W M Johnson Pty Ltd v Maxwelton (Oaklands) Pty Ltd [2000] NSWCA 286

New South Wales Court of Appeal

CITATION : W M Johnson Pty Ltd v Maxwelton (Oaklands) Pty Ltd [2000] NSWCA 286 FILE NUMBER(S) : CA 40136/99 HEARING DATE(S) : 25 September 2000 JUDGMENT DATE : 23 October 2000

PARTIES : W M Johnson Pty Ltd - Appellant Maxwelton (Oaklands) Pty Ltd - Respondent JUDGMENT OF : Priestley JA at 1; Giles JA at 2; Heydon JA at 40

LOWER COURT JURISDICTION : District Court LOWER COURT DC 42/97 FILE NUMBER(S) : LOWER COURT Puckeridge DCJ JUDICIAL OFFICER :

COUNSEL : M G Skinner - Appellant J S Van Alst - Respondent SOLICITORS : Fleming Muntz, Albury David Kotthoff, Corowa CATCHWORDS : SALE OF GOODS - warranty of merchantability under s 71(1) Trading Practices Act - finding of unmerchantabily upheld - no error in assessment of damages - no question of principle. ND DECISION : Appeal dismissed with costs.

THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40136/99 DC 42/97

PRIESTLEY JA GILES JA HEYDON JA Monday 23 October 2000 W M JOHNSON PTY LTD v MAXWELTON (OAKLANDS) PTY LTD JUDGMENT 1 PRIESTLEY JA: I agree with Giles JA. 2 GILES JA: This is an appeal by leave from a verdict and judgment for damages of $59,647.00 plus interest for breach of implied conditions of merchantability and fitness for purpose on the sale of a hay baler. The appellant contended that there were no implied conditions; that the implied conditions had not been breached; and that there were errors in the assessment of damages. For the reasons which follow, in my opinion the appeal should be dismissed with costs.

Facts 3 The respondent farmed the property "Tara" near Oaklands in New South Wales, running cattle, sheep and fat lambs and growing cereal grains. At the relevant time the farming activities were managed by Mr Paul Nixon, the fourth generation of his family on the property. 4 Much earlier on the respondent had had its own hay baler, but for some years it had used a contract baler for hay making, carrying out the mowing, raking and cartage itself. In about April 1994 Mr Nixon decided to acquire a hay baler, in order to bale the crop of oats then being sown rather than harvest it for grain and in order to undertake contract baling work. The respondent contracted to supply to Riverina Stock Feeds 1750 tonnes of hay, plus or minus 10 per cent, as the anticipated production from the 200 hectares sown to oats. Mr Nixon had not operated a hay baler, although he had been involved in the associated activities. 5 Over a period of about three weeks Mr Nixon inspected three used hay balers. One was a Heston 4800 advertised for sale by Mr Geoffrey Sheel, then on Mr Sheel's property near Yarrawonga in Victoria. It was a large machine capable of producing bales of the size specified by Riverina Stock Feeds. An important component of a hay baler, and the component material to the present case, is the knotting system. The hay is mown and raked into windrows. It is then picked up by the baler, compressed into bales, and tied with twine. The Heston 4800 had six knotters tying six strings of twine per bale, each string with two knots. 6 Mr Nixon also contacted the appellant with a view to acquiring a new hay baler. On about 9 May 1994 he met Mr David Higgins, a salesman employed by the appellant, and was given a price and finance details for a new hay baler. It was too expensive, and the discussion turned to a used hay baler. In the interim Mr Sheel had traded in the Heston 4800 on the purchase of a new hay baler from the appellant, and Mr Higgins said that it could be available. Mr Nixon said that he had previously inspected it. 7 A few days later Mr Higgins returned to Mr Nixon with a price for the Heston 4800. Within the appellant, the price had been arrived at on the basis that the market price of an equivalent hay baler in good condition after reconditioning was $45,000 and $10,000 could be allowed for reconditioning. Mr Higgins wrote the price and finance details on a piece of paper, which he gave to Mr Nixon. The piece of paper said, as to the price, "Used Heston 4800 baler as is $35,000". Mr Nixon said that he had seen three faults when he inspected the hay baler at Mr Sheel's property, being a leaking oil pump, cracks in the bale chamber on each side, and two broken bearings on the bale chamber. Mr Higgins offered to reduce the price by $1,000, and Mr Nixon agreed. 8 The trial judge was satisfied that Mr Higgins "indicated … that the baler was a good and reliable baler and had been in operational use by [Mr Sheel] in the previous season". According to Mr Nixon, Mr Higgins also said that the Heston 4800 only dropped one knot in a thousand. The trial judge made no finding, saying that this may have been mentioned but if it was he did not think Mr Nixon relied on it. For present purposes, I will assume in the appellant's favour that this was not said. 9 On 25 May 1994 Mr Higgins returned with an order form, which was then filled out and signed, by which the respondent requested the appellant to supply the Heston 4800 for $34,000 "as per inspection" and "ex Yarrawonga". The order form noted that there was to be a lease of the machine from "Case Credit", and in due course there was executed a commercial hire purchase agreement by which the respondent took the Heston 4800 on hire from J I Case Credit Corporation of Australia Pty Ltd. 10 The Heston 4800 was still on Mr Sheel's property. It was picked up by Mr Nixon in mid-September 1994. Mr Nixon cleaned off chaff, changed the oil in the gear boxes, greased the machine, adjusted the chains according to the operator's manual, and replaced a bolt. At the request of Mr Higgins, he went to a baling school to familiarise himself with the systems of the baler and to set it to its specifications. 11 On about 21 October 1994 the respondent began baling with the Heston 4800. The knotting system did not function as it should have, with a variety of problems. Sometimes there were insufficient strings, sometimes the knots were not tied or came undone. Adjustments were made with the benefit of the manual, but without improvement in the performance of the machine. The day's haymaking was abandoned. 12 Mr Nixon contacted the appellant, and its serviceman Mr Lutz came out the next day. According to Mr Nixon, Mr Lutz rode on the machine and tied the knots by hand, and did not suggest an explanation for the failure of the knotting system to operate properly. Mr Lutz' evidence was otherwise, to the effect that he said that the knotting system did not operate properly because the windrows were too small and the hay was too dry. The trial judge did not accept Mr Lutz's evidence. 13 The respondent continued to try to bale hay with the Heston 4800, but without success. Mr Nixon and a neighbour tried various adjustments of the knotting system, working from the manual. According to Mr Nixon, he told Mr Lynton Johnson of the appellant that he was not happy with the operation of the hay baler and asked what he was prepared to do about it, receiving the curt reply, "It's not my pigeon". Mr Tom Harkness, a mechanic with experience of hay balers, was brought out to the machine on more than one occasion. He could not get the knotting system to operate properly, and concluded that the knotting system would have to be rebuilt. Eventually the machine was effectively abandoned.

The condition of merchantability 14 It is sufficient for the disposal of the appeal to address the implied condition of merchantability pursuant to s 71(1) of the Trade Practices Act 1974 ("the Act") -

"Where a corporation supplies (otherwise than by way of sale by auction) goods to a consumer in the course of a business, there is an implied condition that the goods supplied under the contract for the supply of the goods are of merchantable quality, except that there is no such condition by virtue only of this section: (a) as regards defects specifically drawn to the consumer's attention before the contract is made; or

(b) if the consumer examines the goods before the contract is made, as regards defects which that examination ought to reveal." 15 The appellant accepted that the respondent was a consumer for the purposes of the Act, and that the Heston 4800 was supplied in the course of a business. I have referred to the commercial hire purchase agreement, which could have called in question whether the appellant was the supplier of the machine. Notwithstanding that agreement, in its defence the appellant admitted the sale of the Heston 4800 to the respondent, saying that the order form signed on 25 May 1994 "became the terms and conditions of the contract of sale between the parties", and the proceedings below were conducted on that basis. The Court ruled against a muted attempt by the appellant to deny on appeal that it was the supplier of the machine. 16 The defective knotting system was drawn to the respondent's attention before the contract for the supply of the Heston 4800 was made. The appellant contended that the knotting system was not unmerchantable, a matter to which I will come; but, assuming that against itself, it submitted that the defective knotting system ought to have been revealed by Mr Nixon's inspection of the machine at the property of Mr Sheel. 17 The trial judge did not identify specific reasons for the failure of the knotting system to operate as it should have, finding that it "was defective in that the six knotters did not operate to tie twine on an eight by four by four bale at the same time" and that the Heston 4800 "was unable to twine tie the bales and was unsuitable for the essential task of [sic] which it was required". 18 Mr Nixon spent about three minutes inspecting the knotting system on the Heston 4800 at Mr Sheel's property. He saw worn parts and differently coloured parts which indicated to him that some parts had been replaced, but he did not see distorted welded parts which would indicate that the machine was not tying knots or anything else which alerted him that it was not tying knots. The machine could not be operated because at that time of the year there was no hay to bale. 19 Worn or replacement parts in a machine of the nature of a hay baler are not unexpected, and are not necessarily in themselves defects or indicative of defective operation of the machine. When the machine could not be operated, it could not be appreciated that the knotting system did not work properly. There was no evidence that the inspection conducted by Mr Nixon (see "that examination" in s 71(1)(b)) should have made known that the knotting system was defective, (for example because the wear in the worn parts was so gross that malfunctioning was inevitable) to a person experienced with hay balers, let alone to Mr Nixon. In my view there was an implied condition that the Heston 4800 was of merchantable quality, and it is not necessary to consider whether the inspection of the machine prior to any question of supply by the appellant could be an exculpatory examination for the purposes of s 71(1).

Breach of the condition 20 By s 66(2) of the Act, goods are relevantly of merchantable quality if they are "as fit for the purpose or purposes for which goods of that kind are commonly bought as it is reasonable to expect having regard to any description applied to them, the price (if relevant) and all the other relevant circumstances". Whether this is an exhaustive definition for the purposes of the Act or a meaning additional to the common law concept of merchantable quality need not be decided. The attention in the appeal was on s 66(2), and it was not suggested that, on the facts in the present case, application of the common law concept could lead to a different result. 21 The appellant submitted that the Heston 4800 was as fit for the purpose of baling hay as it was reasonable to expect having regard to its age, the price, and in particular the references to sale "as is" prior to completion of the order form and to "as per inspection" in the order form. In brief, it argued that the Heston 4800 was a 1981 machine, and one would therefore expect wear and possibly malfunctioning; that according to Mr Johnson the price was about $10,000 less than the going price of an equivalent hay baler in good condition; and that the pre-sale words "as is" coloured the contractual words "as per inspection" so as to indicate that the sale was at the respondent's risk following Mr Nixon's inspection of the machine. 22 As part of the submission, it was said that the reason for the knotting system not operating properly was not that it was defective, but that the respondent's use of the Heston 4800 was incorrect. The trial judge found to the contrary. There were two limbs to this part of the submission. 23 First, reliance was placed on Mr Lutz's evidence to the effect that the knotting system did not operate properly because the windrows were too small and the hay was too dry. The trial judge did not accept that this was so, and there is insufficient reason to go against his view: indeed, in the end Mr Lutz was quite uncertain in his recollection, and there was much evidence of attempts to get the knotting system to work with which his evidence could not readily stand. 24 Secondly, it was said that the knotting system had to be adjusted correctly in order to operate properly, and that the respondent was not experienced in using hay balers: and it was said that according to Mr Sheel he had "had no excessive trouble with the knotters", although "everything's got to be adjusted right and be spot on otherwise it does drop knots". The evidence of attempts to get the knotting system to work included constant adjustment and readjustment, and it is apparent that extensive efforts were made by persons experienced in using hay balers to get the knotting system to work. The evidence of Mr Harkness, which was clearly enough accepted by the trial judge, included that it was not an operational problem and that the knotting system was incapable of functioning properly. Perhaps Mr Sheel's notion of excessive trouble was generous: it was open to the trial judge to find as he did. 25 The Heston 4800 was sold as a usable machine, as a good and reliable baler. An old and much used machine may not be in first class condition but, if sold as a useable machine, in order to be merchantable it must be in usable condition. The implied condition of merchantability applies to used goods in less than perfect condition. 26 From the evidence of how the appellant arrived at the price for which the Heston 4800 was sold to the respondent, a process not disclosed to the respondent, $35,000 was thought to be what the market would bear for such a hay baler unreconditioned, that is, in the condition to be expected for its age and usage. It was not the market price for a hay baler with a knotting system which would not operate properly, that is, a known inoperable essential component. The $1,000 was allowed as between Mr Higgins and Mr Nixon in view of the particular matters noted by Mr Nixon on his inspection. Bearing in mind Dixon J's reference to a purchaser's willingness to buy goods without abatement of the price with knowledge of defects in fact unknown (see Australian Knitting Mills Ltd v Grant (1933) 50 CLR 387 at 418), I do not think that in light of the price the Heston 4800 was merchantable when the knotting system did not work effectively, so that the machine could not tie bales. It is not irrelevant that Mr Harkness, also a salesman of such machines, considered that the Heston 4800 was not fit for sale, and would only have offered it for sale if the purchaser was told that the knotting system would have to be rebuilt. 27 Sale of a machine "as is" could not of itself exclude the implied condition of merchantable quality, still less could sale "as per inspection", if for no other reason because of s 68 of the Act. It was said that the words nonetheless brought or contributed to compliance with the condition either because descriptive of the Heston 4800 or because otherwise a circumstance relevant to merchantability. However, in my view the discussion between Mr Nixon and Mr Higgins gave to the words "as is" in Mr Higgins' piece of paper the content of the particular matters noted by Mr Nixon on his inspection of which he told Mr Higgins, and hence the words "as per inspection" in the order form to refer to the same defects for which the allowance of $1,000 had been made. I do not think the pre-sale words "as is" coloured the contractual words "as per inspection". Rather, the contractual words replaced the pre-sale words, with their own, more limited, connotation. Sale of the Heston 4800 following inspection by Mr Nixon, as a used baler "as per inspection", did not mean that it was reasonable to expect the machine to be unfit for the purpose of baling hay due to its defective condition neither seen or reasonably to be seen on the inspection. 28 Looking together at the matters on which the appellant relied, I do not think its submission gains weight. The trial judge said that the knotting system "possessed defects which were not normal for goods of that description" and that "the essential quality which [the respondent] required of the goods was missing", and so that the machine was not of merchantable quality. In my view, the trial judge was correct in holding that the implied condition of merchantability had been breached.

Damages 29 The damages of $59,647 comprised $7,600 for the cost of overhauling the knotting system, $3,897 for expenses incurred by the respondent in attempting to make the Heston 4800 operational and $550 for other expenses, $22,600 for lost profits on the sale of the respondent's hay, and $25,000 for lost profits for contract baling work. The appellant contended that there were errors in awarding the $7,600, the two amounts of $22,600 and $25,000, and for a different reason the $22,600 again. 30 As to the $7,600, the appellant submitted that awarding the cost of overhauling the knotting system would doubly benefit the respondent "since it was for the reason of not overhauling the Baler that the price was reduced from $45,000 to $35,000". 31 The respondent knew nothing of the reduction from $45,000, being first presented with the price of $35,000. While the so-called reduction reflected the appellant's estimate of the cost of reconditioning a hay baler, it was not an allowance for the then unknown particular expense of rebuilding the knotting system. For these reasons alone, the submission is not soundly based. In any event, once it had established each of the implied condition of merchantability and its breach the respondent was entitled to the cost of having the unmerchantable hay baler made merchantable by overhauling the knotting system. 32 The appellant submitted that the damages for lost profits should not have been awarded because conditions on the back of the order form excluded damages for consequential loss. It is unnecessary to set out the conditions, which may not have had that effect. Mr Nixon had agreed in his evidence that he knew that there were "various provisions" on the back of the order form and that he was "happy to enter into the agreement subject to the conditions that were set out there". 33 The relevant provisions were in the part of the conditions to do with the sale of new goods, and had no application to the sale of the Heston 4800. Mr Nixon's agreements did not cause them to apply. 34 The $22,600 was the trial judge's assessment of what he described as the loss of the chance to make the full profit from the contract with Riverina Stock Feeds. The description, which apparently stemmed from counsel's submissions, may not have been accurate. The anticipated production of 1750 tonnes of hay from the 200 hectares had not been achieved, and the respondent estimated that 700 tonnes of hay had been produced. It had been baled by a neighbour using a baler which produced bales smaller than those specified by Riverina Stock Feeds, and no hay at all had been delivered under the contract. The $22,600 seems to have been the lost profits on the supply of 700 tonnes of hay; the appeal was conducted on that basis, and there was no complaint that the trial judge's reasons at this point were not entirely clear. 35 The appellant submitted that the loss of profits had not been established. The conditions of the sale to Riverina Stock Feeds included that, if the respondent defaulted in delivery of hay, Riverina Stock Feeds could at its discretion buy in and require the respondent to make good any extra cost to it. Mr Nixon explained to Riverina Stock Feeds that he could not deliver any hay because of the condition of the Heston 4800, and Riverina Stock Feeds did not invoke the default clause. There was no evidence from Riverina Stock Feeds as to whether it would have invoked the default clause if the respondent had delivered 700 tonnes of hay instead of 1750 tonnes of hay, and had been short in the contractual quantity not because of baling difficulties but because the crop was less than anticipated. The appellant argued that in the absence of evidence to the effect that Riverina Stock Feeds would not have invoked the default clause in that event, the respondent had failed to establish a necessary element in the proof of its loss of profits. 36 The appellant referred to Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd (1977) 16 ALR 23. It was held by majority that the purchaser of a business could not recover damages for fraud when it had not proved the value of the business at the time of purchase. The damages were the difference between the purchase price and that value, and without that necessary integer the damages had not been established. The principle may be accepted, but translated to the facts of the present case it throws up only whether the respondent proved what it had to prove. The case does not answer that question. 37 In the present case there was evidence from which the respondent's loss of profits could fairly be assessed having regard, inter alia, to the default clause. If upon total default under the contract Riverina Stock Feeds was prepared, in the words of Mr Nixon, to allow him to "get out of the contract without any penalties" after he "explained to [Riverina Stock Feeds] the situation", it may readily be inferred that Riverina Stock Feeds would not have invoked the default clause when there was partial default. The appellant argued that Riverina Stock Feeds may have been sympathetic to the respondent when it was burdened with a defective hay baler, but would not have been sympathetic to the respondent when it had overanticipated its production of hay. But from the viewpoint of Riverina Stock Feeds each was a failure on the part of the respondent, in the former case a failure properly to equip itself to perform the contract. I am not persuaded of a material distinction. It may be noted that Mr Nixon gave evidence to the effect that he would not have been asked by Riverina Stock Feeds "to make up the difference", although his explanation of why not was frustrated by objections to the form of his evidence. 38 The trial judge did not specifically deal with the matter, and it may be that the submission made on appeal was not put to him. In my opinion it was open to him to award the amount of $22,600, and the respondent's proof of the lost profits was not deficient. 39 I propose that the appeal be dismissed with costs. 40 HEYDON JA: I agree with Giles JA. _______

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