FEDERAL COURT OF AUSTRALIA Groundhog Sales and Rentals Pty Ltd v Eastern Pearl Corporation [2012] FCAFC 113 Citation: Groundhog Sales and Rentals Pty Ltd v Eastern Pearl Corporation [2012] FCAFC 113 Appeal from: Eastern Pearl Corporation v Groundhog Sales and Rentals Pty Ltd [2012] FCA 406 Parties: GROUNDHOG SALES AND RENTALS PTY LTD ACN 091 781 797 v EASTERN PEARL CORPORATION File number: QUD 234 of 2012 Judges: GREENWOOD, MCKERRACHER AND KATZMANN JJ Date of judgment: 21 August 2012 Catchwords: CONTRACTS – appeal from dismissal of a cross-claim pleading that heavy earth-moving equipment sold was not fit for its intended purpose or of merchantable quality – whether the primary judge erred in finding an express oral term that equipment would be sold on an 'as is' basis – relevance of credibility findings made by primary judge in relation to witnesses – whether the primary judge erred in finding that it was a customary term to sell the equipment on an 'as is' basis Legislation: Goods Act 1958 (Vic) ss 19, 61 Cases cited: Eastern Pearl Corporation v Groundhog Sales and Rentals Pty Ltd [2012] FCA 406 - cited Date of hearing: 8 August 2012 Place: Brisbane Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 37 Counsel for the Appellant: J Catlin Solicitor for the Appellant: Harwood Andrews Counsel for the Respondent: PA Hastie Solicitor for the Respondent: Plastiras Lawyers IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 234 of 2012 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: GROUNDHOG SALES AND RENTALS PTY LTD ACN 091 781 797 Appellant AND: EASTERN PEARL CORPORATION Respondent JUDGES: GREENWOOD, MCKERRACHER AND KATZMANN JJ DATE OF ORDER: 21 AUGUST 2012 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The appeal is dismissed. 2. The stay order the subject of the order of the Court of 8 August 2012 is dissolved. 3. The appellant is to pay respondent's costs, to be taxed if not agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 234 of 2012 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: GROUNDHOG SALES AND RENTALS PTY LTD ACN 091 781 797 Appellant AND: EASTERN PEARL CORPORATION Respondent JUDGES: GREENWOOD, MCKERRACHER AND KATZMANN JJ DATE: 21 AUGUST 2012 PLACE: BRISBANE REASONS FOR JUDGMENT THE COURT: INTRODUCTION 1 The appellant (Groundhog) appeals from a judgment of the Court (Eastern Pearl Corporation v Groundhog Sales and Rentals Pty Ltd [2012] FCA 406) in which its cross-claim was dismissed. The primary judge, having awarded the respondent to the present appeal (Eastern Pearl) damages in the sum of $499,641.33, entirely dismissed a cross-claim by Groundhog against Eastern Pearl. Groundhog sought to set-off the sum claimed under the cross-claim against any award in damages in Eastern Pearl's favour. Groundhog does not appeal from the judgment against it on Eastern Pearl's claim for the payment of damages but only on the dismissal of its cross-claim. 2 For reasons which follow, Groundhog's appeal must be dismissed. THE REASONING AT FIRST INSTANCE 3 The damages award made by the primary judge was in respect of a contractual breach by Groundhog of a joint venture agreement (the JVA) between the parties concerning the purchase and sale of an item of earthmoving equipment known as a Caterpillar 992G (the 992G). 4 In its cross-claim, Groundhog contended that various heavy equipment vehicles delivered to it by Eastern Pearl were not fit for their intended purposes or not of merchantable quality. There were four such vehicles, the identity of which is not presently relevant. Groundhog also pursued various other cross-claims which are not the subject of appeal. 5 On assessment of the credit of the key witnesses, the primary judge reached credibility conclusions which were strongly adverse to Groundhog. This aspect has a significant bearing on the disposition of the appeal. For reasons which his Honour explained, he concluded (at [46]) that Mr Glenn Mackay, on behalf of Groundhog, had been dishonest in his dealings with Mr Ting and Mr Lee of Eastern Pearl in relation to activities concerning the JVA. The adverse credit conclusions in relation to Mr Mackay, both on the claim and the cross-claim, were reached not only in consequence of cross-examination of Mr Mackay at trial but also because of false information he conveyed to Mr Ting and Mr Lee during the activities of the parties under the JVA. Mr Mackay told a series of lies in several emails, conversations and an affidavit. 6 Representations are said to have been made by Mr Lee on three occasions according to the primary judgment. The locations at which the representations were made and the identification of who was there on each occasion is not specified in the judgment. That is largely because it is unclear from both the pleadings and the evidence. 7 There is first a reference to a representation that was made by Mr Lee as to merchantable quality of two items of equipment made to persons unknown on 17 December 2007 (reasons [5]). There is then reference to a discussion in May 2007 (at [42]) where Mr Mackay and Mr Lee met to set trading terms and conditions for future transactions between Groundhog and Eastern Pearl pursuant to which an oral agreement was reached. This was the alleged meeting at which Groundhog asserts that Mr Lee promised the machinery would have specific characteristics as discussed below. This evidence was rejected by the primary judge. 8 There is then reference to a further representation (at [54]). Eastern Pearl, on this occasion relies on conversations between Mr Lee on the one hand and Mr Mackay and Mr Predika of Groundhog on the other in which Mr Lee explained that Eastern Pearl sold its equipment on an 'as is' basis. The primary judge accepted this evidence and other evidence given by Mr Lee concerning these representations. 9 There is therefore some confusion as to precisely when and where representations were made and to whom. As indicated, however, regardless of this detail, the primary judge accepted, for the purposes of the main claim, that there had been a breach of contract and, importantly for the purpose of the cross-claim, entirely rejected the evidence relied upon by Groundhog and accepted the evidence for Eastern Pearl. 10 His Honour thus accepted that in May 2007, Mr Lee of Eastern Pearl attended a meeting with Mr Mackay of Groundhog. His Honour accepted Mr Lee's evidence that during the course of that meeting he explained that Eastern Pearl sold used or second hand equipment to its customers on an 'as is' basis. 11 The primary judge noted (at [42]) that Groundhog asserted a verbal (sic-oral) agreement between Mr Lee and Mr Mackay that equipment purchased by Groundhog from Eastern Pearl would have various characteristics, including that the equipment would be in working condition. Groundhog also alleged that it was a term of this oral agreement implied at law that the equipment would be fit for its purpose or of merchantable quality. Groundhog claimed that it was agreed that equipment purchased by Groundhog from Eastern Pearl would have the following characteristics. It would be: well maintained; late model; with low hours of operation on the meter; excellent quality; in working condition; fully maintained and serviced since new; with proper maintenance histories; immediately saleable in Australia subject to local compliance requirements and free of major defects such that the equipment would be able to be sold in Australia relatively cheaply or promptly rented without delay ("the characteristics"). 12 Eastern Pearl, by its pleading, rejected those contentions and asserted that Groundhog was well aware that the equipment was second hand or used and that Groundhog did not rely on the skill or judgement of Eastern Pearl when choosing and purchasing the equipment. 13 The onus to establish the terms as to the characteristics rested solely with Groundhog. It failed to discharge that onus because his Honour did not believe Mr Mackay. 14 There is no doubt that the primary judge simply rejected the contentions for Groundhog raised through Mr Mackay. His Honour noted that there was no independent documentary evidence that the terms constituting the characteristics were ever the subject of an oral agreement between Mr Lee and Mr Mackay. His Honour continued (at [46]) to note: Mr Mackay is not a reliable witness. He demonstrated, by his false emails relating to the JVA, that he is someone who is prepared to be loose with the truth if there is a commercial advantage in so doing. I accept the evidence of Mr Lee that the machinery was sold on an "as is" basis. 15 The evidence of Mr Lee on the topic had been set out in his witness statement at [6] where he said: At the meeting in May 2007, I recall that I said the words to Glenn and Andrew to the effect that: Eastern Pearl sells used equipment to all its customers on an "as is" basis, without any guarantees. I said words to the effect that: we make every effort to source equipment in good working order but will not offer you any warranties and you will have to inspect the equipment first and be satisfied as to its condition before you buy it. 16 Moreover, specifically in the course of his cross-examination, it was expressly put to Mr Lee by Mr Catlin, counsel for Groundhog, as follows at p 28: Mr Catlin: And you say that the equipment you sell, you sell "as is". You recall saying that? Mr Lee: Yes. Mr Catlin: And is that a term that you've had for many years? Mr Lee: Yes. This is usually common always, as only "as is" condition. Mr Catlin: Okay. And that's a very important basic term in all your trading? Mr Lee: Yes. Mr Catlin: Okay. It's not on any of your invoices, is it? Mr Lee: Some invoice (sic-invoices) – because this is all the documents made by our managers, and the managers sometime (sic-sometimes) they put an invoice for "as is" condition, some time (sic-sometimes) they don't. 17 The primary judge examined the provisions of s 19 of the Goods Act 1958 (Vic) (the Goods Act). That section provides: Implied conditions as to quality or fitness Subject to the provisions of this Part and of any Act in that behalf there is no implied warranty condition as to the quality or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale, except as follows – (a) where the buyer expressly or by implication makes known to the seller the particular purpose for which the goods are required so as to show that the buyer relies on the seller's skill or judgment and the goods are of a description which it is in the course of the seller's business to supply (whether he be the manufacturer or not) there is an implied condition that the goods shall be reasonably fit for such purpose: Provided that in the case of a contract for the sale of a specified article under its patent or other trade name there is no implied condition as to its fitness for any particular purpose; (b) where goods are bought by description from a seller who deals in goods of that description (whether he be the manufacturer or not) there is an implied condition that the goods shall be of merchantable quality: Provided that if the buyer has examined the goods there shall be no implied condition as regards defects which such examination ought to have revealed; (c) an implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade; (d) an express warranty or condition does not negative a warranty or condition implied by this Part unless inconsistent therewith. (emphasis added) 18 It was common ground that the Caterpillar equipment was sold under its trade name. As such, the proviso to subs (a) excluded applicability of the subsection to those circumstances. There was no appeal from that conclusion. 19 It was accepted that Groundhog was confined to a claim under s 19(b) of the Goods Act which carried the further proviso that the merchantable quality term did not apply if an inspection of the item would have revealed the defect. His Honour noted that there was evidence that Mr Hoare of Groundhog attended at Yokohama to inspect the first D8T dozer but that it was not available for inspection at that time. There was also evidence before his Honour that it was open for Groundhog to conduct an inspection of machinery purchased. 20 Ultimately, there was no express determination on the s 19(b) proviso as the matter was able to be dealt with under s 61 of the Goods Act. Eastern Pearl relied upon s 61 of the Goods Act which provided that an implied condition as to merchantable quality: …may be negatived or varied by express agreement or by the course of dealing between the parties or by usage if the usage be such as to bind both parties to the contract. (emphasis added) 21 His Honour was satisfied that any implied term was expressly negatived. He noted that Eastern Pearl's case was that in conversations between Mr Lee for Eastern Pearl and Mr Mackay (and Mr Andrew Predika) for Groundhog, Mr Lee explained that Eastern Pearl sold equipment on an 'as is' basis. His Honour noted (at [54]-[58]) that Mr Lee's evidence was to the effect that while Eastern Pearl tried to obtain equipment in good working order, the company did not offer any guarantees about equipment and that it suggested, through Mr Lee, that Groundhog inspect the equipment for itself. The primary judge accepted Mr Lee's evidence that although the practice of Eastern Pearl was to sell equipment on an 'as is' basis, if there was any difficulty with any particular item of equipment it would consider each issue as it arose in the best interests of the long term commercial relationship between the parties. Mr Lee was prepared to take into account any problems which occurred with particular pieces of equipment in future dealings. 22 On this point, in conclusion, his Honour found: 58 I am satisfied that the industry of the purchasing of earth-moving machinery operates on a sold "as is" basis. Such a term appeared on Groundhog invoices for the on-sale of equipment by it. 59 I am satisfied that s 61 of the Goods Act applies in the current circumstances. The terms to be implied by s 19(b) have been negatived by express dealing by the parties. The express dealing comprehends that the machinery is to be sold and purchased on an "as is" basis. (emphasis added) 23 Because his Honour considered it was an express term of the JVA that the equipment was sold 'as is', he found it unnecessary to consider the individual complaints raised at trial with respect to the pieces of equipment referred to in the cross-claim. GROUNDS OF APPEAL 24 Groundhog raised the following grounds of appeal: 1. The Court erred when it found that it was a term of the agreement/s between the Appellant and Respondent that equipment was sold by the Respondent and received by the Appellant on an "as is" basis. 2. The Court erred when it made the finding that it was a customary term in the purchasing of earth moving machinery that equipment was sold "as is". 3. The Court finding that it was a customary term in the purchasing of earth moving machinery that equipment was sold "as is" was made in error as it was made without expert evidence having been led on industry custom. 4. The Court finding that it was a customary term in the purchasing of earth moving machinery that equipment was sold "as is" was made in error as it was made without evidence on industry custom. 5. The Court finding that it was a customary term in the purchasing of earth moving machinery that equipment was sold "as is" was made in error because it was based on inference contrary to direct evidence including documentary evidence that the term "as is" was denoted on contracts when it was agreed upon and omitted otherwise. 6. The Court erred in finding that Australian contractual terms applied by the Appellant applied to the Respondent as there was no evidentiary basis for such inference. 7. The Court erred in finding that Australian contractual terms applied by the Appellant applied to the Respondent as it was contrary to the evidence of the Appellant that Japanese business and custom with regard to agreements was distinct from Australian custom in the earth moving machinery sales industry. 8. The Court should have found that the s.61 of the Goods Act applied without any agreed variation that equipment was sold "as is". ARGUMENTS ON APPEAL Appeal grounds 1-5 – 'as is' was not proven to be a customary term 25 Before coming to the essence of the arguments raised for Groundhog on the appeal, it is important to restate that the issue before his Honour on the pleadings was whether it was an express term of the oral agreement that the machinery was sold on an 'as is' basis as that term was explained by Mr Lee. 26 That was the expressly pleaded contention of Eastern Pearl in rejection of Groundhog's claim that the oral agreement stipulated that the equipment would have the characteristics. Specifically, Eastern Pearl pleaded in relation to the allegations contained in para 4 of the cross-claim: (a) in May 2007 Mr Lee, on behalf of Eastern Pearl, advised [Mr Mackay], on behalf of [Groundhog] that: (i) Eastern Pearl sold equipment on an 'as is' basis; (ii) Eastern Pearl sold equipment on the condition it was in as at the time of sale without guarantees being given and that whilst every effort was made to source equipment in good order it would not offer any guarantees and Groundhog would have to inspect the equipment first and be satisfied as to its condition before it purchased it; (b) Eastern Pearl otherwise denies the allegations. 27 There is no doubt that the conclusion reached by the primary judge was that Eastern Pearl made out its pleaded case. Mr Lee's evidence, both in chief and on cross-examination, was consistent with that case and was the evidence which his Honour distinctly preferred. 28 Groundhog contends that some of that evidence was illogical and ought to have been rejected. Given that it was the pleaded case and given that there was plausible evidence on which his Honour could reach his conclusion as to the actual terms of the discussion giving rise to the oral agreement, his conclusion should not be disturbed. Any additional observations by the primary judge in relation to whether or not 'as is' was customary in the industry or otherwise (at [58]) were purely secondary to the primary issue squarely before his Honour on the pleadings. 29 Had the case been fought on whether or not it was an implied term by virtue of custom in the trade or industry, the situation may well have been different. When this threshold issue is identified, it can be seen that all the arguments for Groundhog necessarily fall away. To the extent the topic of custom or practice arose, it was entirely incidental to the pleaded dispute. 30 Groundhog, in its oral submissions, points to the tax invoices relating to the sales of the relevant equipment and the fact that those documents do not contain the words 'as is'. However, those documents were not, on the pleaded case for either party, the agreement the subject of the dispute. That agreement was the oral agreement reached in May 2007. 31 It is correct to assert, as Groundhog does, that on the question of the term being customary in the industry, there was no expert evidence to support that conclusion. However, this issue was redundant once his Honour concluded that the specific term was an express oral term. So does the argument concerning implication of a term by custom from the dealings between the parties. It may also be accepted that there were not sufficient dealings at that stage in order to establish custom but the implication of such a term did not arise given the finding of an express oral term. Appeal grounds 6 and 7 – the Australian (Groundhog) contractual terms 32 The arguments on ground 6 and ground 7 fall under the same category. Once again, if Eastern Pearl's case had not depended upon an express term that the equipment was sold 'as is' but, rather, depended upon implying a term to that effect because of Groundhog's Australian custom, then these grounds would have force. That was neither the basis of the pleaded dispute nor his Honour's primary finding. His Honour's brief reference to the industry (at [58]) was incidental to the dominant finding on the express term. 33 While there may be merit again in the Groundhog argument that there was not adequate evidence to reach a conclusion on this issue had it been the ground for the primary judge's conclusion, the reference to the Australian custom was simply confirmatory of the central finding already made. Appeal ground 8 – there was no express dealing 34 On the hearing of the appeal, the appellant sought (and was given) leave, with the consent of the respondent, to amend ground 8 of the Notice of Appeal so as to contend, in clearer language, that the primary judge erred by finding that s 61 of the Goods Act operated so as to displace the implication of a condition of merchantable quality under s 19(b) of the Goods Act. This ground, in substance, does no more than attack the conclusions reached by the primary judge based on his firm preference of the evidence given by Mr Lee to that given by Mr Mackay. Groundhog's written submissions appear to acknowledge that the Court did find the express dealing but contend that the Court should not have done so. Complaint is raised that the primary judge did not expressly record that he found that the words 'the equipment is sold as is' were spoken by Mr Lee to Mr Mackay or another representative of Groundhog. That is not the construction we place on his Honour's reasoning. 35 As indicated above, the pleaded case turned exclusively on the oral agreement made in May 2007. We construe his Honour's reasons that the oral agreement is the basis for his Honour's conclusion that, as stated in Mr Lee's witness statement and his cross-examination, he explained to Mr Mackay that the equipment was sold 'as is' and that the term was accepted implicitly because Groundhog continued to do business thereafter. The implied condition of merchantability was therefore clearly excluded by the express term of the oral contract between the parties. CONCLUSION 36 As a final matter, by oral application, counsel for Groundhog at the completion of argument on the appeal sought a stay of execution of the judgment in the primary claim in favour of Eastern Pearl. The Court indicated that in light of the fact that this judgment was to be provided within a short timeframe, it would favourably consider the granting of a stay of execution of the judgment on the initial claim in favour of Eastern Pearl. That stay was to be on an interim basis only until delivery of this judgment. The order for a stay of execution of the judgment in favour of Eastern Pearl is now vacated. No additional order is required concerning the stay. 37 The Court makes the following orders: 1. The appeal is dismissed. 2. The stay order the subject of the order of the Court of 8 August 2012 is dissolved. 3. The appellant is to pay the respondent's costs, to be taxed if not agreed. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Greenwood, McKerracher and Katzmann. Associate: Dated: 21 August 2012