Sigma Pharmaceuticals Pty Ltd v Nuc-One Enterprises Pty Ltd

SUPREME COURT OF VICTORIA

CAUSES JURISDICTION Do not Send for Reporting

Not Restricted

F4947

No. 2078 of 1998

SIGMA PHARMACEUTICALS PTY LTD (ACN 007 118 594)	Plaintiff
v
NUC-ONE ENTERPRISES PTY LTD (ACN 070 184 083) VALIENTE TRADING PTY LTD (ACN 079 981 098) LESLIE CRAMPTON	Defendants

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JUDGE:	Gillard J
WHERE HELD:	Melbourne
DATE OF HEARING:	27, 28 and 29 October; 2, 4 and 5 November 1998
DATE OF JUDGMENT:	23 December 1998
CASE MAY BE CITED AS:	Sigma Pharmaceuticals Pty Ltd v. Nuc-One Enterprises Pty Ltd & Ors
MEDIA NEUTRAL CITATION:	[1998] VSC 204

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CONTRACT - Sale of intellectual property - Failure to pay instalment of price - Self‑executing provision after default notice - Breach of agreement - Rescinded: Equitable estoppel - s.52 Trade Practices Act claim - Relief against forfeiture - Claim fails

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APPEARANCES:

Counsel

Solicitors

For the Plaintiff

Mr S. Fajgenbaum, Q.C. with

Mr I.H. Percy

Aitken Walker & Strachan

For the Defendant

Mr P.J. Bick

Corrs Chambers Westgarth

HIS HONOUR:

Reasons

The return of a summons in a proceeding instituted by an originating motion in which the plaintiff seeks declaratory relief against the defendants to the effect that it has not defaulted in making a payment pursuant to an agreement and is not in breach of the agreement, alternatively for an order pursuant to s.87(2)(b) of the Trade Practices Act 1974 varying the agreement and in the alternative relief against forfeiture.

The first defendant for its part has filed a cross summons also seeking declaratory relief to the effect that the plaintiff has assigned back to it the property in products, that the agreement has been terminated and seeking injunctive relief, and damages. It also seeks relief pursuant to s.87 of the Trade Practices Act (C'th) 1974 ("the Act").

The proceeding was commenced in the Commercial List by originating motion on 13 October 1998 as a matter of urgency and directions were given to enable the proceeding to be heard expeditiously on affidavit. The parties co-operated and both proceedings were brought on for hearing on Tuesday 27 October, namely fourteen days after the proceeding was instituted in the list and within one month of the dispute arising between the parties.

The dispute arose as a result of the first defendant giving a notice of default pursuant to an agreement on the 14 September 1998 which expired at midnight on 28 September without the plaintiff seeking to remedy the alleged default within the 14 days' period required by the contract.

Parties

The plaintiff, Sigma Pharmaceuticals Pty Ltd ("the plaintiff") is wholly owned by a well known company Sigma Company Limited. The Sigma group is in the business of manufacturing, marketing and distributing pharmaceutical products exclusively through pharmacies. The plaintiff company is one of its trading arms having an annual turnover of the order of M$91. Mr Elmo Ranjan de Alwis ("de Alwis") is its General Manager and senior executive who reports to an executive in the parent company. De Alwis is responsible for the management of the plaintiff and has authority to make most important decisions and write cheques of any amount on behalf of the plaintiff.

The first defendant, Nuc-One Enterprises Pty Ltd ("Nuc-One") is a company controlled by the third defendant Leslie Crampton who is its only Director. His company is engaged in the business of developing products which employ a "wipe on" process. It developed a sun care product and a self tanning product called "Sun Wipes" which are cloth impregnated with chemical products designed in one case to provide protection for skin against the harmful effects of the sun and in the other, self tanning. Mr Crampton has more recently been involved in developing other wipe type products such as insect repellent wipes and shoe shine wipes.

The second defendant Valiente Trading Pty Ltd ("Valiente") is also a company controlled by the third defendant Leslie Crampton, which was registered in September 1997 for the purpose of selling the suncare and self tanning products through supermarkets and grocery stores. It is engaged in that business.

The third defendant Leslie Crampton ("Crampton") is the sole director of the first two defendants and is the person who is in control of the companies and makes all the important decisions on their behalf.

Nuc-One wholly owns Valiente and Nuc‑One is a trustee company of two trusts.

Basic Facts

The basic facts which led to the dispute and ultimately to the present proceedings can be briefly stated.

Prior to August 1997 Crampton through Nuc-One had developed the sun care and self tanning products and approached the Sigma group with a proposal to licence, make, market and distribute Sun Wipes in Australia and New Zealand. Crampton wanted Sigma to fund the manufacturing and marketing of products.

The Sigma group only sells products to pharmacies and accordingly in the early discussions it was agreed between the parties that since Crampton had approached non pharmacy outlets with his Sun Wipes, Sigma would have to employ a different brand name. It was agreed the brand would be called "Solar Wipes" and these would be sold in pharmacies.

Discussions took place over a period of weeks and on the 11 September 1997 the plaintiff, Nuc-One and Valiente executed an agreement called Heads of Agreement.

The Heads of Agreement gave the right to the plaintiff to purchase the title and rights in the intellectual property relating to the sunscreen and self tan wipes. The agreement also provided that Nuc-One assigned the rights to manage the products to Valiente which in turn assigned to the plaintiff the exclusive rights to market, distribute and sell the products to the pharmacy market. It was agreed that the plaintiff would not sell in non-pharmacy outlets. Valiente agreed to undertake those sales in Australia.

The plaintiff was responsible for the manufacture of both products. The agreement was for one year.

It was a term of the Heads of Agreement that Valiente would pay for the purchases of stock from the plaintiff, thirty days from the statement date.

As a result of the Heads of Agreement the plaintiff organised the manufacturing of the two products, and sold to Valiente the two products to be sold by the latter to non pharmacy outlets in Australia under the names of "Sun Wipes". The plaintiff sold the product to pharmacies under the name of "Solar Wipes". Valiente was obliged to pay for the stock thirty days from the statement date.

Pursuant to the Heads of Agreement during the period up to April 1998 the plaintiff supplied products to Valiente with an invoice value of approximately M$1.2. During the same period the plaintiff sold the "Solar" products valued at approximately M$1.2 to pharmaceutical wholesalers.

By March 1998 the product had been on the market for approximately five months and the plaintiff formed a view that it was a good selling product. Valiente on the other hand had not been successful in selling through non pharmacy outlets and the bulk of the stock which had been provided to it, was unsold. It owed a substantial sum of money to the plaintiff.

In about February 1998 further discussions commenced between the parties with respect to their future relationship and as a result on 3 April 1998 two agreements were executed.

The first was an agreement for sale, called "Agreement for Sale of Sunscreen Wipes and Self Tan Wipes ("the Sale Agreement"), of the property rights in the Sun and Solar Wipes. The parties to the agreement were the plaintiff, Nuc-One and Crampton.

The plaintiff purchased the rights to the products for $365,000 plus the $35,000 paid under the "Heads of Agreement" making a total of $400,000. The purchase price was to be paid by instalments, the third being for $100,000 payable on 11 September 1998.

The other agreement called a Distribution Agreement was made between the plaintiff and Valiente pursuant to which the plaintiff agreed to sell to Valiente the Sun Wipe products and permitted their sale by Valiente to non-pharmacies throughout Australia.

In summary the Sale Agreement involved the sale by Nuc-One of its intellectual property rights in the products to the plaintiff and the Distribution Agreement with Valiente involved the plaintiff supplying products to Valiente and granting to it exclusive rights to distribute the product throughout Australia in outlets other than pharmacies. The latter agreement also provided for payment by Valiente for stock supplied not only prior to the Distribution Agreement but also in respect of any stock supplied thereafter which had the effect of granting Valiente considerable credit and a substantial time to pay in respect of the stock previously supplied.

The Sale Agreement also contained a default provision which in substance gave the right to Nuc-One to deliver a fourteen days' written notice requiring rectification of any default in payment of an instalment and if it was not rectified in that period, the clause went on to provide that the plaintiff assigned back to Nuc-One all the intellectual property.

The plaintiff failed to pay the third instalment of $100,000 on 11 September 1998.

On the 14 September 1998, some three days after the third instalment was due, Nuc‑One through Crampton sent a letter demanding payment and requiring rectification of the default within fourteen days. The document came to the notice of the plaintiff's General Manager de Alwis on the 17 September 1998 but the default was not remedied within the fourteen days' period.

On 30 September 1998 Nuc-One's solicitors wrote a letter to the plaintiff pointing out that the intellectual property had been assigned back to Nuc-One by reason of the failure to remedy the default and demanding payment of money and the performance of a number of acts.

Not surprisingly, this caused considerable consternation in the camp of the plaintiff. On the 9 October 1998 the plaintiff's solicitor tendered a bank cheque for the amount plus costs to the defendants' solicitors who refused to accept it.

Four days later the plaintiff issued its notice of motion and summons seeking relief and the defendant, Nuc-One, also issued a summons claiming relief.

The proceedings

The plaintiff in accordance with the directions made, delivered points of claim which were subsequently amended.

The three defendants delivered points of defence which also have been amended and Nuc‑One seeks relief which is set out in its points of cross-claim.

The plaintiff delivered a reply and defence to the cross-claim. The trial proceeded on affidavit with some deponents being cross-examined.

The plaintiff's claim can be summarised as follows:-

(i) The parties entered into the two agreements on 3 April 1998.

(ii) Pursuant to the Distribution Agreement, Valiente was obliged to pay for stock sold to it by the plaintiff.

(iii) Pursuant to the Sale Agreement, the plaintiff was to pay the third instalment of $100,000 on 11 September 1998.

(iv) That between July and 11 September 1998 the parties had discussions with the view to reaching some arrangement whereby the plaintiff was to set off all or part of the $100,000 due to Nuc-One against moneys which Valiente was obliged to pay the plaintiff pursuant to Distribution Agreement.

(v) During the negotiations, Crampton on behalf of the defendants, led the plaintiff through de Alwis to believe that Nuc-One would not rely upon its strict rights under the agreement.

(vi) Acting upon that assumption and encouraged thereby the plaintiff acted to its detriment by ordering further parts necessary for the manufacturer of the products and not making the payment of $100,000 on 11 September.

(vii) On 14 September 1998 Nuc-One gave the default notice to the plaintiff.

(viii) Between 11 September and 29 September 1998 there were further discussions with a view to reaching some arrangement concerning the set off.

(ix) Again during the said discussions Crampton led the plaintiff to believe that Nuc-One would not enforce its strict rights.

(x) Further, that during the whole of the discussions from July 1998 the defendants represented to the plaintiff that until negotiations concerning the debts were concluded Nuc‑One's strict rights would not be enforced and the plaintiff would not be obliged to pay the $100,000 due on 11 September.

(xi) That relying upon the representations the plaintiff did not make the payment of $100,000.

(xii) The plaintiff asserts it was not in breach of the Sale Agreement, alternatively, Nuc-One is estopped from relying upon its strict legal rights, that Nuc-One was in breach of s.52 of the Trade Practices Act, and accordingly, Nuc‑One is estopped from asserting the plaintiff has assigned back to Nuc-One all the intellectual rights.

(xiii) Further and in the alternative, it is alleged that the plaintiff has been at all times ready, willing and able to perform its obligations and in the circumstances is entitled to relief against forfeiture.

The plaintiff claims relief in the form of declarations to the effect that it is not in breach of the sale agreement, that the defendant, Nuc-One, is estopped from relying upon its strict legal rights and further, is estopped from treating the plaintiff as having assigned back to the first defendant, Nuc-One, all its intellectual property rights. In the alternative an order is sought pursuant to s.87(2)(b) of the Trade Practices Act 1974 varying the Sale Agreement by substituting a later date in clause 2.1.3 of the Sale Agreement which provides the date when the third instalment was to be paid. Alternatively, it seeks an order for relief against forfeiture in respect of the intellectual property.

It is suffice to say at this stage that the defendants dispute the facts, deny that the plaintiff is entitled to the relief it seeks, and assert that Nuc-One at no stage led the plaintiff to believe that it would not seek to enforce its strict rights.

Nuc-One's cross-claim can be summarised as follows:-

(i) The plaintiff breached the Sale Agreement by failing to pay the sum of $100,000, that Nuc-One served a notice dated 14 September 1998 requesting the default be rectified and the plaintiff failed to do so.

(ii) By reason of clause 2.3 of the Sale Agreement the plaintiff has assigned back to Nuc-One all the intellectual property rights.

(iii) That the plaintiff is obliged to perform all necessary steps to enable the intellectual property rights to be assigned back to Nuc-One.

(iv) The plaintiff no longer has any right to the intellectual property and accordingly is not entitled to manufacture, sell etc the products but despite this the plaintiff is manufacturing, selling etc the products.

(v) In the alternative, the Sale Agreement came to an end on the assignment back and as a result Nuc-One has suffered loss and damage being the failure to pay the $100,000 and the loss of the use of the money.

(vi) That the plaintiff repudiated the Sale Agreement by its failure to pay and Nuc-One rescinded the agreement by letter dated 30 September and 2 October 1998.

(vii) The plaintiff is at the moment representing and intends to represent that it is the proprietor of the product and is entitled to supply the product and such representations are false and are in breach of s.52 of the Trade Practices Act.

(viii) It is alleged that as the result of the breach of the Trade Practices Act, Nuc-One has suffered loss and damage.

Nuc-One claims declaratory relief that the plaintiff has assigned back the intellectual property, that the Sale Agreement came to an end on 28 September 1998, and that an injunction be granted restraining the plaintiff from manufacturing, selling etc the product or in any way promoting the product. In addition, Nuc‑One claims damages.

The issues

It is clear from the points of claim, defence and cross-claim that there are four broad questions to be considered and determined.

They are -

A.Was the plaintiff in breach of clause 2.1 of the Sale Agreement in failing to pay the $100,000 due on 11 September 1998, did it fail to rectify the breach and if so what was the consequence?
B.If the plaintiff is in breach of the Sale Agreement, is Nuc-One estopped from relying on that breach and/or was it in breach of s.52 of the Trade Practices Act and if so what are the rights of the plaintiff in respect of the said breach? Is Nuc-One estopped from relying on the breach?
C.If Nuc-One is not estopped from relying upon its strict legal rights, and is not prevented by any relief under the Act from pursuing its legal rights, is the plaintiff entitled to relief against forfeiture?
D.If the plaintiff fails what relief is Nuc-One entitled to?

Breach of Sale Agreement

According to clause 2.1 of the Sale Agreement, Nuc-One sold to the plaintiff all its right, title and interest in the product known as Sun and Solar Wipes and any other branded products of sunscreen or self-tan wipes for the sum of $400,000 to be paid by four instalments. The third instalment was to be paid as follows -

"$100,000 on the 11th day of September 1998".

The plaintiff did not pay the $100,000 on 11 September 1998. Accordingly, it was in breach of its obligation under the Sale Agreement.

Clause 2.3 of the Sale Agreement provided -

"2.3 If Sigma Pharmaceuticals defaults in any of the payments referred to in Clauses 2.1 2.2, and does not rectify that default within 14 days of receipt of a notice from Nuc-One requesting the default be rectified by payment of the appropriate amount then Sigma Pharmaceuticals is deemed to have assigned back to Nuc-One all its right title and interest in the Product, including the Intellectual Property and Patent Application No P09112, and will procure that any other company to which it has subsequently assigned any right in the Product will also assign such right to Nuc-One, and will immediately execute any documents required by Nuc-One to effect such assignments."

The evidence established that at approximately 6.30 p.m. on the evening of 14 September 1998, Crampton, on behalf of Nuc-One, sent a letter by facsimile to the manager of the plaintiff which read -

"14th September 1998
Atn: The General Manager
Sigma Pharmaceuticals Pty. Ltd
19 Merrindale Drive
Victoria
Via Facsimile: 03-9889 2801
cc: Mr Jeremy Johnson c/‑ Corrs Chambers Westgarth
Dear Sir, Re: Sale Agreement between: Sigma/Nuc‑One:

Please be advised that you have not made the payment due on the 11th September 1998 as per above agreement and you have 14 days in which to make payment under the agreement effective from today's date.
Yours faithfully,
(signed - Leslie Crampton)
Leslie Crampton
Director."

Crampton omitted to name the suburb, which was Croydon, but nothing turns on that.

Clause 20 of the agreement provided for the service of notices or demands which could be made by delivery, post or facsimile. If a document was to be sent to the plaintiff it was to be addressed to its Croydon address attention "The General Manager" and clause 20.2 provided that the notice was deemed to have been received -

"20.2.3 in the case of a facsimile transmission, on production of a transmission control report indicating transmission without error."

The evidence revealed that the transmission of the fax on 14 September 1998 proceeded without error and this was accepted by the plaintiff.

On 30 September 1998 the lawyers, Corrs Chambers Westgarth, acting on behalf of Nuc-One, sent a facsimile addressed to "The General Manager" of the plaintiff in which it was noted that the plaintiff had defaulted under the agreement and pursuant to clause 2.3, the plaintiff was deemed to have assigned back to Nuc‑One all its right, title and interest in the intellectual property.

According to the evidence of the general manager of the plaintiff, De Alwis, he was absent from his place of employment on 15 and 16 September and the fax did not come to his attention until 17 September 1998.

However, despite the letter from Nuc-One's solicitors on 30 September 1998, the plaintiff did not offer to pay Nuc-One the sum of $100,000 due and owing until 7 October 1998. On 9 October 1998 a solicitor on behalf of the plaintiff tendered a bank cheque payable to Nuc-One in the sum of $105,000 to the solicitor acting on behalf of Nuc-One employed at Corrs Chambers Westgarth. The said solicitor refused the tender.

I am satisfied that the plaintiff was in breach of the sale agreement and as a result of failing to rectify the default within 14 days of the receipt of a notice from Nuc‑One is deemed to have assigned back to Nuc-One all its right, title and interest in the product including the intellectual property and patent application.

Despite the argument faintly pressed by Mr J. Fajgenbaum, Q.C. who appeared with Mr I. Percy of counsel for the plaintiff, that the notice expired later because it did not come to the attention of de Alwis until 17 September 1998, I am satisfied that the 14 day period expired at midnight on 28 September 1998. De Alwis accepted in cross‑examination that he knew on 29 September that the notice had expired on 28 September. This conclusion follows from clause 20.2 of the Sale Agreement.

The Sale Agreement expressly provided that time was of the essence in respect of all matters in the agreement.

Mr J. Fajgenbaum, Q.C. conceded that the plaintiff was in breach of the agreement and as a result of clause 2.3 the property rights were deemed to have been assigned back to Nuc-One, of course reserving the plaintiff's other grounds for relief.

In my opinion it was a proper concession to make.

Reliance on strict rights

The plaintiff put its case on two bases.

The first, relied upon the principle of the law of promissory estoppel.

The principle of promissory estoppel relied upon by the plaintiff was authoritatively stated by Lord Cairns L.C. in Hughes v. Metropolitan Railway Co (1877) 2 A.C. 439 at 448 when he said -
"It was not argued at your Lordships' Bar, and it could not be argued, that there was any right of a Court of Equity, or any practice of a Court of Equity, to give relief in cases of this kind, by way of mercy, or by way merely of saving property from forfeiture, but it is the first principle upon which all Courts of Equity proceed, that if parties who have entered into definite and distinct terms involving certain legal results - certain penalties or legal forfeiture - afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties. My Lords, I repeat that I attribute to the Appellant no intention here to take advantage of, to lay a trap for, or to lull into false security those with whom he was dealing; but it appears to me that both parties by entering upon the negotiation which they entered upon, made it an inequitable thing that the exact period of six months dating from the month of October should afterwards be measured out as against the Respondents as the period during which the repairs must be executed.
It is pertinent to observe that the application of the principle does not depend upon whether one of the parties had any intention to lull the other side into false security and, that it is the effect of the course of conduct which must be considered.

The principle has been applied in Australia. See Barnes v. Queensland National Bank Ltd (1906) 3 C.L.R. 925.

The plaintiff contends that the principle applies in the present matter and the defendant, Nuc-One, is estopped from relying upon its strict rights in relation to the breach of the Sale Agreement and the effect of the default notice.

The plaintiff also puts its claim on the basis that the defendant, Nuc-One, has indulged in conduct which is in breach of s.52 of the Trade Practices Act by representing that it was prepared to negotiate with the plaintiff with the view to reaching an agreement concerning a set off, of the $100,000 due to be paid to Nuc‑One against the moneys which Valiente was obliged to pay the plaintiff pursuant to the distribution agreement and represented that until such negotiations were concluded, Nuc-One's strict rights would not be enforced or alternatively, would be kept in suspense or in abeyance. That until the negotiations were concluded the plaintiff was not obliged to pay the $100,000. It is said that in making the representations the defendant, Nuc-One, was in breach of s.52 of the Trade Practices Act and insofar as the representations were made with respect to future matters, the defendant, Nuc-One, did not have reasonable grounds for making the representations. It is said that the plaintiff relied upon the representations and hence did not make the payment of $100,000.

The both bases for the relief sought raise a common question, namely, did the defendant, Nuc-One, represent that it would not enforce its strict legal rights during the course of any discussions and thereby created an expectation or understanding in the plaintiff that the rights would not be strictly enforced or suspended or kept in abeyance during the course of the negotiations?

Relief from Forfeiture

The plaintiff claims in the alternative if Nuc-One is entitled to rely upon its rights, that in all the circumstances it should be granted relief from forfeiture.

Facts

Before stating the facts which I find, it is necessary to make a number of observations.

First, in considering the factual issues, the main focus must be on the period between 14 September when the notice of default was served and the expiration of the 14 day period. However, in considering the effect of the events which occurred during that period, the events since 3 April 1998 are relevant. Equally, any conduct post 28 September 1998 which bears upon the factual matters occurring during the relevant period are also relevant. It is therefore necessary to trace the events from the beginning of the relationship between the relevant parties and that is from August 1997. But it is the effect on the plaintiff allegedly created by Nuc-One during the 14 days' period which is the main issue.

Secondly, it is important to bear in mind the main issue between the parties. The plaintiff alleges that Crampton on behalf of the defendants, Nuc-One and Valiente, represented to it they were prepared to negotiate with the plaintiff with the view to reaching some agreement, arrangement or understanding whereby the plaintiff could set off all or part of the $100,000 due to be paid on 11 September to Nuc-One against the moneys which Valiente was or would be obliged to pay the plaintiff and that until such negotiations were concluded Nuc-One's strict rights under the Sale Agreement would not be enforced or would be kept in suspense or held in abeyance. The important issues are whether the assumption was created and if so was it relied upon by the plaintiff?

Thirdly, the resolution of the factual issues between the parties ultimately comes down to the evidence of the two main witnesses, namely, de Alwis and Crampton. This involves making an assessment of their truthfulness, accuracy and reliability as witnesses.

Fourthly, the main areas of factual dispute between de Alwis and Crampton concern the number of discussions had between early July and 29 September 1998 between the two men, whether they discussed the two subjects of Valiente's debt to the plaintiff and the plaintiff's obligation to pay the $100,000 to Nuc-One, whether the topic of setting off the plaintiff's obligations to Nuc-One against Valiente's obligation to the plaintiff and whether Crampton led de Alwis to believe that he was prepared to discuss any such set off. De Alwis alleges that there were many conversations from the beginning of July to 29 September on these matters and that Crampton at no stage stated he was not prepared to consider such an arrangement. For his part Crampton denies any discussion involving a set off arrangement prior to 23 September and then only in a conversation with the plaintiff's commercial manager, Ms Toh, in which he gave no indication that he was interested. He admits there was a discussion on 29 September 1998 concerning the topic but this was after the default period had expired.

The resolution of these marked differences in the facts is important to the determination of the issues in this case.

The fifth observation concerns the credibility of the witnesses.

Two important but minor witnesses were Miss Jackie Toh, the commercial manager of the plaintiff, and Mr Ian Crampton, the sales manager of Valiente and the brother of Crampton. I accept Ms Toh on two occasions, namely a conversation with Crampton concerning the return of stock and at the meeting of 24 September stated facts which were not correct but in the witness box she frankly admitted the errors and the reasons why, which were understandable in the circumstances. I was impressed with the way she gave her evidence. I was also impressed with Ian Crampton.

I am satisfied that they were honest and reliable witnesses and I accept them as accurate witnesses.

De Alwis was in the witness box for three days during which time he was cross‑examined for the majority of that time. I had ample opportunity to observe him as a witness. He is the person responsible for the decisions made by the plaintiff and his conduct is under the spotlight. His conduct, if the plaintiff fails, could be subject to criticism.

He was responsible for the Heads of Agreement. The plaintiff permitted M$1.2 worth of stock to be delivered to Valiente up to 3 April, received a small payment, and had no security for the debt. De Alwis knew that Valiente did not have funds to pay for the stock. There was no real effort on the part of the plaintiff to chase the debt prior to 3 April 1998. De Alwis knew Valiente had spent money attempting to sell the product and knew that its sales efforts had not been successful. He was the one responsible for negotiations in respect of the Sale Agreement and agreed to the self‑executing term upon failure of the plaintiff to pay an instalment after the expiration of a default period. He was also responsible for the negotiations leading to the execution of the Distribution agreement which on one view shows the plaintiff extending substantial credit to Valiente with respect to stock previously supplied, and obliged to supply stock in circumstances where there was a deferred payment for past stock.

He was the one who made the decision not to pay the instalment and he was the one who ignored the default notice.

De Alwis had very strong motives for tailoring his evidence if for no other reason than to protect his position as the senior executive of the plaintiff and to avoid criticism of his role.

Subject to two matters I accept him as a truthful, honest and accurate witness. In the witness box he demonstrated a desire to tell the court the truth. The two matters I have reservations about concerned the stock recall in July 1998 and his understanding of what was said about the attitude of the directors of the parent company of the plaintiff at a meeting on 24 September 1998.

In his affidavit de Alwis admitted that the request to Crampton to return stock was to reduce the indebtedness of Valiente. Crampton, in his affidavit, said he was told by Ms Toh that the reason for the request to return stock was to fulfil an export order. Whilst that had some basis I am satisfied that the alleged South African orders were used as an excuse. In his oral evidence De Alwis also put forward that reason for requesting the return of stock. I think the real reason was stated in his affidavit. I sense he distorted his evidence to protect Ms Toh who frankly conceded that she did not want to tell Crampton the real reason because the stock would not have been returned. In the scheme of things the facts concerning the return of stock do not loom large in this case.

The second matter concerns the attitude of the Board of the plaintiff's parent company which was discussed at the meeting held on 24 September. I accept the evidence of Ian Crampton and Ms Toh in relation to this. De Alwis put a gloss on the evidence suggesting that whilst the topic was raised, it was not raised in the context as put by the other two witnesses. I suspect that the change in the evidence comes more from a poor memory than any deliberate intention to mislead the court. Again it is a fact of little moment.

Overall, I was impressed by Mr de Alwis as a witness.

The other main witness was Leslie Crampton. He also has a motive for distorting the truth. If his companies are successful in this litigation then Nuc‑One will benefit handsomely. Whilst he gave evidence that he is not a beneficiary of any of the trusts administered by Nuc-One, the fact is he is prepared to gamble for a substantial windfall to Nuc‑One. I am satisfied on the evidence that he was fully aware on 14 September 1998 of the effect of a failure by the plaintiff to pay the instalment within the 14 days' period and that if the plaintiff did default Nuc-One would be in a very strong position to pressure the plaintiff and the evidence clearly demonstrates that. Evidence was adduced without objection that after 30 September 1998 he was prepared to accept M$3 to settle his companies' claims. The offer was rejected.

In a number of aspects he was an unsatisfactory witness. His evidence concerning Valiente placing an order with the manufacturer with Sigma's consent for the purchase of components to manufacture other products was untrue and his explanation in relation to these matters was to say the least shuffling, evasive and prevaricating. Further his evidence in relation to the reliance upon $20,000 loan provided by his brother and sister‑in‑law at a later time was also incorrect. It is hard to believe given the short period that elapsed between the happening of the events and the court case he could be mistaken about the use of the loan obtained on 17 June from his brother.

He was cross-examined at some length as to the sale of stock by Valiente and was requested to provide figures in relation to stock movements and receipt of moneys. He was requested a number of times to produce records. His evidence in regard to this topic was again shuffling, evasive and prevaricating. He never produced satisfactory documentation.

His evidence concerning the reason why he sent documents to his solicitor from about 13 July onwards was unbelievable. He asserted that he sent the documents to Mr Johnson of Corrs purely to keep him informed and in effect as a convenient post box. I do not accept his evidence that as at 14 September 1998 Crampton was forwarding documents to his solicitors purely and simply for information. His evidence concerning approaching Westpac for financial accommodation and seeking a letter from the plaintiff is contradictory and uncertain with respect to timing and demonstrates an unreliability of memory and a propensity to guess.

I do not accept his evidence that he did not discuss the question of debts and possible set off with de Alwis prior to 11 September 1998. I reach this conclusion not only on the way Crampton gave his evidence but the probabilities inexorably lead to the conclusion that the topic was discussed once Crampton told de Alwis in July that Valiente's financial position was precarious.

Insofar as his evidence is inconsistent with the evidence of de Alwis, Ms Toh and his brother Ian, I reject it.

As stated, while the focus is on the period 14 to 28 September 1998 it is necessary to briefly touch on the facts up to 3 April 1998 and thereafter in more detail.

In 1996 Crampton developed the Sun Wipes and in the following year obtained a favourable response to the product from grocery retailers.

In August 1997 Crampton approached Sigma with a proposal to market the Sun Wipes in Australia and New Zealand and initially dealt with Dr Francis Guyett who was the business development manager. It was appreciated that since Crampton wished to sell the product to grocery chains and Sigma only sold to pharmacies that Sigma would have to sell the product under another name, agreeing the product would be known as Solar Wipes.

The negotiations commenced and at that stage Crampton was negotiating without lawyers. I am satisfied that Crampton is and was an experienced businessman who was more than capable of looking after his own interests and obtaining a bargain to his satisfaction.

On 5 September 1997 Valiente was incorporated as a $2 company without assets or funds. I accept the evidence of de Alwis that he was not aware of its financial set up but he did know from the commencement of their relationship that Valiente had little to no funds.

In early September de Alwis became involved in the negotiations, and eventually the parties signed the Heads of Agreement on 11 September 1997.

The parties were Nuc-One, Valiente and the plaintiff.

It is unnecessary to discuss the terms of the Heads of Agreement in any detail.

The agreement provided a first right of refusal to the plaintiff to purchase the title rights and intellectual property of the Sun Wipes products for the sum of $400,000, payable by instalments. The plaintiff agreed to pay an advance of $35,000 at that time.

The agreement further provided that Nuc-One gave the rights to manage the products to Valiente which in turn assigned the exclusive rights to the plaintiff.

The agreement further provided for the plaintiff to purchase the manufactured product and on-sell it to Valiente at a certain price. One important provision was -

"Valiente will pay for the purchases from 30 days from the Statement date."

This is to be contrasted with Valiente's obligation under the later agreement.

The plaintiff was obliged to pay Valiente a royalty fee of 4% of net sales by the wholesalers. These royalties were to be paid 60 days after the month in which the sales were made. Sigma was to pay a minimum royalty of $50,000 for the 12 months' period.

The agreement was for a term of 12 calendar months.

Between 31 August 1997 and 22 February 1998 the plaintiffs supplied goods to Valiente having an invoice value of M$1.2. In the same period the plaintiff was involved in substantial promotional costs. Valiente also spent money on promotion.

The plaintiff had substantial success with selling its product to the pharmaceutical wholesalers and by April 1998 sold M$1.2. However, in the same period Valiente was not so successful.

As at 3 March 1998 Valiente owed $1,136,924 to the plaintiff for stock and supplies. By the beginning of April 1998 Valiente had only sold about one-third of its expected sales and had paid only $60,000 to the plaintiff.

The plaintiff was pleased with the sale of the products and in February 1998 made a decision to exercise its right to purchase the title, rights, and intellectual property to the products.

Between 18 February 1998 to 3 April 1998 the parties negotiated. The plaintiff was responsible for drafting the two agreements and de Alwis was responsible for the agreement on behalf of the plaintiff. Alltold there were about eight drafts prepared.

For most of the time Crampton negotiated the deal himself. He was competent, able to look after his interests and secured to his companies excellent bargains from their point of view. At the end of March he retained solicitors Corrs Chambers Westgarth who on 31 March wrote a letter to the plaintiff's solicitors which is of significance. I will return to that letter in a moment.

It is necessary to go back in time to another significant event.

Early in negotiations shortly before 18 February 1998 Crampton demanded there be a default provision in the event of non‑payment in the Sale Agreement. At this stage he was negotiating without the assistance of any lawyers. De Alwis in consultation with the solicitors acting for the plaintiff Messrs Aitken Walker & Strachan, prepared a draft which was sent on 18 February to Crampton for his approval. Clause 2.2 of the draft was in a similar form to the final version in the agreement. Its significance lies in the fact that Crampton demanded that if there was a default which was not remedied then the plaintiff was deemed to have assigned back to Nuc-One all the proprietary interest in the product. It is pertinent to observe that Crampton demanded it early in the negotiations, de Alwis approved the form and it became part of the agreement. It was a term which was the subject of discussion and agreement.

Crampton retained his lawyers because he was getting sick of the fact that there were many drafts and he believed that the plaintiff was trying to vary the letter and spirit of the Heads of Agreement. Another significant matter occurred in the course of negotiations.

In a draft prepared at the end of March the plaintiff included a term which provided for a set off, of the money due and owing by Valiente against money that the plaintiff was obliged to pay Nuc-One by instalments for the proprietary rights to the products.

Crampton was not happy with the suggestion and retained Corrs Chambers Westgarth.

On 31 March 1998 the firm wrote a letter to Aitken Walker & Strachan and it contained, inter alia -

"4. The most recent draft Sale Agreement contains terms not provided for or contemplated by Heads of Agreement. Specifically, the most recent draft Sale Agreement provides for a set off of money your client claims is due and owing by Valiente Trading Pty Ltd against the money your client must pay Nuc-One Enterprises Pty Ltd pursuant to the Heads of Agreement.
5. Our client has performed its obligations which your client has not."

The letter concluded that unless the terms of the Heads of Agreement were put in place by 2 April 1998 Nuc-One would treat the plaintiff's conduct as a repudiation of the Agreement, and will act to protect its own interests and recover any loss suffered.

The significance is that the plaintiff was attempting prior to 3 April to obtain the agreement of Crampton to set off the various amounts but it failed to achieve its aim.

On 3 April 1998 the parties executed two agreements. They were -

(i) The Agreement for Sale of Sunscreen Wipes and Self Tan Wipes; the parties being Nuc-One, Crampton and the plaintiff.

(ii) The Distribution agreement; the parties being Valiente and the plaintiff.

The sale agreement provided for payment for the rights to the products of the $400,000 by instalments, the third instalment of $100,000 being due on 11 September 1998.

The default clause is found in clause 2.3 and I have set that out above.

The distribution agreement provided for the payment for stock by Valiente for both the past and future supplies, and which with the benefit of hindsight exposes the plaintiff to the risk of substantial loss in respect of stock in the past.

I am satisfied that the contracting parties knew at 3 April 1998 that Valiente had been unsuccessful in selling the product, that approximately $650,000 worth of stock was unsold, that Valiente was in a poor financial state, had few funds and had only paid $60,000 for stock supplied to that date.

The parties were aware that under the Heads of Agreement Valiente was to pay to the plaintiff for stock purchased 30 days from the statement date.

Despite these facts the plaintiff agreed to a different payment regime which was more favourable to Valiente than the original Heads of Agreement.

Clause 8 of the Distribution Agreement is concerned with terms of sale to Valiente and to products sold on or after 3 April 1998. Valiente was obliged to pay within 30 days of the date of each monthly statement for this stock.

With respect to the stock, which had already been provided and had an invoice value of in excess of M$1.1 and of which Valiente had only paid $60,000 the agreement defined it as "Current Stock".

Clause 9 provided -

"9. DEALING IN CURRENT STOCK
Regarding the Current Stock the parties agree that:
9.1 Title in the Current Stock will pass to Valiente only upon payment to the company of the invoice amount in full;"

Clause 10 is concerned with payment for current stock. This provided -

"10.   PAYMENT FOR CURRENT STOCK
10.1   For each item of the Current Stock sold by Valiente, the proceeds
         of such sales are first paid to the Company in satisfaction of the
         proportion of the Invoiced Amount which relates to that item
         and will be paid to the Company at the end of each month in
         which Valiente receives proceeds.
10.2   The Invoiced Amount will be paid to the Company on or before
         31 December 1998 less the total of:
10.2.1 Any money paid pursuant to clause 10.1 hereof
10.2.2. .....
10.2.3 .....
10.3   Valiente will pay interest on the Invoiced Amount outstanding
         at the Interest Rate from the first day of October 1998 such
         interest to be calculated monthly and payable monthly in
         arrears."

The clause also required Valiente to provide each month a statement setting out the holding of current stock.

The reference to "Company" is the plaintiff and the "Invoiced Amount" is defined in clause 1.1 as meaning "the amount invoiced to Valiente by the Company for Current Stock".

The evidence demonstrated that the sales of the product were basically from October to April the following year and during the winter months very few sales took place.

The evidence also demonstrated that Valiente had little money in April 1998. I am satisfied that de Alwis appreciated on 3 April 1998 that the financial position of Valiente was bad.

I am also satisfied that from July onwards de Alwis was concerned about the ability of Valiente to pay for the current stock and that the prospects were high that Valiente would not be able to pay for the balance of the current stock by 31 December 1998. That became more apparent after the receipt by Sigma of a letter in July 1998 from Crampton in which reference was made to Valiente selling the product on sale or return, consignment basis or deferred payment basis. De Alwis knew that the only way Valiente could pay for stock previously sold was out of the proceeds of future sales. He also knew that Valiente had until the end of the year to pay for the balance of the then current stock unsold and the prospects of payment on time were bleak.

In addition to the purchase price the plaintiff was obliged to pay some $53,000 to Valiente or on behalf of Valiente to cover some of its expenses. This was done on 14 May 1998.

The beginning of the circumstances which led to the dispute occurred early in July 1998 when de Alwis was overseas in Slovenia.

A telephone conversation occurred between de Alwis and Crampton.

Crampton informed de Alwis that he was having trouble with his bank and his bank wanted an assurance the plaintiff would pay the instalment due on 11 September. Crampton informed de Alwis that he arranged for an appropriate letter to be forwarded to the bank by the plaintiff's company secretary. This was done on 6 July 1998. This telephone conversation caused some concern to de Alwis as he was aware that Valiente owed substantial money for products supplied prior to April 1998 and he informed Crampton that he wanted a meeting to discuss payment due by Valiente, he wanted information as to the sales Valiente had made and the amount of stock Valiente expected to order from the plaintiff.

As at this moment in time Valiente had only paid $64,000 to the plaintiff.

Prior to him returning home de Alwis instructed Ms Toh, the plaintiff's commercial manager, to get back some of the stock to reduce the liability of Valiente. On 8 July Ms Toh telephoned Crampton and informed him that she wanted stock for overseas orders requested same to be returned but made no mention of seeking the return to reduce the debt.

Ms Toh asked for more stock than was returned and in the end, stock to the value of $182,920.80 was returned.

I am satisfied that the main reason for the recovery of the stock was to reduce the debt. The reference to an overseas order was a secondary consideration and not the real reason for the request. I should add that evidence was adduced concerning possible sales in South Africa but as at July 1998 the prospects of sales to South Africa were minimal.

On 9 July de Alwis returned to Australia. He was concerned about Valiente having the funds to pay its debts.

After his return de Alwis had a number of conversations with Crampton about meeting to discuss the moneys that Valiente owed the plaintiff, the prospects of payment and the money that was due to Nuc-One in September. De Alwis told Crampton that following the receipt of sales forecasts that the plaintiff would order further components for the product in the expectation that an arrangement would be put in place to reduce the debt. He also informed him that the plaintiff would not request the manufacture of further products until a satisfactory arrangement was made with Valiente to reduce the debt.

In the expectation of reaching a satisfactory arrangement the ordered componentry to make products to the value of approximately $200,000.

By 22 July 1998 de Alwis was getting more concerned about the ability of Valiente to pay and wrote a letter to Crampton on that day which stated, inter alia -

"Valiente is still to pay Sigma Pharmaceuticals for the majority of stock obtained in 1997. Could you please advise me as to how you intend to pay SPL ("the plaintiff") by October for stock that you are supplying on consignment to various outlets. We are not willing to fund the supply of products to your client on a consignment basis, and would therefore need to know how you intend to pay for this inventory should it not be sold and paid for by your client prior to October."
I would also like to request that you forward to Sigma any monies that you have received for inventory sold by Valiente during the past few months in accordance with our agreement."

De Alwis followed the letter up with a telephone call, and Crampton indicated during that conversation there was a risk he would go broke and the plaintiff would get nothing.

This prompted de Alwis to write another letter the following day in which he said, inter alia -

"Could you please provide details of financial arrangements that you will be making to ensure that all moneys owing to Sigma Pharmaceuticals are paid by their due date.
Our concerns stem from your repeated representations that your company 'will go broke, leaving a debt to Sigma unpaid'. Under these circumstances, we would have grave concerns to take conscious steps that increase your level of indebtedness to this company.
We are very keen to supply you with products in order to ensure a mutually preferable business arrangement for both our companies. One possible solution may be an agreement that your customers direct part or all of their payments due to your company directly to Sigma until such time as outstanding monies are paid."

In a number of conversations which occurred in July and later in August, de Alwis told Crampton that one way of reducing Valiente's indebtedness to the plaintiff would be to set off some or all of the moneys that the plaintiff was due to pay to Nuc‑One against Valiente's debt. In one of the conversations Crampton emphasised that his two companies were different legal entities and ought to be treated as such.

In early August de Alwis went overseas and returned some two weeks later. I accept the evidence of de Alwis that he had approximately five telephone calls over the following two weeks' period with Crampton trying to arrange a mutually convenient time for a meeting. I also accept his evidence that he told Crampton notwithstanding Valiente wanted the plaintiff to provide further stock, it was not prepared to increase its exposure to Valiente without some sort of arrangement in place whereby Valiente committed itself to re‑pay moneys owing to the plaintiff.

Also in some of these conversations he referred to the question of the debts owing by the parties be set off.

But Crampton appeared to de Alwis to be reluctant to commit to any proposal.

I reject the evidence of Crampton that before 11 September 1998 there were no discussions about the setting off of the debts.

I am quite satisfied by early September that de Alwis was very concerned about Valiente being in a position to pay debts by the end of the year, that Valiente had sold products and not accounted for the proceeds, had failed to regularly disclose stock and sales figures and the like to the plaintiff and more importantly, concern that if the plaintiff supplied further goods pursuant to the Distribution Agreement the Valiente debt would increase and there would be a real prospect that the debt would not be paid until well into 1999, if at all. While he appreciated the obligation of the plaintiff to Valiente under the Distribution Agreement to supply stock he said he was also concerned about his obligation to his employer. He was in damage control mode.

He was asked in cross‑examination by counsel for the defendant, that he wanted something different to what was in the distribution agreement and he replied -

" No, I wanted to make sure that he could comply with the clauses. There was nothing more than I need in this than he could comply with his commitments in the distribution agreement and if I were to ignore everything that happened between April and the time that I was talking to him I would be most irresponsible because lots of things had happened since: his own admission about the possibility that he could go broke, the letters that the bank needed, things that he had told us in conversations about the fact that he had said he had only been getting dribs and drabs of money in into his business every month. All those things heightened my anxiety and my concern about Mr Crampton's capability to pay for this, to meet his commitments under the agreement. I wasn't looking for anything better than that. I was very happy. I signed this agreement."

The answer was given in the context of the meeting of 24 September 1998.

In his affidavit Crampton stated that he did not recall de Alwis saying in July or August anything about the set off of the debts.

The words he used were -

"I do not recall him asking me to agree to such set off arrangements prior to 11 September 1998."

In giving oral evidence to the court he was adamant and said so on a number of occasions that no conversation occurred prior to 11 September in which that topic was raised.

I do not accept his evidence. I prefer the evidence of de Alwis.

The plaintiff did not pay the instalment on 11 September 1998. That was a deliberate decision made by de Alwis.

On 14 September 1998 at about 6.30 p.m. Crampton faxed to the plaintiff the letter specifying the default and requiring that it be remedied within 14 days.

It is appropriate at this moment in time to summarise what each party knew of the attitude of the other party.

First, de Alwis told Crampton in July and August that he wanted to discuss an arrangement whereby the two debts were to be set off, that Crampton had not rebuffed the suggestion, but showed no willingness to meet to discuss the topic and had in a conversation in August told de Alwis that his two companies were separate and distinct. Further, he appeared to de Alwis reluctant to commit to any proposal.

Further, I am satisfied that de Alwis knew of the commitment under the sale agreement to pay the instalment, he was fully aware of the consequences if he did not do so, and was determined not to pay the instalment until he had an opportunity to come to some arrangement with Crampton.

In my opinion it was obvious to de Alwis that Crampton was not prepared to face up to the obligation of Valiente to pay its debts, that Valiente was in a poor financial state and Crampton was behaving like a debtor seeking to avoid an obligation to pay and doing his best to avoid a creditor. In other words, it was apparent to de Alwis that Crampton was giving him "the run around" and avoiding him.

On the other hand I am satisfied that Crampton was aware that de Alwis wanted to discuss the arrangement, that at no stage did he say he would not discuss the arrangement or indicate that he was not interested even though his conduct may have suggested that, and Crampton was fully aware of the terms of the Sale Agreement and the effect of the non-payment default clause.

On 14 September, Westpac wrote to the plaintiff referring to the irrevocable order to pay by the plaintiff and requesting as a matter of urgency what was the status of the payment. By then de Alwis must have realised that it would be difficult for the parties to come to any arrangement by way of a set off.

I accept the evidence of de Alwis that over the next few days from 17 September onwards he attempted to contact Crampton on a number of occasions and left messages for him. Eventually he spoke to him and arranged a meeting for Monday 21 September which Crampton later cancelled and re-schedules for the 22nd. He did not attend that meeting either. I accept the evidence of de Alwis that when he arranged the meetings he indicated that he wished to discuss the moneys owing by the parties, the possibility of setting-off the debts and the need to have a workable arrangement in place with respect to the moneys owed by Valiente to the plaintiff. This had become particularly urgent as Crampton on behalf of Valiente placed an order with the plaintiff on 21 September 1998 for the supply of more products to the approximate value of $160,000.

On 23 September 1998 Crampton rang and spoke to Ms Toh requesting to speak to de Alwis who was not available.

Both Crampton and Ms Toh gave evidence in regard to this conversation. There is little difference between their versions. The important fact is that the topics were raised by Ms Toh with respect to the situation relating to the Valiente account, that the plaintiff wanted an arrangement whereby the moneys would be set off and Ms Toh also told Crampton that the directors of the plaintiff would take issue with de Alwis and she increasing the debt from Valiente by supplying further stock unless there could be some sort of arrangement reached regarding the set off of the payment due to Nuc‑One.

I accept the evidence of Ms Toh that Crampton did not respond either negatively or positively to the suggested arrangement and that Crampton told Ms Toh that he was uncertain when he could attend a meeting because he was extremely busy.

On 24 September a meeting took place at which Ian Crampton, Ms Toh, de Alwis and a representative of the plaintiff was present. The purpose of the meeting was to discuss a number of matters including the set off of the moneys owing and for the Cramptons to present their sales forecast. Crampton was meant to attend but shortly prior to the meeting his brother rang to say that he would not attend. De Alwis and Ms Toh raised the question of the concern about providing further product to Valiente in the absence of any arrangement concerning reduction of the debt and also whether or not the two amounts could be set off. Ian Crampton made it quite clear that it was not a matter for him but he would raise it with his brother.

There was some dispute between the witness Ian Crampton and de Alwis and Ms Toh as to what was said about the Board of the plaintiff's parent and its attitude. Each witness gave evidence with a different emphasis. However, it is unnecessary in the circumstances to seek to resolve their difference. Clearly the topic was raised that the directors of the parent company were concerned. The fact was that they did not know of the dispute at that stage. Nothing turns on the issue.

On the following day, de Alwis attempted to get in touch with Crampton but had difficulty. Between 24 and 28 September de Alwis had at least one conversation with Crampton which set up a meeting for 28 September. De Alwis accepted that he did not say what was to be discussed at the meeting but I am satisfied that it must have been apparent to Crampton what the purpose of the meeting was, namely, the debt situation of Valiente and its ability to pay, the stock order and the question of some arrangement involving a set off.

Shortly before the meeting for 28 September, Crampton cancelled it and re‑scheduled it for the following day. Again, shortly before the meeting on 29 September, Crampton rang to say he was running late and re-scheduled the meeting for 4.00 p.m. that day. He did not attend and de Alwis rang him and spoke to him over the loudspeaking phone in the presence of Ms Toh.

By this time the 14 day period had expired and de Alwis was aware that that was the position. It follows that he knew the default clause applied.

During the conversation de Alwis said to Crampton that it was necessary to talk about payments due to the plaintiff and in turn payment due by the plaintiff to Nuc‑One. The question was raised as to the possibility of moneys being set off. De Alwis also raised the question of the plaintiff being paid directly by Valiente's customers.

Crampton asked how much of the $100,000 the plaintiff was looking to set off against the Valiente debt. De Alwis said - "Preferably all of it."

Crampton said he would meet at 6.40 p.m. but he did not turn up.

On 30 September Crampton's lawyers sent a facsimile to the plaintiff care of its general manager a copy of which was sent to the plaintiff's solicitors and eventually came to the notice of de Alwis on 1 October.

The letter asserts that the plaintiff has defaulted under the agreement, by reason of the default the plaintiff was deemed to have assigned back to Nuc-One all its proprietary interest in the product and on behalf of Nuc-One a demand was made to pay the balance of the purchase price under the agreement of $165,000 and to perform a number of other acts.

On 1 October the plaintiff's solicitor sent a reply to Nuc-One's solicitors and denied that Nuc-One was entitled to rely upon its default notice.

In this letter it is asserted that since 14 September 1998 on approximately ten occasion de Alwis arranged meetings the express purpose of which was to discuss the debts and that Crampton failed to attend the meetings. It is also asserted that on a number of occasions the parties discussed the possibility of setting off the amount owing by the plaintiff to Nuc-One.

Having asserted that Nuc-One was not entitled to rely upon the notice the letter continued -

"As discussed above, Valiente is indebted to our client for an amount in excess of $600,000. Our client is willing to meet with Mr Crampton to discuss the commercial position in relation to both agreements and hopefully reach a mutually satisfactory arrangement concerning the moneys owed to our respective clients."

It is observed that even though the payment had not been made, that a default notice had not been complied with, the guillotine had dropped and certain consequences followed, the plaintiff was still seeking to arrive at a commercial arrangement. No attempt was made to remedy the default at that time.

On 2 October 1998, Nuc-One's solicitors responded to the letter and in the letter is a statement that there was never a discussion about the possibility of setting off the amount owed by your clients to our clients. The letter then says -

"That was simply a proposal that your client wanted to put to our client."

This does support the inference that the topic had been raised earlier.

By letter dated 7 October 1998, the plaintiff offered to pay $105,000 and on 9 October 1998 tendered the said sum which was rejected.

In my opinion, on 14 September 1998 Crampton made it quite clear that he wanted the plaintiff to pay Nuc-One the amount owing. His conduct thereafter gave a clear indication that he did not wish to discuss arrangements. I am equally satisfied that during the same period, i.e., after 14 September up to 29 September, de Alwis had made a decision that the plaintiff was not going to pay the $100,000 until he had an opportunity to come to some arrangement with Crampton. I am equally satisfied that during the same period de Alwis was fully aware of the consequences of the decision he had made.

Further, I am satisfied that at no stage did Crampton state that he would not discuss an arrangement or not discuss a set off. On the other hand, his conduct demonstrated to de Alwis that he was not prepared to discuss any arrangement even though that was the clear desire and wish of de Alwis. I am satisfied that Crampton was aware of the desire and the determination of de Alwis to have a meeting to discuss an arrangement.

Equitable Estoppel

As a first step in determining whether Nuc-One is estopped from relying upon its legal rights, it is convenient to summarise the material facts bearing on the issue up to and including the service of the default notice on 14 September 1998.

(i) During the negotiations leading to the sale agreement, the plaintiff sought and Nuc-One rejected, a term providing for a set off of the moneys payable by the plaintiff to Nuc-One and the substantial moneys then owing by Valiente to the plaintiff.

(ii) Nuc-One demanded and the plaintiff agreed to the self-executing provision in the sale agreement upon failure to remedy the default.

(iii) Valiente obtained more favourable terms for payment for the stock already delivered than was agreed in the Heads of Agreement.

(iv) The plaintiff knew at 3 April 1998 that Valiente had no assets and few funs and owed a substantial sum of money to it.

(v) That as a matter of law the two agreements were separate and distinct and Valiente and Nuc-One were distinct legal entities with different rights and obligations vis-à-vis the plaintiff.

(vi) That in early July 1998 at the request of Crampton, the plaintiff signed a document addressed to Westpac that it would pay the $100,000 on 11 September 1998 to enable Crampton to obtain loan funds from the Bank.

(vii) That in July 1998 the subject of the debt and possible set off was discussed between de Alwis and Crampton and the latter stated not interested and emphasised that the two companies were different entities.

(viii) That at the end of July 1998 de Alwis expressed concern to Crampton about payment by Valiente of its debts as they fell due and its ability to pay at the end of the year the debts owing.

(ix) That in the latter half of August 1998 de Alwis attempted to set up a meeting with Crampton to discuss debts and set off but failed to do so despite about five telephone conversations.

(x) That Crampton again emphasised during the latter part of August that there were two companies and made it apparent that he was not prepared to commit his companies to any proposal.

(xi) That Crampton whilst knowing that de Alwis wished to meet and discuss an arrangement involving a set off, never stated he was prepared to consider it.

(xii) That both Crampton and de Alwis were aware of the self-executing provision of the sale agreement.

(xiii) That de Alwis and Crampton both knew that de Alwis was determined to obtain an arrangement involving some form of set off and Crampton was equally determined that Nuc-One was to be paid $100,000 in September.

(xiv) That a reasonable person in the shoes of de Alwis would have realised that the refusal of Crampton to respond to phone calls and suggestions of a meeting show that he was avoiding the issue. Whilst de Alwis was clearly annoyed by Crampton's attitude to the payment of Valiente's debts and the fact that Valiente was seeking more stock thereby increasing its indebtedness, the stand taken by Crampton on behalf of Nuc-One was in accordance with its legal rights under the sale agreement.

(xv) With full knowledge and appreciation of the consequences, de Alwis refused to pay the instalment on 11 September 1998 despite the obligation under the sale agreement and the undertaking given to the bank by the plaintiff.

These facts must be considered as part of the overall circumstances concerning the parties relationship during the period up to and including 14 September 1998.

Mr Fajgenbaum QC relied upon the doctrine of equitable estoppel which was stated by Lord Cairns in Hughes v. Metropolitan Railway Co (1876) 2 AC 439 at 448.

I have set out the principles above.

The statement of principle by his Lordship, is particularly apt to the present proceeding because his Lordship was dealing with parties to a contract and the conduct of them.

Whether the principle applies depends upon the consideration and determination of two general fields of enquiry, namely -

(i) Has one party to the contract been led by the other party to the contract to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense or held in abeyance?
and

(ii) Would it be inequitable in all the circumstances to allow the other party to enforce its rights?

It is not necessary for the party relying upon the principle to establish that the other party had any intention to take advantage of or to lay a trap for or to lull into a false sense of security, the other party.

The principle has been considered in recent times by the High Court of Australia. The most recent High Court case is The Commonwealth v. Verwayen (1990) 170 CLR 394.

The seven judges did not speak with one voice and although it may be said that this area of equity is still developing, nevertheless in my opinion, so far as the application of the principles are concerned to the present case, they are fairly well established.

The principles that were stated by Lord Cairns so many years ago in my opinion state the basic law. However, I am assisted by what Deane, J said at p.444 in Verwayen's Case -

"2. The central principle of the doctrine is that the law will not permit an unconscionable - or, more accurately, unconscientious - departure by one party from the subject matter of an assumption which has been adopted by the other party as a basis of some relationship, course of conduct, act or omission which would operate to that other party's detriment if the assumption be not adhered to for the purposes of the litigation."

His Honour went on to consider the court's approach to the question in a given set of circumstances. His Honour said -

"3. Since an estoppel will not arise unless the party claiming the benefit of it has adopted the assumption as the basis of action or inaction and thereby placed himself in a position of significant disadvantage if departure from the assumption be permitted, the resolution of an issue of estoppel by conduct will involve an examination of the relevant belief, actions and position of that party.
4. The question whether such a departure would be unconscionable relates to the conduct of the allegedly estopped party in all the circumstances. That party must have played such a party in the adoption of, or persistence in, the assumption that he would be guilty of unjust and oppressive conduct if he were now to depart from it."
(Emphasis added)

His Honour made it clear that in considering whether a departure from the assumption would be unconscionable it is necessary to consider all the circumstances including the reasonableness of the conduct of the party in acting upon the assumption, and the nature and extent of the detriment which he sustains by acting upon the assumption if departure from the assumed stated of affairs was permitted.

One may induce the assumption by some form of representation and there may be a circumstance where the estopped party knows the other side is labouring under a false assumption and fails to correct it when it is his "duty in conscience to do so" - op cit - p.444.

In considering the circumstances it must not be overlooked that an assumption may arise by either action or inaction. A true statement when made may become false. It may create a false assumption. In some circumstances there may be a duty to correct. But as was said by the Privy Council in Chadwick v. Manning (1896) AC 231 at 238 -

"But silence is innocent and safe where there is no duty to speak"

Deane, J held that there can be a duty in conscience to correct a false assumption.

The point is well summarised in the ancient case of Tappt v. Lee (1803) 3 Bos. Pul. 367 (127 ER 200) where Chambre, J said at ER 203 -

"Fraud may consist as well in the suppression of what is true, as in the representation of what is false. If a man, professing to answer a question, selects those facts only which are likely to give a credit to the person of whom he speaks and keep back the rest, he is a more artful knave than he who tells a direct falsehood."

Quoted with approval by the High Court in Krakawski v. Eurolynx Properties Ltd (1995) 183 CLR 563 at 575.

A man may by silence without seeking to deceive produce a false impression in the mind of another and as a result may represent something which is false or create a false assumption or expectation.

In other words, it is just not a question of looking at the positive conduct and what Crampton said and did but to consider all the circumstances to determine whether he on behalf of Nuc-One created an assumption in the mind of de Alwis on behalf of the plaintiff that rights would not be strictly enforced.

Applying those principles to the circumstances up to 14 September 1998, in my opinion Crampton had not created any assumption in the plaintiff that Nuc-One would not enforce its rights or keep them in suspense or hold them in abeyance.

The most that can be said against him is that he never directly and expressly said that he would not consider any question of set off or that he would never attend a meeting to discuss some such arrangement knowing that de Alwis was anxious to reach some arrangement. However, his conduct for the whole period refutes any suggestion that he was interested or would consider it. Nuc-One needed money, it wanted its instalment, it had obtained money from the bank on the strength of it and when the suggestion was made during this period he pointed out that the companies were two distinct entities and he was reluctant to commit to any such proposal.

Whilst it cannot be denied that de Alwis in the same period was very concerned about the exposure of his employer company to further indebtedness, that he was concerned that Valiente could not in any way pay the debts which were finally due on 31 December and that these concerns might critically reflect upon his decision to enter into the agreements on 3 April 1998, all matters which could not have been lost on Crampton, the fact is that in my opinion Crampton did not by action or inaction, by thought, word or deed create any assumption in de Alwis that he would consider such a proposal. De Alwis may have been anxious but Crampton was clearly avoiding the issue.

But even if it could be said that he did create some belief in de Alwis that he may consider such a deal he quickly dispelled the suggestion when he sent the facsimile of 14 September. It is pertinent to observe that he noted on it, forwarding a copy to the solicitor handling the matter at Corrs Chambers Westgarth. His conduct in the context of avoiding de Alwis in the weeks prior to 14 September demonstrates that he "meant business" and his facsimile shows he was determined that Nuc-One should be paid its money to which it was entitled pursuant to the agreement.

It was sent and received by de Alwis in circumstances where de Alwis had made a deliberate decision not to pay the instalment with knowledge and appreciation of the consequences to the plaintiff.

The material facts, bearing on the issue, occurring in the following 14 days can also be conveniently summarised.

(i) That the delivery of a notice was a clear indication that Nuc-One was asserting its strict legal right to be paid.

(ii) That de Alwis had made a deliberate decision not to pay as he wanted to reach an agreement concerning the Valiente debt, the question of future supply of stock and a possible set off of the debts.

(iii) That de Alwis spoke to Crampton on the telephone in order to arrange a meeting and that he told Crampton the reason was to discuss the two debts.

(iv) That Crampton knew what was on the agenda for the meeting, namely debts and set off and by agreeing to attend showed a willingness to talk.

(v) Meetings fixed for 21 and 22 September were cancelled by Crampton which must have indicated to de Alwis that Crampton was avoiding the subject.

(vi) On 21 September Valiente placed an order for further product. It is noted that that is Valiente's order and not Nuc-One and was placed pursuant to an agreement which was not in any way threatened by the notice of 14 September. Whilst I accept that it clearly shows the relationship between Valiente and the plaintiff was to continue, it does not in my opinion represent to the plaintiff that Nuc-One would not seek to rely upon its strict rights.

(vii) Crampton spoke to Ms Toh on 23 September, she mentioned the topic about the debts and set off but significantly, having raised the topic with Crampton, he made no response.

(viii) Crampton failed to appear at a meeting fixed for 24 September, and although the topic was raised his brother Ian declined to say anything about it and undertook to tell his brother that the topic had been raised.

(ix) De Alwis spoke to Crampton on 25 September to arrange a meeting and despite a meeting being fixed for Monday 28 September Crampton cancelled it, then agreed to come to a later meeting and then failed to attend.

(x) At no stage up to and including 28 September did Crampton state that he was prepared to talk, his attitude which was apparent to de Alwis and Ms Toh was non-responsive and he was clearly manifesting a refusal to meet to discuss the topic.

(xi) De Alwis continued up to 29 September to maintain the position not to pay the instalment with full appreciation of the consequences.

(xii) On 29 September Crampton asked de Alwis how much he wanted to set off and de Alwis said "preferably the lot". Crampton made no response.

(xiii) At no stage did any person between 14 September and 28 September mention the default notice and at no stage did Crampton demand compliance.

(xiv) At no stage did Crampton state anything indicating a rejection of a discussion on the topic.

(xv) That the plaintiff wished to continue in the manufacture and sale of the products and had and was proposing to spend money on promotion.

In my opinion the guillotine dropped at midnight on 28 September 1998. The self‑executing provision in clause 2.3 of the Sale Agreement automatically applied. The plaintiff had assigned back to Nuc-One the interest in the products.

The plaintiff relies upon the conversation which took place on the following day, 29 September 1998 in which Crampton asked de Alwis what amount of money he wished to set off against the Valiente debt. In my opinion the conduct is outside the relevant period but taken in context with all that occurred in the 14 day period, it could not be said that Crampton on behalf of Nuc-One had created any assumption that Nuc-One would not enforce its strict rights in that period.

The fact is that de Alwis and Crampton had adopted certain positions, Crampton in accordance with the legal rights of Nuc-One and de Alwis taking the moral ground on Valiente's debt and relying upon the obvious bargaining strength of the plaintiff. On any view it was a contest of wills. The fact was that de Alwis failed in his endeavours and Crampton on behalf of Nuc-One maintained its right to payment. Mr Fajgenbaum, Q.C. submitted that Crampton's conduct created the following assumption -

"Sigma was not required to pay the $100,000 to Nuc-One until there was a rejection of the proposal, that all or any of the liability to pay that $100,000 might be set off against the Valiente debt, and whilst that proposal was still a matter that would be discussed at a meeting, to be held for that purpose between Crampton and de Alwis, which Crampton had agreed to attend, notwithstanding that he had cancelled or failed to attend prior appointments fixed for that purpose."

I have carefully considered the facts and the arguments put on behalf of the plaintiff. Looking at the state of affairs as at midnight on 28 September 1998 a reasonable person knowing all the facts, in the shoes of de Alwis could not have concluded that the plaintiff was not required to pay the $100,000 until there was a rejection of the proposal concerning some form of set off.

Significantly, de Alwis gave no such evidence. The closest he got was in answer to a question put by Mr Fajgenbaum, Q.C. -

"Why didn't you make the payment of 11 September?---I didn't make the payment of 11 September because Mr Crampton and I were talking about putting together some arrangement where we could reduce his debt. I felt that the monies that we owed Mr Crampton could be used as part of this scheme - part of this arrangement. I hadn't at that stage specified which part of it. Whether it was going to be the whole hundred thousand, half of it, quarter of it. I was seeking to have something paid back and Mr Crampton would be aware of that. We were negotiating to try and come up with some settlement that would utilise these amounts that Sigma owed in the future towards setting off that debt."

On no view of the evidence to the 11 September 1998 could it be said that the parties were negotiating and the reference to talking, was raising the topic. I do not accept his assertion that the parties were negotiating. I accept that he wanted to achieve a satisfactory arrangement but Crampton was manifesting opposition to such a proposal.

Straight after giving that evidence de Alwis stated that he was reminded by Crampton prior to 11 September that Sigma had to pay the instalment. This was when the parties were talking about Crampton paying for the componentry which was in late July.

The reality is that de Alwis was determined to obtain a satisfactory arrangement and the conduct of Crampton right up to midnight on 28 September did not represent to the plaintiff that Sigma was not required to pay the $100,000 until there was a rejection of the proposal.

Looking at the totality of the circumstances up to midnight of 28 September 1998 and the events thereafter 7 October 1998 which bear upon the question of any assumption being created, the events refute any such assumption.

The prominent events which bear upon the question, namely, the rejection of the proposal to set-off pre 3 April 1998, the default provision in the agreement, the reminder by Crampton that the companies were distinct, the plaintiff's assurance to the bank, the refusal of Crampton to meet, his refusal to commit to any proposal, his refusal to show any interst prior to 28 September 1998, the service of the default provision notice, his continual refusal to meet, Crampton's behaviour on behalf of Valiente which was typical of a debtor avoiding his obligations, when taken in context clearly refute any such assumption being created.

In my opinion at no point was Crampton under any duty to emphatically say that I reject any proposal. But in any event his conduct clearly semaphored that fact.

In my opinion the plaintiff failed to establish any assumption that Nuc-One would not enforce its rights under the contract for a period of time or would keep them in suspense or held in abeyance.

But even if I was wrong and the assumption was created the next question is whether it would be inequitable to allow Nuc-One to depart from the assumption and rely upon its strict rights. Or to put it in the language of Deane, J in Verwayens case would Nuc-One be guilty of unjust and oppressive conduct if it was permitted to rely upon its strict rights in all the circumstances? Taking into account the conduct of the main players, de Alwis and Crampton, each of whom was seeking to gain an advantage, in my view, in all the circumstances, to permit Nuc-One to rely upon its strict rights could not be described as an unconscientious departure from a situation that may have been created.

This was a commercial relationship and the parties were dealing at arm's length. Each side was seeking to gain or maintain an advantage. It was a contest of wills. De Alwis made a decision not to pay. The plaintiff breached the agreement with full knowledge of the consequences. The circumstances do not raise an equity in the plaintiff.

It would not be unconscionable for Nuc-One to demand its rights.

To adopt what Deane, J said in Verwayens case at p.440, the doctrine of estoppel by conduct is founded upon good conscience and its rationale is to "save people from being victimised by other people". Its rationale is not to save people from their own mistake; afortiori from their own deliberate decision. On the basis that a party ought not in conscience as between the parties be allowed to resile from a position it created, in my opinion looking at the dealings between these parties which in the end was a contest of wills, it would not be against conscience to permit Crampton on behalf of Nuc-One to enforce its rights.

Accordingly, the plaintiff fails to establish that the doctrine of estoppel applies to stop Nuc-One relying on its rights.

Section 52 Trade Practices Act Claim

The plaintiff alleged in its amended points of claim that the defendants represented to the plaintiff that they were prepared to negotiate with the plaintiff with the view to reaching an agreement, arrangement or understanding for the plaintiff to set off all or part of the amount to be paid to Nuc-One against monies which Valiente was or would be obliged to pay the plaintiff and until such negotiations were concluded Nuc-One's strict rights would not be enforced or alternatively, kept in suspense or abeyance and until such negotiations were concluded the plaintiff was not obliged to pay the amount on 11 September.

It was asserted that the representations were made in the course of trade or commerce and that insofar as they related to future matters the defendants did not have reasonable grounds for making the representations. It is said that relying on the representations the plaintiff did not make the payment of $100,000.

In order to establish a breach of s.52 it is necessary for the plaintiff to prove that the conduct was misleading and deceptive or likely to mislead or deceive. In this case the conduct is constituted by the representations allegedly made by Crampton on behalf of the first two defendants.

Mr Fajgenbaum, Q.C. referred to what Gummow, J said in Demagogue Pty Ltd v. Ramensky (1992) 110 ALR 608 concerning misleading conduct being constituted by acts, omissions, statements or silence. His Honour at p.617 quoted with approval what Professor Butt explains in his work "The Standard Contract for Sale of Land in New South Wales" as follows -

"'Conduct' within the meaning of s.52 includes refusing to do an act, and refusal to do an act includes a reference to refraining (otherwise and inadvertently) from doing that act: s.4(2). But in any case where a failure to speak is relied upon the question must be whether in the particular circumstances the silence constitutes or is part of misleading or deceptive conduct. The expanded meaning given by s.4(2) to conduct should not distract attention from the fundamental issue in the case at hand."

Clearly a party may be representing a present or future fact by conduct which is constituted by an omission to act or a failure to speak. I accept that is the law.

The same is said in the field of misrepresentation.

The question here is whether looking at the conduct of Crampton on behalf of Nuc-One did he make the representations that are pleaded against the defendants?

The facts upon which the plaintiff relies relate to the conduct of Crampton during the period up to 28 September 1998 and all the circumstances up to that date.

In my opinion the plaintiff has not established that Crampton on behalf of the defendants made representations as alleged in the statement of claim.

For the reasons already stated, as at 14 September 1998 Crampton put beyond doubt any suggestion that he was interested in negotiating an arrangement involving the debts. Further, subsequent to 14 September and up to 28 September, Crampton's conduct again clearly demonstrated that he was not interested in doing any deal concerning the debts. In my view he was not obliged in that period to say that he was not interested. His conduct said it for him. It was obvious and it was not necessary to be said.

His conduct clearly represented that Nuc-One was not interested up to midnight on 28 September 1998.

But even if I was wrong I am not persuaded by the plaintiff that it relied upon any representation made not to pay the amount of $100,000. The evidence clearly demonstrates that de Alwis made a decision not to pay the amount and continued with that attitude after 29 September. The attitude continued through into the letter written by the plaintiff's solicitors on 1 October in which having admitted a failure to pay, and asserting that Nuc-One was not entitled to rely upon the notice, the plaintiff indicated that it was prepared to meet with Crampton to discuss the commercial position in relation to both agreements "and hopefully reach a mutually satisfactory arrangement concerning the monies owed to our respective clients".

As late as 1 October 1998 de Alwis was maintaining his position that the plaintiff was not going to pay the $100,000. This was after the guillotine had dropped. There can in my opinion be no question of any representations made by Crampton which induced de Alwis to make that decision. It was his decision and his decision alone which he made for commercial reasons and what he thought was in the interests of his employer. The claim fails.

Relief Against Forfeiture

The law of relief against forfeiture developed in Chancery and was closely allied to the equitable jurisdiction of relieving against penalties.

Equity developed the doctrine to overcome the strict approach at common law with respect to the upholding of bargains. Equity was prepared to grant relief in suitable cases where a contracting party failed to pay money pursuant to a contract relating to land and at law the other contracting party was able to recover the former's interest. In other words, it was to ameliorate the strict enforcement of contractual provisions at law.

The doctrine developed in relation to mortgages and subsequently was applied to leases where the landlord re‑entered the premises for failure to pay rent. Legislation was passed as early as 1730 in England to regulate the practice of granting relief in a landlord and tenant relationship.

The equitable jurisdiction was well established by the eighteenth century.

Although the doctrine developed hand in hand with relief against penalties and indeed it can be said that the relief against forfeiture is but part of the general power of equity to relieve against penalties, the fact is that there is a substantial difference between the two areas of law. The differences are conveniently summarised in "The Principles of Equity", edited by Patrick Parkinson at p.311 et seq.

The modern law of relief against forfeiture can be traced back to the speech of Lord Wilberforce in Shiloh Spinners Ltd v. Harding (1973) AC 691.

That case involved the relationship of landlord and tenant and the breach of a covenant to repair.

At p.722 Lord Wilberforce stated -

"There cannot be any doubt that from the earliest times courts of equity have asserted the right to relieve against the forfeiture of property. The jurisdiction has not been confined to any particular type of case. The commonest instances concerned mortgages, giving rise to the equity of redemption, and leases, which commonly contained re‑entry clauses; but other instances are found in relation to copyholds, or where the forfeiture was in the nature of a penalty. Although the principle is well established there has undoubtedly been some fluctuation of authority as to the self-limitation to be imposed or accepted on this power. There has not been much difficulty as regards two heads of jurisdiction. First, where it is possible to state that the object of the transaction and of the insertion of the right to forfeit is essentially to secure the payment of money, equity has been willing to relieve on terms that the payment is made with interest, if appropriate, and also costs.
... Secondly there were the heads of fraud, accident, mistake or surprise, always a ground for equity's intervention, inclusion of which entailed the exclusion of mere inadvertence and afortiori of wilful defaults."
(Emphasis added)

His Lordship noted what Lord Eldon, LC said in 1811 that the principle "might represent an unjust variation of what had been contracted for". His Lordship was of the view that the argument had "much force".

In regard to the sanctity of contract his Lordship said -

"I would fully endorse this: it remains true today that equity expects men to carry out their bargains and will not let them buy their way out by uncovenanted payment. But it is consistent with these principles that we should re-affirm the rights of courts of equity in appropriate and limited cases to relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result. The word 'appropriate' involves consideration of the conduct of the applicant for relief, in particular whether his default was wilful, of the gravity of the breaches, and of the disparity between the value of the property of which forfeiture is claimed as compared with the damage caused by the breach."
(Emphasis added)

The High Court has considered the principles in three cases after Shiloh Spinners v. Harding. They are Legione v. Hateley (1983) 152 CLR 406, Ciavarella v. Balmer (1983) 153 CLR 438 and Stern v. McArthur (1988) 165 CLR 489.

Whilst the learned High Court judges have not spoken with one voice and with different emphasis it is possible to distil a number of principles with respect to the jurisdiction and its exercise.

The two heads of jurisdiction referred to by Lord Wilberforce are well established. It is clear that the jurisdiction is not confined to those two heads but it is unnecessary to consider that question.

Mr Fajgenbaum, Q.C. relied upon both heads of jurisdiction. Taking the first head of jurisdiction, namely, that the object of the transaction the subject matter of the sale agreement and the insertion of the self-executing clause were essentially to provide security for payment of money he submitted that in the circumstances the court should relieve on terms of paying compensation, the plaintiff from the forfeiture of the property rights in the product.

I am satisfied that the court does have jurisdiction in this case and the question is whether this is an appropriate case to relieve against forfeiture?

Two matters of importance to the question of exercising the jurisdiction are -

(i) the sale agreement contained a term that time was of the essence;

(ii) that Nuc-One terminated the agreement because of the repudiation by the plaintiff in failing to make the payment and the rescission occurred either on 30 September or at the latest 2 October.

In regard to the last matter, even after Nuc-One's solicitors wrote on 30 September referring to the failure to pay, the service of the default notice and the application of clause 2.3 the plaintiff still sought to ignore the obligations under the sale agreement and to meet with Crampton in order to reach a mutually satisfactory arrangement. The plaintiff did not tender the instalment plus compensation until 9 October 1998.

Once the jurisdictional question is satisfied, the issue comes down to deciding whether the circumstances are appropriate for the grant of the relief.

The following factors are relevant to that exercise and particularly relevant to the present case -

(i) "It is only in exceptional circumstances that specific performance will be granted at the instance of a purchase who is in breach of an essential condition" per Mason and Deane, JJ in Legione supra at p.448; Ciavarella v. Balmer (1983) 153 CLR 438 at 454.

(ii) In considering the exercise of the jurisdiction it must not be overlooked that the contract is a commercial one, entered into at arm's length by person's who are able to look after their own interests and the jurisdiction should not be used to re-form contracts - per Deane and Dawson, JJ in Sterne's Case supra at p.526.

(iii) That to establish exceptional circumstances where the contract has been validly rescinded for breach of a term which is essential, the party seeking relief must show conduct amounting to unconscionable conduct on the part of the vendor. See Ciavarella supra and Shiloh's case.

(iv) Unconscionable conduct does not have to be exceptional because the exceptional aspect to the jurisdiction is that a court will be reluctant to interfere "with the contractual rights of parties who have chosen to make time of the essence of the contract" per Deane and Dawson, JJ in Sterne's case supra at p.526.
As their Honours said - 'The circumstances must be such as to make it plain that it is necessary to intervene to avoid injustice or, what is the same thing, to relieve against unconscionable - or more accurately, unconscientious - conduct.'

(v) "The circumstances which may make the case exceptional to warrant relief in favour of a purchaser who is in breach of an essential term ordinarily there must be something 'such as fraud, mistake, accident or surprise before relief will be granted'. These elements do not, however, exhaust the scope of unconscionable or unconscientious behaviour; they are referred to in this context to emphasise that a strong case must be made out to warrant departure from the general approach, which is to hold the parties to their bargain." - Deane and Dawson, JJ, Sterne's case supra at p.526.
(Emphasis added)

Although Mason, CJ dissented in Stern's case his statement of principle concerning the unconscionable conduct is supported by other authorities. His Honour said at p.503 -

"The doctrine is a limited one that operates only where the vendor has, by his conduct, caused or contributed to a situation in which it would be unconscionable on the vendor's part to insist on the forfeiture of the purchaser's interest."

The present case concerns a commercial agreement entered into at arm's length and does not relate to an interest in land.

Mr Fajgenbaum, Q.C. submitted that the doctrine did apply to contracts generally where they concerned transfer of proprietary or possessory rights - see Scandanavian Trading Tanker Co v. Flota Petrolera (1983) 2 AC 694 and Mr Bick of counsel for the defendants did not seek to contest the submission.

A number of cases have recognised that the doctrine can apply to contracts dealing with the transfer of proprietary or possessory rights.

In two cases involving forfeiture of shares no argument was put that the jurisdiction could not extend to shares. See Sparkes v. Company of Proprietors of the Liverpool Waterworks (1807) 13 Ves Jun 428, 33 ER 354; Prendergast v. Turton (1841) 1 Y and CCC 98, 62 ER 107; and Rule v. Jewell (1881) 18 Ch. D 662. I also refer to Jobson v. Johnson (1989) 1 WLR 1026, B.I.C.C.Plc. v. Burndy Corporation (1985) Ch. 232 and Esanda Finance Corporation v. Plessnig (1989) 166 CLR 131 at 151.

But it is a matter of substantial weight that it is a commercial contract where parties are able to look after their own interests.

In Sport Internationaal v. Inter-Footwear Ltd (1984) 1 WLR 776, the Court of Appeal in England noted that the jurisdiction has never been extended to "ordinary commercial contracts unconnected with interests in land and, though it may be that there is no logical reason why, by analogy with contract creating interest in land, the jurisdiction should not be extended to contracts creating interest in other property, corporeal or incorporeal, there is, at the same time, no compelling reason or policy that we can see why it should be."

Putting aside the question of jurisdiction, on any view the fact that it is a commercial contract is a matter of substantial weight when considering the exercise of the jurisdiction.

As Oliver, LJ said in the Sport Internationaal case at p.788 -

"Here were two commercial concerns, locked in litigation, advised by counsel and solicitors. They could not be more at arm's length. One can hardly conceive of a case in which certainty is more important than in a contract putting an end to litigation. The fact that part of the subject matter was the use of a trade mark underlines the need for both certainty and for avoidance of delay, for, if the licence is determined, the licensor will wish to know at once, particularly in the case of an exclusive licence, whether he is entitled to preserve or to build up his good will by entering upon the territory himself or granting licences to others."

Quoted with approval by Lord Templeman in the House of Lords in the same case, op. cit. at p.794.

The fact that it is a weighty matter was adverted to by Deane and Dawson, JJ in Stern's case at p.528.

As already stated, Mr Fajgenbaum, Q.C. submitted that the court had jurisdiction to grant relief because the object of the transaction was to secure the payment of money. I have accepted that that is so.

He also submitted that the jurisdiction was founded on the fact that there was fraud, accident, mistake or surprise. In my opinion neither fraud, accident, mistake or surprise has been established and I do not consider the exercise of the jurisdiction under that head.

The argument put by Mr Fajgenbaum with respect to the second head concerned Crampton's conduct in leading Sigma to assume that compliance with the default notice was not required. As a matter of fact, I do not accept that conclusion.

In support of the exercise of the jurisdiction Mr Fajgenbaum, Q.C. relied upon a number of matters. They are -

(i) the plaintiff wishes to continue its trading relationship and is merely asking for an extension of time in which to pay the $100,000 plus compensation.
I am prepared to accept that that is so.

(ii) That if the plaintiff is deprived of its property it will suffer a substantial loss because of the stock it has in hand, it wishes to keep trading and has already spent or committed to spend $371,,369 on promotion.
With respect to the stock held for Valiente, no doubt under the distribution agreement it can supply the stock to it when requested.
For the purposes of the argument I am prepared to accept that it may not be able to sell its Sigma stock.

(iii) That Nuc-One suffers no loss from the non-receipt of money between 28 September and 9 October.
That assertion is not strictly correct. It has raised a loan with the bank. It is an inference that Nuc-One and/or Valiente would be liable for interest. However, I do accept that any damage would be small.

In addition, the plaintiff may suffer some loss by reason of the fact that it has already paid out $200,000 on 3 April 1998 and since then, because of the winter season, has not been able to make many sales.

Mr Fajgenbaum, Q.C. says that Nuc-One can be fully and adequately compensated for any loss it may suffer by the payment of money which the plaintiff is prepared to pay.

As against the arguments put on behalf of the plaintiff, Mr Bick submitted on behalf of the defendant, Nuc-One, that relief against forfeiture should not be granted and relied upon the following matters -

(i) Nuc-One did not contribute to the plaintiff's breach of contract;

(ii) the plaintiff's breach was substantial;

(iii) the plaintiff's breach was wilful and deliberate, designed to achieve the collateral purpose of putting pressure on Nuc-One to contribute to the debts of Valiente;

(iv) that the consequences for Nuc-One and also the other company, Valiente, are severe;

(v) that the plaintiff's behaviour as evidenced by de Alwis in seeking to achieve unilateral variation of two contracts by deliberate breach of one of them is such that it should not be entitled to relief from forfeiture.

Other than the assertion that the consequences for Nuc-One and Valiente are severe, which in my opinion is exaggerated and could be overcome by suitable compensation, I do agree that the matters relied upon by Nuc-One are significant and weighty.

In my opinion Nuc-One is not entitled to relief from forfeiture.

In coming to that conclusion I accept the submissions of Mr Bick concerning the weight to be attached to the factors he has listed.

But in addition, there are a number of other factors of considerable weight.

First of all, clause 2.3 was inserted in the contract at the request of Crampton early in the negotiations and accepted by de Alwis.

Secondly, de Alwis fully understood the effect of breach of failure to comply with the provision, and was fully aware after he received the notice of default the consequences of breaching the sale agreement.

Thirdly, the breach of the sale agreement did not come about because of any inadvertence, mistake, surprise or carelessness but came about because of the wilful and deliberate act by de Alwis, who at all times was fully aware of the consequences of what he was doing.

Fourthly, there is no evidence of fraud, deception, surprise or misleading conduct on the part of Crampton who throughout sought to exercise the legal rights of Nuc-One.

Fifthly, it was a commercial transaction entered into by parties at arm's length and well able to look after their own interests and it is of the utmost importance in commercial transactions that parties fully appreciate and understand their rights and obligations and know where they stand - see Scandanavian Trading Tanker Co case supra at p.704.

Sixthly, even after the guillotine had dropped, the plaintiff ignored the consequences and continued to adopt a line which was in breach of the sale agreement without in any way attempting to remedy the breach.

Seventhly, Nuc-One validly terminated the agreement by rescinding it for breach of an essential term.

Finally, and in my view a matter of significance is that looking at the behaviour of both parties it cannot be said that Nuc-One through Crampton was guilty of any unconscionable conduct which would make it contrary to good conscience that Nuc-One should be permitted to enforce its legal rights.

The fact was that de Alwis on behalf of the plaintiff was seeking to re-make their contractual relationship. The plaintiff had failed in its endeavours in April 1998 to get Crampton to agree to a set off of monies, that from July onwards de Alwis was determined to change the contractual relationship and in this regard was prepared to ignore the terms of the sale agreement to get his way.

He now seeks to come to court to seek equity and in my opinion the plaintiff has failed to establish any equity which would entitle it to relief against forfeiture.

In this regard I repeat what I have said in previous cases involving commercial relationships. That is, that parties to a contract must appreciate, "That a contract is a contract is a contract." Even though its full meaning and import may not be appreciated at the time of its execution the parties are bound by it. Too often in the commercial world a party to a contract later realises that it is not to his liking and seeks to and does ignore it, varies it unilaterally or seeks to pressure a change. It cannot be over-emphasised that what they agreed to, they are bound by.

It would only be in exceptional circumstances that a court would grant relief from forfeiture in relation to a commercial contract. And then only when it was established that there was an equity in the parties seeking relief against forfeiture. The plaintiff has failed to establish any equity in it for relief.

Conclusion

It follows that the plaintiff has failed to establish any ground for relief and its proceeding will be dismissed.

Nuc-One's Cross-claim

Nuc-One has sought a number of heads of relief.

It was agreed at trial that if the plaintiff failed then the question of orders to be made on Nuc-One's cross-claim would be the subject of submissions.

I am prepared to hear the parties in relation to the matters pleaded.

However, it is appropriate for me to make a number of observations which I hope will be of assistance to the parties.

First, in my opinion Nuc-One is entitled to a declaration with respect to the effect of the application of clause 2.3 and further, a declaration to the effect that the sale agreement has been validly rescinded.

If there is any evidence that the plaintiff is seeking to exercise any rights with respect to the product then there may be grounds for the granting of an injunction.

This brings me to the two claims made for damages.

Nuc-One claims damages as a result of the rescission of the sale agreement. The particulars assert an entitlement to the $100,000 instalment due on 11 September 1998, the loss of the use of the money and what is described as consequential economic loss as a result of the non-payment.

Clearly there has been a breach of the sale agreement and secondly, Nuc-One has validly rescinded it.

In accordance with the general principle, all rights which have accrued up to the date of rescission can be enforced. See Mcdonald v. Dennys Lascelles Ltd (1933) 48 CLR 457 at p.476-7. As a general proposition the rescinding party is entitled to damages.

But this brings me to the question whether the terms of the sale agreement provide alternative remedies to Nuc-One. In other words, was it the common intention of the parties that if Nuc-One exercised its rights pursuant to clause 2.3 then it elects to recover the property rather than the instalment not paid.

In my opinion there is a strong argument that by accepting the property back Nuc-One elects to pursue that remedy and not seek the payment of the instalment.

The court seeks to determine the presumed common intention of the parties which means both parties and not one party. If the reasonable bystander at the date of execution of the agreement posed the question - "Well, if the instalment is not paid and the property is returned is Nuc-One entitled to both the instalment and the property?" - in my opinion the most probable answer based upon common sense would be - "No".

No doubt the parties will seek to make submissions in respect to that issue.

Nuc-One has also pleaded a number of causes of action based upon breach of s.52 of the Act which relate to what the plaintiff is doing with respect to the supply and sale of the products.

If Nuc-One wishes to proceed with these claims then it will be necessary to hear from the parties with respect to the evidence in support of these claims. As presently advised I am not aware of any evidence which supports these claims.

Subject to any submissions from counsel, it appears to me that an order should be made that the plaintiff's proceeding be dismissed with costs.

I will hear the parties with respect to orders on the cross-claim brought by Nuc-One.

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SUPREME COURT OF VICTORIA
CAUSES JURISDICTION	Do not Send for Reporting
Not Restricted

[1998] VSC 204

23 December 1998