VID 141 of 2008
Federal Court of Australia
Castel Electronics Pty. Ltd. v. Toshiba Singapore Pte. Ltd.






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 on 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 unsuitable for the Australian market. The parties then agreed to terminate the contract, though some issues concerning damages remained unsettled. As a result, the Australian distributor sued the Japanese company claiming repayment of all costs and expenses incurred due to non-conformity of the goods.

The Court held that CISG applied to each sales contract concluded under the distribution agreement (Art. 1(1)(a)).

As to the merits, the Court found that seller had breached the implied warranty of fitness for purpose or merchantable quality arising under Art. 35(2)(b) CISG and corresponding to that provided for by domestic law.

With respect to damages, the Court awarded the Australian distributor the costs incurred as a result of non-conformity of the goods, as well as loss of profit according to Art. 74 CISG.



The applicant, Castel Electronics Pty Ltd (“Castel”) which was incorporated on 25 June 1996 has, since that date, carried on in Australia the business, formerly conducted by a predecessor company, of a wholesaler and distributor of electrical and electronic products including television receivers, audio products, white goods including air conditioners and associated goods. As a result of the introduction to Australia of high definition digital television broadcasting and the projected phasing-out of analogue television broadcasting, a demand was created from about 2003 for set-top boxes which enabled the digital signal transmitted by television broadcasters to be captured and displayed through an analogue television receiver. As well as effectively converting analogue television receivers into digital receivers, more advanced set-top boxes incorporated a recording function which enabled programs to be recorded, rewound and replayed in more varied, complex and sophisticated ways than had been available using traditional VCR recorders to record material received by analogue television receivers.
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 has, for many years, been a large-scale manufacturer of electrical and electronic equipment and from about August 1997 arranged for TSP to distribute most of its products throughout Asia including to Russia and the Middle East. Pursuant to that arrangement, TSP became the supplier to Castel of many “Toshiba” branded television products. Many of the products so supplied were manufactured by TSP or by companies to which TSP had contracted their manufacture.

The distributorship agreement between Toshiba and Castel


(1) CASTEL shall undertake for its own account marketing, sales, advertisement and sales promotions of the PRODUCTS and shall use its best endeavours towards obtaining the largest sales volume of the PRODUCTS in the TERRITORY.
(2) Any advertisement for CASTEL’s sales promotion of the PRODUCTS shall be made at CASTEL’s own discretion and expense unless TOSHIBA agrees in writing to share or pay such expense.
(3) TOSHIBA agrees to provide CASTEL with a reasonable quantity of such advertising materials or other sales support as catalogues, leaflets and posters written in English, the quantity of which shall be decided upon by negotiation between the parties hereto. CASTEL shall bear any freight, insurance, tax, duty, assessment and any other charge and/or expense which may be charged or imposed on such materials after delivery thereof to the carrier at Japanese port of shipment.

TSP becomes the main supplier to Castel of Toshiba products.

After Castel had been advised in August 1997 that many of its Toshiba products were to be supplied in future by TSP, Castel followed a practice of submitting purchase orders to Toshiba in Japan or TSP or Toshiba Visual Products Pty Ltd in Singapore according to which company was the appropriate source of the relevant product. Payment for the goods to be shipped FOB from Tokyo or Singapore as the case might be, was made in US dollars by letter of credit in favour of the appropriate supplier. Later in the relationship between Castel as Australian distributor and Toshiba and TSP as suppliers, a practice was developed whereby each month Castel submitted a Purchase Sales Inventory (“PSI”) which indicated, on a monthly basis, Castel’s projected requirements for Toshiba products for the ensuing six months, “sales” or actual purchases by Castel for the month in question and sales of Toshiba products which had been made by Castel in the same month. As well, in another column, were identified Castel’s orders for the ensuing month in respect of each Toshiba product. Another column indicated the “inventory” or stock on hand of the same product held by Castel. Upon receipt of each month’s PSI, Toshiba or TSP, as the relevant supplier, issued a pro forma invoice for the goods for which a firm order had been indicated in the PSI for a particular month.
In about October 1997, Toshiba advised Castel that, henceforth, Toshiba colour television products would be shipped to Castel from Singapore by TSP. From that time, most of Castel’s requirements were met by TSP, although Castel continued to obtain certain smaller volume “Toshiba” branded products from Toshiba in Japan and “Toshiba” wide-screen rear projection television receivers from Toshiba UK.

The advent of the set-top box and the development of the J35

In order to enable customers in Australia with the existing analogue television receivers to receive digital television broadcasts, manufacturers, including TSP, developed “set-top boxes” which could be positioned on top of analogue receivers and convert a digital signal to a format in which it could be viewed using those receivers. TSP’s first version of a set-top box was the “S23” which was later followed by its “S25”. Neither the S23 nor the S25 had features which markedly distinguished it from competitors’ set-top boxes which were also present on the Australian market at that time.
By email in September 2003, Mr Ronald So of TSP advised Mr Kwong, the Managing Director of Castel, that TSP proposed to introduce to the market an improved version of the “S25” set-top box with high definition capacity. The email gave details of some specifications of the new model and invited Mr Kwong to indicate the price for which Castel expected to be able to sell it. Mr Kwong responded by indicating the prices at which competitors’ set-top boxes were selling in Australia and suggesting that the “best”, i.e. undiscounted price, for which the new “Toshiba” unit could sell in Australia would be AUD$999 “on introduction in August [2004]”.
In the “Toshiba” colour television manual for 2004, issued to Castel in April of that year, it was indicated that the J25 set-top box would be available from October 2004. In July 2004, Mr Kwong of Castel attended a “World Tour” in Singapore mounted by TSP to promote its forthcoming range of “Toshiba” products including the J35 set-top box and the “DLP” rear projection television receiver. In the “Toshiba” manuals and product brochures, as well as orally by Mr So in the course of the “World Tour” 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. It was also asserted that the J35 would be available for sale on the projected launch date in October 2004 or “such later date as will allow sufficient time to exploit the J35’s innovative character.”
Also at the “World Tour” in Singapore in 2004 TSP offered and promoted for the Australian market the “DLP” range of television receivers utilising digital light processing (“DLP”) technology which had been developed by Texas Instruments in the United States of America and had been incorporated in “Toshiba” television receivers which were already being sold in that country. Attractive features of the DLP receivers were that they offered large screen sizes (up to 72 inches) and incorporated a “Phoenix” lamp which had a longer life than that achieved by other lamps.
In December 2004, TSP provided Castel with a sample J35 set-top box and, early in 2005 issued a brochure containing the specifications for a J35 and detailing what were seen to be its attractive features including its 180GB Hard Disk Drive (“HDD”) which it was said;
... brings you the finest picture quality” and “the solution of high and standard definition recording and playback. With such a large capacity HDD, you can enjoy great convenience and freedom to capture 18 hours of high definition or 49 hours of standard definition of superior quality just like live screening.

Castel placed its first commercial order for J35s with TSP for delivery in January 2005. That was ordered in the PSI format described at [7] above and was for 2,380 units. However, that order was not filled according to its terms because delays had been encountered by Zinwell Corporation (“Zinwell”) a Taiwanese company to which TSP had subcontracted production of the J35. As a result, only 40 units were shipped to Castel in February 2005 with the stipulation that they were not to be re-sold but were for display purposes only. That difficulty had been foreshadowed in an email dated 13 December 2004 from Mr So to Mr Kwong of Castel which recited;
Before the field [tests] in progress now in Australia, Toshiba and Zinwell engineers did the evalution [sic] of the HDD-J35 samples in Singapore last week. The overall performance is not so satisfactory which requires a modification of hardware. 100 sets cannot be produced in Dec and the subsequent production will likely be affected, too. Before the final result of Australian field test, Zinwell cannot give us a recovery schedule. We will keep on inform you the progress closely.
We apologize the inconvenience caused. We also seek your understanding of the uncertainties and difficulties involved in developing leading technology.

Later, on 12 January 2005, Mr So forwarded to Mr Kwong by email a revised delivery schedule which provided for delivery of 2,280 units between 24 and 29 February and a further 2,280 units to be delivered at “end March”. The launch of the J35 which had been deferred until March 2005 was further delayed because of the need to replace the software in the units which had been shipped to Australia. To enable that to be done, the units were returned to Zinwell and, after re-working were again sent to Australia in time for a launch on the Australian market in April 2005. After that launch, Castel placed with TSP further orders for commercial quantities of J35s.
After the release of the J35s for sale in Australia, numerous complaints about them were made by retail purchasers and referred to Castel’s service department. According to Mr Kwong, nearly every fault reported to Castel was “generic” in the sense that it was common to a batch of J35s as imported to Australia rather than being a “one-off” or isolated occurrence. The proliferation of complaints required Castel to divert to responding to customer grievances members of staff who would otherwise have been engaged in visiting retailers and promoting sales. Each “generic” fault required all units in a given batch to be rectified. Notice of the occurrence of the fault was given to TSP but, as each new “generic” fault was identified, units in each preceding batch had to be recalled for repair or upgrade to correct the new fault. According to Mr Kwong, “at least 54 generic faults of an epidemic nature” were encountered over the two years which followed the Australian launch of the J35. Mr Kwong acknowledged, however, that many of the “epidemic” faults were identified in close proximity to each other so that the number of recalls was limited and faults were rectified in patches. Other “one-off” faults in the J35 were identified from time to time but were not regarded as “epidemic”. Nevertheless, the volume of “epidemic” defects revealed by consumer complaints during April and May 2005 were so large that, on 20 May 2005 Mr Kwong wrote to Ms Violet Oh of TSP in these terms;

By mid-2006, Castel had concluded that the continuing deficiencies of the J35 were so profound that the model would never be merchantable in Australia.


Termination of Castel’s Distributorship of “Toshiba” Products

By about October 2006, it was apparently seen on both sides that the arrangement between Toshiba and TSP on the one hand, and Castel as their Australian distributor on the other, could not be sustained in light of the distress and dissatisfaction which had been caused by the failure of the J35 and C26 set-top boxes and the recurrent lamp problems with the DLP television receiver. The termination of the relationship was first discussed at a meeting on 9 November 2006 at Castel’s Melbourne premises. That meeting was attended by Mr Sato, who, from July 2002 to September 2006 was the Manager, Sales and Marketing for TSP and later became Chief Specialist in Toshiba’s Global Production Department, Mr Yamamoto, who succeeded Mr Sato as TSP’s Manager, Sales and Marketing, and Mr Murakami, who, it will be recalled, had taken over in September 2006 as TSP’s Department Manager.
There was a further meeting in Melbourne on 16 November 2006 attended by Mr Osumi, a director of TSP. Later, Mr Yamamoto and Mr Osumi met two of the directors of Castel, Mr Kwong and Mr Eric Ho in Hong Kong on 2 December 2006. Mr Yamamoto and Mr Murakami attended a further meeting in Melbourne on 11 December 2006 mainly to discuss Castel’s stock requirements on the assumption that it would continue to distribute Toshiba products until 31 March 2007. There was also discussion of price reductions which might be allowed to Castel as it ran down its distributorship.
On 5 April 2007, at a further meeting in Melbourne, a termination agreement (“the Termination Agreement”) was executed between Castel, TSP and Toshiba. The Termination Agreement recited that, in it, “Toshiba and TSP shall be jointly or severally called “Toshiba”.” It contained the following clauses:
Castel Electronics Pty Ltd (“Castel”) has until recently been the Australian Distributor for Toshiba AV products under a distribution agreement dated 8th August 1996 as renewed and sale and purchase transactions (collectively the “Distribution Arrangements”).
Castel and Toshiba agree that the Distribution Arrangements ended on 1st April 2007. Castel and Toshiba have a number of issues outstanding between them relating to the cessation of the Distribution Arrangement. They have agreed to resolve some of those issues in the manner set out below.
Castel and Toshiba have agreed to resolve all claims which Castel may now or in the future have against Toshiba except for the following matters : -
all claims (including fixture claims) for warranty, quality and consumer issues (including indemnity or claims in respect of liabilities to consumers under Australian Law) for certain of the products namely Toshiba brand television receivers and set top boxes including but not limited to J35, STB, DLP and C26 (together with all other products in which epidemic failure (i.e. failure more than 3 percent of such product purchased from Toshiba) has occurred) purchased by Castel from Toshiba.
ongoing warranty costs and fees to be borne by Toshiba or TAP for Toshiba brand TVs, DVD products and other AV products distributed by Castel on or before March 31, 2007, which would be borne by Castel;
the claims against Toshiba that Castel has in respect of all damages and losses (whosever arising) and expenses to Castel’s business arising from the conduct, representations, actions and/or omissions, if any, of any of Toshiba (including their officers, servants, agents and subsidiaries) affecting Castel for the period commencing 1 January 2007 to 31 March 2007.


(a) Breach of contract

It is common ground that, on the issue by TSP of commercial and shipping documents after acceptance of an order from Castel for “Toshiba” products, a contract for the sale of goods (a “sales contract”) came into existence. (...)

It was also not disputed that, to the extent that it was capable of applying to them, the CISG governed the terms of each sales contract. (...)

Similarly, Australia and Singapore have, at all material times, been “Contracting States” within the meaning of the CISG. That has the effect that the CISG governs 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 (see Summit Chemicals Pty Ltd v Vetrotex Espana SA [2004] WASCA 109).
The provision of the CISG which is principally applicable to Castel’s claim is Article 35 which provides, so far as is relevant;
(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;

Those provisions have been treated by Australian courts as imposing, effectively, the same obligations as the implied warranties of merchantable quality and fitness for purpose arising under s 19 of the Goods Act; see Playcorp Pty Ltd v Taiyo Kogyo Ltd [2003] VSC 108 at [235], Ginza Pte Ltd v Vista Corp Pty Ltd [2003] WASC 11, at [189]-[191] and Summit Chemicals Pty Ltd v Vetrotex Espana SA [2004] WASCA 109.(...)


The prima facie measure of damages where goods do not conform with the contract, whether as a result of a breach of the implied warranty of fitness for purpose or merchantable quality or for some other reason, is the difference between the value of the non-conforming goods at the time of delivery and the value which they would have had at that time had they conformed with the contract. Thus, Article 50 of the CISG provides: If the goods do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time. However, if the seller remedies any failure to perform his obligations in accordance with article 37 or article 48 or if the buyer refuses to accept performance by the seller in accordance with those articles, the buyer may not reduce the price.

However, Article 74 recognises that damages recoverable for breach of a contract are not confined to the loss of profit on the non-conforming goods but extend to consequential losses. The same article imposes a foreseeability test by way of limiting the damages, whether represented by loss of profits on the goods or consequential losses, to those which were reasonably foreseeable at the time when the contract was concluded. (...)


(i) The cost of dealing with defective products

Mr Acton quantified this aspect of the alleged loss by imputing the “increased costs” incurred by Castel in dealing with the defective Toshiba products. He then calculated an amount said to represent the effect of the cost of dealing with the “problem” products on sales by Castel of other products. In addition, he took into account the estimated gross margin which Castel would have earned from sales by Castel of other products. To that he added the estimated gross margin which Castel would have earned from sales of the “problem” products had they not been defective and compared it with the gross margin actually earned on those products in the relevant period.(...)

Mr Acton’s calculations which I have just summarised were based partly on an estimate of the amount of time spent by Castel’s sales staff in visiting customers and retailers to rectify problems as they were discovered and the non-salary costs such as motor vehicle expenses referable to that activity. Another integer in this calculation was the estimated cost of time spent by Castel’s internal service staff in rectifying units, returning them to Zinwell as required and returning the reworked products to consumers. A different method was applied to calculating the cost of the time of service staff devoted to rectifying “epidemic” products other than the J35 and the C26 by assuming that each service job on one of those products required the same amount of time.
A cost was attributed by Mr Acton to handling of “epidemic” problems by Castel’s warehouse staff by expressing the total amount of extra time devoted to handling those products as a proportion of the total quantity of products handled in Castel’s warehouses. As well “fixed costs that [could] not be explicitly attributed to particular products or activities” such as office space, depreciation and the like were allocated “according to the role of these activities in a representative year” which was selected by Mr Acton as the year ended 30 June 2005. Advertising and promotional costs were not allocated because they were not regarded as attributable to specific products.
I accept that the costs of rectifying defective or non-conforming goods can be a head of damage under Article 74 of the CISG, either because they operate to reduce the profit on the goods or because they are incurred as a consequence of the breach. However, such costs are only recoverable if they would not have been incurred but for the breach. Costs 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. Thus, the fact that sales staff, who were part of Castel’s permanent business establishment, spent time in visiting customers and retailers to rectify or recover defective goods does not mean that the value of that time is a cost, in the relevant sense, of rectifying the goods. The hypothesis that it is such a cost rests on the assumption that the time of the sales staff, if not devoted to the defective goods, would have been spent on other, profit-making activities. That assumption has not generally been made out on the evidence in this case.
However, I except from that observation the expenses incurred in putting on extra staff or using outside contractors specifically to rectify the defective goods. In this context, it is to be remembered that Mr Hew gave evidence, recounted at [42] above, that Castel’s service department had to be increased from seven to 35 to handle complaints generated by “epidemic” faults. (...)}}


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