Pacific Blues (Fiji) Ltd v Levi Strauss (Australia) Pty Ltd

PACIFIC BLUES (FIJI) LTD v LEVI STRAUSS (AUSTRALIA) PTY LTD
[2004] SASC 125
Appeal from a Master

BESANKO J: This matter came before me on 25^th February 2004 as an appeal from the decision of a Master. The plaintiff in an action in this Court applied for leave to amend its Reply. The Master gave leave in relation to certain amendments and refused it in relation to others. The plaintiff appealed against the Master’s decision insofar as he refused leave to amend. During the course of submissions on the appeal, counsel for the plaintiff said that additional amendments could be made to the Reply which would further clarify the plaintiff’s case. I did not give the plaintiff leave to bring in a further Reply, but indicated that I would not deliver judgment for at least 14 days and that I would consider any further Reply brought in by the plaintiff. The plaintiff brought in a further Reply, and then after discussions between the parties, the plaintiff brought in yet another version of its Reply. The latest version of the Reply is dated 5^th April 2004. The parties agreed that, subject to the question of costs, I should dismiss the appeal, and that I should rule on the Reply dated 5^th April 2004 as, in effect, an application before me to amend the Reply. I am prepared to adopt this course because the parties agree that this is an appropriate course, and because this matter has a long and somewhat unfortunate history in terms of a dispute between the parties concerning the sufficiency of the Reply.
The plaintiff is a company incorporated under the laws of the Republic of Fiji. It carries on a business of manufacturing jeans for sale in the markets in Australia and New Zealand. The defendant is a company incorporated under the laws of New South Wales. It is a subsidiary of a company incorporated under the laws of California in the United States of America. It carries on a business of manufacturing jeans and of selling jeans to the retail market.
The plaintiff entered into a contract with the defendant whereby it agreed to manufacture and supply jeans to the defendant. It is alleged that the contract was entered into in July 1999, although it seems that the plaintiff supplied jeans to the defendant prior to this date. In this action, it is alleged that the plaintiff supplied jeans to the defendant from July 1999 to about August 2000. The plaintiff’s claim against the defendant relates to the defendant’s conduct under the contract. For the purposes of this appeal, it is unnecessary to set out the details of the plaintiff’s claim.
The defendant says that the contract between it and the plaintiff was governed by certain terms and conditions, and relevantly for present purposes, clauses 9 and 10 of a document entitled “Levi’s Terms and Conditions”. These clauses provide as follows:
“9.All garments manufactured by Contractor in pursuance of these terms and conditions conform to quality standards established by LSAust (including, without limitation, visual standards or other standards) as LSAust may provide. LSAust shall be the sole judge of whether the garments are first quality, irregulars or unsaleable. No payment shall be required from LSAust for garments, which are deemed by it to be unsaleable, or which for any reason fail to be delivered.
10.All garments delivered by Contractor to LSAust shall be separated into first quality and irregulars for inspection by LSAust. LSAust in its sole discretion will determine the classification of garments as first quality or irregulars. Manufacturing irregulars up to 2% of the total garments shipped for each cutting contract will be paid at 100% of the contract price. Manufacturing irregulars over 2.1% and up to 10% will be paid at 50% of the contract price. Manufacturing irregulars in excess of 10% shall be transferred at no cost to LSAust. Where irregular garments can be repaired and converted to first quality garments, such garments will be paid at 100% of the contract price less the costs or (sic) repairs (including costs of reshipping and recartoning), as per section 4 of these terms and conditions.”
The defendant pleads that a number of jeans supplied to it were irregulars within clause 10 or “Seconds” as they were called in argument. The defendant pleads that it deducted and was entitled to deduct $527,936.37 in relation to the Seconds supplied to it.
The plaintiff denies that clauses 9 and 10 were terms and conditions of the contract. In the alternative, in paragraph 8 of the Reply it pleads that conditions 9 and 10 are “void and/or unenforceable being provisions which are penal in nature”. In the further alternative, the plaintiff alleges that in carrying out the process of classification the defendant owed it certain duties which it breached.
It is unnecessary to discuss in any detail the procedural history of the action. It is sufficient to say the following. Some time before June 2002, the plaintiff filed a Reply which included paragraphs 8, 8.1, 8.2 and 8.3. The defendant applied to strike out paragraph 8 of the Reply, or in the alternative, the particulars in paragraphs 8.1, 8.2 and 8.3. The basis of the defendant’s application was that the pleadings did not disclose a reasonable cause of action or defence.
The defendant’s application came before a Master of this Court and in reasons delivered on 15 July 2002, the Master set out why he made an order on that date striking out paragraphs 8.2 and 8.3 of the Reply. It was common ground before the Master that the question whether a contractual provision was a penalty is to be judged as at the date the contract was entered into. The Master decided that paragraph 8.1 should not be struck out. He struck out paragraph 8.2 because it contained allegations of matters which occurred after the contract was entered into, and because the allegations involved matters of evidence and argument. He struck out paragraph 8.3 because he said the allegation of price discrimination in that paragraph was not relevant to the question of whether clauses 9 and 10 were penal in nature, and because the allegations contained matters of evidence and argument.
The plaintiff appealed against the Master’s decision to a single Judge of this Court. After a number of hearings, Gray J noted that the parties had agreed on the outcome of the appeal, and he made the following orders:
“1.     Leave to the plaintiff to amend its reply and defence to a counter claim in the terms initialled and approved.
2     The    appeal from the master is allowed to reinstate paragraphs 8.2.2 and 8.3 of the reply as amended.
3     The appeal is otherwise dismissed.
4     The plaintiff is to pay two thirds of the defendant’s costs of the appeal in the cause.”
On 2^nd May 2003, Gray J delivered brief reasons for judgment in the course of which he said:
“The plaintiff sought to amend the paragraphs that had been struck out to limit the date to which they refer. Those amendments have now been made. Once the amendments were made, counsel for the defendant acknowledged that material facts were pleaded. On that limited basis counsel for the defendant did not oppose the court allowing the appeal in respect of the amended paragraphs.
During the course of the appeal the plaintiff purported to amend its reply by adding paragraphs 8A to 8F. Counsel for the plaintiff acknowledged that leave was required to make these amendments and had not been obtained. It was agreed that the appropriate course to follow was for the plaintiff to withdraw the proposed amendment. The plaintiff indicated that it would make application to amend when it was in a position to fully particularise the proposed plea.”
During the submissions on appeal, it was agreed before me that although Gray J reinstated paragraphs 8.2.2 and 8.3, that was done on the understanding that if ultimately the particulars put forward in support of the allegations were inadequate or insufficient, the defendant would not be precluded from bringing another application to strike out the paragraphs.
After Gray J’s decision, the plaintiff decided it wished to make further amendments to the relevant paragraphs and plead some new allegations, and it made an application to amend its Reply. On 11^th November 2003, that application came on for argument before the same Master who had heard the defendant’s strike out application. The Reply and Defence to Counterclaim which had been initialled and approved by Gray J could not be located.
The Master made an order in the following terms:
“1. Leave to the plaintiff to file and serve an amended reply and defence to counterclaim in the form of Exhibit “RDB1” to the affidavit of Ronald David Windevere Bellman, affirmed 25 August 2003, with the following deletions – paragraphs 8.2, 8.2 (sic 8.3), 8D, 8E, 8F and the final sentence of 8A.3 – within 14 days”.
Principles Relevant to the Application
This action was commenced after 3^rd June 2000 and is governed by r46A of the Supreme Court Rules 1987. A pleading, including a Reply, must be as brief as the nature of the case permits and must contain the material facts relied upon and not the evidence or arguments by which they are to be proved (r46A.02(a) and (b)). Rule 46A.03 sets down the requirements for a Statement of Claim. Although I am dealing with a Reply and not a Statement of Claim, the relevant principles apply to all pleadings. Rule 46A.03 provides:
“46A.03     In an action where damages for personal injuries are not claimed the Statement of Claim must plead, but plead only:
(a)     the material facts relied upon to constitute any cause of action, or grounds for an extension of time or other relief sought;
(b)     such further material facts as are necessary to give other parties fair notice of the case which they will have to answer;
(c)     the general nature of the legal causes of action;
(d)     any statutory provisions relied upon; and
(e)     the general nature of the relief sought.”
The Rules identify two types of material facts, namely, those facts which are necessary elements of a cause of action, and those which are not. As the only facts which are to be pleaded are material facts, the difference between the two types of fact will often be one of degree and the level of particularity required. The pleader must plead sufficient facts to establish a cause of action, and whether the pleader has done so is a question of law. The pleader must also plead such facts as gives his opponent fair notice of the case which he will have to answer. In the first instance at least, that is a question of judgment for the pleader. What is a further material fact must be judged by reference to the particular circumstances of the case, although there will be clear cases of a deficiency in the pleading. The pleader has a significant responsibility in determining what to plead, and the matter requires careful consideration. If he errs, he may be required to plead further material facts if the absence of those facts means that his opponent is not given fair notice of the case he will have to meet, and is significantly prejudiced in the conduct of his case by not having them (r46A.09). There is a further consequence to the pleader if he or she does not plead the further material facts which should be pleaded. Speaking generally for the moment, without leave a party will not be able to present a case at trial not properly raised in the pleadings (r46A.10).
At the same time as the Rules place a significant responsibility on the pleader, the Rules are designed to discourage opponents from complaining about a lack of further material facts unless there is good reason to do so. Under the previous Rules, there were a number of arguments about the lack of particularity in a pleading which seemed sound enough on the face of the pleading but which were shown to be barren and fruitless points when the issues were exposed at trial. Arguments of this nature increased costs for no good reason.
To avoid such arguments, the Rules were amended to require an applicant for further particulars to show not only that he or she will not be given fair notice of the case, but also that they will be significantly prejudiced in the conduct of the case if the further material facts are not provided. Often the two requirements of fair notice and significant prejudice will overlap. After all, the notice which must be given is “fair” notice and if that is not done it is likely a degree of prejudice will result. However, the additional requirement of significant prejudice enables the Court to look outside the pleading and require the applicant to show that, in the particular circumstances of the case, the absence of further material facts will cause significant prejudice in the conduct of the applicant’s case. In addition, if an argument about the sufficiency of a pleading arises at trial, the Court is to resolve that argument without undue technicality and having regard to the substantial merits of the case. In considering the question the Court may have regard to documents outside the pleadings including any Affidavit of Loss, experts’ reports or discovered documents, but they are not to be treated as if they are pleadings (r46A.10).
It is by the means referred to above that the Rules as to pleadings seek to achieve the proper balance between the need to ensure that a party’s claim is disposed of in the most expeditious and cost-effective way and the need to ensure that an opponent has fair notice of the case he or she has to meet, and that the Court is in a position to give correct rulings on the evidence put forward at trial.
The above principles apply with equal force to a Defence (r46A.05) and a Reply and Defence to Counterclaim (r46A.06).
I am considering an application to amend a Reply. The proposed amendment must comply with the Rules as to pleading. If it does not, the amendment should not be allowed.
The Amendments in this Case
Paragraph 8.2
The defendant does not object to this paragraph and I will allow it.
Paragraph 8.3
The defendant objects to this paragraph. Paragraph 8.3 is said to be a particular of the allegation that clauses 9 and 10 are “void and/or unenforceable being provisions which are penal in nature. It reads:
“8.3Further to the matters pleaded in paragraph 8.2.1 hereof, in July 1999 the defendant practiced price discrimination.
8.3.1 The jeans market within which the defendant traded was an oligopolistic market, and within that market the defendant was the market leader. The defendant was therefore able to substantially determine the market price for its products by reference to the quantity of jeans which it was prepared to release onto that market.
PARTICULARS
8.3.1.1The market in which the defendant principally operated within Australia was the supply of fashionable jeans to consumers who were typically over the age of 30 and which were not designer label jeans.
8.3.1.2Until the defendant provides further and better discovery the plaintiff cannot identify either the size of that market or the defendant’s market share.
8.3.2 The defendant used its classification of Firsts and Seconds as a means of restricting the quantity of First quality garments which it supplied to the Australian market, and thereby it was able to maintain a significantly higher price for First quality garments than it would have had it released onto that market all the garments which it received and which were of First quality.
PARTICULARS
8.3.2.1Until the defendant provides further and better discovery, and further, until the defendant provides answers to the plaintiff’s request for interrogatories the plaintiff cannot provide further particulars.
8.3.3 By segmenting its market into First and Seconds, and then by restricting the quantity supplied to the Firsts’ market the defendant was able to achieve greater profits than it would have had it supplied to the Firsts’ market all the garments which it received and which were of First quality.
PARTICULARS
8.3.3.1The plaintiff repeats paragraph 8.3.2.1.”
The effect of this plea is that the defendant had a practice at the time the contract was entered into in terms of the jeans it classified as First or Seconds, and it contains the reason for that practice. I note at this point that the plaintiff does not suggest that the so-called practice of price discrimination was illegal. The defendant attacked the plea in paragraph 8.3 on two grounds. First, it argued that the plea was not maintainable in law. Secondly, it argued that the plea is deficient because it does not plead sufficient material facts.
The basis of the first submission is that the fact that the defendant practised what the plaintiff called price discrimination (as described in the plea) could not lead to the conclusion that clauses 9 and 10 constituted a penalty at the time the contract was made. The focus of the plea in paragraph 8.3 is on the reason the defendant acted in a particular way, rather than on the precise way in which the defendant acted, and there is a good deal of force in the defendant’s submission. The plaintiff submitted that the defendant’s submission was not open to the defendant in light of the agreement reached during the argument before Gray J and the orders made by Gray J. It is unnecessary for me to decide this point because I have reached the conclusion that the plea ought not to be allowed on other grounds.
The defendant submitted that the plea in paragraph 8.3 does not plead sufficient material facts. The plaintiff submitted that it is unable to provide any further material facts until discovery is provided by the defendant. The defendant submitted that the plaintiff is in effect fishing and the plea constitutes an abuse of process. I think the defendant’s submission is correct. There are no material facts as to size of the market or the defendant’s market share. There are no material facts as to how the defendant was able to substantially determine the market price for its products by reference to the quality of jeans which it was prepared to release onto the market. There are no material facts as to how the defendant used its classification of Firsts and Seconds as a means of restricting the quantity of First quality garments which it supplied to the Australian market, or how the defendant was thereby able to maintain a significantly higher price for First quality garments than it would have had it released onto that market all the garments which it received and which were of First quality, or of how, by its conduct, the defendant was able to achieve greater profits than it would have had it supplied to the Firsts’ market all the garments which it received and which were of First quality.
In my opinion, the plea in paragraph 8.3 does not contain the necessary material facts to constitute a ground of reply. In the alternative, the plea does not contain such further material facts as are necessary to give the defendant fair notice of the case which it will have to meet. In my opinion, the allegations in paragraph 8.3 rise no higher than, in effect, a theory and there is nothing in the plea to suggest that it has a basis in fact. I recognise that there is a grey area between a case where the plaintiff has a claim and cannot be criticised for failing (in the absence of discovery) to provide further material facts, and a case where the plaintiff is engaging in a fishing expedition. In my opinion, this case clearly falls on the wrong side of the line for the plaintiff.
Paragraphs 8A – 8H inclusive
The pleas in paragraphs 8A – 8H inclusive proceed on the assumption that clauses 9 and 10 are part of the contract and are not void and/or unenforceable because they are penal in nature.
The defendant does not object to paragraphs 8A, 8B and 8C. However, it is necessary to say something about those paragraphs in order to understand the defendant’s objections to the later paragraphs.
In paragraph 8A it is alleged, I assume as a matter of construction, that clauses 9 and 10 give no discretion to the defendant as to the classification of garments, that it must classify in accordance with the contractual standards and that the defendant breached this obligation. In paragraph 8B it is alleged that a correct classification by the defendant would have resulted in a further amount owing to the plaintiff of $250,950.

In paragraph 8C it is alleged that if clauses 9 and 10 did give the defendant as certifier a discretion as to classification, there was an implied term that the defendant act honestly and impartially.
The defendant objects to paragraph 8D which alleges that the defendant as certifier owed a duty of care to the plaintiff. The defendant submitted that this plea is not maintainable in law. The defendant must show that the plea is not reasonably arguable (General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125). The defendant submitted that the imposition of a duty of care would be inconsistent with the contractual provisions to the effect that the defendant is the sole judge of whether garments are First or Seconds. The defendant submitted that there is good reason for the contractual provisions having regard to the sort of difficult judgments the certifier must make.
The plaintiff referred to the judgment of McHugh JA (as he then was) in Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 and said that a valuer or certifier under a contract may be liable to an injured party for negligence, and that a valuation or certification under a contract which is made dishonestly or is affected by bias is not binding and may be set aside. By analogy it was at least arguable, submitted the plaintiff, that if one of the contracting parties is the certifier he may be liable in negligence to the other party, or if the certification is made dishonestly or is affected by bias it may be set aside. It seems to me that a number of arguments may be put on either side in terms of the plea in paragraph 8D, and I cannot say at this stage that the plea is unarguable. There was some criticism by the defendant of the particulars of negligence, but the plea is not so deficient that it ought not be allowed to stand. I will allow paragraph 8D.
The defendant objects to paragraph 8E. This paragraph alleges that in classifying garments into Firsts and Seconds the defendant acted dishonestly and in a manner which was biased in its favour, or negligently and in breach of the duty of care it owed to the plaintiff. I have already dealt with the issue of the duty of care and negligence. The plea contains particulars of dishonesty and bias (paragraph 8E.1). They are as follows:
“PARTICULARS OF DISHONESTY AND/OR BIAS
8E.1The plaintiff repeats the matters pleaded in paragraphs 8.1 to 8B hereof. The defendant from time to time, which the plaintiff cannot further particularise until the defendant makes further and better discovery, delegated the task of classifying garments into firsts, seconds, and thirds, to servants and/or agents of one or other of the Nemer Group of Companies (“the Nemer Group”), which until the defendant makes further and better discovery the plaintiff cannot further particularise. The Nemer Group is more particularised in paragraph 8E.1.8 hereof. In classifying those garments into firsts, seconds and thirds, those servants and agents did so in accordance with the financial interests of the Nemer Group.”
PARTICULARS
8E.1.1The Nemer Group have for many years, which the plaintiff cannot further particularise until the defendant makes further and better discovery, provided washing and dry cleaning services to the defendant, which the plaintiff cannot further particularise until the defendant makes further and better discovery.
8E.1.2The defendant and the Nemer Group had intended that the Nemer Group would provide washing and dry cleaning services in respect of garments manufactured by the plaintiff to the order of the defendant (“the Arrangements”), until the defendant makes further and better discovery the plaintiff cannot further particularise the Arangements (sic). The Nemer Group could not implement the Arrangements unless it established a washing and dry cleaning facility in Suva.
8E.1.3The Nemer Group was not prepared to establish a washing and dry cleaning facility in Suva, in the Republic of Fiji, unless it obtained from the government of the Republic of Fiji, certain tax concessions which, until the defendant makes further and better discovery the plaintiff cannot further particularise.
8E.1.4The tax concessions which the Nemer Group sought from the government of the Republic of Fiji were not granted by that government.
8E.1.5By reason of the matters pleaded in paragraph 8E.1.4 hereof, the Nemer Group did not want the defendant to place orders with the plaintiff given that those companies would not be able to wash and/or dry clean the garments manufactured by the plaintiff.
8E.1.6By reason of the matters pleaded in paragraph 8E.1.4 and 8E.1.5 hereof the Nemer Group were biased and had a conflict of interest when classifying garments manufactured by the plaintiff to the order of the defendant.
8E.1.7The plaintiff cannot provide further particulars as to which garments were wrongly classified as seconds when those garments should have been classified as firsts until the defendant provides answers to the plaintiff’s interrogatories.
8E.1.8The Nemer Gourp (sic) of companies consists of Tip Top Dry Cleaners Pty Ltd, which has an issued share capital of 10,000 shares, 9999 shares of which are held by a company called R.M.N. Corporation (249) Pty Ltd and one share is held by Antoine George Nemer. R.M.N. Corporation (249) Pty Ltd has an issued share capital of 10,000 shares, 9999 of which are held by a company called FADU Pty Ltd and one share is held by Antoine George Nemer. FADU Pty Ltd has an issued share capital of two shares, one of which is held by Antoine George Nemer and the other is held by Linda Nemer, both of the same address, namely, 186 Cross Road, Malvern, South Australia.”
The defendant submitted that there was no evidence that it delegated the task of classification to one or other of the Nemer Group of Companies, and in fact, the defendant said that it did not delegate that task in relation to any garments manufactured by the plaintiff. This submission, which is disputed, is not a reason not to allow the plea and the issue is whether the plea complies with the Rules as to pleadings. In the alternative, the defendant submitted that the plea did not contain sufficient material facts. The defendant submitted that there were no material facts in support of the plea of the delegation of the task of classification to the Nemer Group. Perhaps by implication more than anything else, the present plea is that one or more of the Nemer Group classified garments produced by the plaintiff (paragraph 8E.1.6) and that that was done under a delegation from time to time. In my opinion, that is a sufficient plea. The defendant submitted that there was no basis identified in the affidavits filed by the plaintiff for the very serious allegation of bias. That is not a ground upon which to disallow a pleading. The defendant submitted that the plea should not be allowed because in it the plaintiff admits that it cannot identify which garments (if any) were wrongly classified as Seconds and hence admits that it has no basis for the fundamental allegation in paragraph 8E. I think that this particular difficulty is overcome by the reference in paragraph 8F to the calculation in paragraph 8B.
Paragraphs 8F, 8G and 8H are consequential upon the pleas in paragraphs 8D and 8E and I will allow these paragraphs.
The plaintiff said that the figure in paragraph 8G should be the same as the figure in paragraph 8B (ie., $250,950).
Conclusion
I dismiss the plaintiff’s appeal. I grant leave to the plaintiff to amend the Amended Reply to Amended Defence and Defence to Amended Counterclaim in terms of the document dated 5^th April 2004 subject to the deletion of paragraph 8.3 and the correction of the figure in paragraph 8G. I will hear the parties as to the costs of the appeal and the application to amend.

[2004] SASC 125

30 April 2004