McGrath v Australian Naturalcare Products Pty Ltd

[2008] FCAFC 2

FEDERAL COURT OF AUSTRALIA

McGrath; in the matter of Pan Pharmaceuticals Ltd (in liq) v Australian Naturalcare Products Pty Ltd [2008] FCAFC 2

TRADE PRACTICES – misleading and deceptive conduct – whether conduct capable of amounting to representation – whether representations continuous or made as to future matters – onus of proof in establishing ‘reasonable grounds’ for making representation.

TORT – whether a duty of care to avoid economic loss owed.

DAMAGES – method of calculation in claims under Trade Practices Act 1974 – no error in primary judge’s approach.

Fair Trading Act 1987 (SA) s 54(2)
Fair Trading Act 1990 (Tas) s 11(2)
Fair Trading Act 1992 (ACT) s 11(2)
Therapeutic Goods Act 1989 (Cth) ss 36, 38, 40, 41
Trade Practices Act 1974 (Cth) ss 51, 51A, 52, 79, 82
Trade Practices Revision Act 1986 (Cth)

Accounting Systems 2000 (Developments) Pty Limited v CCH Australia Ltd (1993) 42 FCR 470 cited
Adelaide Petroleum NL v Poseidon Limited (1988) ATPR 40-901 cited
Australian Competition and Consumer Commission v Danoz Direct Pty Limited [2003] FCA 881 discussed
Australian Competition and Consumer Commission v Emerald Ocean Distributors Pty Limited [2005] FCA 1703 referred to
Australian Competition and Consumer Commission v Henry Kaye [2004] FCA 1363 discussed
Australian Competition and Consumer Commission v IMB Group Pty Limited (1999) ATPR 41-704 cited
Australian Competition and Consumer Commission v Oceana Commercial Pty Limited [2003] FCA 1516 referred to
Australian Competition and Consumer Commission v Universal Sports Challenge Limited [2002] FCA 1276 discussed
Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 cited
Blacker v National Australia Bank [2000] FCA 681 discussed
Branir Pty Limited v Owston Nominees (No 2) Pty Limited (2001) 117 FCR 424 cited
Braverus Maritime Inc v Port Kembla Coal Terminal Ltd (2005) 148 FCR 68 cited
Chappel v Hart (1998) 195 CLR 232 referred to
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 cited
City of Botany Bay Council v Jazabas Pty Limited [2001] NSWCA 94 discussed
Concrete Constructions Group v Litevale Pty Ltd (2002) ATPR (Digest) 46-224 referred to
Downey v Carlson Hotels Asia Pacific Pty Limited [2005] QCA 199 discussed
Effem Foods Pty Limited (t/as Uncle Ben’s of Australia) v Lake Cumbeline Pty Limited (1999) 161 ALR 599 cited
Farah Constructions Pty Limited v Say-Dee Pty Limited (2007) 236 ALR 209 cited
Fubilan Catering Services Limited v Compass Group (Australia) Pty Limited [2007] FCA 1205 discussed
Futuretronics International Pty Limited v Gadzhis [1992] 2 VR 217 cited
Lewarne v Momentum Productions Pty Limited [2007] FCA 1136 discussed
Miba Pty Limited v Nescore Industries Group Pty Limited (1996) 141 ALR 525 cited
Murphy v Overton Investments Pty Limited (2004) 216 CLR 388 referred to
Newcastle City Council v GIO General Ltd (1997) 191 CLR 85 cited
Network Ten Pty Ltd v TCN Channel Nine Pty Limited (2004) 218 CLR 273 cited
Phoenix Court Pty Limited v Melbourne Central Pty Limited, [1997] FCA 1101 cited
R v Secretary of State for the Environment, Transport and the Regions, Ex parte Spath Holme Ltd [2001] 2 AC 349 approved
Sykes v Reserve Bank of Australia (1998) 88 FCR 511 cited
Thompson v Mastertouch TV Services (1977) 29 FLR 270 referred to
Ting v Blanche (1993) 118 ALR 543 cited
Wheeler Grace & Pierucci Pty Limited v Wright (1989) ATPR 40-940 cited
Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515 cited
Wright v TNT Management Pty Limited (1985) 15 NSWLR 679 cited

Parliamentary Debates, House of Representatives, Vol H of R 147
Parliamentary Debates Vol H of R 148
Parliamentary Debates Vol S 114

ANTHONY GREGORY MCGRATH AND CHRISTOPHER JOHN HONEY AS JOINT LIQUIDATORS OF PAN PHARMACEUTICALS LTD v AUSTRALIAN NATURALCARE PRODUCTS PTY LIMITED
NSD 2506 OF 2006

EMMETT, STONE AND ALLSOP JJ
24 JANUARY 2008
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 2506 OF 2006

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	ANTHONY GREGORY MCGRATH AND CHRISTOPHER JOHN HONEY AS JOINT LIQUIDATORS OF PAN PHARMACEUTICALS LTD Appellant
AND:	AUSTRALIAN NATURALCARE PRODUCTS PTY LIMITED Respondent

JUDGES:	EMMETT, STONE AND ALLSOP JJ
DATE OF ORDER:	24 JANUARY 2008
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.The appeal be dismissed.

2.On or before 15 February 2008, the parties file submissions on costs, including draft orders for which they contend.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 2506 OF 2006

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	ANTHONY GREGORY MCGRATH AND CHRISTOPHER JOHN HONEY AS JOINT LIQUIDATORS OF PAN PHARMACEUTICALS LTD Appellant
AND:	AUSTRALIAN NATURALCARE PRODUCTS PTY LIMITED Respondent

JUDGES:	EMMETT, STONE AND ALLSOP JJ
DATE:	24 JANUARY 2008
PLACE:	SYDNEY

REASONS FOR JUDGMENT

EMMETT J

INTRODUCTION

1. Australian Naturalcare Products Pty Limited (Naturalcare) sells complementary medicines by mail order.  Until April 2003, Pan Pharmaceuticals Limited (Pan) was a substantial contract manufacturer of complementary medicines and Naturalcare purchased a substantial part of its stock from Pan for many years.  On 28 April 2003, Pan’s licence under the Therapeutic Goods Act 1989 (Cth) (the TG Act) to manufacture therapeutic goods was suspended. As a result of that suspension, Pan ceased to manufacture and sell therapeutic goods and was no longer able to supply products to Naturalcare.

2. Subsequently, Pan became insolvent and was ordered to be wound up.  Naturalcare lodged a proof of debt in the winding up claiming, inter alia, compensation for loss of profits as a consequence of being unable to obtain products from Pan.  The appellants, the joint liquidators of Pan (the Liquidators), rejected Naturalcare’s proof of debt in so far as it claimed loss of profits from its inability to continue to obtain products from Pan.  By Originating Process under the Federal Court (Corporations) Rules 2000 (Cth), Naturalcare appealed to the Court against the rejection of its proof of debt by the Liquidators.

3. The basis of Naturalcare’s claim to be entitled to compensation from Pan was that, in one way or another, Pan was under a duty or an obligation owed to Naturalcare to continue to comply with the conditions of its licence in relation to the conduct of its business of manufacturing therapeutic goods. Naturalcare put its claims on several bases, including breach of contract, breach of a common law duty of care, estoppel and contravention of s 52 of the Trade Practices Act 1974 (Cth) (the Trade Practices Act).

4. A judge of the Court rejected Naturalcare’s claims in so far as they were based on breach of contract, breach of duty of care and estoppel. However, his Honour concluded that there had been contraventions of s 52 of the Trade Practices Act and that Naturalcare was entitled to damages pursuant to s 82 of the Trade Practices Act. On 27 November 2006, his Honour ordered that the Liquidators’ decision to reject Naturalcare’s proof of debt be set aside and directed that, in lieu thereof, the Liquidators admit Naturalcare as a creditor of Pan for the sum of $2,242,191.67, being an increase of $471,922.97 plus interest thereon of $305,143.57.

5. The Liquidators have appealed from his Honour’s orders on grounds that his Honour erred in concluding that there were contraventions of the Trade Practices Act and in concluding that Naturalcare suffered loss or damage by reason of its reliance on conduct of Pan that was alleged to have contravened the Trade Practices Act. They also say that the primary judge erred in the assessment of the damages that his Honour found resulted from the alleged contraventions. Naturalcare has filed a notice of contention seeking to uphold his Honour’s orders on the alternative basis that Pan had acted in breach of a duty of care said to be owed by it to Naturalcare.

6. I have read in draft form the reasons of Allsop J for concluding that the appeal should be dismissed. Although I have reached a different conclusion on one question, it is unnecessary for me to decide all of the questions addressed by Allsop J. However, save for that one question, I would be disposed to agree with Allsop J’s conclusions and the reasons for them. In particular, I agree that his Honour’s observations concerning the operation of s 51A of the Trade Practices Act.

7. The question on which I have reached a different conclusion is whether a particular representation alleged to have been made by Pan to Naturalcare in April 2002 was misleading or deceptive. Because of the different conclusion I have reached on that question, it is necessary for me to deal with Naturalcare’s contention based on contravention of the Trade Practices Act. That requires, first, a brief outline of the relevant provisions of the TG Act.

   THE THERAPEUTIC GOODS ACT

8. The objects of the TG Act are, relevantly, to provide for the establishment and maintenance of a national system of controls relating to the quality, safety, efficacy and timely availability of therapeutic goods that are used in Australia or exported from Australia. The Therapeutic Goods Administration (TGA) is a unit of the Australian Government Department of Health and Ageing and is responsible for administering the provisions of the TG Act.

9. Part 3-3 of the TG Act, which consists of ss 33A to 41A, deals with the manufacturing of therapeutic goods. The complementary medicines manufactured by Pan and sold by Naturalcare are therapeutic goods within the meaning of that term when used in the TG Act. For the purposes of the TG Act, sponsor, in relation to therapeutic goods, relevantly means a person who, in Australia, manufactures the goods, or arranges for another person to manufacture the goods, for supply, whether in Australia or elsewhere, but does not include a person who manufactures the goods on behalf of another person who, at the time of the manufacture, is a resident of, or is carrying on business in, Australia.  Thus, Naturalcare was a sponsor in relation to the therapeutic goods manufactured on its behalf by Pan. 

10. Under s 35(1) of the TG Act, a person must not, at premises in Australia, carry out a step in the manufacture of therapeutic goods for supply for use in humans unless the person is the holder of a licence that is in force that authorises the carrying out of that step in relation to the goods at those premises. Section 36 authorises the Minister to determine written principles to be observed in the manufacture of therapeutic goods for use in humans. The manufacturing principles may relate to the standards to be maintained and the equipment to be used at premises used for manufacturing of therapeutic goods or the procedures for quality assurance and quality control to be employed in the manufacture of therapeutic goods.

11. Pursuant to s 36 of the TG Act, manufacturing principles have been determined. Under clause 3 of the Determination, therapeutic goods must be manufactured in compliance with, inter alia, the Australian Code of Good Manufacturing Practice for Therapeutic Goods – Medicinal Products, published by the Commonwealth Department of Community Services and Health in August 1990 (the Code). According to its introduction, the Code was developed as an Industry-Government document reflecting agreed standards and practices for the manufacture of therapeutic goods. Conformity to the Code was to be the basis for the assessment of eligibility for initial and continued licensing under the TG Act. The introduction states that almost all clauses of the Code are written using the term “should”, which was to indicate requirements that are expected to apply unless shown to be inapplicable or replaced by an alternative demonstrated to provide at least an equivalent level of quality assurance. 

12. Part 1 of the Code, which contains general provisions for medicinal products, covers the following subjects:

    ·buildings and grounds;

    ·equipment;

    ·personnel and training;

    ·factory sanitation and personal hygiene;

    ·documentation;

    ·manufacturing procedures;

    ·quality management.

13. The section dealing with manufacturing procedures contains a subsection dealing with contract manufacture, being the manufacture in part or whole of a product by one manufacturer (referred to as the Contract Acceptor) for another party (referred to as the Contract Giver).  In the present case, Naturalcare was the Contract Giver and Pan was the Contract Acceptor. 

14. Clause 698 of the Code provides that the Contract Giver must ascertain that, where a licence is required, the Contract Acceptor is appropriately licensed and should also be satisfied that the Contract Acceptor has the ability to do the work and that the operations can be carried out in the agreed manner.  The Code requires that initial and periodic audits of the Contract Acceptor should be carried out and documented, presumably by the Contract Giver.  Where necessary, such audits may be carried out by an agreed third party quality representative. 

15. Clause 699 of the Code provides that, to ensure that the responsibilities of sponsor and manufacturer are clearly understood and recorded, the arrangements and responsibilities for every aspect of manufacture and quality control that is relevant to good manufacturing practice, for each product made under contract, must be unambiguously specified in writing in a document signed by a representative of both parties.  Clause 699 includes a note recommending that commercial arrangements be the subject of a separate agreement or contract. 

16. Under s 37(1) of the TG Act, an application for a licence under the TG Act must identify the therapeutic goods or classes of therapeutic goods that the applicant proposes to manufacture, the manufacturing premises that will be used in the manufacture of those goods and the steps in the manufacture of those goods that the applicant proposes to carry out under the licence. Under s 38, where certain prerequisites have been satisfied, the Secretary to the Department must grant the person a licence to carry out the relevant steps at the relevant premises unless the Secretary is satisfied that the person will be unable to comply with the manufacturing principles or the premises are not satisfactory for the manufacture of the goods. Under s 39, a licence commences on the day specified in the licence and remains in force until it is revoked or suspended.

17. Section 41 authorises the Secretary to revoke a licence or suspend a licence for a period if, relevantly, the holder of the licence has failed to observe the manufacturing principles. Where the Secretary proposes to revoke or suspend a licence, unless the Secretary considers that failure to revoke or suspend the licence immediately would create an imminent risk of death, serious illness or serious injury, the Secretary must inform the holder of the licence of the action that the Secretary proposes to take and the reasons for that proposed action and give the holder an opportunity to make submissions to the Secretary in relation to the proposed action.

    THE RELATIONSHIP BETWEEN PAN AND NATURALCARE

18. Mr Barry Schadel started the business of Naturalcare in 1989.  He did so with encouragement from Mr Jim Selim.  At all relevant times Mr Selim was the Chief Executive Officer of Pan and Mr Schadel was the Managing Director of Naturalcare.  Naturalcare started with only one product, which was supplied by Pan but initially sourced from overseas, as Pan did not have the technology to manufacture the product at that time.  The business relationship between Pan and Naturalcare was fostered by a close, professional and personal relationship between Messrs Selim and Schadel, who worked together on the development of Naturalcare’s business, particularly in the early years of their dealings. 

19. Messrs Selim and Schadel worked closely and collaboratively to develop Naturalcare’s business and had regular meetings until April 2003, when the business of Pan came to an end.  At the meetings, Mr Selim would propose new products that might be added to Naturalcare’s range and would discuss their formulas and benefits.  If Mr Schadel was interested in the products, he would ask Mr Selim to send him a quote and, if Mr Schadel found it satisfactory, he would send Pan a purchase order. 

20. In 1990, Pan and Naturalcare first entered into a contract manufacturing agreement as contemplated by clause 699 of the Code.  Further contract manufacturing agreements were entered into between Pan and Naturalcare in February 1995 and August 1998 and April 2002.  In February 1995, August 1998 and March 2002, Naturalcare and Pan also signed confidentiality agreements, the terms of which are not presently relevant.  

21. The form of contract manufacturing agreement that was operative from 1 March 2002 was signed on behalf of Pan on 3 April 2002 and on behalf of Naturalcare on 8 April 2002 (the Manufacturing Agreement).  It stated that its objective was to specify the Code responsibilities relating to manufacture for Naturalcare by Pan of the products listed in Appendix 1.  Appendix 1 contains some 53 products of Naturalcare.  The Manufacturing Agreement was to continue in operation for three years and was to be deemed automatically renewed for a further three years at the end of each three year period.  If either party intended to terminate, six months notice in writing to the other was required.  The Manufacturing Agreement did not cover any other commercial arrangements. 

22. The schedule to the manufacturing agreement consisted of four columns headed as follows:

    GMP Clause          Code of Good Manufacturing             Pan          Naturalcare

    Practices Responsibilities

23. In column 1 clause numbers of the Code dealing with particular responsibilities were specified.  In Column 2 a brief description of the responsibility was specified.  In the third and fourth columns an “x” was inserted opposite that description of the responsibility to signify either Pan or Naturalcare or both as having responsibility.  The majority of the items displayed an “x” under Pan, four items had an “x” under Naturalcare only and four items had an “x” under both.  Thus, by the Manufacturing Agreement, Pan and Naturalcare agreed that, in relation to any accepted order for the supply of goods, the party specified against a particular clause of the Code in the Schedule to the Manufacturing Agreement would accept the responsibility to perform the task specified in that clause of the Code in connection with the supply of those goods. 

24. The Manufacturing Agreement did not constitute an agreement for the manufacture or supply of products by Pan.  Rather, it was an arrangement to the effect that, if and when Pan and Naturalcare entered into an agreement whereby Pan would manufacture and supply products to Naturalcare, the responsibilities for various aspects of manufacture and quality control specified in the Code would be allocated between Pan and Naturalcare as stated in the schedule to the Manufacturing Agreement. 

25. By the end of 1992, Naturalcare was offering its customers approximately 26 separate complementary products, all of which had been suggested by Mr Selim, who encouraged Naturalcare to purchase all of its products from Pan.  Mr Selim also encouraged Naturalcare to look into selling its products into international markets and promised to help Naturalcare with the supporting documentation required to register products overseas.  At all times, Mr Schadel reposed considerable trust and confidence in Mr Selim personally and from a business point of view. 

26. By March 1994, Naturalcare could not go on without an injection of equity funding.  During that year, Mr Schadel negotiated the sale of a majority of Naturalcare’s issued capital to a new shareholder, although Mr Schadel retained his position as managing director.  Mr Terry Davis, the Executive Director of the new shareholder, told Mr Schadel that he would like to investigate alternative suppliers for Naturalcare’s product as he was concerned about Naturalcare’s reliance on Pan.  In 1995 and 1996, Mr Davis and Mr Schadel had meetings with Mr Selim where Mr Davis voiced his concerns to Mr Selim. 

1. At one of those meetings, Mr Selim told Messrs Schadel and Davis that they had nothing to worry about and that Naturalcare could continue to buy all of its products from Pan without a worry.  Mr Selim told them that Pan was the largest manufacturer of health care products in Australia and that Pan complied with all of the TGA’s requirements, so there was no risk in Pan not being able to supply Naturalcare.  After those meetings, Naturalcare nevertheless began placing more of its orders for generic products with Lipa Pharmaceutical Pty Ltd (Lipa), where Lipa could offer a better price than Pan.  In December 1997, Naturalcare and Lipa entered into a manufacturing agreement, as contemplated by the Code. 

2. In mid-1998, the majority shareholder of Naturalcare sold its shares to a manufacturer of therapeutic goods based in the United States of America.  Mr David Robinson, a director of the purchaser, became a director of Naturalcare.  In 1999, Messrs Robinson and Schadel had a meeting with Mr Selim concerning the relationship between Naturalcare and Pan.  Mr Robinson told Mr Selim that if Pan was not able to supply Naturalcare, even temporarily, that would have a serious negative effect on Naturalcare’s business.  Mr Selim replied that Naturalcare did not need to worry about that.  He said that Pan was the largest supplier of nutritional supplements in Australia and there was no possibility that Pan would not be able to supply Naturalcare with the products that Naturalcare ordered.  He also said that, as Pan is the largest supplier in Australia, Pan worked closely with the TGA and met or exceeded all necessary standards the TGA set for the manufacture of nutritional supplements. 

3. The business relationship between Messrs Schadel and Selim continued to function.  In late 2002, Mr Selim offered to introduce Mr Schadel to a possible buyer of Naturalcare when Mr Schadel expressed a desire to sell.  In February 2003, Mr Selim told Mr Schadel that he thought that there was an opening in the market for a pharmacy only brand that Naturalcare could fill by selling its existing range under another label.  Mr Selim also told Mr Schadel that he should relaunch his business in the French market and that Pan would given him extended credit terms and free products to help him with the venture. 

4. In early 2003, there were reports of adverse reactions after individuals took one of Pan’s products called Travacalm.  As a result, the TGA conducted a special audit of Pan on 30 and 31 January 2003.  The audit revealed a number of significant deficiencies, including three items classified as critical.  The audit also revealed compelling evidence of deliberate and systematic manipulation of laboratory analysis results so as to represent out of specification batches as complying with specification. 

5. The TGA carried out a further audit of Pan’s operations on 24 and 25 February 2003 and on 7 to 11 and 14 April 2003. That audit revealed that the issues identified during the 30-31 January 2003 audit concerning Travacalm were not restricted to that product. The audit also revealed a number of nonconformities with respect to manufacturing principles and the conditions of Pan’s licence to manufacture therapeutic goods. On 28 April 2003, the TGA sent a letter to Pan as well as notices under the TG Act, suspending Pan’s licence.

   TRADE PRACTICES CLAIM

6. The essence of the allegations of contravention of the Trade Practices Act made in Naturalcare’s statement of claim are as follows:

   (1)Naturalcare was wholly reliant and dependent on Pan for the supply of the soft gel goods sold by Naturalcare and was substantially reliant and dependent on Pan for the supply of all other goods sold by Naturalcare and, consequently, Naturalcare’s entire business was wholly or alternatively substantially reliant and dependent upon Pan continuing to supply Naturalcare with those goods customarily purchased by Naturalcare from Pan in the quantities customarily acquired by Naturalcare.

   (2)After Mr Schadel expressed concern to Mr Selim over Naturalcare’s reliance and dependence on Pan, Mr Selim acknowledged that any failure of supply by Pan would have significant adverse consequences for Naturalcare’s business.

   (3)In 1995 and 1996, Mr Selim confidently assured Mr Schadel that Pan was the largest manufacturer of health care products in Australia and was compliant with the requirements of the TGA and, accordingly, that the risk associated with Naturalcare’s reliance and dependence was negligible or immaterial: this allegation refers to the meeting described at paragraph [27] above. 

   (4)In 1999, Mr Selim indicated to Mr Schadel that Pan was ready, willing and able to continue to supply Naturalcare with all goods Naturalcare customarily acquired from Pan in the quantities Naturalcare customarily obtained such goods from Pan: this allegation refers to the meeting described at paragraph [28] above.

   (5)In April 2002, Naturalcare and Pan entered into the Manufacturing Agreement: this allegation refers to the agreement that was effective from 1 March 2002, which is referred to in paragraphs [21] to [24].

   (6)The terms of the Manufacturing Agreement included a promise by Pan to manufacture certain goods for Naturalcare, during the term (including any renewed term) of the Manufacturing Agreement, to the standard set out in the Code. 

   (7)The Manufacturing Agreement conveyed to Naturalcare a representation that Pan would so conduct its manufacturing processes as to comply with the Code (the Quality Assurance Representation).

   (8)By the conduct referred to in (3) and (4) above Pan represented to Naturalcare that Pan would continue to supply all or most of Naturalcare’s requirements as to therapeutic goods, or, alternatively, all of Naturalcare’s requirements as to soft gel goods and all or most of Naturalcare’s requirements as to other therapeutic goods sold by Naturalcare (the Supply Representation).

   (9)In reliance upon the Quality Assurance Representation and/or, alternatively, in reliance upon the Supply Representation:

   (10)Naturalcare continued the course of dealings with Pan knowing such courses or dealing rendered Naturalcare’s business particularly reliant and dependent on Pan’s continued supply of goods to Naturalcare.

   (11)Naturalcare did not seek out alternate suppliers so as to reduce materially its reliance and dependence on Pan.

   (12)Between at least 1 May 2002 and 29 April 2003 Pan did not comply with the Code in relation to the manufacture and supply of therapeutic goods by it to Naturalcare.

   (13)On 28 April 2003 Pan’s manufacturing licence was suspended by the TGA under s 41 of the TG Act in consequence of the TGA forming the view that Pan had not complied with the Code since 30 April 2002 and the non-compliance was so serious that the ongoing availability of products manufactured by Pan represented a very serious risk to the community.

   (14)On and from 28 April 2003 Pan ceased to manufacture, or supply to Naturalcare, therapeutic goods.

   (15)By reason of the matters referred to in paragraphs (10), (11) and (12), the conduct on the part of Pan in making the Quality Assurance Representation and/or in the alternative in making the Supply Representation was misleading or deceptive or likely to mislead or deceive.

   (16)The conduct referred to in paragraph (13) was engaged in by Pan in contravention of s 52 of the Trade Practices Act.

   (17)Naturalcare has suffered loss or damage as a result of, or because of, the conduct referred to in (13). 

7. The allegations referred to in (3) and (4) were disputed by Pan.  However, the primary judge accepted that those assertions were made out in the terms indicated above.  The allegations referred to in (10), (11) and (12) were not in dispute in so far as Pan made the following admissions:

   ·Pan did not comply with the Code in relation to the therapeutic goods manufactured and supplied by Pan to Naturalcare between 1 May 2002 and 28 April 2003.

   ·Pan did not comply with the Code in relation to the therapeutic goods manufactured and supplied by it to other customers between 1 May 2002 and 28 April 2003.

   ·Pan’s manufacturing licence was suspended by the TGA as a result of Pan’s failure to comply with the Code.

8. Naturalcare contended to the primary judge that each of the Quality Assurance Representation and the Supply Representation was with respect to a future matter: in the one case, future conduct of the manufacturing process and, in the other case, the future ability to supply therapeutic goods. Each was broadly concerned with the continuing supply of therapeutic goods. His Honour said that Naturalcare contended that Pan had not established reasonable grounds for making either representation, with the result that the making of each of them was misleading and deceptive or likely to mislead and deceive, by the operation of s 51A of the Trade Practices Act.

9. His Honour noted Pan’s contention, apart from denying that the representations were made, that the assurances received by Mr Schadel from Mr Selim were in the present tense, such that the representations were about the then present capacity to manufacture and supply rather than being about a future matter. Pan contended that, even if the assurances were with respect to a future matter, no continuing representation was pleaded or proved. Accordingly, even if there were a breach of s 52 at the time of the making of the representation, there was no causal relationship between those breaches and the damage alleged to have been suffered. Finally, his Honour said that Pan contended that, in any event, there was a reasonable basis for making any representations that were made.

10. The primary judge found that the terms of the Manufacturing Agreement conveyed the Quality Assurance Representation, in a general fashion, for the term of the Manufacturing Agreement and not restricted to goods actually ordered.  His Honour was also satisfied that the explicit assurances by Mr Selim, in the conversations with Mr Schadel, were implicitly carried forward by the course of dealings between Pan and Naturalcare and between Mr Selim and Mr Schadel.  His Honour was satisfied, therefore, that Pan, at all times, represented itself to Naturalcare as a safe and reliable supplier, which was, and would remain ready, willing and able to comply with the Code.  While that representation is not the Supply Representation as pleaded, his Honour nevertheless found that the Supply Representation was also made.  It was therefore necessary for his Honour to consider whether it was misleading or deceptive, or likely to mislead or deceive, to make either or both of the representations pleaded. 

11. Pan admitted that it did not comply with the Code between 1 May 2002 and 28 April 2003, when its licence was suspended. It made no admission about any time prior to 1 May 2003. On the other hand, the Manufacturing Agreement was entered into in April and was said to be operative from 1 March 2002. His Honour considered that that timing difference was of little merit. His Honour observed that there was no evidence of any relevant change of circumstances between 1 March 2002 and 1 May 2002. His Honour considered that the audits by the TGA on 30-31 January 2003, 24-25 February 2003 and 7, 11 and 14 April 2003 and the reports given under the TG Act in 2003 were cogent evidence of the failure by Pan to comply with the Code by reason of serious systemic deficiencies. Further, his Honour said, Pan called no evidence to establish compliance with the Code during 2002 and 2003 and did not call evidence to explain or rebut the effect of the investigations by the TGA in 2003 and the conclusions that could be drawn from the investigations. His Honour was therefore satisfied that Pan was in serious breach of the Code during 2002 and 2003. His Honour was not specific as to the time in 2002 that was relevant. His Honour considered that the position in earlier years was not so clear.

12. Audit reports of Pan by the TGA showed significant deficiencies in earlier years but Pan continued to be licensed. While Pan did not call evidence to prove compliance with the Code or to prove that there was a proper basis for representations of compliance in earlier years, Mr Selim was not cross-examined on that matter. His Honour said that the gist of Naturalcare’s case was not based upon the earlier representations being a breach of s 52 when made. Rather, his Honour said, the gist of the case is that the representations continued to be part of the basis upon which business was done in 2002 and 2003.

13. His Honour found that, if the Quality Assurance Representation carried with it a representation as to future conduct, no reasonable grounds were established for making such a representation.  However, his Honour also concluded that the Quality Assurance Representation was misleading, if viewed as a statement of existing circumstances at the commencement of and during the term of the Manufacturing Agreement.  That observation is at odds with the pleading and is at odds with Naturalcare’s contention, as noted by his Honour, that each of the Quality Assurance Representation and the Supply Representation was with respect to a future matter. 

14. His Honour accepted that Pan was ready and willing to supply and indeed continued to supply up until the suspension of its licence.  However, Pan was ultimately unable to supply because of its failure to comply with the Code, leading to the suspension of its licence.  His Honour considered that the true situation for all of 2002 and the relevant part of 2003 was that the failure to comply with the Code rendered Pan liable to suspension and cancellation of its licence at all times.  His Honour was therefore satisfied that the Supply Representation was objectively misleading and deceptive for the whole of the relevant period, presumably 2002 and 2003.  Once again, that appears to be at odds with the pleading as well as being at odds with his Honour’s characterisation of Naturalcare’s case, that both representations were with respect to future matters.  However, his Honour was also satisfied that, to the extent that the Supply Representation related to the future, no reasonable grounds were established for making it. 

15. His Honour also found that Naturalcare, through Mr Schadel, relied upon the Quality Assurance Representation and the Supply Representation in so far as Naturalcare continued to acquire most of its goods from Pan and was lulled into what was a false sense of security by the those representations.  His Honour found that, if Mr Schadel had thought that there was any real danger of Pan losing its licence because of non-compliance with the Code, he would have taken steps to reorganise Naturalcare’s business to minimise dependence upon Pan for supply.  His Honour found, in essence, that Mr Schadel was induced not to reorganise the business to reduce dependence upon Pan as a supplier. 

16. Much of the argument on the appeal was concerned with the extent to which the conclusions reached by the primary judge were within with the case pleaded and conducted by Naturalcare.  The argument was available because of the somewhat convoluted pleading in the final version of the Statement of Claim.  I have set out above my analysis of the essence of the allegations made by Naturalcare in the final version of its statement of claim.  The essence of those allegations is that:

    ·by entering into the Manufacturing Agreement, Pan made the Quality Assurance Representation;

    ·by the assurances given by Mr Selim to Mr Schadel in 1995 and 1996 and in 1999, Pan made the Supply Representation.

17. Thus, there is no allegation that the Quality Assurance Representation was made at any time other than when the Manufacturing Agreement was entered into.  There is no allegation that the Supply Representation was made at any time other than when the assurances were given by Mr Selim to Mr Schadel.  Further, both representations are, in the terms in which they are pleaded, representations with respect to future matters.  The Quality Assurance Representation was that Pan would conduct its manufacturing processes in a particular way.  The Supply Representation was that Pan would continue to supply certain of Naturalcare’s requirements.

18. Under s 51A(1) of the Trade Practices Act, a representation is to be taken to be misleading if it is a representation with respect to any future matter and the maker of the representation does not have reasonable grounds for making the representation. Under s 51A(2), the maker of the representation with respect to any future matter is to be deemed not to have had reasonable grounds for making the representation unless it adduces evidence to the contrary. However, if evidence is adduced by a representor to the effect that the representor had reasonable grounds for making the representation, the deeming provision will not operate. Where the representor adduces such evidence, it is then a matter for the Court to determine, on the balance of probabilities in the ordinary way, whether or not the representor had reasonable grounds for making the representation.

19. In the present context, the question of whether Pan had reasonable grounds for making the relevant representations requires an examination of the position as at 1995, 1996 and 1999, on the one hand, and as at April 2002, on the other hand. 

20. As to the periods in 1995, 1996 and 1999, there was evidence that Pan was carrying on its business manufacturing goods pursuant to its licence under the TG Act. His Honour did not find that at any of those times there were no reasonable grounds for making the statements and giving the assurances attributed to Mr Selim. Further, Pan adduced evidence concerning audits of its operations conducted by the TGA at various times after 1995 up to April 2002. Following those audits, Pan’s licence remained on foot. There is no reason to conclude, on the balance of probabilities, that as at 1995, 1996 or 1999, Pan was not complying with the TG Act in the conduct of its business. Indeed, Pan continued to supply the relevant parts of Naturalcare’s requirements right up to the cancellation of its licence in April 2003. On the balance of probabilities, therefore, Pan had reasonable grounds for making the Supply Representation when it was made in 1995, 1996 and 1999. There was no allegation that the Supply Representation was made at any later time. There was no basis for concluding that the Supply Representation was misleading or deceptive or likely to mislead or deceive when it was made in 1995, 1996 or 1999.

21. The primary judge found that the Quality Assurance Representation was made by Pan, by Pan’s entering into the Manufacturing Agreement.  There was no allegation that the Quality Assurance Representation was made at any later time.  The question, therefore, is whether, as at 8 April 2002 at the latest, when Naturalcare signed the Manufacturing Agreement, Pan had reasonable grounds for representing that it would so conduct its manufacturing processes as to comply with the Code. 

22. While Pan admitted that it did not comply with the Code between 1 May 2002 and 28 April 2003, it did not admit that it was not complying with the Code before that time. Naturalcare does not appear to have sought from Pan any particulars of the extent to which Pan admitted that it failed to comply with the Code from 1 May 2002. As at 8 April 2002, Pan was the holder of a licence under the TG Act, which had been granted on 24 January 2002. Pan had been the holder of such a licence for many years. On 30 April 2002, Pan was audited by the TGA and on 28 June 2002, a further licence under the Act was issued to Pan. Thus, an inference is clearly available that the audit conducted by the TGA on 30 April 2002 disclosed no failure to comply with the Code. Pan adduced evidence as to those matters, which go to the question of whether there was a reasonable ground for representing that Pan would so conduct its manufacturing processes as to comply with the Code. Accordingly, there was no presumption in favour of Naturalcare under s 51A and Naturalcare therefore had the onus of establishing, on the balance of probabilities, that there were no reasonable grounds for making the representation.

1. The reasoning of the primary judge was based on the fact that there was no evidence of any relevant change of circumstances between 1 March 2002 and 1 May 2002 and the fact that audits conducted by the TGA in 2003 were cogent evidence of the failure by Pan to comply with the Code by reason of serious systemic deficiency.  His Honour was certainly justified in finding that Pan was in serious breach of the Code during 2003.  However, it does not follow that Pan was in serious breach of the Code throughout the whole of 2002.  While Pan admitted that from 1 May 2002 it failed to comply, there is no evidence of the extent of the non-compliance as from 1 May 2002.  There is no basis for extrapolating backwards from that date, to 8 April 2002, to conclude that there was any serious breach of the Code before 1 May 2002.  I do not consider that the evidence supports a finding, on the balance of probabilities, that there was no reasonable ground for representing, as at 8 April 2002, that Pan would so conduct its manufacturing processes as to comply with the Code. 

2. It follows, in my opinion, that his Honour erred in concluding that, by making the Quality Assurance Representation and by making the Supply Representation, Pan engaged in misleading or deceptive conduct or conduct that was likely to mislead or deceive, in the manner pleaded by Naturalcare. At the time when the relevant representations are alleged to have been made, Pan had reasonable grounds for making the representations. It follows that his Honour erred in concluding that Pan contravened s 52 of the Trade Practices Act by making the Quality Assurance Representation and by making the Supply Representation.

3. Accordingly, it is unnecessary to deal with the questions of whether the representations were in fact made and whether there was reliance, in the relevant sense, by Mr Schadel on behalf of Naturalcare, on the representations.  It is also unnecessary to consider the issues concerning quantum of damages.  On the other hand, in the light of the conclusion I have reached, it is necessary to consider the question raised by Naturalcare in its notice of contention. 

   BREACH OF DUTY CLAIM

4. Naturalcare claims that, as at 1 May 2002 at the latest, Pan came under a duty of care to Naturalcare to take reasonable care to ensure that Pan’s manufacturing processes complied with all applicable codes and regulatory requirements.  Naturalcare says that, in breach of that duty, Pan failed, on and after 30 January 2003 at the latest, to take reasonable care to ensure that its manufacturing processes complied with all applicable codes and regulatory requirements.  No particulars of any failure prior to 30 January 2003 were provided in Naturalcare’s statement of claim. 

5. In its notice of contention, Naturalcare complains that the primary judge erred in failing to find that Pan was under a duty to Naturalcare to take reasonable care to ensure that Pan’s manufacturing processes complied with all applicable codes and regulatory requirements.  Naturalcare says that the relationship between it and Pan exhibited features that, in combination, constituted a sufficiently close or special relationship to give rise to a duty on the part of Pan to take care to prevent economic loss to Naturalcare.  Naturalcare points to five factors.

6. First, Mr Selim made the statements referred to in paragraphs [27] and [28] above, in circumstances where he knew or ought reasonably to have known that the statements would be relied on.  Naturalcare says that Pan thereby assumed responsibility to take reasonable care to prevent economic loss to Naturalcare. 

7. Secondly, Pan was in control of its own manufacturing processes and Naturalcare had no way of knowing or assessing the risk that Pan’s processes were non-compliant with the applicable codes and regulatory requirements.  Accordingly, Naturalcare was in Pan’s hands and was vulnerable, in the sense that it was unable to protect its own interests.  To the extent that Naturalcare might have taken steps to protect its own interests, it was induced by Mr Selim’s statements not to take such steps. 

8. Thirdly, Mr Selim was aware that any failure by Pan to comply with the applicable codes and regulatory requirements would have adverse consequences for Naturalcare.  Pan therefore had actual foresight of the likelihood that Naturalcare could suffer harm in the event that Pan manufactured and supplied product otherwise than conformably with the applicable codes and regulatory requirements.  Accordingly, Pan should have had the interests of Naturalcare in contemplation when manufacturing product for, and supplying products to, Naturalcare.

9. Fourthly, Pan assumed particular responsibilities under the TG Act and the Code in circumstances where the statutory regime gave, and was intended to give, comfort to sponsors in the position of Naturalcare.

10. Fifthly, imposing a duty in the terms alleged by Naturalcare would not impose an unreasonable burden on Pan because Naturalcare was within a class that would be primarily affected by Pan’s failure to discharge the alleged duty to take care.

11. It is one thing to say that Pan was under a duty to Naturalcare to take reasonable care to ensure that, in manufacturing goods and supplying the goods to Naturalcare, Pan complied with all applicable codes and regulatory requirements in relation to that manufacture and supply: there would be no real difficulty in finding a contractual duty to do so.  Indeed, the Liquidators admitted Naturalcare’s proof of debt in so far as it claimed compensation for Pan’s failure to do so. 

12. However, it would ordinarily be of no concern to Naturalcare as to whether Pan ensured that, in relation to goods manufactured and supplied to third parties, Pan complied with all applicable codes and regulatory requirements.  Indeed, that is not Naturalcare’s complaint.  It makes no complaint, and could hardly be heard to make a complaint, about Pan’s failure to comply with all applicable codes and regulatory requirements in relation to its manufacture and supply of goods to parties unrelated to Naturalcare. 

13. Rather, Naturalcare’s complaint is that Pan failed to ensure that it continued to be licensed to manufacture and supply goods to Naturalcare. It is the fact that the TGA suspended Pan’s licence to do so that is alleged to have given rise to loss on the part of Naturalcare. Naturalcare does not say that it suffered loss because Pan manufactured and supplied goods to third parties otherwise than in compliance with all applicable codes and regulatory requirements. Thus, Naturalcare would need to establish Pan was under a duty to ensure that it did not conduct its manufacturing processes in a way that would result in the suspension of its licence under the TG Act. In effect, that is a duty to continue carrying on its business.

14. The relationship between Naturalcare and Pan in relation to goods actually supplied by Pan to Naturalcare was that of buyer and seller.  That relationship was governed by the contractual obligations and rights that arose following the acceptance by Pan of an order for therapeutic goods placed by Naturalcare.  The obligations and rights included those identified in the Manufacturing Agreement.  The Manufacturing Agreement, of course, imposed no obligations on either party, except in an inchoate sense.  As I have said, by the Manufacturing Agreement, Pan and Naturalcare agreed that, in relation to any accepted order for the supply of goods, the party specified against a particular clause of the Code in the Schedule to the Manufacturing Agreement would accept the responsibility to perform the task specified in that clause of the Code in connection with the supply of those goods. 

15. Where an order from Naturalcare was accepted by Pan, Pan came under a contractual obligation to manufacture and supply the relevant goods compliantly with the applicable codes and regulatory requirements.  The primary judge found, and there is no question raised as to the correctness of that finding, that Pan was not under any contractual obligation to Naturalcare to manufacture and supply to Naturalcare for the term of the Manufacturing Agreement the goods customarily acquired by Naturalcare from Pan in the quantities customarily obtained by Naturalcare from Pan.  Clearly, it would have been open to Naturalcare to stipulate for such a promise by Pan.  It did not do so. Naturalcare claims, nevertheless, that, notwithstanding the absence of such a contractual obligation, Pan was under a common law duty to do so, so as to avoid economic loss that might be suffered by Naturalcare by Pan’s failure to do so.  That is a somewhat startling proposition. 

16. Naturalcare makes no claim that the statements made by Mr Selim were false, misleading or deceptive at the time when they were made.  Nor does Naturalcare make any claim that, in circumstances where it continued to rely on those statements to continue its dealings with Pan, that Pan came under a duty to inform Naturalcare that the statements, if they were repeated after 30 April 2002 would be false, misleading or deceptive.  Rather, the allegation is that Pan was under a duty to Naturalcare to continue to conduct its business in a way that would ensure that the statements, if repeated, would not be false, misleading or deceptive. 

17. Even if it be the fact that the statements made by Mr Selim induced Naturalcare not to take steps that it might otherwise have taken to avoid the risk, it is clear from the fact that Naturalcare sought assurances from Pan, that Naturalcare understood that there was a risk.  Thus, Naturalcare was not vulnerable in the sense that it could not have known of the risk, and could not protect itself from that risk.  It made the choice to rely on non-contractual assurances rather than to stipulate for a contractually binding promise by Pan. 

18. There is no reason for the law to impose a duty on one of two contracting parties to act in the interests of the other party in relation to a matter that the parties have not by express conduct or necessary implication included into the terms of their contractual relationship.  While vulnerability is an important requirement in cases where a duty of care to avoid economic loss arises, vulnerability in that context is not to be understood as meaning only that the claimant was likely to suffer damage if reasonable care was not taken.  Rather, vulnerability is to be understood as a reference to the claimant’s inability to protect itself from the consequences of a wrongdoer’s want of reasonable care, either entirely or at least in a way that would cast consequences of loss on the wrongdoer (Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515 at [22] and [23]).

19. As the primary judge observed, the risk of a supplier of goods not being able to maintain supply is an everyday incident of commercial life. Many regulatory requirements regulate manufacturers and suppliers of goods and there is always a risk that, if the applicable codes and regulatory requirements are not complied with, the supply of goods may be prohibited or suspended. Various strategies to minimise risks of that kind and their impact are available to an intending purchaser. All of those strategies were open to Naturalcare. It elected not to adopt the obvious one of stipulating in its contract with Pan for compliance with the applicable codes and regulatory requirements to ensure that it continued to be the holder of a licence under the TG Act that enabled it to manufacture therapeutic goods.

20. No claim in tort is based upon the making of the statements as such.  Naturalcare’s complaint is that, by reason of the statements made by Mr Selim, it did not adopt appropriate strategies available to it to avoid a risk of which it was aware.  That, of itself, is not sufficient to impose upon Pan a duty to take care to ensure that the risk does not materialise.  The complaint in tort must fail, essentially for the reasons given by the primary judge. 

    CONCLUSION

21. The appeal should be upheld. The orders made by the primary judge should be set aside. In lieu of those orders, there should be orders dismissing Naturalcare’s Originating Process with costs.  Naturalcare should pay the Liquidators’ costs of the appeal. 

I certify that the preceding sixty-nine (69) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

Associate:
Dated:        24 January 2008

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 2506 OF 2006

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	ANTHONY GREGORY MCGRATH AND CHRISTOPHER JOHN HONEY AS JOINT LIQUIDATORS OF PAN PHARMACEUTICALS LTD Appellant
AND:	AUSTRALIAN NATURALCARE PRODUCTS PTY LIMITED Respondent

JUDGES:	EMMETT, STONE AND ALLSOP JJ
DATE:	24 JANUARY 2008
PLACE:	SYDNEY

REASONS FOR JUDGMENT

STONE J

1. I have had the advantage of reading in draft, the reasons of Allsop J. I respectfully agree with his Honour’s reasons, except in so far as is indicated below in relation to s 51A of the Trade Practices Act 1974 (Cth). I note however, that my reservations on this point do not affect my agreement with his Honour’s conclusion that the appeal should be dismissed.

2. The interpretation of s 51A throws up many problems. The section provides that a representation as to the future is deemed to be misleading if the representor did not have reasonable grounds for making it; s 51A(1). The provision clearly identifies what must be established, namely the absence of reasonable grounds. The Court’s task of evaluating the actual representation is narrowed so that its enquiry is focused on the reasonability of the grounds for making the representation.

3. Section 51A(2) further narrows the task in some circumstances. At least one aspect of the effect of the s 51A(2) appears to be uncontroversial, namely that a representor who adduces no evidence to support a defence of reasonable grounds is deemed to have made a misleading representation. Despite any other differences of interpretation, this much is clear from the authorities referred to by Allsop J at [177].

4. There is, however, disagreement as to the effect of the section where the representor adduces some (relevant) evidence that there were reasonable grounds for making the representation.  This raises the question of what is evidence “to the contrary”.  Among the issues thrown up by this question is whether it is evidence which, taken by itself, is sufficient to establish reasonable grounds or merely to raise the question.  In characterising the evidence, does the whole of the evidence adduced by both parties have to be considered?  If evidence adduced by the representor in support of a claim to have had reasonable grounds is rebutted by the representee’s evidence, does that show that the representor’s evidence was in fact not “evidence to the contrary”? 

5. The background to the introduction to the section outlined by Allsop J shows that when the section was introduced there were different views as to the desirability of imposing the persuasive rather than the evidentiary burden of proof on the representor. Although as a result of that debate, the terms of the present s 51A(2) were accepted by the Government of the day, I am not entirely persuaded that a clear intention of the legislature can be discerned. As Lord Nicholls of Birkenhead, speaking on statutory interpretation, commented in R v Secretary of State for the Environment, Transport and the Regions, Ex parte Spath Holme Ltd [2001] 2 AC 349 at 396, a search for the “intention of Parliament” may be helpful so long as one remembers that it “is an objective concept, not subjective”.

6. As Allsop J’s analysis of the evidence shows, in the circumstances of this case it is not necessary to resolve these questions. In relation to the Supply Representation, on any view of s 51A(2), the appellants adduced evidence sufficient to rebut the statutory presumption. In relation to the Quality Assurance Representation, as his Honour has remarked at [243], even on the view most favourable to the appellants, the primary judge’s conclusion that the Quality Assurance Representation was misleading is shown to be correct.

7. The correct interpretation of s 51A(2) was not the subject of full argument in this appeal or, it would seem, in few if any of the decisions concerning the section. In the circumstances, I do not think that the interpretation of the section is best addressed by interpreting what other courts have said about it. In my view the resolution of the questions to which I have referred in [73] above would be better left to a court that has had the benefit of full argument in a matter where the outcome depends on the view taken of the section.

8. I agree with the orders proposed by Allsop J.

I certify that the preceding eight (8) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.

Associate:

Dated:        24 January 2008

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 2506 OF 2006

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	ANTHONY GREGORY MCGRATH AND CHRISTOPHER JOHN HONEY AS JOINT LIQUIDATORS OF PAN PHARMACEUTICALS LTD Appellant
AND:	AUSTRALIAN NATURALCARE PRODUCTS PTY LIMITED Respondent

JUDGES:	EMMETT, STONE AND ALLSOP JJ
DATE:	24 JANUARY 2008
PLACE:	SYDNEY

REASONS FOR JUDGMENT

ALLSOP J

Background and the pleaded claims

1. The Third Further Amended Statement of Claim (the “Statement of Claim”) and the Second Further Amended Originating Process (the “Originating Process”) contained the respondent’s/plaintiff’s (to which I will refer as “ANP”) claim by way of an appeal from the appellants’/defendants’ (to whom I will refer as the “Liquidators”) decision to reject ANP’s proof of debt dated 17 February 2004 lodged in the liquidation of Pan Pharmaceuticals Limited (“Pan”).  Some claims of ANP against Pan were admitted to proof.  The claims said to have been wrongly rejected were the subject of the pleading in the Statement of Claim and a nine day hearing before the primary judge.

2. The claims were categorised in the Statement of Claim as:

   (a)a “contractual damages claim”

   (see [7]-[50] of the Statement of Claim)

   (b)a “misleading or deceptive conduct” claim

   (see [51]-[60] of the Statement of Claim)

   (c)a “tortious count”

   (see [61]-[66] of the Statement of Claim)

   (d)an estoppel claim

   (see [66A]-[66J] of the Statement of Claim)

3. The primary judge dismissed the claims in contract, tort and estoppel, but found in ANP’s favour on the trade practices claim, directing that ANP be admitted to proof by an increased sum of $471,922.97, plus $305,143.57 interest (totalling $777,066.54), consequent upon a finding of an entitlement to an award of damages under s 82 of the Trade Practices Act 1974 (Cth) (the “TP Act”).

4. The Liquidators appeal against the orders based on the misleading or deceptive conduct count.  ANP complains about the primary judge’s rejection of the claim in tort.  ANP does not seek any variation of the orders.  Its complaint is therefore formulated in a notice of contention, rather than a cross-appeal.

5. Pan was a contract manufacturer of complementary medicines.  It was licensed under the Therapeutic Goods Act 1989 (Cth) (the TG Act) until 28 April 2003, when the Therapeutic Goods Administration (TGA) suspended its licence.

6. Mr Jim Selim was the Chief Executive Officer of the corporate predecessors to Pan, and of Pan after it was listed on the Australian Stock Exchange. 

7. ANP was a customer of Pan (or its corporate predecessors) in the period 1989 to 28 April 2003.  At all times, Mr Barry Schadel was the managing director of ANP.

8. As part of the regulatory scheme in relation to complementary medicines, ANP was registered by the TGA as the ‘sponsor’ of certain complementary medicines. Pan was nominated as one of the manufacturers in relation to some of those products. At all relevant times until 28 April 2003, Pan held a licence under the TG Act to manufacture relevant products of the kind that it sold to ANP and to others.

1. In 1990, as required by cl 699 of the Australian Code of Good Manufacturing Practice for Therapeutic Goods – Medicinal Products (the Code), Pan and ANP entered into a Good Manufacturing Practice Agreement.  (I will refer to these agreements in the plural and in the singular to the 2002 agreement as “Manufacturing Agreements” and the “Manufacturing Agreement”, respectively.  From time to time I will use, as the documents sometimes used, the initials “GMP”.  These stand for “Good Manufacturing Practice” under the Code.)  Clause 699 of the Code provided:

   To ensure that the responsibilities of both parties are clearly understood and recorded, the arrangements and responsibilities for every aspect of manufacture and quality control that is relevant to Good Manufacturing Practice, for each product made under contract, must be unambiguously specified in writing in a ‘Specification of GMP Responsibilities’, or equivalent document, signed by a representative of both parties.

   Clause 699 also includes a note:

   It is recommended that commercial arrangements be the subject of a separate agreement or contract.

2. Manufacturing Agreements were executed between ANP and Pan in 1990, February 1995, August 1998 and April 2002, allocating responsibilities as required by the Code.  The April 2002 Manufacturing Agreement executed by Pan on 3 April 2002 (which I will take to be the date that it entered into the agreement), effective from March 2002, like previous agreements, was for a period of three years and provided:

   If either party intend to terminate the agreement, (6) months notice in writing to the other party is required.

3. On 28 April 2003, the TGA suspended Pan’s licence and recalled goods manufactured by Pan on or after 1 May 2002.  On 22 May 2003, the Liquidators were appointed as administrators of Pan and on 23 September 2003, as liquidators.

4. In response to the recall of Pan’s products, ANP “terminated” an alleged Supply Contract:  [48] of the Statement of Claim.  On 13 February 2004, ANP submitted a proof of debt for loss of profit of $15,674,619 based on breach of contract that was later adjusted on 8 September 2004 to a claim for $6,463,226.  The Liquidators allowed a total of $1,465,125.13 for product on hand, recall costs, loss of profit for stock on hand and a loss of profit on confirmed but undelivered orders.

5. On 10 September 2004, the claim for future loss of profits based on an ongoing contract was rejected by the Liquidators.  ANP commenced the proceeding heard by the primary judge to set aside the rejection of its proof of debt by the Liquidators for loss of profits.

   The misleading or deceptive conduct claim

6. Considerable debate took place on appeal as to whether the approach of the primary judge and the arguments of ANP on appeal went beyond the case as pleaded and conducted at the hearing.  Thus, it is necessary to examine with some care the pleadings, the evidence and what was otherwise said at the hearing in order to appreciate and deal with the submissions of the parties on appeal.

7. The misleading or deceptive conduct claim commenced (in [51] of the Statement of Claim) with a repetition of [18] of the Statement of Claim, which was as follows:

   At various times between 1995 and 2002 (inclusive), ANP made it known to Pan, or in the alternative by course of dealings Pan knew full well, that:

   (a)ANP was wholly reliant and dependant [sic] on Pan for the supply of the soft gel goods sold by ANP and substantially reliant and dependant [sic] on Pan for the supply of all other goods sold by ANP; and

   (b)ANP’s entire business was wholly or alternatively substantially reliant and dependant [sic] upon Pan continuing to supply ANP with those goods customarily purchased by ANP from Pan at the quantities customarily required by ANP.

   Particulars

   Various discussions between Mr Schadel and Mr Selim during which:

   a)Mr Schadel expressed to Mr Selim concern over ANP’s reliance and dependence on Pan.

   b)Mr Selim acknowledged that any failure to supply by Pan would have significant adverse consequences for ANP’s business.

   c)Mr Selim confidently assured Mr Schadel that Pan was the largest manufacturer of healthcare products in Australia and was compliant with the requirements of the Therapeutic Goods Administration and, accordingly, that the risk associated with ANP’s reliance and dependence was negligible or immaterial.

   d)Mr Selim indicated to Mr Schadel that Pan was ready, willing and able to continue to supply ANP with all goods ANP customarily acquired from Pan at those quantities ANP customarily obtained from Pan.

   e)On the basis of Mr Selim’s assurances, Mr Schadel indicated that:

   a.ANP would continue to acquire all of its soft gel goods exclusively from Pan; and

   b.ANP would continue to acquire the bulk of all its other goods from Pan.

8. The particulars to [18] of the Statement of the Claim were defined as the “Conduct”: see [52] of the Statement of Claim.

9. ANP asserted that it relied upon the Conduct in the following ways (see the particulars to [53] of the Statement of Claim):

   (a)ANP continued the course of dealing with Pan knowing such course of dealing rendered ANP’s business particularly reliant and dependant [sic] on Pan’s continued supply of goods to ANP.

   (b)ANP did not seek out alternate suppliers so as to materially reduce its reliance and dependence on Pan.

10. In [55] and [55A] of the Statement of Claim, two representations were extracted from the Conduct: the so-called Quality Assurance Representation (the “QAR”) and the so-called Supply Representation (the “SR”).  The QAR was pleaded in [55] of the Statement of Claim, as follows:

    In the premises, the Manufacturing Agreement conveyed to ANP a representation, namely, that Pan would so conduct its manufacturing processes as to comply with the Code for Good Manufacturing Practice for Therapeutic Goods, August 1990.

11. Thus, the QAR was said to have arisen out of the Manufacturing Agreement that Pan entered into on 3 April 2002, in the context (that is “in the premises”) of what was pleaded and particularised in and under [18] of the Statement of Claim. In debate on the appeal, counsel for ANP said that the QAR should be understood not only as a representation as to a future matter for the purposes of ss 51A and 52 of the TP Act, but also as a representation of present fact: that Pan was conducting its manufacturing processes as to comply with the Code. That is not what the words of [55] of the Statement of Claim say, but there is some force in the proposition that the two ways of putting the representation are inextricably intertwined. Both, however, are representations made on or about 3 April 2002, and both arise from the Manufacturing Agreement in the context of the matters pleaded and particularised in and under [18] of the Statement of Claim.

12. The SR was pleaded in [55A] of the Statement of Claim, as follows:

    Further, or in the alternative, by making the statements pleaded at sub-paragraphs 18(c) and (d) Pan represented to ANP that Pan would continue to supply all or most of ANP’s requirements as to therapeutic goods, or, alternatively, all of ANP’s requirements as to soft gel goods and all or most of ANP’s requirements as to other therapeutic goods sold by ANP.

13. It can be seen that this representation was pleaded as a representation as to a future matter arising from two groups of conversations set out in (c) and (d) of the particulars to [18] of the Statement of Claim.  It is also to be noticed that (c) and (d) under [18] refer to conversations that dealt with compliance with the requirements of the Code as a related question to that of supply, that is, one related to ability or capacity, not just commercial willingness, to supply.  The evidence revealed that these two groups of conversations occurred in 1995/1996 and between 1998 and 2000.  The argument on appeal proceeded on the basis that the dates were 1995/1996 and 1999.  The primary judge dealt with this evidence at [28]-[47] of his reasons, in particular at [30]-[31] where he dealt with the 1995/1996 conversations, and at [43]-[44] where he dealt with the later conversation.  Mr Schadel was the managing director of ANP, Mr Davis was a part-owner of ANP in 1995/1996 and Mr Robinson was a director of ANP between 1998 and 2000.  The 1995/1996 conversation was dealt with at [30]-[31] of his Honour’s reasons, as follows:

    [30]Schadel, Davis and Selim had two meetings in 1995/1996 where Davis voiced his concerns to Selim.  Davis said that at one of the meetings a conversation took place to the following effect:

    ‘Me [Davis]:    “How can I be certain you can supply all our product at the right quality and competitive prices as you want all our business?  Given your current and past issues with the Therapeutic Goods people where do you stand with a clean bill of health and who could we turn to if you were not able to supply?”

    Mr Schadel:“Jim, you have to give Terry confidence that all the commitments you have made to me that you can deliver on them, particularly in respect of new products, pricing and continuous supply.”

    Mr Selim:“You have nothing to worry about.  [Naturalcare] can continue to buy all of its products from Pan without a worry.  Pan is the largest manufacturer of health care products in Australia.  Pan complies with all of the TGA’s requirements so there is no risk in Pan not being able to supply [Naturalcare].  There is no problem in Pan continuing to supply [Naturalcare].” ’

    Schadel said that the conversations included words to the following effect:

    ‘Mr Davis:“Jim, I am extremely concerned that  [Naturalcare’s] business is totally reliant on Pan for the majority of its best-selling products.  I have asked Barry to continue to try to source products from other manufacturers.”

    Me [Schadel]:    “Jim, I have told Terry many times about our long term relationship and the fact that I believe Pan is still the major manufacturer in Australia but we are both concerned that [Naturalcare] has become totally reliant on Pan.”

    Mr Selim:“You have nothing to worry about.  [Naturalcare] can continue to buy all of its products from Pan without a worry.  Pan is the largest manufacturer of health care products in Australia.  Pan complies with all of the TGA’s requirements so there is no risk in Pan not being able to supply [Naturalcare].  There is no problem in Pan continuing to supply [Naturalcare].”

    Mr Davis:“For example, what would happen if government intervention closed your plant?”

    Mr Selim:(laughing) “That would never happen.  Pan is Australia’s number one manufacturer and is TGA compliant.” ’

    Selim said that the conversation was to the following effect:

    ‘Mr Davis:“[Naturalcare] is looking to diversify its suppliers of generic products, and I am encouraging Barry to source product from other suppliers.”

    Me [Selim]:        “What about our relationship, Barry?  What about our history?  We have together formulated [Naturalcare’s] top sellers.  Pan has helped to build your business.”

    Mr Schadel:“Can Pan cope with supplying all of [Naturalcare’s] products?  Does Pan have the production capacity?”

    Me [Selim]:        “Yes, Pan has the production capacity to manufacture all of [Naturalcare’s] products.  [Naturalcare] should get 100% of its products from Pan and we should continue to work together to develop new products.  Other sponsors which are much larger than [Naturalcare], such as Bullivants, get all of their products from Pan with no problem.”

    Mr Schadel:“Pan needs to be competitive on price.”

    Me [Selim]:        “Yes, Pan will stay competitive on price, but it is not a charity.” ’

    [31]Selim denied that the TGA was mentioned in the conversation, or that he said the phrase ‘nothing to worry about’ and asserted that the focus of the discussion was the capacity of Pan to supply a number of big customers as well as Naturalcare at the same time.  I accept the evidence of Davis.  He was not cross examined.  He is now independent of the parties and had no reason to give false evidence.  His evidence is broadly consistent with and corroborates that of Schadel.  I find that Schadel and Davis relied upon and continued to rely upon the assurances given by Selim. 

14. The later conversation was dealt with at [42]-[44] of his Honour’s reasons, as follows:

    [42]In mid 1998, Cellarmasters sold its shares in Naturalcare to Amrion Inc, a manufacturer of therapeutic goods based in the Unites States of America.  Amrion came to own 90 per cent of Naturalcare’s issued shares although Schadel retained his position as Managing Director.  Mr David Robinson, a director of Amrion, became a director of Naturalcare in about July 1998 and retained this position until about November 2000.  He gave evidence that he travelled to Australia on two occasions to have meetings with Schadel to evaluate Amrion’s ownership of Naturalcare and analyse the company’s business opportunities and weaknesses.  At one of these meetings Robinson claims he had a conversation with Schadel with words to the following effect:

    ‘Me [Robinson]:   “[Naturalcare] appears to be very dependent on Pan Laboratories for the supply of the majority of your products.  I am concerned about what happens to [Naturalcare] if that supply is cut off or interrupted?”

    Mr Schadel:“Pan Labs is the largest manufacturer of nutritional supplements in Australia.  Almost every company in our industry is buying from Pan.  They have a great reputation for quality.  I don’t think there is any chance they would not be able to supply [Naturalcare].” ’

    [43]Robinson, Schadel and Selim had a meeting as to the substance of which all three men gave evidence.  Robinson said the relevant conversation was to the following effect:

    ‘Me [Robinson]:   “[Naturalcare] buys a significant amount of product from Pan Labs.  If you were not able to supply [Naturalcare], even temporarily, it would have a seriously negative affect on our business.”

    Mr Selim:“You do not need to worry about that.  Pan is the largest supplier of nutritional supplements in Australia.  There is no possibility that Pan won’t be able to supply [Naturalcare] with the products they order.  Further, as Pan is the largest supplier in Australia, we work closely with the TGA and we meet, or exceed, all necessary standards the TGA sets for the manufacture of nutritional supplements.” ’

    Schadel said Robinson said words to the following effect:

    ‘[Naturalcare] is overly reliant on Pan.  I think that we will be seeking to diversify its suppliers.’

    Schadel said Selim’s reply was to the following effect:

    ‘There is no risk of Pan ceasing supply.  Pan has helped build [Naturalcare].  Our relationship extends beyond simply supplying goods – it extends into other areas including constant product development.  We have built the business together and we should stay together.’

    Selim said the conversation included words to the following effect:

    ‘Mr Robinson:     “I’m telling Barry he should source products from other suppliers.”

    Me [Selim]:         “There is no problem in Pan continuing to supply [Naturalcare].  Pan has the capacity to meet all of [Naturalcare’s] production needs.  Pan has not let you down.  For products you have ordered, Pan has supplied.”

    Mr Robinson:     “Yes, Pan has looked after [Naturalcare].” ’

    [44]I accept the evidence of Robinson.  He was not cross-examined and there is no reason to doubt his reliability.  His evidence is broadly consistent with and corroborates that of Schadel.  I find that Robinson and Schadel relied and continued to rely upon Selim’s assurances.

15. To return to the pleading, in [56] of the Statement of Claim and the particulars thereunder, ANP asserted that it relied upon the QAR and the SR in the same way as it relied on the Conduct, with one additional assertion, being that it entered into the Supply Contract in reliance thereon (which can be ignored given the primary judge’s findings that this contract did not come into existence).

16. In [57] of the Statement of Claim, ANP asserted that the Conduct and/or the QAR and/or the SR was or were misleading or deceptive or likely to mislead or deceive.  At this point, before examining the particulars of that assertion, it is necessary to say something about the co-extensiveness of the Conduct with the QAR and the SR.  The Conduct was defined as the conduct in the particulars to [18] of the Statement of Claim.  The only conduct of Pan in those particulars is what is found in (b), (c) and (d).  The conduct in (b) is incapable of being misleading or deceptive in the context of this case; it is something ANP asserted that Mr Selim was aware of.  Thus, the Conduct is really found in the same activity (the statements of Mr Selim in (c) and (d) under [18]) that were said to found the SR.

17. The asserted misleading or deceptive nature of the Conduct, the QAR and the SR was particularised under [57] of the Statement of Claim, as follows:

    a.On 28 April 2003 Pan’s manufacturing licence was suspended by the Therapeutic Goods Administration under section 41 of the Therapeutic Goods Act, 1989 (Cth) in consequence of the TGA forming the view that:

    (a)Pan had not complied with the Australian Code of Good Manufacturing Practice since 30 April 2002 and

    (b)The non-compliance was so serious that the ongoing availability of products manufactured by Pan represented a very serious risk to the community.

    b.On and from 28 April 2003 Pan ceased to manufacture, or supply to ANP, therapeutic goods.

    c.Between at least 1 May 2002 and 29 April 2003 Pan did not comply with the Code for Good Manufacturing practice for Therapeutic Goods, August 1990 in relation to the manufacture and supply of therapeutic goods by it to ANP.

18. It is to be noted immediately that these so-called particulars (as to a. and b.) are assertions of uncontroversial fact and (as to c.) comprise an assertion which was substantially admitted by the Liquidators in [33] of the relevant Further Amended Defence (the “Defence”).  They do not amount to assertions (assisted by s 51A as mentioned in [55B] of the Statement of Claim) that Pan had no reasonable grounds upon which to make the two representations at the times they were made (dealing with them as future representations), or that as at 3 April 2002 the QAR was falsified by the existing non-compliance with the Code (if the QAR can be seen as a representation of present fact, notwithstanding its tolerably clear phrasing as a representation as to a future matter).

    The primary judge’s approach to the misleading or deceptive conduct claim

19. The primary judge, correctly, for the reasons expressed above, dealt with the claim as based on the two representations, the QAR and the SR.  In [84] of his reasons, the primary judge noted the submission of ANP that each was a representation as to a future matter and set out ANP’s assertions as to its case:

    …It is contended that Pan has not established reasonable grounds for making either representation, with the result that the making of each of them was misleading and deceptive, or likely to mislead and deceive.  It is further contended that Naturalcare relied upon the misleading conduct by continuing to conduct business on the basis that the bulk of the products it was to sell would be acquired from Pan and did not reorganise its business.  This left it vulnerable to the sudden cessation of supply which occurred upon suspension of Pan’s licence, leading to losses due to the disruption to its business.

20. This summary of the issues correctly reflected the representations as pleaded, that is, as representations as to future matters.  It also recorded the attack on those representations as misleading or deceptive or likely to mislead or deceive because of an asserted lack of reasonable grounds for making them.

21. The primary judge then, at [85] of his reasons, noted the submissions of the Liquidators, as follows:

    Pan disputes each link in that chain.  It denies the making of the representations.  Pan then submits that the evidence of Schadel was that the assurances he received from Selim were in the present tense so, even if his evidence is accepted, the representations were about the then present capacity to manufacture and supply rather than being about a future matter.  On that basis Pan contends that the representations are not shown to have been misleading.  Even if the assurances were in respect of a future matter, Pan submits that no continuing representation was pleaded or proved.  It would follow, so it was said, that even if Pan failed to carry the onus provided by s 51A, all that would be established was a breach of s 52 at the time of the making of the representations and there was no causal relationship between those breaches and the damage alleged to have been suffered.  It was submitted that, in any event, there was a reasonable basis for any representations that were made.

1. A licence thus amended was issued to Pan on 5 February 2003.

2. Another audit was carried out by TGA on 24 and 25 February and 7, 8, 9, 10, 11 and 14 April 2003.  It is necessary to examine the comments in this audit report and the other critical documents dealing with Pan’s non-compliance issued in 2003 with some care, given the primary judge’s use of them at [91] of his reasons as evidence of systemic deficiencies revealing the non-compliant position of Pan in early April 2002, and before.

3. The audit report of the February and April 2003 audit contained an “overview” in the following terms:

   The audit revealed:

   (i)That the issues identified during the (30-31 January ’03) audit investigating the recall of Travacalm, were not restricted to that product;

   (ii)That “corrective actions” to previous TGA audits were unsatisfactory,

   (iii)(Further) Non-conformities:

   -   With respect to:

   •    The Manufacturing Principles; and

   •The conditions of the company’s licence to manufacture Therapeutic Goods;

   and

   (iv)Nine aspects regarded as critical:

   …

4. The audit report then dealt in detail with these four areas with nine aspects that were regarded as critical, which included the following:

   (a)data manipulation:  This concerned four additional incidents to the five reported in the January 2003 audit.  These four were products different from Travacalm, manufactured in October and November 2002 and January 2003.

   (b)results fabrication:  This concerned “compelling evidence” that test results from a third party were substituted with fabricated values to misrepresent four batches.  These were four cod liver oil products manufactured in February and March 2003.

   (c)substitution of chondroitin from shark cartilage with that from bovine cartilage:  This concerned five batches.  These five batches were manufactured in February and April 2002.  A similar incident had previously been raised about a batch manufactured in August 2000.

   (d)deficient raw material and finished product control:  Important systemic deficiencies were identified.  Also, importantly, the audit report appears to implicate a named person who was the General Manager at Pan and the person responsible for the correspondence with the TGA after each audit and, I would infer, for Pan’s actions in responding to disclosed non-conformities.  The detailed commentary on these deficiencies referred to products manufactured in July and August 2002, in respect of which this person passed before they were tested.  Other products were released in 2003 without testing.  There were also records of raw material that failed specification, but were nonetheless used in manufacturing product.  The records indicate this occurred in at least September and November 2002 as well as 2003.

   (e)critically deficient controls for ensuring compliance with conditions of registration or listing:  These concerned a number of products, in particular involving changes to formulations whether by omitting or substituting ingredients to approved formulae.  The evidence of these deficient controls occurred in March 2001, February and April 2002, August, September, October and December 2002 and January 2003.

   (f)critically deficient process controls:  These concerned various products, being evidenced by events in September and November 2002 and January 2003.  Many of the complaints about systematic problems were not dated.  It should be noted, however, that one aspect of the complaints was inadequate investigations and remedial action following process or testing problems identified in the April 2002 audit and in January 2003.

   (g)inadequate assurance about cross-contamination:  These deficiencies could be seen as current problems in equipment, cleaning and systems.

5. On 23 April 2003, an Expert Advisory Group met with TGA members.  The advice of this group was sought as to whether the matters thrown up in the February and April 2003 audit report reflected risks of death, serious illness or serious injury.  The group expressed the opinion that the “multiple failures of GMP identified in the [TGA] auditors’ report… create risks of death, serious illness or serious injury…”.

6. On this basis, Pan’s licence was suspended by notification in a letter dated 28 April 2003.  By another letter of the same date, listings of the medicines identified in the letter were cancelled and a product recall was effected.  Importantly for the argument on appeal, the product recall was made from 1 May 2002, and not any earlier.

7. Against the background of this evidence, the findings of the primary judge at [91] of his reasons, the arguments of the parties, the conclusions about the SR and QAR expressed earlier and the operation of s 51A, must all be assessed.

8. First, for the purposes of nullifying the deeming effect of s 51A(2), does that body of evidence suffice as “evidence to the contrary” of the SR being made without reasonable grounds in 1995/1996 and 1999?

9. A further question arises at this point about the operation of s 51A, to which reference was made earlier (see [120] above).  Are the Liquidators entitled to point to only some of the evidence adduced by them as “evidence to the contrary” or must they seek to show, from all the evidence adduced by them, that there is evidence to the contrary?  For instance, if one examined the evidence chronologically up to 30 April 2002, one could discern a history of audits, of apparent sufficient compliance and response to identified non-conformities with the Code to enable the Liquidators to state that as at 1995/1996, 1999 and 3 April 2002, there were reasonable grounds for the SR and the QAR to the extent that each contained a representation that Pan was and would in the future be in sufficient substantive compliance with the Code to be entitled to have and retain its licence. This body of evidence could be seen as tolerably clear “evidence to the contrary” of any lack of reasonable grounds for making the SR and QAR in 1995/1996 and 1999, and 3 April 2002, respectively.

10. What is the position, however, if the assessment about whether evidence to the contrary has been adduced must take into account all the evidence adduced by them, including the 2003 audit reports, report of the Expert Advisory Group and the TGA letters to Pan in April 2003?

11. It is not necessary to answer this question in relation to the SR. In respect of the SR, in my view, taking the approach less favourable to the Liquidators – that is taking all the evidence led by the Liquidators, including the investigations of 2003, that evidence does admit of the inference that Pan had reasonable grounds to make the SR in 1995/1996 and 1999. In other words, that evidence is “evidence to the contrary” for the purposes of s 51A(2). It is true that significant specific and systemic problems were revealed in the 2003 audit. These matters reached back into 2002 in significant respects. Other, isolated instances reached back to 2000 and 2001. The widespread and serious deficiencies identified in 2003 did not expressly or by implication lead to a view that the earlier audits in 1994, 1995, 1997, 1998 and 2001 had been either less than competently done or so inadequate in their sampling as to permit Pan to retain its licence and be issued with certificates of good practice in circumstances where there was substantial non-compliance with the Code. Evidence to the contrary having been adduced by the Liquidators, the deeming provision no longer operated. There was no other evidence adduced by ANP on this issue, and so it cannot be concluded that the SR was made without reasonable grounds. There was no attempt by anyone to call witnesses as to the state of Pan’s systems from 1994 or 1995. The party which or who bore the ultimate onus carries the disadvantage of that. Here, however, taking all the evidence of audits as a whole, I consider that the Liquidators adduced evidence to the contrary of the proposition that there were no reasonable grounds for making the SR in 1995/1996 and in 1999.

12. As to the QAR, the Liquidators argued for the same conclusion.  Pan entered into the Manufacturing Agreement on 3 April 2002.  The admissions of the Liquidators ran from 1 May 2002.  The TGA recall, in the context of an acute appreciation of the risk of death, serious illness or serious injury, was made from 1 May 2002.  The Liquidators emphasised the audit on 30 April 2002 (although its terms were not tendered) leading to the grant of the licence in June 2002.  The Liquidators submitted, in effect, that there was evidence to the contrary of the QAR being made on 3 April 2002 without reasonable grounds. 

13. At this point, the question posed above as to the operation of s 51A(2) might be seen to become important. If the Liquidators are entitled to point to the evidence of audits and certificates up to, but no further than, 30 April 2002, they will have adduced evidence as to the reasonable grounds for the QAR on 3 April 2002, and thus “to the contrary” for the purposes of s 51A(2). If that be so, the more problematic evidence arising from the 2003 audits and reports would be assessed with the statutory deeming provision eliminated. This 2003 material would need to be sufficiently strong for it to permit ANP to carry the onus of proof that, despite the evidence of audits and certificates up to 30 April 2002, there were in fact no reasonable grounds for the making of the QAR on 3 April 2002. If, on the other hand, to assess whether there has been evidence to the contrary one must examine all the evidence on the subject matter adduced by the Liquidators, the question is whether all that material, taken as a whole, is contrary to the proposition that there were no reasonable grounds for making the QAR on 3 April 2002. In the latter case, if the 2003 material only neutralised the effect of the earlier material (up to but no further than 30 April 2002), and in that sense meant that there was not evidence to the contrary, the issue would be determined by the statutory presumption. Thus, the answer to the question that I have posed might be critical in any given case. No argument was placed before us on this question. Difficult questions of statutory presumptions in evidence, including those operating in the criminal law, might intrude: see Heydon JD and Cross R, Cross on Evidence (7^th ed, Butterworths, 2004) pp 249 ff.

14. Looking at the evidence here and approaching the matter in a way most favourable to the Liquidators, that the evidence up to, but no further than, 30 April 2002 was “evidence to the contrary” for the purpose of the removal of the deeming effect of s 51A(2), in my view, the evidence as a whole supports the primary judge’s conclusion at [91] of his reasons that ANP proved that Pan was in serious breach of the Code during 2002. This is sufficient for ANP to prove that there were no reasonable grounds to make the QAR on 3 April 2002.

15. The seriousness of the problems recognised by the April 2003 audit, the source or provenance of a considerable number of the problems in 2002, the systemic nature of a number of the problems, the apparent serious nature of some of the behaviour of Pan employees (including, it would appear, the general manager) and the lack of any foundation to conclude that there was any sharp differentiation between 3 April 2002 and 1 May 2002 in such a systemically deficient manufacturing environment, lead me to conclude that the primary judge was correct in his findings in this regard, or that there was no error in the finding.

16. Taken as a whole, the evidence adduced by the Liquidators not only fails to admit of the inference that as at 3 April 2002 there were reasonable grounds for the making of the QAR, but admits of the conclusions drawn by the primary judge that there were serious breaches of the Code in 2002, and thus that there were no reasonable grounds to make the QAR on 3 April 2002.

    Reliance on the QAR

17. The primary judge concluded that Mr Schadel relied on both the SR and the QAR, stating the following at [95] and [96] of his reasons:

    [95]I am satisfied that Naturalcare, through Schadel, did rely upon the Quality Assurance representation and the Supply representation. Counsel for Pan relied upon some factors to negative reliance, for example, the intention to source product from Amrion; the pattern of purchase from other suppliers; the freedom reserved by Schadel to acquire goods from other suppliers if price were favourable; and the variety of manufacturers Naturalcare had listed with the TGA to manufacture its products. It is submitted for Pan that the express evidence of reliance given by Schadel should be given little or no weight, citing Chappel v Hart (1998) 195 CLR 232 at 246 n64.

    [96]    Chappel v Hart does not compel that conclusion. Indeed, the absence of such evidence could be fatal to a claim of reliance and causation. In the present case, Schadel’s evidence accords with commercial reality. Naturalcare continued to acquire most of its goods from Pan and was lulled into what was a false sense of security by the assurances over the years and entry into the Manufacturing Agreements. It is obvious that if Schadel had thought that there was any real danger of Pan losing its licence because of non-compliance with the Code, he would have taken steps to reorganise the business to minimise dependence upon Pan for supplies. In essence, Schadel was induced not to reorganise the Naturalcare business to reduce dependence upon Pan as a supplier. The misleading conduct does not have to be the sole cause of the action or inaction said to cause the damage (I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited (2002) 210 CLR 109 per Gleeson CJ at [33], per Gaudron, Gummow and Hayne JJ at [57], per McHugh J at [90]–[93] per Callinan J at [216]).

18. The Liquidators submitted that these conclusions were not open on the evidence.

19. Mr Schadel gave evidence of reliance which the primary judge accepted.  The primary judge was in a position of considerable advantage in drawing that conclusion.

20. The Liquidators first rely upon the criticism made of evidence of what would have been done if another posited event had occurred.  Reliance was placed on the views of McHugh J in Chappel v Hart (1998) 195 CLR 232 at 246 in discounting the views of injured plaintiffs as to what they would have done to avoid their injury if appropriate warnings had been given. Making all due allowance, if I may respectfully say so, for the great common sense of these views, nevertheless, parties must deal with reliance and with evidence of an alternative hypothesis when the issues in a case call for it. The person who can speak is the person who was there. Hindsight may affect the weight of the evidence, as will many other factors including the passage of time, the objective state of the facts, an understanding of common human affairs and the quality of the cross-examination. The legislation in New South Wales dealing with personal injuries that was referred to is of no assistance.

21. Here, there were other factors which might be seen to tend against reliance.  Mr Schadel conceded that in 1999, ANP intended to source product from its principal shareholder, Amrion.  ANP did not pursue this because Amrion failed to secure a TGA licence, not because of assurances of Mr Selim.  Secondly, ANP’s purchasing was, at least from January 2000 to April 2003, only 43% by volume and 56% by value from Pan.  Thirdly, it was Mr Schadel’s evidence that ANP was free to shop around and that ANP purchased the volume it did from Pan because of price.  The primary judge had the distinct advantage of hearing this and all the other evidence in a nine day hearing.  The evidence as a whole permitted the primary judge to conclude that ANP relied on the SR and the QAR.  The primary judge (wrongly in my respectful view) took those as continuing representations.  That does not destroy reliance on the SR and the QAR as future representations when made.  The SR was not misleading or deceptive; the QAR was.

22. In my view, there has not been demonstrated, any error in the relevant conclusion of the primary judge that ANP relied on the QAR.

23. That takes one to damages.

    Damages from contravention of the QAR

24. The Liquidators submitted that ANP had altogether failed to prove any loss and that the primary judge erred fundamentally in his approach to the issue.  Central to these submissions were the assertions that ANP had chosen a unitary structure for its damages claims, being the contractual measure of damages, and that having failed in the contract claim it was left without proof of loss by the misleading or deceptive conduct of Pan for the purposes of s 82 of the TP Act, arising from the QAR.

25. Before examining how the primary judge approached the question of damages for the found misleading or deceptive conduct, it is of assistance to examine how the damages cases were put by ANP.  Its contractual case was that Pan had repudiated a supply contract under which Pan promised.

    …to manufacture and supply to ANP the goods customarily acquired by ANP from Pan at those quantities ANP customarily obtained from Pan.

26. The primary judge rejected this contract claim for a number of reasons.  First, there were discrepancies between the underlying evidence and the pleaded terms, in particular the evidence that it was open to ANP to source products from alternative suppliers.  Secondly, there was an inherent improbability of the parties intending to be bound by conduct when they carefully regulated their respective positions in successive Manufacturing Agreements in writing.  Thirdly, there were insuperable difficulties in establishing what goods were covered by the alleged Supply Contract, given that it was said to extend beyond the goods listed in the schedule to the Manufacturing Agreement, to any product that the ANP had ever ordered and that Pan had ever manufactured for ANP in their 14 year relationship.  Related to this was the finding by the primary judge that he was not satisfied that there was any pattern about the ordering practice of ANP to form the basis of a finding that there were customary quantities purchased.  It was clear that ANP was free to shop around for the best price, and that it did so.

27. ANP accepted in the Statement of Claim that under the asserted Supply Contract either party could terminate the contract by six months notice in writing to the other.

28. ANP claimed that it had suffered loss and damages set out in [49] and [50] of the Statement of Claims, as follows:

    [49]As a result of Pan’s repudiation of the Supply Contract, ANP has suffered the loss and damage particularised in the report of Raymond John McKewen dated 19 October 2005 (“the Expert Report”) of $1,747,640, comprising:

    (a)‘loss of profits on non substitutable products’ $3,078,443 representing the loss of profits which ANP would have earned from the sale of certain ‘non substitutable’ goods had Pan continued to supply those products until expiration of the Supply Contract on 1 March 2008, there being no alternate supplier for these products; and

    (b)‘interim loss of profits on substitutable products’ $1,082,289 representing loss of profits with respect to ‘substitutable’ products, being goods for which ANP has (ultimately) found an alternate supplier, the claim being for lost profits during that ‘limbo period’ between termination and obtaining supply from an acceptable alternate source.  But for Pan’s repudiation, APN [sic] would have made profits on the sale of the substitutable products during that limbo period and claims the lost profit; less

    (c)Adjustments for marketing, selling and distribution (MSD) costs and wages as set out in the Expert Report.

    [50]In addition, ANP suffered loss and damage to the extent of $193,724 as a direct consequence of Pan’s repudiation of the Supply Contract, being certain types of loss claimed as part of ANP’s “Costs Claim”, particulars whereof are set out in the Expert Report, and at paragraph 9.5.1 of the Report of Mr McKewen dated 15 July 2005.

1. The damages claimed by the asserted contravention of the TP Act were the same: [49] and [50] were simply repeated in [60] of the Statement of Claim. Likewise, these paragraphs were repeated in [66] in the pleading of the damages in the tort claim.

2. The reasons for this unitary approach to the pleading and proof were not explored. It is not difficult in a case such as this to appreciate that there may be tensions produced by leading evidence for differently structured damages cases. That said, the choice made by ANP was to rely upon the same evidence as was led in the contract claim. That does not mean that the measure of loss under s 82 of the TP Act was the contractual measure; rather, ANP relied on the evidence adduced in the contract claim to prove loss in the trade practices claim.

3. The primary judge referred to Murphy v Overton Investments Pty Limited (2004) 216 CLR 388 at [44]-[52]. As was made clear in that case, the measure of loss for a claim under s 82 of the TP Act is not to be constrained by common law rules. The TP Act contains important remedial tools such as orders under s 87 which may, in any given case, affect how the conception of loss or damage caused by contravening conduct is to be analysed and assessed. Primary consideration should be given, one would have thought, to the loss or damage as perceived and asserted by the applicant.

   the loss here

4. The loss or damage caused by the asserted contravening conduct was that which arose out of the asserted (and found) reliance in the continued course of dealing and reliance on Pan without seeking alternative suppliers so as to reduce materially its reliance and dependence on Pan.

5. The question for the primary judge was whether the evidence put forward in the case was sufficient to enable him to reach a satisfactory conclusion as to that loss.

6. The primary judge began by pointing out that ANP had been placed in a difficult position by Pan.  The primary judge said the following at [100] of his reasons:

   In my opinion, the approach taken by Naturalcare is acceptable as a starting point (Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388 at [44]–[52]). As it was induced to do nothing, it did not get out of the way and was a sitting duck when hit by the runaway train. Quantification of the effects of the train wreck is a good starting point for the assessment of loss. Of necessity, the assessment of damages in a case such as this is imprecise. There is a body of material in evidence as to the financial performance of the Naturalcare business prior to and after the suspension of licence and product recall which forms the raw material for the necessary assessment. The fact that the witnesses have approached the matter in one way or another is not decisive.

7. The appellants criticised this as the use of a colourful and inapposite analogy.  Leaving to one side the aesthetics of the metaphor, I do not agree with the criticism of the Liquidators.  It was submitted that this was a loss of opportunity case and, therefore, attempts had to be made in the evidence to reconstruct the decision-making process and to prove what would have been done and how it would have been done.  At one level of generality, that can be accepted.  However, ANP was not obliged to prove their case in a manner required by the Liquidators.  The real question is whether the facts proved permitted a conclusion to be drawn about the position in which ANP found itself, compared to the position it would or may have been in had the QAR not been made.

8. The Liquidators point to the fact that there was no proof of the ability to source alternative supply or the terms of such likely supply.  In particular, the Liquidators submitted that ANP needed to prove a number of matters which, by reference to the reliance on the QAR can be taken to be the following:

   (a)there were products that were replaceable from 2002;

   (b)there were potential suppliers of the products it would have replaced in 2002;

   (c)the potential suppliers could and would have supplied Naturalcare at the same or similar profit levels in 2002;

   (d)the time-frame over which Naturalcare could have changed its business to not be dependent on Pan Pharmaceuticals in 2002;

   (e)following the Pan Pharmaceuticals recall, there was demand for the same or similar products which would have allowed Naturalcare to maintain its levels of sales of the same or similar products; and

   (f)following the Pan Pharmaceuticals recall, Naturalcare’s alternative suppliers could and would have supplied it at the same or similar cost or profit levels in circumstances where Naturalcare would not have had long-term supply agreements and Pan had been removed from the market as a supplier.  Pan Pharmaceutical’s former customers were competing for supply from the remaining suppliers and Naturalcare would have had to compete against them for supply.

9. ANP answered this criticism by pointing out a number of aspects of the evidence.  First, ANP pointed out that Mr Selim’s own evidence was that ANP could have obtained alternative supply before 28 April 2003.  Secondly, the evidence of Mr Esler that was led by the Liquidators was that there were alternative manufacturers in the business of supplying therapeutic goods between 2000 and April 2003, had access to the same raw materials as Pan and made similar tablet and soft gel products as those manufactured by Pan.  Thirdly, there was evidence led by ANP that, after April 2003 existing suppliers tended to favour existing customers.  Fourthly, there was evidence led by ANP of continuing demand for products after the recall.  Fifthly, there was evidence of Mr Schadel and Mr Davis that was accepted by the primary judge that they would have reorganised the business to minimise dependence upon Pan.

10. The force of these matters was sought to be deflected by the Liquidators by the submission that since ANP had stated at the trial that the only way to calculate damages was as was done, it was disingenuous for it now to point to evidence not relevant to the way it pressed for damages at the trial.

11. Before turning to the primary judge’s reasons, it is appropriate to set out how ANP put the matter in argument in chief at the hearing before the primary judge.  In its written submissions in chief, ANP said that but for the misleading or deceptive conduct, it would have diversified its suppliers.  In recognising these matters, ANP also recognised the potential complexity of four factors:  the 14 year history of supply, the availability of goods from alternative sources prior to April 2003, the difficulties of supply after April 2003 and the development of some of ANP’s products by Pan.  ANP then put the following in [65]-[69] of those written submissions:

    [65]However, the evidence plainly establishes that but for Pan’s misleading and deceptive representations, ANCP would have decreased its reliance on Pan, both by obtaining product from a range of suppliers and by developing more generic product rather than complex slurry mix soft gels.

    [66]As a result, when the recall occurred and Pan ceased to supply ANCP, ANCP would have been obtaining similar therapeutic product from other suppliers who were still able to supply.

    [67]Further, ANCP would have been far better equipped in the market to obtain alternative suppliers for those products it still obtained from Pan as at April 2003.  For example, Lipa Pharmaceuticals favoured existing customers in the period after the Pan recall.

    [68]In the circumstances of the present case, the only practical or realistic way of quantifying the loss suffered by ANCP as a consequence of the misleading and deceptive conduct is by reference to the quantum of profit that ANCP would have realised from the sale of the Pan product as calculated in Mr Stuart’s Spreadsheet.  ANCP’s case, however, is not that it would have realised profit on Pan product but for the misleading and deceptive conduct – rather, its case is that it would have obtained profit on similar volumes of therapeutic products obtained from other suppliers.

    [69]This approach provides the best possible estimate of the loss and damage suffered by ANCP as a result of Pan’s misleading and deceptive conduct.  Trying to hypothesise for the purposes of evidence on quantum a business developed over 14 years, with different suppliers of varying quantities of products, would not provide any better estimate of damage; on the contrary it would provide a less accurate estimate, as every element involved in the calculation would be speculative.

    [footnotes omitted]

12. The primary judge, in effect, accepted this structural approach.  He said at [101] of his reasons that the proposed measure of damages would be a good proxy for the loss flowing from not reorganising suppliers.  He stated at [101]

    If reorganisation of the business could have been completed so as to eliminate dependence upon Pan prior to the suspension of Pan’s licence, then the proposed measure of damages would be a good proxy for the loss caused by the misleading and deceptive conduct. If reorganisation would not have been completed, there would need to be a discount to reflect the extent to which reorganisation would not have taken place. The evidence of what occurred in relation to reorganisation after the recall is of some value in assessing what may have occurred in the 12 months prior to it. However, the latter period was complicated by widespread effect of the failure of Pan, which meant that many other customers apart from Naturalcare were scrambling to obtain supply. I am not satisfied that the divorce from Pan would have been complete by the time of the suspension of the licence, even if commenced in March 2002.

13. No specific attack was made on the reasonableness of these findings.

14. In [102] of his reasons, the primary judge then discussed the fall in revenue in the two years after April 2003.  His Honour plainly, in the light of the rest of his reasons, was using the past revenue (in pursuance of the arrangements between Pan and ANP) as the hypothesis of alternative supply.

15. After making other adjustments which were not the subject of debate, the primary judge made an adjustment for a discount of 20% to take account of uncertainties expressed in [104] as:

    …Then there should be some discount for the uncertainty as to whether the business would have been completely reorganised by the time of the licence suspension and for other uncertainties.

16. Ultimately the legitimacy of the structure of this approach is what was in issue.  I am not persuaded that there was any error in the approach.  Mr Selim’s evidence was an ample basis for concluding that alternative supply could have been obtained before April 2003.  Whether or not a 20% discount was sufficient for the kinds of uncertainties identified by the primary judge may be debatable, but the argument of the Liquidators did not descend to such detail.  There was evidence that suppliers were favouring their own existing customers after Pan’s collapse.

17. Overall, I think that there existed a sufficient evidential framework for the primary judge to approach the evidence as he did, using the posited contractual supply as a surrogate for re-organised supply from other suppliers, applying a discount for uncertainty.

    The tortious count

18. Though it is strictly unnecessary for me to deal with the tortious count on the above view of the misleading or deceptive conduct claim, I express my agreement with the views of Emmett J on this aspect of the matter on the assumption that I am wrong about the misleading or deceptive conduct claim.

    Fresh evidence on appeal

19. At the hearing of the appeal, the Liquidators sought to tender fresh evidence pursuant to the Federal Court of Australia Act 1976 (Cth), s 27. The evidence that they sought to tender was a document that was publicly available from the TGA website, which was said to explain why the recall went back to 1 May 2002. Mr Sullivan QC, who appeared for the Liquidators, frankly conceded, without being asked, that the document was reasonably available at the time of the hearing before the primary judge. The Court rejected the tender and indicated that it would give its reasons for so doing in the reasons for judgment. My reasons for rejecting the tender were as follows.

20. First, the document was available at the time of the hearing. Though that is not a factor found in the terms of s 27, it is a relevant consideration bearing in mind the primary function of the appeal court being to correct error: Branir Pty Ltd v Owston Nominees (No 2) Pty Limited (2001) 117 FCR 424 at 438 [30]. Secondly, the tender was justified on the basis of meeting a new case. To the extent that that assertion arose from how the primary judge dealt with the issues, that submission could be seen as understandable. However, the appeal should be dealt with, as I have done so above, on the basis of how the case was pleaded and conducted at the trial. At the hearing of the appeal I saw, and I see now, no acceptable reason why the parties should not be held to their pleaded cases and to the evidence that they adduced at the trial. Thirdly, and related to the second point, the acceptance of this evidence would, in fairness, have opened up a contest about the period April to May 2002 in a way that would or could have required the appeal court to engage in a trial. That was not acceptable in circumstances where there were no compelling reasons justifying it.

    Result

21. For the above reasons, I would dismiss the appeal, though I would hear the parties on costs, which can be done by the exchange of written submissions.

I certify that the preceding two hundred and one (201) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Allsop.

Associate:
Dated:        24 January 2008

Counsel for the Appellants:	Mr AJ Sullivan QC with Ms KC Morgan
Solicitor for the Appellants:	Blake Dawson Waldron
Counsel for the Respondent:	Mr J Stoljar with Ms KW Dawson
Solicitor for the Respondent:	Australegal
Date of Hearing:	31 July, 1 August 2007
Date of Judgment:	24 January 2008