Quarry Industries Ltd v Joan Carmel Fazzalari and Nick Vincent Fazzalari No. SCGRG 94/699 Judgment No. 4855 Number of Pages 16 Contract Sale of Goods

[1994] SASC 4855

COURT IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA KING CJ(2) MILLHOUSE(3) AND PERRY(1) JJ

CWDS
Contract - sale of goods - warranty of fitness - Appeal from District Court judgment for damages for breach of contract for the sale of sand and metal mix to a merchant who supplied contractors and others - mix contaminated by impurities which caused pitting of the surface of the cured concrete - held that the trial judge correctly found that the mix was not fit for sale and was unmerchantable. Sale of Goods Act 1895 s141 and s11(3).

Contract - damages for breach - Held that the trial judge correctly found that loss of profits from repeat orders was within the reasonable contemplation of the supplier and provide a proper basis for the award of damages.

MacDonnell East Pty Ltd v McGregor (1936) 56 CLR 50 and Bayview Quarries Pty Ltd v Castley Development Pty Ltd (1963) VR 445 considered.

HRNG ADELAIDE, 7 November 1994 #DATE 8:12:1994

Counsel for appellant:     Mr J Rau

Solicitors for appellant: Johnston Withers

Counsel for respondent:    Mr K McCarthy QC with him Ms K Schulz

Solicitors for respondent: Phillips Fox

ORDER
Appeal and cross-appeal should be allowed.

JUDGE1 PERRY J This is an appeal and cross-appeal arising out of proceedings in the District Court in which the appellant sued the respondents for the balance said to be due on an account relating to the supply by the appellant to the respondents of various quantities of sand and metal.

2. The respondents counterclaimed for damages by reason of the alleged defective quality of some of the sand and metal supplied.

3. The learned trial Judge gave judgment for the appellant against the respondents for $40,669.75, and separately assessed damages payable by the appellant on the counterclaim at $79,056, together with interest of $6,000.

4. The appellant complains that the trial Judge should not have awarded anything on the counterclaim. In their cross-appeal, the respondents assert that the learned trial Judge erred in not setting off the amount awarded on the claim from the amount awarded on the counterclaim. The respondents contend that there should have been one judgment in favour of the respondents for the difference, and that there should have been one order for costs in their favour.

5. At the relevant times, the respondents carried on business under the name Northern Sand and Metal from an address at Salisbury Plains. They sold sand, metal, loam, landscaping requirements, building materials and some hardware.

6. In the early 1980s, the respondents began mixing and selling pre-mixed concrete. At first they obtained the sand and metal separately and mixed it in what was described as a "batching plant". One of the appellant's salesmen suggested that if the respondents obtained their supplies from the appellant the appellant could pre-mix the sand and metal, which would simplify the process. The respondents agreed, and the appellants began supplying the respondents' requirements of sand and metal in a pre-mixed form. Indeed, the appellant became the sole supplier to the respondents of the respondents' sand and metal requirements.

7. In 1991, the respondents began to receive complaints from some of their customers of "popping", that is, pitting of the surface of the cured concrete. The pitting was described by an expert whose report was before the learned trial Judge, as
    "... conical depressions or patches up to 50 mm diameter,
    but averaging 20 mm in diameter and extending to a depth of
    10 mm. Within each conical depression, a mainly white
    weathered aggregate was present but sometimes a red coloured
    aggregate was encountered."

8. The pitting did not affect the structural strength of the concrete, only its appearance.

9. The first complaint was made in about May 1991 with respect to concrete laid at a house owned by Mr Seychelle. When the respondent Mr Fazzalari inspected the work, he agreed that the condition was so unsightly that it should be replaced. A technician employed by the appellant, Mr Georgeson, stated after he had inspected the work that there was an impurity in the mix which had been supplied. The respondents incurred expense in cutting up the concrete so that it could be removed, and in supplying mesh when it was re-laid. The appellant supplied replacement concrete at its expense.

10. Soon after that incident, the respondents' yard manager, the witness Beatrice, noticed that a large load of sand and metal mix which it had received from the appellant appeared to be contaminated with pieces of soft, white stone. He spoke to Georgeson. After examining a quantity of the same material still held by the appellant, Georgeson advised the respondents not to use it. The appellant came and removed the material.

11. Unfortunately, that was not an end of the matter. The appellant continued to supply contaminated material, and the respondents continued to receive complaints from customers who experienced the problem of the popping of the surface of the completed work. Beatrice began to keep a record of the complaints. He recorded some 25 complaints made by customers between receipt of the complaint as to the Seychelle job and the end of 1991. Some of the disgruntled customers complained to the Department of Consumer Affairs.

12. Naturally, the respondents were concerned at the effect the complaints were having on their business. They did not advertise much, only in the Yellow Pages of the telephone book and occasionally in the local paper. Over the years they had built up a clientele largely through word of mouth. It is clear from the evidence that news spread quickly amongst regular customers, who were in the main cement contractors, that there were problems with the mix being supplied by the respondents. Not surprisingly, some of the contractors began to look elsewhere for their supplies.

13. The appellant assisted in rectification of some of the faulty work. The repair work carried out by the appellant was done at a cost of over $87,000 spread amongst a number of jobs. The respondents contributed in time, effort and materials towards rectification. But in presenting their case the respondents did not attempt to offer evidence from which the cost to the respondents of the contribution by them could be quantified.

14. The arrangement between the respondents and the appellant with respect to the appellant's account for materials supplied was that in the first place the appellant would invoice the respondents for particular deliveries. Although the evidence is not entirely clear, it appears that monthly statements would then be furnished by the appellant which would set out the balance due after debiting the various invoices and any arrears and crediting any payments made within the period covered by the statement. The evidence of Mr Berryman, the credit manager of the appellant, was that the appellant's terms were that it expected payment within 30 days of the statement.

15. The period over which the complaints came in from customers extended to early 1992. At some time after that, the respondents took the view that the cost of the impact on their business of the supply by the appellant of faulty aggregate was such that they were entitled to decline to pay any further accounts from the appellant

16. By letter dated 31 March 1992, Mr Minicozzi, solicitor for the respondents, wrote to the manager of the appellant in the following terms:
    "I am instructed that my client has an outstanding debt to
    you of some $40,000.
    As you are aware, my client has a substantial claim against
    Quarry Industries Limited with respect to the defective sand
    and metal mix blended by Quarry Industries Limited for use
    by my client in its concrete batching plant.
    It is anticipated that this counterclaim and set off is well
    in excess of $40,000.
    My client is anxious to resolve:
    a. The payment of the $40,000;
    b. The issue of the defective blend.
    Until such time as that is resolved, my client has no
    intention of paying the $40,000.
    In the event that Quarry Industries Limited sees fit to
    issue proceedings, then those proceedings will be defended
    on the basis that there is a substantial set off and
    counterclaim.
    I invite you to refrain from issuing proceedings and to
    co-operate with my client in resolving the question of the
    defective sand and metal mix."

17. Apparently there were some further negotiations between the parties which did not resolve the matter, and the appellant commenced the proceedings in the District Court by the issue of a summons on 16 October 1992. In its statement of claim, the appellant sought payment of the balance of its account with the respondents, namely, the sum of $40,669.75.

18. In their defence and counterclaim the respondents pleaded that they had relied on the appellant's skill and judgment to supply material suitable for the particular purpose, namely, the preparation of pre-mixed concrete, and asserted that in consequence there was an implied condition that the goods would be reasonably fit for that purpose (Sale of Goods Act 1895 s.14 I). Alternatively, they claimed that the goods were bought by description, and that there was an implied condition that they would be of merchantable quality (s.14 II). They go on to assert that the breaches of condition fell to be treated as breaches of warranty (s.11(3)) and advanced a claim for damages for breach of warranty accordingly. Further, they asserted that they were entitled to a set-off by way of diminution and extinction of the price, pursuant to s.52(1)(a).

19. Although alternative causes of action were pleaded under the Trade Practices Act (1974) (Commonwealth) and the Fair Trading Act (1982), the counterclaim was put forward at the trial as a claim for damages for breach of contract, more particularly for breach of warranty. It is unnecessary to refer to other possible causes of action.

20. The manner in which the respondents pleaded their counterclaim gave rise to difficulties at the hearing, and it is necessary to refer to the final expression of the counterclaim as it appears in the pleading:
    "13
    (4) Consequent upon the supply of defective pre-mixed
    concrete to their customers, the defendants have:
    (a) received numerous complaints from customers and end
    users of the product;
    (b) lost long standing clients;
    (c) sustained injury loss and damage to their reputation and
    otherwise and have been brought into odium and contempt.
    (5) The said loss and damage exceeds $45,000.
    AND THE DEFENDANTS claim:
    1. A declaration pursuant to Section 38 of the District
    Court Act that the plaintiff is liable to the defendants.
    2. Judgment for the defendants for damages to be assessed.
    3. An order that there be an inquiry into the defendants'
    damages.
    4. That the plaintiff pay the defendants' costs of and
    incidental to this action.
    5. Such other or further relief as to the Court seems just."

21. When the case was opened, counsel for the plaintiff advised the learned trial Judge that the counterclaim was in issue but not the claim. He proceeded to tender a bundle of invoices and a statement which supported the quantification of the plaintiff's claim. He did not tender any further evidence.

22. The respondents then assumed the position of dux litis. Counsel for the respondents informed the Court that although the prayer for relief in the statement of claim sought only an "inquiry into the defendants' damages", the trial Judge would be asked to assess them. Counsel for the appellant did not oppose that suggestion, with the result that the trial then proceeded on the footing that if the respondents made out their case on the counterclaim, the learned trial Judge would assess and award damages in accordance with the evidence called at the trial, and not at some later stage.

23. Counsel for the respondents further conceded that the plaintiff's claim, in the amount pleaded, was due, subject only to the respondents' alleged right of set-off.

24. The respondents' counsel then proceeded to call Mr Beatrice and Mr Fazzalari, together with three contractors who had allegedly taken their custom elsewhere after complaints had arisen, and an accountant, Mr Brenton Ellery.

25. The appellant called evidence in reply, namely, the credit manager of the appellant.

26. After hearing the addresses of counsel, a week later the learned trial Judge called counsel before him to say that he was "quite happy to re-open" the case because of his concern as to two issues. They were the issue of mitigation of damages on the part of the respondents, which he felt had not been properly explored at the hearing which had taken place, and as to the nature of the damages pursued by way of the counterclaim, as to which he commented to counsel for the respondents: "The damages you are seeking are really not pleaded".

27. As a result of those intimations by the learned trial Judge, several days later the case was called on again and the hearing re-opened.

28. Discussion then took place as to a proposed amendment to the pleading of the respondents' counterclaim. Counsel for the respondents proffered a proposed amendment to paragraph 13(4) of the counterclaim, which he said was to be inserted between sub-paragraphs (b) and (c). The proposed amendment was as follows:
    "AMENDMENT TO PARA 13(4) OF THE COUNTERCLAIM
    Particulars of Loss of Long Standing Clients
    Three established and regular clients of the defendant
    ceased making purchases from the defendant in consequence of
    which the defendant has lost and will continue to lose
    income as hereinafter set forth.
    NET MONTHLY LOSS AT 33.3% GROSS
    CLIENT                 VALUE OF CALCULATED LOST SALES
    Parafield Concrete
    (from February 1992)             $1,521.00
    S and I Concrete
    (from March 1992)                $1,250.60
    Lodge Plastering/Construction
    (from May 1992)                 $1,690.00"

29. The amendment was not opposed by counsel for the appellant, who said: "My friend does not propose proceeding with, although he does not delete sub-paras (a) and (c), so it really boils down to (b)".

30. Counsel for the respondents did not join issue with that remark.

31. I have already set out the text of paragraph 13(4) of the counterclaim. In the light of the unchallenged observation by counsel for the appellant, and having regard to the terms of the amendment and the course of the trial before and after the amendment, the only counterclaim pursued was the respondents' counterclaim for loss of income from established clients whose business the respondents had lost, and in particular the three clients identified in the amendment.

32. I have taken time to describe the circumstances and terms of the amendment, as it will be seen that the conclusion which I reach as to the effect of the amendment and the manner in which the case proceeded, is relevant to the arguments on the appeal as to the legitimacy of one of the heads of damage eventually assessed by the learned trial Judge.

33. In his reasons for judgment the learned trial Judge made the following findings:
    "There is little doubt on the obligation of a supplier of
    aggregate which the supplier is aware is to be used for the
    manufacture of premix concrete to provide material suitable
    for the readymix concrete product. I accept that the
    impurities which caused the popping do not affect the
    strength of the poured concrete. The problem is the visual
    effect of the numerous pop ups. There could not be a
    complaint in regard to the material which was no doubt
    supplied for areas that would not be observed such as floors
    where the same would be covered by various forms of
    covering.
    However, the plaintiff would have been aware that the very
    point of the defendants' small batching plant was to provide
    small quantities of premix concrete which would be used in
    patios, walkways, kerbing and similar areas where the
    finished concrete would be observed. This base material
    must not contain any impurities leading to a "pop up"
    surface, and if supplied, such material would be totally
    unsatisfactory and it would follow that the work would have
    to be replaced, and, indeed, in many instances this is what
    has happened.
    The plaintiff was obliged to supply material which was fit
    for this purpose, of premix concrete. Clearly it failed in
    its obligation to provide proper material to the
    defendants".

34. He went on to conclude:
    "Consequently the plaintiff is in breach of the duty that it
    owed to the defendants by the continued supply of the faulty
    material and arising from this breach the defendants have
    suffered damage to their business. Clearly this problem was
    known and I have no doubt that the plaintiff should have
    foreseen and contemplated the disastrous results to the
    defendants' small business."

35. Although the learned trial Judge does not refer to the legal basis of the finding of breach of duty, having regard to the manner in which the counterclaim was pleaded and presented, he must be taken to have found that the respondents were entitled to damages for breach of warranty. Where there is an implied condition of fitness for a particular purpose, and the buyer has accepted the goods, "the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty." (Sale of Goods Act s.11(3).)

36. Mr Wells QC of counsel for the appellant contended that although there may have been an implied condition that the sand and metal mix was reasonably fit for the purpose of being used in the preparation of pre-mixed concrete, there was no implied condition of fitness for the purpose of providing concrete for patios, walkways and kerbing as opposed to foundations, where the appearance of the surface was not critical. Because the popping had no effect on structural strength but only on the aesthetic appearance of the surface of the concrete, he argued that there was no breach of any implied condition of fitness.

37. In my opinion, that argument is not sound. The respondents were carrying on a general business of the supply of concrete for whatever applications customers might require. In fact, the evidence of Mr Beatrice was that most of the sales were for concrete driveways and not for foundations. Use of concrete for driveways and other exposed surfaces is a common use, and the appellant must be taken to have appreciated that if the concrete suffered from a defect which gave rise to the popping effect, it would not be fit for sale within the general business conducted by the respondents, and would likewise, in the ordinary sense, cease to be merchantable.

38. The principal argument developed by the appellant was as to damages.

39. Consistently with the amended particulars of loss, at the trial the respondents submitted that they had lost the custom of the three contractors referred to in those particulars, and that they should be awarded damages calculated upon the basis of what they might have been expected to have made by way of profits each month out of orders placed by those customers.

40. The accountant Mr Ellery analysed the history of the sales made by the respondent to each of those three contractors up to the time when they stopped doing business with the respondents. In the case of Parafield Concrete, he considered that it was reasonable to regard the loss of sales as being worth in the order of $4,500 per month from February 1992. On a similar footing, he estimated the loss of sales to S and S Concrete as from March 1992 at $3,700 per month. He was unable to find evidence of any substantial loss of sales to Lodge Plastering. He estimated the loss of profit arising from the loss of sales to Parafield Concrete and S and S Concrete at 28% of the gross sales figures.

41. In the case of Lodge Plastering, the proprietor of that firm was called, a Mr Belperio. Even although Mr Ellery was not able to discern in the respondents' financial records a basis for concluding that there had been any substantial loss as a result of diminution in business from that firm, the learned trial Judge was entitled to accept the evidence of Mr Belperio, which justified the conclusion that had it not been for the supply of faulty aggregate, the respondents might reasonably have expected ongoing orders from that firm of the order of $50,000 to $60,000 per year.

42. The learned trial Judge approached this aspect of the matter on the basis which finds expression in the following passage in his reasons for judgment:
    "The defendants were no doubt in a difficult position. They
    probably had two options. They could simply endeavour to
    contact their former clients and advise them of the action
    that had been taken and continue to trade hoping that with
    the passage of time the problem would be rectified. This
    approach may take many years.
    Alternatively they could involve themselves in a detailed
    advertising and marketing type exercise with the aim of
    securing the return of their former clients and obtain a new
    client base. This course may also involve a review of their
    price structure in an industry which is clearly very
    competitive. I consider that this course was probably the
    preferred option, but it does involve some speculation of
    the quantum of damage.
    The question has to be asked as to what would be a
    reasonable time to allow the defendants to put these various
    efforts on foot to regain the loss suffered to the goodwill
    of the business.
    In all the circumstances I consider a period of say 18
    months would not be unreasonable.
    I accept the evidence of Mr Ellery and proceed to assess on
    that basis.
    Parafield Concrete -
    18 moths x $4,500 at 28%  $22,680
    S and S concrete -
    Trading would have continued probably
    until mid 1992 for a six month period
    consequently the position is
    6 x $3,700 at 28%   6,216
    Mr Belperio gave evidence that current
    trading was in the region of $50,000
    to $60,000 a year although last year
    slightly less. I propose to fix his
    monthly trading at $4,000. The
    position is then 18 x $4,000 at 28%         20,160
   Total $49,056"

43. He went on to consider what he described as the "second head" of the assessment. He said:
    "The second head concerns the balance claim which must
    reflect the efforts of the defendants and their employees to
    retain their business. Mr Beatrice mentioned that the
    defendants had supplied the mesh for Mr Seychelle's job and
    he himself cut the concrete so that it could be removed.
    I mentioned this area of the assessment if speculative
    bearing in mind the evidence concerning the financial
    trading of the business in rather general terms to say the
    least. I have fixed an 18 month period. However in all the
    circumstances I propose to allow a sum of $30,000 under this
    further head of damage.
    Consequently I enter judgment on the counterclaim for the
    defendants for the sum of $79,056.
    I publish my reasons and will hear parties on the nature of
    the judgment on the claim and counterclaim".

44. As to the "second head", the appellants complain in the notice of appeal:
    "8. That in awarding the sum of $30,000 under a second head
    of damage the Learned Trial Judge erred in that:
    8.1 He did not adequately describe in his judgment the
    reason for awarding such damages.
    8.2 The respondents did not claim damages under any second
    head of damage, the only damages claimed by the respondents
    being the value of the loss of sales of the three customers.
    8.3 No evidence was presented to the Court on any other
    ground of damages apart from the value of the loss of sales
    of the three customers."

45. In my opinion, that ground of appeal is made out. The learned trial Judge approached the assessment of that head of damage in a manner which was not put forward by the respondents, and necessarily because of that, not the subject of any response from the appellant.

46. As I have pointed out, while it is true that the respondents alleged that they had "... sustained injury, loss and damage to their reputation and otherwise and have been brought into odium and contempt" (counterclaim para 13(4)(c)), that allegation was not proceeded with at the trial. The amendment which was made when the learned trial Judge re-opened the hearing, together with what was said by counsel at the time, makes it clear that the only counterclaim which the respondents were proceeding with was as to the three named contractors whose business they had allegedly lost. Furthermore, there was a dearth of evidence upon which the learned trial Judge could properly have assessed any other loss.

47. Mr Wells QC advanced a number of criticisms as to the learned trial Judge's allowance of $49,056.

48. He submitted in the first place that damages for loss of commercial reputation are not recoverable in contract other than between banker and a commercial customer. Whether or not that proposition is true, and I do not pause to consider the various authorities which he cited in support of it, this was not an action for damages for loss of commercial reputation in the sense suggested by Mr Wells QC. In essence, it was a claim for loss of profits, the profits in question being those which more than likely would have been derived from a continuance of the supply of concrete by the respondents to the three customers in question.

49. Mr Wells QC went on to contend that even if in some circumstances loss of repeat orders from existing customers might be recoverable, the circumstances in which such a recovery would be allowed by the Courts did not exist in the present case. In particular, he submitted that such damage should be regarded as too remote, in that the respondents did not establish at the trial that at the time the contract was entered into the appellant knew or understood that there was an established client base, and could reasonably have contemplated interference with an established client base if it supplied defective materials.

50. In my opinion, that submission reflects too narrow a view.

51. The appellant should be taken to have been well aware that the respondents were likely to have some customers, at least, who relied on them for ongoing supplies of pre-mix concrete.

52. Furthermore, I doubt that the appellant's contention that there was a single contract rather than a series of contracts is correct. I rather think that there was a separate contract of sale entered into on each occasion that the appellant accepted an order from the respondents.

53. Be that as it may, on the evidence it may safely be inferred that the appellant was well aware of the likely disastrous effect upon the respondents' reputation if over a period of time it supplied faulty materials to the respondents, and it must equally be taken to have been within the reasonable contemplation of the appellant that the persistent supply of faulty materials could well result in a loss of future profits to be derived from repeat orders from existing clients, as well as from a falling off of custom generally.

54. Mr Wells QC further argued that the learned trial Judge erred in awarding damages based, in the case of Parafield Concrete and Belperio, on a projection of loss of profits over a period of 18 months.

55. Consideration of this aspect of the matter overlaps the separate but related question whether the respondents took reasonable steps to mitigate their loss.

56. Mr Wells QC pointed to passages in the evidence of Mr Jorquera, the proprietor of S and S Constructions, and Mr Grennan of Parafield Concrete in which they said that they were not made aware that the respondents had eventually arranged to obtain supplies of sand and metal from another supplier, and in the case of Grennan, that if he had been told that, he would probably have resumed trading with the respondents. But the evidence of Beatrice and Fazzalari was to the contrary, and was to the effect that they had spoken to all their larger customers, and specifically to Grennan, in an unsuccessful attempt to persuade them to resume trading with the respondents. The learned trial Judge was entitled to prefer that evidence.

57. The evidence demonstrated that the supply of contaminated aggregate had, over a period of time until it ceased, a disastrous effect on the respondents' business.

58. They responded by complaining to the appellant, visiting all the complainants, attending to rectification of the problem, ceasing purchases from the appellant and urging customers to return. In my opinion, the appellant failed to discharge the onus upon it of proving that the respondents did not take reasonable steps to mitigate their loss.

59. As to the period over which the loss of profits to be derived from the three customers in question was to be calculated, this fell to be determined by reference to a number of factors. Clearly, it was necessary to recognise that even without the problems in the quality of the aggregate, in a competitive market the three contractors in question may not necessarily have continued to place orders with the respondents indefinitely. Apart from that, circumstances (as in the case of S and S Concrete) may have arisen which had the effect of varying or extinguishing the extent of their requirements for concrete.

60. Once the business was lost, eventually, other customers might have been introduced to take their place. But the evidence points to recessionary pressures and fierce competition which might have made it difficult to restore the lost business.

61. In my opinion, on the whole of the evidence, it was not unreasonable to base the calculation over a period of 18 months.

62. Furthermore, the learned trial Judge having accepted Mr Ellery's evidence, there is no ground for interfering with his adoption of Mr Ellery's estimate of a net profit of 28% to be derived from gross sales.

63. It follows that, in my opinion, no ground has been made out to interfere with the learned trial Judge's assessment of $49,056 as representing a fair estimate of the amount to be allowed by way of loss of profits.

64. In the result, I would allow the appellant's appeal for the purpose of reducing the judgment pronounced on the counterclaim to $49,056. I deal separately with the appeal as to interest.

65. As to the cross-appeal, the first point taken was that the learned trial Judge should have applied s.52(1)(a) of the Sale of Goods Act so as to set off the allowance on the counterclaim from the amount of the appellant's claim, which, as I have indicated, was not in contention.

66. The relevant parts of s.52 of the Sale of Goods Act are:
    "(1) Where there is a breach of warranty by the seller, or
    where the buyer elects or is compelled to treat any breach
    of a condition on the part of the seller as a breach of
    warranty, the buyer is not by reason only of such breach of
    warranty entitled to reject the goods; but he may-
    (a) set up against the seller the breach of warranty in
    diminution or extinction of the price; or
    (b) maintain an action against the seller for damages for
    the breach of warranty.
    (2) The measure of damages for breach of warranty is the
    estimated loss directly and naturally resulting, in the
    ordinary course of events, from the breach of warranty.
    (3) In the case of breach of warranty of quality, such loss
    is prima facie the difference between the value of the goods
    at the time of delivery to the buyer and the value they
    would have had if they had answered to the warranty.
    (4) The fact that the buyer has set up the breach of
    warranty in diminution or extinction of the price does not
    prevent him from maintaining an action for the same breach
    of warranty if he has suffered further damage."

67. For some reason, and notwithstanding the fact that the respondents had pleaded an entitlement to set off under that section of the Sale of Goods Act in their defence and counterclaim, the learned trial Judge did not expressly deal with the matter. Instead, without coming to any conclusion as to the correctness of that contention, he entered separate judgments for the appellant and the respondents on their claim and counterclaim respectively.

68. In my opinion, on a proper construction of s.52, it does not have the effect of entitling the respondents to a set-off. When ss.(1)(a) speaks of an entitlement to "set up against the seller the breach of warranty in diminution or extinction of the price", the price being referred to is the price of the goods with respect to which there is a breach of warranty.

69. The respondents conceded at the trial that they were unable to demonstrate that any of the goods the subject of the appellant's claim on the balance of account for $40,669.75 were contaminated. In any event, in conceding that they did not challenge the appellant's claim, subject to the set-off, they must be taken to have abandoned any such suggestion. In those circumstances, there is no room for the operation of s.52(1)(a).

70. At common law, a counterclaim for damages cannot be set off against a liquidated claim: MacDonnell East Ltd v McGregor (1936) 56 CLR 50; Bayview Quarries Pty Ltd v Castley Development Pty Ltd (1963) VR 445. No claim for an equitable set off was pleaded or argued.

71. The cross-appeal, insofar as it complains of a failure to set off the counterclaim, must be dismissed.

72. It remains to deal with the questions of interest and costs.

73. The learned trial Judge adjourned the question of costs and interest to a later date after delivering his judgment. After hearing counsel on those issues, he awarded a lump sum by way of interest of $6,000 on the judgment in favour of the respondents on the counterclaim. He did not make any order for interest on the separate judgment which he pronounced on the appellant's claim.

74. As to costs, he ordered that both the appellant and the respondents recover from the other their costs on the claim and counterclaim respectively, to be taxed.

75. The view which I have reached as to the application of s.51(1)(a) makes it unnecessary for me to deal with the argument that by reason of the application of that section the appellant should have been found to have failed in its claim.

76. The respondents further argued that the learned trial Judge erred in awarding costs to the appellant, as the respondents admitted the quantum of the appellant's claim in their defence, denying its liability to pay only by reason of the set-off which it claimed to be entitled to make.

77. While it is true that the respondents in one sense admitted the appellant's claim, because of the set-off claimed by the respondents the appellant was obliged to institute proceedings. Neither party was prepared to admit any liability to the other.

78. But at the trial the invoices tendered in support of the appellant's claim against the respondents were tendered as a formality, as the claim was admitted save for the question of a set-off. It seems to me in those circumstances that there were no substantial costs incurred at the trial by reason of the prosecution by the appellant of its claim against the respondents.

79. On the other hand, the respondents' claim against the appellant was resisted in its totality throughout.

80. In my opinion, the proper order as to the costs of the trial would be to allow costs to the appellant against the respondents on the amount of its judgment on the claim, that is, $40,669,75, but that such costs do not include any costs associated with the trial. The respondents were entitled to their costs on the counterclaim, including the costs of the trial.

81. With respect to interest, I do not think that in the circumstances of this case it would be right to award interest separately on the claim and counterclaim. It will have been seen that, on my view of the matter, the appellant should hold its judgment for $40,669.75 on the claim, but the respondents' judgment on the counterclaim would be reduced to $49,056. I would award interest to the respondents on the difference, being approximately $8,500, from early in 1992 to the date of judgment, which is April 1994, a period of about two years. I would adopt an interest rate of 8%. The full calculation should not, however, be allowed, as the losses suffered by the respondents were building up during that period. I would allow a lump sum in lieu of interest of $750.

82. I would allow the appeal for the purpose of reducing the award on the counterclaim to $49,806 inclusive of interest. I would allow the cross-appeal only on the question of costs, as to which I would make an order for costs in the terms indicated above.

JUDGE2 KING CJ In my opinion the appeal and cross-appeal should be allowed.

2. The judgment in the District Court should be varied as follows.

3. There should be judgment for the plaintiff on the claim in the sum of $40,669.75 with costs, such costs however to exclude counsel fees and all other costs associated with the trial. There should be judgment on the counterclaim in the sum of $49,806.00, inclusive of interests, with costs.

4. I agree with the reasons of Perry J.

JUDGE3 MILLHOUSE J I agree with my brother Perry.