Karmot Auto Spares Pty Ltd v Dominelli Ford (Hurstville) Pty Ltd
[1992] FCA 273
•14 MAY 1992
Re: KARMOT AUTO SPARES PTY. LIMITED
And: DOMINELLI FORD (HURSTVILLE) PTY. LIMITED and FERDINANDO DOMINELLI
No. G212 of 1991
FED No. 273
Evidence - Trade Practices
(1992) 14 ATPR 41-175
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Heerey J.(1)
CATCHWORDS
Evidence - admissibility - business records - Evidence Act 1905 (Cth), Part IIIA - document received from applicant's customers - whether document part of record of applicant's or customer's business.
Trade Practices - misleading and deceptive conduct - s.52 Trade Practices Act 1974 - sale of automotive spare parts - express representations - whether untrue - history of disputes between manufacturer and vendor - silence - whether breach of s.52 - reliance - exclusion clause - relevance of - involvement of second respondent - s.75B Trade Practices Act 1974.
Trade Practices - misleading and deceptive conduct - relief - s.87 Trade Practices Act 1974 - return of goods and refund of purchase price - delay - interest - award of interest actually incurred - award of interest related to prevailing rates - opportunity cost.
Words and Phrases - "business record".
Evidence Act 1905 (Cth): Ss.7A(1), 7B(1).
Fair Trading Act 1987 (NSW): s.42
Trade Practices Act 1974 (Cth): Ss.52, 75B, 87.
Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) ATPR 48, 527
Compafina Bank v ANZ Banking Group Ltd (1982) 1 NSWLR 409
Gould v Vaggelas (1985) 157 CLR 215
Hadley v Baxendale (1854) 9 Ex 341
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83
Hungerfords v Walker (1988) 171 CLR 125
Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1989) ATPR 53, 143
Marsh v Ruby (1975) VR 191
Munchies Management Pty Ltd v Belperio (1988) 84 ALR 700
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191
Platz v Creative's Landscape Design Centre Pty Ltd (1989) ATPR 50, 309; (1989) ATPR 50, 697
Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477
Ruby v Marsh (1975) 132 CLR 642
Trade Practices Commission v TNT Management Ltd (1984) 56 ALR 647
Karmot Auto Spares Pty Limited v Dominelli
Ford (Hurstville) Pty Limited and Anor (NG 212 of 1991)
HEARING
SYDNEY
#DATE 14:5:1992
Counsel for the applicant: Mr C.C. Hodgekiss
Solicitors for the applicant: Hunt and Hunt
Counsel for the respondent: Mr J.D. Heydon QC with Mr R. Bell
Solicitors for the respondent: Norton Smith and Co.
ORDER
1. Declare that the first respondent has in trade or commerce engaged in conduct that was misleading or deceptive or was likely to mislead or deceive contrary to s.52 Trade Practices Act 1974 (Cth) and s.42 Fair Trading Act 1987 (NSW).
2. Declare that the second respondent has procured, induced, aided or abetted or been knowingly concerned in contraventions of s.52 Trade Practices Act 1974 (Cth) and s.42 Fair Trading Act 1987 (NSW) by the first respondent.
3. Order that the respondents pay to the applicant $865,313.
4. Order that the applicant return to the first respondent and the first respondent accept the following quantities of automotive water pumps:
WPA 47L: 3010
WPA 47N: 4553
WPA 90: 4574
WPA 91: 4173
5. Order that the agreement of 12 July 1989 between the applicant and the first respondent be varied insofar as is necessary to enable the respondents to deal in the said pumps returned and to use the name "Chedele".
6. Order that the respondents pay the applicant's costs, including reserved costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
This claim under s.52 of the Trade Practices Act 1974 (the Act) and equivalent New South Wales legislation arises out of the purchase by the applicant (Karmot) from the first respondent (Dominelli Ford) of a quantity of automotive spare parts.
About 60 per cent of the purchase was of water pumps for various makes of motor cars. These were manufactured in China by CMC China National Import and Export Corporation (CMC) and were thus "after market" parts, that is to say they were not manufactured by the maker of the vehicle for which they were intended.
Dominelli Ford carried on business as a Ford dealer in Hurstville. In about 1980 a Mr Ray McGregor became the Spare Parts Manager for the company. He was successful in building up that side of the business, which included the sale of after market parts under the name Chedele.
In early 1989, with apparently little or no warning, Mr McGregor left Dominelli Ford. Because of this sudden departure and because funds were needed for a proposed venture into a Volvo dealership, the Managing Director of Dominelli Ford, Mr Ferdinand Dominelli, decided to dispose of the Chedele business.
In early April 1989 Mr Dominelli entered into negotiations with Karmot's Managing Director Mr David Hutchins and as a consequence Karmot agreed to buy the Chedele business. The bulk of the purchase price, $690,170, was paid on 30 June 1989 and a further amount of $15,000 on 23 October 1989. A formal agreement was entered into on 12 July 1989 at Mr Hutchins' request, primarily for the purpose of obtaining a covenant against the use by the vendor of the name Chedele. That agreement used a printed form appropriate to the sale of a business, but the consideration attributed to the sale was the nominal sum of one dollar. In substance the transaction was one for the sale of goods, namely the Chedele stock held by Dominelli Ford.
Karmot's case is that in the course of negotiations in April 1989 Dominelli Ford, through Mr Dominelli and other officers, engaged in misleading and deceptive conduct in that there were express representations which were untrue and also silence as to certain matters which in the circumstances amounted to misleading and deceptive conduct consistently with the principles expounded by the Full Court in Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477 at 490, 504 and 505 and Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 at 95. Most of the contest on these issues is concerned with defects in the pumps. Karmot's case is that there was some reference by Mr Dominelli to defects, but in a reassuring way. In truth, as discovered documents disclosed, there had already been extensive disputes with the manufacturer. These documents principally consisted of correspondence between the respondents and CMC and also with CMC's Singapore agent Inter-Revco Industrial Pty Limited (Inter-Revco). (The role of Inter-Revco is not completely clear. In his affidavit sworn 26 November 1991, par 24, Mr Dominelli refers to Inter-Revco as the agent of the manufacturer, but in his evidence at trial he said that firm "was supposed to be our agent)."
There were conflicting versions of what was said and done in the course of negotiations. To my mind, Mr Hutchins' evidence was generally more persuasive. He struck me as an intelligent man who gave his evidence in a careful manner. Mr Dominelli on the other hand was less impressive.
Exclusive Distribution AgreementThe first express representation alleged by Karmot is that it was allegedly said by Mr Dominelli in the course of negotiations that there was an exclusive distribution agreement between Dominelli Ford and CMC. This is said to be untrue because at the time the representation was made the agreement had already been cancelled by CMC. In particular there had been sent to Mr Dominelli a fax on 2 March 1989 in which CMC said "We are going to forget the Sydney agreement and contract. We are not going to go on."
Dominelli Ford does not dispute that the representation was made, but claims that it was not untrue. It argues that CMC could not have effectively terminated the agreement. However I do not think I need resolve this issue because I am not satisfied that one essential element of Karmot's claim under this heading is made out, viz that there was any reliance on this particular representation. There is no direct evidence of reliance and I do not think I can in the circumstances infer that there was reliance. The substance of the transaction was that Karmot desired to purchase this particular stock at a reasonable price. What was attractive was the nature of the goods and the price rather than any exclusivity although, as will hereafter appear, the quality of the goods and the reliability of future supplies were important.
Rectification of faulty pumpsThe evidence of Mr Hutchins, which I accept, is that on 3 April 1989 he was told by Dominelli Ford's Sales Manager Mr Gardner that "we have had a problem" with water pumps which was "the interference between the bearing shaft and the hub were incorrect at manufacture and they are now being replaced". Later that day, in a conversation with Mr Dominelli, Mr Hutchins asked:
"Why have pumps been returned to China?"
and Mr Dominelli replied:
"The pumps have been returned to the factory because of a fault. These are now being returned reworked. Some of the pumps on the stock list have not yet arrived back into stock. David, these pumps have been reconditioned by the factory and are now better than new ones."
In my opinion this was a representation as to an existing fact, namely the then present condition of the pumps which had been returned. Also in its ordinary meaning it was not confined to the hub or any particular fault, but extended to the general condition of the pumps. Further, it was more than a mere puff. Dominelli Ford was a seller of imported manufactured products and its assurance as to the quality of those products would be critical to a purchaser in the position of Karmot. Therefore I accept Mr Hutchins' evidence that he did in fact rely on this statement.
As at April 1989 the position represented to Karmot was not true. Out of 10,000 WPA 47L and WPA 47N pumps which had been returned to CMC on 30 March 1988, only 900 of the former had been returned (this occurred on 30 January). On 29 March Mr Dominelli sent a fax to Inter-Revco thanking that firm for their positive response "to resolving our problems". The fax stated:
"In answer to your question as to the acceptability of the replaced pumps to date, it is too early to tell conclusively as we are unsure about the number that has physically been put on vehicles, but Glen Gardner tells me that they appear to be OK to date. Please forgive me if I have sounded threatening or abrupt in the past, you must understand that 18 months is a long time to replace faulty products. The loss of confidence has been very damaging, not to mention the loss of face we have suffered and the financial strain it placed on our cash flow."
On 18 April Mr Gardner stated in a fax to Inter-Revco:
"The 900 WPA 47L modified water pumps still faulty. The hub is pressed too low on shaft. Please stop further shipment of these pumps."
Shortly afterwards, on 24 April 1989, Mr Dominelli faxed Inter-Revco:
"No-one has responded to our fax re discovery of the WPA 47L modified pumps still faulty, the hub is pressed too low, please advise status of shipments".
Therefore I find that the representation about the success of the rectification work was untrue at the time it was made because as at 3 April the respondents had at best a tentative expectation that the rectification had been satisfactory, which was something different from the firm assurance given to Mr Hutchins. Moreover by the time Karmot paid $690,170 on 30 June, the representation had been, to the knowledge of the respondents, rendered quite untrue. But they did nothing to retract or qualify the assurance that had been given. The correspondence between Dominelli Ford and CMC and its agent (unbeknowns at the time to Karmot) showed that the problem was regarded as significant, aggravated of course by the long delay which had occurred.
Karmot sought to establish the falsity of this representation by other documents. It is not strictly necessary to consider these because I think falsity was sufficiently established by the Dominelli Ford documents to which I have just referred. However as substantial argument was advanced, and as the admissibility of a number of documents was left unresolved, I think I should record my conclusions.
It was said that pumps were returned as defective to Karmot by customers who were wholesalers or retailers who had in turn received returns from their own customers. Karmot sought to tender a large number of documents under Part IIIA of the Evidence Act 1905 (Cth) to establish that these returns were as a result of defects in allegedly rectified pumps. In my opinion the objections taken to this tender were valid.
One class of such documents is exemplified by a document headed "Warranty Claim Form" received by Karmot from Walkers Auto Spares of Ipswich giving details of a pump purchased and stating:
"Hub became dislodged from pump shaft causing fan to damage radiator and fan shroud. Price to repair replacement Radiator $142.50
Fan shroud $29.00."
If this document was part of the record of the business of Walkers Auto Spares, and assuming the requirements of Part IIIA were otherwise satisfied, it would not matter that the business was that of a non-part y to this litigation: Compafina Bank v ANZ Banking Group Ltd (1982) 1 NSWLR 409 at 412. But the document in question is not part of the records of the business of Walkers Auto Spares. It had passed out of the possession and control of that firm. I think the ordinary sense of "business record" connotes a repository of information in organised form which is accessible in the usual course of and for the purposes of that business to those who conduct it.
Although the document in question was produced from the custody of Karmot, it was not part of the record of the business of Karmot; see Trade Practices Commission v TNT Management Pty Ltd (1984) 56 ALR 647 at 659 where Franki J. said:
"In general, a statement of fact in a letter from A to B found in the files of B is not admissible as a business record of B merely because it was filed and kept by B. This is because statements in the letter are not made in the course of, or for the purposes, of B's business".
(His Honour goes on to observe that a note made on the letter by a "qualified person" in B's business, such as endorsement of the word "Paid" on an invoice, may make the statement in that note a business record of B).
In the case of a number of documents which were documents of Karmot, another objection taken was that an examination of the document reveals that probably the maker of the statement of fact did not have personal knowledge of the facts asserted. An example is a Karmot voucher dated 7 December 1990 written by Mr Slender of Karmot which notes a pump returned from Bradden Exhausts and states:
"... the pulley came off the front of the pump just after fitment".
On the face of it this would appear to be a statement relayed to Mr Slender by Bradden Exhausts, and quite probably a statement that had in turn been made to Bradden Exhausts by one of that firm's customers. As such the "qualified person" (Mr Slender) could not be reasonably supposed to have had personal knowledge of the facts stated: see s.7A(1).
There is also another category of document objected to, correctly in my view, by counsel for the respondents. These were exhibits CL, CS, CV, CW, DA, DE and DG which were generated in 1990. I do not think these amounted to admissions against Dominelli Ford because they are, read in context, no more than documents passing on to CMC the allegations of Karmot.
Since I have concluded that despite the rejection of documents of the kind just discussed there is sufficient evidence to establish that this representation was false when made, the remaining questions are reliance and damage. I shall postpone these until I come to the alleged representations by silence because the subject matter - the quality of the goods, the reliability of the manufacturer the effect on a purchaser in the position of Karmot - is common to both. Moreover, the representations by silence (a convenient but not completely accurate description) in part depend on what was actually said in relation to defects and rectification.
Sales figuresKarmot complains of a representation that the monthly sales of parts in the Chedele range were $60,000 to $90,000.
On 3 April 1989 during the course of the purchase negotiations Mr Hutchins was present with Mr Dominelli near the office of Dominelli Ford's accountant Mr Domenic Tesoriero. Mr Hutchins asked Mr Dominelli what the average monthly sales were and Mr Dominelli in turn asked Mr Tesoriero. Mr Hutchins' version is that he did not hear what Mr Tesoriero said to Mr Dominelli but very shortly thereafter Mr Dominelli said that the monthly sales were between $60,000 and $90,000 per month. Mr Tesoriero's version is that he said to Mr Hutchins:
"In the three months before Ray left we sold between $60,000 and $90,000 in the past, although sales since then have dropped because we have not had the personnel to sell the product."
In this regard there was some uncertainty by Mr Hutchins as to whether the critical words were said to him by Mr Dominelli or Mr Tesoriero. In his first affidavit sworn on 22 August 1991 Mr Hutchins deposed that Mr Tesoriero said the words. However at trial his evidence was that Mr Tesoriero said something he did not hear and Mr Dominelli then said the words.
On this issue I am not satisfied that Mr Hutchins was told, either directly by Mr Tesoriero or via Mr Dominelli, the bald figures $60,000 to $90,000. There was in existence at the time a computer sales printout, although it was not suggested that it was shown to Mr Hutchins, and this showed the following figures (to the nearest thousand):
1988
July $48,000
August $45,000
September $48,000
October $63,000
November $73,000
December $91,000
1989
January $36,000
February $47,000
On either version this particular information was in the possession of Mr Tesoriero who would have been familiar with it and would have had no motive to give anything other than an accurate representation of the facts contained in a document which, for all he knew, might have been immediately inspected by Mr Hutchins. On Mr Tesoriero's version, what was said was quite true.
Moreover, I am not persuaded there was any reliance by Karmot on what was said about sales. Although it would have been apparent at an early stage that sales per month of $60,000 to $90,000 were not being achieved, no complaint was made at the time of Karmot's first letter of demand on 5 March 1990 nor in Karmot's solicitors letter of demand on 14 March 1990. The complaint was not made until these proceedings were commenced on 3 May 1991.
Silence as Misleading and Deceptive ConductThis part of the case only emerged shortly prior to trial as a result of further discovery made by Dominelli Ford. Documents so discovered, which had not been seen by Mr Hutchins at the time of the negotiations, revealed a history of serious disputes between Dominelli Ford and CMC concerning the quality of pumps supplied and the lack of prompt and satisfactory rectification. Karmot's case is that although the question of defects and rectification was raised in the way I have already indicated, what was said was in itself misleading and, more importantly, was reassuring and necessarily conveyed the impression that there had been no other problems with the pumps and that CMC was a reliable manufacturer and supplier.
The true picture, as revealed by the correspondence, was very different. A convenient starting point is a fax sent on 2 March 1989 from Mr Dominelli to CMC (exhibit AW). (In this and subsequent documents same irrelevant detail has been omitted and punctuation modified.) This of course was only a month before the negotiations with Karmot. The fax includes the following:
"We decided to do business, with your company, because we believed that, like us, you were an honourable company, and would honour your obligations and commitments.
In order that you have a better understanding about my frustrations, we have set out below, the sequence of events in our transactions, with your company.
December 10 1986 - Letter of credit was issued for USD$84,000 being for 15,000 water pumps to be manufactured in China.
April 14 1987 - Letter of credit was amended to USD$127,050 being for 20,000 water pumps to be manufactured in China. September 11 1987 - (Letter of credit ...) paid USD$88,200 being payment for 15,000 water pumps of which 9243 water pumps were returned for rectification on March 30 1988 which has cost vs Aust$1060 per month in interest charges calculated at 15.5%. Total cost to date being Aust$19,080 which works out at Aust$2.06 per water pump. October 23 1987 - Received 15,000 water pumps ... of which 9243 faulty water pumps were later returned - 4516 WPA 47L returned for rectification on 30/3/88 - 4727 WPA 47N returned for rectification on 30/3/88 October 23 1987 - Letter of credit was issued for USD$159,500 being for 20,000 water pumps to be manufactured in China...
March 30 1988 - Water pumps returned to China for rectification ...
WPA 47L 4516 units
WPA 47N 4727 units
Total 9243 units
........ ........ ....
April 12 1988 - (Letter of credit ...) paid USD$38,850 being payment 5,000 WPA 91 water pumps which later were found to have faulty hubs.
April 28 1988 ... paid USD$111,150 being payment 15,000 water pumps of which 5,000 WPA 55M water pumps were later found to have faulty hubs.
June 10 l988 - Received 5,000 water pumps ... 5,000 WPA 91 pumps were found to have faulty hubs. June 10 1988 - Received 15,000 water pumps ... 5,000 WPA 55M pumps were found to have faulty hubs. June 23 1988 - Chinese delegation arrived (names of delegation given).
- According to our advice of the meeting we believe that:-
- Chinese delegation agreed to meet all costs involved as a result of rectifying these pumps which includes costs of returning water pumps to China plus interest at 15.5% of monies expended by Clint Chedele Pty Ltd being cost of pumps, customs duty charges, shipping company charges etc. - Chinese delegation also agreed to supply 10,000 hubs at no charge which were to replace the defective hubs. - Cost of removing and replacing these defective hubs plus interest calculated at 15.5% on moneys expended by Clint Chedele Pty Ltd being cost of pumps, customs duty, bank charges, shipping company charges etc. was to be reimbursed. Refer copy of agreement dated 20 June 1988 attached. October 20 1988 - China advised that they had rectified and were returning 1010 WPA 47L water pumps together with 990 WPA 47N water pumps...
- China also advised that they were shipping 500 replacement WPA 91 water pump hubs together with 500 replacement WPA 55M hubs.
Our problem, is simply this, we returned 9243 water pumps on 30/3/88 and eleven months later we are advised that only 20% of these pumps, 2000 in number, have been rectified to date, and which we received, late January, 1989.
Similarly in June 1988, 10,000 water pumps were found to have faulty hubs and, and nine months later, only 10% of these hubs, 1,000 in number, have been returned to us and was received, late January, 1989.
This company cannot continue to satisfy its customers on the current service received from China to this date. Our clients have lost confidence and our people have lost confidence in China's ability to supply good products or to have faulty products rectified promptly.
As a consequence we respectfully request that China reimburse our losses to date of Aust$37,087 being interest and to also reimburse the shipping costs of Aust$2,312.20 expended on the return of the faulty water pumps.
Also to return, 3506 WPA 47L water pumps.... Also to return, 3737 WPA 47N water pumps .... which we understand, have been rectified.
We also respectfully request, that you honour, your agreement to replace the outstanding 9,000 faulty hubs and also to reimburse the labour cost of replacing those faulty hubs, total cost being Aust$15,000. (Calculation of interest cost claimed is given.) ........ ........ ........ ..
As you can appreciate, we trade in a very competitive market, and supply and service is of paramount importance and this delay, has cost our company, loss of face, and also loss of business confidence and has put a huge strain on our financial resources, not to mention, the huge loss of goodwill, and, confidence, in the ability of China to compete, in the Australian market. It is, just not that simple, to cease doing business, as we have, a continuing legal and moral obligation, to honour the warranty, and be able to service, the 40,000 water pumps, which we have already paid for, at this date.
I, would be most grateful, in the spirit of good trade relationships between our two companies to settle this honourably as I see no reason to waste all the time and energy expended on developing this new market as the major establishment costs are behind us.
Solid business relationships are always fraught with problems in the initial stages as it is the learning stage."
On 3 March 1989 CMC sent a fax disputing some of Mr Dominelli's assertions and he replied by fax dated 7 March 1989 (exhibit AY) in the following terms:
"I am also at a loss to understand why you keep disputing the number of pieces returned.
It has been confirmed by you that the WPA 47L and WPA 47N pumps were of faulty manufacture. Therefore it is only a matter of time before the pumps that were sold and not as yet returned to us will have to be eventually replaced under our warranty conditions ......
To say that your company is not responsible for reimbursing our interest costs is not valid. The moral and legal obligation of your company is very clear on this point. Manufacturers are responsible for all costs relating to replacing faulty products. We paid you in good faith and were assured by you that the product was of good quality and met all our specifications. Now we find that this was not the case, as it has been proven that 50% of products leaving your factory to date has been faulty. I refer you to Ray McGregor's fax dated 2 May 1988. We did not cause the problems and to expect us to pay for your mistakes is illogical and ludicrous.
Because of the time that has lapsed since we paid for your products it is now 18 months since we paid for the 5,000 WPA 47L and 5,000 WPA 47N and approximately 11 months since we paid for the faulty 5,000 WPA 91 and faulty 5,000 WPA 55M pumps, which you must agree is an intolerable situation ...
Mr Yao Min Da, I do not wish to sound monotonous, but the bottom line is simply this.
We have to date paid for 40,000 units of which only 50% were any good. We have paid out approximately Aust$230,000 in unsaleable stock putting enormous pressure on our cash flow and incurring an interest cost of Aust$97 per day.
I am sure that if the situation was reversed you would not tolerate such a situation". (Writer's emphasis)
The fax from Mr McGregor dated 2 May 1988 to which Mr Dominelli referred (exhibit AZ) included the following:
"Our bank has just informed us that L/C 1730/2402 will be ready for exchange tomorrow 4 May 1988 for 5,000 each WPA-55M, WPA-55, WPA-90, WPA-55S. Mr Chen you must be aware that we have not received three each of each product for testing of this production run as we have stated in this L/C along with a lot of other discrepancies you have asked us to sign.
We have no doubt that everything is not in order, the area that is of concern to our company and surely must be of concern to your company as well, is the risk we both take if the hub is still not rectified according to the Australian standards requirement. Mr Chen of the $5,000,000 turnover our company achieves in automotive part sales per year 65% of this turnover is in water pumps so we are relying heavily on your expertise and skill to achieve volume growth in the future.
Mr Chen can you please return to us today by fax or telex that you guarantee the hub problem is securely rectified to enable us to sign the documents in full confidence, or we will have to ask you to expedite three each sample from the production run at our expense to secure full confidence in the product to sell into the Australian market place. This rectification on WPA-47L and WPA-47N water pumps has caused an enormous loss of business for these products and we need to fight back with a much improved product to ensure full confidence in the product for future development. Mr Chen we need to get at least some of the rectified WPA-47L and WPA-47N on their way to us before you visit us in Australia. Both our companies are suffering a setback in future planning while this uncertainty is with us".
On 7 March 1989 Mr Dominelli sent a fax to Inter-Revco (exhibit BA) which included the following:
"Mr Lie Wan Tion consider our position, of the 40,000 pumps manufactured and paid for by us to date by Mr Yao Min Da's factory, no less than 20,000 pumps were faulty. Fifty per cent to date proved to be unsaleable.
To suggest that we continue to order more pumps before the current problems are overcome and confidence in the product restored would be foolhardy and irresponsible to say the least...... It is now 18 months since we paid for the 5,000 WPA-47L, 5000 WPA-47N pumps and approximately 11 months since we paid for 5000 WPA-91 and 5000 WPA 55M pumps.
You must agree that this is an intolerable situation, one that must be addressed urgently and honourably." (Writer's emphasis)
Mr Dominelli enlisted the aid of the Australian Embassy in China and on 23 March sent a fax (exhibit BD) enclosing recent correspondence with CMC which Mr Dominelli said:
"... should give you a fair idea about my frustrations to date."
On 29 March 1989 Mr Dominelli sent to Inter-Revco the fax already referred to (exhibit BG) which stated that it was too early to tell conclusively about the replaced pumps. The fax also stated:
"Please forgive me if I have sounded threatening or abrupt in the past, you must understand that 18 months is a long time to replace faulty products. The loss of confidence has been very damaging, not to mention the loss of face we have suffered and financial strain it placed on our cash flow."
I do not accept Mr Dominelli's claim that the "loss of confidence" he referred to was intended to mean his own loss of confidence. Although I do not doubt that there had been a loss of confidence by Mr Dominelli in CMC (in itself a significant factor in this case) in the present context the expression was plainly intended to refer to loss of confidence by his own customers in his company. His evidence on this point I found disingenuous and damaging to his credibility.
On 7 April 1989 Mr Dominelli sent a fax (exhibit BJ) to the Australian Trade Commission in Shanghai repeating the history of the defective parts and stating:
"If the Chinese are allowed to get away with and not be responsible for their lack of quality control it would be paramount to allowing them the opportunity of obtaining money under false pretences, which is downright criminal".
In the fax there is also reference to a dispute about the number of faulty pumps which have been returned for replacement under warranty, Dominelli Ford claiming 9,243 and CMC 8550. Mr Dominelli commented:
"What amazes me most is that if one accepts either 8,550 or 9,243 pumps were faulty and had to be replaced under warranty wouldn't it be logical that the balance of 10,000 pumps would eventually have to be replaced".
On 18 April 1989 there was the fax from Mr Gardner to Inter-Revco already referred to (exhibit BK) stating that the 900 WPA 47L modified water pumps were still faulty and that further shipment should be stopped. Mr Dominelli's fax of 24 April 1989 to Inter-Revco (exhibit BL) indicates his personal knowledge of the last mentioned fax. On 22 May 1989 Mr Dominelli sent a fax to CMC (exhibit BS) in which he stated:
"... because of the problems associated with the 47L and 47N pumps we have not been able to deliver too many as we have only still received 900 pieces of 47L and 990 pieces of 47N".
On 20 June 1989 Mr Dominelli sent a fax to Inter-Revco (exhibit BU) stating that "at long last" the first shipment had arrived. The position with that shipment was said to be as follows:
"The case with hubs was broken and the hubs were all rusted. The case was broken with five pumps missing. To date we still do not know what ship the balance of the pumps and hubs are arriving on and when I am so frustrated I could scream".
On 23 June 1989 Mr Dominelli sent a fax (exhibit BV) to Inter-Revco stating:
"It is imperative that I receive the stock as soon as possible. The cost to date in not being able to sell 20,000 pumps is horrific. Plus I now find out that the hub position of the WPA-47N and WPA-47L need repositioning approximately 2mm. Another cost."
On Mr Dominelli's evidence (affidavit sworn 26 November 1991 par 12) Mr Hutchins was only interested in the water pumps. It was at Mr Dominelli's insistence that Karmot purchased the whole Chedele line. This was a substantial new long term venture for Karmot in which the reasonable expectation would be for future purchases from CMC once the Dominelli Ford stock was exhausted. Such purchases would need to be paid for in advance by letter of credit. The market into which Karmot was to sell was a highly competitive one. Defects would be likely to emerge when pumps were being used on vehicles in circumstances causing great inconvenience. It would not need many complaints by end users for retailers and wholesalers to discard Chedele pumps and other products in favour of competing goods.
The conclusion to be drawn is that the reliability of CMC as a manufacturer which would supply products of good quality and promptly replace or rectify the occasional defective product was critical to the whole venture from the point of view of Karmot.
In my opinion Dominelli Ford's conduct was such as to induce a belief in Karmot that CMC was a manufacturer of the required reliability. As the correspondence clearly shows, that conduct was misleading and deceptive. Fifty per cent of the goods supplied had been unsaleable. There had been a history of unsatisfactory and frustrating performance by CMC resulting in a loss of confidence both by Dominelli Ford's customers and by that company itself.
I draw the inference that had the true position been disclosed Karmot would not have entered into the transaction at all; cf Gould v Vaggelas (1985) 157 CLR 215 at 236. There was no compelling need for it to do so. It was a willing but not anxious purchaser. Confidence in the reliability of the supplier was of fundamental importance.
Exclusion ClauseThe agreement of 12 July 1989 included the following term:
"20. The Purchasers acknowledge that, in entering into this agreement, they have not relied upon any statement, representation, warranty or condition made or given by the Vendors or any one on their behalf in respect of the subject matter of this agreement, other than those that are expressly herein contained."
Such provisions are only relevant in claims under the Act if and insofar as they tend to show an applicant did not in fact rely on the misleading and deceptive conduct complained of: Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) ATPR 48, 527 at 48, 539; Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1989) ATPR 53, 143 at 53, 146.
In the present case I find that, notwithstanding the execution of the agreement containing this provision, Mr Hutchins did in fact rely on the conduct of Dominelli Ford. In reality the agreement of 12 July 1989 is not an agreement into which Mr Hutchins "claims to have been induced to enter by misleading conduct" (cf Keen Mar); the real detriment of which he complains, the payment of $690,170, had already occurred. Moreover the real nub of the case is what Mr Hutchins was not told, so cl 20 would seem to be of little relevance.
Involvement of Mr DominelliIt will be apparent from the evidence to which I have referred that Mr Dominelli was knowingly concerned in the conduct of Dominelli Ford which constituted contraventions of the Act. I find therefore that he was knowingly involved in such contraventions within the meaning of s.75B(1). The contrary was not contended.
ReliefTherefore I think that unless there is some good reason why it would be impractical or unjust to do so I should exercise, subject to necessary adjustments, the express power given by s.87(2)(c) of the Act to order a refund of the purchase price. This power is not conditioned on a finding that the contract under which the money was paid has been rescinded, nor is it in terms necessarily excluded where there has been conduct which might amount at common law to an affirmation of that contract.
The present case is one where, as I find, goods would not have been purchased were it not for misleading and deceptive conduct of a substantial kind. If the Act confers power to order the seller to refund the price and the buyer to return the goods unsold, together with the proceeds of such sales as the buyer has made to his customers, then I believe it is fair and reasonable that such orders should be made in the circumstances of this case.
I approach this issue bearing in mind that provisions in the Act should not be read down to conform with former common law or equitable requirements: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 204 per Mason J.; see also at 198 per Gibbs C.J. Those comments were made in the context of a discussion of s.52. More specifically, in relation to remedies available under the s.87, Fisher J. said in Platz v Creative's Landscape Design Centre Pty Ltd (1989) ATPR 50,309 at 50,312:
"There was no attempt by either counsel to refer to the alternative argument that it was open to the Court, if the circumstances be appropriate, to exercise its powers under sec.87 unrestricted by the general law bars of affirmation, lapse of time and restitution. It can however be argued that these restrictions are not fetters on the exercise of the powers under the section but matters to be taken into account in the exercise of the Court's discretion namely whether and in what manner the powers should be exercised. To my mind this more relaxed approach is preferable."
On appeal this passage was approved by the Full Court: (1989) ATPR at 50,697. The Full Court saw no more than "different shades of emphasis" between the view of Fisher J. and that of another Full Court in Munchies Management Pty Ltd v Belperio (1988) 84 ALR 700 at 714 where it was said that:
"... in the exercise of the discretion in these matters given to the court by s.87, the equitable principles concerning rescission give safe, if not necessarily exclusive, guidance."
Counsel for the respondents argued that an order could only be made for damages in respect of those pumps which could be shown to have been returned to Karmot because of defects of the kind referred to in a representation. The use of the word "compensate" in s.87(1) was stressed.
However in Munchies the Full Court said (at 713):
"The orders for accounting and payment of money made in (Alati v Kruger and Yorke v Ross Lucas) as part of the process of rescission ab initio may be seen as recovery literally of the amount of loss or damage within the meaning of s.82, giving "recover" the sense of regaining through restitution a position lost by the conduct complained of."
That statement seems to me applicable in the present case. I do not think the language of s.87 prevents an order for mutual return of purchase price and goods sold unless it can be shown that all the goods were defective in a way relevant to the misleading and deceptive conduct.
Counsel for the respondents urged delay as a reason against granting the relief sought. There was in fact some delay before proceedings were commenced on 3 May 1991, but Dominelli Ford was put on notice of the problems being encountered as early as 5 May 1990 (exhibit CS) when Mr Hutchins wrote to Mr Dominelli complaining about the parts. Subsequently on 14 March 1990 Karmot's solicitors wrote a letter (exhibit CY) seeking a refund of the purchase money. Thereafter Dominelli Ford and Karmot made some attempts to reach a satisfactory arrangement with CMC, but to no avail. The course Karmot took was not unreasonable and should not tell against it. And whatever the delay may have been, it was not put that this resulted in any particular prejudice to the respondents.
I shall therefore make an order that will require the respondents to refund to Karmot the following amounts:
Paid 30 June 1989 $690,170 Paid 23 October 1989 15,000 $705,170 Less sales by Karmot $170,255 $534,915
I shall order that Karmot return to Dominelli Ford and that the latter accept the following pumps which are still in its possession (see affidavit of Mr Hutchins sworn 6 March 1992):
WPA 47L 3010
WPA 47N 4553
WPA 90 4574
WPA 91 4173
I shall order the agreement of 12 July 1989 be varied insofar as is necessary to enable the respondents to deal with the pumps returned and to use the name Chedele.
InterestWhere an order is made for the refund of a purchase price interest should also be awarded over the period from the date of the payment to the date of the court's order: Munchies 84 ALR at 717; Creative's Landscape (1989) ATPR at 50,322.
Should the rate of interest be fixed by reference to notional or conventional rates, or should a successful applicant recover the interest actually incurred? In Munchies a rate of 10 per cent was allowed on the purchase price for a period between January 1987 and June 1988 and in Creative's Landscape Fisher J. (at 50,322) applied the same rate "being the rate awarded on the purchase price by the Full Court of this Court in Munchies." In Munchies the Full Court simply noted that the trial judge (Foster J.) fixed the "appropriate interest rate at 10 per cent." The point does not seem to have been argued on appeal. An examination of the judgment at first instance (unreported, 9 June 1988, at 23) shows that his Honour rejected a claim for bank interest, notwithstanding a finding that the vendor knew the purchasers intended to borrow the purchase price from the bank. His Honour does not explain why the bank rate was rejected or why the particular rate of 10 per cent then was chosen.
In the present case Karmot claimed interest actually incurred. In my view the decision of the High Court in Hungerfords v Walker (1988) 171 CLR 125, which was decided after Munchies, makes interest actually incurred the appropriate measure. The Full Court of the Supreme Court of South Australia had increased the rate fixed by the trial judge (10 per cent) to 20 per cent being the rate the plaintiffs were paying on their highest interest loan, and the High Court treated this as correct: 171 CLR at 150.
It was not argued in the present case that Munchies supported a proposition that ten per cent is always the appropriate rate or that a successful applicant could not recover interest at the rate actually incurred.
Where an interest rate was not agreed but an award of interest is appropriate, a rate related to the market place should ordinarily be fixed: Ruby v Marsh (1975) 132 CLR 642 at 653; Cullen v Trappell (1980) 146 CLR 1 at 21. In the absence of any direct evidence, the Practice Notes issued under s.94(1) of the Supreme Court Act 1970 (NSW) would seem to be an appropriate guide. Awarding a rate of ten per cent, which as a matter of notoriety has been well below prevailing interest rates in recent years, would seriously under-compensate a successful applicant. There would also be a disincentive against respondents making reasonable settlement offers since even a respondent ordered to pay the full amount of an applicant's claim would have enjoyed the benefit of higher interest rates in the meantime.
Any delay that there may have been in commencing these proceedings should not reduce the interest to be awarded because Dominelli Ford has had the benefit of the money in the meantime: cf Marsh v Ruby (1975) VR 191.
Karmot borrowed money from its bank to buy the goods in question and subsequently borrowed further monies from its directors and other sources to refinance that borrowing. Except in one regard, viz interest payable to Hutchins Holdings Pty Ltd, counsel for the respondents did not challenge the quantum of the amounts claimed. In summary form they were as follows:
1. ANZ loan account No 1, interest to
23 December 1991, account charges
and stamp duty $262,277
2. Hutchins Holdings loan of $80,000
from 30 November 1990 to 31
December 1991 at Supreme
Court rate (15%) $13,000
3. Hutchins Holdings loan of $200,000
from 14 March 1990 to 31 December
1991 at agreed rate (12%) $44,677
4. ANZ loan account No 2 (to reduce
loan account No 1) interest, account
charges and stamp duty $1,427
5. D and S Hutchins loan of $481,371.42
(following sale of family home on
24 September 1991), interest to
31 December 1991 at Supreme Court
rate (15%) $19,386
6. D Hutchins loan of $200,000
interest from 23 December to 31 December 1991 at Supreme Court rate (15%) $575
7. Interest on $15,000 from 23 October
1989 to 31 December 1991 at
Supreme Court rate (15%) $4,925
Hutchins Holdings was a family company. I think interest is properly allowable on amounts borrowed from it. Had Hutchins Holdings sued Karmot, it would have been entitled to interest on the Hungerfords principle, the reasoning of which extends to claims for debt as well as damages: 171 CLR at 146.
Looked at another way, money which Karmot has had to borrow from Hutchins Holdings to replace other monies borrowed for payments made as a result of misleading and deceptive conduct involves an opportunity cost to Karmot. Karmot could have used that money for profitable purposes. I do not see that the respondents can avoid the cost of compensating Karmot for the cost of that money any more than they could if Karmot had used money available from cash resources of its own.
However I have disallowed a claim for $12,104 agent's commission and legal costs incurred by Mr and Mrs Hutchins on the sale of their home to enable funds to be advanced to Karmot. Although no complaint was made as to this by counsel for the respondents, it seemed to me too remote. In a common law claim such an item would not fall within either limb of Hadley v Baxendale (1854) 9 Ex 341 on the evidence in this case. I think in this instance the same result should follow.
Two further adjustments need to be made. I should allow interest from 31 December 1991 to the date of this order (14 May 1992). The relevant principal sum would be a total of those for which the interest claims in items 5, 6 and 7 above are made i.e. $696,371. After 28 February 1992 the Supreme Court Act rate reduced from 15 to 13 per cent. Interest on my calculation is $35,487.
I should also allow interest to the respondents on the sales which Karmot made, viz $170,255. This figure was for sales to 30 April 1991, which covered roughly a period of two years from the time Karmot acquired the goods. It would be unfair to Karmot to take the interest as running from the beginning of that period and equally unfair to the respondents to take it from the end. The evidence does not enable any precise evaluation, so I will simply take a middle point and allow interest from 30 April 1990 to 28 February 1992 at 15 per cent, and thereafter at 13 per cent i.e. $51,536.
The net amount of the order therefore will be $865,313 made up as follows:
Purchase price paid $705,170 Interest to 31 December 1991 346,267 Interest from 31 December 1991
to 14 May 1992 35,487 $1,086,924 Less sales $170,255
Interest 51,356 $221,611 $865,313
I shall also make the declarations sought and order that the respondents pay Karmot's costs, including reserved costs.
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