-  WASC 11; CIV 1647 of 1998
- Supreme Court of Western Australia
NON CONFORMITY OF GOODS (ART. 35 CISG)- GOODS NOT FIT FOR A PARTICULAR PURPOSE - PUBLIC LAW REQUIREMENTS IN BUYER'S COUNTRY
REMEDIES AVAILABLE TO THE BUYER (ART. 45 CISG) - DAMAGES - CAN BE AWARDED TOGETHER WITH OTHER REMEDIES (ART. 45(2) CISG)
BUYER'S RIGHT TO REDUCE PRICE WHERE LACK OF CONFORMITY - CALCULATION OF REDUCTION (ART. 50 CISG)
INTEREST RATE - DETERMINED BY OTHERWISE APPLICABLE DOMESTIC LAW (ART. 78)
A seller from Singapore and an Australian company (buyer) entered into a contract for the sale of a contact lenses solution, expressly stating that the goods had to be sterile and manufactured according to the Australian Therapeutic Goods Administration (TGA).
A dispute arose between the parties when the buyer refused to pay the price alleging the lack of conformity of the goods: upon examination by the TGA the goods were found to be contaminated with bacteria and therefore not sterile.
The Court first held that since CISG prevailed over the provisions of the Sales of Goods Act of 1895, the contract was governed by CISG (Art. 1(1)(a) CISG).
As to the merits, the Court made express reference to Arts. 35 and 45 CISG holding that, by virtue of Art. 45, the buyer could rely on both Art. 50 in order to obtain the price reduction and on Art. 74 in order to claim damages for breach of contract. For this reason the Court ordered that the purchase price claimed by the seller be reduced to zero; furthermore the Court held that the buyer was entitled to damages for breach of contract (and for negligence) and to interest.
1 BARKER J: The plaintiff (Ginza) in action CIV 1647 of 1998 (the Ginza action) is a company incorporated in Singapore. At material times, Ginza manufactured contact lens solution in Singapore and its place of business was in Singapore.
2 The defendant in the Ginza action (Vista) is a company incorporated in Australia. At material times, Vista carried on business in Australia as a wholesaler of Ginza's contact lens solution and its place of business was in Australia.
3 The plaintiff (Kontack) in action CIV 1434 of 2000 (the Kontack action) is a company incorporated in Australia. At material times, Kontack carried on a like business to Vista in Australia and its place of business was in Australia.
4 The defendant in the Kontack action is Ginza.
5 At material times, the persons who directed and managed the business of Vista and Kontack and were entitled to beneficial ownership of the shares in Vista and Kontack were common.
The nature of the claims and counterclaims
6 In the Ginza action, Ginza sues for the invoiced costs of contact lens solution (goods) supplied by it to Vista.
7 Vista says that such goods were supplied, but only some were supplied to Vista. It says Kontack dealt with Ginza for the supply of the majority of the goods in question.
8 Both Vista and Kontack allege, in any event, that the goods so supplied by Ginza were not manufactured in accordance with agreed requirements and were contaminated, in breach of express and implied terms of the respective contracts between them and in breach of tortious duties of care owed to each of them.
9 As a result of the breaches, Vista and Kontack say they were obliged to recall these and like goods from retail sale in Australia. They say they should not be obliged to pay the invoiced costs of the goods and, further, that they are entitled to be paid damages for the losses they have suffered.
10 Ginza denies any agreement with Kontack, denies the alleged breaches and, in any event, denies that either Vista or Kontack suffered losses to the extent claimed.
11 Vista also claims against Ginza a separate sum pursuant to a commission agreement.
The pleaded causes of action
12 In both the Ginza action and the Kontack action, Vista and Kontack respectively plead causes of action in contract and tort.
13 In each action, Vista and Kontack respectively plead that it was an express term of the agreement that: (1) goods supplied would be manufactured according to the requirements of the Australian Therapeutic Goods Administration (TGA); and (2) the goods would be sterile. They also plead implied terms as to merchantable quality and fitness for the purpose of the goods supplied and to this end rely upon the provisions of either the Sale of Goods Act 1895 (WA) or the United Nations Convention on Contracts for the International Sale of Goods (Vienna Sales Convention) which has been given effect in Western Australia by the Sale of Goods (Vienna Convention) Act 1986 (WA).
14 Ginza admits there was an agreement with Vista substantially in these express terms. However, Ginza denies that there was ever an agreement concluded between itself and Kontack as alleged or at all. Ginza also says that the implied terms arise under the Vienna Sales Convention and not under the Sales of Goods Act 1895.
15 In each action, Vista and Kontack respectively claim that the goods supplied by Ginza: (1) were supplied in breach of each of the terms of that agreement; (2) were not reasonably fit for the purpose for which they were required, contrary to the term of the agreement implied pursuant to s 14(1) of the Sales of Goods Act 1895 or the Vienna Sales Convention; and (3) were not of merchantable quality, contrary to the term of the agreement implied pursuant to s 14(11) of the Sale of Goods Act or the Vienna Sales Convention.
16 Ginza denies it has acted in breach of the contract. It also raises an issue whether, in the circumstances of the case, if it is has any contractual liability, the Sale of Goods (Vienna Convention) Act 1986 applies to the exclusion of the Sale of Goods 1895 and has the effect of limiting its liability.
17 In the event that the Court should find that there was no agreement concluded between Kontack and Ginza as alleged by Kontack, Kontack further claims that Ginza is liable to it in damages for negligence in respect of the manufacture of the goods. Kontack pleads that Ginza negligently supplied goods to Vista that were not manufactured according to the requirements of the TGA and were not sterile.
18 Vista also claims, in the alternative, that Ginza is liable to it in damages for negligence in this same respect.
19 Ginza denies that it is liable to either Vista or Kontack in tort.
20 In a separate counterclaim in the Ginza action, Vista claims that Ginza is liable to pay it the sum of $AUD19,337 on account of commissions due to it pursuant to a commission agreement and as a result of the sale of contact lens care goods by Ginza to the Choonwae Pharma Corporation of Korea. Ginza admits that liability but pleads it is entitled to set off against the sum claimed the amount of the claim of Ginza in the Ginza action.
21 In the event that Vista makes out its claim for damages in the Ginza action in contract or in tort, Vista claims that it is effectively entitled to reduce Ginza's claim to zero and is also entitled to damages under the following heads of damage: (1) the invoiced costs of recalled goods; (2) the lost profit margin on the resale of goods to retailers; (3) the direct costs of recalling goods; (4) lost reputation, goodwill and future sales.
22 Kontack claims similar entitlements.
23 In these circumstances, the following issues fall for determination:
1. Was there any relevant agreement at material times between Kontack and Ginza?
2. Was the agreement between Vista and Ginza, and any agreement found to exist between Kontack and Ginza, breached by the failure of Ginza to meet the express term of the contract that the goods should be "manufactured according to the requirements of the TGA"?
3. Further, or alternatively, was the agreement between Vista and Ginza, and any agreement found to exist between Kontack and Ginza, breached by reason of a failure of Ginza to comply with the express term of the contract that the goods should be "sterile"?
4. Further, or alternatively, was the agreement between Vista and Ginza, and any agreement found to exist between Kontack and Ginza, breached by reason of a failure of Ginza to comply with the implied terms of the contract that the goods should be of merchantable quality and fit for the purpose required?
5. Does the Sale of Goods (Vienna Convention) Act 1986 apply to the agreement between Ginza and Vista, and any agreement found to exist between Ginza and Kontack, to the exclusion of the Sale of Goods Act 1895; and if it does so, does it have the effect that Vista and Kontack are only entitled to reduce the price with respect to those batches of goods which were actually tested and found to be not sterile?
6. If there was no agreement between Kontack and Ginza as alleged, is Ginza liable to Kontack in damages for negligence?
7. If Vista is entitled to damages, what is the extent of its entitlement?
8. If Kontack is entitled to damages for negligence against Ginza, what is the extent of its entitlement?
Were the goods "fit for the purpose" and of "merchantable quality"?
186 In light of my finding that the goods were not sterile, and given the concessions of the parties noted above (and subject to consideration of the argument of Ginza that the Vienna Sales Convention applies so as to affect any reduction in price to which Vista may be entitled), I also find that the goods were not fit for the purpose for which they were supplied.
Does the Sale of Goods Act 1895 or the Sale of Goods (Vienna Convention) Act 1986 apply to the contract?
187 The Sales of Goods Act 1895 was enacted in order to codify the law relating to the sale of goods. It has counterparts throughout Australia. It is understood that the Sales of Goods Act 1895 applies to contracts of sale of goods made in Western Australia.
188 The Sale of Goods (Vienna Convention) Act 1986 was enacted to give effect within Western Australia to the United Nations Convention on Contracts for the International Sales of Goods (Vienna Sales Convention). By s 5 of the Convention Act, the provisions of the Vienna Sales Convention set out in Sch 1 to the Act have the force of the law in Western Australia. Section 6 provides that the provisions of the Convention prevail over any other law in force in Western Australia to the extent of any inconsistency. This would appear to mean that, for example, to the extent that the Vienna Sales Convention makes provision inconsistent with that made by the Sales of Goods Act 1895, the provisions of the Convention prevail.
189 Article 1 par (1)(a) provides that the Convention applies to contracts of sale of goods between parties whose places of business are in different States, when the States are Contracting States. In this case, the place of business of Ginza at all material times was in Singapore and that the place of business of Vista at all material times was in Australia. I have found above that the contract of sale of goods in question in this case was between Ginza and Vista only. In other words, there is in this case a contract of sale of goods between parties whose places of business are in different States, the States relevantly being Singapore and Australia. It is common ground that each State is a Contracting State. In those circumstances, the Vienna Sales Convention applies to the contract of sale of goods that I have found to exist between Ginza and Vista.
190 By the pleadings in the Ginza action and by the submissions of the parties, each of Ginza and Vista accept that the implied terms pleaded going to fitness for the purpose and merchantable quality find expression both in the Sales of Goods Act 1895 and in the Vienna Sales Convention. This is substantially so.
191 For example, in a manner not unlike s 14 of the Sales of Goods Act 1895, the Vienna Sales Convention deals with the question of conformity of the goods with the contract. In particular, by Article 35 par (1), the seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract. By par (2), except where the parties have agreed otherwise, the goods do not conform with the contract unless, inter alia, they:
(a) are fit for the purpose for which goods of the same description would ordinarily be used;
(b) are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller's skill and judgment.
192 The Vienna Sales Convention also specifies remedies for breach of contract by the seller. Article 45 par (1) provides that, if the seller fails to perform any of his obligations under the contract or this Convention, the buyer may: (a) exercise the rights provided in Articles 46 to 52; (b) claim damages as provided in Articles 74 to 77. By par (2), the buyer is not deprived of any right he may have to claim damages by exercising his right to other remedies.
193 Article 50, which is discussed in further detail below, provides, inter alia, that if the goods do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time.
194 Article 74 provides that damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss for which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of the contract.
195 By virtue of Article 45, a buyer can both rely on Article 50 in order to claim the right to reduce the price of goods supplied, as well as on Article 74 in order to claim damages for breach of the contract. In that regard, the provisions of the Convention appear similar to those of s 52, and especially s 52(4), of the Sales of Goods Act 1895. The latter subsection permits a buyer to set up a breach of warranty in diminution or extinction of the price as well as maintain an action for damages for breach of warranty if further damage has been suffered by a buyer beyond that diminution or extinction of the price. In this action, this is how Vista has pleaded its case.
196 On the face of it, the terms of the Convention would appear to govern all relevant issues to the exclusion of the Sales of Goods Act 1895.
Vista's right to reduce the price of the goods
197 In these circumstances, therefore, Vista is entitled to reduce the price of the goods supplied by Ginza and the subject of the Ginza action from that claimed to zero pursuant to the Vienna Sales Convention Article 50, which reflects s 52(1)(a) of the Sales of Goods Act 1895. This outcome reflects the proportion the value the goods actually delivered had at the time of the delivery (effectively no value) to the value that conforming goods would have had at that time (the sum claimed by Ginza in the Ginza action).
198 Ginza says that the effect of Article 50 and 51(1) of the Vienna Sales Convention is such that Vista is only entitled to reduce the price with respect to those batches of product that were tested and found to have been contaminated. I do not consider the Convention operates in the manner contended for.
199 Article 50 of the Convention provides that:
"If the goods do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time. However, if the seller remedies any failure to perform his obligations in accordance with article 37 or article 48 or if the buyer refuses to accept performance by the seller in accordance with those articles, the buyer may not reduce the price."
Article 51(1) provides that:
"If the seller delivers only a part of the goods or if only a part of the goods delivered is in conformity with the contract, articles 46 to 50 apply in respect of the part which is missing or which does not conform."
200 In my opinion, the effect of these two Articles is not as contended for by Ginza. Article 50 does not provide that only the costs associated with the recall of the particular goods actually tested and proved to be contaminated, are recoverable. Article 50 simply provides that, where such goods do not conform to the contract, the buyer may reduce the price in the same proportion as the value "that the goods actually delivered" had at the time of delivery bears to the value that the conforming goods would have had at that time. The question that is raised for consideration in this action is which, if any, of the goods were conforming goods. Where, by reference to the evidence, the Court concludes that all the goods in issue should be taken not to be conforming goods, then Article 50 has the effect, as I have found, that the price of the goods in question should be reduced to zero.
201 The result of the application of Article 50, in the circumstances as I have found them, means that Ginza cannot succeed in its claim.
202 On the other hand, Vista is entitled to its remedies, not only under Article 50 in this way, but also for damages assessed in accordance with Article 74 of the Vienna Sales Convention.
203 A further question remains as to whether Ginza is liable to Vista and to Kontack in damages for negligence.
Is Ginza liable to Vista in damages for negligence?
204 Ginza agreed to manufacture sterile lens solution for distribution in Australia by Vista, with the additional understanding that goods distributed under the "Kontack" brand name would also be distributed by Kontack. Ginza knew that such goods had to be manufactured in accordance with the requirements of the Australian TGA in order to qualify for importation by Vista into Australia or for sale within Australia.
205 In light of the above findings, I consider that Ginza was not only bound by an express term of the contract between it and Vista to supply goods that would be manufactured according to the requirements of the Australian Therapeutics Goods Administration and that such goods would be sterile, but that it also owed Vista a duty of care to provide goods to Vista that were manufactured in accordance with the requirements of the TGA and that were sterile.
206 In light of the above findings, it follows that Ginza breached each duty of care it owed in these terms to Vista and is liable in damages for negligence to Vista as a result.
Is Ginza liable to Kontack in damages for negligence?
207 I have found that Kontack did not conclude an agreement with Ginza as alleged. Accordingly, Kontack is unable to sustain a claim in damages for breach of contract.
208 However, Kontack argues that it is entitled to have damages in negligence in a similar sum. For the reasons set out above in relation to Vista's entitlement to sue in tort, I accept that that is so. At all material times, Ginza, through Mrs Khan, was aware that Kontack Pty Ltd had been incorporated by Dr Grauaug as a corporate vehicle for the marketing of "Kontack" brand goods in Australia and that Kontack was itself the wholesaler or distributor of Kontack brand products within Australia. Mrs Khan of Ginza was well aware of the close relationship between Vista and Kontack and the reason why Kontack had been formed separately to sell Ginza product within Australia. Indeed, as noted above, on occasion invoices and statements were issued by Ginza directly to Kontack for the supply of certain goods, although not those in issue in this action.
209 In those circumstances, I find that Ginza owed Kontack duties of care to provide goods to Vista under the "Kontack" brand name, that were manufactured in accordance with the requirements of the TGA and that were sterile.
210 I also find that the duty of care in each respect was breached, for the same reasons I have set out above as to why the terms of the contract with Vista, to similar effect, were breached.
211 Accordingly, Ginza is primarily liable to Kontack for damages in tort.
Vista's and Kontack's damages
212 In light of the facts as I have found them, Vista was entitled, if not obliged, to recall the goods that it did recall. Vista, in my view, acted responsibly in its dealings with the TGA, both before and after the third recall. In practical and commercial terms, it had no alternative but to act in the way that it did.
213 By reason of the finding that there was no relevant contract between Kontack and Ginza in respect of the goods identified in the Kontack action, only Vista is entitled to damages for breach of contract. However, each of Vista and Kontack are entitled to damages for the negligence of Ginza. Vista's damages, in my view, in a case such as this, will be the same whether measured in contract under Article 74 of the Vienna Sales Convention or in tort.
214 Damages are claimed under the following heads of claim: (1) The invoiced costs of recalled products, that is to say, invoices raised by Ginza for which Vista was liable. (2) Lost profit margin on the resale of the product concerned. (3) Direct costs of recalling product. (4) Lost reputation, goodwill and future sales.Each head of damage constitutes something which Ginza ought to have foreseen at the time of making the contract, should it breach the contract, save in respect of head (3) so far as Kontack is concerned. I will deal with each head of claim in turn.
Invoiced costs of recalled products
215 Vista: I have found that the products duly recalled by the TGA were manufactured by Ginza in breach of its contract with Vista and also negligently.
216 The invoiced costs of those products recalled by Vista was in the sum of $AUD163,557.45. However, the invoices include invoices 97/0304 and 97/3006 in a total sum of $AUD31,635, which were never paid by Vista and which comprised part of Ginza's claim. As Vista is entitled to reduce Ginza's claim on account of these invoices (as set out above), they cannot also comprise part of the damages awarded to Vista. Accordingly, Vista is only entitled to damages under this head of damage in the sum of $AUD131,922.45.
217 Ginza further argues that damages under this head should be further reduced by a sum of $AUD6,516.64, on the basis that Dr Grauaug conceded in cross-examination that his calculation of such damages involved a double-counting. I do not accept that this is the case. Dr Grauaug explained in his evidence that, if one totalled all of the AMCAL Visiclear MPS500ML bottles that had been counted in the stocktake, the number was 23,117. If one then totalled the AMCAL Visiclear MPS500ML bottles that were listed in the damages summary in exhibit V22, including the last item on that list which was said to have been counted twice, the total was 21,867. It appears, therefore, that Vista has, in fact, claimed less recalled AMCAL Visiclear MPS500ML stock than the stocktake listed. This leads me to conclude there has been no double-counting as alleged.
218 Kontack: Because I have found there is no contractual relationship between Ginza and Kontack, it follows that Kontack cannot make a claim in respect of the invoiced costs of products recalled by it, because it was not invoiced by Ginza for those products. However, Kontack is entitled to damages in tort under this head in respect of such invoiced goods.
219 The invoiced cost of those products bearing the Kontack brand name the subject of this action was $AUD73,330.40. However, these invoices included invoices 97/0504, 97/0706 and 97/1107 in respect of Kontack brand name goods which have never been paid either by Vista or Kontack. Accordingly, the claim for damages under this head should be reduced by a sum of $AUD48,724.90.
220 Kontack is entitled to damages under this head, therefore, in the sum of $AUD24,605.60.
Lost profit margin on resale of recalled products
221 Vista: As to the lost profit margin on the resale of products to retailers in Australia, the amount claimed by Vista action is $AUD79,232.78.
222 Of this sum, Ginza says that Dr Grauaug conceded that $AUD4921.28, being the figure in the last line of exhibit V22, was a double-counting of sums claimed in that exhibit. For the reasons set out above, I do not accept there has been any relevant double-counting.
223 Ginza also claims that Dr Grauaug admitted that commission was paid on the total price of the goods, that is, the total of Ginza's invoiced price and that it has been included in the calculation of alleged lost profit. The commission is said to have been between 10 and 15 per cent and payable on Vista and Kontack brands. Ginza says these amounts have not been accounted for; and there is no documentary evidence that the commissions were in fact paid to the agents concerned. Ginza says the only evidence that they had been paid came from Dr Grauaug in re-examination, but he did not point to any documents showing accounts from the agents or confirmation of payment to them. Thus, it is said by Ginza that, after taking account of commissions payable on Vista and Kontack brands, and having regard to the fact that there is no primary evidence in relation to Dr Grauaug's assertion that commissions have been paid, appropriate deductions have to be made from Vista's alleged loss of profit to provide a true figure.
224 On behalf of Vista and Kontack, it is submitted that there should be no deduction in the award of damages under this head because of the commission paid. Ginza and Kontack claim they are entitled to the gross profit margin on the sale of their respective products because the commission and all other expenses in relation to the sales were paid by Vista and Kontack respectively. Dr Grauaug said in evidence that the commission in respect of sales was, in fact, paid. This assertion is said to be supported by the Vista and Kontack financial statements in vol 6 of the trial bundle which confirm that the commissions were paid. I accept that this is so. Trial bundle page 2500 shows that in the financial year 1997, Vista paid commission of $AUD8074. Trial bundle page 2518 shows that in the financial year 1998, Vista paid commission of $AUD9127. Trial bundle page 2608 shows that in the financial year 1997 Kontack paid commission of $AUD25,923. Trial bundle page 2622 shows that in the financial year 1998, Kontack paid commission of $AUD3911. Thus, in 1997, Kontack paid $AUD25,923 in commission on gross sales of $AUD183,692: as to the latter sales see trial bundle page 2608. This represented approximately 15 per cent of gross sales. In relation to Vista in 1997, Vista paid $AUD8074 in commission on $AUD538,947 of gross sales (see trial bundle page 2500). However, Vista was not required to pay commission on sales of such brand names as AMCAL, Soul Pattinson and Blue Circle.
225 I accept the submission of Vista and Kontack to the effect that commission, therefore, was only payable in relation to the "Vista" brand name and "Kontack" brand name goods. The Vista branded goods represented a small amount of total sales. The Kontack brand name goods were only sold by Kontack. Vista appears to have sold a small amount of product under the "Vista" brand name, where commission was paid. And also to have sold other brands, such as AMCAL, Soul Pattinson and Guardian, where no commission was payable.
226 The evidence suggests that the commissions referred to by Dr Grauaug were in fact paid. For example, trial bundle page 2500 shows that, for the financial year 1997, Vista paid commission of $AUD8074 and the amount of $AUD4921.28, challenged by Ginza as not having been paid, would appear to be part of this sum.
227 Kontack: Under this head of damage, Kontack claims lost profits of $AUD115,650. I accept the submission of Ginza that Vista cannot now claim in contract for lost profits in respect of goods sold by Kontack, a separate company from itself, and must abide by the legal and contractual arrangements it created for itself. Vista accepts that, if the Court does not find a contract between Kontack and Ginza, then it is not open to Vista to convert that loss of profits claimed in the sum of $AUD120,571.88 to a Vista loss of profits claim. However, Ginza is liable to Kontack for damages for negligence under this head of damage.
228 Ginza submits, however, that, if it is liable for such damages, the claimed lost profit of $AUD115,650.20 should be reduced by the sum of $AUD28,347.09. This latter sum is said to represent commission allegedly paid at 15 per cent on the total price of all Kontack products in accordance with exhibit V22. However, for the reasons I have set out above, I am not satisfied that the submission is correct. I am satisfied on the balance of probabilities that the commissions in question were paid by or on behalf of Kontack and I am satisfied that Kontack is entitled to the gross profit margin on the sale of its products. It was obliged to pay commissions to achieve the sales and in the calculation of damages should not be obliged to forfeit the recovery of those commissions which were, in effect, wasted expenditure.
229 I find, therefore, that under this head of damage Kontack is entitled to the sum of $AUD115,650.20.
Direct costs of recalling products
230 Vista: The direct obligation to recall the products was imposed on Vista by the TGA and I find that only Vista is entitled to claim for those costs directly incurred in recalling the products.
231 In relation to the direct cost of recalling products, the sum incurred by Vista is in the sum of $AUD105,521.68.
232 Ginza also submits that Dr Grauaug admitted that the expenses listed on page 43 of his witness statement for Blue Circle, $AUD25,866 have not been paid. The essence of the submission of Ginza is that there is no presently incurred sum, nor is there a sum that is, in all probability, likely to be incurred.
233 It is correct to observe that this sum has not been paid. However, in my view, there is a present liability in respect of the Blue Circle debt and no reason to consider that it has been forgiven by the creditor. Indeed, the Blue Circle debt is the subject of a judgment debt in the Victorian Magistrates' Court. The fact is that Vista has been in receivership for some time and this event may well have led to the creditor not pressing for satisfaction of the outstanding judgment debt.
234 Ginza also says that Vista is not entitled to claim as damages a sum of $AUD8678.47 still owing to Sigma (formerly AMCAL) for public relations consultancy fees and solicitors' fees. I accept that items of expense included in the Sigma demand on account of public relations consultancy fees and solicitors' fees would not, on the face of it, be recoverable against Vista, and that solicitors' legal costs could only become recoverable to some extent, in any event, once an action had been commenced. There is nothing to suggest that the action has been commenced.
235 Accordingly, the entitlement of Vista to damages under this head is in the sum of $AUD105,521.68 less the claimed Sigma expenses of $AUD8678.47, being the sum of $AUD96,843.21.
236 Kontack: I find that Kontack is not entitled to any portion of the $AUD389.20 claimed under this head of damage.
Claim for loss of goodwill
237 As to the head of loss relating to loss of reputation, goodwill and future sales, Vista claims a sum of between $AUD158,000 and $AUD178,000. In its written opening, Vista claimed that amount. Kontack also claimed damages under the same head of damage in its pleading, but did not particularise any sum. Mr Thompson, called by Vista to give expert evidence concerning the extent of such business losses, treated Vista and Kontack as one and the same entity for the purposes of his calculations. Mr Thompson's view was that any potential purchaser would purchase Vista and Kontack as a group and the businesses should be valued collectively. It seems that only Vista's claim for damages under this head was being pressed at trial.
238 No doubt it is correct to observe that, in the particular circumstances governing the shareholding, control and management of Vista and Kontack, the prospective purchaser of the business of Vista would expect to acquire the business of Kontack as well. However, that does not mean, as a matter of law, that the value of the goodwill of Vista necessarily comprehends the value of the goodwill of Kontack. It may simply mean that the value of the goodwill that a prospective purchaser might be prepared to pay would be the composite value of the two businesses.
239 Mr Thompson made no attempt to distinguish between the businesses of Vista and Kontack and no evidence was adduced to attribute to Kontack any goodwill value. Nor was any formula or other evidence adduced to suggest any means of breaking-down the value attributed to Vista by Mr Thompson so that it reflected goodwill values for each of Vista and Kontack.
240 For present purposes, given the finding I have made that Ginza is liable to Kontack for lost profit margin on the resale of product in tort, it is reasonable to conclude that Ginza should also be liable under this head of damage to Vista in contract and tort and to Kontack in tort, if such a loss is proved. The real question is, having regard to the disclosed business activities of Vista and Kontack, what evidence is there of damage under this particular head of claim.
241 Mr James Ronald Thompson, of Jarot Business Assessments, gave expert evidence in support of this head of the claim of Vista and Kontack for damages. His evidence was the subject of close cross-examination by Senior Counsel for Ginza. In relation to the claim for damages under this head, which might simply be called "goodwill", Ginza says that Vista, and by extension Kontack, had no right at any material time to such damages because it had no right to continuity of supply from Ginza. Ginza, it says, could have determined the arrangements that were in place at its whim, as Dr Grauaug of Vista conceded in his evidence. If Ginza had simply decided to stop supplying Vista with product, Vista would have been in the same position as it was presently. It could not insist on continuity of supply from Ginza.
242 Similarly, Ginza argued that no contractual arrangements existed between Vista and any of its retail outlets. If those outlets had ceased selling Vista stock at any time, Vista would simply have collapsed. Ginza contends that no representative of any of the retail outlets was called to give evidence as to why these ceased sourcing Vista's products and, by implication, no inferences can be drawn.
243 In any event, Ginza claims Vista's claim ignores the fact that it found another supplier and dealt with that supplier until October 1998, some 12 months after Ginza's product was recalled. The evidence showed that Esoform, an Italian company, was relied on by Vista for about a 12-month period to supply an alternative contact lens solution for its Australian business. In those circumstances, Ginza argues it is not possible causally to relate the collapse of Vista's business to Ginza rather than Esoform. It also argues that Mr Thompson should have taken Vista and Kontack's trading relations with Esoform in this period into account when assessing the "goodwill" value of the business.
244 In my view, it is relevant to take into account the fact that Vista and Kontack had no right to continuity of supply of product from Ginza at all material times. However, given the subsistence of the relationship between Vista and Ginza from the early 1990s until late 1997, it is reasonable to conclude that none of the parties had any real expectation, other than that the arrangements in place in July 1997, prior to the third audit, would continue indefinitely into the future.
245 It is also fair to observe that Vista did make arrangements with Esofrom, as an alternative supplier of contact lens solution, following the breakdown of its arrangements with Ginza in late 1997. However, the fact that it obtained supplies for 12 months before its business collapsed does not, in my view, mean that there can be no causal link between the collapse of Vista's (and Kontack's) business and the breaches of contract or tortious duties I have found. Vista, obviously, did what it could to obtain alternative supplies so that its business did not collapse. However, its efforts to find a suitable alternative supplier were not successful. The damage done to the business of Vista (and Kontack) by Ginza's breach of contract (and duty of care) took their toll, notwithstanding the attempt by Vista to replace Ginza with Esoform as a reliable supplier. In my opinion, the breach of the contract and the tortious conduct were capable of constituting material causes of whatever loss of goodwill was ultimately suffered by Vista and Kontack.
246 In that respect, Ginza submits that the evidence of Mr Thompson should not be relied on in an assessment of the claim for loss of goodwill made by Vista and Kontack. In my view, much of the expert evidence provided by Mr Thompson does not assist in measuring the extent of the business losses of Vista and Kontack. Mr Thompson was substantially reliant on information provided to him by Dr Grauaug concerning the nature and conduct of the business, although Mr Thompson insisted he made some independent assessments based on his understanding of the business at the time operated by the companies.
247 Mr Thompson, for example, proceeded on the basis that Vista had a 10 per cent share of the contact lens solution market in Australia at material times. This information was given to him by Dr Grauaug. Dr Grauaug ultimately conceded in cross-examination that Vista had nothing like a 10 per cent share of that market. Dr Grauaug accepted that a market share of about 2 per cent was more accurate. Mr Thompson agreed that, if he had been told the market share was 1 per cent or 5 per cent, it would have had a material effect on his conclusions.
248 Mr Thompson described Vista as a wholesale business, but said this was the only business importing contact lens solutions of which he had any personal knowledge. Ginza submits that the characterisation of Vista as a wholesaler was incorrect. In fact, it should be characterised as a distributor. Mr Thompson's report is said to be based on Vista being a wholesaler. For example, Mr Thompson derived the rate of return on investment (ROI) from his belief that Vista was a wholesaler. If one accepts the claimed distinction between a wholesaler and a distributor, then there is substance in the contention that the assessments made by Mr Thompson were fundamentally flawed, as they were based on a false premise.
249 In many respects, I consider there is force in the submission made on behalf of Ginza in this respect. Vista was not the manufacturer, obviously, of the Ginza products. It simply imported them into Australia and then distributed them. However, it was a wholesaler in the conventional sense that it sold those goods to retailers. I do not think that any significant distinction can be drawn between the act of distribution for profit and the act of wholesale, in these circumstances. The point really is that initially made on behalf of Ginza, that Vista and Kontack had no right to continuity of supply. They were not the manufacturers and could not guarantee contracts of supply to retailers within Australia. Nor did they have any control over a retail outlet's decision whether or not to take their product. They constituted examples par excellence of the "middleman"; and, in this case, a middleman without any apparent commercial leverage. All of these factors would be taken into account by any prudent purchaser of a business such as that operated by Vista and Kontack and would materially affect the rate of return on investment that such a purchaser would consider appropriate.
250 Mr Thompson was asked to specify what comparable businesses he had previously assessed and valued that would give substance to his testimony as to the goodwill value of this business. He was unable to describe any single business which was comparable to Vista. When asked what analysis of the future prospects of the business he had undertaken, Mr Thompson said that he worked on information given to him, the fact that the product was a simple one, the fact that it was a wholesaling business, and what he thought would appeal to the buyer.
251 It appeared from cross-examination that Dr Grauaug did not tell Mr Thompson that Vista's relations with Esoform had broken down or that its product had been recalled by the TGA. Nor did Dr Grauaug tell him that Vista had continued operating until the end of 1998, and that it had only ceased operating when Esoform's product was recalled.
252 The 40 per cent return on investment figure that Mr Thompson used in his calculation of the goodwill value was a figure based on his subjective assessment of Vista's performance. He acknowledged that, even after implementing certain "add-backs", the combined Vista/Kontack net profit in 1996/97 was only $42,000. On that basis, he accepted there was no goodwill value in the business. He said, however, that his goodwill value assessment was based on his view as to the projected higher profits the business would, in all probability, earn in the future. However, he acknowledged his opinion was based on a number of assumptions. When asked what analysis he had undertaken in deriving his opinion that the growth of sales could have been anywhere between 30 per cent and 70 per cent, he indicated he did not undertake any analysis and instead relied on his experience. In the event, he averaged the range to suggest that 50 per cent sales growth would be appropriate.
253 Mr Thompson could not produce any worksheets or calculations in respect of the view set out in his report and conceded there were none. When the profits for the three previous years, namely, 63 per cent, 4 per cent and 80 per cent were put to him, he acknowledged that, instead of the business growing, it could have receded to a much lower figure.
254 In short, Mr Thompson took the view that this was a business which was soon to reap the benefits of its careful establishment and that, given its present market share - 10 per cent, as he (incorrectly) understood it - significant growth in profits could be enjoyed from an expenditure base which would be little increased on that disclosed for the 1996/97 year. This appears to me to be a generously optimistic assessment of the likely future of the business expansion of Vista and Kontack as of the 1998 year. It was also one that had no actual regard to the performance of Vista and Kontack during the period it was supplied with similar goods by Esoform, although not too much should be made of this period of trading which was effectively after the event of the difficulties in late 1997.
255 Counsel for Vista and Kontack submitted that "it is very easy to attack Mr Thompson's evidence, but equally difficult to show a flaw in his background, experience and expertise derived in real life as a business valuer who has conducted over 2000 business valuations in 15 years". Mr Thompson, he suggested, "knows what he is talking about". However, counsel also accepted that the key issue to the goodwill valuation made by Mr Thompson was his assumption that sales in the 1998 year would be likely to rise by an average of 50 per cent. Counsel submitted that the course of dealings between Dr Grauaug and the Coles Supermarket chain in 1993, and later with the Woolworths chain, suggested that there was real potential for the combined sales of the two companies to increase dramatically.
256 For my part, I cannot be satisfied that the assumption made by Mr Thompson that, in the 1998 financial year, the combined sales of Vista and Kontack would increase by an average of 50 per cent, or anything like it, is well placed. There is nothing in the evidence before me to justify any such view. Indeed, there is a paucity of evidence before me to suggest any sales growth scenario is realistic. If one were to assume, for the sake of hypothesis, even a 10 per cent growth in combined sales of the two companies, it is apparent from an extrapolation of Mr Thompson's evidence, that a prudent purchaser of the combined businesses would be reluctant to pay any or any substantial sum on account of their alleged goodwill value.
257 In all the circumstances, given that this was a business that depended upon the personal relationships between Dr Grauaug and Ginza , was still in its relatively formative stages, had a small market share (about 2 per cent) and was an importing business that depended upon goodwill between Ginza and Vista to ensure continuity of supplies, and having regard to the actual financial performance of Vista and Kontack at material times, I am not prepared to award any damages on account of the alleged loss of goodwill of the combined businesses of Vista and Kontack. To do so, on the evidence before me, would constitute an entirely speculative exercise, something I should not undertake.
Conclusion and orders
258 In the event, the claim of Ginza in the Ginza action and its counterclaim and claim for set-off in the Kontack action should be dismissed.
259 In the Ginza action, by application of Article 50 of the Vienna Sales Convention (or, for that matter, by application of s 52(1) of the Sale of Goods Act 1895, if that Act were relevant) the purchase price claimed by Ginza should be reduced to zero. Indeed, the same result is arrived at if the counterclaim of Vista for damages in contract and tort is set off, as it should be in a case such as this where there is a close connection between Ginza 's claim and Vista's counterclaim (see Casella v Costin Pty Ltd, unreported; SCt of WA; Library No 5416; 22 June 1984, per Wallace J with whom Burt CJ agreed)) against the claim of Ginza for the unpaid price of the goods supplied.
260 In the Ginza action, Vista is entitled to damages, calculated as follows:
Invoiced costs of recalled products: $AUD131,922.45.
Lost profit margin on resale of recalled products: $AUD 79,232.78.
Direct costs of recalling products: $AUD 96,843.21.
Loss of goodwill, etcetera: Nil
262 Vista is also entitled to judgment on its claim under the commission agreement in the sum of $AUD19,337.00.
263 In the Kontack action, Kontack is entitled to damages, calculated as follows:
Invoiced costs of recalled products: $AUD 24,605.60
Lost profit margin on resale of recalled products: $AUD115,550.20
Direct costs of recalling products: Nil
Loss of goodwill, etcetera: Nil
265 The appropriate orders therefore should be:
(1) In the Ginza action, the claim of Ginza should be dismissed. However, on its counterclaim, Vista is entitled to damages for breach of contract and in negligence in the total sum of $AUD307,998.44. Vista is also entitled to interest on such damages at the rate of 6 per cent per annum, pursuant to s 32 of the Supreme Court Act 1935 (WA), calculated from 10 December 1997 (when formal demand for damages was made following the third recall of the goods in question) until judgment.
(2) In the Ginza action, Vista is also entitled to judgment against Ginza on its counterclaim in the sum of $AUD19,337, pursuant to the commission agreement concerning the sale of contact lens care goods by Ginza to the Choonwae Pharma Corporation of Korea. Vista is also entitled to interest on such sum at the rate of 6 per cent per annum pursuant to s 32 of the Supreme Court Act 1935, calculated from 4 December 1998 (when demand therefor was made) until judgment.
(3) In the Kontack action, on its claim, Kontack is entitled to damages against Ginza for negligence in a total sum of $AUD140,155.80. Kontack is also entitled to interest on such damages at the rate of 6 per cent per annum, pursuant to s 32 of the Supreme Court Act 1935, calculated from 10 December 1997 until judgment. Ginza 's counterclaim and claim to set-off should be dismissed.
(4) Vista and Kontack are also entitled to an order for their costs of the action. I will hear from the parties as to the appropriate terms of the costs order or orders.}}
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