty repairs.

29. That email drew a somewhat terse response on the same day from Mr Chinveeraphan, who stated that it seemed that email correspondence was futile. However, he suggested that a face-to-face meeting would be productive.

30. Mr Rees and Mr Chinveeraphan met on 26 November 2010. On 28 November 2010, Mr Rees wrote to Mr Chinveeraphan by email, noting that Ipstar had “conceded that [there] is a Statutory Warranty on equipment for three years on-site parts and labour” under the TPA. Mr Rees confirmed that SkyMesh had outlaid money for service calls to customers who asserted a statutory warranty, and that he would request that Ipstar reimburse it for those charges. He stated that, before booking a service call with Skybridge in future, SkyMesh would ask Ipstar to confirm “our diagnosis” (presumably, the reason for the defect) and Ipstar would issue an RMA to give to Skybridge. He said that, in those circumstances, Skybridge would carry out the service call and bill SkyMesh for the work, and SkyMesh would claim the repair costs back from Ipstar.

31. On 14 December 2010, Mr Rees wrote to Mr Gibson, with a copy to Mr Chinveeraphan, Mr Leeflang and Mr Cross. He stated that there was a need to agree on documentation that SkyMesh needed to supply Ipstar for its statutory warranty claims so that its claims for reimbursement of expenses could be processed quickly. He indicated that SkyMesh was required to pay Skybridge over $1.1 million on that day, part of which was for statutory warranty claims to be reimbursed by Ipstar. He stated that “things are going to get tight for our cash flow” if SkyMesh could not get its claims “turned around by Ipstar by the time our bandwidth bill becomes due”.

32. On 20 December 2010, Mr Rees sent a further email, this time to Mr Leeflang as well as Mr Gibson, with a copy to Mr Chinveeraphan and Mr Cross. In that email, he stated that SkyMesh was making progress on its statutory warranty claims and that “we have the past 12 months or so done now”. He stated that “we’ll send the first 12 months or so through to you shortly and we’ll have a lot more done by Christmas”. He attached a sample spreadsheet to show the types of claims that Ipstar would be receiving. He stated that the older the claims were, the smaller the claimed amounts would be, because “the repairs in the first year were covered by the warranty uplift we [SkyMesh] paid to Skybridge”.

33. Mr Leeflang was cross-examined on Mr Rees’ two emails of 14 December 2010 and 20 December 2010. He denied that he participated in any discussions with anyone at Ipstar about the company’s response to SkyMesh’s statutory warranty claims under the TPA. He stated that he was not sure if Mr Chinveeraphan indicated that he was interested in the way the company would respond to the statutory warranty claims, although he acknowledged that the claims were a serious matter for Ipstar. He acknowledged that Mr Rees’ email of 14 December 2010 had mentioned the need to agree on documentation. He agreed that when he received Mr Rees’ email of 20 December 2010, he did not tell Mr Rees that the documentation was unsatisfactory.

34. Mr Leeflang subsequently agreed that it was likely that he would have discussed the appropriate manner in which to respond to Mr Rees’ emails with Mr Chinveeraphan. He acknowledged that he was aware of the size of the potential claims.

35. On 21 December 2010, Mr Rees wrote to Mr Gibson and Mr Leeflang by email, stating that SkyMesh had finished going through the Skybridge invoices covering the period 31 December 2009 to 30 November 2010 for which SkyMesh claimed compensation from Ipstar. The email claimed a total of $583,065.49. Mr Rees sent another email to Mr Gibson and Mr Leeflang on 30 December 2010, referring to Skybridge invoices covering the period 15 February 2008 to 16 December 2009 for which SkyMesh claimed compensation. This email claimed a total of $116,039.91. On 1 January 2011, Mr Rees wrote to Mr Gibson by email, noting that the November 2010 bandwidth invoice was due shortly, but that Ipstar had statutory warranty claims “totalling close to twice that amount, some of it being for amounts that we [SkyMesh] outlaid as far back as November 2007”. He indicated Ipstar’s only response to its claims to date had been to say that “we will respond in due course” and asked whether Ipstar had an expectation that its invoice would be paid while SkyMesh awaited a response on its statutory warranty claim.

36. In cross-examination, Mr Cross indicated that Mr Rees’ email of 1 January 2011 would have been brought to his attention if SkyMesh had failed to pay its invoices. He said that he had had discussions with Mr Chinveeraphan about the statutory warranty claims, which discussions occurred in late 2010 or January 2011. He agreed that these discussions occurred in the context of discussing the costs that might be occasioned to the company if and when the statutory warranty claims were met and that Mr Chinveeraphan told him that he wanted to increase the bandwidth price to recoup the cost if and when those claims arrived.

37. On 4 January 2011, Mr Gibson replied to Mr Rees by email and stated that Ipstar had an expectation that SkyMesh would continue to pay outstanding invoices. He also noted that Mr Chinveeraphan had been overseas for the last month, and that due to the “sizeable volumes [sic] and amounts of the claims”, Ipstar would need to “carefully consider our response to historical, current and future claims, including ensuring that we are provided with all the information that we need to investigate each and every claim, the development of a new RMA process and the establishment of appropriate resources to investigate” the statutory warranty claims .

38. On 31 January 2011, Mr Rees emailed Mr Gibson, noting that Mr Gibson had previously said in his email of 4 January 2011 that Ipstar would provide a detailed reply to SkyMesh’s statutory warranty claims “shortly”. Mr Rees then asked Mr Gibson to define what he had meant by “shortly”, suggesting that Mr Rees was not satisfied with the time that Ipstar had taken in providing a response. Mr Gibson responded by email later the same day, and stated that “the ball is not in my court”, but that he would follow up and get an answer. He stated that he believed that an answer would come “early this week”.

39. On 4 February 2011, Mr Cross forwarded to Mr Rees by email a copy of a proposed addendum to the existing agreement between the parties. This was the first version of the document which later became the Second Addendum. The email noted that the proposed addendum included new bandwidth pricing, warranty terms and an RMA process. The bandwidth price in the proposed addendum was $3,060 per Mbps per month. The proposed addendum also sought to insert an amended warranty and to provide a new RMA process in respect of claims under the warranty. That process included requirements for a specific description of the faults and a return of the goods intact and undamaged. It stated that, if a fault was found by Ipstar, then it would, “at its expense and its option”, repair or replace the defective goods.

40. The price nominated in the proposed addendum was expressed to be effective from 7 February 2011 until 7 February 2012. Mr Cross’ email enclosing the proposed addendum stated that “we trust you understand that the new pricing is a reflection on the substantial increase in the cost of doing business with SkyMesh”.

41. On 8 February 2011, Mr Leeflang wrote to Mr Rees by email, stating that a large number of the claims submitted by Mr Rees in his emails of 21 December 2010 and 30 December 2010 were invalid and that Ipstar would not “continue to investigate the lists that you have provided as there are too many errors and hence, Ipstar rejects the total claim submitted”. That response had evidently been the subject of discussions between Mr Leeflang, Mr Cross and Mr Chinveeraphan because, on 7 February 2011, Mr Chinveeraphan suggested to Mr Leeflang by email, with a copy to Mr Cross, that the sentence quoted earlier in this paragraph added to his email to Mr Rees.

42. On 8 February 2011, Mr Chinveeraphan also emailed Mr Rees in relation to the statutory warranty claims, stating that he was concerned that SkyMesh did not fully understand the scope of the statutory warranties under the TPA. He said that “much of the information that you [SkyMesh] provided does not evidence legitimate statutory warranty claims”. He stated that Ipstar was now “implementing a formal process through which SkyMesh can put a claim” and that SkyMesh should follow that process and provide all information evidencing its claims in accordance with it.

43. On 9 February 2011, Mr Rees emailed Mr Cross in response to the proposed addendum attached to Mr Cross’ email of 4 February 2011. He noted that Mr Cross had stated the bandwidth price increase was due to the “substantial increase in cost of doing business” with SkyMesh. Mr Rees said that he was keen to understand what Mr Cross had meant by that. He stated that he could understand that adding a three-year warranty would increase the price of the satellite equipment, but that he was not sure why the bandwidth price would increase.

44. Mr Rees also asked Mr Cross whether the bandwidth price was negotiable or “a take it or leave it situation”. He stated that SkyMesh had a gross margin of “around 25% before expenses” and that a 20% increase in bandwidth price would make it impossible to operate at a profit.

7. Mr Rees further inquired whether Ipstar was increasing the bandwidth price for all customers, or just for SkyMesh. He noted the competitive disadvantage at which his company would be placed if the increase only applied to SkyMesh.

8. Mr Rees also stated that he had expected that the statutory warranty claims would already have been resolved at that point in time, and that it looked like the process was going to be much more complex than anticipated. He proposed to discuss a way to progress the claims with Mr Gibson and Mr Leeflang.

9. On 10 February 2011, Mr Rees sent an email to Mr Leeflang concerning, first, the RMA process for future statutory warranty claims and, second, Ipstar’s attitude to retrospective statutory warranty claims. In relation to the former issue, Mr Rees stated that the information being requested by Ipstar was not available to SkyMesh and that it was information already available to Ipstar. He also stated that he believed that part of the proposed RMA process did not comply with the TPA or the ACL.

10. In relation to the retrospective statutory warranty claims, Mr Rees stated that Mr Leeflang’s email of 8 February 2011 from Ipstar was the first that SkyMesh had heard of the proposal to reject the claims that SkyMesh had made. He stated that SkyMesh had provided Ipstar with all the information needed to check whether the claims were valid and that it had done so in good faith. He stated that he did not believe that Ipstar had the right to reject the entirety of the claims “on the basis that you’ve found a small number of errors”.

11. On 18 February 2011, Mr Chinveeraphan emailed Mr Rees, stating that, to process any potential statutory warranty claims, Ipstar “needs to be provided with evidence that the claim is a proper one for which Ipstar is liable” and that, when such evidence was received, Ipstar would comply with its obligations under the statutory warranties.

12. On 21 February 2011, Mr Cross responded to Mr Rees’ comments on the proposed addendum. He stated that compliance with the RMA process included in the proposed addendum would “achieve operational efficiencies” which would benefit Ipstar and service providers such as SkyMesh. He also stated that the fact that the duration of the new bandwidth pricing was for a limited term of 12 months was because “we cannot anticipate what the future holds”. He stated that, should SkyMesh agree to the proposed addendum, then, in the period leading up to the end of the 12–month term, Ipstar would thoroughly reassess market conditions, its costs generally and the costs of doing business with SkyMesh.

13. Mr Rees responded by email on the same day, stating that “there is information on those forms [the RMA forms] we don’t know and can’t find out”. In relation to the price increase, Mr Rees stated that the 20% increase “effectively makes our satellite business unprofitable”. He asked again if the bandwidth price was negotiable or “a take it or leave it situation”.

14. On 23 February 2011, Mr Cross emailed Mr Rees, telling him that the new bandwidth price was Ipstar’s current proposal and that SkyMesh was welcome to make a counter-proposal. He said Ipstar had “reviewed our costs, which have recently increased and that needs to be reflected in pricing”.

15. On 24 February 2011, Mr Rees sent a further email to Mr Cross, stating that SkyMesh agreed that Ipstar’s costs would increase due to the statutory warranty claims, assuming that Ipstar paid SkyMesh’s legitimate claims. He stated that he knew that Ipstar had had a 100% mark-up on satellite equipment for the previous five years which he thought “would have been sufficient to cover costs, even with a failure rate of 22.89%”. He stated that it was a matter for Ipstar as to how it chose to recover its costs, but that he would have thought that it was more logical to increase equipment costs rather than bandwidth prices. He also stated that it did not make sense to increase bandwidth prices beyond SkyMesh’s ability to pay.

16. In that email, Mr Rees put a counter-proposal to Ipstar which involved continuing “to pay for bandwidth under the price schedule in our current agreement”, but with an increase in price if there was a decrease in bandwidth utilisation. He also indicated that he would consider an increase in costs for additional bandwidth over and above what SkyMesh was currently using.

17. Mr Rees stated the Department had “given us [SkyMesh] confidence (unofficially) that we can connect customers right up to” 30 June 2011 and that it was spending an “enormous amount of money” on marketing activities to connect as many customers as possible by then.

18. On 1 March 2011, Mr Cross responded to Mr Rees by email, stating that if SkyMesh wished to assert a statutory warranty claim, Mr Leeflang had already provided details of what was required. He distinguished these requirements from the RMA process, which was stated to only apply to parts sold after 1 July 2010 where Ipstar had given a “voluntary” warranty. In relation to the counter-proposal made by Mr Rees, Mr Cross stated that Ipstar did not accept continuation of the current pricing and that increasing the price for UTs would not solve the increased cost of doing business with SkyMesh in the long-term. He said that there was a “huge increase in the number of service calls from SkyMesh since December which was disproportionate to other providers”.

19. Mr Cross stated that Ipstar was not prepared to sign a new addendum with a three-year term and would offer the proposed addendum with a 12-month term only. However, he stated that the pricing had been reassessed and that Ipstar’s final offer was $2,933 per Mbps per month.

20. On 2 March 2011, Mr Cross sent a further email to Mr Rees, attaching the proposed addendum in word document format. It added a subparagraph which stated that “if IPA [Ipstar] and SP [SkyMesh] cannot agree to new pricing by 7 February 2012, this Agreement will automatically terminate with immediate effect”.

21. On 4 March 2011, Mr Rees emailed Mr Leeflang and requested him to look at an attached spreadsheet and the information it contained relating to the statutory warranty claims. He noted that it was “a complete dump from SkyMesh’s and Skybridge’s systems” and that it might contain charges for service requests which would not be claimed by SkyMesh. He stated that it was “not a claim” in itself, but “just a first draft”, and requested that Mr Leeflang advise whether the information provided would be sufficient to process the claims.

22. On 10 March 2011, Mr Rees emailed Mr Cross some suggested amendments to the proposed addendum. Mr Rees stated that he looked forward to resolving the points he raised and getting the proposed addendum signed.

23. On the same date, Mr Leeflang responded to Mr Rees’ email of 4 March 2011, which contained the “complete dump” from SkyMesh’s and Skybridge’s system. Mr Leeflang said that he could not figure out which charges in the spreadsheet were in fact going to be claimed, noting it was “a complete dump of the 9,700 jobs”.

24. Mr Rees responded to Mr Leeflang by email on the same day and noted that he had said in his email of 4 March 2011 that the spreadsheet was “just a first draft” to enable Mr Leeflang to say whether the amount of information was sufficient. Mr Leeflang responded to Mr Rees by email on the same day, stating that, at that point in time, he could not really say whether the information was sufficient.

25. On 14 March 2011, Mr Rees emailed Mr Leeflang, enclosing what he described as “our first claim for Statutory Warranty” using the spreadsheet format requested by Ipstar and the information that was available to SkyMesh. Mr Rees emailed a “second claim for Statutory Warranty” to Mr Leeflang on 28 March 2011. In this email, Mr Rees also asked for an update on the processing of the first claim sent to Ipstar in his email of 14 March 2011.

26. Mr Leeflang responded by email to Mr Rees on 29 March 2011, stating that he “wasn’t expecting anymore as thought [sic] that the first run was the final run as it looked like a scripted result” and that “it’s [hard] if they keep coming along like this”. He also stated that Ipstar was completing its “statutory handling policy”, and that “once that is complete, I’ll let you know and we’ll start the processing”.

27. On 30 March 2011, Mr Rees wrote to Mr Leeflang by email, noting that it appeared from Mr Leeflang’s email that Ipstar had not started processing the “first claim” he had submitted by email on 14 March 2011. He stated that Ipstar had already rejected SkyMesh’s statutory warranty claims submitted in the previous year and that SkyMesh had subsequently gone to “great lengths” to provide the requested information and “check and verify” every claim. He pointed to the fact that Ipstar was now charging SkyMesh 15% more for bandwidth because of the “substantial increase in cost of doing business with SkyMesh”. He stated that, contrary to Mr Leeflang’s assertion in his email, there had in fact been no increase in Ipstar’s costs because “you’ve not paid a single cent of the claims we have submitted”. Mr Rees further stated that “if your intention is to bleed SkyMesh with higher bandwidth charges and lack of spare parts while not paying legitimate claims, then I must say that this will backfire badly”. He requested that both claims that he had submitted by email on 14 March 2011 and 28 March 2011 be paid promptly.

28. On 14 April 2011, Mr Cross emailed Mr Rees, attaching a revised version of the proposed addendum. Mr Cross insisted that the addendum include a term that the agreement should terminate if the parties could not agree on a new bandwidth price before the end of the 12-month term in the addendum.

29. On 21 April 2011, Mr Leeflang emailed Mr Rees, stating that Ipstar had combined the two statutory warranty claims submitted by email on 14 March 2011 and 28 March 2011 into one claim for the purposes of processing. Mr Leeflang informed Mr Rees that the result of Ipstar’s investigation was that 247 items in the claim had a fault, 140 items had no fault and 2,482 items had incomplete information. These claims were described in an accompanying spreadsheet as having been “rejected”. The email stated that SkyMesh would need to satisfy the following criteria to allow Ipstar to proceed:

“(1)   IPSTAR asks that the pricing [for the items in the claim] is reviewed and standardised by Skymesh [sic]

(2)   IPSTAR asks that Skymesh reprocess the claim removing claims that are:

a.   extended warranty

b.   jobs where refurnished parts were the part being replaced or used

c.   paid by the end user for the work, otherwise, provide information to confirm to us that end users didn’t pay for service calls

(3)   IPSTAR asks that Skymesh reprocess the claim by including the:

a.   missing serial numbers

(4)   IPSTAR asks that Skymesh provide the parts that have:

a.   not been sent to IPSTAR for testing”

83. Mr Leeflang also raised certain other issues in his email and commented that it took Ipstar “a great deal of time to deal with this and process the information as we ended up wasting a lot of time looking for parts that were never received”.

84. On 22 April 2011, Mr Rees responded by email to Mr Cross’ email of 14 April 2011, expressing his disappointment at the unwillingness of Ipstar to negotiate any of the substantive issues raised by him in his email of 10 March 2011. He also indicated that the proposed addendum involved a price increase that SkyMesh did not agree was reasonable and that SkyMesh “simply wanted comfort that services would not be determined arbitrarily and without good cause” under the agreement. He stated that, despite its “significant ongoing concerns” with the proposed addendum, SkyMesh had no option but to continue dealing with Ipstar. He said that, in those circumstances, the addendum needed to be finalised to provide SkyMesh “with some security of supply”, and that SkyMesh agreed with the addendum “under duress”. The addendum was executed on 27 April 2011 and became the “Second Addendum” to which I have previously referred at [4] above.

85. On 4 May 2011, Mr Rees responded in detail to Mr Leeflang’s email of 21 April 2011 refusing to further process SkyMesh’s statutory warranty claims. Mr Rees rejected Mr Leeflang’s comments about the claims, but requested Ipstar to pay the claims it had decided were valid. He stated that “we’ve [SkyMesh] been trying to get Ipstar to reimburse us for costs since December last year and you just come up with reasons not to pay us”. He further stated that Ipstar had increased SkyMesh bandwidth price so that it could not compete with other resellers and that Ipstar was making SkyMesh pay for repairs and refusing to reimburse legitimate expenses. He stated that Ipstar had “forced us [SkyMesh] into a corner and now you’re poking us with a sharp stick”.

86. Mr Leeflang replied by email to Mr Rees on 19 May 2011. Mr Leeflang acknowledged that his description of some claims as having been “rejected” in his email of 21 April 2011 was “a bit harsh”. He said that his intent was to say that, “based on information provided in the claim, the claim cannot progress any further and more verification is required”. He set out the additional matters which he said were required.

87. On 26 May 2011, Mr Rees replied in detail to Mr Leeflang by email. Mr Rees stated that he believed that Ipstar was not clear on SkyMesh’s position with respect to the statutory warranty claims and that he thought that he ought to set out what he regarded as the history of the matter. On 27 May 2011, Mr Leeflang responded by email, stating that he disagreed with various assertions made by Mr Rees and saw no purpose in responding to them on a line-by-line basis.

88. On 16 December 2011, Mr Gibson wrote to Mr Rees by email stating that Ipstar was prepared to hold SkyMesh’s current pricing open for another year. Mr Rees responded by email on 17 January 2012. He noted that it was not financially viable for SkyMesh to agree to the offer, and stated that the price should be no more than SkyMesh was paying prior to 1 March 2011. He stated that the 15% increase which Ipstar had applied to reach the current bandwidth price was not financially viable for them. He pointed out that the funding deed which SkyMesh had with the Department prevented an increase in prices for three years from the time the customer is connected, the last customer being connected on 30 June 2011. He acknowledged that SkyMesh had customers whose services had been installed for more than three years, but stated that, since Australia Private Networks Pty Ltd (APN), Ipstar’s other major client, was buying bandwidth for a much cheaper price than SkyMesh, if there was an attempt by SkyMesh to increase its prices, it would mean that those customers “would most likely transfer to APN or cancel and take up Telstra NextG”. He also noted that, although APN was willing to sell bandwidth to SkyMesh at SkyMesh’s old price or less, APN’s agreement with Ipstar precluded on-selling.

89. The bandwidth price of $2,933 per Mbps per month set out in the Second Addendum continued to be levied and paid until the relationship between Ipstar and SkyMesh terminated.

90. It appears that no payment was made by Ipstar to SkyMesh in relation to its statutory warranty claims prior to the commencement of the proceedings at first instance.

91. There is one other matter which should be noted. On 19 April 2012, Mr Cross wrote to Mr Chinveeraphan by email, attaching a spreadsheet which Mr Cross said in his evidence was the formula used in deciding bandwidth pricing with SkyMesh. The spreadsheet was in the following terms:

“SkyMesh Bandwidth Pricing 2012

1) Previous Calculations:

SkyMesh Network at time of negotiations:

Customer base: 34,921

Bandwidth purchased: 220 Mbps

Bandwidth price: AUD$2550/Mbps/Month

Stat Warranty Additional Cost to IPSTAR:

Assumed failure rate 4%/year + 1,397

1.   Assumption based on maximum percentage of failures acceptable to industry

2.   If failure rate was based on SkyMesh/Skybridge assertions, the percentage applied would be higher

Costs – Labor $320, hardware $400 + total $720

1.   Labor cost is based on Skybridge quotes

Total cost + 1,397x$1,005,840 per year

SkyMesh Bandwidth Price Calculations:

Required price increase per Mbps : $1,005,840/220Mbps = $4572/Mbps/year or $381/Mbps/month

1.   This is around 15% of the current BW pricing = $2550/Mbps/month

2.   Resultant pricing = 2550+381 = $2931/Mbps/month

Actual price provided = AUD$2933/Mbps/Month

2) New Bandwidth Pricing

SKM total UT’s purchased	38,726
SKM Fleet Today	28,421
SKM previous Mbps Price	$ 2,550.00
Mbps purchased by SKM today	233
Failure Rate per year	1%	>(0.75%/year is more
Labour & Hardware cost	$ 720.00	accurate based on units
Monthly Price Increase per Mbps	$ 73.19	returned since 2007)
New Monthly Mbps price	$ 2,759.19

3) Sliding Scale (as per 2008 SKM Addendum)

Mbps	Price AUD$
0 to 9	$ 3,372.00
10 to 29	$ 2,989.00
30 to 49	$ 2,889.00
50 to 69	$ 2,832.00
70 to 89	$ 2,791.00
90 to 109	$ 2,760.00
110 to 139	$ 2,735.00
140 to 169	$ 2,715.00
170 to 199	$ 2,700.00
200 to 239	$ 2,686.00	>SKM falls into this price
bracket today

92. As I indicated at [48] and [51] above, Mr Leeflang and Mr Cross were cross-examined at trial. I have summarised a portion of their cross-examination above. There are further parts of the cross-examination which are relevant to the unconscionability claim. It is convenient to deal with the cross-examination of each of Mr Leeflang and Mr Cross separately.

(a)   Mr Leeflang

93. Mr Leeflang denied that he was told to drag his heels for as long as possible and not pay SkyMesh’s claims, or to make it as difficult as possible to make the claims. He was asked whether he was privy to communications with others at Ipstar in which it was decided to respond to the statutory warranty claims by providing, firstly, new bandwidth pricing at a greater amount, secondly, new warranty terms, and thirdly, an RMA process. Mr Leeflang said that that may have been the case, although he stated that he did not recall it happening like that. He said that he had difficulty in answering because he was not part of the “commercial discussion” around the terms of the proposed addendum.

94. Mr Leeflang was cross-examined on his email of 8 February 2011, to which I have referred at [56] above. It will be recalled that, in this email, Mr Leeflang responded to the claims submitted by Mr Rees in his emails of 21 December 2010 and 30 December 2010. Mr Leeflang said that some of these claims may have been claimable, and that, even in relation to valid claims, Ipstar refused to pay them. He said that “rejection [of the claims] wouldn’t have been just my decision. It would have been a decision with Supoj [Mr Chinveeraphan] as well”. He agreed that Mr Chinveeraphan told him to reject all of the claims. Mr Leeflang stated that he thought that it was commercially appropriate to pay the valid claims. He stated that his view was that, if there was evidence that Ipstar owed money, it should pay it. He said that he may have indicated that to Mr Chinveeraphan. He also gave this evidence:

“Q.   Then you say at the top of page 2229, ‘IPSTAR will not [continue] to investigate the list that you’ve provided as there are too many errors and, hence, IPSTAR rejects the total claims submitted.’?

A.   Yes, I do.

Q.   You say you’d gone through a thorough review. Was that true?

A.   I think it was about 390 something claims that we had a look at. We had a look at a sample.

Q.   When you say, ‘following a thorough review’, had you given a thorough views [sic] for those claims?

A.   Of the ones that we sampled, yes.

Q.   You’d found that there were some that you thought were acceptable claims and some that you thought were invalid claims; is that right?

A.   There may have been.

Q.   No, that’s what you found, isn’t it?

A.   Well, I probably did – yeah, I would have found some that were claimable. I mean, what we wanted to do was try and process the whole lot at once.

Q.   You found some claims that were – you thought were valid and some that you thought might be invalid; is that right?

A.   This is, again –

Q.   Is that right?

A.   Yes, from – Paul started [sic] that he supplied.

Q.   Even in relation to the valid claims, you refused to pay them, didn’t you?

A.   Yes, we did.”

95. Mr Leeflang was also cross-examined on the email he received from Mr Rees on 10 February 2011, to which I have referred at [62]-[63] above. It will be recalled that, in this email, Mr Rees responded to Mr Leeflang’s email of 8 February 2011. In Mr Rees’ email, he had stated that SkyMesh had had “no feedback at all from Ipstar regarding the processing or approval of our claims”. Mr Leeflang agreed that this was a fair representation of what occurred. He also agreed that there was never any suggestion that the statutory warranty claims would not be approved.

96. Mr Leeflang also stated that he agreed with Mr Rees’ comment in that email that “we [SkyMesh] don’t believe you’ve got the right to reject the entirety of our claim on the basis that you’ve found a small number of errors”. He said that he was overruled by Mr Chinveeraphan on that point.

(b)   Mr Cross

97. At the outset of his cross-examination, Mr Cross was asked about his email of 19 April 2012 to Mr Chinveeraphan, to which I have referred at [91] above. He agreed that the email contained a “frank and honest account of the way in which the bandwidth pricing had been arrived at” and that he was referring to “the additional cost of doing business” with SkyMesh when he sent the email increasing SkyMesh’s price. He agreed that he and Mr Chinveeraphan had discussions as to Ipstar’s pricing response to SkyMesh in early 2011, and that Mr Chinveeraphan told him that he wanted to recoup any obligation that Ipstar may be under for statutory warranties back from the party asserting the statutory warranties.

98. Mr Cross agreed that he ordinarily got approval from Mr Chinveeraphan in making commercial decisions about the pricing of bandwidth. He agreed that Mr Chinveeraphan directed him to prepare the proposed addendum with the figures for bandwidth pricing which were included in it.

99. Mr Cross denied that he participated in any discussions with Mr Chinveeraphan about the “operational response” to the statutory warranty claim. He denied that it was Mr Chinveeraphan’s direction to make things as difficult as possible for SkyMesh in recovering its statutory warranty claims. He was asked whether it was Mr Chinveeraphan’s direction that part of the company’s response to those statutory warranty claims should be to increase the bandwidth pricing. Mr Cross said that it was not in direct response to the statutory warranty claim, but instead, in respect of reviewing the agreement which was due for renewal or termination. However, he agreed that part of the response that Mr Chinveeraphan directed in respect of the statutory warranty claims was to increase the bandwidth pricing. Mr Cross agreed that the reason for Ipstar adopting the particular bandwidth pricing in its negotiations with SkyMesh was the desire to recover the amount of the statutory warranty claims and that there was no other reason.

100. Later in his cross-examination, Mr Cross was asked further questions about the reason for the increase. He agreed that he had conversations in January 2011 with Mr Chinveeraphan as to what the company’s response should be to the statutory warranty claims. He agreed that they occurred in the context of discussing the costs that might be occasioned to the company if and when the statutory warranty claims were received, and that Mr Chinveeraphan told him that he wanted to increase the bandwidth price so as to be able to recoup the costs as and when the claims arose.

101. Mr Cross was cross-examined on his email of 4 February 2011, which attached the proposed addendum, to which I have referred at [54] above. He agreed that within the proposed addendum there was a price increase, new warranty terms and a new RMA process. He agreed that the inclusion of the RMA process was an attempt to make it part of the contractual arrangements between Ipstar and SkyMesh.

102. Mr Cross was also asked about drafting of Mr Leeflang’s email of 8 February 2011 to Mr Rees, to which I have referred at [56] above. He stated that he did not recall that Mr Leeflang had the belief that some of the claims submitted were valid, but he vaguely remembered discussion about rejecting the whole claim. He denied that he was part of the team determining the response to the claim.

103. Mr Cross was also asked about Mr Chinveeraphan’s email of 8 February 2011, to which I have referred at [57] above. In that context, he was asked the following questions and gave the following answers:

“Q.   Was Mr Supoj directing the company’s response; was he?

A.   On some issues, yes.

Q.   Was he directing the response in terms of how to deal with the statutory warranty claims?

A.   Yes.

Q.   Was he directing the response in terms of increasing the bandwidth price with SkyMesh?

A.   Yes.

Q.   Was he directing the response in terms of the matters that he was requiring of SkyMesh in the proposed addendum?

A.   Yes.”

104. Mr Cross stated that he would have been aware that some of the claims made by SkyMesh were valid. He said that he did not consider whether it was appropriate to reject the claims in their entirety as it was not part of his remit and he did not question Mr Chinveeraphan’s authority. He said that it was a matter which fell under the operational department. Ultimately, he said that he believed that claims which were valid should not have been rejected.

105. Mr Cross was also asked about Mr Rees’ inquiry in his email of 9 February 2011, to which I have referred at [58]-[61] above, regarding whether Ipstar was increasing the bandwidth price for all customers. He acknowledged that it was only the price payable by SkyMesh that was being increased, and said that he did not believe that doing so would put SkyMesh at a competitive disadvantage in relation to other internet service providers. Even with the price increase, Mr Cross stated that he believed that it was possible for SkyMesh to remain competitive.

106. Mr Cross was asked about his email of 21 February 2011 to Mr Rees, to which I have referred at [65] above, which he acknowledged was one of his first responses to Mr Rees’ inquiries about what Mr Cross had meant by the “increased cost of doing business”. He agreed that he did not give Mr Rees a “frank and honest answer” as to the reason for the increase and he ultimately stated that he was not sure why he did not do so. It was put to him that he lied in the email and he responded that he “didn’t reveal all the costs”. He said that he had been given legal advice as to how to respond to Mr Rees’ inquiries. Ultimately, he was asked these questions and gave these answers:

“Q.   But you’ve written a letter that you have accepted was lacking in frankness and wasn’t an honest account and you’ve told me that that’s not normally how you conduct yourself, so I want to suggest to you that one of the reasons that you didn’t reveal the true position was that you were uncomfortable with that true reason for the price increase; that’s fair, isn’t it?

A.   Yes.

…

Q.   It was your intention, when writing this letter, not to reveal the true reason for the price increase, wasn’t it? Wasn’t it?

A.   Yes.”

107. Mr Cross was asked about his email of 23 February 2011 to Mr Rees, to which I have referred at [67] above, which he agreed was his second attempt to explain the reasons for the price increase. Ultimately, he acknowledged that he did not give a “frank and honest answer” to the inquiry in that email.

108. Mr Cross was asked about his email of 1 March 2011 to Mr Rees, to which I have referred at [71] above. In a passage relied on by the primary judge at [135(3)], he was asked the following questions and gave the following answers:

“Q.   You say, ‘We have already seen a huge increase in the number of service calls from SkyMesh since December which is disproportionate to other providers, then you say (and I do not mean your statutory warrant retro claims.’

A.   Yes.

Q.   You were intending to suggest, weren’t you, that the reason for the price increase was not to do with the statutory warranty claims?

A.   No, I’m just saying there’s a huge increase in the number of service calls since December.

Q.   Come on, Mr Cross, have a look at this. ‘We’ve seen a huge increase in the number of service calls from SkyMesh since December which is disproportionate to other providers’ and then you specifically state, ‘And I do not mean your statutory warranty retro claims’, don’t you?

A.   Yes.

Q.   In other words you’re talking about issues other than the statutory warranty claims?

A.   Yes.

Q.   You’re seeking to justify the price increase on the basis of matters other than the statutory warranty claims; aren’t you?

A.   Yes.

Q.   That’s not a true reflection of the reasons for your price increase; was it?

A.   No.

Q.   You accept, don’t you, that this third time that you’ve dealt with this concept didn’t involve a frank and honest response from you? You accept that; don’t you?

A.   Partially, yes.

Q.   Insofar as you were purporting to give an explanation for the increased cost of doing business it was a false explanation; wasn’t it?

A.   Yes.

Q.   The reason you gave a false explanation is because you did not want to reveal the true reason for the price increase, that’s right; isn’t it?

A.   Yes.

Q. Can we go then to the first time you deal with this issue, it’s at 2386 [Mr Cross’ email to Mr Rees of 2 March 2011, referred to at [73] above]. You don’t in that email reveal the true reason for the price increase; do you?

A.   No.

Q.   You tried to keep secret from SkyMesh the true reason for the price increase; didn’t you?

A.   No.

Q.   Really? Is that really your evidence?

A.   We didn’t reveal the reason for the price increase.

Q.   We know that, you tried to keep it secret; didn’t you?

A.   Not intentionally.

Q.   Mr Cross, you intentionally kept secret from SkyMesh, from the time that you were asked questions about it, what the real reason was for the price increase; didn’t you?

A.   Yes.”

109. He subsequently gave this evidence:

“Q.   He’d already made a counter-proposal and you’d rejected it?

A.   Yes.

Q.   You believed that he had no other practical alternative but to agree to the price that you demanded?

A.   As I’ve just stated he could have volunteered an alternative arrangement.

Q.   You were aware at this stage, that SkyMesh was dependent upon obtaining bandwidth to continue its business of providing IPSTAR satellite services to its customers?

A.   Yes.

Q.   And you knew that there had been a substantial capital cost in providing SkyMesh’s customers with the equipment that was supplied by IPSTAR?

A.   Yes.

Q.   You were aware that there was [sic] some 30,000 odd user terminals active to the SkyMesh network at about that time?

A.   Yes.

…

Q.   Because to replace IPSTAR satellite equipment at its various customers’ premises would have, assuming they were prepared to move to some other provider, would have cost $2,000 times 30,000, something in the order of 6 million [sic]?

A.   Yes.”

110. Mr Chinveeraphan did not give evidence.

The relevant legislation

111. Section 22 of the ACL, as in force at the time of the entry into the Second Addendum, was relevantly in the following terms:

“22   Unconscionable conduct in business transactions

(1)   A person must not, in trade or commerce, in connection with:

(a)   the supply or possible supply of goods or services to another person (other than a listed public company); or

(b)   the acquisition or possible acquisition of goods or services from another person (other than a listed public company);

engage in conduct that is, in all the circumstances, unconscionable.

Note: A pecuniary penalty may be imposed for a contravention of this subsection.

(2)   Without in any way limiting the matters to which the court may have regard for the purpose of determining whether a person (the supplier) has contravened subsection (1) in connection with the supply or possible supply of goods or services to another person (the business consumer), the court may have regard to:

(a)   the relative strengths of the bargaining positions of the supplier and the business consumer; and

(b)   whether, as a result of conduct engaged in by the supplier, the business consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and

(c)   whether the business consumer was able to understand any documents relating to the supply or possible supply of the goods or services; and

(d)   whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the business consumer or a person acting on behalf of the business consumer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services; and

(e)   the amount for which, and the circumstances under which, the business consumer could have acquired identical or equivalent goods or services from a person other than the supplier; and

(f)   the extent to which the supplier’s conduct towards the business consumer was consistent with the supplier’s conduct in similar transactions between the supplier and other like business consumers; and

(g)   the requirements of any applicable industry code; and

(h)   the requirements of any other industry code, if the business consumer acted on the reasonable belief that the supplier would comply with that code; and

(i)   the extent to which the supplier unreasonably failed to disclose to the business consumer:

(i)   any intended conduct of the supplier that might affect the interests of the business consumer; and

(ii)   any risks to the business consumer arising from the supplier’s intended conduct (being risks that the supplier should have foreseen would not be apparent to the business consumer); and

(j)   if there is a contract between the supplier and the business consumer for the supply of the goods or services:

(i)   the extent to which the supplier was willing to negotiate the terms and conditions of the contract with the business consumer; and

(ii)   the terms and conditions of the contract; and

(iii)   the conduct of the supplier and the business consumer in complying with the terms and conditions of the contract; and

(iv)   any conduct that the supplier or the business consumer engaged in, in connection with their commercial relationship, after they entered into the contract; and

(k)   without limiting paragraph (j), whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the business consumer for the supply of the goods or services; and

(l)   the extent to which the supplier and the business consumer acted in good faith.

…

(5)   For the purpose of determining whether a person has contravened subsection (1):

(a)   the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and

(b)   the court may have regard to circumstances existing before the commencement of this section but not to conduct engaged in before that commencement.”

112. Section 22 took effect with the introduction of the ACL on 1 January 2011. It was in similar terms to its predecessor, s 51AC of the TPA.

113. At that time, s 21 lso dealt with unconscionable conduct in respect of the supply of goods and services. However, s 21(5) limited its scope to “goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption”. Section 21(6) also provided that the section did not include a supply of goods if it was for the purpose of resupply. Further, unlike s 22(5)(b), which limited the conduct to which a court could have regard to that occurring after the section commenced, s 21(4)(b) provided that, in determining whether there was a contravention of s 21, “the court may have regard to conduct engaged in, or circumstances existing, before the commencement” of the section. The section was in that respect similar to its predecessor, s 51AB of the TPA.

114. These provisions were amended by the Competition and Consumer Legislation Amendment Act 2011 (Cth). The amendments took effect from 1 January 2012. Section 21 was amended to remove the provisions which limited its scope to “goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption” and excluded the supply of goods for the purpose of resupply. Section 21(3)(b) of the amended provision, like its predecessor s 21(4)(b), stated that the court, in determining whether there was a contravention of s 21, could “have regard to conduct engaged in, or circumstances existing, before the commencement” of the section. Section 22 was amended to take account of the fact that the contraventions it covered were now wholly dealt with in s 21. The provisions of s 22(5) were repealed.

115. The provisions of s 22(5)(b) as it existed at the time of the alleged contraventions are not without significance, as some of the conduct to which I have referred at [27]-[50] above occurred prior to 1 January 2011. However, no point was taken concerning this in the appeal and, in any event, the conduct which is relevant to the question of unconscionability in the setting of the bandwidth price, to the extent that it commenced prior to 1 January 2011, continued until 27 April 2011, the date of execution of the Second Addendum.

116. Further, it should be noted that the amendment to s 21 which came into force on 1 January 2012 contained the following subsection which was not previously incorporated into either s 21 or s 22 of the ACL:

“21   Unconscionable conduct in connection with goods or services

...

(4)   It is the intention of the Parliament that:

(a)   this section is not limited by the unwritten law relating to unconscionable conduct; and

(b)   this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour; and

(c)   in considering whether conduct to which a contract relates is unconscionable, a court’s consideration of the contract may include consideration of:

(i)   the terms of the contract; and

(ii)   the manner in which and the extent to which the contract is carried out;

and is not limited to consideration of the circumstances relating to formation of the contract.”

117. The provisions of the TPA relevant to the defective goods claim are s 74B, s 74D, s 74H and s 74K. Relevantly, they were in the following terms:

“74B   Actions in respect of unsuitable goods

(1)   Where:

(a)   a corporation, in trade or commerce, supplies goods manufactured by the corporation to another person who acquires the goods for re-supply:

(b)   a person (whether or not the person who acquired the goods from the corporation) supplies the goods (otherwise than by way of sale by auction) to a consumer;

(c)   the goods are acquired by the consumer for a particular purpose that was, expressly or by implication, made known to the corporation, either directly, or through the person from whom the consumer acquired the goods or a person by whom any antecedent negotiations in connexion with the acquisition of the goods were conducted;

(d)   the goods are not reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied; and

(e)   the consumer or a person who acquires the goods from, or derives title to the goods through or under, the consumer suffers loss or damage by reason that the goods are not reasonably fit for that purpose;

the corporation is liable to compensate the consumer or that other person for the loss or damage and the consumer or that other person may recover the amount of the compensation by action against the corporation in a court of competent jurisdiction.

20   Notwithstanding that these proceedings have been on foot for over 5 years, no evidence has been served by the plaintiff concerning the conclusions that might be drawn from the contents of the records associated with service calls apart from a handful of random examples. It is not suggested, nor could it be, that the facts recorded by Skybridge technicians on the small number of records that have been examined facilitate any conclusion as to the contents of the thousands of records that have not been examined.

21   While the defendant accepts that there was a period during which it supplied equipment incorporating a component (the Patriot OMT) that was prone to leaking, it put in place procedures to facilitate the replacement of defective parts at its cost. As far as it is able to ascertain, it has fully discharged its obligations in that regard.”

238. At the outset of the trial, senior counsel for SkyMesh made it clear that its case was that it did not matter why the equipment did not work. He made the following comments:

“WILLIAMS:   It does not matter why they don’t work as they’re supposed to work, it is the fact that they don’t work as they are supposed to work which is the matter that makes them unmerchantable and not fit for purpose.”

239. This was consistent with SkyMesh’s Statement of the Real Issues in Dispute, which was filed on 3 November 2016, four days before the trial began on 7 November 2016. Relevantly, it contained the following statement:

“4.   Whether the goods that were manufactured by the defendant (as a deemed manufacturer), and supplied by the plaintiff to consumers as set out in the amended schedules to the Commercial List Statement were:

a.   of unmerchantable quality; and/or

b.   unfit for purpose,

within the meaning of the Trade Practices Act 1974 (Cth) and/or the Australian Consumer Law (as applicable).”

240. That paragraph did not limit the issue to damage from water ingress or firmware problems.

241. On the second day of the trial, there was discussion as to how the claim would be proved. The following exchange occurred between the primary judge and senior counsel for SkyMesh:

“HIS HONOUR: Well who is going to look at the 20,000 documents? That’s why I’m coming back to that you know.

WILLIAMS: I know, I understand the practical problem and it’s been exercised in my mind for quite a long time. But we shouldn’t be put to this position. If we are put to it –

HIS HONOUR: I hope it can be avoided but it looks like it may not be able to be avoided.

WILLIAMS: Well it’s not going to be avoided by us abandoning it, your Honour.

HIS HONOUR: No, I understand that.

WILLIAMS: We’ve tried to float some creative ways of dealing with it, just quick and cheap, they don’t seem to be attractive so we will have to think some more and your Honour might get lots of little packs like we see today.

HIS HONOUR: Well if you have to go down that route it won’t be a three week case it will be probably a lot longer and what I’ll have to do is vacate the hearing date and send you off to another date and probably send you off to a referee and that will cost both parties a lot of money and at the end of the day they’d be far better off spending their money on sorting out an agreement between themselves.”

242. The issue was further discussed on the third day of the trial. The following exchange took place:

“HIS HONOUR: Yes. So you can’t realistic – no sensible commercial person could ever tolerate that situation, therefore, Mr Donaldson, I’m going to say to you, I want you to go your client and get some specific instructions about Mr Williams’ proposal for 40 – he said 30 – I’m changing it to 40 – 40 samples taken at random by a process of selection that you, your client agree to, as a way through, not because you have to legally, but because there’s a considerable commercial imperative to agree to it.

DONALDSON: Can I respond to that –

HIS HONOUR: Yes.

DONALDSON: – even before speaking to your Honour, I note and agree, with respect, entirely with the commercial imperative, but because of the lack of utility in deciding even 40 claims wherever claim is based on a different document with a different set of facts – I think the way though it is probably something the plaintiff should have done in the first place and that is to look at them all and for us, in turn, to look at them all, and then to determine – let’s find out, first of all, whether or not we’re still meeting a claim based upon the pleaded allegations –

HIS HONOUR: Well, assume for the moment you are. Assume you are.

DONALDSON: Assuming that that’s the claim we’re facing, the first step would be for the plaintiff to look at those 4,000 claims and see how many of them actually relate to the pleaded basis of unmerchantability, namely water ingress into ODUs or –

HIS HONOUR: And firmware bug.

DONALDSON: – and firmware bug and when that process is gone through, the plaintiff might decide that it’s 2,000 instead of 4,000 and we might agree that it’s 1,500 instead of 2,000 and the case might contract enormously, but the first step to actually identify the short way home is to identify what the issues are and we can’t identify what the issues are on the basis of a random sample.

HIS HONOUR: Well, don’t worry about any change of issues. This is all predicated on the assumption that the case you’re here to meet is the one that’s been pleaded against you, because that’s a good place to start.

DONALDSON: It is.

HIS HONOUR: Now, my point is this: you could logically say – and your client could logically agree, look, for them to go through that is another days and days of sorting through material, what’s wrong with taking a fair, random sample and saying that will determine – that way we all save a lot of money, one way or the another [sic], if we win or we loss, we’re saving a lot of money, it is an option open to the client and it doesn’t suffer from any problem about the pleading issue because, on the assumption that the case you’re meeting is the one that’s pleaded, you will get, let’s say the 50 samples or 100, if you want 100, whatever it is, at the moment take 40 which is 1% and if it turns out, when you look at the 40, there’s 20 in there where there’s a modem problem that’s not the bug, firmware bug or not clearly that, you will say, ‘Well, they don’t get up on that because – the pleaded case is limited to the bug and the water ingress. Those are the things that we’re looking for’, and if they’re not there then they don’t make good their case. You’ve got that open to you to say that and you’re not precluded from saying that about the 40 – any of the 40 that meet the criteria. What you want to be sure of is that there’s a fair sampling for some of the reasons that I mentioned this morning. That is a commercial way of dealing with it, and, by the way, it is not dissimilar to what you might get physical [sic] you called in an expert statistician or someone very experienced in sampling. I mentioned that mineral water case. In that mineral water case, there were a million bottles of mineral water in a warehouse in Alexandria and we went with the experts to Alexandria and we say, ‘What is the way in which we can take a sampling of this that is a fair sampling and we will then look at that and with that sample we will know what, from that, whether there’s problem or not?’, and he devised a sampling scheme which was used and then they were tested and the result was that a significant number had – not all – but many bottles had the problem. So all I’m saying is there’s a way through the thicket, if you wish it.”

243. On the eighth day of the trial, the primary judge was informed that the parties had agreed on a representative sample process in dealing with the claims and its terms were incorporated in a document which became Exhibit H. I have summarised that agreement at [123] above. Immediately before its tender, the following exchange took place between the primary judge and senior counsel for Ipstar:

“HIS HONOUR: I think the distinction is this, that the pace maker argument says, look, every one of those units was defective because they were, as a group, collectively prone to failure. The second argument doesn’t have to do that, it doesn’t have to make good that. It just says we’re just going to claim every call out was as a result of something in the system not working, why we don’t know, for this argument, we just say someone had to go out and do something and it doesn’t matter why and we don’t have to show it was water ingress or the modem was faulty or something like that, and then the third argument is, well, we’ll have to show that these individual items were no good. Is that – that’s –

DONALDSON: There’s always been the understanding this is all within the pleaded case, that he can fit two within the pleaded case, then we’ll address it as a separate argument.”

244. On the following day, a further exchange occurred:

“HIS HONOUR: I just want to explore that. So I assume they both say, ‘Yes, it’s an equipment failure, but it’s not a hanging modem, if the case of a modem, it’s some other problem with the modem, not caused by the user, not the consumer problem, or an ODU problem not caused by water ingress, but, nevertheless, a fault’, what do I do then, if they say that?

DONALDSON: What will your Honour –

HIS HONOUR: You’ll be saying, ‘Well, the pleaded case is limited to those two things.’?

DONALDSON: Yes,

HIS HONOUR: And, Mr Williams, you’ll –

WILLIAMS: I’ll say it isn’t.

HIS HONOUR: No, you’ll say any fault –

WILLIAMS: It isn’t and it doesn’t matter – sorry.

HIS HONOUR: You’ll say any fault, if it doesn’t work for any reason integral or inherent in the equipment, then it’s faulty?

WILLIAMS: Yes. And there’s another level to that and it’s the pure pacemaker and that is the goods as a whole were unmerchantable so if you have to go and do something do [sic] them they get replaced, well, you get it no matter what the immediate issue might have been because you’re replacing faulty goods.

…

DONALDSON: I’m not sure if I misheard my learned friend, I might have, when we were having that little contra-tung about the pleading, I’m not sure if I heard him say he’s not restricted by the pleading. We don’t accept that that’s the position and it hasn’t been since we embarked down this course. If what he’s really saying isn’t the case he wants to put is within his pleading then that’s fine.

HIS HONOUR: I had understood that to be what he said.

DONALDSON: I might have misheard him. Maybe he was uncharacteristically sloppy.

WILLIAMS: To be clear we contend that based upon the pleading we’re entitled to say that something is unmerchantable or unfit for purpose without ascribing a root cause as to why.

HIS HONOUR: I think you said that in your opening.

WILLIAMS: We did.

DONALDSON: As long as that’s understood that that’s the platform from which we’re working we’re content, your Honour.

HIS HONOUR: You’re not going to say that he can’t run that case because of the pleading; are you?

DONALDSON: It depends what he means by root cause.

HIS HONOUR: He’s just made it clear, he did in the opening, he said, ‘It’s not our job to ascertain a root cause. If we show that it wasn’t working, modem or outdoor unit, that’s sufficient’ he claims.

DONALDSON: What’s what he claims.

HIS HONOUR: Does the pleading support that?

DONALDSON: Earlier when we were discussing these propositions I went to the pleading, no, we say it doesn’t support it and Mr Williams stood up in response to that and says, yes, it does and that’s what divides us.

HIS HONOUR: You mean the issue is does the current pleading support such a –

DONALDSON: Precisely.

HIS HONOUR: In other words he’s not saying he is seeking or has sought to amend.

DONALDSON: No, and when the proposal for this proportionate approach came up I made it very clear that it was on that basis and Mr Williams made very clear that he thought I was misconstruing the pleading and that’s fine, we can have a debate about that but that’s all I wanted to make clear.”

245. Finally, on the eleventh day after the conclusion of the evidence, senior counsel for Ipstar made the following submission:

“DONALDSON: We will treat that as abandoned, your Honour. The first matter that I might address is my learned friend’s observation that we are taking an arid pleading point, and his reliance upon conduct, including payment of some claims and the wording of questions to the experts prior to the commencement of the hearing. There is a well-established principle that while part [sic] are bound by the case they plead, a case may be conducted in such a way as to expand the issues beyond those strictly pleaded so as to leave it open to a party at the end of a case to rely on things that weren’t pleaded.

But you couldn’t imagine a more profoundly different case than this one, where about day 3 or 4, when it became absolutely obvious that this case hadn’t been prepared in a way that was capable of sensible and economical determination, your Honour requested of me that I obtain instructions to adopt an unorthodox but pragmatic solution to the problem that everyone faced. And I made it absolutely clear, and there was no demur from anyone about this, that if we were going to go down the track of me effectively receiving all of the expert evidence in connection with these 102 sample claims that hadn’t even been selected before in the course of the trial, and adopt a procedure of that time, it was going to be on the basis that the allegations we met were the ones that were identified in the pleading. I identified what those allegations were, and we proceeded with a completely unorthodox, but pragmatic and sensible, approach to getting this litigation over with on that express understanding. Now that is the absolute antithesis of a trial conducted on the basis that the issues were wider than those pleaded, and there could be no stronger case for binding someone to, not only what is pleaded, but in effect an agreement as to how we were all to find our way through the thicket, as your Honour put it, and get this case resolved. So if there is any arid, there is an argument to the effect that there was conduct pre-dating those events by weeks or months or years which indicated that some other course of action was contemplated by the parties.”

(d)   The concession

246. The concession referred to by the primary judge was made in the context of closing submissions by Ipstar in relation to Exhibit U tendered during the hearing. Exhibit U was a document identifying the 102 representative items. The concession was as follows:

“1.   The Sample Claims Document Summary (Exhibit U) (the Table) was tendered on 24 November 2016 in the course of the plaintiff’s submissions in reply. The defendant’s response to the document is as follows.

2.   The defendant accepts that, in connection with the sample cases highlighted in yellow in the Table, the plaintiff has proven that the items were affected by water ingress.

3.   As regards the uncoloured entries and the items coloured orange (number 43) and blue (number 73), the defendant’s position is that:

a.   With the exception of:

i.   items 69 and 75 in respect of both the ODU and the modem; and

ii.   items 1, 11, 17 and 24 in respect of the modem,

the expert evidence establishes that at the time that they were replaced in the course of the relevant service call, their functioning was impaired by a defect;

b.   However, there was insufficient evidence in respect of any of the uncoloured entries to enable the experts to identify the cause of the defect, notwithstanding that they were asked to do so (question 2);

c.   The Court cannot, without such expert assistance, arrive at a reliable conclusion as to the cause of any such defect by reference to the material extracted from the service records by the plaintiff and reproduced in the table;

d.   If the plaintiff is correct in its submission to the effect that the onus of establishing that the defendant supplied unmerchantable goods is established by proof of the matters referred to in subparagraph (a) coupled with evidence of the timing of the failures (as to which see paragraphs 20 to 28 of the defendant’s written outline), there is no need for the Court to have regard to the detailed service records;

e.   If the plaintiff is incorrect in that regard then, by reason of the matters set out in subparagraphs (b) and (c), consideration by the Court of the detailed contents of the Table cannot assist it.”

The document in which the concession was said to be made attached a table which set out the 102 representative items. A large number of the items fell within the uncoloured category.

(e)   The parties’ submissions

247. Senior counsel for Ipstar submitted that its claim on this issue was simply one of a denial of procedural fairness. He submitted that SkyMesh had come to the case without a full analysis of all of its claims. He referred to the exchange which took place on the second day of the trial, to which I have referred at [241] above. He submitted that the references to the trial transcript in Ipstar’s written submissions, some of which I have referred at [241]-[245] above, showed it was clearly a condition of the agreement that Ipstar be confined to its pleaded case. He pointed out there was no obligation on Ipstar to agree to the course which was proposed.

248. Senior counsel for Ipstar referred to the discussion which took place on the third day of the trial, which I have set out at [242] above. He said that the agreement followed, but, as his predecessor confirmed in closing oral submissions at the trial which I have extracted at [245] above, it was on the basis that it was confined to the pleaded case.

249. Senior counsel for Ipstar submitted that there was no challenge to the primary judge’s conclusion as to the scope of the pleadings, namely, that they were confined by the particulars in paragraph 9.1 of the Third Further Amended Commercial List Statement. With respect, this does not appear to be correct. Ground 2 of the notice of contention expressly raised this issue and it was argued in the submissions in this appeal both written and oral.

250. Senior counsel for Ipstar also referred to the findings of the primary judge at [111]-[112] and [114]-[115] that four of the 102 representative items would not be recoverable if water ingress or firmware problems were required to be proved.

251. Ipstar submitted in writing that the primary judge misconstrued Ipstar’s concession which I have set out above at [246] above, stating that it was limited to defects generally, and not the causes of such defects, which had to be determined in accordance with the particularised case. In reply, senior counsel for Ipstar submitted that SkyMesh’s Reply to the Amended Commercial List Response did not expand the pleadings.

252. In those circumstances, it was submitted by Ipstar that the question of damages should be remitted to the primary judge for further consideration.

253. Senior counsel for SkyMesh submitted that the pleadings included both the Third Further Amended Commercial List Statement and the Reply to the Amended Commercial List Response, and that the issue which divided the parties was whether it was necessary to prove the underlying cause of the defect or not. He submitted that this issue was expressly raised in the Reply. He noted that the primary judge accepted at [92(9)] that SkyMesh in the Reply to the Amended Commercial List Response pleaded that it was not necessary to establish why the equipment was not working.

254. Senior counsel for SkyMesh submitted that the essential requirement of pleading was to put the other party on notice of the case it had to meet. He submitted that the pleading including the Reply did so. He accepted that the allegations in the Reply may not have been put in the most logical part of the pleading, but said that Ipstar was on notice of the allegation.

255. Senior counsel for SkyMesh submitted that, having regard to the structure of the judgment, the primary judge had already made his findings before dealing with Ipstar’s concession. He stated that the concession was designed to protect Ipstar if it was concluded that SkyMesh was only entitled to succeed on the basis of defects caused by water ingress or firmware problems.

Consideration

256. The real difficulty raised by this ground of appeal is that there was no discussion as to what precisely encompassed “the pleadings” in the discussion which led to the representative sample process. The pleadings in paragraphs 9.1 and 10.1 simply allege that the goods were not reasonably fit for purpose and not of merchantable quality. However, as the primary judge pointed out, their generality was limited by the particulars, which allege the specific defects of the water ingress and firmware problems.

257. However, as I indicated at [234]-[235] above, paragraphs 3 and 6 of the Reply to the Amended Commercial List Response, although not directly responsive to the paragraphs in the Response to which they were directed, expressly raised the proposition that SkyMesh was not obliged to identify the precise cause of failure. No application was made to strike out these paragraphs of the Reply.

258. It thus appears that the claim of unfitness for purpose and lack of merchantable quality was limited to the water ingress and firmware problems by the particulars which were included in the Second and Third Further Amended Commercial List Statements. However, the Reply sought to extend that claim to defects irrespective of whether they were caused by those particular faults.

259. In that context, it also must be remembered that, as the primary judge pointed out at [92(1)], SkyMesh’s case was opened widely, making it clear that it was not limited to the water ingress or firmware problems, and SkyMesh’s Statement of the Real Issues in Dispute filed shortly prior to the commencement of the trial made no reference to the water ingress or firmware problems.

260. Proceedings in the Commercial List of the Supreme Court are commenced by summons and are governed by Practice Note SC Eq 3, which does not specifically refer to the filing of a reply to a commercial list response. If these proceedings were commenced by statement of claim, the filing of a reply would be permitted by r 14.4 of the Uniform Civil Procedure Rules2005 (NSW) (the UCPR). Further, a “pleading” is relevantly defined in the dictionary to the UCPR to include “a statement of claim, defence, reply and any subsequent pleading for which leave is given”. Although Part 14 of the UCPR does not directly apply in proceedings commenced by summons (see r 14.1), a commercial list statement and a commercial list response stand in the place of pleadings. In circumstances such as the present case where a reply to the commercial list response was permitted, it would seem to me that such a reply forms a part of the pleadings.

261. In these circumstances, the pleaded case did encompass the allegation that Ipstar was liable for defects irrespective of whether they were caused by the water ingress or firmware problems.

262. Ipstar put its case primarily on the basis that it was denied procedural fairness. I do not think that this was the case. It had the Reply to the Amended Commercial List Response for some two months prior to the commencement of the trial and was aware that not only was SkyMesh seeking to conduct the case on the basis that it did not have to establish that the defects were due to the water ingress or firmware problems, but that it was contending that this claim fell within the pleadings. The fact that Ipstar may have believed to the contrary does not mean that it was denied procedural fairness.

263. It has been pointed out on many occasions that the function of pleadings is “to state with sufficient clarity the case that must be met” in order to “ensure the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against him or her”: Banque Commerciale SA en Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 at 286; Dare v Pulham (1982) 148 CLR 658 at 664. SkyMesh’s pleading in the present case, which includes the Reply to the Amended Commercial List Response, adequately put Ipstar on notice that SkyMesh was contending it was entitled to compensation for defective equipment irrespective of the cause.

264. So far as the concession was concerned, it seems to me that its terms, which I have extracted at [246] above, are entirely clear. Paragraph 3(d) states that, if SkyMesh was correct in establishing that it satisfied its onus by proof of the matters in paragraph 3(a), then there was no need to have regard to the detailed service records for each of the 102 representative items. Paragraph 3(a) contains the concession that, in respect of the 102 representative items, for all but six of the items, the expert evidence established that at the time of replacement the functioning was “impaired by a defect”. It follows that the effect of the concession was that, if SkyMesh was correct in its assertion that all it had to prove was that each of the 102 representative items was defective, then there was no need for the primary judge to go to the detailed service records for each item. Subject to the pleading issue, it was not contended in this appeal that, to establish liability, SkyMesh had to go further and prove the reason that each piece of equipment was defective.

265. The primary judge concluded at [108] that, on the basis of that concession, that he did not have to go into the detail of the 102 representative items. Once it is appreciated that the pleading extended to claiming that Ipstar was liable for defects beyond those resulting from the water ingress or firmware problems, then, in my opinion, he was correct in adopting this course.

266. It follows that the grounds of appeal in relation to the defective goods claim have not been made out.

Conclusion

267. In the result, I would make the following orders:

1. Grant the appellant leave to amend its notice of appeal in terms of the draft amended notice of appeal dated 30 August 2017.

2. Order the appeal be dismissed.

3. Order the appellant pay the respondent’s costs of the appeal.

268. BEAZLEY P: I agree with the reasons of Bathurst CJ and the orders his Honour proposes.

269. LEEMING JA: I agree with the orders proposed by the Chief Justice, and with the entirety of his Honour's reasons. What follows is by way of elaboration, not qualification, on the principal point in the appeal, which was whether Ipstar’s conduct contravened s 22 of the Australian Consumer Law.

270. First, in an appeal challenging the evaluative conclusion of the primary judge that Ipstar's conduct was unconscionable contrary to the Australian Consumer Law, there is no escape from a close consideration of the facts: Thorne v Kennedy [2017] HCA 49; (2017) 91 ALJR 1260 at [41]-[43]. This reflects the characteristic approach of equity, as described by Dixon CJ, McTiernan and Kitto JJ in Jenyns v Public Curator (Q) (1953) 90 CLR 113 at 118-119; [1953] HCA 2. As the Chief Justice’s reasons make plain, consideration is required of not merely the communications between the parties leading to the second addendum, but also the market conditions under which they were operating, and the matters which in fact were motivating Ipstar (which, in this case, were contrasted with what Ipstar said at the time were its reasons). I mention this because Ipstar maintained that “a party’s reasons for seeking an increased price are not relevant”. I disagree. The submission sits ill with the words “in all the circumstances” in s 22(1), finds no support in the long list of matters to which a court may have regard in s 22(2), and, more fundamentally, is contrary to Jenyns. There is nothing to suggest that the statute in applying and expanding the equitable doctrine in any way curtailed the approach to be adopted in evaluating whether the party’s conduct contravened it.

271. Secondly, it is true that a commercial party is ordinarily entitled to extract the highest price it can for the supply of its product. It is also true that a commercial party can and should set its price having regard to that party’s liabilities, including in the present case Ipstar’s liability for the defective products it had supplied in the past. And it is true that mere inequality of bargaining power, such as was present in the dealings between Ipstar and SkyMesh, is of itself unremarkable and does not engage the statutory proscription of unconscionability. Ipstar rightly emphasised as much.

272. However, Ipstar’s conduct went considerably further. On Ipstar’s own case, Ipstar determined the price it would charge SkyMesh by reference to the likely cost to it of the defective goods it had previously supplied to SkyMesh’s customers. Ipstar did not raise its price to other purchasers of bandwidth. Instead, it sought to pass on the entirety of its liability generated by defective supplies to SkyMesh’s customers to SkyMesh. Then, after the claims had been made and pressed, Ipstar did not pay them. It did not, prior to the commencement of proceedings, pay any of the claims for defective equipment which it used to determine the price increase, even those which it thought were valid. On Ipstar’s case, it had calculated a price increase based on a liability to pay claims, while at the same time refusing to pay any of them. The impression from the documents is that Ipstar appears to have taken quite extreme steps to prolong the claims adjudication process. And at the same time as Ipstar was refusing to pay any claims, which on its case were incorporated into the increased price charged to SkyMesh, Ipstar insisted on SkyMesh paying the increase immediately. All this took place in circumstances where SkyMesh was effectively locked in to dealing with Ipstar, because SkyMesh could only change supplier at a cost of tens of millions of dollars in replacing equipment which could only be used for the Ipstar service. Finally, throughout this time, Ipstar intentionally kept secret the real reason for the price increase, by giving explanations which those officers which it called accepted were known by it to be false at the time they were given.

273. Mr Supoj Chinveeraphan determined the stance taken by Ipstar. He did not give evidence. Although there was no discovery, it was plain from one email chain, inadvertently sent to SkyMesh by Ipstar, that he was closely involved in settling the wording of the correspondence between the parties. Ipstar’s officers who gave evidence, Messrs Leeflang and Cross, accepted as much. It was Mr Chinveeraphan who drafted the words “IPSTAR rejects the total claim submitted” in its response to SkyMesh, notwithstanding that its officers believed that some of the claims were valid, and notwithstanding the way Ipstar maintained the increase had been calculated.

274. It is not necessary in order to determine this appeal to address the advantages enjoyed by a trial judge in reaching the evaluative conclusion that the conduct falls within that proscribed by statute. I agree with the Chief Justice that Ipstar's conduct was so far removed from what is acceptable in Australia that it should be regarded as contrary to s 22.

275. Finally, Ipstar’s written submissions (although not those made orally) maintained that “unconscionability requires a high level of moral obloquy”. I have not found any assistance in asking whether Ipstar's conduct involved a “high level of moral obloquy”, and I respectfully do not accept the submission, notwithstanding the use of that term by Spigelman CJ in Attorney-General (New South Wales) v World Best Holdings Ltd (2005) 63 NSWLR 557; [2005] NSWCA 261 at [121], and its endorsement in Paciocco v Australian and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28 at [188].

276. The passage in World Best in its context is as follows:

“Even if the concept of unconscionability in s 62B of the Retail Leases Act is not confined by equitable doctrine, as the decisions under s 51AC of the Trade Practices Act suggest, restraint in decision-making remains appropriate. Unconscionability is a concept which requires a high level of moral obloquy. If it were to be applied as if it were equivalent to what was ‘fair’ or ‘just’, it could transform commercial relationships in a manner which the Minister expressly stated was not the intention of the legislation. The principle of ‘unconscionability’ would not be a doctrine of occasional application, when the circumstances are highly unethical, it would be transformed into the first and easiest port of call when any dispute about a retail lease arises.”

277. I do not think that Spigelman CJ was purporting to gloss the statute when his Honour referred to a “high level of moral obloquy”. Rather he was concerned to emphasise that to find that conduct was not “fair” or “just” was insufficient, and that the doctrine was one of “occasional application, when the circumstances are highly unethical”. The essence of each of the four sentences in the passage reproduced above is that the doctrine is unlikely to be available in ordinary cases. It is important not to read the second sentence reproduced above in isolation, or as if it were a statute. As was said in Stewart v Atco Controls Pty Ltd (in liq) (2014) 252 CLR 307; [2014] HCA 15 at [32], it is necessary to bear in mind that “the words of a principle stated in a judge’s reasons for decision require consideration of what those reasons convey about the principle and are not to be applied literally.” A unanimous High Court there cited what had been said by Gummow J in Brennan v Comcare (1994) 50 FCR 555 at 572:

“The frequently repeated caution is against construing the terms of those judgments as if they were the words of a statute. The concern is not with the ascertainment of the meaning and the application of particular words used by previous judges, so much as with gaining an understanding of the concepts to which expression was sought to be given.”

278. Sackville AJA, with whose reasons McColl JA and I agreed, regarded invocation of the phrase “high level of moral obloquy” as unhelpful in PT Ltd v Spuds Surf Chatswood Ltd [2013] NSWCA 446 at [101]-[102]. That view accords with what has subsequently been said (without attempting to be exhaustive) in Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd [2017] FCAFC 75 at [52] and in Commonwealth Bank of Australia v Kojic [2016] FCAFC 186; 341 ALR 572 at [54]-[60], [69]-[72] and [88]. “Moral” is a notoriously imprecise adjective: “someone under a moral obligation” was the example of conceptual uncertainty chosen in Re Baden's Deed Trusts (No 2) [1973] Ch 9 at 20. When combined with “obloquy”, which is scarcely a word in common parlance, the imprecision is heightened. To insist on the presence of a “high level” of such an imprecise quality does not, in my respectful opinion, assist in the task of giving legal meaning to unconscionable in s 22 of the Australian Consumer Law. But even if the epithet were less imprecise, there would be no warrant to construe s 22 as being subject to some threshold requirement. Instead the statutory language falls to be applied in terms.

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Amendments

15 February 2018 - [184] Change "Section 12CA prohibited conduct" to "Section 12CA prohibited unconscionable conduct"

[184] Add after "s 12CC expressly prohibited" - "unconscionable conduct in respect of"

[184] Change "to persons" to "from or to persons"

[211] Change "indicted" to "indicated"

Decision last updated: 15 February 2018