Petty, J. v Penfold Wines P/L

JOHN PETTY v. PENFOLD WINES PTY LTD
No. NG300 of 1991
FED No. 615
Number of pages - 34
Trade Practices - Contract
(1993) ATPR 41-263

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
LOCKHART J

CATCHWORDS

Trade Practices - whether representations that liquor retailer was getting "the best discount rate" and with respect to terms of payment were misleading or deceptive conduct by liquor producer - whether reasonable reliance on representations - whether liquor producer and wholesaler took advantage of substantial degree of market power for purpose of deterring or preventing a person from engaging in competitive conduct - delineation of markets discussed - whether liquor producer and wholesaler in trade or commerce discriminated between purchasers of goods of like grade and quality in relation to discounts, rebates or credits given in relation to the supply of goods leading to substantial lessening of competition - ss. 46, 49, 52 Trade Practices Act.

Contract - whether representation that liquor retailer was getting "the best discount rate" and with respect to terms of payment for purchases from liquor producer and wholesaler were contractual or mere puff - whether breach of agreement of supply - whether reasonable reliance - whether consequential loss and damage.

Trade Practices Act 1974 (Cth)

Fair Trading Act 1987 (NSW)

HEARING

SYDNEY, 5-7, 9, 12-16 and 23 July 1993

#DATE 3:9:1993

Counsel for the Applicant: C Stevens QC and I Jackman

Solicitors for the Applicant: Tony Giurissevich

Counsel for the Respondent: J D Heydon QC and P Comans

Solicitors for the Respondent: Allen Allen and Hemsley

ORDER

THE COURT ORDERS THAT:

1. The application be dismissed.

2. John Petty pay the costs in the proceeding of Penfold Wines Pty Limited.

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

JUDGE1

Introduction

LOCKHART J Mr John Petty sues Penfold Wines Pty Limited ("Penfolds") claiming declarations, injunctions and damages for alleged breach of contract, contravention of s. 46 (monopolization), s. 49 (price discrimination) and s. 52 of the Trade Practices Act 1974 ("the Act") and contravention of s. 42 of the Fair Trading Act 1987 (NSW). The applicant also claims damages based on alleged estoppel.

Mr Petty was involved in operating liquor retailing businesses from 1984 to 1991, in particular, in running the two businesses with which this case is concerned, being licensed premises at 1/25 Ralston Avenue, Belrose ("Belrose") and 19 Babbage Road, Roseville ("Roseville"), both suburbs of Sydney, since 1985 and 1986 respectively. The businesses traded under the names "The Chase Cellars" (at Roseville), "Belrose Village MFC" and "Belrose Rite-Way" (at Belrose). Belrose was both a liquor retailing outlet and a supermarket; each activity was conducted in different sections of the same store, but with common check out points. The case is concerned primarily with Belrose. Initially, Mr Petty carried on the businesses at Belrose and Roseville in partnership with a Mr P R Nelson, but he purchased Mr Nelson's share on 11 May 1987 and thereafter continued the businesses on his own account.
Prior to entering into the business of liquor retailing, Mr Petty held various positions in organizations concerned with computers and statistics. In running the liquor businesses, he worked with computers, including writing and operating computer programs and their operation and gained extensive practical knowledge in business statistics.
Mr Petty conducted his business by selling liquor products to his customers at prices which gave him low margins of return; for profits he relied upon a large volume of sales.
Penfolds carries on business of supplying wines and champagne to retail liquor outlets including the two premises of Mr Petty.

Allegations
6. Mr Petty makes a number of allegations in some detail. They are as follows:-
. From 11 May 1987 until April 1990 Penfolds by its agent, one of

its employees, Yvonne Gibson, represented to Mr Petty that Penfolds was willing to and would supply its goods to him as and when ordered; that the prices at which Penfolds would supply its goods to Mr Petty would be the best prices at which Penfolds supplied goods to any of its customers, being the "300 case" rate and being in accordance with a pricing schedule for that rate; and that no-one was supplied by Penfolds on any better rate of volume discount, rebate, allowances and/or promotions. (The "300 case" rate was the rate at which Penfolds supplied its customers at certain times in conformity with its published pricing schedule in the event of orders exceeding 300 cases in a calender month, allowing for averaging of sales.)

. Mr Petty placed orders with Penfolds for the supply of goods from

11 May 1987 to 1 April 1990.

. An offer was thus made by Penfolds to Mr Petty to supply goods on

the terms stated in the offer in consideration of the payment of the prices indicated by Penfolds, an offer which continued to operate throughout the period 1 May 1987 to 1 April 1990.

. In about mid March 1990 Penfolds by its agent, Ms Gibson,

represented to Mr Petty that, consequent upon Penfolds having acquired Lindemans Wines Pty Limited ("Lindemans"), what had previously been the "300 case" rate would become the "500 case" rate which would be the best rate to apply from 1 April 1990 at which any customer of Penfolds could be supplied other than as is set out in the next paragraph.

. From mid March 1990 Penfolds by its agent, Ms Gibson, represented

to Mr Petty that as from 1 April 1990 a new rate would exist known as the "semi-trailer" rate whereby there would be a further discount over and above the "500 case" rate of 3% on goods packed in casks and 2% on goods packed in bottles, the minimum order would be 20 pallets, each pallet would be of only one product and one variety of that product, and that the "semi-trailer" rate was the best rate at which any customer of the respondent would be supplied.

. Mr Petty relied on those representations and placed orders with

Penfolds on that basis from 1 April 1990.

. The matters aforesaid constituted an offer by Penfolds to supply

goods to Mr Petty on the terms stated in that offer in consideration of payment of the prices indicated.

. The agreement between the parties was further varied in April 1990

when Penfolds offered by its agent, Ms Gibson, to supply goods to Mr Petty on the basis of the discounts just mentioned with minimum orders of 20 pallets, such orders to be either products from the previously available Penfolds range or products from the recently acquired range of Lindemans' wines under its various labels.

. The agreement between the parties was further varied whereby, in

the event of Mr Petty placing orders with Penfolds between 3 April and September 1990 for quantities of less than 20 pallets, Penfolds agreed to supply him with the goods as ordered at either the "semi-trailer" rate or the "500 case" rate on any given order.

. The agreement was further varied in September 1990 whereby any

order of Mr Petty to Penfolds would be supplied at the "semi- trailer" rate.

. At the time of making the relevant variations mentioned above,

Penfolds, by its agent, Ms Gibson, represented to Mr Petty that the discounts and terms prevailing after each respective variation were the best rates at which any customer of Penfolds would be supplied.

. From 1987 to mid December 1990 Penfolds by its agents, Ms Gibson

and her superiors, represented to Mr Petty that on occasions when competitors of Mr Petty advertised some of the goods of Penfolds for sale to the public at prices less than prices payable by Mr Petty to Penfolds, they were not being supplied by it at any price, rate, rebate, allowance or promotion better than that at which Mr Petty was being supplied.

. Mr Petty relied upon each of the relevant representations and

ordered and was supplied the goods of Penfolds on that basis.

. Contrary to the representations to which reference has been made,

Penfolds supplied its goods to others at prices and/or terms better than those made available to Mr Petty; and in particular allowed to its customers:

(a) further discounts of 5% (alternatively between 2% and 3%) and extended credit terms over and above those allowed to Mr Petty; and/or

(b) an entitlement to the discounts and terms made available to Mr Petty, but without requiring the quantity of product ordered by any one customer to be as great as the minimum quantity imposed by Penfolds upon Mr Petty.

. Mr Petty suffered consequential loss and damage. By reason of

this conduct of Penfolds, it engaged in misleading and deceptive conduct under s. 52 of the Act or s. 42 of the Fair Trading Act in consequence of which Mr Petty suffered loss and damage.

. A further agreement between the parties was alleged by Mr Petty.

By agreement between the parties made in December 1989, Penfolds agreed to supply its goods to Mr Petty as requested, with payment to be made before the end of the 60th day from the end of the month in which the goods were delivered; or, in the event of payment being due in a month when Mr Petty had insufficient funds available, then further time to pay would be allowed, but supply would be suspended by Penfolds pending payment. This allegation is based on an alleged oral agreement between Mr Petty on the one hand and Mr Geoff Richardson and Ms Gibson on behalf of Penfolds on the other, in December 1989 at the Roseville Chase Chinese Restaurant.

. It was a further term of this agreement that Penfolds' goods would

continue to be supplied to Mr Petty, but that Penfolds would be entitled to suspend supply whilst any payment was outstanding beyond its due date.

. Goods were ordered by Mr Petty and delivered by Penfolds and paid

for by Mr Petty in conformity with the agreement from December 1989 to November 1990.

. In about mid October 1990 Penfolds purported to vary its agreement

with Mr Petty whereby:

(a) Penfolds would vary the date of the close of its trading month for the months of October and November 1990;

(b) payment would be due by the 14th day of the month following the month of the relevant trading period; and

(c) Mr Petty's dealings with Penfolds would be on these usual trading terms of the respondent.

. Penfolds notified Mr Petty of its purported variation of the

determination of the close of the trading month for the months of October and November 1990, but failed to notify him of a unilateral variation of Penfolds' terms for payment.

. Mr Petty paid monies to Penfolds and he ordered goods from it for

delivery to him. Mr Petty alleges that no sums were due at relevant times by him to it, and that there was no basis for it refusing to supply its goods to him. But Penfolds refused to supply its goods to Mr Petty by oral notification to him on 14 December 1990 and the refusal was a breach of the agreement between the parties which occasioned loss and damage to Mr Petty. (This allegation is framed in alternative ways).

. At relevant times (between May 1987 and December 1990) in the

areas of circulation of the Manly Daily, The Northern Herald and the North Shore Times newspapers, there existed markets of various kinds in relation to the sale of liquor.

. Penfolds was a corporation with a substantial degree of power in

the relevant market (see s. 46 of the Act). Penfolds was a corporation with a substantial degree of power in the market for various liquor products. It accounted for approximately 40% of the sales in Australia of the relevant goods and was the largest supplier to Mr Petty for those goods, accounting for about 48% of his sales of those goods.

. Purchasers of goods other than Mr Petty were given further

discounts and/or better terms than those given to him;

. By reason of these matters, Penfolds discriminated between

purchasers of goods of like grade and quality in relation to the prices charged for the goods, and discounts, allowances, rebates or credits given or allowed in relation to the supply of the goods.

. The discrimination was of such magnitude and was of such a

recurring or systematic character that it had or was likely to have the effect of substantially lessening competition in the relevant markets.

. By reason of those matters Penfolds contravened ss. 46 and 49 of

the Act and Mr Petty has suffered loss or damage by reason of those contraventions.

. Between October 1988 and January 1989 Penfolds by its agent, Ms

Gibson, and by various documents, offered to Mr Petty supplies of certain champagnes on terms of an additional discount of approximately 3%, but conditional upon (a) minimum purchases being of 20 pallets (1,300 cases); (b) each pallet being of the same brand of champagne and the same variety of that particular champagne; and (c) pallets not to be mixed by reference to the brand of champagne or the variety contained thereon.

. Penfolds represented and warranted to Mr Petty that the terms were

"non-negotiable" and were identical with the best terms Penfolds was willing to offer to and accept from any of its customers. Mr Petty, in reliance upon this offer and representation, placed orders with Penfolds consistent with them, deliveries were made sufficient to occasion the 3% discount to arise; but by reason of being unable to mix the contents of pallets, Mr Petty obtained quantities of certain champagne brands and varieties of those brands in excess of that which he otherwise would have bought.

. Contrary to the representations just mentioned and in breach of

warranty, Penfolds supplied those champagnes to certain of its customers on the basis of allowing the contents of the pallets to be mixed both in terms of brand of champagne and/or the champagne varieties of a particular brand, and allowing the minimum order at which the champagne was supplied to be one pallet.

. By reason of these matters Penfolds unlawfully discriminated in

trade and commerce between purchasers of goods of like grade and quality in relation to the prices charged for champagne and discounts, allowances etc. given or allowed in relation to the supply of champagne (s. 49 of the Act). The other ingredients of unlawful price discrimination are also said to have occurred.

. Similar allegations are made as to the period between October 1989

and January 1990 as are made with respect to the period October 1988 to January 1989, based on minimum purchases being 100 pallets (i.e. 6,500 cases).

Witnesses

Affidavits filed by Mr Petty were read at the trial. Affidavits were sworn or affirmed by:
. Mr Petty;
. Ms Gibson, who was employed as a sales representative/ accounts

executive by Penfolds 1982 until 3 May 1991. Her duties included servicing major accounts in the Sydney metropolitan area and she was the sales representative to Mr Petty at his two shops (and also an earlier liquor shop at Double Bay which is not relevant for present purposes);

. Lachlan Stewart McDonald, who, from May 1987 until August 1991 was

Mr Petty's store manager at Belrose and Roseville;

. an expert witness called by the applicant, Gerard Francis Quinlan,

who is described as a liquor industry consultant and who is a registered valuer of licensed premises.

. Trevor John Vella, who is a member of a firm of management

consultants. He gave expert evidence with respect to the losses claimed by Mr Petty.

. Joseph Garner Harrison, who has been in the supermarket and

grocery retail industry since 1960.

Each witness, except Mr Harrison, was cross-examined.
Affidavits filed by Penfolds were read at the trial. The deponents were:
. Jeffrey Thomas Richardson, who was employed by Penfolds at

relevant times as New South Wales State Sales Manager;

. John Charles Cole, who was National Credit Manager of Penfolds;

. Ross William Leedham who was New South Wales Commercial Manager of

Penfolds;

. Shane Thomas Sinclair, the Group Controller of Robespierre Pty

Limited trading as Farmer Brothers ("Farmer Bros.") who has been involved in the liquor retailing industry since July 1977. From January 1989 until July 1989 he was employed by Theo's Liquor Markets group ("Theo's"). Otherwise, since July 1977 Mr Sinclair has been employed in various capacities by Farmer Bros.;

. Wayne Richard Lonergan, who is a chartered accountant. He gave

expert evidence for Penfolds relating to Mr Petty's retail liquor store business.

All of Penfolds' witnesses were cross-examined.
There was also a considerable amount of documentary evidence presented at trial.

Facts
12. I shall now make certain findings of fact. Not all of my findings are set out under this heading, because it is more convenient if some facts are found when dealing with specific matters.

Mr Petty commenced his business of owning and operating retail liquor stores in 1984 when he held a 49% interest in a partnership which conducted the Double Bay Liquor Store. In 1985 he formed a partnership with Mr Nelson, each having a 50% interest, to acquire and operate the Roseville Chase Cellars liquor store business. In July 1986, the partnership of Mr Petty and Mr Nelson expanded when they acquired the Belrose MFC Liquor Store and Supermarket for $122,000 plus stock. In October 1986 the Double Bay store was sold for approximately $410,000 plus stock. Of those proceeds, $199,200 were paid to Mr Nelson and the balance was used to retire the debt of the Double Bay partnership and to pay Mr Petty. The Double Bay partnership was dissolved in early 1987. On 11 May 1987 Mr Petty acquired Mr Nelson's 50% interest in the partnership with respect to the Roseville and Belrose for approximately $180,000 plus adjustments leaving Mr Petty with a 100% interest in the two businesses. In March 1989 Mr Petty sold the Roseville Chase Cellars business for $270,000 plus stock. Thereafter his retailing business consisted solely of Belrose.
In November 1989 Mr Petty told his bankers, Westpac Banking Corporation Limited ("Westpac"), that he was considering selling Belrose. It was listed for sale in February 1990 but did not obtain a buyer.
In December 1990 Mr Petty and Penfolds had a dispute over the payment of his account, further details of which I shall refer to later, as the events of that time are critical to the case. Penfolds then decreased Mr Petty's credit limit from $50,000 to $15,000 and reduced his terms of credit. From late December 1990 Mr Petty ceased to purchase stock from Penfolds.

On 14 August 1991 receivers and managers were appointed by the Supreme Court of New South Wales to manage the Belrose business and the business was sold on 29 October 1991 to Clancy's Food Stores Pty Limited for $145,000. The sale was completed on 26 November 1991. $308,934 was received from the sale of the business representing goodwill, licences, fixtures, fittings, stock and adjustment to liquor licence fee.
Mr Petty's business strategy was to achieve a high sales volume by offering high discounts, to sell his product for less than or equal to the prices of his major competitors and to forgo profitable trading at least in the short term to achieve these sales.
Mr Petty's business operated at a loss during the whole of the period from 1987 onwards. His business strategy and pricing policy resulted in sales being made over the relevant period for less than the total cost of purchasing the stock and operating the business. A fundamental problem to Mr Petty's stated business strategy and pricing policy was that the gross profit margins which this strategy produced were too low. His business strategy and pricing policy resulted in his gross margins declining from 11.5% to 11%. Indeed, his business earned a profit margin throughout the relevant period which was consistently below the industry average.
Mr Lonergan, the expert witness called by Penfolds, prepared a report for the purpose of providing Penfolds with an independent assessment of the key business and financial issues which affected Mr Petty's liquor store business and contributed to its failure on 14 August 1991 with the appointment of receivers and managers. Mr Lonergan was cross-examined. Although certain of the assumptions made by Mr Lonergan in his report are not consistent with the facts as proved, the substance of the assumptions made by him are consistent with the evidence. I accept the findings in his report as being basically correct and reliable. I accept that Mr Petty's stated business strategy and pricing policy were inconsistent with operating and developing a commercially viable business. It is true that he persisted with his strategy for the purpose of boosting sales revenue and hopefully goodwill to enhance the prospect of the business being sold in the medium term for a large capital gain. Unfortunately for him, the business proved difficult to sell in a period of high interest rates and general economic recession. One of the major factors leading to the decline and failure of Mr Petty's liquor business was the adoption of a high turnover/low margin business strategy over an extended period without due regard to the profitability of the business. In my view the business strategy and pricing policy of maximizing sales at low margins was a strategy adopted by Mr Petty unrelated to Penfolds.
From 1989 onwards, the equity in the Belrose business reduced from $143,954 to a negative $202,414, thus showing a surplus of liabilities over assets. Also during this period the business was increasingly financed by indebtedness to Westpac and to trade creditors which increased from $399,736 at 30 June 1987 to $897,079 at 31 March 1991, an increase of approximately $497,000. The business had too much debt.
Westpac became concerned with the level of Mr Petty's indebtedness as early as August 1988. A bank file note of 2 August 1988 states:

"His debt load is too high to service and he

cannot afford to let matters run on."

(The "matters" referred to are the proposed sale of the Roseville Cellars)

Many Westpac file notes are in evidence. It is sufficient to note that from late 1988 onwards Westpac continued to express concern over the ability of Mr Petty's business to service its level of debt. A bank file note of 15 January 1991 records that the:

"business has run at a loss for 3 consecutive

years with proprietors (sic) equity eroded.

Business has survived purely on Bank funding

working capital needs and manipulation of

creditor terms.

Mr Petty is aware about our concern with the

position. He has given us all the financial

data requested including his undertaking to sell

business or unit by May 1991. If this does not

eventuate the Bank will need to sell the unit.

Bank's margins are now appropriately set to

reflect risk."

The reference to the "unit" is to a flat owned by Mr Petty.

The increase in Mr Petty's business debt was not only accompanied by a sustained period of operating losses, but also by a period of rising interest rates. These factors combined to eliminate Mr Petty's equity in the business.
I accept the correctness of Mr Lonergan's conclusion that the business operated by Mr Petty:

"was substantially overgeared during a period of

negative cashflows and rising interest rates and

that this was a major factor which contributed

significantly to the decline of the business".

I also accept Mr Lonergan's opinion as correct that the business carried an excessive level of stock and that adequate controls were not implemented to safeguard and maintain stock. The business's failure to manage the asset was a major factor which contributed significantly to its decline.
Mr Quinlan, an expert valuer called by Mr Petty, valued the Belrose business at $500,000 effective at 31 December 1990. He adopted a market value approach to his valuation. Mr Lonergan analyzed Mr Quinlan's valuation and the assumptions made by Mr Quinlan in arriving at his valuation. I see no useful purpose in discussing in detail the contents of Mr Quinlan's report or Mr Lonergan's report with respect to this matter. I am satisfied that Mr Quinlan's valuations were essentially on the basis of assessing the value of a hypothetical business to a hypothetical purchaser and that he was not valuing the business in fact operated by Mr Petty. The valuations were not appropriate for assessing the security position of Westpac in relation to funding the business. There is a marked difference between the hypothetical results adopted by Mr Quinlan and the actual operating results. I agree with Mr Lonergan's criticisms of Mr Quinlan's valuation.

Terms of payment between Mr Petty and Penfolds
27. Mr Petty first purchased goods from Penfolds in 1984 or 1985 when he conducted his business at Double Bay. There was no written agreement governing the supply of goods between them or any overriding arrangement of supply. It was simply a case of Mr Petty ordering goods from Penfolds from time to time. He was under no obligation to offer to buy goods from Penfolds, nor was it under any obligation to accept Mr Petty's offers. It is important to remember that this was the fundamental basis of the relationship between the parties throughout its subsistence. Each time Mr Petty placed an order for goods with Penfolds, that constituted an offer by him to purchase those goods on the relevant terms and conditions of Penfolds unless varied. This order or offer could be accepted or rejected by Penfolds as it wished. The invoices and the monthly statements sent by Penfolds to Mr Petty recorded the usual terms of payment between them which were: "on or before the 14th day of the month following the month of despatch". Statements issued generally on the first day of each month so that in fact payment was due on the 14th day of each month in respect of goods comprised in that statement, namely, goods delivered during the previous month.

There is one variation to these credit arrangements which is alleged by Mr Petty: the variation that was said to be made at a luncheon at the Roseville Chase Chinese Restaurant. The luncheon was attended by Mr Petty, Ms Gibson, Mr McDonald and Mr Richardson. Each of them gave evidence by affidavit and orally about the events at the luncheon. It was not a short affair. The witnesses varied as to when the luncheon was held. In my opinion it was held on 23 November 1989 which accords with the recollection of Mr Richardson. Account of what was said and the order of events at the luncheon differed from witness to witness, but the substance of most of the relevant statements was agreed in by each of them, with one critical difference to which I will refer shortly.
Mr Richardson had attended the luncheon because he had been sent there by his superior, Mr Roberts, for the sole purpose of bringing Mr Petty's account "back into line". This evidence was not challenged and I accept it. The version of the conversation in Mr Richardson's affidavit was as follows:

"Richardson: It has been brought to my

attention that your account with Penfolds has

been trading in the 60 day and over period for

some time now. This is unacceptable and your

account will have to be brought back in line

with our trading terms which are that goods

purchased in one month become payable on the

14th day of the following month."

Mr Petty appeared to become quite agitated and said:

"That is ridiculous. I cannot operate under

those conditions. I want to do more business

with Penfolds, but if you put these conditions

on me then I won't be able to make large

purchases of Penfolds' products because I would

have to pay you before I have sold the goods."

Richardson: All right, we are prepared to do

this. If you pay your account on or before the

59th day then we will not hold the goods and I

do not believe there will be a problem. If you

do that then your account will never appear on

the 60 day and over reports.

Petty: I suppose we can do business under those

conditions."

At some stage during the conversation Mr Petty said:

"There may be a couple of times a year when I

will not be able to pay by the 59th day, for

example, when licence fees are due.

Richardson replied: Mate, if it is over 60 days

it is out of my hands. It is then a matter for

Gary Roberts and John Cole."

It is with respect to these last statements of Mr Petty and Mr Richardson that there is a fundamental difference in the version of the witnesses. Mr Petty's evidence was that he said to Mr Richardson that he would probably miss a couple of times a year in paying by the 59th day such as when he had to "clean up other suppliers to buy my pre-CPI stock and of course licence time. I know you'll put me on hold at those times". Mr Richardson is then alleged by Mr Petty to have responded by saying:

"Not a problem. It'll come to me to review at

those times and as long as you're in 30 days

most of the year, I can handle it."

Ms Gibson gave a version different to the version of Mr Petty in that his version acknowledges that Penfolds is authorized to put him on hold, but Ms Gibson's version is that such orders will be "okayed". Mr McDonald's version is similar to that of Mr Petty, though in cross-examination Mr McDonald said that he was not prepared to deny the correctness of Mr Richardson's version.
In my opinion the most credible version of the conversation is that given by Mr Richardson. He went to the luncheon having been sent there by Mr Roberts for the sole purpose of bringing the account "back into line". It would have been beyond Mr Richardson's authority to have made the arrangement which Mr Petty asserts was made; and I see no reason to believe that Mr Richardson would have deliberately chosen to exceed his authority. The luncheon was lengthy and basically convivial; but those circumstances do not in my view suggest that Mr Richardson would have taken the step of agreeing to the version of the conversations as deposed to by Mr Petty about circumstances in which he could pay his account beyond the 59th day.
Mr Richardson prepared a "contact report" dated 23 November 1989 which recorded his version of the events of the luncheon. However, that document was not prepared until more than 12 months after 23 November 1989, namely, some date in December 1990. He said in his affidavit that he prepared it then "because I saw a dispute looming between Mr Petty and Penfolds and wished to record my recollection in writing". In his cross-examination Mr Richardson confirmed this. I do not propose to rely upon the document at all, notwithstanding that in terms it does confirm Mr Richardson's version of the events at the luncheon. It is unfortunate that a document of this kind was prepared a year after the event when in its own term it purports to record the events of the luncheon held "today", namely, the date of the memorandum (23 November 1989), which was inaccurate. However, I do not think that the events surrounding the preparation of that memorandum affect Mr Richardson's credit generally. Also, at the time he gave his evidence he had ceased working for Penfolds and was employed by United Distillers Limited.
The arrangement, as alleged by Mr Petty, would be an odd arrangement for Penfolds to make through Mr Richardson. It would, for practical purposes, leave in the hands of Mr Petty, the debtor, control of the circumstances in which Penfolds was entitled to suspend payment and the duration of that suspension. It leaves open-ended the time beyond the expiration of the 60 days in which Mr Petty could make payment of his overdue indebtedness. There is also the important disparity between Mr Petty and Ms Gibson as to the effect of non-payment within the 60 day period, Mr Petty recognising that he would be put on hold for existing and future orders and Ms Gibson's version being that such orders would be "okayed" by Mr Richardson.
I saw all the witnesses give their evidence and I have assessed it in the light of the probabilities and the whole of the relevant evidence. In the result, the arrangement made at the November lunch was that Mr Petty had to pay his account before the expiration of 60 days; that is if goods were purchased in, say, February they had to be paid for not later than 29 April. It is important to remember, however, that the ordinary trading terms of Penfolds still applied, so that payment was expected to be made by the 14th day of the month following the date of purchase, that is the 14th day of the statement month; but as a concession to Mr Petty he was given the extended credit agreed upon at the November luncheon. If he did not do so, then Penfolds would withhold delivery of further goods.
It was a concession made in favour of Mr Petty by Penfolds and in no sense can it be construed as constituting an agreement whereby Penfolds would continue to supply all goods ordered by Mr Petty in the future provided the trading terms as extended were met. Mr Petty did not remain obliged to purchase anything from Penfolds, nor was Penfolds obliged to accept any future offer of Mr Petty. The arrangements made in November 1989 did not vary this fundamental basis of their trading relationship.
As a concession to Mr Petty the terms of payment were extended at the luncheon so that his supply would not be cut off if he paid so as to avoid being placed with the 60 day accounts, that is if he paid by the 59th day. To extrude a further concession of the kind for which Mr Petty contends, would be to place an unreal gloss upon the conversation and one which I am not prepared to place upon it. Even if I were prepared to do so, I would not be prepared to accept that it had any contractual significance at all, let alone any significance of the kind to which s. 52 of the Act is directed. Nor am I satisfied that if there was a representation made by Mr Richardson as alleged by Mr Petty (which I think there was not) there was any reliance by Mr Petty upon the making of it. It is true that Mr Petty placed orders with Penfolds after the luncheon of 22 November 1989 which were fulfilled by it, but that is a neutral factor. Any late payment or withholding of payment by Mr Petty was not because of any reliance upon any alleged representation by Mr Richardson, but because Mr Petty was unable to pay earlier than he did. At material times he was heavily indebted to Westpac and was involved in negotiations with Westpac which at times were of an intense nature. Any withholding of payment was in no way due to his reliance upon any representation by Penfolds through Mr Richardson or anybody else.
For an applicant to establish a case of reliance upon the making of any representations, it is necessary that the reliance be reasonably based. This is particularly so with respect to the case of Mr Petty based upon s. 52 of the Act. In the circumstances which occurred in December 1990 to which I shall turn in a moment, Mr Petty could not possibly have reasonably concluded that Penfolds would continue to supply him or continue to any indefinite extent to supply him.

Alleged breach of the agreement to supply
39. In view of my finding that there was no contractual obligation imposed upon Penfolds by virtue of the luncheon conversation on 23 November 1989 other than a forbearance to sue Mr Petty for moneys due by him until the expiration of the 59th day after the end of the month in which the goods were delivered, there is no foundation for Mr Petty's case that Penfolds breached its alleged agreement to supply him by failing to accept his order for goods on 14 December 1990.

It is the conversation over luncheon on 23 November 1989 that is the foundation stone for Mr Petty's case that Penfolds wrongfully withheld supplies of goods to him in December 1990 with the disastrous consequences which he seeks to lay at the door of Penfolds.
However, I shall deal with the applicant's case on the assumption that his version of the conversation so far as relevant at the luncheon on 23 November 1989 is the preferred version. It is his version to which I refer and not that of Ms Gibson. It must be borne in mind that I do not accept Mr Petty's version of that day's conversation on crucial questions.
It is useful to recount the events that led up to the alleged breach of contract by Penfolds. On 30 November 1990 Mr Petty rang Mr Leedham (Penfolds' Commercial Manager for New South Wales) and told him that he would pay his outstanding accounts for September purchases on 10 or 12 December. On 10 December Mr Petty spoke to Ms Gibson and told her that his account would be paid on 13 December. On 13 December Mr Petty gave Ms Gibson a cheque for $68,480.86. Mr McDonald then gave Miss Gibson a fresh order for delivery of goods on 18 December. On 14 December Mr Petty had to place his relevant advertisements for the Christmas trade. Ms Gibson placed Mr Petty's order with Penfolds. Mr Richardson said there would be no further deliveries of goods until Mr Petty's outstanding account was paid. Mr Cole then declined to allow further terms and credit to Mr Petty. On 18 December 1990 Mr Petty's Christmas delivery of goods from Penfolds was expected by him. On 20 December Mr Petty rang Mr Roberts of Penfolds. On 21 December Mr Richardson offered Mr Petty $15,000 stock on credit to be delivered the following day. Mr Petty declined the offer and ceased to buy further stock from Penfolds. On 15 January 1991 Mr Petty's licence fees fell due for payment.
Mr Petty's account with Penfolds for September purchases (the statement was issued in early October 1990) was $68,480.86. Based on the arrangement made at the 23 November 1989 luncheon, this had to be paid by Thursday, 29 November to avoid withholding of future supplies. The September purchases were paid for by Mr Petty by his cheque of 13 December 1990. When Mr Petty paid for his September purchases on 13 December he owed in addition to the $68,480.86 paid that day a further $72,000 for October purchases. He did not adhere to the arrangement made at the November 1989 lunch because he paid, not by 29 November but on 13 December 1990 when he had slipped into the 60 day report, something which is clear from the 23 November 1989 luncheon he was not entitled to do. Even after his payment of $68,480.86 on 13 December Mr Petty still owed approximately $72,000. There can be no conceivable basis for a suggestion that Penfolds was obliged to extend indefinite credit to Mr Petty, nor was any such suggestion asserted.

Also, Mr Petty told Mr Leedham on 3 December that Westpac was "getting very nervous". Mr Petty gave evidence that what he said to Mr Leedham was that his bank was getting "the nervous nellies". It does not matter which of these two versions is correct, though I prefer the evidence of Mr Leedham. On any view of the matter it was a serious statement notwithstanding that Mr Petty spoke to Mr Leedham in a "flippant type way, trying to play down the incident". Mr Leedham gave evidence, which I accept, that a statement of this kind had never been made to him before by any customer of Penfolds and that it rang "alarm bells" for him.
The fact is that Westpac was becoming nervous with Mr Petty's account. Assuming that Mr Petty was being candid with Penfolds in his statement about the bank's attitude, and I accept that he was, not only did Penfolds react in the way it did to the situation but in my opinion it was reasonably entitled to do so.
On no view of the facts could it be said that there was a promise by Penfolds to supply goods whenever requested. Indeed, there never was an obligation to supply. There was simply a series of orders lodged by Mr Petty which Penfolds was at liberty to accept or reject as it wished. Also, even if Mr Petty's version of the events of 23 November 1989 were to be accepted, (and in my opinion it cannot), so that he was entitled to slip into the 60 day report on occasions, those occasions would not have extended to the events of November-December 1990. The period for buying pre-CPI fell in approximately February and August of each year and the licence fee period was 15 January and 15 May. The non-payment by Mr Petty of the account by 30 November 1990 was not due to those reasons; I accept the correctness of the submission of counsel for Penfolds that on no version of the November 1989 conversation could it be suggested that the variation alleged by Mr Petty to have occurred then could have allowed him to decline to pay simply because his bank would not extend sufficient credit to him.
I also accept the correctness of the submission of counsel for Penfolds that Mr Petty had communicated to Penfolds that his bankers were getting nervous or had the "nervous nellies" and that this took the circumstances beyond any of the occasions on which indulgence could reasonably be required pursuant to the alleged variation of the contract.
Mr Petty's case turns upon his assertion that Penfolds refused to supply him in December 1990. There was in my opinion no such refusal. There was simply a statement by Penfolds that Mr Petty's accounts would have to be brought up to date before there could be any further deliveries of goods. On any view of the facts (either Mr Richardson's version of the relevant conversation with Mr Petty on 14 December or Mr Coles conversation that day), the conversation concluded with the representative of Penfolds saying that they would check further and get back to Mr Petty. On Mr Petty's own evidence he went home "not long after" the conversation with Mr Cole. It was not until 20 December that Mr Petty rang Mr Roberts of Penfolds having had "some rather serious domestic hassles" on 17 and 18 December.
On 21 December Mr Richardson offered Mr Petty $15,000 of stock on credit to be delivered on 22 December. The delivery of goods which Mr Petty had hoped to obtain by the lodgement by Mr McDonald of the order on 13 December was requested for 18 December. Even if there was an obligation by Penfolds to supply (which there was not), it was only to supply within a reasonable time of the date requested. Mr Petty said to Mr Richardson on 21 December that the offer by Penfolds was "too little, too late" and he then chose to part company with Penfolds which he did by ceasing to buy from Penfolds after December 1990. Even if, contrary to my findings, Penfolds was obliged to supply stock to Mr Petty on some running basis, plainly this obligation could only be to comply with reasonable requests for stock. The offer of $15,000 of stock by Penfolds on 21 December, which admittedly must carry with it an implied refusal to supply more than that volume of stock in the circumstances as they then prevailed, was in my opinion reasonable in all the circumstances.
On 3 December 1990 Mr Petty had told Mr Leedham that Westpac was getting very nervous (or getting the nervous nellies). This was a serious incident in the relationship between Mr Petty and Penfolds and Mr Leedham reacted to it as such, as he was in my opinion reasonably entitled to do. The fact is that Westpac was becoming nervous with Mr Petty and this was an extremely significant factor in measuring the reasonableness of the obligation of Penfolds to supply stock to Mr Petty. As mentioned earlier, Mr Petty still owed Penfolds approximately $72,000 even after his payment of approximately $68,000 on 13 December. Mr Petty's record of payment with Penfolds was not a good one. He had on at least three occasions failed to adhere to the arrangement made on 23 November 1989.
On no view of the facts could it be said that Penfolds was obliged to supply volumes of stock infinite in terms. The highest that Mr Petty could put his case is that Penfolds was obliged to supply Mr Petty with a reasonable volume of stock. In the months leading up to December 1990 Mr Petty ordered an average of less than $50,000 per month of stock from Penfolds. December is, of course, a heavier month than other months because of the forthcoming Christmas trade; but even accepting this fact, by the time Mr Petty paid the sum of approximately $68,000 on 13 December which was then over the 60 day limit, there was only about one-half of a calender month left. The offer of Penfolds to supply $15,000 worth of stock on credit must be viewed in that light.
In any case as Mr Petty had breached his contractual arrangements with Penfolds by non-payment of the September account within the 59 day period, there was no entitlement on his part to further indulgence from Penfolds for the reasons previously given. Penfolds was entitled to suspend any obligation it might otherwise have had to supply Mr Petty while considering its position. Nor could it be said that Penfolds was under any obligation to supply immediately upon receipt of an order from Mr Petty. As Penfolds actually offered $15,000 worth of stock for delivery four days after the original order date specified by Mr Petty, it could not be said in my opinion that the conduct of Penfolds was unreasonable.
Much was made in argument by counsel for Mr Petty of what was said to be the sharp contrast between Penfolds' treatment of Mr Petty on the one hand and the indulgence shown by it to other customers in relation to credit terms. Evidence was adduced of some of the competitors of Mr Petty. These included Theo's Liquor Market ("Theo's") (including the two Crown of the Hill stores), Figtree Cellars, Brookvale Cellars and Farmer Bros.. Mr Petty was particularly concerned with the credit terms offered by Penfolds to Theo's. For reasons which I give elsewhere, the arrangements between Penfolds and Theo's was quite different from the arrangements made with Mr Petty and for legitimate commercial reasons. Any comparison such as alleged is not in my opinion relevant.

Whether contractual terms or representations for Penfolds to supply Mr Petty on best discount rates.
54. Mr Petty's case is that it was a term of the contract or of the multiplicity of particular contracts (on the assumption, which is correct in my view, that there was no continuing obligation by Penfolds to supply; but rather simply a case of Mr Petty lodging orders from time to time and Penfolds accepting them or not as it wished) by which Penfolds supplied goods ordered by Mr Petty, that it was giving him the best volume discount rates available to retailers of its products. Mr Petty's case is based on the alleged representations made by Ms Gibson to him and to Mr McDonald to which reference has already been made.

The alleged term of the contract pleaded in paragraph 7(b) of the statement of claim is that:

"the prices at which the goods of Penfolds would

be supplied to Mr Petty were the same as the

best terms Penfolds supplied to any of its

customers, being the "300 case" rate, and being

in accordance with a pricing schedule for that

rate".

See also paragraph 11(v) of the statement of claim. Various versions of the representations were given by Mr Petty, Mr McDonald and Ms Gibson, both by affidavit and orally. The versions differed quite a lot and it is difficult to discern any precise term from the various accounts of the relevant conversations. For example, in oral evidence Mr Petty's version of questions asked of Ms Gibson ranged from saying: "whether there were bigger deals" to "was this the best that I could get?" and "am I getting the best deal?" and in his affidavit "Are there any better volume discount rates?" and "Are there any promotional advertising allowances or rebates ... better than I am currently getting?" Ms Gibson said that Mr Petty asked "Can I buy bigger?". Mr McDonald gave the following versions: "Are there any better deals?"; "Am I on the top rate?" and "We were on the best rate".

However, I am satisfied that something along the general lines was said by Ms Gibson to Mr Petty and Mr McDonald from time to time.
It is clear that during conversations between Mr Petty and Mr McDonald or either of them, and Ms Gibson that Mr Petty or Mr McDonald asked her whether Mr Petty had the best deal available to him from Penfolds by way of discount or otherwise and Ms Gibson told him that he was on the best deal.
Statements of this kind do not, in my opinion, sit easily with the notion that they had a contractual or promissory flavour. Indeed, in my opinion even accepting that the words used by Ms Gibson were in fact used, which I am satisfied they were, they were not promissory in character. They were remarks in conversation, commercial puffing that was not intended to have contractual effect: see Savage (JJ) and Sons Pty Limited v Blakeney (1970) 119 CLR 435 at 442. The very fact that the three witnesses concerned (Mr Petty, Mr McDonald and Ms Gibson) varied in their account of what was said by Ms Gibson from time to time is illustrative of this point.
Nor am I persuaded that Mr Petty attributed any contractual significance to the statements made by Ms Gibson. Still less am I persuaded that Ms Gibson and Penfolds thought that any such remarks had any contractual significance. Nor in my opinion could it be successfully argued that the comments by Ms Gibson to Mr Petty and Mr McDonald were in the nature of representations of the kind to which Part V of the Act is directed. They could never have been intended by any participant in a relevant conversation to have been acted upon by Mr Petty and, in fact, in my opinion, they were not acted upon by him. Mr Petty gave evidence that he accepted the statements at their face value and in essence that he would not have continued to trade with Penfolds if the true position was as he later learnt it to be. I do not accept Mr Petty's evidence on this point.
What the statements made by Ms Gibson meant on their reasonable construction, and an interpretation which any reasonable person in Mr Petty's position would have assumed they meant, was simply that Penfolds was giving Mr Petty the best discounts and other support from Penfolds that it gave other retailers of liquor products having businesses of substantially the same size, scale and volume as the business of Mr Petty.
Mr Petty's business grew from a small one to a much larger one and this was reflected in his purchase of Penfolds' stock. The representations were said to have been made from early in 1985 onwards; indeed as early as the time when his purchases of Penfolds' stock were only about $2,500. Retailers such as Theo's and Farmer Bros. or Liquorland had much larger businesses than the business of Mr Petty whether based on purchases of Penfolds' stock or otherwise.
What is in issue in this branch of the case is not the ad hoc rebate paid to retailers such as Figtree Cellars and Brookvale Cellars, as they were rebates of a kind that Mr Petty and other retailers claimed. What is in issue is only the further discounts and extended credit terms alleged in the statement of claim which were summarized earlier.
The position as to discount rates so far as relevant is as follows.
From April 1987 to April 1990 Penfolds allowed a volume discount in respect of sales of specified volumes of certain of its products. The volume discount was 3% on purchases of 65 to 299 cases and 6% in respect of purchases of 300 cases and over. In April 1990, following the Lindemans' acquisition, the volume discounts were altered so that the discount previously available in respect of purchases of 300 cases and over became available only in respect of purchases of 500 cases and over. The change applied from 2 April 1990. Also a discount of 2% applied in respect of purchases of 100 to 249 cases and 4% in respect of purchases of between 250 and 499 cases.
From September to December 1990 the volume discounts were altered by Penfolds so that a discount of 2% was available for purchases of between 65 and 194 cases, 4% for purchases of between 195 and 499 cases and 6% in respect of purchases of 500 cases and over. Penfolds also allowed what were described as level 1 and level 2 discounts. They were also volume related. They were available to retailers and were made available in relation to purchases of the quantity described in trading terms. The discounts were dollar figures, not percentages. The discounts were deducted from the wholesale list prices as reduced where applicable by the volume discount and by Penfolds' promotional allowance. Wholesalers would supply retailers the prescribed amounts of goods to qualify for level 1 and level 2 discounts. The retailers were entitled to claim and often did claim a rebate from Penfolds equivalent to the level 1 and level 2 discounts on the charges made by Penfolds to them. The rebate was claimed by submitting a written claim and documentation evidencing the sale to the retailer.
Another discount known as the "warehousing allowance" was offered in relation to orders of 1,300 cases or more of Penfolds products. 1,300 cases is equivalent to 20 pallets which is the amount of product carried by a fully laden semi-trailer. It is not entirely clear precisely when the warehousing allowance was introduced but it appears to have been in the early 1980s.
Penfolds had many competitors for the supply of retail stock. The competition in all categories of goods and all price segments in which Penfolds carries on business is fierce. There is a very high degree of substitutability between the respective products with competitors within particular price segments of particular categories. The warehousing allowance was offered by Penfolds to particular retailers prior to 1985 on the basis that they regularly purchased in large volumes of not less than a certain volume per month (approximately $40,000 per month) on the condition that all or nearly all goods purchased would be unloaded mechanically. The amount of the warehousing allowance was 3% discount in respect of cask or flagon wine and 2% in respect of bottled wines and coolers. Farmer Brothers received the warehousing allowance in respect of all goods purchased by it from Penfolds from 1985 and Brookvale Cellars and Figtree Cellars from 1986. From May 1987 until April 1990 Penfolds gave Mr Petty the 300 case rate which was varied to the 500 case rate from 1 April 1990. In addition, from April 1990 until December 1990 Penfolds gave Mr Petty the semi-trailer or warehouse discount rate.
Penfolds maintained for part of the hearing that Theo's received an additional 5% discount only from March 1989, an assertion based on a contract note of 8 March 1989 which was a fabricated document. I shall refer to it more fully later when examining Penfolds' defence to Mr Petty's s. 49 case.
Mr Petty's case based on breach of contract with respect to the supply based on best discount rates fails.

Section 52 of the Act
70. I turn then to Mr Petty's case based on alleged contravention of s. 52 of the Act in so far as the supply on best discount rates is involved. As mentioned earlier, the statements made by Ms Gibson to Mr Petty and Mr McDonald upon their reasonable construction mean simply that she was saying to them on behalf of Penfolds that Mr Petty was receiving the best discounts and other support from Penfolds that he could receive as a trader with the volume and scale of a business such as his. The correct test is to determine what the statements made by Ms Gibson would mean to Mr Petty or Mr McDonald when viewed objectively: see Sutton v A J Thompson Pty Limited (In Liquidation) (1987) 73 ALR 233 at 240. For the reasons which I gave earlier when dealing with the case of breach of contract, they were not statements of the kind that can give rise to a contravention of s. 52. Nor were they misleading or deceptive or likely to mislead or deceive.

The representations as pleaded in the statement of claim and as alleged during the course of evidence and argument are not established and the case fails. The statements made by Ms Gibson were not misleading or deceptive.
Although it is not strictly necessary to consider the question whether Mr Petty relied on representations made to him by Ms Gibson I shall nevertheless do so, as it was the subject of evidence and argument. Mr Petty's case on reliance is that he continued to place orders with Penfolds for the supply of goods after the making of the representations by Ms Gibson. He said in his evidence that if he had known that Theo's or any other competitor was given any discount additional to the discount which he was obtaining, he:

"would have realized that the businesses

conducted by me were not commercially viable and

after confronting Penfolds with that apparently

different treatment if I was not given the same

terms then I would have ceased to conduct those

businesses as soon as practicable. I would have

responded in these ways because any extra

discount (and especially an extra discount of

5%) in a competitor would have deprived me of

the ability to establish and carry on a discount

liquor store, especially as in the early period

of such a business one tends to incur

considerable losses ..."

I do not accept this evidence of reliance given by Mr Petty. In particular I do not accept that, if he had realised that better discounts were being obtained by other retailers, unless Penfolds gave him the same treatment he would have ceased to conduct business with it. In my view Mr Petty was determined to enlarge the volume of sales of his businesses by meeting or just beating his competitors, a policy pursued by him from at least November 1987, independently of any alleged reliance on any representations from Penfolds. Mr Petty was determined to pursue this strategy of aggressive discounting.
Also, over the period from May 1987 to December 1990 the amount of money which represents what Mr Petty asserts was the lost discount on actual purchases made by him from Penfolds was $40,870.98, an average of less than $12,000 per annum. I take into account the fact that if Mr Petty's business had expanded considerably by reason of additional discounts being granted to him by Penfolds then the figure representing the additional discounts would be higher than $40,870.98. But I cannot accept that a figure as small as an additional $12,000 per annum would have made any difference in Mr Petty's decision-making process as to whether he would or would not continue to carry on business or as to whether he would or would not pursue his aggressive discounting strategy. Mr Petty himself gave evidence that even a figure of $63,000 was to him "not a considerably large payment".

As to damages that would have been obtained by Mr Petty if he had succeeded in his case of breach of contract or misleading conduct under s. 52 in relation to the best discount rates, I shall briefly state why Mr Petty's claim for damages would be small. During the period from 1987 onwards Mr Petty owed his bank, Westpac, considerable sums and the bank was becoming increasingly concerned about his account. He was not in a position to take advantage of any additional discounts for any substantial increase in the volume of his purchases. If he had sought to increase substantially the volume of his purchases, this would have involved purchasing considerable amount of additional stock from Penfolds and it is more likely than not in my view that he would not have been able to fund such a substantial increase in purchases. He was accumulating losses and his indebtedness, particularly to the bank, was increasingly high.

Section 42 of the Fair Trading Act
76. Nothing additional arises.

Section 46 of the Act
77. Section 46 of the Act prohibits a corporation that has a substantial degree of power in a market from taking advantage of that power for the purpose of deterring or preventing a person from engaging in competitive conduct in that or any other market. Mr Petty alleges that Penfolds took advantage of its power in the wholesale market for relevant alcoholic beverages for the proscribed purpose of deterring or preventing him from engaging in competitive conduct in the relevant retail market for relevant alcoholic beverages.

Penfolds is a manufacturer and wholesaler of wine products; it is not a retailer. Mr Petty is a retailer, not a manufacturer or wholesaler. To determine whether Penfolds had and took advantage of a substantial degree of power it is necessary to look at the market in which Penfolds operated; and that must be the wholesale market for relevant products. If Penfolds had and took advantage of that power it is necessary to ascertain the purpose of its exercise by reference to the market in which Mr Petty carried on business, namely, the retail market for relevant products.
I turn to the retail market in which Mr Petty conducted his business.
The first question that arises is to define the relevant retail market or markets. Mr Petty alleges that there are four relevant product markets and one geographic retail market, namely, the "North Shore" of Sydney, an area in which the Manly Daily, Northern Herald and the North Shore Times newspapers circulate. The Manly Daily and the North Shore Times are weekly newspapers and the Northern Herald is a lift-out supplement published by the Sydney Morning Herald on Thursday of each week. The product markets which Mr Petty initially alleged as the relevant markets are:-

(a) a market for discount retail sales of still wine, champagne and fortified wine;

(b) a market for retail sales of still wine, champagne and fortified wine; and

(c) a market for discount retail sales of champagne;

(d) a market for retail sales of champagne.

Counsel for Mr Petty narrowed the field of the relevant product markets in final address to either a market for discount retail sales of wine or a market for discount retail sales of wine and champagne.
There is no warrant for limiting the product market to a market for the discount sales of products. Apart from the inherent uncertainty in defining a market with reference to the concept of "discount", it is plain that Mr Petty's business strategy was to sell certain alcoholic products at a heavily discounted rate, indeed sometimes at a loss, for the purpose of attracting sales of non-discounted products wherein he envisaged his source of profit would lie. Mr Petty did not apply this policy when he ran his initial liquor store at Double Bay, indeed he did not discount there at all because according to the evidence Double Bay is not an area in which people involve in sales of liquor at a discount. But he built up his business at Roseville by adopting this strategy of discount sales in 1984-1985. He used discounting as a tool to attract large numbers of customers with the intention that they would buy the non-discounted items either in addition to discounted items or in place of them. This strategy was one engaged in by other liquor retailers; it was not the prerogative of Mr Petty nor does he suggest that it was. The submission for counsel for the respondent that the discounting adopted by Mr Petty and other retailers was essentially a strategy, and, in particular was an essential element in the strategy, that products be sold at regular margins in order to return a profit, is correct. The conclusion is not reasonably open on the evidence that retail liquor outlets which engage in discounting comprise a separate and distinct market from other liquor shops.
In my opinion the relevant product market in this case is the market for the retail sale of all alcoholic beverages. All liquor products including still wine, champagne, fortified wine, beer and spirits are commonly sold in one shop by liquor retailers. In the case of Mr Petty's Belrose business it was a mixed business, that is a mixed grocery/supermarket (including initially a butcher and delicatessen) in one part of the store and the liquor products in the other part, though with common check-outs. The whole of Mr Petty's Belrose shop was licensed premises and the liquor products were all placed together by him in that portion of his shop which housed the liquor products.
There is in evidence a substantial body of advertising material which was inserted by Mr Petty and his competitors in various media but principally in the local newspapers to which reference has been made. The advertisements promote a range of liquor products including still wine, champagne, fortified wine, beer and spirits (the wines being advertised as bottled and cask wines). There is no evidence upon which the Court can reliably find that there was a separate market for each of wine, beer and spirits or wine and champagne. It is true that champagne was heavily advertised in the period immediately before Christmas, but this does not assist a conclusion that there was a separate market for champagne. Mr Sinclair gave evidence (which I accept) that the retail market was one for at least all alcoholic beverages. There is some evidence that would place the product market as being wider than all alcoholic beverages so as to include for example non-alcoholic beverages, in particular orange juice and mineral water; but it is not, in my opinion, the correct conclusion to draw from the evidence.
The delineation of the geographic market is more difficult. Penfolds argued in favour of the geographic market as being the whole of the Sydney metropolitan area. Characterization of a market is a question of degree (Queensland Wire Industries Pty Limited v BHP Co Limited (1989) 167 CLR 177 per Dawson J at 199). The geographic boundaries need not be drawn with precision; some amount of "fuzziness" is inevitable: Australian Meat Holdings Pty Limited v Trade Practices Commission (1989) ATPR 40-932 at 50,091, approved by the Full Court of this Court in Singapore Airlines Limited v Taprabone Tours WA Pty Limited (1991) 33 FCR 158 at 178-9. Mr Petty argued for a geographic market being the North Shore of Sydney. Descriptions of parts of Sydney as the North Shore or the north side are incapable of precise definition. Whilst there is an initial attraction about the argument that the relevant geographic market is the northern suburbs of Sydney, it does not ultimately stand the test of scrutiny.
The market is the "area of close competition between firms": Dowling v Dalgety Australia Limited (1992) 106 ALR 75 at 97; the QCMA Case (1976) 25 FLR 169 at 190. The competition is not only competition between Mr Petty and the persons with whom he closely competes; but it extends to competition between those persons and others with whom they closely compete. The influence upon the price of one liquor retailer cannot in my view be accurately determined unless one looks at all persons who compete with each other with respect to the relevant products. There are very large numbers of liquor retailers in the metropolitan area of Sydney, indeed, large numbers in the north side of Sydney itself. The main players in the market are Farmer Bros., Theo's, Liquorland and Mac's and each of them conducts businesses at many sites in Sydney. Theo's operates in Neutral Bay, Cremorne, Harbord, Forestville, West Lindfield, Haberfield, Enfield, Concord West, Hurstville, Carlton and Carlingford. Farmer Bros has liquor stores at Mosman and Waterloo. Liquorland (a Coles-Myer chain) has liquor shops at Frenchs Forest, Manly, Narrabeen, Avalon, Artarmon, Willoughby, St Ives, Parklea, Kensington, Auburn, Caringbah, Baulkham Hills, Eastwood, Leumeah, Canley Vale, Merrylands, Miranda, Guildford and Seaforth.
Many of these stores have home deliveries and conduct mail order businesses. The main companies engaged in the mail order or home delivery wine trade are Farmer Bros. operating from Waterloo; Camperdown Cellars, Cellar Masters and the Australian Wine Co-Op Society Limited operating from Woolloomooloo. Mr Sinclair gave evidence (which I accept) that Farmer Bros.' Waterloo store at relevant times attracted customers from all over Sydney.
In my opinion the relevant geographic market is the Sydney metropolitan area, so far as the market in which Mr Petty carried on business is concerned.
Little attention was devoted by the parties to the definition of the wholesale market in which Penfolds conducts its business; but that is the relevant market where Penfolds must have and exercise a substantial degree of power if contravention of s. 46 is to be decided. Penfolds is a manufacturer and wholesaler of liquor products; whilst it is vertically integrated to some degree, it does not operate in the retail market for liquor goods.
Penfolds and its principal competitors operate nationally; it is artificial to separate an Australia-wide market for alcoholic beverages into geographic or political segments (such as New South Wales or the Australian Capital Territory). The relevant product and geographic market in which Penfolds conducts its business is the market for sale of alcoholic beverages throughout Australia.
For a corporation to contravene s. 46 it must be established that it has a substantial degree of power in a market and that it has used its market power for a proscribed purpose. The term "power" is not defined in the Act but s. 46(4)(a) provides that power means market power. In Queensland Wire Mason CJ and Wilson J said at 189-190:

"Market power can be defined as the ability of a

firm to raise prices above the supply cost

without rivals taking away customers in due

time, supply cost being the minimum cost an

efficient firm would incur in producing the

product ... Courts have often looked to market

share to determine the degree of market power

... But as s. 46(3) ... suggest(s) a large

market share does not necessarily mean that

there is a substantial degree of market power

... A large market share may well be evidence of

market power ... but the ease with which

competitors would be able to enter the market

must also be considered. It is only when for

some reason it is not rational or possible for

new entrants to participate in the market that a

firm can have market power ... Another indicator

of market power ... is vertical integration ...

but its presence does not necessarily mean that

market power exists."

Dawson J at 200 cited with approval the following passage from Kaysen and Turner, Anti Trust Policy (1959):

"A firm possesses market power when it can

behave persistently in a manner different from

the behaviour that a competitive market would

enforce on a firm facing otherwise similar cost

and demand conditions."

In Dowling I stated the major factors to be taken into account in identifying market power, drawing primarily from Queensland Wire and from Arnotts Limited v Trade Practices Commission (1990) 24 FCR 313:-

(a) the ability of a firm to raise prices above the supply cost (the minimum cost an efficient firm would incur in producing the product) without rivals taking away customers in due time;

(b) the extent to which the firm's conduct in the market is constrained by that of competitors or potential competitors;

(c) the market share of the firm, although this alone is not generally determinative of market power;

(d) the existence of vertical integration, although this alone is not generally determinative of market power; and

(e) the extent to which it is rational or possible for new entrants to enter the market - the extent of barriers to entry.

Finally, power held by a firm in a sub-market may be sufficiently substantial for the firm to have the requisite degree of power in a market for the purposes of s. 46: Singapore Airlines v Taprabane.

The principal matter relied upon by Mr Petty to found his assertion that Penfolds has market power is that between May 1987 and December 1990 Penfolds accounted for approximately 40% of the sales in Australia of wine products and Penfolds was Mr Petty's largest supplier. Also Penfolds accounted for more than 40% of all sales in Australia of champagne and more than 75% of Mr Petty's sales of champagne.
Over the period from early 1987 to mid 1991 the Australian wine industry saw a number of mergers and acquisitions among the leading manufacturers of wine products. For example Penfolds acquired the business of Lindemans in about January 1990 and the merger of the two businesses was completed in about April 1990. The businesses of Penfolds and Seppelts Wines Pty Limited were merged in December 1990. Putting to one side for the moment these two mergers, the main competitors of Penfolds among the leading Australian wine manufacturers over that same period were (I rank in descending order of levels of competition) as follows:-

. Lindemans Wines Pty Limited

. Orlando Wines Limited

. Thomas Hardy and Sons Pty Limited

. Berri Renmano

. Wolf Blass Wines Pty Limited

. Mildara Wines Limited

. Seppelts Wines Pty Limited

. Samuel Smith and Son Pty Limited

. Wyndham Estate Wines Limited

. McWilliam's Wines Pty Limited

. Miranda Wines Pty Limited

. Di Bortolli Wines Pty Limited

By the middle of 1991 the main competitors of Penfolds (after the acquisition of Lindemans and Seppelts) were (I rank them in descending levels of competition) the following:

. The Orlando Wyndham Group

. Thomas Hardy and Sons Pty Limited

. Berri Renmano Limited

. Mildara Blass Limited

. Samuel Smith and Son Pty Limited

. McWilliam's Wines Pty Limited

. Di Bortolli Wines Pty Limited

. Miranda Wines Pty Limited

The competition in all categories of alcoholic beverages and all price segments in which Penfolds markets its products is fierce. There is a very high degree of substitutability between the respective products of competitors in the market within particular price segments of particular categories. That substitutability is illustrated by a number of examples in the evidence.
Prior to the amendments made in 1986 to s. 46 of the Act by Act No. 17 of 1986, s. 46 proscribed monopolization. Section 46(1), so far as relevant, provided that a corporation that is in a position substantially to control a market for goods or services shall not take advantage of the power in relation to that market that it has by virtue of being in that position for a proscribed purpose. The section now proscribes misuse of market power by corporations which have a substantial degree of power in a market, a distinctly lower threshold.
The term "substantial" has been considered in a number of cases: see Radio 2UE Sydney Pty Limited v Stereo FM Pty Limited (1982) 62 FLR 437 per Lockhart J at 444 and cases there cited. It is clear that "substantial" in the context of s. 46 is not intended to retain the high degree of market power connoted by the prior reference in s. 46(1) to being in a position substantially to control a market. "Substantial" is used in a relative sense to signify something that is considerable or large. See also Dowling and Eastern Express Pty Limited v General Newspapers Pty Limited (1991) 30 FCR 385 and on appeal (1992) 35 FCR 43.
The evidence does not support a conclusion that there are any relevant barriers to entry which make it not rational or possible for new entrants to enter or participate in the manufacturing or wholesale markets of alcoholic beverages. In the wholesale market, apart from the fairly large number of major wholesalers, there are hundreds of small boutique wineries with a large range of choice throughout Australia.
Also as mentioned earlier, the level of competition between Penfolds and its competitors is fierce. However Penfolds accounted during the relevant time for approximately 40% of the sales in Australia of wine products. It thus had a large market share. Penfolds was vertically integrated to a degree, though had not penetrated the retail market.
Under the old test of s. 46 before the 1986 amendment plainly Penfolds was not in a position substantially to control the market. But in my opinion in the light of all the evidence Penfolds did at relevant times between early 1987 and late 1990 (I ignore the acquisition of Seppelts in December 1990 because the evidence does not establish that any additional market power which that gave Penfolds had a bearing on the issues in this case) have a substantial degree of power in the Australian market for the sale by wholesale of alcoholic beverages.
Next, I shall consider whether Penfolds took advantage of its market power for a proscribed purpose. The term "take advantage" does not involve any notion of hostile or predatory intent: Queensland Wire per Mason CJ and Wilson J at 191. It simply involves the use of the market power; and the question is whether the alleged contravener with a substantial degree of market power has used that power for a proscribed purpose. Mr Petty alleges that Penfolds took advantage of its power in the producers' market for the purpose of deterring or preventing him from engaging in competitive conduct in the retailers' market. Reliance is placed upon the fact that Mr Roberts as State Manager of Penfolds in New South Wales told Ms Gibson in effect that Theo's should be protected from Mr Petty's competitiveness because of the value of Theo's custom to Penfolds. It is also alleged that Mr Richardson gave unsatisfactory explanations in evidence as to the reason for Penfolds' conduct towards Mr Petty in December 1990.
Secondly, it is alleged that Penfolds had the purpose of preventing low priced sales of its commercial range of products apparently to maintain the "price prestige" of the products. Mr Roberts determined the ultimate marketing strategy of Penfolds, and the fact that he did not give evidence to rebut any available inferences as to intention or purpose was relied upon by Mr Petty.
The evidence of Ms Gibson by affidavit is that about two weeks after Penfolds took Mr Petty's order in about July 1990 when there was a special deal on Seaview Cabernet Sauvignon and Seaview Chardonnay lines of wines, Mr Roberts approached her in the office and said to her words to the following effect:

"Theo is going off about Petty doing the Seaview

Cab-Sav and Chardonnay before him. He is not

going to go with the deal. Lay off Petty for a

while. Theo is worth more dollars to us than

Petty is."

In cross-examination Ms Gibson gave substantially the same version of the conversation. I accept her evidence on this point; but it does not advance Mr Petty's case very far. In my opinion there is simply no evidence to suggest that Penfolds refused supply to Mr Petty in December 1990 because of any desire on Penfolds' part to prevent the image of its goods being eroded by excessive price cutting. Reliance cannot be placed upon the conversation between Mr Roberts and Ms Gibson to which I have referred to support any such finding. There is no evidence upon which a conclusion could be founded that any of the Penfolds executives thought in late 1990 that Mr Petty was causing them trouble or embarrassment or damaging the image of Penfolds wines by selling them very cheaply or for any other reason. Although it is true that Mr Roberts did not give evidence and he is the person who had the conversation with Ms Gibson, it was not suggested in cross-examination to any of the executives of Penfolds who gave evidence (Mr Cole, Mr Leedham and Mr Richardson) that Penfolds wished in effect to curry favour with Mr Theodore Karides (who controls Theo's) by disadvantaging Mr Petty. Indeed, only one month earlier (November 1990) Penfolds had given Mr Petty the right to the warehouse allowance off statement and independently of achieving sales of $40,000 a month. This advantage had been given by Mr Richardson on behalf of Penfolds. It is a curious concept that an advantage of this kind was given to Mr Petty in November yet one month later it is said that Penfolds acted in the manner alleged in relation to Mr Petty because of its desire to maintain a harmonious relationship with Theo's. The events of December 1990 are explained essentially because of the late payment of Mr Petty outside the terms of the arrangement that had been made at the luncheon a year earlier.

The conclusion is not open that Penfolds desired to ensure that its products were not undersold and were not discounted and to maintain a particular price prestige. Mr Petty gave no evidence of any pressure upon him by Penfolds with respect to that matter and Mr Sinclair denied it. As to the change in the trading terms made available by Penfolds to Mr Petty following the events of 14 December 1990, the persons involved in the relevant decisions gave evidence on behalf of Penfolds, and I am satisfied, that the purpose of Penfolds in taking the steps it did was to ensure that Mr Petty's account, which it regarded as unsatisfactory, did not fall further into arrears and that a small but nevertheless responsible credit limit would apply to it. What induced Penfolds change of credit policy to Mr Petty was the combination of his payment history and the statement by Mr Petty that his bank manager was getting nervous.
The case under s. 46 fails.

Price Discrimination
108. Section 49 of the Act provides relevantly that a corporation shall not in trade or commerce discriminate between purchasers of goods of like grade and quality in relation to discounts, rebates or credits given in relation to the supply of goods if the discrimination is of such magnitude or is of such a recurring or systematic character that it has or is likely to have the effect of substantially lessening competition in a market for goods, being a market in which the corporation supplies or the purchasers supply goods. The lessening of competition includes preventing or hindering competition (s. 4G).

The discrimination asserted by Mr Petty is said to be twofold. First, Mr Petty relies on the conferring by Penfolds of an additional discount of 5% on purchases by Theo's (including the two Crown of the Hill stores), Figtree Cellars and Brookvale Cellars, over the discount given to Mr Petty until April 1990. Secondly, he bases his case upon an extra discount of 2% on bottles and 3% on casks given after April 1990 to Theo's (including the Crown of the Hill stores), Figtree Cellars, Brookvale Cellars, Farmer Bros. and Lucky's Bi Cheap.
Thirdly, Mr Petty relies on extended credit terms given to Theo's. The case in relation to extended credit terms can be dealt with very briefly. This alleged price discrimination was based essentially upon two documents: an application for credit made by Mr Petty to Penfolds with respect to the Belrose business; and a letter from Penfolds to Mr Karides of Theo's in which Theo's was informed that Penfolds had agreed to give Theo's extended credit on its champagne purchase with respect to an order totalling $438,453.60. Under the extended credit terms $219,226.80 was said to be due on 30 April 1988 and the balance on 31 May 1988. These documents could not, whether read by themselves or in conjunction with all relevant surrounding circumstances, possibly establish a case of unlawful price discrimination under s. 49. The allegation ultimately was only faintly pressed.
As is the case with s. 46 the first question is to determine the relevant market in which it is alleged that the price discrimination occurred.
As mentioned earlier, for s. 46 purposes there are two relevant markets. First, the corporation must have a substantial degree of power in a market which in the case of Penfolds must be the wholesale market for alcoholic beverages. The relevant market for the test of determining whether the corporation has taken advantage of its power for the purpose of deterring or preventing a person from engaging in competitive conduct in that or any other market must be, on the facts of this case, the retail market for alcoholic beverages because it is only that market in which Mr Petty is engaged.
So it is with s. 49. There are two relevant markets in this case. They are the Australian market in which Penfolds supplies its products, namely, the wholesale market for alcoholic beverages; and the market in which Mr Petty operates, namely, the relevant market in the metropolitan area of Sydney for the sale of alcoholic beverages.
The primary case of Mr Petty is that the further discounts of 5% or alternatively between 2% on bottles and 3% on casks over and above the discounts allowed to Mr Petty constitute price discrimination in contravention of s. 49.
It must be established that Penfolds' conduct was of such magnitude or of such a recurring or systematic character that it had or was likely to have the effect of substantially lessening competition in the retail liquor market of the metropolitan area of Sydney.
The warehouse allowance of 2% on bottles and 3% on casks was granted to Theo's (including the Crown of the Hill stores at Forestville, Harbord and West Lindfield), Brookvale Cellars, Figtree Cellars, Farmer Bros. and Lucky's Bi Cheap. The additional discount allowed to Theo's was between 2% and 3%, that is additional to the warehouse allowance. It was not an additional discount of 5% because it was in lieu of the warehouse allowance of 2% on bottles and 3% on casks.
The competition in the relevant market for the retail sale of alcoholic beverages in the Sydney metropolitan area was active and aggressive at all relevant times. In that area there are many hundreds of retail liquor outlets, indeed, there are hundreds of liquor outlets in the northern suburbs of Sydney alone. It is clear from the evidence that discounting of retail outlets was aggressive. Indeed, Mr Petty described his discounting as extremely aggressive; but the discounting of Mr Petty, for example, had little effect on the market as he was unable to risk discounting his goods to a price below his larger rivals, with one or two exceptions.
I am not satisfied that the competitors of Mr Petty, except perhaps on one or two occasions, took notice of his pricing behaviour to the point where it affected their own behaviour. Mr Sinclair (he was a director and shareholder of Farmer Bros and had worked also for Theo's) gave evidence which I accept that he "did not perceive Mr Petty's prices or business as influencing us or our pricing decisions". (He was speaking of Farmer Bros.). He said that the real influences were far broader prevailing conditions in the market. Mr Sinclair said that the disappearance of Mr Petty's business, or, rather the substitution of Mr Petty's business by that run subsequently by Clancys at the same premises in Belrose following the appointment of the receivers to Mr Petty's Belrose business, made no difference to the price setting by Farmer Bros. or the fierce competition in the North Shore area. He said that, if anything, competition became fiercer after Mr Petty left his business.
The evidence cannot support the conclusion that the granting of the additional discounts complained of and the conduct that flowed from it was of such magnitude or of such a recurring or systematic character that it had the relevant effect of substantially lessening competition.
I also accept as correct the submission made by counsel for Penfolds that, if Mr Petty had obtained the "Theo's discount" (i.e. the highest rate of discount obtained by any retailer) on all his purchases of Penfolds' products from May 1987 to December 1990, the total amount of such additional discount would have been in the vicinity of $40,000. I accept also that any effect on competition must be measured by reference to the monetary effect of failure to obtain that discount unless Mr Petty can establish that the obtaining of the discount would have so radically altered his business strategy as to require that an entirely new sales history be postulated. I am not satisfied that if any additional discount of this kind had been granted to Mr Petty, it would have led to any changed business strategy on his part. He always intended to "loss lead" his discounted products and to run his business as a whole at a loss in the first phase of his business strategy.
It also must be remembered (Mr Sinclair agreed with this evidence and I accept it) that if a greater discount had been allowed to a particular retailer including Mr Petty, that would result in a further saving of sales tax and licence fee in respect of the lower price.
The case as to substantial lessening of competition under s. 49 has not been established.

Section 49(2)(b) defence
123. Penfolds sought in the alternative to rely on s. 49(2)(b) by way of defence. That provision states that s. 49(1) does not apply in relation to a discrimination if the discrimination is constituted by the doing of an act in good faith to meet a price or benefit offered by a competitor of the supplier.

Penfolds relied upon a document described as a "Contact Report" dated 8 March 1989 relating to Theo's purporting to issue from Mr Gary Roberts with copies being sent to various officers of Penfolds. Counsel for Mr Petty tendered the contact report but not the first paragraph, which never became part of the evidence. The balance of the document was admitted into evidence. The contact report as admitted into evidence reads as follows:

" CONTACT REPORT

COPY TO: CUSTOMER: THEOS LIQUOR MARKETS G ROBERTS

G PHIPPS CONTACT: THEO KAREDIS J RICHARDSON B MCGRATH PENFOLDS J GULLOTTA CONTACT: GARY ROBERTS G WETTEN P SCHMAALL DATE: 8TH MARCH 1989 MASTER FILE ...

After some lengthy discussions and negotiations it was agreed that Penfolds meet competition and that we would pay Theo 5% over and above our best stated deal. The procedure for doing this would be that Penfolds pass on the warehouse allowance off statement (2% Bottles, 3% casks/flagons) and that Theo would then invoice Penfolds for the difference between the 5% and warehouse allowance and this figure would be paid as a credit on Theo's account.

ACTION:

1. P. Schmall to organise warehouse allowance for Theo's Group of Liquor stores.

2. B. McGrath to follow-up on the 'difference' payment and to credit Theo's account."

Penfolds relied upon the document to support its argument that it granted the additional discount of 5% to Theo's to "meet competition", and thus to make out a defence under s. 49(2)(b).
Counsel for Mr Petty cross-examined various witnesses called by Penfolds in respect of the contact report and submitted that the document was a sham, expressly brought into existence to satisfy the defence under s. 49(2)(b).
The contact report was not part of the documents discovered by Penfolds in its initial affidavit of discovery. Mr Roberts was not called to give evidence. The document carries the plain inference that until 8 March 1989 Theo's was not already receiving the additional 5% discount. But it is plain that Theo's discount of 5% existed from 1985 onwards. The circulation list mentioned in the document was erroneous because Mr Schmaall was included and Mr Leedham excluded. It wrongly refers to Mr Schmaall as organizing the "warehouse allowance" for Theo's, whereas on 8 March 1989 he was in South Australia with no responsibility for or contact with Theo's.
The document is a sham, probably intended to make out a defence for Penfolds under s. 49(2)(b). This is a regrettable aspect of the case and caused me to doubt and to look with great care upon certain of the documents produced by Penfolds in this case. In the end, however, nothing important turns on documents of this suspect kind.
I am not satisfied that the defence has been established, although for reasons already given there is no necessity for the defence because a case of contravention of s. 49 has not been established.
The application is dismissed with costs.

[1993] FCA 615

03 SEPTEMBER 1993