FEDERAL COURT OF AUSTRALIA

Eastern Pearl Corporation v Groundhog Sales and Rentals Pty Ltd

[2012] FCA 406

THE COURT ORDERS THAT:

1.    The first respondent pay the applicant the sum of $499,641.33 damages for breach of contract.

2.    The application is otherwise dismissed.

3.    The first respondent pay the applicant’s costs of the application.

4.    The cross-claim is dismissed.

5.    The cross-claimant pay the cross-respondent’s costs of the cross-claim.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    This matter concerns a breakdown in a commercial relationship between a Japanese company and an Australian company. The companies had a business relationship involving the purchase and re-sale of heavy earth-moving equipment. The applicant, Eastern Pearl Corporation (“Eastern Pearl”) is based in Tokyo, Japan. Eastern Pearl operates a business leasing, buying and selling heavy earth-moving equipment for use in civil construction and mining industries. The first respondent, Groundhog Sales and Rentals Pty Ltd (“Groundhog”) is incorporated pursuant to the Corporations Act 2001 (Cth) (“the Corporations Act”). It operates a business supplying earth-moving equipment in the civil construction and mining industries. The second respondent, Mr Mackay, is a director of Groundhog.

The causes of action

2    By application filed in the Queensland District Registry of the Court on 22 December 2010, Eastern Pearl claims damages against Groundhog pursuant to s 82 of the Trade Practices Act 1974 (Cth) (“the TP Act”) for misleading and deceptive conduct in breach of s 52 of the TP Act. Eastern Pearl claims that Mr Mackay was knowingly concerned in that contravention.

3    In the alternative, Eastern Pearl claims damages for breach of contract by Groundhog, being breach by Groundhog of a joint venture agreement (“the JVA”) between Eastern Pearl and it, concerning the purchase and sale of an item of earth-moving equipment known as a Caterpillar 992G (“the 992G”).

4    By its cross-claim, Groundhog claims damages at common law and pursuant to the Goods Act 1958 (Vic) ) (“the Goods Act”) and the TP Act against Eastern Pearl for selling various heavy equipment vehicles to Groundhog which were not fit for the purpose for which it was intended that they were to be used or were not of merchantable quality. The parties conducted the case on the basis that the Goods Act applied to certain vehicle purchases made by Groundhog from Eastern Pearl. Those vehicles were:

    a Caterpillar D7R11 dozer (“the D7R11”);

    the first Caterpillar D8T dozer (“the D8T No 1”);

    a Caterpillar D10R dozer (GH92) (“the D10R”);

    the second Caterpillar D8T dozer (GH93) (“the D8T No 2”).

5    Groundhog also claims that Eastern Pearl engaged in false and misleading conduct by representing that the D8T No 2 and the D10R were fit for the purpose for which they were purchased and were of merchantable quality. The relevant representations were said to be made by Mr Lee of Eastern Pearl on or about 17 December 2007. Groundhog also raises an issue about losses it suffered in respect of the sale of an Excavator as a consequence, it says, of the conduct of Eastern Pearl.

The joint venture agreement

6    For reasons which will become apparent, it is convenient to first deal with Eastern Pearl’s claim that it is entitled to damages as a result of Groundhog’s breach of the JVA. The essential facts concerning the claim are not in dispute.

7    Between May and October 2007, Eastern Pearl sold the D7R, the D8T (No 1) and the D8T (No 2) to Groundhog. In November 2007, Mr Lee, on behalf of Eastern Pearl, met with Mr Mackay and Mr Sean Hoare, who represented Groundhog. As a result of their discussions Groundhog and Eastern Pearl decided to enter into the JVA. The JVA concerned the joint purchase and the sale of the 992G, referred to at [3] above.

8    The JVA is dated 6 February 2008. It was signed on or about that date on behalf of Eastern Pearl by Mr Raymond Ting. It was signed much later by Mr Hoare, on behalf of Groundhog, in or about 2010. However, both companies acted as if they were bound by the JVA and treated it as binding upon them.

9    Eastern Pearl and Groundhog agreed that each of them would pay half of the purchase price of the 992G. The JVA provided for a 50-50 share of the profit or loss arising from the sale or rental of the 992G. This included the sharing of any expenses of the JVA.

10    After Eastern Pearl and Groundhog jointly purchased the 992G, it was shipped from Japan to Brisbane in July 2008. On 24 September 2008, Mr Andrew Predika of Groundhog emailed Mr Ting informing him that Groundhog had arranged to rent out the 992G in a mine in Queensland. Mr Ting replied requesting information about the type of mining work involved, the length of the rental and its rate. Groundhog did not respond to that query.

11    In late October 2008, Groundhog agreed to sell the 992G to JMS Civil and Mining for $1,200,000 plus GST. It received payment for the sale on 9 December 2008. It failed to inform Eastern Pearl of the sale.

12    On 9 December 2008, Mr Ting emailed Mr Mackay, Mr Predika and Mr Hoare of Groundhog requesting an update on what was happening with the 992G. On 10 December 2008, Mr Mackay emailed Mr Ting informing him that the 992G had been sold and that he would provide a full report. The email said that the details of the sale were being finalised, “including the build spec required and the payment terms applicable”. That was false. The 992G had been sold by this time and payment for it had been received by Groundhog. Later in December 2009, the 992G was transferred to its new owners to a site at Blackwater, Queensland.

13    On 12 February 2009, Mr Ting sent an email to Mr Mackay asking for a full report about the 992G. In a dishonest communication by email shortly thereafter, Mr Mackay claimed that the sale transaction had not been completely finalised. He claimed that the 992G had been sold pursuant to a hire purchase arrangement and that Groundhog had spent $100,000 to build the 992G to mine specifications in order to secure a good sale.

14    By email dated 23 February 2009, Groundhog, through Mr Mackay, informed Mr Ting that the sale price of the 992G was $920,000 plus GST. The email referred to an amount spent on tyres and mine specification adjustments and referred to an estimated profit of $220,000. The email also referred to the sale as being subject to a hire purchase arrangement and that the first rental cheque would be received at the end of March 2009. In an email from Mr Mackay to Mr Ting sent the next day the estimated profit was reduced to $175,000 for the joint venture.

15    In August 2009, Mr Mackay told Mr Lee of Eastern Pearl that the 992G was sold on a “hire to purchase” arrangement. The email said that the machine was delivered in March 2009 and that the rental period was 6 months, after which the purchaser would pay the balance of the purchase price. Of course, this was also false.

16    In September 2009, Mr Lee and Mr Ting met with Mr Mackay, Mr Hoare and Mr Predika for lunch at the Grand Hyatt Hotel in Melbourne. At the lunch, Mr Mackay told Mr Lee and Mr Ting that the purchaser of the 992G had financial problems and was not then in a position to pay for the 992G.

17    By email, on 13 October 2009, Mr Ting asked Mr Mackay for an update about “the deal for the 992G with your customer”. Mr Mackay responded on the same day saying that he hoped to finalise the deal on 21 October 2009. By email late on 21 October 2009, Mr Ting asked Mr Mackay for a report about the meeting. On 27 October 2009, Mr Mackay informed Mr Ting by email that the deal had been finalised “but our client can’t pay us for some time”. Mr Mackay also said:

I now need to work out how to pay Eastern Pearl by ourselves from Groundhog.

Mr Ting next emailed Mr Mackay on 25 November 2009 saying:

Please let us know the status for the 992. Thanks.

18    The saga continued into 2010. In an email sent to Mr Mackay on 8 January 2010, Mr Ting expressed concern at the delay and said that unless the “customer” paid the full amount in January, Eastern Pearl would buy back the 992G from Groundhog or Groundhog could pay Eastern Pearl’s joint venture costs.

19    Mr Mackay replied on 15 January 2010. He said that the “only option” was for Groundhog to pay Eastern Pearl back the joint venture funds but that Groundhog did not have those funds “at this time”. Mr Mackay asked Mr Ting to find out what would be acceptable to Mr Lee. About two hours later, on 15 January 2010, Mr Mackay advised Mr Ting that the net profit to the joint venture was $179,000 (being $89,500 to each partner).

20    Later in the afternoon of 15 January 2010, Mr Ting made a proposal to Mr Mackay. On 18 January 2010, Mr Mackay accepted the first option in that proposal. That option was that Groundhog pay to Eastern Pearl $427,000 (being 50 per cent of the net sales price on the 992G) in four monthly instalments. Mr Mackay, however, said that Groundhog did not have those funds “at present”.

21    In an email sent on 20 January 2010, Mr Ting told Mr Mackay that Eastern Pearl had heard that the 992G was at Blackwater in Queensland and had been sold and paid for. He requested $427,000 payable in four monthly instalments from January 2010.

22    Mr Mackay responded the same day, saying that he could not commence the payments until the end of February. Later that afternoon, Mr Ting agreed that Eastern Pearl would accept Mr Mackay’s proposal provided Groundhog made four monthly payments commencing on 25 February 2010 of $106,750 each. Mr Mackay responded to Mr Ting saying “we accept your gracious terms and thank you for your current understandings in these difficult times”.

23    On 22 January 2010, Eastern Pearl sent a document called, “Payment Contract” to Groundhog. It reflected the agreement for Groundhog to pay four monthly instalments commencing on 25 February 2010. Mr Mackay informed Mr Ting on 1 February 2010 that Mr Lee and he had agreed in a telephone conversation on 30 January 2010 that the payments would commence in March.

24    Mr Ting responded on 1 February 2010 saying that the outstanding amount of $427,000 is due on 10 February 2010. Mr Mackay protested that such was contrary to his understanding with Mr Lee that Eastern Pearl was to send a new agreement with March as the commencement time for payments from Groundhog.

25    On 11 February 2010, the then lawyers for Eastern Pearl sent a letter of demand to Groundhog. Omitting formal parts, the letter said:

Dear Mr Mackay

OUTSTANDING DEBT – EASTERN PEARL CORPORATION

We act for Eastern Pearl Corporation (EPC) and are instructed as follows:

1.    EPC entered into a Joint Venture Agreement (JVA) with Groundhog Sales & Rentals Pty Ltd (GHSR) dated 6 February 2008 in respect of 1999 Caterpillar Wheel Loader Model 992G Serial No 7HR00236 (Equipment).

2.    It was a term of the JVA that any profit earned on the sale of the Equipment would be shared between GHSR and EPC in equal proportions.

3.    The Equipment was sold in June 2009 at a net sale price of $854,000.

4.    GHSR accordingly owes EPC one-half of $854,000, namely $427,000.

5.    Despite numerous requests, GHSR has not paid EPC the outstanding debt of $427,000 or any part of it. The most recent of these requests was dated 1 February 2010 and sought payment by 10 February 2010, failing which the matter would be put into the hands of EPC’s lawyers.

6.    GHSR has not paid EPC any interest on the outstanding debt.

7.    If GHSR does not pay the full amount of the outstanding debt to EPC by 5.00 pm on Thursday 25 February 2010, EPC will proceed to take such action as it is advised in order to recover the outstanding debt, accrued interest and legal costs, without further notice to GHSR.

8.    EPC will consider, in its absolute discretion, any proposal to satisfy the outstanding debt by the transfer of title to equipment from GHSR to EPC, provided EPC is satisfied as to value and title is unencumbered.

26    Groundhog did not respond to the letter of demand. Mr Mackay did not inform Eastern Pearl that the 992G had been sold for cash on 23 October 2008 for $1,200,000 plus GST.

27    Solicitors acting on behalf of Eastern Pearl then serviced a statutory demand on Groundhog for the $427,000 pursuant to s 459E(2) of the Corporations Act. Groundhog applied to set aside the statutory demand. In an affidavit in support of that application, Mr Mackay asserted falsely that Groundhog received $920,000 for the 992G. For reasons which are not of present significance, the application to set aside the statutory demand succeeded.

Amount Owing under the JVA

28    Eastern Pearl submits that the true situation is that Groundhog owes Eastern Pearl $540,210.15 in respect of its share of the proceeding of the sale of the 992G under the JVA. The net sale price was $1,200,000. The relevant expenses (as will be explained below) were $119,579.77. This left a profit of $1,080,420.30 to be shared by the partners, according to Eastern Pearl.

29    There is evidence which Eastern Pearl accepts, which shows that Groundhog incurred expenses totalling $119,579.77 on the 992G prior to its sale. There is a dispute about whether other expenses were incurred by Groundhog. Groundhog contends that a $30,000 “finders fee” was paid to Mr Shane Bennett, in respect of the sale, and a payment of $51,130.35 to EDI must be deducted.

(i)    The finders fee

30    To help effect the sale of the 992G, Groundhog engaged the services of Mr Bennett. Mr Bennett was paid a commission of $30,000 in accordance with the usual practice in the heavy machinery sales industry. I see no reason why this expense should not be deducted from the profit amount for the sale of the 992G.

(ii)    The EDI payment

31    Mr Shane Chestnut is a director of a company called Equipment Direct International Pty Ltd (“EDI”). Groundhog made a payment $51,138.35 to EDI, which it says is a cost associated with the 992G. The claim by Groundhog relates to a tax invoice from EDI to Groundhog dated 4 March 2009 for $51,138.35 plus GST for the preparation of the 992G for sale. There is an undated document in evidence from Mr Chestnut headed “To Whom it may concern”. The body of the document says:

This letter is to confirm that Ground Hog Sales & Rentals was invoiced a total of $51,138.35 plus GST for works performed on a CATERPILLAR 992G Wheel loader on the 4th March 2009.

These funds were not paid to EDI directly as we completed a CONTRA accounting arrangement for funds that EDI owed GHSR for other non-related transactions.

Should you wish to discuss this matter any further please do not hesitate to contact our Office Manager, Helena Stibbard on 07 5666 9100 during business hours.

Kind Regards

Shane Chestnut

Director

Equipment Direct International

32    In his oral evidence, Mr Chestnut described the nature of the work covered by the invoice. He said:

That was work in preparation for sale, which entails a refurbishment, repainting, site-specific requirements for the client, including mine specification work, fire suppression, auto lube, and a number of other service-related oil filters, lube – that side of work preparation for sale. The MEM Rockhampton site assembly was for the assembly of the machine when it arrived to sell it.

33    Mr Chestnut also referred to assembly of the machine and commissioning it for the client. He also gave evidence about re-painting, fire suppression work and bringing the machine up to mine specifications. He was not challenged on any aspect of his evidence of the work preferred by EDI to prepare the 992G for sale. The claim by Groundhog for the deduction from the joint venture profit for the amount paid to EDI is accepted.

(iii)    Calculation of profit

34    The 992G was sold for $1.2 million plus GST. From the $1.2 million the following must be deducted:

    $119,579.00 repair costs

    $ 51,138.35 EDI payments

    $ 30,000.00 finders fee

Total:    $200,717.35

35    That leaves a net profit figure for the joint venture of $999,282.65. Half of that figure is $499,641.33. Under the JVA, Groundhog owes $499,641.33 to Eastern Pearl.

36    Groundhog acknowledges that it owes Eastern Pearl a sum in approximately that amount. However, it says that the joint venture was made conditional by a term that past debts to Groundhog would be paid by Eastern Pearl. That claim is not supported by the evidence. It is rejected.

37    Eastern Pearl is entitled to damages in the sum of $499,641.33 for breach of the JVA.

The sECTION 52 TRADE PRACTICES ACT claim

38    Eastern Pearl submits that Groundhog engaged in misleading and deceptive conduct by sending emails between September 2008 and January 2010 containing falsehoods with respect to the 992G. It says that this has the effect that the compromise which occurred in January 2010 for $427,000 is set aside.

39    The critical problem with the s 52 TP Act claim is that if Groundhog and Mr Mackay did engage in misleading and deceptive conduct in respect of the 992G as alleged, Eastern Pearl has not suffered any damage thereby. The real position under the JVA has been arrived at with the calculation of the profit figure of approximately $499,000 to each partner. The compromise of $427,000 has been overtaken by events.

40    However, Eastern Pearl says it is entitled to recover the sum of $35,854.38 in respect of the statutory demand proceedings being legal costs incurred as a result of the misleading and deceptive conduct of the respondents. The statutory demand proceedings involved Eastern Pearl seeking to enforce its rights under the JVA for a sum not too far removed from the current amount it has been found to be entitled to under the JVA in this proceeding. It chose to be patient with Groundhog but lost patience and sought recovery under the Corporations Act. It failed in that case by reason of a technicality. Eastern Pearl’s insistence on its rights under the Corporations Act is not directly referable to the obfuscation by Mr Mackay about the circumstances of the sale of the 992G. The costs incurred by Eastern Pearl in the proceeding under the Corporations Act included indemnity costs. It would not be appropriate to visit such costs on Groundhog or Mr Mackay. Those costs were not incurred as a consequence of any misleading conduct by the respondents but as a consequence of the way Eastern Pearl’s then solicitor conducted that proceeding.

41    The claim made under the TP Act is rejected.

The cross-claim

42    In the cross-claim, Groundhog contends that in May 2007 Mr Mackay and Mr Lee met to set trading terms and conditions for future transactions between Groundhog and Eastern Pearl. Groundhog asserts a verbal agreement between Mr Lee and Mr Mackay that equipment purchased by Groundhog from Eastern Pearl would have the following characteristics:

•    well maintained;

•    late model;

•    low hours of operation on the meter;

•    excellent quality;

•    in working condition;

•    fully maintained and serviced since new;

•    with proper maintenance histories;

•    immediately saleable in Australia subject to local compliance requirements and free of major defects such that the equipment would be able to be sold in Australia relatively cheaply or promptly rented without delay (“the characteristics”).

43    Groundhog also alleges that it was an implied term in the equipment purchase transactions that the equipment would be fit for its purpose or of merchantable quality.

44    Eastern Pearl rejects those contentions. It says that the equipment was second hand or used and that Groundhog did not rely on the skill or judgment of Eastern Pearl in choosing the equipment it bought from Eastern Pearl.

(i)    The s 52 Trade Practices Act claims

45    In addition to claims of breach of contract, Groundhog seeks to rely on s 52 of the TP Act. That claim is not sustainable. That is because the conduct of Eastern Pearl which Groundhog relies on did not occur within Australia. Eastern Pearl is not an Australian corporation. No consent of the Minister has been sought to raise a s 52 claim against Eastern Pearl; see s 5(3) of the TP Act. This aspect of the cross-claim is rejected.

(ii)    The characteristics

46    There is no independent documentary evidence that the terms constituting the characteristics at [42] above were ever the subject of a verbal agreement between Mr Lee and Mr Mackay. Mr Mackay is not a reliable witness. He demonstrated, by his false emails relating to the JVA, that he is someone who is prepared to be loose with the truth if there is a commercial advantage in so doing. I accept the evidence of Mr Lee that the machinery was sold on an “as is” basis.

(iii)    Not fit for its purpose or lacking merchantable quality

47    Groundhog is able to pursue its cross-claim on the sole basis that Eastern Pearl has breached s 19 of the Goods Act. That section implies in to contracts for the sale of goods, warranties as to fitness for purpose and merchantability in certain circumstances.

48    Section 19 of the Goods Act provides:

Subject to the provisions of this Part and of any Act in that behalf there is no implied warranty condition as to the quality or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale, except as follows –

(a)    where the buyer expressly or by implication makes known to the seller the particular purpose for which the goods are required so as to show that the buyer relies on the seller’s skill or judgment and the goods are of a description which it is in the course of the seller’s business to supply (whether he be the manufacturer or not) there is an implied condition that the goods shall be reasonably fit for such purpose: Provided that in the case of a contract for the sale of a specified article under its patent or other trade name there is no implied condition as to its fitness for any particular purpose;

(b)    where goods are bought by description from a seller who deals in goods of that description (whether he be the manufacturer or not) there is an implied condition that the goods shall be of merchantable quality: Provided that if the buyer has examined the goods there shall be no implied condition as regards defects which such examination ought to have revealed;

(c)    an implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade;

(d)    an express warranty or condition does not negative a warranty or condition implied by this Part unless inconsistent therewith.

49    As counsel for Eastern Pearl submits, there are two preliminary elements to s 19(a). They are:

    The buyer must expressly or by implication make known to the seller the purpose for which the goods are required; and

    The goods must be of a description which it is in the course of the seller’s business to supply.

50    However, counsel contends that the proviso to s 19(a) has the effect that s 19 does not apply to the pieces of machinery the subject of the cross-claim. The proviso excludes a specified article sold under its “patent or other trade name”.

51    The cross-claim concerns Caterpillar equipment sold under that trade name.

52    Groundhog is therefore confined to a claim based on s 19(b) of the Goods Act. Under the proviso to s 19 (b), the merchantable quality term does not apply if an inspection of the item would have revealed the defect. There is evidence that Mr Hoare of Groundhog attended at Yokohama to inspect the first D8T dozer but that it was not available for inspection at that time.

53    Counsel for Eastern Pearl refers to s 61 of the Goods Act which provides that the implications of an implied condition as to merchantable quality:

…may be negatived or varied by express agreement or by the course of dealing between the parties or by usage if the usage be such as to bind both parties to the contract.

54    Eastern Pearl relies on conversations between Mr Lee on the one hand and Mr Mackay and Mr Predika of Groundhog on the other, in which Mr Lee explained that Eastern Pearl sold its equipment on an “as is” basis. Mr Lee’s evidence was to the effect that while it tried to obtain equipment in good working order it did not offer any guarantees about equipment and suggested that Groundhog inspect the equipment for itself.

55    The effect of Mr Lee’s evidence was that although the practice of Eastern Pearl was to sell equipment on an “as is” basis, if there was any difficulty with any particular piece of equipment it would consider each issue as it arose in the best interests of a long term commercial relationship between the parties. Any problems which occurred with particular pieces of equipment were prepared to be taken into account by Mr Lee in future deals.

56    There is no credible evidence that Groundhog told Eastern Pearl about any difficulties it had with any of the pieces of machinery the subject of the cross-claim. The only such evidence came from Mr Mackay. For reasons identified above, in particular in respect of his false emails, I do not consider Mr Mackay to be a reliable witness. I reject his evidence that he complained to Mr Lee about the defects. I prefer the evidence of Mr Lee to the effect that no such complaints were made.

57    I agree with counsel for Eastern Pearl that Mr Mackay, when making excuses to Mr Ting about the lack of payment for the sale of the 992G, did not ever articulate any claim for compensation for faulty machinery. That was when one would have expected such a claim to be made had it possessed any validity.

58    I am satisfied that the industry of the purchasing of earth-moving machinery operates on a sold “as is” basis. Such a term appeared on Groundhog invoices for the on-sale of equipment by it.

59    I am satisfied that s 61 of the Goods Act applies in the current circumstances. The terms to be implied by s 19(b) have been negatived by express dealing by the parties. The express dealing comprehends that the machinery is to be sold and purchased on an “as is” basis.

(iv)    Conclusion of the cross-claim (other than as to the Hitachi Excavator)

60    The TP Act is inapplicable. The s 19(a) proviso in the Goods Act applies. The s 19(b) implied condition as to merchantable quality is displaced by the operation of s 61 of the Goods Act. This leaves the cross-claim with no room to operate.

61    Subject to the issues raised at [62] to [64] below, there is no need to consider the individual complaints now raised with respect to the pieces of equipment referred to in the cross-claim. As no breach of contract has been established no need arises to quantify the claimed breach.

(v)    The Hitachi Excavator

62    An additional issue raised in the cross-claim, apart from the Caterpillar equipment, concerned an Ex 1800 Hitachi Excavator. Groundhog alleges that Eastern Pearl required it to sell the Hitachi for less than its re-sale value to a Queensland company called R D Williams Pty Ltd (“R D Williams”).

63    The cross-claim alleges that Mr Mackay complied with this demand at Mr Lee’s insistence, “in the interests of a long-term relationship”. Groundhog’s compliance cost it $400,000 in lost profit. This episode also resulted in Groundhog paying $25,000 compensation to R D Williams and incurring about $11,000 in cartage costs.

64    This aspect of the cross-claim must also be rejected. No one forced Groundhog to lose this opportunity to make a profit or to contribute to a loss incurred by R D Williams. It did so in consideration of its long term best commercial interests. There is no basis in law to visit the consequence of that commercial decision on Eastern Pearl.

(vi)    Final conclusion on the cross-claim

65    For the reasons expressed above, the cross-claim cannot succeed in any regard. It is dismissed with costs.

Associate:

Dated:    24 April 2012