R.T.P. A/Asia Pty Ltd v Airlaw Pty Limited
[1993] FCA 103
•09 MARCH 1993
Re: R.T.P. A/ASIA PTY LTD
And: AIRLAW PTY LIMITED; LEON KEITH ERNST and TAPEBIN PTY LIMITED
No. G233 of 1992
FED No. 103
Numbers of pages - 39
Trade Practices - Practice and Procedure
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Gummow J.(1)
CATCHWORDS
Trade Practices - misleading and deceptive conduct - whether representation made by one party before entry into contract.
Practice and Procedure - equitable remedies - imposition of terms - factors to be taken into account in framing of appropriate term for specific equitable relief.
Trade Practices Act 1974
Doulton Potteries Ltd v Bronotte (1971) 1 NSWLR 591
Pappas v Soulac Pty Ltd (1983) 50 ALR 231
HEARING
SYDNEY, 26 October 1992, 1,2,3,17 February 1993
#DATE 9:3:1993
Counsel and solicitors for Mr J.C. Kelly instructed by RTP
A/Asia Pty Ltd: Owen Hodge and Son.
Counsel and solicitors for Mr Ian Lawry instructed by
Airlaw Pty Limited, Loder and Loder
Tapebin Pty Limited and Mr Ernst:
ORDER
THE COURT:
(1) Orders that, upon there being paid into Court by or on behalf of
the applicant on or before 28 days from the date of these orders the sum of $164,420.90, the first and third respondents deliver to the applicant or as its solicitors may direct by written notice to their solicitors the tools supplied to the third respondent pursuant to the orders the subject of the 7 invoices comprising Exhibit 1 ("the Tools").
(2) Orders that moneys paid into Court as described in Order (1) be
applied in the manner described in the Reasons for Judgment delivered today or as required by further order.
(3) Orders that until the execution of Order (1), or if it not be
executed, then until further order, the first and third respondents by themselves, their servants and agents and the servants and agents of each of them be restrained from (a) using the Tools for anyone other than the applicant and its assignees and (b) from selling, charging, assigning or otherwise dealing with the Tools.
(4) Declares that the contract made 21 May 1991 between the applicant
and the first respondent was not validly terminated by the first respondent by notice dated 23 March 1992.
(5) Orders that the proceeding stand over to a date to be fixed for
further consideration and the giving of further directions, including an order for transfer under s. 86A of the Trade Practices Act 1974, if appropriate.
Note: Settlement and entry of orders is dealt with in Rule 36 of the Federal Court Rules.
JUDGE1
The Nature of the Proceeding
GUMMOW J. The second respondent (Mr Ernst) is a Director of the first respondent ("Airlaw") and the third respondent ("Tapebin"). Maveda Pty Ltd ("Maveda") is another related corporation. The evidence shows that at all material times Mr Ernst was the dominant voice in the affairs of these corporations. Messrs O'Dea and Toomey, the other officers of the companies who had some dealings with Miss Ng, gave short oral evidence. They appeared to be of less forceful character than Mr Ernst. Airlaw traded under the name "P. and G. Industries" from premises at Mortdale, a Sydney suburb.
The applicant ("RTP") also carries on business in Sydney, from the same premises as an associated company, N.G.R. International Pty Ltd ("N.G.R."). Miss K.S. Ng is a Director of RTP. Both companies are controlled by members of her family. N.G.R. imports industrial products including industrial rubber hoses, automotive filters and conveyor belts. In 1990, the turnover from N.G.R.'s Australian operations was about $7m. In the past, the fittings for these products, particularly the industrial rubber hoses, had been imported. The hoses were sold for use in many industries, particularly in farming, irrigation, bush fire fighting, mining and construction.
Miss Ng graduated from the University of New South Wales in 1988 with a Commerce degree. In her studies she specialised in marketing. Miss Ng worked for the Otis Elevator Company in marketing, then in October 1990, Miss Ng took charge of RTP's operations with a view to having produced in Australia specialised industrial fittings for sale to Australian and overseas markets. She sought quotations from Airlaw for the production of those industrial fittings and had various conversations with Mr Ernst. During the period of these negotiations, Miss Ng consulted her husband (then her fiance) Mr Kimball Nunn, an electrical engineer, to help her understand technical points.
Mr Ernst had with others recently purchased Airlaw from a receiver. Operations had commenced on 19 January 1991 as a plastic injection moulder. Tapebin was to be what is described in evidence as the "asset holding company" and also would carry out the manufacturing side of the operation. Mr Ernst had had extensive experience as an engineer. He believed the Australian injection moulding industry to be inefficient and saw a strong opening for Airlaw.
A written contract between Airlaw as supplier and RTP as customer was entered into on 21 May 1991 ("the Contract"). The provenance of the document was with Airlaw rather than RTP, and Mr Ernst played an important part in the drafting. He received limited legal advice in the preparation of the Contract, attention being focussed upon what became cl. 6. It will be necessary to refer later in greater detail to the provisions of the Contract.
As the case was presented at the trial, Airlaw alleged that at a meeting between Miss Ng and Mr Ernst on 21 March 1991 various representations were made which contravened s. 52 of the Trade Practices Act 1974 ("the T.P. Act") and the truth of which was relied upon by Airlaw in entering into the Contract.
The representations are pleaded as follows:
"(a) That RTP was a major supplier of products to large Australian operations specifically B.T.R. Nylex; B.T.R. Industrial, Boral, Borg Warner who required hose fittings to go with RTP's hoses which are supplied to the mining and other industry through those companies.
(b) That RTP's research showed that the annual volume of sales to be achieved for the hose fittings would be in the vicinity of l,700,000.
(c) That RTP and its other trading company in Asia own rubber hose plant in Thailand, plant in the Philippines and a fishing fleet in Malaysia who would purchase the product."
As the case for Airlaw was developed at the trial, it became apparent that representation (b) was crucial to its case and that the others were of secondary importance. In address, counsel for Airlaw concentrated heavily upon representation (b). In that regard, it should be noted that the case was conducted on the footing that representation (b) was "with respect to a future matter", and was taken to be misleading if RTP did not have reasonable grounds for making it; it was for RTP to adduce evidence to the contrary of the proposition that it did not have such reasonable grounds; if it did not do so, it should be deemed not to have had such grounds. This, it was not disputed, is the effect of s. 51A of the T.P. Act.
The performance of the Contract required the use by Airlaw of certain specialised tooling. The tooling has the special characteristics which attract the jurisdiction of equity to grant specific relief in respect of it; see Doulton Potteries Ltd v Bronotte (1971) 1 NSWLR 591. The tooling was manufactured by third parties. A firm styled "Actif Toolcraft" made all of the tools except the strainers. They were made by R. and L. Engineering. Actif Toolcraft rendered 6 invoices for instalment payments between June and December 1991; a total of $118,000 was paid by Tapebin. The strainers cost $16,270. This was paid in October 1991, again by Tapebin. The total thus expended by Tapebin in payments to third parties was $134,270. Some $7,000 also was credited to Maveda, for production of the design drawings.
On 23 May 1991, that is to say two days after Airlaw entered into the Contract with RTP, Airlaw entered into a written contract with Tapebin ("the Tapebin Contract"), which Mr Ernst signed, describing himself therein as Director of Tapebin and Secretary of Airlaw. The Tapebin Contract provided for Tapebin to have the tooling manufactured. The total tooling cost was identified as $140,500 (cl. 6.1) and Airlaw was to pay Tapebin $4,370 monthly for 40 months in payment of that price. Airlaw was to be entitled to delivery of the tools upon payment of those moneys.
In the course of negotiations between Miss Ng and Mr Ernst, he may have said Airlaw wished to "lease" the tools from an associated company. However, I am satisfied on the evidence that the existence of such an agreement as the Tapebin Contract did not become known to RTP until Airlaw's counsel addressed the Court on the first day of the trial, 26 October 1992. From what was then said, it became apparent that it would be necessary to amend the pleadings to introduce Tapebin as a party. This, together with the need for further evidence, necessitated an adjournment of the trial.
The Contract between RTP and Airlaw
12. On several occasions before the Contract was signed, Miss Ng stressed to Mr Ernst the great importance she attached to ownership of the tools by RTP and to their not being used other than to supply RTP. Mr Ernst told her that "as between" the two companies the tooling would be owned by RTP. He was reluctant, and Miss Ng insistent, that the Contract deal specifically with the subjects of ownership and user.
It is appropriate now to refer to certain provisions of the Contract of 21 May between Airlaw and RTP. Clause 3 was headed "Timing". It read as follows:
"(3) The Contract will operate from the date of signing this Contract until its expiry forty eight (48) months from twenty (20) weeks after the date of this Contract or 6,960,000 items, whichever comes first, but after expiry shall continue to govern the terms of supply of the products until formal termination.
Full production capacity is expected to be available at the end of twentieth (20th) week after signing this Contract. The expected program to full production would be: Completion of Tooling Drawings 1 week Commit to Tooling Manufacture 1 week First Tools 2-14 weeks Initial Production 14-16 weeks Full Production 20 weeks."
Clause 4 dealt with unit pricing, there being a base unit price for each category of item which varied with the size of the unit, thus a 3/4 inch nut had a base unit price of 11.4 cents, and 1 inch nut a base unit price of 12.3 cents. Clause 5 was headed "Future Pricing Adjustments". At each 12 months from the date of the Contract, the prices were to be adjusted to take into account costs variations as to material, labour and overheads. Each of these variations was to be detailed and submitted to RTP before any change to the invoice value. Clause 5.2 is of significance. It stated:
"5.2 After the purchase by RTP of 6,960,000 items, the price of all items supplied thereafter under this Contract by
(Airlaw) will reduce by 3.2 cents being the tooling cost amortisation rate per item."
The reduction of 3.2 cents in respect of 6,960,000 items is $222,720. Clause 6.1 specifies the "total tooling cost" as $140,500. The interest component in the $222,720 represents application of a simple interest rate of 14.6% p.a.
It will be recalled that cl. 3 states that full production capacity is expected at the end of the 20th week from signature, and that the Contract will operate until its expiry 48 months from the 20th week, or the production of 6,960,000 items, which ever comes first. When these provisions are treated together, the result is that the difference between the specified total tooling cost of $140,500 and $222,720 represents the interest factor in the delayed recoupment by Airlaw of an amount equal to the specified tooling cost which it would have to outlay to be ready for production at the end of 20 weeks from signing of the Contract; the interest is expressed as a component of the purchase price to be paid by RTP for the items produced by Airlaw using the tooling.
Before the delivery of the tools to RTP under the Contract, RTP was empowered to terminate the Contract by payment to Airlaw of $14,500 (being 10% of the tooling cost), 70% of 58% of the selling price of 6,960,000 items, less the number actually sold, and the "Residual of Tooling not amortised in the selling price of items purchased and paid for by RTP". Clause 11.1 so provided.
What the Contract did not deal with in detail was the quantum of items for which orders would be placed by RTP periodically over the 48 month period. Its terms did not ensure that the tooling cost amortisation rate per item of 3.2 cents was recouped by Airlaw in regular periodic amounts rather than, for example, as a result of small orders being placed in the early months and larger orders being placed only towards the end of the period.
Clause 6.2 made only limited provision in this regard. It looked at the situation at the end of each of the first 4 years, but not from time to time during the course of each of those 4 years.
Clause 6.2 stated:
"6.2 Where RTP have not purchased 1,740,000 items in any of the first four years of the Contract, commencing from a date ten (10) weeks after full production, RTP shall pay to
(Airlaw) at the end of each year calculated from an original date ten (10) weeks after full production, an amount equal to the shortfall in the number of units supplied during the previous year (being the difference between 1,740,000 units and the number of units actually supplied) calculated at 3.2 cents per unit."
This meant, for example, that if RTP ordered no components, it faced an obligation to pay Airlaw $55,680 for each of 4 years, giving a total of $222,720, the sum mentioned above as involving the application of a simple interest rate of 14.6% per annum to the "total tooling cost" of $140,500.
The result was that although the Contract largely had been prepared by Mr Ernst, it contained the seeds of future trouble for Airlaw. Although Airlaw expected that RTP would order around 1.7m. items in each of the 4 years, no provision prevented RTP from placing small orders in one or more of the months within each year. In that regard, cl. 8 obliged RTP to forecast requirements to 3 months' notice with firm requirements to one month minimum notice at any time; dispatch was to be due 4 weeks from firm order by RTP, and Airlaw was to dispatch up to one quarter of RTP's firm monthly requirements in any one working week, within two working days from delivery advice from RTP
The Purported Cancellation
20. In the first months of production RTP placed orders in small quantities. This had the effect of delaying recoupment by Airlaw (or Tapebin) of the tooling cost and of burdening Airlaw with production costs. The first order was dated 8 October 1991 and delivery was made on 22 October. Further orders were placed on 7 and 22 November 1991, 19 December 1991, 10, 11 and 26 February 1992 and 26 March 1992. RTP contends that the final order dated 26 March 1992 was short supplied by Airlaw, and that it had to obtain alternative supplies. The total number of items ordered was 39,175 units. The total price was $4,920. The total yielded by the application of the amortisation rate of 3.2 cents per item was $1,253.60.
On 23 March 1992, Airlaw, under the signature of Mr Ernst, after receiving legal advice, wrote to Miss Ng purporting to "cancel from the beginning" the Contract. In his cross-examination, Mr Ernst agreed that "part of the reason" why Airlaw chose to terminate the Contract was that, in addition to the outstanding tooling costs, "we were losing every time we set the tools" and he believed "that the contract couldn't succeed as drafted". No allegation was made in the letter of breach of contract by RTP. So far as material, the letter read as follows:
"It is with some regret that we must notify you that our Agreement to manufacture fittings for RTP A/sia Pty Ltd is cancelled from the beginning. We had to take this step because the representations made by you both before the Contract was entered into and in the Contract itself were false.
We took advice which was, that the misrepresent-ations, constitute actionable misrepresentation at common law and misleading and deceptive conduct within the meaning of Section 52 of the Trade Practices Act. Those representations made which were false are as follows:
(a) That RTP had a substantial market established, in particular B.T.R. Nylex, for other products which meant that the sales volume to be expected for the fittings would be about 1,500,000 per year. This representation was made on 23rd March, 1991, by Kim Ng and on other occasions.
(b) On 26th April 1991, Kim Ng visited our factory and re-affirmed the quantities and sales. She also said that she expected the business to be greater than expected because of export opportunity with your associated company in Thailand.
(c) Those representations were re-affirmed by the quantities stated in the Contract. We acted on those representations, signed the Contract, and made the capital outlay of $150,000 for the tooling. Many months were spent in the design of the tooling and the fittings.
We are taking advice to decide if we will proceed with action against you for recovery of our substantial losses to date. To minimise those losses, we will now actively seek markets of our own for the products, and if possible, sell the tools to another company."
It will be observed that the representations asserted in this letter do not correspond with those now pressed at the trial and set out earlier in these reasons. For example, the representation alleged in para. (b) of the letter was not relied upon; rather, reliance primarily was placed upon what was said on 21 March 1991. Paragraph (c) of the representations as pleaded, going to the Asian business, is much wider than that advanced in the letter.
As I have indicated, the last purchase order is dated 26 March 1992. On 31 March, Airlaw, again under the signature of Mr Ernst, wrote to Miss Ng stating that notwithstanding the fact that the Contract was "cancelled from the beginning" Airlaw was prepared to supply products from current stock against that purchase order "at the agreed price". The letter continued, in part:
"However, any component which must be manufactured will be charged at a rate which reflects the run quantity. When the existing stock is finished, all goods will be charged at the run quantity rate unless by that time we have other arrangements with other Customers. If at that time, our other arrangements permit, we will sell to you at a to be advised List Price, less a discount which will be related to your purchased quantities."
The present litigation was commenced by application filed by RTP shortly thereafter, on 23 April 1992.
The Issues
23. RTP asserts in its amended statement of claim that there was no valid termination by Airlaw in the letter of 23 March 1992. It seeks declaratory and injunctive relief to protect what it says is its beneficial ownership of the tools. These are central issues in the case.
RTP also maintains a claim to damages against Airlaw under s. 82 of the T.P. Act. It contends that Airlaw, in contravention of s. 52 of the T.P. Act, represented that RTP would own the tooling and that Airlaw would not cause or permit any person to obtain any right, title or interest therein during the course of the supply agreement which was in any way inconsistent with RTP's ownership. These issues were not fully pursued at the trial because as I understood it RTP maintained as its preferred position that the Contract itself contained terms to the effect of these representations. As will become apparent, in my view this position was well taken by RTP.
RTP also claims that the design and tooling drawings used for the manufacture of the tooling were defective and that this led to the production of defective goods for supply to RTP under the Contract. In addition, RTP asserts that "off tool samples" supplied to RTP in September 1991, for use in dealing with prospective customers, were defective. It is also contended that Airlaw was late in delivery pursuant to the purchase order dated 8 October 1991.
I should deal at this stage of these reasons with these latter allegations of breach of legal obligation by Airlaw. These allegations lack any real substance and I would not grant RTP any relief in respect of them. The evidence is that the first order was placed on 8 October and delivery by Airlaw made on 22 October, after considerable efforts had been made by Mr Ernst and his colleagues to fill the order as quickly as practicable. Clause 8.2 provided for dispatch to be due 4 weeks from firm order. The "off tool samples" were not manufactured and supplied under the Contract, but as part of a special arrangement to assist Miss Ng with the provision of samples for use in September on a business trip she was planning to Melbourne. At that time, production capacity, in accordance with the Contract, had not been achieved, as was apparent to all parties.
The position concerning the supply of defective goods is that in late November 1991, Mr Ng received complaints from some customers that nuts which they had received in their recent orders did not fit the male ends. It transpired, as the evidence of Mr Toomey makes clear, that there had been a packaging error by Airlaw involving some 13 faulty nuts. Full replacement was made. There was no defect in the goods manufactured for supply under the Contract. Rather, the 13 nuts had been taken out of the wrong storage box when the relevant order on Airlaw by RTP had been filled by Airlaw. The faulty nuts had been made before the commencement of full manufacture in October, and had not been manufactured from glass filled plastic, as later was the case. When the problem was drawn to his attention by Mr Ng, Mr Toomey went to RTP's warehouse and he isolated the 13 nuts from those held by RTP
There are two cross-applications. In the second, Tapebin seeks a declaration against RTP that it is the owner of the tooling and in the alternative, that RTP is not entitled to possession or use of the tooling until payment of it of the amount expended by Tapebin in procuring the tooling, together with interest.
In the first cross-application, Airlaw raises against RTP the alleged misleading and deceptive conduct to which I have earlier referred. Alleged representation (b) is a central issue in the case. Airlaw seeks a declaration that the Contract has been determined "as and from 23 March 1992" and seeks orders under ss. 82 and 87 of the T.P. Act.
A claim is also made by Airlaw of breach by RTP of cl. 8.1 of the Contract. I have already referred to this provision. It states:
"RTP will produce forecast requirements to (three) 3 months notice and firm requirements to one (1) month minimum notice at any time."
Airlaw also asserts that there is a breach by RTP of cl. 9.2.2. Clause 9 was headed "Packing and Transport". Clause 9.2.2 states:
"Any pallet must be filled to a minimum of 1.5 metres of cardboard boxed items".
The allegation is that in breach of this provision, RTP placed orders of such small quantities that packing in accordance with the Contract was impossible. In respect of the alleged breaches of contract, damages are sought by Airlaw. I find no case made out as regards cl. 9.2.2. It was also submitted that on 23 March 1992, Airlaw had been entitled to terminate the Contract by reason of these breaches, under express powers of termination conferred by cl. 11.3. It will be necessary to return later in these reasons both to cl. 11.3 and to cl. 8.1.
With the consent of the parties, I directed on 1 February 1993 that questions of quantum of pecuniary relief be determined separately and after the determination of other issues of liability in the case. At that later stage so much of the proceeding as concerns issues of assessment of damages may be appropriately remitted to the District Court of New South Wales, pursuant to s. 86A of the T.P. Act. Such an order may be made on this Court's own motion if the statutory criteria are satisfied. Alternatively, these issues might be referred to the Registrar of this Court for mediation; but I would not make such an order for referral unless satisfied that the parties were genuinely seeking to resolve their dispute in this way.
Title to and Possession of the Tools
32. It will be apparent from the outline of the dispute given above that issues of title to and right to possession of the tooling are of particular importance to the parties. There was much debate before me as to the effect of the provisions in that regard which were inserted by cl. 6.3 of the Contract. This states:
"6.3.1 During the continuation of the Contract, (Airlaw) shall use the tools solely for RTP or its Assignees.
6.3.2 As between the parties RTP shall own the tools. 6.3.3 Subject to 6.3.1 until payment to (Airlaw) by RTP of the monies provided by the Contract to be paid,
(Airlaw) shall be entitled to the use and possession of the tools.
6.3.4 Upon payment of the said monies and upon expiry or termination of this Contract RTP shall be entitled to delivery of the tools.
6.3.5 If (Airlaw), being so entitled, terminates this Contract, then, if RTP does not within 28 days of the date of termination, pay (Airlaw) the balance then due in relation to all monies provided by the Contract, the Ownership of them shall, in lieu of those monies, but without further consideration, pass to (Airlaw).
6.3.6 If RTP becomes entitled to delivery of the tools, but (Airlaw) fails after demand to deliver up the tools then RTP shall be entitled to enter the premises of (Airlaw) during normal business hours through its Employees and Agents to remove the tools."
Clause 6.5 also should be noted. This states:
"6.5 (Airlaw) will be responsible for maintenance and repairs of the tools while used in the (Airlaw) factory, so as to ensure that the items so produced shall conform to the design of the products and items in accordance with drawing number E83/91 and E100/91, and the parties hereby agree that this is an essential term of the Contract."
These provisions, and those of cl. 5 and 6, clearly distinguish between (i) ownership, (ii) possession and (iii) use of the tools. Whilst "as between" RTP and Airlaw, the latter was to own the tools, put broadly, Airlaw was to have possession until payment of the total tooling cost by operation of the mechanism for the amortisation rate of 3.2 cents per item over 6,960,000 items.
In the events which have happened, RTP seeks equitable relief to vindicate what it says are its rights to ownership and possession, so as to put to an end to any threat that the tools will be used for production to supply some other business. As I indicated to counsel in the course of addresses, my view, which upon further reflection has not changed, is that the appropriate order in the first instance would not be for a judicial sale by a Court appointed receiver.
Counsel for Airlaw submitted, and I accept, that if this point were reached in my decision, effect would better be given to the equities between the parties by first requiring delivery up of the tools by RTP upon terms which gave effect to what in substance was the equitable lien of the unpaid seller of the tooling. The terms would require payment by RTP of a sum representing the value of the tooling price of $140,500, from what I accept is the commencement of production date of 8 October 1991, until payment, with an allowance for the $1,253.60 already received. Counsel for Airlaw proposed a rate of 12%, that is to say lower than the 14.6% yielded by the contractual provisions dealing with the amortisation rate.
Tapebin and Airlaw
36. What of the relationship between Tapebin and Airlaw? Counsel for those parties, whilst not conceding any point, did not strongly dispute the following propositions. The first is that the provision in cl. 6.3.2 of the Contract that "as between" RTP and Airlaw, RTP should own the tools, carried with it implied obligations upon Airlaw to do all that was reasonably necessary to secure performance of the contract (Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607-8) and not by its own act to put it beyond its power to honour its obligations (O'Keefe v Williams (1910) 11 CLR 171 at 211). In the present case this required Airlaw not to cause or facilitate the obtaining by any third party, such as Tapebin, of any title or interest in or over the tools which was inconsistent with or detracted from the rights of RTP arising by or under the Contract.
I turn to the second proposition. Here, the role of Mr Ernst in the affairs of both Tapebin and Airlaw and the timing of the entry by Airlaw and Tapebin into the Tapebin Contract, two days after the contract between Airlaw and RTP, together with the emphasis Miss Ng had placed during the negotiations with Mr Ernst upon issues of ownership, possession and use of the tooling is of much significance. The proposition is that if, in the circumstances I have outlined, Tapebin were to assert its proprietary rights so as to provide Airlaw with an answer to the claim of RTP (stemming from cl. 6.3.2 of the Contract) that it received the tools upon payment under terms imposed by the Court, Tapebin would be further participating with knowledge in or facilitating the breach by Airlaw of its obligations to RTP (cf Torquay Hotel Co. Ltd v Cousins (1969) 2 Ch 106 at 138). I should add that the entry by Airlaw into the Tapebin Contract was a breach by it of the Contract with RTP
The Meeting of 21 March 1991
38. I turn now to consider the evidence on the question of whether Airlaw has made out its case upon its cross-application that at the meeting between Miss Ng and Mr Ernst on 21 March 1991 he, on behalf of RTP, represented that RTP's research showed the annual volume of sales to be achieved for the hose fittings to be in the vicinity of $1.7m.
In mid-March 1991, Miss Ng telephoned Mr Ernst and told him she would like his company to provide a quotation in relation to the production of some specialised industrial fittings. Arrangements were made for Mr Ernst to come to RTP's offices for further discussions. This meeting took place on 21 March 1991 and lasted for about an hour and a half. Miss Ng told Mr Ernst that there were two companies operating from the office premises, one of which was N.G.R. and the other RTP. She introduced Mr Ernst to her father, who was in another room, and told him that he was Managing Director of N.G.R., whilst she was the National Marketing Director for RTP. She said that the companies were associated.
Miss Ng gave a general description of the business of N.G.R. indicating that it was an importer, amongst other things, of industrial rubber hoses which were used in farming, irrigation, bush fire fighting and other industries. She said that N.G.R.'s hoses were being sold to these industries, and that it was felt that there was an opportunity also to supply fittings to those industries. She stressed the need for a superior product. Mr Ernst responded that with few exceptions Australian manufacturing has had an abysmal track record. He referred to his own business experience.
The meeting of 21 March 1991 was followed in the weeks before the entry into the Contract on 21 May 1991 by a number of conversations and meetings. Several quotations were provided to Miss Ng, technical matters were discussed, and on 24 April 1991 she was provided with a draft contract prepared by Airlaw. Miss Ng said she would not sign it until she obtained her own legal advice. This she did. Revisions to the draft contract followed.
It is clear that at the initial meeting on 21 March 1991 Miss Ng said that she wished to be provided with two quotations. One was to be for fittings, design, drawings and production of the tooling, along with the piece price if RTP was to pay for the tooling forthwith. The second quotation was to be prepared on the basis that Airlaw would bear the cost of the tooling, and RTP would recover the tooling over a 4 to 5 year period. She said that the reasons for seeking this second quotation was reluctance on RTP's part to make a heavy investment by paying for the tooling "up front", with the risk of then discovering that there was a problem in design or otherwise, which meant that RTP was then unable to market the product successfully.
It is also clear that at this meeting Miss Ng told Mr Ernst of various figures as estimates for sales for particular items. Mr Ernst wrote these down. They produced a total of 1.44m. items. This total did not make any allowance for the strainers. Later, early in May, an estimate of 300,000 items was added for the strainers, giving a total of 1.74m. It is that figure which later found its way into cl. 6.2 of the Contract. There were numerous meetings and conversations between the initial conversation in March and entry into the Contract in May.
At the first meeting, there was, in a general way, discussion of the supply of hoses to large Australian operations including B.T.R. Nylex, Boral and Borg Warner, and of the existence of extensive business interests in Asia. The allegation is that Miss Ng directly associated RTP with the supply of products to the large Australian concerns and with the business interests in Asia. Her position is that although in speaking generally she may have used the term "we" without express differentiation on each occasion between N.G.R. and RTP, she had emphasised the existence of the two companies earlier in the meeting and had also drawn attention to the different roles played by her father and herself. I accept Miss Ng's account.
Mr Ernst, as he assimilated various information that was passing between him and Miss Ng during a lengthy meeting, may not have committed any such firm distinction to his memory of what had been said. Nevertheless, I accept that Miss Ng did not put forward the company with which she was concerned, RTP, as the present major supplier of products to large Australian operations nor as owning various business interests in Asia.
Clearly enough, on the findings I have made above as to the means by which the figure of 1.44m. items was arrived at by Mr Ernst, it must follow that there was at the meeting of 21 March 1991 no representation in the terms pleaded as to the annual volume of sales to be achieved for the hose fittings as being in the vicinity of 1.7m. Nevertheless, the explanation for the later increase of 1.44m. to 1.7m. being so clearly apparent, I would not find against Airlaw as to the making of this alleged representation simply for so technical a reason.
The question thus becomes whether it was represented by Miss Ng to Mr Ernst that RTP's research showed the annual volume of sales to be achieved for the hose fittings to be in the vicinity of 1.44m. units.
In Pappas v Soulac Pty Ltd (1983) 50 ALR 231 at 234-5, a case arising under s. 52 of the T.P. Act, Fisher J. referred with approval to a caution earlier administered by Holmes J. That Judge had invited consideration of:
"(H)ow easily and insensibly words of hope or expectation are converted by an interested memory into statements of quality and value when the expectation has been disappointed."
See Denning v Darling 20 NE 107 at 108-9 (1889).
Miss Ng's evidence was that she stressed to Mr Ernst that she did not have a technical background and she was relying upon the design and tooling expertise of Mr Ernst to provide a high quality marketable product which would be superior to what was currently offered in the market. As I have said, she also sought a quotation which would involve Airlaw bearing the immediate cost of the tooling, with RTP to recover it over a 4 to 5 year period. She appreciated that the cost of the tooling would be related to the volume of production using the tooling.
It will be apparent that the form of the alleged representation (b) varies between what was said in Airlaw's letter of 23 March 1992, in the pleading, and by Mr Ernst in oral evidence. The representation, which on its pleading Airlaw seeks to make good, does not include the word "estimate"; rather, it is couched in terms of what was shown by RTP's research, namely that sales to be achieved would be in the vicinity of 1.7m., without any accompanying further qualification or disclaimer.
However, in her affidavit evidence, Miss Ng said that she said to Mr Ernst words to the effect:
"The figures I have given you were only
estimates as we have not been involved in the fittings market before. It is therefore difficult for us to tell what our actual sales will be. They could end up being higher or lower than what we originally estimated."
In his affidavit evidence, Mr Ernst largely admitted the accuracy of that statement. But in his oral evidence in chief, he said:
"She listed off from a sheet of paper that she had quantities and I - and she said to me that 'these quantities are the figures that I believe I can sell in the marketplace and they are these figures', and I wrote them down in my diary."
In his cross-examination, Mr Ernst put it differently again. He said that Miss Ng had used "the words that 'it will be more or less than that but these figures . . . are what I expect to sell'". Moreover, as I have indicated, to the very specific account given by Miss Ng in para. 13 of her affidavit of 21 April 1992 (which included words to the effect that it was difficult for RTP to tell what the actual sales would be) in his affidavit in reply of 7 May 1992 Mr Ernst had not responded with an account in which Miss Ng used the words he later attributed to her in his oral evidence.
In her cross-examination, Miss Ng agreed that as far as she knew Mr Ernst was going to rely on the figures produced by her research. That, she said, was the very reason why she stated them to Mr Ernst as being "estimates". It is true that her later acceptance in May 1991 of the figure of 1.74m. for inclusion in cl. 6.2 is consistent with she herself being confident as to the results of her research. But this does not necessarily suggest that Miss Ng vouched that figure to Mr Ernst in her initial conversation in March.
Later in the cross-examination of Mr Ernst, the following passage appears:
"I am suggesting to you she said to you that because the figures were only estimates and she had not been involved in the fitting market before, it was therefore difficult 'to tell what our actual sales will be'?
- Yes, I think that's - I haven't denied that. And she said that they, referring to actual sales, 'could end up being higher or lower than what we originally estimated'?
- Yes.
Yes. And that was a fact that was known to you as a matter of ordinary common sense in any event was it not?
- Well, of course. I mean -
Yes?
- Yes."
To the extent that it is necessary to do so, I would resolve any conflict in the evidence of Mr Ernst and Mr Ng in favour of Miss Ng. Each witness was cross-examined at some length, though I should in fairness to counsel immediately indicate, not at excessive length. Miss Ng impressed me strongly as a careful witness with a good grasp of what had occurred throughout the various twists and turns of the relationship between RTP and Airlaw, commencing in March 1991 and ending with the institution of the present proceeding just over a year later. On the other hand, Mr Ernst's recall of crucial events appeared to be coloured by his subsequent appreciation that the terms of the Contract were such that, to him, Airlaw had not made a good bargain. Mr Ernst's forthright and somewhat over-confident method of dealing with questions in oral evidence led Mr Ernst into apparent inconsistencies between his affidavit and oral evidence upon, for example, the important subject of what was disclosed to Miss Ng by him as to the method of financing of the tooling and the role of Tapebin (Transcript 2/2/93, pp 65-69).
I conclude that Airlaw has not made out its case that at the meeting of 21 March 1991 Miss Ng, on behalf of RTP, made to Mr Ernst, on behalf of Airlaw, what is pleaded as representation (b), namely that RTP's research showed the annual volume of sales to be achieved for the hose fittings to be in the vicinity of 1.44m. (later adjusted with the figure for the strainers of 300,000). There was mention of numbers which gave a total of 1.44m., but Miss Ng stressed prior lack of involvement in the fittings market and the uncertain nature of the estimates she was providing. These findings are fatal to the cross-application by Airlaw based upon contravention by RTP of s. 52 of the T.P. Act.
Repudiation by Airlaw
56. It follows that Airlaw lacked the necessary legal foundation for the claim in the letter of 23 March 1992 to RTP that the Contract was "cancelled from the beginning" by reason of contravention by RTP of s. 52 of the T.P. Act. In any event, as counsel for RTP emphasised, such cancellation would flow only from the administration by the Court of the remedies provided for by s. 87 of the T.P. Act. This may be compared with the position at general law where in some cases of misrepresentation, in particular fraudulent misrepresentation, the intervention of a court of equity is essentially to confirm, and to make orders in aid of, the rescission by the innocent party of a contract or disposition which is voidable at law: Alati v Kruger (1955) 94 CLR 216 at 223-4.
Airlaw sought to support the notice of "cancellation" given by the letter of 23 March 1992 on the footing that Airlaw had been induced by representation (b) to enter into the Contract. But the findings I have made as to the alleged representation (b) are fatal also to this submission.
It was then submitted that Airlaw was entitled on 23 March 1992 to terminate the Contract pursuant to the express powers conferred by cl. 11.3.2 and 11.2.3 of the Contract. Clause 11.3 states:
"11.3 Either party can terminate this Contract by immediate notice to the other if the other shall -
1. Become permanently incapable of performing this Contract.
2. Commit a significant unrectifiable breach.
3. Persistently breach this Contract.
4. Commit a rectifiable breach but fail to rectify if after reasonable notice.
5. Commit a breach of an essential term of this Contract.
The essential terms of this Contract are:
(a) Material as specified in Clause 7.1.
(b) Maintenance of tools as specified in Clause 6.5
(c) Payments of monies when due as per Clause 10 and Clause 6.2.
(d) Economic Variations as specified in Clause 5.1."
By January 1992, RTP appreciated that the level of orders which had been placed by RTP was not up to Airlaw's hopes or expectations. On 23 January 1992, Messrs Ernst, O'Dea and Toomey attended upon Miss Ng at her office to complain. Mr Ernst said that the 3 month schedule of forecast requirements (something required by cl. 8.1 of the Contract) had not been received and was overdue. He also said that RTP had not met the contract requirements for packaging. This was a reference to cl. 9.2.2 to which I have referred earlier in these reasons. Mr Ernst went on to say that Miss Ng must understand that Airlaw must adjust prices so as to be consistent with very short production runs. Miss Ng said that she would stick to the Contract.
I accept the submission for RTP that if any right to rescind under cl. 11.3 arose, it was available for exercise on 23 January, and that far from exercising the right of rescission, Airlaw affirmed the Contract by proceeding to insist on further performance. On 18 February 1992, Airlaw insisted upon the provision of a forecast schedule in accordance with cl. 8.1. of the Contract. The first forecast schedule was not received until 26 February 1992. In the meantime, orders under the Contract had been placed by RTP on 10, 11 and 26 February 1992 and these were filled by Airlaw.
I conclude that whilst there was a breach by RTP of cl. 8.1 by reason of the failure to supply the forecast, and an action for damages against RTP, no present right of termination under the express power in cl. 11.3 subsisted when Airlaw's letter was written on 23 March 1992. It is, indeed, not surprising that in the letter no right of termination for breach was asserted.
This letter was a clear statement that Airlaw considered itself at liberty to disregard the Contract and in particular at liberty actively to seek its own markets for the products and, if possible, to sell the tools to another company. The tools, during the term of the Contract, were to be used by Airlaw solely for RTP or its assignees and as between the parties the tools were to be owned by RTP (cl. 6.3). These were important provisions, repudiation of which gave rise to the right in RTP to treat the Contract as discharged; see Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 556-7.
Acceptance by RTP
63. Plainly, as I have indicated, there was no valid termination by Airlaw in the letter of 23 March 1992, so that RTP has made out its case for the declaration to that effect which is sought in para. 1A of the amended Application. However, perhaps curiously, RTP takes the position that the Contract remains on foot and accordingly asserts that there was no acceptance by it of the repudiation by Airlaw. It may be this attitude is the result of an imperfect appreciation of the preservation of rights which had arisen in RTP's favour before the repudiation by Airlaw, in accordance with the principles explained by Dixon J. in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-7.
It is often said that it is essentially a matter of fact whether the innocent party has accepted a repudiation. The authorities are collected and analysed by Hill J. in Argy v Blunts and Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112 at 138-41.
It is plain that, despite the assertions by RTP that the Contract is still on foot, the contractual relationship between the parties has utterly broken down. The option or election for the innocent party to refuse to accept a repudiation and to continue to press for performance is, in many circumstances, circumscribed by practical considerations flowing from the nature of the contract; see Greig and Davis, The Law of Contract, p 1439.
This is not the sort of case where the innocent party has refused to accept a repudiation and for its part has continued to tender performance of the continuing requirements imposed upon it by the remaining executory provisions of the Contract; see, for example, White and Carter (Councils) Ltd v McGregor (1962) AC 413. There, the appellants were advertising contractors who had contracted with the respondent to advertise its business in a certain way for 3 years for a fixed sum. The appellants did not accept a repudiation and proceeded to carry out the contract by advertising in the stipulated manner for the 3 year period despite the fact that the respondent persisted throughout with its repudiation. After carrying out the contract on their part, the appellants successfully sued for the fixed sum originally agreed upon.
On 3 September 1992 a Judge of this Court declined to make orders on a motion by Airlaw and Mr Ernst seeking release from certain undertakings given by them to the Court on 23 April 1992; the motion was adjourned to the first day of the trial. Those undertakings, given for the benefit of RTP obliged Airlaw, until further order, not to use the tools for anyone other than RTP or its assignees and not to sell, charge, assign or otherwise deal with them. The result, in a general sense, was to preserve the "status quo" in relation to the tooling. No relevant cross undertakings were given by RTP as to payments by it which were accruing under cl. 6.2. Airlaw was still asserting that the Contract was at an end. There is no evidence that at the end of the first of the 4 years of the Contract, commencing from the date 10 weeks after full production on 8 October 1991, RTP made to Airlaw the payment required by cl. 6.2. Indeed, the contrary is not asserted. Thus, RTP turned its back upon the Contract in a vital respect.
In all the circumstances I conclude that the repudiation by Airlaw is to be treated as having been accepted by October 1992, notwithstanding the assertions in the application to this Court which had been made to institute this litigation on 23 April 1992 that RTP regarded the Contract as still on foot.
Equitable Relief
69. This being the present contractual position between Airlaw and RTP, what are the relevant proprietary rights in the tooling, and what, if any, equitable relief is to be given to give effect to those rights?
I have already referred to the distinction drawn in the Contract between ownership, possession and use of the tools. The contrast between cl. 6.3.1 and cl. 6.3.2 should be noted. The first is directed to user of the tools by Airlaw "during the continuation of the Contract". The following provision is not so limited in time. Clause 6.3.2 states in absolute terms that "As between the parties RTP shall own the tools". This, it is true, is subject to the provisions of cl. 6.3.5. This provides that if, being so entitled, Airlaw terminates the Contract then ownership of the tooling will pass to Airlaw if within 28 days of the date of termination RTP does not pay to Airlaw the balance then due in relation to all moneys provided for in the Contract; the ownership of the tools is to pass in lieu of payment of those moneys. That provision has no application to the events as they have come to pass. Airlaw terminated the Contract but was not entitled to do so.
In my view, at the time of the repudiation of the Contract by Airlaw, the title to the tooling was an accrued right enjoyed by RTP and is one which has survived the subsequent discharge of the Contract, in accordance with the principles explained by Dixon J. in McDonald v Dennys Lascelles supra. Further, the nature of the tooling is such as to attract specific equitable relief in aid of that title and to ensure its delivery to the plaintiff upon satisfaction of any right in the nature of an equitable lien: Doulton Potteries Ltd v Bronotte supra.
As indicated earlier in these reasons, Tapebin, despite its cross-application seeking specific relief in respect of the tooling, cannot advance proprietary rights flowing in its favour from the Tapebin Contract with Airlaw as a means of impeding the enjoyment by RTP of the title it acquired against Airlaw pursuant to the Contract. Any specific relief obtained by RTP should be directed against both Airlaw and Tapebin.
It is of paramount importance that the tooling lie idle and unused for no longer than is necessary. On the other hand, in moulding any equitable relief it is a relevant consideration that cl. 6.3.4 of the Contract provided that RTP was not to be entitled to delivery of the tooling without payment of what might shortly be called the balance outstanding of the tooling cost. As I have earlier indicated, I would accept the submission by counsel for Airlaw that an appropriate term would require RTP to pay a sum representing the value of the tooling price of $140,500 from the commencement of production date of 8 October 1991 until payment, with an allowance for the $1,253.60 already received. I also accept the submission that the terms of specific relief given RTP should oblige it to make such payment within 28 days of the date of the orders.
When these questions of the form of relief were discussed in the course of addresses, counsel for RTP took the point that the imposition upon his client of such a term as to payment for the tooling would, if not qualified, operate inequitably upon his client. This was said to be because in such an order allowance was not made in favour of RTP for the unliquidated damages which it might recover against Airlaw for breach of contract. After all, the Contract had been discharged by reason of the repudiation by Airlaw, and this should be reflected in the working out of the equities.
It will be for RTP to quantify any such claim in unliquidated damages upon the further hearing of the case, issues of pecuniary relief having been put to one side for the present. If the various claims to unliquidated damages (to which I will shortly refer in greater detail but which also include a claim against RTP) are pursued, further time and expense will be caused to the parties. It is of great importance that the issue of ownership and possession of the tooling be resolved forthwith, if this may properly be done.
Any term imposed as the price of equitable relief should reflect the legal or equitable rights and obligations between the parties, and seek to give effect to substantial justice between them. The relationship between payment by RTP for the tooling, and the vindication of its title by the enjoyment of possession was fundamental to the contractual relationship between the parties. However, the circumstance that the party upon whom the term is imposed has, arising out of the same contract, as yet unquantified damages claims against the party for whose benefit the term is imposed, does call for some adjustment in the operation of the term. I also take into account the existence of an unliquidated claim by Airlaw against RTP. But Airlaw has a specific claim on the tooling in the nature of an equitable lien, that is readily quantified, and the existence of the unliquidated claim should not delay the implementing of orders to deal with the disposition of the tooling, so that it no longer lies idle in the hands of Airlaw.
In all the circumstances, the term I have discussed should require payment of the sum in question into Court, to await the outcome of the claims to general damages between the parties and the making of such order for set-off as was then appropriate. But as I have indicated, it is in the interests of all parties that such claims be compromised without further litigation. If that be done, the appropriate order for payment out of the moneys in Court may then be made.
If, by reason of RTP failing to do equity by making the appropriate payment, the orders I have outlined are not implemented, then it will be necessary further to consider the matter. I would entertain an application, after the expiry of the 28 days, by Airlaw for orders as to the sale of the tooling to a third party (with whom RTP and its directors and related corporations had no contract, understanding or arrangement touching the matter) on terms that the proceeds thereof, after allowance of a set-off representing the sum specified for payment in compliance with the terms of the order for specific delivery which I have above described, be paid into Court, to await the outcome of the unliquidated claims between the parties. Allowance would also have to be made for the expenses of conducting the sale. Further delay would necessarily be involved. It would be hoped that it was not necessary to bring the matter back for further consideration in a manner described, and that the initial orders would be efficacious to bring the dispute concerning the tooling to an end.
In the meantime, and in aid of the orders described above, it will be necessary to continue, but now as injunctive relief, which is final rather than interlocutory in character, the undertakings to the Court by Airlaw on 23 April 1992. This relief will be extended to bind not only Airlaw but also Tapebin.
Damages
80. I turn then to consider further the questions that remain as to assessment of damages. RTP has unquantified claims to unliquidated damages for (i) breach of the Contract by the entry by Airlaw into the Tapebin Contract, and (ii) repudiation of the Contract by Airlaw by the letter of 23 March 1992, this having been subsequently accepted by RTP as discharging the Contract.
Airlaw has an unquantified claim for unliquidated damages for a breach by RTP of cl. 8.1 of the Contract by reason of the delay until 26 February 1992 in the supply of the first forecast schedule. This claim, and the RTP claim in respect of entry into the Tapebin Contract, survive the discharge of the Contract by acceptance by RTP of Airlaw's repudiation.
Conclusions
82. There should be orders for declaratory and equitable relief in the terms outlined above. The proceeding should be stood over for directions as to the disposition of the remaining issues. I draw attention to what I have said earlier in these reasons concerning s. 86A of the T.P. Act.
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