- VID 1080 of 2010
- Federal Court of Australia
- Castel Electronics Pty. Ltd. v. Toshiba Singapore Pte. Ltd.
SCOPE OF CISG - DISTRIBUTORSHIP AGREEMENT – CISG APPLICABLE TO INDIVIDUAL SALES CONTRACTS CONCLUDED UNDER IT
SELLER'S EXEMPTION FROM LIABILITY FOR NON-CONFORMITY OF GOODS (ART. 35 (3) CISG ) - ONLY IF BUYER KNEW, OR COULD NOT HAVE BEEN UNAWARE, OF THE PARTICULAR DEFECTS ALLEGED BY IT
DAMAGES (ART.74) - LIMITED TO FORESEEABLE LOSSES
RIGHT TO A REDUCTION OF AMOUNT OF DAMAGES PAYABLE TO THE AGGRIEVED PARTY UNDER ART. 77 CISG - BURDEN OF PROOF ON THE PARTY IN BREACH
A Japanese company and an Australian company concluded a non-exclusive distribution agreement whereby the latter would advertise, market and promote the sale of the former's electronic products in Australia. After years of collaboration, the Japanese company proposed to the Australian distributor to introduce in the Australian market some new television products manufactured by a Singapore company, wholly-owned by the Japanese company. Those products did not, however, have the expected qualities and were found to be defective. The parties then agreed to terminate the contract, though some issues concerning damages remained unsettled. The Australian distributor sued the Japanese company claiming repayment of all costs and expenses incurred due to non-conformity of the goods.
The First Instance Court held that CISG applied to each sales contract concluded under the distribution agreement. As to the merits, the Court found that the seller had breached the implied warranty of fitness for purpose or merchantable quality arising under Art. 35(2) (a) CISG. With respect to damages, the Court awarded the buyer the costs incurred as a result of non-conformity of the goods, as well as loss of profit according to Art. 74 CISG.
The parties appealed and cross-appealed the decision. On appeal, the seller claimed itself not liable for non-conformity of the goods under Art. 35 (3) CISG. In fact, since every single sales contract concluded under the distribution agreement had to be considered separately, this meant that after the first products had been delivered to the buyer, the latter could not have been unaware of the goods' deficiencies. The seller also held that the buyer had failed to prove, according to Art. 74 CISG, that at the time of conclusion of each relevant contract the seller foresaw, or ought to have foreseen, the losses that the buyer claimed to have suffered. Moreover, in the seller’s view, the buyer had failed to take reasonable steps to mitigate loss under Art. 74 CISG.
The Court of Appeal rejected the seller's argument based on Art. 35(3) CISG. In so doing, the Court observed that said provision, properly construed, excludes liability only where the specific circumstances giving rise to the liability for lack of conformity alleged by the buyer are known, or could not been unknown, to it at the time the contract was concluded. It follows that the buyer is not prevented from relying on Art. 35 CISG merely because is aware of factual circumstances giving rise to a different defect. In the Court’s view, this construction of Art. 35(3) CISG reflects the natural and ordinary meaning of the text, as it "would also be uncommercial to read Art.35(3) CISG as excluding liability for loss suffered by reason of a lack of conformity where the buyer knew of, and was content to accept, a particular defect but did not know of a different defect which was also present when the contract was made. Knowledge of the first defect would not relieve the seller from liability for loss resulting from the second". Since, in the case at hand, it had not been established that the buyer was aware of the particular defects alleged by it, the claim had to be dismissed.
Moreover, in accordance with Art. 74, the Court granted the buyer's claim for damages, finding that the seller could have foreseen the loss suffered by the buyer as a result of the non-conformity of the goods.
Finally, the Court dismissed the seller's claim based on Art. 77 CISG. In so doing, the Court observed that it would be contrary to commercial commonsense if the burden of proof cast upon the party in breach by the second sentence of Art. 77 could be cast off by that party simply asserting non-compliance by the innocent party with the obligation created by the first sentence of the provision. Since no evidence had been shown by the seller regarding its right to have the amount of damages payable to the buyer reduced, its claim had to be rejected.
REASONS FOR JUDGMENT
1. This is an appeal and cross appeal from orders of a judge of this Court made on 28 September 2010 that there be judgment for the appellant in the sum of $2,613,127 and that the respondent’s cross claim be dismissed. On 9 December 2010 the primary judge ordered the respondent pay interest in the sum of $2,047,356.51. He also made orders as to costs. The respondent was ordered to pay the appellant’s costs on a party and party basis until 29 April 2009. He ordered the appellant pay the respondent’s costs incurred after that date on an indemnity basis.
2. There are no grounds of appeal directed to the costs orders which were made by consent but the appellant does seek orders on appeal that the respondent pay the costs of the appeal “and of the proceeding below insofar as the same have not been disposed of by final order”.
3. The appellant, Castel Electronics Pty Ltd (“Castel”) which is incorporated in Australia, carries on business as a wholesaler and distributor of electrical and electronic products, including television receivers (set top boxes, digital recording devices), audio products, white goods including air conditioners and associated goods.
4. The respondent, Toshiba Singapore Pte Ltd (“TSP”) which is incorporated in Singapore, is a wholly-owned subsidiary of Toshiba Corporation (“Toshiba”) and Toshiba Home Appliance Corporation (“THAC”) both of which are incorporated in Japan. Toshiba is a large-scale manufacturer of electrical and electronic equipment.
5. On 8 August 1996 Castel entered into a non-exclusive distributorship agreement with Toshiba under which Castel became the Australian distributor of Toshiba products (“Distribution Agreement”). The Distribution Agreement was renewed annually until 1 April 2007.
6. From October 1997 TSP became the supplier of Toshiba branded television products to Castel. The majority of these products were manufactured by TSP or by companies with which TSP had contracted their manufacture.
7. Set top boxes are designed to allow analogue television receivers to receive digital television broadcasts. TSP’s first set top box was an S23 which was followed by an S25. Those set top boxes were not materially different to their competitors’ set top boxes.
8. Mr So was employed by TSP. In September 2003 he advised Mr Kwong, the Managing Director of Castel, that TSP intended to market an improved version of the S25 with high definition capacity. Mr Kwong was invited to indicate the best price at which TSP could sell the improved unit. He advised the unit could sell for $999 “on introduction in August 2004”. TSP had subcontracted the manufacture of the J35 set top box to Zinwell Corporation (“Zinwell”).
9. In 2004 TSP informed Castel of a new range of products it was developing including the J35 set-top box and the DLP rear projection television receiver. In the Toshiba manuals and by Mr So of TSP it was represented that the J35 was capable of receiving high definition television digital signals in all Australian display formats and was capable of recording and replaying high definition television broadcasts. TSP represented that DLP receivers incorporated digital light processing technology; included a long life “Phoenix” lamp; and offered large screen sizes (up to 72 inches).
10. In December 2004 TSP provided Castel with a sample J35 set-top box. Castel placed its first commercial order for 2,380 J35 units for delivery in January 2005. There were delays in supply of the J35 boxes to Australia because of manufacturing complications encountered by Zinwell. Units had to be returned so that faulty software could be replaced. The J35 product was finally launched in Australia in April 2005.
11. After the release for sale of the J35 units in Australia, Castel received numerous complaints about their performance and functionality. The reported faults in the J35s were “generic” in the sense that they were common to a batch of J35s imported to Australia rather than being a “one-off” or isolated occurrence. In the two years following the launch of the J35 set top box, the volume of generic faults or defects were so great as to have been “of an epidemic nature” to Castel.
12. After the faulty J35s had been reworked by Zinwell, TSP indicated by email on three separate occasions to Castel that the defects had been remedied. Despite those reassurances, Castel continued to encounter serious problems with the J35 units even after they had been reworked and Castel was forced to recall the units.
13. Mr Kwong said that “at least 54 generic faults of an epidemic nature” were encountered in the two years following the April 2005 launch.
14. On 20 May 2005 Mr Kwong wrote to Ms Violet Oh of TSP:
15. On 7 June 2005 Mr Sato of TSP emailed Mr Kwong on the first of the occasions in  saying that he believed that the major software problems with the set top boxes had been solved.
16. However, Castel continued to encounter problems with the J35s even after the defects were said to have been remedied. On 5 July 2005 Mr Kwong wrote to Mr Sato detailing the significant problems Castel were having with the units.
17. Ms Oh responded but on 8 July 2005, in response to the volume of complaints and consumer concern, Castel informed TSP that it had temporarily stopped selling the J35 units in Australia and would not accept further stock. Castel emailed:
If we cannot resolve the retailers/consumers concern we not only cannot sell them the J35 (sic) but also any other products.
18. On 12 July 2005 a meeting took place in Melbourne between River Chiang of Zinwell, Mr Chey of TSP and representatives of Castel to discuss the J35 problems and to allow Mr Kwong to make a decision by 14 July 2005 “as to the on-going sales activities of the J35”.
19. In the meantime, on 13 July 2005 Mr Kwong wrote to Mr Sato requesting “to hold any more shipment of J35 to us – whether we paid for or opened [letter of credit] for. If there is to be any reworked such should not be done here but at Zinwell”.
20. On 4 August 2005 Mr Sato sent the second email to Mr Kwong advising the faults in the J35 had been rectified. On 8 November 2005 Mr Sato sent the third email to Mr Kwong and for the third time told Mr Kwong that the faults in the J35 had been rectified.
21. However, faults in the J35s continued to emerge. Castel estimated that each unit which it sold had to be re-worked or returned for rectification on average 2.6 times after the first sale. By mid-2006, Castel had considered that the ongoing deficiencies of the J35 were so profound that the model would never be merchantable in Australia.
22. There were also recurrent complaints to Castel about faulty lamps in the DLP television receivers.
23. In October 2005 TSP informed Castel about a new product, the C-26 set-top box, which was designed to have similar features to the J35 but without the latter’s hard disk recording function. Castel placed orders with TSP for delivery of C26 units between September 2005 and August 2006. The first delivery of 1,000 units was made in October 2005. However, similar defects to those encountered with the J35 were apparent in the C26 set top box.
24. On 5 April 2007 representatives of Castel, TSP and Toshiba agreed to terminate Castel’s distributorship of Toshiba products. Castel, TSP and Toshiba entered into a termination agreement (“Termination Agreement”) in order to resolve “a number of issues outstanding between them relating to the cessation of the Distribution Agreement”. The Termination Agreement provided that, for the purposes of that agreement, Toshiba and TSP were to be “jointly or severally called Toshiba”.
25. The Termination Agreement did not cover certain “Unresolved Disputes” including those pertaining to “claims for warranty, quality and consumer issues ... for ... Toshiba brand television receivers and set top boxes including ... J35, STB, DLP and C26 purchased by Castel from Toshiba”.
26. Castel entered into a further agreement with TSP and Toshiba relating to those disputes which had not been resolved by the Termination Agreement (“Unsolved Disputes Agreement”). The Unsolved Disputes Agreement provided, inter alia, that TSP was to make an interim payment of $2 million to Castel. While the Unsolved Disputes Agreement asserted that the parties were to negotiate in good faith in order to resolve unsolved disputes as expeditiously as possible, it also preserved the right of either party to take such further action as “may be available to them”.
Castel’s claims at trial
27. In Castel’s Amended Statement of Claim, Castel sought relief for loss and damages on two grounds. Castel asserted that TSP had engaged in misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) (“TP Act”). Castel alleged that TSP was further or alternatively liable for breach of the sales contracts which existed between TSP and Castel for the supply of Toshiba products.
28. Castel asserted that a contract for the sale of goods came into existence between Castel and TSP upon receipt by Castel of each pro forma invoice from TSP.
29. Castel said that by supplying the defective J35 products, the DLP products and the C-26 products, TSP breached the terms of the sales contract relating to the particular goods.
30. Castel pleaded that by supplying the defective J35 products, the DLP products and the C-26 products, TSP breached several terms implied into the sales contracts by virtue of the United Nations Convention on Contracts for the International Sale of Goods done at Vienna on 10 April 1980 (“CISG”). Castel asserted that CISG applied to the sales contracts because Castel and TSP had their respective place of business in Australia and Singapore, both of which are “Contracting Parties” under CISG.
31. Castel claimed that by operation of Article 35 of CISG the following terms were implied into each sales contract:
(a) that the Respondent as seller was obliged to deliver goods of the quantity, quality and description required by the sales contract (Article 35(1));
(b) that the goods had to be fit for the purposes for which goods of the same description would ordinarily be used (Article 35(2)(a)); and,
(c) that the goods would have and retain for a reasonable period of normal use by consumers their specified qualities and characteristics.
32. Castel asserted that the supply of defective or faulty products by TSP breached each of those implied terms.
33. In the alternative, Castel invoked the warranties for fitness for purpose and merchantable quality implied by s 19(a) and (b) of the Goods Act 1958 (Vic) (“Goods Act”).
34. Castel asserted that TSP made certain representations relating to the functionality, quality and capability of the J35 and C-26 set top boxes and the DLP receivers. It claimed that it had relied on these representations in placing orders for each of these products. Further, Castel argued that these representations constituted misleading and deceptive conduct because the representations were either false or TSP had no reasonable basis for making them.
35. Castel alleged that TSP represented that the J35:
(a) was being developed and would be released in July 2004;
(b) would be capable of receiving high definition television digital broadcast signals in all relevant Australian display formats;
(c) would be capable of recording and replaying high definition television broadcasts;
(d) would be more powerful than the existing S25 set-top box;
(e) would most likely be the “most wanted set-top box in the market”;
(f) would be available by the launch date set by TSP or such later date as would allow Castel sufficient time to exploit the innovative character of the J35 before competitors could introduce competing products into the market.
36. Castel alleged that in reliance upon those representations, it purchased 4,640 J35s from TSP.
37. Castel complained of the further representations by TSP that the problems earlier discovered in the J35 had been substantially resolved and it remained superior to competitors’ actual and proposed products (“further representations”). Castel alleged that in reliance on the representations and further representations it purchased a further 4,040 J35s from TSP.
38. Castel alleged that both the representations and the further representations amounted to misleading and deceptive conduct and that TSP had no adequate basis for making them.
39. In relation to the DLP product, Castel alleged that TSP made representations that:
(a) they would be large rear projection television receivers utilizing DLP technology developed by Texas Instruments of United States of America and licensed to Toshiba for the manufacture of DLP television sets;
(b) they would have a long lamp life; and
(c) they would be superior prestigious products.
40. Castel asserted that in reliance on the DLP representations, Castel placed orders for, and TSP supplied, 2,250 units between December 2004 and October 2006.
41. Castel alleged that from January 2005 serious defects in the DLP receivers became apparent.
42. Castel claimed the DLP representations were misleading and deceptive conduct in that they were false and that TSP lacked any adequate basis for making them.
43. Castel alleged that TSP represented that the C-26 would have the following characteristics:
(a) it would be a state of the art set top box with features long awaited by consumers;
(b) it would have substantially the same capacities as the J35 was meant to have save for a recording function;
(c) it would be free of defects; and
(d) it would be superior to a competitive set top box product marketed by Sony with a Broadcom IC chip incorporated into a set top box.
44. Castel asserted that in reliance on the C-26 representations, Castel entered into sales contracts with TSP for the purchase of 12,000 C-26s. It was then alleged that, after delivery, serious defects appeared in the C-26s. Castel also alleged that the C-26 representations amounted to misleading and deceptive conduct and that TSP lacked any adequate basis for making them.
45. Castel sought relief under two principal heads of damage.
46. First, Castel claimed for the costs it incurred in dealing with the faulty products supplied by TSP under the sales contracts and the breach by TSP of those contracts (“the expectation claim”). Under the expectation claim, Castel sought $23,634,533 in damages (“the expectation damages”).
47. Secondly, Castel claimed that it had lost an opportunity by not becoming a distributor of Harman International Industries Inc (“Harman”), an electronics manufacturer. Castel pleaded that it had not taken up the opportunity to become Harman’s distributor in reliance on the representations made by TSP in relation to the J35, DLP and C-26 products (“the reliance claim”). Castel quantified the lost opportunity on its reliance claim at $33,657,361 (“the reliance damages”).
48. In its amended statement of claim Castel pleaded the expectation claim at $15,585,442. It pleaded in respect of the reliance claim:
74. The Applicant lost the opportunity to acquire and profit from the Australian Harman International distributorship and any other supplementary business by reason of relying upon the said misleading and deceptive conduct constituted by the J 35 representations and DLP representations and the consequences thereof, and thereby suffered further loss and damage.
The Applicant’s loss when account is taken of its lost opportunity to pursue alternative business prospects is $34,338,579 (which includes the costs of $15,585,442 of dealing with the faulty products referred to above). The calculation is summarised in the Particulars of Loss delivered separately. Further loss and damage is being incurred and the Applicant reserves the right to serve amended particulars before trial.
49. In a document entitled Amended Particulars of Loss and Damage, Castel identified its losses in the dollar figures mentioned in  and  and as separate entitlements.
50. Although it does not appear to have been argued before the primary judge and was not argued on appeal, it is difficult to think that Castel could be entitled to damages under both claims.
51. Baron Parke stated the general rule as to the measure of damages in Robinson v Harman  EngR 135; (1848) 154 ER 363 at 365 “... where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed”. That principle has been applied in Australia: Wenham v Ella  HCA 43; (1972) 127 CLR 454 at 471; Commonwealth v Amann Aviation Pty Ltd  HCA 54; (1991) 174 CLR 64 at 80.
52. If the Court assesses Castel’s expectation damages with that principle in mind, Castel could not thereafter be entitled to reliance damages.
53. The expectation claim only arises because of TSP’s failure to provide Castel with goods of the quality and description represented which were fit for the purpose for which goods of the same description would ordinarily be used and goods of merchantable quality.
54. Castel only claims to have suffered damages based on its reliance claim because it lost an opportunity which on its case it would not have exercised if TSP had performed its obligations under the contract.
55. If Castel is compensated for its expectation claim, and therefore compensated for TSP’s breach, it is difficult to see how Castel could then be entitled to damages on its reliance claim. In this case Castel’s damages for its expectation claim all fall within the first limb of Hadley v Baxendale  EngR 296; (1854) 9 Exch 341 and accordingly Castel will, if compensated, receive all losses that arise directly from the breach. In those circumstances it will have been treated as if TSP had performed its side of the bargain and the question of Castel’s reliance claim would not arise.
56. Castel’s case was that it would have pursued the opportunity if it had not been misled. If it is compensated for the breach it would follow it would not have pursued the opportunity. At trial Castel apparently put its two claims as alternatives. The primary judge said at  that Castel “indicated in written submissions that its claim for loss and damage was put on two alternative bases”.
57. On appeal the case was not put that way and Castel sought its reliance damages in addition to the expectation damages. However, we do not need to reach a conclusion on that matter because we agree with the primary judge that the reliance claim was not made out as a matter of fact.
58. In its Amended Particulars of Loss and Damage, Castel recognised allowances which had been made by TSP:
9. The Applicant gives credit for the following payments received from the Respondent by way of partial compensation for its losses:
59. The primary judge had regard to those allowances.
60. TSP denied that its relationship with Castel was governed by the CISG, although it admitted that the contract was governed by the law of Singapore: clause 15 of the Defence.
61. In the alternative it said that if the CISG would otherwise have applied to the contracts TSP and Castel had excluded the application of CISG or alternatively Articles 35 and 36 from those contracts.
62. TSP admitted making most of the J35 representations complained of but denied that the applicant had relied upon those representations for the purchase of TSP’s goods. TSP denied that the pleaded misrepresentations were false or that its conduct was misleading or deceptive. It admitted making the DLP representations and the C-26 representations but denied that those representations were false or that by those representations it had engaged in misleading or deceptive conduct. It denied that it had contravened s 52 of the TP Act. It denied that Castel had suffered damage of any kind and denied both the expectation damages or the reliance damages.
63. In relation to the expectation damages, TSP pleaded that if contrary to its denial the CISG applied to the relevant contract and if notwithstanding its non-admission that Castel had suffered any loss of damage, Article 74 of the CISG provided that the damages to which Castel was entitled could not exceed the loss which TSP foresaw or ought to have foreseen at the time of the conclusion of the relevant contract in light of the facts and matters which it then knew or ought to have known as a possible consequence of the breach of contract.
64. Apart from Article 74 which was relied upon in answer to the expectation claim, there was no other plea in TSP’s defence relying upon any other Article of the CISG.
TSP’s cross claim at trial
65. TSP’s cross claim consisted of three separate claims.
66. First, TSP sought to recover from Castel an alleged overpayment of $616,673 in respect of stock which TSP had agreed, pursuant to the Termination Agreement, to purchase from Castel as at 11 April 2007.
67. Secondly, TSP claimed for the costs it incurred in taking over Castel’s obligations to honour five year warranty obligations to purchasers of Toshiba products sold by Castel.
68. Thirdly, TSP alleged that Castel had no entitlement to retain, and was obliged to repay to TSP, the sum of $2,666,667, a sum paid by TSP as interim or provisional compensation pursuant to clause 4 of the Unsolved Disputes Agreement, entered into after the Distributor Agreement between Castel and TSP had been terminated.
69. Castel relied on the evidence of an independent expert Mr Peter Acton, a financial and management consultant, to prove the quantum of damages it sought under both the expectation claim and the reliance claim. [Omissis]
70. The expectation claim had three separate bases:
(a) a claim for the cost and expenses of attempting to remedy the faults in the defective products and the further expense of Castel dealing with its retailers (the first aspect); and
(b) the loss of profit suffered by Castel in wholesaling other Toshiba products apart from the defective products over the period (the second aspect); and
(c) the loss of profit on the defective products (the third aspect).
71. The first aspect of the expectation claim related to the increased costs incurred by Castel in dealing with the defective Toshiba products. The evidence of Mr Acton was that the supply of the relevant defective products by TSP to Castel resulted in increased costs for Castel of $7,431,843 over the three year period from 2004/2005 to 2006/2007.
72. The increased costs, Mr Acton said, consisted of:
(a) time spent by Castel’s sales staff visiting customers and retailers to rectify problems with the products supplied by TSP;
(b) non-salary costs such as motor vehicle expenses referable to Castel’s sales staff visiting customers and retailers;
(c) time spent by Castel’s internal service staff in rectifying units, returning them to Zinwell as required and returning the reworked products to consumers;
(d) engaging external service contractors and purchasing spare parts to rectify the defective products;
(e) additional freight costs;
(f) employing additional staff to deal with customer complaints; and
(g) “fixed costs” such as office space and depreciation.
73. For the second aspect of the expectation claim, Castel asserted that TSP’s supply of defective products reduced the gross profit margin of other electronic products sold by Castel. Mr Acton’s evidence was that, prior to the manifestation of problems with the J35, C26 and DLP products, the gross margins which Castel had maintained in respect of other electronic products exceeded 25%. After the defects became apparent in the marketplace, Castel’s gross margin on sales of other electronic products or brown goods (as they are called), declined from 24.9% in 2003/2004, to 20.5% in 2004/2005 and 16.4% in 2005/2006 before rising in 2006/2007 to 19.4%.
74. Mr Acton was of the opinion that the diminution in gross margin was attributable to the problems experienced by customers with the defective products, not because of a contraction of, or increased competition in, the market for electronic goods. He said in his written report:
Gross Margin lost comes directly off profits, since the costs of generating the revenue are unchanged by the discount on them. Had Castel’s margin on Toshiba products remained at 25%, profits would have been significantly higher, giving rise to additional cumulative lost profit to Castel of $8,404,217.
75. Mr Acton in the three financial years ending 2005, 2006 and 2007 quantified the loss sustained by Castel in respect of reduced gross margins on those other goods at $8,404,217. He calculated the sales of goods apart from the defective goods in each of the three years from which he deducted the cost of sales. He thereby identified the actual gross margin and the percentage gross margin.
76. Because he assumed that the cost of sales was a constant, he then calculated the implied sales. That is, he increased the actual gross margin in each year to 25% and thereby calculated what the sales would have been if the 25% margin had been maintained. He then calculated, as Castel’s loss, the difference between the actual gross margin in dollar terms that was obtained in each year and the gross margin in dollar terms which would have been obtained if the 25% gross margin had been maintained.
77. In the third aspect of its expectation claim Castel sought to recover the losses it sustained by reason of the significant diminution in gross profit margins in respect of the defective products supplied by TSP.
78. According to Mr Acton, Castel would have expected the J35, DLP and C-26 products to have sold at a significantly higher margins compared to other Toshiba products because they were novel and without direct competition in the market.
79. Mr Acton said that there was a rapid decline in the profit margin for the J35, DLP and C-26 products as soon as defects became known. For example, Mr Acton’s evidence was that the gross profit margin for the J35 was 34.9% during the first three months of sales but, after seven months, the gross profit margin had dropped to 6.8%.
80. Mr Acton said based on other Toshiba products the drop in gross profit margin should not have exceeded 1% after the first three months of sales [Omissis]
81. Castel’s reliance claim was based on the loss of opportunity to take up the Harman distributorship. In September 2003 Castel approached Harman International to indicate its interest in becoming a distributor of Harman products in Australia. At that time, Convoy International (“Convoy”) was a distributor of Harman products in Australia which were marketed under brand names, Harman Kardon and JBL, being Harman’s range of professional speaker products.
82. In April 2004 Harman offered to appoint Castel as distributor of its Infinity brand speakers and car audio products. Castel rejected Harman’s offer because it was interested in carrying the complete Harman range. Mr Kwong gave evidence that if Castel was limited to distributing only some of Harman’s products there would be insufficient income to justify the distributorship.
83. Harman was not prepared to displace Convoy as the distributor of other Harman products but insisted that it would only appoint Castel as a distributor of the Harman Kardon and JBL products if a satisfactory agreement could be reached between Castel and Convoy for the displacement of Convoy.
84. Castel therefore entered into negotiations with Convoy to secure the Convoy distributorship of the Harman products. Convoy insisted that the goodwill attaching to the Australian distributorship of the Harman Kardon and JBL products was valued at $6 million. Castel did not accept that figure to be the true value of Convoy’s distributorship and suggested an independent valuation by KPMG. The valuation was not pursued because Convoy indicated that KPMG’s valuation would not affect the price which it was seeking.
85. Castel was unable to agree on terms with Convoy for the takeover of its Harman distributorship. In May 2004 Castel advised Harman that it would not be pursuing its negotiations with Convoy in relation to the Harman distributorship.
86. Mr Kwong said in evidence that Castel did not pursue the Harman distributorship “because of the assurances of TSP regarding the imminent launch of its new J35 and DLP products”. Mr Kwong said that but for TSP’s representations in relation to its new products, Castel “would have pursued and concluded a Harman distributorship or other distributorships”.
87. Mr Kwong’s evidence was that at June 2004 the option to distribute Infinity branded Harman products remained available to Castel but Castel was not prepared to take up Harman’s renewed offer of a limited distributorship.
88. Although its pleadings said otherwise, at trial TSP did not dispute that the CISG governed the terms of each sales contract. Indeed, TSP relied upon a decision of von Doussa J in Roder Zelt-Und Hallenkonstruktionen GMBH v Rosedown Park Pty Ltd  FCA 1221; (1995) 57 FCR 216. It was accepted by TSP that Australia and Singapore were Contracting States within the meaning of the CISG which meant that the CISG governed the rights and liabilities of Castel and TSP under each sales contract to the exclusion of any operation which the Goods Act might otherwise have.
89. Although no plea was raised relying on Article 35 of the CISG, TSP purported to rely on that Article on appeal. Article 35 has been held to impose the same obligations as the implied warranties of fitness for purpose and merchantable quality as is given by s 19 of the Goods Act: Playcorp Pty Ltd v Taiyo Kogyo Ltd  VSC 108 at ; Ginza Pte Ltd v Vista Corporation Pty Ltd  WASC 11 at .
90. At trial TSP relied upon Article 74 which it had raised in its pleadings if contrary to its denial the CISG applied. TSP also purported to rely on appeal on Article 77 which was not pleaded.
91. Those Articles will be discussed later in these reasons in the context of TSP’s cross appeal.
Findings of the primary judge
92. The primary judge accepted that upon the issue of an invoice as a notification of acceptance of an order from Castel for Toshiba products, a contract came into existence between TSP and Castel.
93. His Honour found that, because Australia and Singapore “have, at all material times, been “Contracting States” within the meaning of the CISG” the CISG governed the rights and liabilities of Castel and TSP under each sales contract. In particular, His Honour found that Article 35 of the CISG operated to imply into each sales contract warranties of merchantable quality and fitness for purpose.
94. His Honour found there had been “clear, persistent and recurrent breaches by TSP of the implied warranties imported into each sales contract”. His Honour said:
The totality of the relevant evidence establishes to a very high degree of satisfaction that the J35 was never developed to a point where it was reasonably fit to be offered for sale to Australian retailers or in the Australian retail market for set-top boxes. Although less comprehensive, the evidence also establishes to a considerable degree of probability that there were similar breaches of the implied warranties in respect of both the DLP television receivers and the C26 set-top boxes.
95. The primary judge made no findings in relation to Castel’s claim that TSP had engaged in misleading and deceptive conduct contrary to s 52 of the TP Act although he said that many of the representations relied upon were coextensive with the implied warranties of fitness for purpose or merchantable quality arising under the CISG.
96. However, his Honour considered it unnecessary to address Castel’s s 52 claim because it was “relied on only in support of the alternative reliance claim”. Because his Honour found that the reliance claim had not been made out, it followed that Castel’s reliance on s 52 of the TP Act did not require consideration.
97. The primary judge held that Castel’s claim for damages was confined to its expectation claim in respect of the alleged breaches of the sales contracts.
98. As to the first aspect of Castel’s expectation claim, the primary judge reminded himself of the general principle that “costs are only recoverable if they would not have been incurred but for the breach.” His Honour said that “[c]osts which would have been incurred in any event as a necessary incident of the purchaser’s business cannot be claimed to reduce the profit which would have been derived had the goods conformed with the contract.”
99. His Honour did not accept that Castel could recover the costs associated with its permanent sales staff visiting customers and retailers in response to complaints about defective goods. His Honour reasoned that such costs would only be recoverable where there was evidence that the attendances with its customer in relation to the defective goods meant that the sales staff had foregone the opportunity to pursue other profit making activities.
The primary judge found that Castel was entitled to the costs it incurred in hiring additional service staff to deal with customer complaints. However, for reasons that are not clear, the primary judge awarded only 80% of the figure calculated by Mr Acton. [Omissis]
103. His Honour accepted that Castel would have been able to recover for all expenditure on spare parts used in attempting to rectify the defective products. The primary judge also allowed in full the claim for freight which Mr Acton identified as “in excess of that normally required to deliver products.”
104. The primary judge did not accept that certain “fixed costs” or administrative costs including office space and depreciation were recoverable. Further, His Honour did not allow Castel to recover interest paid for the relevant period. His Honour found there was no evidence to support the assumption that TSP’s conduct in supplying defect products caused Castel to incur extra expenses in the form of interest.
105. The primary judge did not allow for Castel to recover the costs of time spent by warehouse staff dealing with the defective products, except where those extra costs were incurred because of the need to handle defective goods (e.g. extra wages paid to warehouse staff for overtime).
106. The primary judge assessed Castel’s damages under the first aspect of Castel’s expectation claim as follows:
107. As to the second aspect of Castel’s expectation claim, the primary judge did not accept Mr Acton’s evidence that the significant decline in gross margin in relation to other Toshiba products was caused wholly by Castel selling the defective products supplied by TSP. His Honour found that the decline was partly attributable to the contraction of the Australian brown goods market and increased competition in the market between wholesalers from 2003.
108. The primary judge found that but for the breaches of contract by TSP, the gross margin which Castel would have derived on its sales of non-epidemic Toshiba goods for the 2005/2006 and 2006/2007 financial years would have been 20%. [Omissis]
110. The primary judge rejected Mr Acton’s estimate of the repercussive effect of the defective products as being “unduly high”. His Honour found that but for the defective products, Castel’s margins on its other electronic products would have averaged 20% (as opposed to 25% as suggested by Mr Acton) in each of the 2004/2005, 2005/2006 and 2006/2007 financial years.
111. His Honour therefore rejected Castel’s submission that the 4.4% reduction in gross profit margin between 2003/2004 and 2004/2005 was due to “the repercussive effect of the “epidemic” Toshiba products”. His Honour said at :
112. Accordingly, his Honour found that the damages recoverable by Castel under this head were confined to the 2005/2006 financial year in which Castel’s actual gross margin was 3.6% below the 20% average gross margin (actual gross margin for the 2005/2006 financial year was 16.4%). [Omissis]
114. As to the third aspect of Castel’s expectation claim, the primary judge accepted Mr Acton’s evidence that the J35, DLP and C-26 devices were innovative products and should have attracted significantly higher margins than other products when they were introduced into the Australian market. [Omissis]
117. The primary judge concluded that the total sum to which Castel was entitled under the three aspects of its expectation claim consisted of:
(i) Cost of dealing with defective products: $1,725,232
(ii) Impact of defective products on Castel’s sales of other products: $2,195.720
(iii) Loss of margin of profit on defective products: $2,176,591
118. His Honour assessed the loss and damage sustained by Castel as a result of TSP’s breaches of the sales contracts as $6,097,543. [Omissis]
119. The primary judge entered judgment for Castel in the sum of $2,613,137 for Castel’s expectation claim. We have already referred to the subsequent order for pre-judgment interest in the sum of $2,047,356.51.
120. The primary judge dismissed Castel’s reliance claim. He found that Castel did not pursue the Harman distributorship because it was not prepared to pay the amount sought by Convoy and Harman was not prepared to terminate or transfer its distributorship agreement with Convoy. In doing so, His Honour rejected Castel’s submission that it had not pursued the Harman distributorship in reliance on the representations made by TSP in relation to the defective products.
124. The primary judge concluded that the reliance claim could not be made out [Omissis]
125. The reliance claim therefore failed for two reasons: first, the representations had not been made before negotiations with Harman ceased; and secondly, negotiations ceased for reasons apart from Castel’s association with TSP.
126. The primary judge dismissed TSP’s cross claim.
The Notice of Appeal, the Notice of Contention and the Cross Appeal
130. Castel’s Notice of Appeal complains of his Honour’s rejection of Castel’s reliance claim for damages and the first and second aspects of Castel’s expectation claim which had not been accepted in full by the primary judge.
131. TSP filed a Notice of Contention in which it contended that the primary judge’s finding that TSP was not liable to Castel under s 52 of the TP Act should be affirmed for two reasons apart from those relied upon by the primary judge.
132. TSP also filed a Notice of Cross Appeal in which it appealed against the primary judge’s orders that there be judgment for the appellant in the sum of $2,613,127 plus interest and that the respondent’s cross claim be dismissed.
133. Castel’s Notice of Appeal contains 18 grounds of appeal which can be summarised in relation to the two different claims.
134. The grounds of appeal in relation to Castel’s reliance claim are that the primary judge erred by:
(a) finding that after June 2004, none of Castel, Convoy or Harman contemplated the revival of the Harman Option;
(b) failing to find that as at June 2004 Harman was willing for Castel to take on the wholesale Australia-wide distribution of Harman’s Infinity, Becker and JBL professional speaker ranges;
(c) failing to consider:
(i) the course which Castel would have taken if TSP had not made the J35 and DLP representations;
(ii) the opportunity which was lost to Castel in not taking up the Harman Option in reliance on those representations;
(d) failing to find that the J35 representations and the DLP representations were misleading and deceptive, and that Castel relied on the J35 representations and on the DLP representations, and not quantifying the loss sustained by Castel relying on the J35 and on the DLP representations, and in not pursuing a distributorship for audio consumer goods after June 2004.
135. Castel’s Notice of Appeal challenges the findings made by the primary judge in relation to the costs of dealing with the defective products (which was the first aspect of Castel’s expectation claim) and the impact of the defective products on the gross sales of other electronic products sold by Castel (which was the second aspect of Castel’s expectation claim).
136. The grounds of appeal in relation to the first aspect of Castel’s expectation claim are that the primary judge erred in:
(a) not awarding Castel the costs attributable to sales staff (also called field staff, but excluding those sales staff who were re-assigned to the service department) whose re-assigned duties entailed dealing with consumers and visiting retailers to receive complaints, provide explanations and deal with the epidemically faulty goods;
(b) not awarding Castel increased administrative staff costs attributable to dealing with the epidemically faulty goods;
(c) reducing Castel’s claim for the costs of service personnel attributable to rectifying the epidemically faulty goods by 20%.
137. The grounds of appeal in relation to the second aspect Castel’s expectation claim are that the primary judge erred in:
(a) finding that there was no significant impact on Castel’s gross margin in the 2004/2005 financial year;
(b) finding that there had been a contraction of the Australian brown goods market from 2003;
(c) finding that increased price competition in relation to sales of audiovisual consumer goods in the 2002/2003 financial year or subsequently, particularly in relation to plasma television receivers, led to a reduction in Castel’s gross margin in the 2004/2005 financial year;
(d) finding that Castel’s margin on its other Toshiba products would have been 20% in the 2005/2006 and 2006/2007 financial years but for the presence of the defective products;
(e) not applying a gross margin of 25% in calculating the profit lost to Castel on its sales of other Toshiba goods between the 2004/2005 and 2006/2007 financial years.
138. The Notice of Contention only addresses Castel’s reliance claim. [Omissis]
139. TSP also contended in its Notice of Contention that Castel failed to prove that it suffered loss for which TSP was liable. We will briefly address that contention but again, because we agree with the primary judge’s reasons for dismissing Castel’s reliance claim, we do not need to resolve that issue.
140. TSP’s Notice of Cross Appeal contains 29 separate grounds of appeal. The grounds may be summarised within six broad grounds:
(a) the primary judge failed to apply Article 35(3) of CISG;
(b) the primary judge failed to apply Article 74 of CISG;
(c) the primary judge should have ruled that Mr Peter Acton’s evidence was inadmissible;
(d) the primary judge should not have found that there was only a single cause of action but should have found that there were a number of contracts where Castel submitted each order for the various TSP goods;
(e) the primary judge erred in not considering each separate contract and considering the damage suffered by Castel in respect of each separate contract;
(f) the primary judge failed to apply Article 77 of CISG.
The submissions on appeal on the reliance claim
141. Castel submitted that the primary judge should have found that a distribution agreement between Castel and Harman remained available to Castel as at June 2004 and thereafter.
142. It submitted Castel was already negotiating with Harman in relation to a distributorship when the representations were made by TSP and Harman had already offered Castel the distribution of some of its goods in Australia. In April 2004 and again in June 2004 Harman offered to appoint Castel to be the Australian distributor of its Infinity branded speakers. Castel submitted that as at June 2004 Harman was also willing for Castel to distribute certain other of its professional speaker ranges, including Becker and JBL. Harman was willing for Castel to acquire Convoy’s distribution of Harman goods in Australia, provided that satisfactory terms of agreement could be reached. Castel contended Convoy had indicated that it was willing to cede its Harman distribution for the right price. There was no written or long term distribution agreement between Harman and Convoy.
143. Castel argued that the primary judge erred by failing to consider the course which Castel would have taken if TSP had not made the J35 and DLP representations and the opportunity which was lost to Castel in not taking the course in reliance on those representations.
144. Castel submitted that the approach to be adopted in determining its reliance claim was that the Court should have first considered the course Castel would have taken if TSP had not made the representations about its J35 and DLP products; and secondly determined the opportunity which was lost to Castel in reliance on those representations. [Omissis]
145. Castel submitted that notwithstanding that it pursued an agreement with TSP in preference to a distribution agreement with Harman, the opportunity to enter into a distributorship agreement with Harman nevertheless remained available to it after June 2004. Castel submitted that the primary judge erred in finding that after June 2004, none of Castel, Convoy or Harman contemplated the revival of the Harman distributorship negotiations.
148. Further, TSP submitted that there was no evidence to support Castel’s assertion that any opportunity existed for Castel to pursue a distribution agreement with Harman after June 2004. [Omissis]
149. TSP submitted that Castel’s claim that it would have pursued the Harman distributorship was inconsistent with its reason for rejecting Harman’s initial offer [Omissis]
The reliance claim considered
159 The primary judge concluded (at ):
In my view, it is unnecessary to resolve any of the controversies which have been raised about the application of the Trade Practices Act to the facts of the present case. That is because the representations in question, many of which are co-extensive with the implied warranties of fitness for purpose or merchantable quality arising under the CISG, are relied on only in support of the alternative reliance claim. ... [T]he alternative reliance claim cannot be made out because the Harman Option ceased to be available to Castel on 4 June 2004 before the making of almost all of the alleged J35 representations, the further J35 representations, the DLP representations and the C26 representations and independently of any act or forbearance by Castel in reliance on any of those representations. It follows that an assessment of Castel’s claim for damages must be confined to its primary expectation claim in respect of the alleged breaches of the sales contracts.
165. […] there is no substance in Castel’s insistence that Castel was persuaded by TSP to forego a commercial opportunity which the Court must value taking into account the degree of probabilities or possibilities.
It was incumbent on Castel to establish on the balance of probabilities that it had lost a valuable opportunity. If Castel satisfied the burden of proof it bore on this issue, the Court could proceed to value that opportunity in accordance with the degree of likelihood that the opportunity would have ensued to Castel’s pecuniary gain. [Omissis]
167. The primary judge was simply not satisfied that Castel would or could have concluded an agreement with Harman or Convoy, nor that the misconduct alleged by Castel against TSP had any bearing on that state of affairs. [Omissis]
168. On appeal Castel also complained that the primary judge had failed to address Castel’s loss of opportunity after 4 June 2004.
169. Castel did not plead that the opportunity to take up the Harman distributorship was available to it after 4 June 2004. [Omissis]
180. Castel relied on the evidence of Mr Acton for its reliance damages. [Omissis]
181. TSP argued that Mr Acton’s unsupported estimate of the markets was in the case of the audio market 12 times larger than Harman’s estimate; and in the case of the car audio market in the order of 5 times larger than Harman’s estimate.
The admissibility of Mr Acton’s evidence
193. Before addressing the appeal and cross appeal in relation to Castel’s expectation claim, it is necessary to address the submission put by TSP that the whole of Mr Acton’s evidence was inadmissible. A similar objection was taken by TSP at trial but his Honour received Mr Acton’s report and Mr Acton’s oral evidence.
225. We reject TSP’s contention that the primary judge was wrong to receive Mr Acton’s evidence.
The expectation claim considered
226. The primary judge awarded damages for costs incurred through its service department in dealing with the defective products for the 2004/2005, 2005/2006 and 2006/2007 financial years. This included the costs of employing additional staff in the service department: see  of his Honour’s reasons. However, the primary judge did not allow the whole of Castel’s claim in this regard.
227. Castel submitted that the primary judge erred in not awarding Castel the costs attributable to the additional sales staff it employed in anticipation of increased sales activity from 2005 to 2007. In particular, Castel submitted that the primary judge erred in finding that Castel would not have reduced its sales force even if there was no need to retain that staff to deal with the faulty goods.
228. Castel submitted that Castel’s expenses increased considerably in 2002/2003 in anticipation of increases sales activity from TSP’s supposedly innovative products. Further, during the years from 2004/2005 to 2006/2007 Castel engaged additional sales staff to increase its sales capacity to allow for an Australia-wide distribution. Castel submitted that although the additional staff it employed between 2004/2005 to 2006/2007 were classified as sales staff, the bulk of their duties included visiting and pacifying retailers, listening to complaints, providing explanations and collecting defective goods. Mr Acton’s evidence was that sales staff spent 39% of their time on activities other than sales.
229. Although there was no direct evidence from Castel that the additional sales staff were surplus to Castel’s sales needs, Castel contended that the primary judge should have inferred that Castel would not have continued to employ its sales staff unnecessarily. Castel submitted that the primary judge should have found that those staff would not have been employed and retained but for the need to carry out the additional work caused by the defective products. Castel submitted such an irresistible inference arose because Castel carries on an ordinary commercial business which would not continue to employ surplus staff unnecessarily.
230. Castel submitted that His Honour ought to have quantified and awarded Castel the costs of that sale staff in an amount of $1,899,731 (plus interest) for the 2004/2005, 2005/2006 and 2006/2007 financial years.
231. Castel further submitted that the primary judge erred in not awarding Castel increased administrative staff costs attributable to its dealing with the epidemically faulty goods. Castel submitted that the primary judge ought to have quantified and awarded Castel $1,353,642 on account of such increased administration costs over the 2005, 2006 and 2007 financial years.
232. Further, Castel alleged that the primary judge erred especially when he gave no reason in reducing Castel’s claim for the costs of service staff attributable to rectifying the epidemically fault goods by 20%.
233. His Honour correctly identified the principle upon which this first aspect of the expectation claim fell to be assessed. The extra costs incurred with rectifying defective products are either a cost as a result of the breach which operate to reduce profits.
234. However, he found that those costs which he refused to award were not recoverable because the costs would have been incurred in any event. There is no doubt that if these costs would have been incurred in any event then the costs cannot found a claim for damages.
240. We think with respect that the primary judge was wrong not to draw the inference sought by Castel. If Mr Acton’s evidence is to be accepted, and it was not suggested it was unreliable in this regard, nearly 50% of the sales staff was employed in remedying defective products in 2005/2006 and almost 50% in 2006/2007. It is hard to think that if the products had not been defective that Castel would have continued to employ those people when no other work was apparently available to them.
241. It would have been better if Castel had proved by direct evidence that which we are prepared to infer but we think that his Honour should have allowed the amount claimed in respect of the sales staff over the period of three years which was in the sum of $1,899,731.
242. Castel’s claim in relation to administrative staff also rests upon the Court drawing an inference that Castel would not have employed administrative staff in the period between the financial years ending in 2005 and 2007 of the numbers that were employed, except for the need to address the defective products.
247. We think the primary judge was wrong not to have drawn the inference which Castel sought and should have allowed the administrative staff which Mr Acton said was employed in relation to the defective products.
248. Mr Acton quantified this part of the first aspect of Castel’s claim at $1,353,642.
249. The third matter for consideration on the first aspect of Castel’s claim is the reduction that the primary judge made in relation to the costs of Castel’s service department. The primary judge accepted Mr Hew’s evidence that Castel’s service department had to be increased from 7 to 35 to handle complaints and allowed for that loss. However, he reduced the amount claimed by Castel by 20% for reasons which he left unexpressed.
250. Mr Acton’s assessment of this part of the first aspect of Castel’s expectation claim was based upon the assumption that Mr Hew’s evidence was accepted. The primary judge accepted Mr Hew’s evidence. In our opinion, having accepted Mr Hew’s evidence, there was no reason to reduce this part of the first aspect of Castel’s expectation claim by 20%. We agree with Castel’s contentions that that part of their claim should be increased by 20%, an increase of $218,432.
251. We would therefore increase the award in favour of Castel on the first aspect of its claim by:
1)Sales Staff $1,899,731; 2)Administrative Staff $1,353,642; 3) Service Department $218,432; Tot: $3,471,805
252. We turn to the second aspect of Castel’s claim. At trial, Castel had argued that the loss of profit margin on other Toshiba products ought to be determined by reference to the average profit margin of 25.18% in the four financial years from 1999/2000 to 2003/2004 financial year, being the period prior to the introduction of the defective products in April 2005.
253. Castel submitted that the primary judge erred in determining that the reduction in average gross margin was due to a contraction in the brown goods market and increased competition amongst retailers. It also took issue with his Honour’s finding that the introduction of the defective products had not had a significant impact on Castel’s gross margin in the 2004/2005 financial year.
254. Castel submitted that the introduction of the J35 product in April 2005 had a significant impact on its total gross margin for other products in the 2004/2005 financial year. Castel asserted that the decline of average gross margin on the other products from 24.9% in 2003/2004 to 20.5% in 2004/2005 was solely caused by the introduction of the J35 product.
255. Castel claimed that in 2004/2005, 11 per cent of the total annual service department activity was devoted to dealing with J35 related problems. Castel led evidence of the complaints made by retailers and consumers about the poor performance of the J 35 product. Because Toshiba goods were marketed as innovative technology, Castel submitted that the defects in the defective products were so widespread that they were likely to have an immediate and significant impact on gross profit margin. For those reasons, Castel argued that the “only inference fairly open was that the epidemically faulty products had a substantial adverse impact...on the gross margin reducing it from...25.18% for the 4 years prior to 2003/2004 to 20.5% in the 2004/2005 year”.
256. Castel submitted that the impact of the J35 on the gross margin of other Toshiba products in the 2004/2005 financial year should not be measured solely from the date the product was available for sale (i.e. April 2005). Castel asserted that the delayed release of the J35 affected the sales of other products such as analogue televisions with which it was to have been sold as a package.
257. Castel contended that the primary judge’s finding that the reduction in profit margin was due to a contraction in the brown goods market in 2003 was contrary to the evidence. Castel referred to its evidence of increased gross margin for the 2002/2003 financial year (27.7%) and the evidence that it had maintained its gross profit margin notwithstanding retail price competition. Castel asserted that the fact there was evidence of falling retail prices did not translate directly to falling wholesale profit margin. The finding Castel argued was not supported in the evidence and was contrary to unchallenged evidence of Mr Acton that the economy and retail sales were very strong at the relevant time. [Omissis]
258. TSP did not deny that the introduction of the J35 had a significant impact on the average gross margin of Castel. TSP submitted that Mr Acton’s evidence should be given very little weight as there was no evidence to support his assumption that there had been no market wide decline in margins for brown good products during the relevant period. Mr Acton admitted under cross examination that he had not conducted any analysis of the market to determine the strength of the market at the relevant time.
259. TSP further submitted that his Honour’s finding that there had been a contraction of the brown goods market in 2003 was open on the evidence. [Omissis]
260. The primary judge relied on the evidence of Castel’s Manager of Sales and Marketing, Mr Michael Hall for his finding of increased competition in the brown goods market which his Honour set out at : [Omissis]
261. There was no evidence that the list prices of non-epidemic Toshiba products had been discounted or reduced in response to complaints about the defective products. Further, there was no evidence adduced as to the landed cost of Toshiba goods other than the J35, C26 and DLP products and whether these costs had varied after the introduction of the faulty products.
262. However, Castel asserted that the primary cause of the reduction in gross profit margins of other Toshiba products was an increase in costs incurred as a result of having to deal with the defective products. In particular, Castel referred to the costs it incurred in giving sweeteners and discounts designed to quell retailer dissatisfaction with Toshiba products.
263 Mr Acton gave evidence that in his opinion some of the erosion of the profit margin on the non-epidemic “Toshiba” products was attributable to “extra discounts, free product, cash incentives and additional display materials”. [Omissis]
264. However, Castel admitted there was no evidence as to the quantum of such sweeteners or discounts. Indeed, the primary judge noted the absence of quantitative evidence of the effect on the gross margins on non-epidemic products: . [Omissis]
265. In our opinion, there was evidence to support the primary judge’s finding that the decline in sales was partly attributable to the contraction of the Australian brown goods market from 2003 and increased competition between participants in that market, all of which attributed to greater discount by wholesalers. The primary judge was entitled to rely upon the evidence of Mr Hall and the evidence contained in the PSI reports from 2003 onwards from Mr Kwong. Those reports provided telling evidence of the state of the market during that period independent of Castel’s problem with the defective products.
267. His Honour was right in our opinion to conclude as an estimate that Castel’s margins on its other Toshiba products would have averaged 20% in each of the financial years ended 2005, 2006 and 2007 instead of the 25% “hypothetical gross margin” of which Mr Acton gave evidence.
268. His Honour’s finding meant that there were only two years of the three years under consideration in which the gross margin fell below 20%; in 2005/2006 to 16.4% and in 2006/2007 to 19.4%.
269. His Honour limited his assessment of the damage to 2005/2006 we think because his Honour thought that a reduction of 0.6% in 2006/2007 was de minimis.
270. Sales in the relevant year 2005/2006 were $36,909,591. His Honour calculated the 3.6% reduction in gross margin to be $2,195,720: . TSP claimed the arithmetical calculation engaged in by the primary judge was wrong. It claimed the proper calculation for the 2005/2006 year would lead to a figure of $1,344,944.
271. Castel accepted that the arithmetical calculation was wrong but submitted that the correct calculation would lead to a figure of $1,681,180.25 for the 2005/2006 year. Castel also in addressing this arithmetical error again sought damages for the reduction in the gross margin below 20% for the 2006/2007 year.
272. It is not possible to understand how his Honour reached the figure that he did for the reasons he gave. We accept, as the parties did, his Honour’s calculation involves an undisclosed error. Castel urged the Court when correcting this error to also award damages for the diminution of 0.6% in gross margin for the year 2006/2007.
273. For the reasons we have given, we agree with his Honour’s reasons. We do not think when addressing an arithmetical error we should ignore the primary judge’s reasons and award damages for the 2006/2007 year. His Honour clearly thought the loss was de minimis. We do not think in an exercise of this kind that a Court can be so precise as to determine whether a difference in gross margin of 0.6% in 20% or 25% in the non-defective products was due to the particular events of which complaint was made. It is not possible to be that precise. We therefore, like the primary judge, shall confine ourselves to the 2005/2006 year.
274. We must now address why it is that the two parties contend for a different result which, of course, must be because the parties are working on different premises.
The cross appeal
286. TSP filed a cross appeal in which it argues that:
1. The primary judge erred in failing to address TSP’s submission that, by reason of art 35(3) of the CISG, TSP was not liable to Castel for any lack of conformity of the set-top boxes because at the time of the conclusion of each relevant contract, Castel knew, or could not have been unaware, of a lack of conformity in each and every relevant set-top box within the meaning of art 35(3) of the CISG.
2. The primary judge erred in failing to hold that Castel failed to prove, as required by art 74 of the CISG, that at the time of the conclusion of each relevant contract TSP foresaw, or ought to have foreseen, the losses that Castel claims to have suffered.
3. The primary judge failed to address TSP’s submission that Castel had failed to discharge its duty, created by art 77 of the CISG, to take reasonable steps to mitigate any loss caused by a breach by TSP of any contract to supply the set-top boxes and DLPs to Castel.
4. The primary judge erred in failing to hold that Castel did not prove that it had suffered any loss for which TSP is liable. In particular, the evidence of Mr Acton was inadmissible and should have been excluded or disregarded. Mr Acton’s evidence of Castel’s hypothetical profit based on the consummation of the Harman Option was premised on two assumptions (gross sales and a “range of products”) and that no evidence was called to prove either of these assumptions. TSP also contends that Mr Acton was not qualified and was unfamiliar with quantifying losses under contracts for the sale of goods and that his evidence did not therefore satisfy the requirements of ss 79(1) of the Evidence Act.
5. The primary judge erred in holding that “there was, relevantly, a single cause of action in breach of contract” and by failing to apply a proper approach to the assessment of loss and damage.
288. In response to TSP’s cross appeal, Castel argues that:
1. When each contract was entered into for the purchase of the J35s, the C26s or the DLPs, Castel did not know, and could not have been aware, of a lack of conformity in each and every set-top box within the meaning of art 35(3) of the CISG. [Omissis] Once Castel became aware of the defects, it halted supply until it was informed by TSP that the defects had been rectified.
2. Castel’s loss was foreseeable and foreseen at the date of each contract. TSP knew that the goods which it delivered were not ready for mass production and sale.
3. TSP failed to raise any issue at trial as to a failure on Castel’s part to mitigate its loss.
4. TSP did not seek at trial to have Mr Acton’s evidence excluded as inadmissible.
5. The primary judge was correct in holding that it was permissible to group claims in respect of a number of different sales contracts because the damage allegedly caused by each breach was substantially the same and the grouping did not obscure issues of causation and quantum of damages in relation to each breach.
289. Before dealing with the particular Articles of the CISG relied upon on the appeal we should briefly deal with an anterior point which was relied upon by TSP. It claimed that the primary judge erred in treating the claim as a single breach of contract and that the primary judge should have dealt with each contract separately and assessed damages in respect to each separate contract.
290. The circumstances of this case allowed the primary judge to treat TSP’s conduct as a single breach of contract even though the defective products were supplied pursuant to a number of different orders. It was not necessary to address each sales contract and determine which of the products supplied pursuant to that sales contract suffered from what defect and the particular damage suffered as a consequence. There were three types of defective products, the J35, DLP and C26. They were supplied over a relatively short time and within each of the separate products they had the same endemic types of faults.
291. The breach was substantially the same in respect of each of the defective products and occurred over a short time therefore grouping the individual breaches did not obscure questions of causation and damage. In Cassis v Kalfus  NSWCA 460 Hodgson JA with hom Powell and Heydon JJA agreed, said:
A large factor in causing the trial to miscarry has been the lack of precision in the appellants’ pleading. It is not acceptable to plead a series of breaches occurring over many years, and then to make a global pleading of damage caused by all the breaches. While it may be appropriate to bring a claim arising out of an ongoing relationship, involving a number of breaches occurring over many years, and while it could be productive of complexity and repetition to require each individual breach to be explicitly linked to allegations of damage caused by that breach, a pleading should enable definition, in a way fair to both parties, of issues concerning breach, causation and quantum of damage in relation to each cause of action relied on. It may be possible to group causes of action where the damage involved in each of them are substantially the same, so long as this can be done without obscuring issues of causation and quantum of damages arising in relation to each of them.
292. This was the type of case to which his Honour was referring in the last sentence of the passage set out above. It was not necessary in the circumstances to consider each product, each breach and any damage caused by each breach.
294. As we understand the argument, TSP claims that Castel had to prove on the balance of probabilities that its expectation of a certain outcome, as a result of a performance based relevant contract, had a likelihood of attainment rather than being a mere expectation. It claimed that the appellant’s expectation of higher gross margins must be “objectively made out”: Commonwealth v Amann Aviation Pty Ltd  HCA 54; (1991) 174 CLR 64 at 85.
295. The argument went that to calculate the gross margin which was lost, in the case of resale of goods, there must be evidence of the cost of the goods and of the cost of sales. Price obtained on the resale must be adduced in evidence in order to determine the hypothetical and actual gross margins.
298. There was no obligation on Castel in this case to prove that each of the defective products which were sold to it would fetch a particular price in the market where the parties understood the value of those products not defective in the market.
299. For those reasons, even if we had accepted the premise we would have rejected the argument.
300. We propose to deal in turn with TSP’s contentions based on articles of the CISG.
Article 35(3) of the CISG
301. Article 35 of the CISG provides:
(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.
(2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they –
(a) are fit for the purposes 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 judgement;
(c) possess the qualities of goods which the seller has held out to the buyer as a sample or model;
(d) are contained or packaged in the manner usual for such goods or, where there is no such manner, in a manner adequate to preserve and protect the goods.
(3) The seller is not liable under sub-paragraphs (a) to (d) of the preceding paragraph for any lack of conformity of the goods if at the time of the conclusion of the contract the buyer knew or could not have been unaware of such lack of conformity.
302. TSP did not plead its reliance on Article 35(3) as a defence to Castel’s claim. Article 35(3) and its relevance to the case was mentioned only in the following lines in TSP’s final written submissions to the trial judge:
... upon the admissions made by Mr Hew in cross-examination, TSP contends that at the time at which each relevant contract was entered into between Castel and TSP for the supply of ... J35 and/or ... C26 set top boxes by TSP to Castel, Castel knew, or could not have been unaware, of a lack of conformity in each and every set top box within the meaning of Article 35(3) of the CISG. Accordingly, by reason of Article 35(3) of the CISG, TSP is not liable under Article 35(2) for any such lack of conformity.
309. Article 35(3) of the CISG, properly construed, excludes liability only where the circumstances which give rise to the liability for lack of conformity alleged by the buyer are known to the buyer. It is only if the buyer knew of the “lack of conformity” which gives rise to the liability that Article 35(3) operates to render that liability unenforceable. Article 35(3) does not operate to deem the goods in question to be in conformity with the contract; rather, it proceeds on the assumption that the goods do not conform with the contract in a way which would give rise to a liability in the seller for loss were it not for Article 35(3). Article 35(3) operates to relieve the seller from the liability which would otherwise arise from that “lack of conformity”. The seller is relieved from that liability only where the “lack of conformity” which gives rise to the liability sought to be enforced by the buyer was known to the buyer at the time the contract was made.
310. To put it another way, if the factual circumstances giving rise to the lack of conformity which is alleged by the buyer to give rise to the liability which it asserts against the seller were not known to the buyer at the time the contract was made, Article 35(3) of the CISG does not defeat the buyer’s claim merely because different factual circumstances giving rise to a different lack of conformity were known to the buyer. The focus of Article 35(3) is upon the “liability” in respect of which the buyer seeks to recover its loss. It is only if the facts which give rise to that liability are known to the buyer at the time of making the contract that Article 35(3) affords the seller a defence against the buyer’s attempt to enforce its claim.
311. This construction of Article 35(3) reflects the natural and ordinary meaning of the text. It would also be quite uncommercial to read Article 35(3) as excluding liability for loss suffered by reason of a lack of conformity where the buyer knew of, and was content to accept, a particular defect (such as an absence of software which the buyer intended to obtain and install itself) but did not know of a different defect (such as faulty wiring) which was also present when the contract was made. Knowledge of the first defect would not relieve the seller from liability for loss resulting from the second.
312. Accordingly, Article 35(3) would operate to relieve TSP from liability for loss suffered by Castel by reason of defects in non-conforming goods supplied by TSP only if, at the time of making each contract for the supply of those goods, Castel knew of the particular defects which gave rise to that liability. The cross-examination of Mr Hew did not establish his knowledge of the existence of the particular defects which gave rise to the liability which Castel seeks to enforce and which ultimately became manifest in the particular goods in each batch at the time the order for that batch was made.
313. The cross-examination of Mr Hew elicited admissions by Mr Hew that after J35 units were received by Castel from TSP, Castel on-sold some of them, even though they were affected by defects. Mr Hew did not admit that there were serious defects in all such units; and the questions were focused upon his knowledge of defects after receipt, and before on-sale, not upon the material time, which was when Castel and TSP contracted for the supply of any particular batch. It did not seek to elicit admissions that Mr Hew knew, or must have been aware of, defects in all the J35 units, the subject of each order, at the time the orders were placed by Castel. The cross-examination was not targeted with sufficient precision to engage the operation of Article 35(3). TSP failed to establish that the particular defects which gave rise to the lack of conformity in respect of which Castel sued TSP were known to Castel at the time each batch of goods was ordered by it.
314. For these reasons this aspect of TSP’s cross appeal should be rejected.
Article 74 of the CISG
315. Article 74 of the CISG provides:
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 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 contract.
316. At trial, TSP submitted that:
... no evidence was given, or addressed in the cross-examination of any TSP witness, of what TSP did foresee, or ought to have foreseen, as loss likely to be suffered by Castel as a result of any breach by TSP of any contract. Accordingly, there is no evidence on which the Court may conclude, as required by CISG Article 74, that TSP did foresee, or ought to have foreseen, any of the alleged losses which Castel has claimed to have suffered.
317. In this Court, TSP argues that the primary judge erred in failing to accept this submission and to give an adequate explanation of the reasons why he did not accept it.
318. TSP’s argument is misconceived insofar as it proceeds on the assumption that what “ought to have been foreseen by” TSP could only be proved by evidence from TSP’s employees. When Article 74 speaks of consequences which “ought to have been foreseen” it is speaking of consequences which were, objectively speaking, foreseeable by the breaching party. The primary judge found that this test was satisfied. His Honour said at :
I accept that it was foreseeable at the time of the formation of each of the relevant sales contracts that recurrent failures, recalls and delays in supplying replacements of the “epidemic” products would have had a repercussive effect in reducing Castel’s margins of profit on other “Toshiba” products. Mr Acton’s inference that some of the erosion of the profit margin on the non-epidemic “Toshiba” products was attributable to extra discounts, free product, cash incentives and additional display materials is borne out by the evidence of Mr Michael Hall.
319. It is evident, in our respectful opinion, that his Honour used the word “foreseeable” to refer to what “ought to be foreseen”. There was no error on his Honour’s part in treating what was “foreseeable” as the same as “ought to have been foreseen”.
320. This aspect of TSP’s appeal should be rejected.
Article 77 of the CISG
321. Article 77 of the CISG provides:
A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated.
322. TSP’s argument under this heading involves two steps: first, that Article 77 conditions the right of recovery of damages by a buyer upon compliance with the obligation in the first sentence of Article 77; and secondly, that it is incumbent on the buyer to plead and prove its compliance with that obligation. In our opinion, neither step is correct.
323. While the first sentence of Article 77 imposes an obligation to mitigate, the second sentence prescribes the manner in which that obligation is given effect. It operates by affording the party in breach “a claim” for a reduction in the damages which will otherwise be payable by that party. Article 77 contemplates that, absent a successful claim by the party in breach for a reduction in “the damages” otherwise payable, the other party will be entitled to recover “the damages”.
324. Article 77 thus creates an obligation in one party to mitigate loss and confers a correlative right upon the party in breach to enforce that obligation. The natural and ordinary reading of Article 77 structured as it is, is that the right of enforcement conferred by the second sentence of the Article is an exhaustive statement of the rights of the party in breach. That right is “a new right ... created with an inseparable new remedy”: Byrne v Australian Airlines Ltd  HCA 24; (1995) 185 CLR 410 at 456; Josephson v Walker  HCA 68; (1914) 18 CLR 691 at 697, 701-702.
325. That view accords with commercial commonsense. It would be distinctly surprising if the onus of proof cast upon the party in breach by the second sentence of Article 77 could be cast off by that party simply asserting non-compliance by the innocent party with the obligation created by the first sentence of the Article.
326. Insofar as the second sentence of Article 77 is concerned, it is for the party in breach to make good its claim for a reduction in damages. [Omissis]
327. Neither the text nor the context of Article 77 of the CISG reveals any good reason to depart from this rule. TSP did not plead or seek to prove its claim for a reduction in the damages payable by it.
328. Accordingly, we conclude that TSP was obliged to plead and prove its claim for a reduction under Article 77. It failed to do so.
329. In any event, the primary judge’s findings were inconsistent with a failure on the part of Castel to mitigate its loss. [Omissis]
330. Accordingly, this aspect of TSP’s cross appeal must be rejected.
333. For the reasons we have given, we think the judgment will need to reflect an additional loss suffered by Castel in the order of $2,957,265.
334. However, we cannot simply make an order that the judgment be increased by that amount because that would be to under-compensate Castel. The judgment sum contains within it a significant sum for interest. If Castel’s damages are to be increased by the amount to which we have referred, no doubt that would have an effect on the interest to which Castel is entitled. The parties should be entitled to be heard in relation to that.
335. We would expect that Castel would be entitled to the costs of the appeal and of the cross appeal, but we will hear the parties in relation to the order for costs.
336. We also noted at the outset of these reasons the order for costs made by his Honour on 9 December 2010. We do not know why the parties consented to the orders in their terms but we suspect that an offer was made by TSP which was more favourable than the judgment entered by the primary judge. We do not know whether the increase in the award, together with any interest upon that increase, would have an effect upon those orders. The parties ought to be heard in relation to that matter. We think that the parties should provide us, as they did the primary judge, with the calculation of the interest which would be payable on the award and any submissions they would wish to make in relation to the question of the costs of the trial. Of course if these matters can be agreed by the parties we would invite the parties to bring in short minutes to reflect the agreement.
337. For those reasons, we make the following directions:
1. Castel provide its written submissions within 7 days in relation to:
(a) the interest payable on the increased award;
(b) the judgment sum to be entered by this Court;
(c) the order for the costs of the trial;
(d) the costs of the appeal and cross appeal.
2. TSP to file its written submissions in reply within 10 days.
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