Sola Basic Australia Limited v Morganite Ceramic Fibres Pty Limited

[1989] HCATrans 216

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S59 of 1989

B e t w e e n -

SOLA BASIC AUSTRALIA LIMITED

Applicant

and

MORGANITE CERAMIC FIBRES PTY

LIMITED

Respondent

Application for special leave

to appeal

MASON CJ

TOOHEY J

GAUDRON J

Sola

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 15 SEPTEMBER 1989, AT 12.08 PM

Copyright in the High Court of Australia

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MR C.S.C. SHELLER, QC: If Your Honours please, in this matter

I appear with my learned friend, MR P.M. BISCOE, for

the applicant. (instructed by Moore & Bevins)

MR D.F. ROFE, QC: If Your Honours please, I appear with my

learned friend, MR B. C .. -. LU!CH-,- for the respondent.

(instructed by Malcolm Johns & Co)

MASON CJ:	Mr Sheller.
MR SHELLER:	Your Honours, this application arises out of

proceedings commenced by an insurer in the name of

its insured to recover damages which represented the

amount that each had paid its insured in respect of

certain losses suffered by it. In short, it was

exercising its rights of subrogation.

The proceedings took the course of a preliminary

trial on two issues before His Honour Mr Justice Smart,
and those two issues were whether there was an accord

and satisfaction which operated as a defence to the

proceedings and, secondly, if that defence were made

out, was it effective against the insurer? Those two
issues are described at the beginning of

Mr Justice Smart's judgment at page 21 in the application book.

Now, Your Honours, as to the first issue: the

case as it was argued was on the ambit of a written

accord and satisfaction evidenced by two telexes,

that accord and satisfaction being performed. The

question was did that accord and satisfaction extend
beyond the replacement costs of a piece of machinery,

or a transformer, that the applicant had sold to the

respondent and which failed on five occasions.

Your Honours, the application is from a decision of a majority in the Court of Appeal consisting of

Mr Justice Hope and Mr Justice Priestley,

Mr Justice Meagher dissenting. Mr Justice Meagher

approached the matter as a construction question

and on the basis of that approach found in favour
of the applicant.	He also dealt with the second

question and held that the accord and satisfaction

was effective against the insurer.

The majority, and the judgment was that of

Mr Justice Priestley, approached the matter not on

the basis that it was a construction point but on the

basis that there was a question as to what were the

terms of the accord and satisfaction and_in approaching

it in that manner came to the conclusion that if there

was an accord and satisfaction or an agreement between

the parties, it was to be found not in the two telexes

but in the first of them, to be treated as an acceptance

of an earlier offer. We submit that that approach is,

with the greatest respect, unsustainable.

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The alternative approach put forward, in the

judgment of Mr Justice Priestley, was that there was
no accord and satisfaction, that if the first telex

involved an offer, the second telex was not an

acceptance of that offer but was a counter offer

and that that counter offer was not accepted by

performance. In coming to that conclusion, with the

greatest respect, His Honour overlooked the fact that

the parties had agreed that there was an

accord and satisfaction and it had been performed.

Now, Your Honours, the particular documents on which this turns are set out in the judgment of

Mr Justice Priestley. May I hand to Your Honours a

chronology that we have prepared which

was used in the Court of Appeal. We have changed, of

course, the page references to being page references

in the application book.

Your Honours, the applicant manufactured

transformers and it sold a transformer to the respondent

and that contract was made in 1983 and in 1984 there were

five failures of that transformer. The dates of those

failures are set out in the chronology: one in

April, one in May, three in July. Your Honours, after

the second failure a letter was written by my client

making a suggestion that in the light of what was

going on spare equipment should be purchased.	Then
there were three more failures.	And on 3 August 1984

a letter, which assumed great importance in

the judgment of the majority, was written by the

respondent to the applicant, and that is found

quoted in the judgment at page 72.

GAUDRON J:  Now, do you make some special point by reference

to that letter, Mr Sheller?

MR SHELLER: Yes, Your Honour, I make this point: that

His Honour Mr Justice Priestley treated that letter

as an offer which was accepted by the first of the

two telexes. What we say about it, that if one

looks at it, that while -

GAUDRON J: Is that nota finding of fact though, ultimately?

MR SHELLER:  Your Honour, it is a finding of fact in the sense

that it involves a construction of two documents but

we submit that it is unsustainable when one looks at

the documents because quite plainly this letter,

which is set out, describes various matters which the
respondent said that it was prepared to accept. And
may I just invite Your Honours' attention to this

on page 72: after having referred to the economic

consequences of what had occurred and of the need to

replace the transformer - that is at line 23 -

the writer then said at line 29 that they were:

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therefore at the current position -

they were -

unable to risk any further exposure to attemps ..... to rectify ..... and suggest

that we return the unit to you and that

you return to us the cheque for $24,005 -

and that was part of the purchase price. They say

then - and this is important - in the next

paragraph:

Furthermore, I would seek your assistance

to cover the additional cost of buying a

replacement unit from the United Kingdom.

This cost is estimated to be $25,000 in

excess of your original price to us.

And they then go on and say that they suggest a

meeting to agree the proposal and the writer goes on,

on page 73, to:

point out that the proposal ..... is designed

to resolve this company's claim relating
to the cost of replacing the defective

transformer/reactor. It does not, in

any way, affect any claim which this company's

insurer may have against you under its rights

of subrogation.

And those, Your Honours, were claims that related to

material damage and loss of profit.

Now, Your Honours, the importance of that letter

in the structure of Mr Justice Priestley's judgment

is that he set out the two telexes, and they appear at

pages 78 and 79, and I can say this about the stage

when those telexes were interchanged between the

parties and it is this:  that water had gone under

the bridge to the extent that an independent report

had been obtained from a Dr Grantham of Unisearch

which, in effect, said that the blame for what had

here occurred was as much ascribable to the fault of

the respondent in not sufficiently identifying what it

needed, as it was to the applicant.

Now, this telex was sent on 18 December by the applicant and it refers to that background and refers

to the report prepared by Dr Grantham and, in

particular, his finding that there was not any design

fault and his saying - and I am reading from about

line 12 on page 79 - he being -

of the view that you should have specified

the fact that there was a transient voltage

requirement -

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then some inquiries that Sola had undertaken and

the fact that they were:

still waiting for a report from overseas -

that they were -

reluctant to commit this company to a

guarantee of the kind which you have

suggested at this stage.

And that, Your Honours, was a reference back to another

letter of 7 December in which Morganite had suggested

that we provide or construct another transformer and

provide a five-year guarantee in respect of it.

Having said all that and, as it were, weighed

the balance one way or another as to the rights and

wrongs of the case, the writer said:

Thus I propose that we accept the return

of the unit to us and refund to you the

sums which you have paid to us, with the

result that we each will bear our own

not-inconsiderable losses which have

otherwise resulted from this venture.

Now, Your Honours, Mr Justice Priestley, in his

judgment - and if I could invite Your Honours to go

to page 83 - said, in effect, that the approach that

had been taken to construe that telex and determine

the ambit of the offer was not really the correct

approach, and I invite Your Honours' attention to

the bottom of page 83. And after referring to CODELFA,

His Honour, at line 30, said:

it seems to me that the appellant's first

submission does not deal with what is

really the first issue in the case: both

parties have assumed there was a contract

between them, but they are not agreed as to

its terms. The first question therefore is

not what is the meaning of a contract whose	terms are known, in which case the CODELFA
rules apply, but, what are the terms of the contract, in which case the CODELFA rules
do not apply, and the Court must decide
from all the evidence arguably relevant to the existence of particular terms of the
contract.

Now, having set that out as the task to be undertaken,

His Honour then said, at the bottom of page 85, having referred to that telex in some detail, coming to the

final sentence - and I read from line 25 on page 85:

Then came the final sentence, which

if it had ended at the first comma, would

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have left the matter completely clear:

"Thus I propose that we accept the

return of the unit to us,".

If the telex had ended there, there

could have been no doubt that Sola was

accepting Morganite's offer in its

letter of 3 August. Sola argues however

that the remainder of the sentence

altered everything.

I should point out, Your Honours, that the proposal was

not rrerely, "that we accept the return of the unit to us",
but also "and refund to you the sums which you have

paid to us."

Now, on that page, Your Honours, what

Mr Justice Priestley is saying - and this appears clearly enough at about line 20 - is that the first telex was an acceptance of an offer made in the

letter of 3 August and we respectfully submit with

the greatest respect to His Honour that that view is
unsustainable because the offer, even if one looked

at the letter of 3 August and regarded it as such,

went beyond the mere return of the transformer and

the return of the price. Furthermore, to take such

an approach simply ignores what is said in the letter

and which is quoted at line 8:

"with the result that we each will bear

our own not-inconsiderable losses which

have otherwise resulted from this venture."

And His Honour said of those words in the document

that they were "non-operative", and that appears at line 21. We respectfully submit that they make it

as plain as could be that this was not an acceptance

of an offer made in the letter of 3 August with the

consequence that there was some binding agreement

between the parties.	It simply could not be, we
respectfully submit.	The offer was not in those

terms and the letter of 3 August made it plain that

part of the offer and, that, we respectfully submit,	damages, apart from the replacement costs, were not	flies entirely in the face of what is said in the
quoted passage from the telex.

Now, Your Honours, having dealt with the matter

on that basis and, as we would submit, on a basis, ·as

His Honour seems to say in his judgment, which was not

that to which the arguments were addressed - and may I

just remind Your Honours that when Mr Justice Smart
came to deal with the matter before him, at page 25,
he described the issue that he had to determine as

"the construction issue" and he said at line 13:

Morganite submitted that on the true construction

of the telexes of 18 & 19 December 1984 -

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that is the respondent submitted

in the light of the factual matrix, it had
not released its claims for fusion and

consequential damage but that the release

was limited to the cost of replacing the

ineffective system.

In short, that what the court was concerned with

was not whether there was an accord and satisfaction

but its ambit.

Now, His Honour Mr Justice Priestley then dealt

with the matter on an alternative basis and that one finds at page 87 in his judgment and on that page he

said:

If the better construction of the last

sentence of Sola's telex of 19 December

was not the one I have stated, but one which

takes the sentence as making an offer to

compromise all matters outstanding between

the two companies, the question would arise

whether Morganite's telex of 19 December

was an acceptance of it.

And Your Honours, this turned upon the telex as set

out at the bottom of page 79. It is the telex from

Morganite:

"Your telex of December 18 received. I note

your proposal and am issuing instructions
for the unit to be duly returned to you

freight to your expense and would appreciate

your earliest refund of the amount in

question, $24,005."

Now, His Honour said that there were two features of

that telex which led him to the conclusion that it was

a counter offer. He said, firstly:

that it did not in terms accept what was

-·	said in the previous day's telex; it
acknowl~c;lged rec_eipt of the., tel~x, and
·"noted" the propo&al .:. ·

and then -

it then added a proposal not previously

mentioned, so far as the evidence goes,

that Sola should pay the cost of

returning the equipment.

And then he says:

There is nothing in the evidence to indicate whether the amount of the freight would be

trifling -

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and then further down the page, he says:

The other matter is that Morganite's

telex of 19 December strikes me, in the

whole context, as being a repetition

(with an additional ingredient) of what

Morganite had previously offered.

Now, we, again, respectfully submit, Your Honours,

that that simply could not be so. It is a restatement

or an acceptance of, at best, part of what was put

forward in the letter of 3 August.

But what then he deals with on the next page,

page 88, is the question of what happened thereafter.

Your Honours, at page 80, Mr Justice Priestley said

at the top of the page, after this interchange of

telexes:

Thereafter, the equipment was returned without anything further being said or done

upon which either party relied as bearing upon the question whether the parties had

agreed to compromise all their differences.

Your Honours, with the greatest respect, that is not

an accurate statement of what happened. What happened

is found set out at page 23 in the primary judgment

at line 14. And what His Honour Mr Justice Smart said

was:

Although the money was refunded, it was

further agreed that Morganite should retain

the reactor cabinet for use as a tool box

and that it should sell on Sola's behalf as scrap, the transformer component. This was done and Morganite sent to Sola $30 therefor.

The parties were agreed that the agreement

of 19 December 1984, as varied, had been

performed by both parties.

Your Honours, there was no question but that there

was an accord and satisfaction in relation to the

cost of replacement and that that accord and

satisfaction had been performed. And we respectfully

submit it was simply not open to say that even if the

telex of the 19th should be treated as a counter offer

because it brought in the question of who would pay

for the freight, that it was not accepted by

performance.

Now, Your Honours, we respectfully submit that

the majority in the Court of Appeal did not address
the real issue on the accord and satisfaction, namely,
the question of construction and that their finding

against the applicant is, with respect, unsustainable,

on the documents.

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GAUDRON J: That may not be the real question though, might it.

Might it not be whether ultimately they werE right in

~ismissing your appeal?

MR SHELLER:  Your Honour, I take that on board if I may by saying

this, that we respectfully submit that there is a

powerful, if not insuperable argument that we would

advance that is simply as a matter of construction

that accord and satisfaction extended to all the

claims made by the respondent against the applicant.

And the language of what is said in the dissenting

judgment of Mr Justice Meagher is language that we would

seek to adopt as part of this submission and may I

invite Your Honours' attention to pages 90 and 91 and,

particularly, His Honour points out at the top of page 91

that:

Negotiations between the parties in

August 1984 to settle the claims of the

respondent against the appellant proceeded

on the basis that the failures of the system

and the consequent damages were entirely due

to the appellant's fault, a situation which the
appellant seemed, albeit reluctantly, to
accept. Those negotiations in essence were

negotiations to settle the first head of

damages which I have described and were

expressly so limited.

And His Honour there, of course, is referring to the

letter of 3 August.

Then in October 1984 the situation

changed fundamentally when Dr Grantham's

report ascribed the bulk of the blame for

the system's failure to the respondent. In

this context the appellant's attitude

stiffened somewhat and the appellant sent

the offer contained in the telex of 18 December.

The last paragraph of that telex is critical.

And His Honour then set it out.

It is not disputed that that offer was
accepted.	I do not see how the offer could

be construed as meaning anything else but

that if the appellant refunded the purchase

price of the system (ie, satisfied in full
the first head of loss) the respondent would

bear the other two heads of loss. I do not

see what other construction can be given to

the words "which have otherwise resulted".

And we could add on to those, "from this venture',

that is to say, the venture which involved the supply

of this tr·ansformer .

For these reasons, in my view the submissions

of Mr Sheller QC for the appellant that the

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telexes constituted an accord must be

accepted. That accord was an agreement

to satisfy all the respondent's causes of action against the appellant. That

the accord was followed by satisfactions

is not denied.

Now, His Honour then dealt with the other construction

point, and I would not propose to take up time with this

beyond adopting what His Honour said; the other point

being as to the extent to which one could investigate

extrinsic evidence. And His Honour having referred to

that at line 12 said:

it seems to me that an examination of the

surrounding circumstances strengthens the

interpretation to which one arrives by the

consideration of the plain words of the

contract itself.

And we would respectfully submit that is so simply for

the reason that emerges from the telex of 18 December

that the parties had received a report which, as it were,

left the blame at least as much in the camp of Morganite

as it did in the camp of Sola Basic.

GAUDRON J:  I take it from that that there is no longer any point

made by you as to having resort to evidence of

surrounding circumstances?

T9 :MR SHELLER: Your Honour, I am content to argue it on the basis

that one looks at the surrounding circumstances. The

particular matters that Mr Justice Smart seemed to

take account of, apart from identifying what the
venture was and what the piece of machinery was, was
matter as to the knowledge of my client as to the

insurance situation.

GAUDRON J: Well now, if you accept that, where is the matter

of principle in this case as to the accord and

satisfaction?

:MR SHELLER:  Your Honour, this is a contract. It is one contract

and the language of one particular contract, and I

accept that. But, Your Honour, we would seek here

to invoke the Court's discretion on a somewhat wider

basis than saying that this has to be shown to be a

matter of public importance. The situation is this,

we submit, that the judgment of the majority of the Court of Appeal is clearly wrong; that as a result
of that we are faced, as appears from the evidence,

with a long, expensive and complicated engineering

case and, Your Honours, we submit that if one looks

at section 35A, if there is sufficient doubt

attached to the decision of the court, then the

interests of the administration of justice demand

that we should not, on the basis of an incorrect and,

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we submit, clearly incorrect statement of the law,
be faced with a lengthy technical trial and also,
of course, has to be taken into account that that
would involve the use of judicial time in such an
investigation, over a matter of weeks, when it is

unnecessary.

MASON CJ:  But the administration of justice is a factor to

be taken into account, no more than that.

MR SHELLER:  Yes.

MASON CJ: It is not something that insistently demands, as

it were, marching out of the words of the section

itself. And one must face reality: there are so
many cases in which time would be saved, expense

would be saved, if the parties could get a final

decision on a question of law that divides them at

an early stage of litigation by resorting to this

Court. But we must recognize that the time and

resources of this Court just do not permit us to

achieve that.

MR SHELLER:	Your Honour, I, of course, accept that and I hope I am not inviting Your Honours to march out of the
section or at least too far out beyond saying - - -
MASON CJ:	I thought the word "demand" with the, as it were,

intonations that you - - -

MR SHELLER:	Yes. Well, Your Honour, I used the word "demand" and I would water that down and would say that as a
matter of exercise of discretion it would point strongly in the direction of granting leave.
And, Your Honours, what particularly here we would
stress is that it may be a different thing, as
Your Honours commonly say, that there is mt sufficient
doubt attached to the decision below. Now, we would be
so bold as to submit in this case that not merely is there sufficient doubt but that there is considerable
doubt attached to the majority decision in the Court
of Appeal and that this is a particular case where
one is looking at what is patently, with respect,
judgments which are wrong and in that context putting
the parties, and, indeed, judicial time, at risk for a period of three, four or more weeks in terms of a trial
at first instance. Now, that is the way, Your Honours,
which I have to put it.  I cannot suggest to Your Honours
that when one comes down to it one is doing other than
look at a construction of the terms of a particular
contract.  But may I just add this, Your Honours, that into
that pot one also has to throw the fact that one is
looking at an approach taken in the Court of Appeal which, as appears from His Honour's judgment, was really never addressed by the applicant. It was simply,
Your Honours, an appeal which ran as a matter of
construction, and then the majority said - and, indeed,

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the majority had not adopted what Mr Justice Smart

said or said that his view was a correct view.

They have simply said, "Well, you have approached

it in the wrong way, this is the way it works out.",

and we submit that on its face that is wrong.

Your Honours, we submit that when one bears

that in mind and when one bears in mind the cost

and complexity of what follows from that, that that

is ground for special leave. And, Your Honours,

that is the basis upon which we would put this

application.

I should, of course, point out that there is

this other issue, the subrogation issue.

1:1ASON CJ: Yes.

MR SHELLER:  Of course, that, Your Honours, if one accepts what

the majority said, does not arise but that in itself

is a matter which would be of general public

importance because there, clearly enough, there

is no precise decision in Australia. There are what

appear to be conflicting views expressed by Your Honour

the Chief Justice in CROWLEY's case and

Sir Garfield Barwick in a later case and there is a line of American authority which depends, we would submit, upon a practice in America whereunder a

subrogated insurer can sue in its own name. So that

there is in the case within the ambit of what we are about here a matter of general public importance but that does not arise until we overcome the first hurdle,

and I recognize that, Your Honours.

Those are our submissions, if Your Honours

please.

1:1ASON CJ: Thank you, Mr Sheller.

In this case the first question on which the applicant must succeed in the proposed appeal, if the

general importance in principle is to arise, is	second question which involves a matter of more
a question of construction of a particular contract
determined at an early stage of the proceedings in
the courts below. That first question is one which
raises no point of general .principle and,
accordingly, the case is not one in which it would be
appropriate to grant special leave to appeal. The
application is therefore refused.

MR ROFE:  Your Honour, I ask for costs.

1:1ASON CJ:  Yes. You do not resist that, Mr Sheller?

MR SHELLER:	No, Your Honour.
1:1ASON CJ:	The application is refused with costs.

AT 12.47 PM THE 1:1ATTER WAS ADJOURNED SINE DIE

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