McInnes, D.N. v Global Imports P/L

Re: DONALD NEIL McINNES
And: GLOBAL IMPORTS PTY LIMITED
Nos. G 210 - 211 of 1992
FED No. 918
Number of pages - 15
Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Einfeld J.(1)

CATCHWORDS

Trade Practices - product safety standard - sale of children's toys in breach of standard - imposition of penalty - criteria applicable

Trade Practices Act Part V, ss.65C(1)(a), 79(1), 79(2)

Commonwealth Crimes Act ss.16A(2), 19B

Ducret v Colourshot Pty Ltd (1981) 35 ALR 503

Pretorius v Venture Stores (Retailers) Pty Ltd v Venture Stores (Retailers) Pty Ltd (Northrop J unreported 14 February 1992)

Gardam v Splendid Enterprises Pty Ltd (1987) ATPR 40-779

Clarke v Pacific Dunlop Limited (1989) ATPR 40-983

HEARING

SYDNEY

#DATE 3:12:1992

Counsel and solicitor G. Farmer instructed by
for the applicant Director of Public Prosecutions

Solicitor for the A. Torok of Murphy and
first respondent Moloney Solicitors

ORDER

1. The defendant is convicted of the offences detailed in summonses numbered G 210 and G 211 of 1992.

2. The defendant is to pay to the Commonwealth a fine of $1,000 on the first charge and $4,000 on the second charge, payable to the Registrar of this Court within such time and on such conditions as the Court orders.

3. The defendant is to pay the prosecution's costs.
Note: Settlement and entry of orders are dealt with in Order 36 of the Federal Court Rules.

JUDGE1

EINFELD J. The defendant was an importer of childrens' toys from about January 1988 to November 1992. In February 1988 and May 1989 it imported from Korea a quantity of toys known as the "Happy Hippo". This toy consisted of a model hippopotamus made out of hard plastic or polystyrene derivative which had a number of appendages. One of them was a small white tweetie bird which was attached to the nose of the hippo. Each toy was sold in a box which said that it was suitable for children aged between one and four years.

On or about 19 April 1989 and 4 May 1990 a quantity of these toys was supplied to one of the defendant's customers in the Australian Capital Territory which traded as Wishing Well Gifts and Toys (Wishing Well). Some of these toys were tested by officials of the Federal Bureau of Consumer Affairs (the Bureau) and were found to contravene or not to comply with a consumer product safety standard prescribed by the appropriate Minister pursuant to Part V of the Trade Practices Act. In consequence the defendant was charged with two offences of supplying goods in contravention of section 65C(1)(a) of the Trade Practices Act. To these charges the defendant has pleaded guilty. By section 79(1) of the Act, this means that the defendant could face penalties of up to $200,000.
The evidence establishes that the defendant imported 1,740 Happy Hippos in all. The first consignment was 300 units for which the defendant paid $US3.55 FOB Korea. The second shipment consisted of 1,440 units for which the price was $US4.00 FOB Korea. Customs duty and sales tax were apparently payable in respect of the importation and sale of these toys. The goods were sold to the clients of the defendant for $A9.35 or thereabouts.
The appropriate safety standards prescribed by the Minister and in force at the time of these offences were those approved by the Standards Association of Australia. It is admitted that these standards apply to these toys. One of the standards prescribes what is known as a "drop test", meaning that the particular toy is dropped a specific number of times, in the circumstances most likely to produce damage, onto what is known as a "specified impact medium". If pieces break off or other hazardous edges or points are revealed, the toy is susceptible to being excluded from permitted sale in Australia. The prescribed safety standard is breached when any detached piece can fit into a small conical container sized so as to indicate that the piece could be swallowed by a child of the appropriate age group.
In this particular case the appropriate conditions for the drop test were that the toy had to be dropped 10 times from a height of 1.5 metres onto vinyl tiles of a particular thickness and quality cemented to a concrete slab of a specified concentration and size. The prosecution alleges that one of the toys sold to Wishing Well produced dangerous small parts on the first and second drop tests. The second unit produced dangerous small parts on the first, fifth and eighth drops. In each case the bird at the tip of the hippo's nose was detached on the very first drop. This bird and the other detached pieces comfortably fitted into the cylinder. Accordingly it was determined that the toy failed the prescribed standard and the prosecutions have followed.
The managing director and sales manager of the defendant company were interviewed by officers of the Bureau on 17 June 1991. Their attitude was that the toy looked what they described as "deceivingly strong" and that they were "shocked" to find that the toy had failed the drop test. They said several times during the interview that they had sought and obtained an assurance from the Korean manufacturer that the toy met the Australian standard. They were also informed that the toys were being supplied both to the European and the American markets. There is in evidence the results of a series of tests made in Korea, albeit with only five drops from a height of 850 mm, which are said to have produced no detachments of any kind. I was also informed that the Australian standard was recently changed so that the drop test is now conducted from a height of 1.38 metres rather than 1.5 metres. I was informed that this new lower height in Australia was consistent with the test being used in the United States. There is no evidence as to whether the bird became detached if the lower height was used. There is also no evidence as to the surface upon which the drop test took place in Korea.
The defendant ceased to sell the toys immediately the results of the drop test were drawn to their attention by federal officers. In fact it contacted all its customers who had purchased the toy to recall any unsold stock. It seems that none of the customers had any stock left and that only Wishing Well had received any complaints from any customers. Wishing Well had had about six returns, all of which were sent back to the defendant. The defendant itself had about 79 units left in their own store. The efforts made by the defendant to protect customers from any danger was only part of the co-operation extended by the defendant to the investigators and it seems that the chief investigator who was the informant for the issue of the summonses in question expressed to the defendant's representatives his satisfaction with the extent of this co-operation. It seems therefore that of the 1,740 toys imported by the defendant, only about 85 did not find their way into the hands of apparently satisfied purchasers.
The prosecution suggested in argument that there was reason to believe that the defendant's failure to meet the standards was not inadvertent or accidental. In this regard the prosecution produced a letter dated 26 April 1990 from an officer of the Bureau drawing the attention of the defendant to the fact that at the Sydney Toy Fair held just prior to the letter, the defendant had exhibited a multi-actioned toy called a "Take- Apart Puzzle Clock" which failed some of the prescribed standards in force at the time. Although that toy and the standards concerned were quite different to the Happy Hippo, the prosecution says that if they were not appreciated before, this letter alerted the defendant to the existence of standards and the requirement of strict compliance.
The defendant replied to the letter on 1 May 1990 indicating that it was not previously aware that the particular toy was hazardous and that the toy had immediately been withdrawn from sale. The defendant says that the company had in stock at least 10,000 toys of 300 different varieties and that it did not connect the Happy Hippo to the letter of 26 April because it had originally been imported more than two years earlier. Moreover, the letter of 26 April 1990 postdated the first sale to Wishing Well by 12 months. While virtually coinciding with the second delivery to Wishing Well on 4 May 1990, the evidence suggests that the order for this sale was placed with the defendant during the Sydney Toy Fair between 6 and 10 April 1990. Hence the 26 April letter does not support the submission made for it. To the contrary, the second order is unlikely to have occurred if the toy had been regarded as dangerous or was unpopular with customers for that reason. No doubt the defendant thought, if at all, that the re-order was something in the nature of proof of safety.
The company also said that at the time of the importations of Happy Hippo, it also imported from the same manufacturer a toy called the "Happy Elephant" which was very similar to the hippo. The elephant passed the test standard. It seems that the Australian Toy Association circulates members about the appropriate safety standards but the defendant did not become a member of the Association until November 1988 and the information concerning the standard applicable to the Happy Hippo was circulated in February 1988 so that the defendant had not become aware of its responsibilities in this regard from this source.
The defendant also presented evidence that it had had some of its remaining stock of Happy Hippos subjected to its own drop tests. These tests were conducted on 25 May 1992 by AWTA Textile Testing, a company referred to in a publication of the Bureau as a laboratory in Australia which can perform some or all of the tests in the standard. The results of the tests were evidenced by some photographs placed in evidence which showed that some very small pieces had broken off during the tests and two cracks had occurred at the back of the hippo's head. On none of the drops did the bird become detached from the nose of the hippo. It appears that what is known as the "pass rate" was between 70% and 80% which was similar to the pass rate in the tests conducted on behalf of the Bureau.
The managing director of the defendant Mr Richard Kahwati was cross examined on his affidavit. He strongly denied a wilful or neglectful breach of the mandatory standard and persuasively suggested that the whole matter was inadvertent and greatly regretted by the defendant. His evidence was that as a consequence of this prosecution, he and his brother, who conducted this business together, had decided to cease the importation of toys altogether and to concentrate on importing gifts. Consequent upon this rationalisation of the business as well as a need to cut costs, about five employees were sacked. His attitude was that if a minor infringement such as this caused all this trouble, dealing in toys was simply not worth the effort. In this regard evidence was produced to show that the company has had accumulated losses up to the year ending 30 June 1991 of just under $140,000 although it expects a small profit of around $60,000 for the year to 30 June 1992. Mr Kahwati's evidence was that he and his brother and their families had come as refugees from the Sudan around 25 years ago. They had set up this small business mainly for their children and he and his brother now only worked part time in the business which is essentially run by their sons-in-law.
Section 79(2) of the Act provides that where a person is convicted of two or more offences being contraventions of the same provision and those offences appear to have been of a substantially similar nature and to have occurred at or about the same time, the total fine imposed for the offences should not exceed the maximum fine applicable to one of the offences. However, the onus of proving this section rests on the defendant, and this section was not relied upon here: see Ducret v Colourshot Pty Ltd (1981) 35 ALR 503. Given my conclusions, the section is not relevant.
With respect to the imposition of penalties, Justice Northrop said in Pretorius v Venture Stores (Retailers) Pty Ltd v Venture Stores (Retailers) Pty Ltd (unreported, 14 February 1992):

The principles to be applied in determining the amount of penalty to be imposed are well known and have been discussed in many authorities. It is not relevant to refer to them here. I do not find it helpful to refer to the amount of penalty imposed in other cases. No two cases are identical and in my opinion it is not helpful to refer to the penalty imposed by a Court on the particular facts of one case.

I agree with his Honour's approach which should not be surprising given the variety of relevant factors involved in determining penalties. Some of them are listed in section 16A(2) of the Crimes Act. Of course, if there are substantial factual similarities, justice demands that similar offences receive a similar penalty. Indeed, in Clarke v Pacific Dunlop Limited (1989) ATPR 40-983, Woodward J referred to the penalties imposed by Justice French in two other cases. One of these cases was Gardam v Splendid Enterprises Pty Ltd (1987) ATPR 40-779. The defendant company carelessly substituted the labelling "Styled to reduce fire danger" for the appropriate labelling, "Warning - high fire danger - keep away from fire" on children's night dresses. The breach was inadvertent but Justice French found that no efforts had been made to rectify the problem arising from the mislabelling. His Honour had a feeling of unease as to whether those standing behind the defendant at the trial fully appreciated the seriousness of the obligation imposed in respect of the labelling of children's nightclothes.
Justice French said at page 48,503 that the sections of the Act which provide for the declaration of consumer product safety standards and their enforcement are plainly of the highest importance. His Honour noted that the defendant was a family business and a number of persons' livelihood depended upon the continuance of the business. He further stated that any fine must be at a sufficient level to mark the seriousness of the offence but not so high as to be oppressive. The defendant was fined $5,000 and ordered to pay the prosecutor's costs.
Although the present case also involves a safety standard involving children, it differs significantly from Splendid Enterprises and other reported cases. The defendant's solicitor, in a most commendably comprehensive fashion, supported by most useful written submissions, asked for a dismissal under section 19B of the Commonwealth Crimes Act. He said that I should find that:

1. although there are two offences, it should be regarded as one offence;

2. the breach was not deliberate;

3. there was no complaint from the public and no actual injury to any person;

4. the defendant took all possible remedial steps and fully co-operated with the investigating officers;

5. the company is a small family business which is not in a good financial condition;

6. it has ceased importing toys;

7. the failure percentage was low and the toy had passed the Korean tests for the European and American markets;

8. the Australian standard has now been reduced to a drop from 1.38 metres;

9. the defendant has pleaded guilty and was told by an officer of the Director of Public Prosecutions that its culpability was at the low end of the scale and that the prosecution was not seeking a large penalty but wished to have these offences used as a deterrent to the rest of the industry;

10. deterrence of the actual defendant is of less relevance in this case.

In connection with deterrence, the evidence for the prosecution was that the Bureau has conducted testing and enforcement campaigns every Christmas since 1988. Apparently 100 toys are tested each Christmas and an additional 30-40 are tested at other times during the year. Despite the fact that the mandatory standard has existed for nearly five years, high failure rates continue to appear. In the last four years the failure rates have been:

1988 54% 1989 34% 1990 40% 1991 37%

The prosecution pointed out that the objective of the standard was to protect children and that the policy of Part V as set out in the cases was to impose strict liability, and penalties that reflect the seriousness of the offence and apply the deterrent factor. The prosecution asked for a finding that there was at least a degree of wilfulness in that the defendant probably knew that standards did exist and that tests were required, but chose not to carry them out. The prosecution stressed the need for deterrence.
I am satisfied that this was not a wilful breach. The defendant's business in terms of toys was very new when the first importation took place and clearly the defendant's principals had no knowledge at all of the nature of the industry and its legal requirements. The fact that they did not join the industry association until nearly a year after they commenced in business is suggestive of the fact that they were unaware of the existence of legal requirements or that any association with the rest of the industry was necessary or desirable. By the time of the second delivery to Wishing Well in May 1990, I believe that the defendant was lulled into the security that there had been no complaints after the sale of the first 300 toys and that there was therefore no reason to suggest that there was a danger which required testing. Interestingly the law seems to provide a mandatory standard but not mandatory testing. It does not, or did not at the relevant time for this case, make provision either for licensing of toy importers or even for their registration with the Bureau so that they may be circulated with details of their legal obligations.
I found Mr Kahwati's evidence persuasive that this was a small family enterprise which was making little or no money although it was looking for ways to provide the next generation of the family with a secured income. The co-operation which the company's representatives extended to the investigating officers, the fact that immediately upon being informed that the toys could represent a danger to children, they instituted a recall of any unsold toys and destroyed all or most of whatever they had, and their early demonstration of what I am prepared to accept was a contrite attitude to the situation they had created all militate in their favour. Also, the prosecution did not seek to cross examine the persons who tested the toys on behalf of the defence. As a consequence, I am entitled to take into consideration that the overall failure rate of these toys, especially in relation to the tweetie bird, was quite low. Whilst that would be of no assistance at all to any child who had in fact suffered from harm, happily there was no evidence of any such suffering.
On the other hand, the business was operating for profit. Any doubts about the sale of any products or any delay in their sale would represent a hindrance to the realisation of the profit, or even the return of the moneys paid to the manufacturer and for the shipping expenses, duty and tax. Certainly the commercial community must be deterred from the philosophy of "selling at all costs", especially to or for children. Although the directors of the defendant may very well not have known of the particular legal requirements or safety standards applicable to toys, they, like the rest of the community, would have known that toys can be dangerous to children. They, like the rest of the community, must have known from widespread publicity that at every Christmas time toys are discovered which are unsafe. As people involved in the trade, they would certainly have been conscious by the time of the second sale involved in these charges that they as distributors of toys had a special responsibility to ensure that everything they sold for young children had to be safe.

In fact, everything the defendant has done in this regard has been done after the danger was drawn to its attention, despite the fact that after November-December 1988, when it joined the Toy Association and had its first Christmas in the toy business, the company must surely have become aware of the need to comply with strict Australian safety standards. It certainly should have been aware of it. Yet prior to being informed of the Bureau's test results, the company seems to have given absolutely no attention at all to what safety standards applied other than at most verbally inquiring of some nameless Korean executives as to whether these toys met the safety standards of any country. Even the fact that it made such inquiries suggests a clear consciousness of the need for safety and the existence of standards and testing in most developed countries. Although the results of the inquiries wrongly led the company into believing that Australia's standards would be passed because Korean standards had apparently been passed, these inquiries are the major factor for not imposing a very heavy fine indeed.
Because the times and circumstances of these sales were quite different, and the defendant's degree of culpability was therefore also different, I do not agree with the solicitor for the defendant that the two offences should be treated as one. I must say, though, that were it not for the plea of guilty, I would have had some doubt that the summonses were adequate because they are in identical terms despite the fact that they actually refer to two quite different sales, more than 12 months apart, involving different numbers of toys which produced different test results. There is in fact no way of knowing which of the two summonses refer to which of the sales.
In deference to the contrary submission on behalf of the defendant, I should have thought that it would be rare where a commercial enterprise in circumstances such as this would be given the benefit of the so called "first offender" provisions of section 19B of the Crimes Act. The fact that the first sale on 19 April 1989 was made right at the beginning of the defendant's entry into the toy business justifies a finding that this was a relatively innocent breach of the absolute standards prescribed. However, this fact alone does not warrant a dismissal of the summons without penalty. There is an important public interest at stake and although the standards are arbitrary, the existence of such standards is widespread around the western world if not virtually universal. Business people must be conscious of their responsibilities in this regard, even if it means factoring into their price structures the cost consequences of having to ensure that their products are safe and rejecting those that are not. It is only a matter of luck that no child was hurt from the dangerous nature of this particular toy. Treating summons G 210 of 1992 as this first sale, I find the offence proved and fine the defendant $1,000.
By the time of the second sale the defendant must or should have known precisely what its responsibilities were, if not from its membership of the Toy Association, then from its experience in the industry. Yet it trusted to luck and did little or nothing, even after it had had some returns. Treating summons G 211 of 1992 as referring to the sale to Wishing Well on 4 May 1990, I find the offence proved and fine the defendant $4,000. I take into account in fixing these fines that on both charges the defendant is to pay the prosecution's costs. I will entertain an application for time to pay.

[1992] FCA 918

03 DECEMBER 1992