Brookfield v Davey Products Pty Ltd [1996] FCA 971

CATCHWORDS

Sale of Goods - appeal against dismissal of claims against supplier for damages for breach of terms implied by s.14 of the Sale of Goods Act 1895 (SA) as to reasonable fitness for their purpose and of merchantable quality, for negligent misstatement, and for misleading and deceptive conduct constituted by representations as to the capabilities of the goods - finding by trial judge that goods used otherwise than for the purpose made known by the purchaser to the seller - grounds of appeal dependant upon successful challenge on appeal to findings of fact as to nature of the working environment in which the goods were used - alleged factual errors by the trial judge not made out - appeal dismissed. Matter No. SG20 of 1996 IAN WALTER BROOKFIELD and SEPTIC PRODUCTS OF AUSTRALIA PTY LTD -v- DAVEY PRODUCTS PTY LTD VON DOUSSA, O'LOUGHLIN & LEHANE JJ ADELAIDE 12 SEPTEMBER 1996

IN THE FEDERAL COURT OF AUSTRALIA ) ) SOUTH AUSTRALIA DISTRICT REGISTRY) No. SG20 of 1996 ) GENERAL DIVISION ) ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: IAN WALTER BROOKFIELD and SEPTIC PRODUCTS OF AUSTRALIA PTY LTD Appellants AND: DAVEY PRODUCTS PTY LTD Respondent

MINUTES OF ORDER JUDGES MAKING ORDER : VON DOUSSA, O'LOUGHLIN & LEHANE JJ PLACE ORDER MADE : ADELAIDE DATE ORDER MADE : 12 SEPTEMBER 1996 THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The appellants pay the respondent's costs of the appeal. Note: Settlement and entry of order is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA ) ) SOUTH AUSTRALIA DISTRICT REGISTRY) No. SG20 of 1996 ) GENERAL DIVISION ) ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: IAN WALTER BROOKFIELD and SEPTIC PRODUCTS OF AUSTRALIA PTY LTD Appellants AND: DAVEY PRODUCTS PTY LTD Respondent CORAM: von Doussa, O'Loughlin & Lehane JJ PLACE: Adelaide DATE : 12 September 1996 REASONS FOR JUDGMENT THE COURT: Introduction: This is an appeal from a judgment of Branson J dismissing a claim for damages for loss alleged to result from the supply by the respondent of defective submersible pumps which had been installed in household waste water systems. The first appellant (Mr Brookfield) is a qualified master plumber who from 1988 traded under the business name Brookfield Plumbing Services. In 1989 Brookfield Plumbing Services commenced installing a waste water system known as the "Parco Beaver Aerobic Septic System" ("the Parco Beaver System"). Initially these systems were acquired through Waterite (SA) Pty Ltd, the South Australian distributor of the system. However after a few months the arrangement with Waterite (SA) Pty Ltd finished, and the Parco Beaver System was obtained from an interstate distributor, Allwater Treatment Pty Limited ("Allwater"). In 1990 Brookfield Plumbing Services commenced installing a version of the Parco Beaver System which Mr Brookfield had modified ("the modified Parco Beaver System"). In September 1990 a provisional liquidator of Allwater was appointed. Mr Brookfield then negotiated with the Parco company which held the intellectual property rights in the Parco Beaver System and he became licensed to manufacture and sell the Parco Beaver System in Australia through a company formed by him called Parco Beaver Australia Pty Limited. The relationship between Mr Brookfield and the Parco company did not flourish and came to an end in mid 1991. Parco Beaver Australia Pty Ltd eventually changed its name to Septic Products Australia Pty Ltd ("Septic Products"). This occurred on 26 June 1992. Septic Products is the second appellant. Before this name change occurred, in about March 1991 an informal joint venture agreement was entered into between Mr Brookfield and the second appellant. On 1 July 1991 the assets and liabilities of the Brookfield Plumbing Service business were transferred to the second appellant in which Mr Brookfield had a 50% shareholding. He was also the chief executive officer and a director of the company. In September 1991 Mr Brookfield received provisional patent approval for a waste water system described as the BPS Trickle Filter System ("the BPS System"). Thereafter the second appellant only installed the BPS System. Shortly after Allwater went into provisional liquidation in September 1990, Mr Brookfield contacted the respondent, a supplier of pumps. He spoke with Mr Wilsdon, the respondent's South Australian manager. Mr Wilsdon had already identified the waste water industry as a potential source of sales for pumps, and Mr Brookfield as a potential buyer of pumps. After discussions between the two, and a visit by Mr Wilsdon to the premises of the second appellant on about 5 October 1990 when he was shown a working display unit of the Parco Beaver System (which for display purposes had clean water circulating through it), the respondent commenced to supply Mr Brookfield with two models of pumps. The models were the Davey Lowara Doc 3 ("the Doc 3 pump") and the Davey Lowara Doc 7 ("the Doc 7 pump"). The Doc 3 pump was to be used in lieu of the Grundfos KP 100 pump ("the KP 100 pump") as a recirculation pump. The Doc 7 pump had been used as an irrigation pump in the Parco Beaver System supplied by Allwater, and Mr Brookfield used the Doc 7 pumps obtained from the respondent for the same purpose. Subsequently Davey Products provided "Sumprat" pumps to Mr Brookfield. These were of almost identical design to the Lowara pumps, and there was an equivalent model for both the Doc 3 and Doc 7 pumps. The applicants experienced problems with all models of pump supplied by the respondent. Losses said to arise from these problems are the subject matter of the appellants' claim; the cause and extent of the problems were central issues at trial. In October 1991 Mr Brookfield advised the respondent that Septic Products would no longer use its pumps. Thereafter Septic Products obtained pumps first from I.T.T. Flygt Ltd, and then from White International Pty Ltd. Septic Products also encountered problems with pumps from these suppliers and they were joined as respondents when proceedings were initiated in this Court on 1 November 1993. The claims against I.T.T. Flygt Ltd and White International Pty Ltd were settled by the applicants before the trial commenced. Septic Products was placed in liquidation on 5 April 1993. The appellants' case at trial: At trial the appellants contended that they relied upon representations made orally and in brochures by the respondent that the pumps would do the particular jobs required of them. They did not. The trial judge did not accept the appellants' assertion that virtually all the pumps failed, but her Honour held that approximately 50% of the Doc 3 pumps supplied failed in use. There was no finding as to the percentage of Doc 7 pumps that failed. The evidence shows that although there were failures, the percentage was considerably lower. The appellants contended that the pump failure led to the collapse of the Septic Products' business and to its liquidation. Both appellants alleged they had suffered loss. In final addresses at trial it became apparent that the liquidator of Septic Products had no involvement in the proceedings, and that Mr Brookfield had given instructions for the proceedings to be issued in the name of Septic Products. The trial judge questioned the entitlement of Mr Brookfield to use the name of Septic Products in the litigation. This inquiry led to the disclosure of a deed of assignment which had neither been discovered by the appellants, nor referred to in the pleadings. By the deed, dated 28 October 1993, the liquidator of Septic Products (the Assignor) purported to assign to Mr Brookfield (the Assignee) all the "Assignor's right title and interest as applicant in certain Federal Court proceedings". Mr Brookfield covenanted with the liquidator as follows: "The Assignee covenants with the Assignor: (1) to institute proceedings in an action for damages in the Federal Court of Australia against the parties referred to in Recital B herein on or about the 28th of October 1993; (2) upon receipt of damages awarded to the Assignee pursuant to the proceedings referred to herein pay in full the amounts specified to the creditors referred to in the Annexure hereto together with such other amounts to such other parties able to prove in the liquidation of the Assignor or in the event there are insufficient damages awarded to pay in full undertake to pay creditors on a pro rata basis; (3) to indemnify and keep indemnified the Assignor from and against any liability incurred by the Assignor arising out of the proceedings referred to herein and any associated costs reasonably incurred in the liquidation of the Assignor." The appellants were given leave to amend their pleadings to allege an assignment in equity by the liquidator of Septic Products' choses in action against the respondent to Mr Brookfield. Mr Brookfield was also granted authority by order of the trial judge with effect from the commencement of the proceedings at his own expense and risk as to costs to use the name of Septic Products as a co-applicant. This authority was granted to meet the procedural requirement as to joinder of an assignor of a chose in action: Three Rivers District Council v Bank of England [1996] QB 292 at 313 and McIntyre v Gye and Another (1994) 51 FCR 472 at 480. At trial Mr Brookfield contended that he had claims for relief not only as assignee of the choses in action of Septic Products but also in his own right. The trial judge considered that as Septic Products had been joined to satisfy the procedural requirement, and by reason of the terms of the deed of 28 October 1993, Septic Products could not be seen as a party itself entitled to relief from the respondent. The company had purported to assign those rights to Mr Brookfield. Her Honour said that she did not understand the contrary to have been argued. The causes of action pursued at trial by the appellants included a claim for damages under s.82 of the Trade Practices Act 1974 (the TP Act) for a contravention of s.52 of the TP Act; a claim for negligent misrepresentation; and a claim for breach of contract based on the conditions said to be implied by s.14 of the Sale of Goods Act 1895 (SA) that the pumps would be reasonably fit for the particular purpose made known to the respondent by the appellants and that the pumps would be of merchantable quality. The judgment at first instance: Neither in the application nor in the statement of claim is any distinction drawn between the claims for relief made by Mr Brookfield in his own name and claims made in reliance on the deed of 28 October 1993. At trial no attempt was made to prove loss or damage suffered directly by Mr Brookfield although it was argued that, quite apart from the deed, the losses of Septic Products were in reality the losses of Mr Brookfield. The trial judge rejected this approach. Her Honour held that it was not appropriate in the circumstances of this case to disregard the incorporation of Septic Products and to allow one only of two shareholders in Septic Products to claim the company's losses as his own. Her Honour considered the circumstance of Septic Products being in liquidation with unpaid creditors made an award to Mr Brookfield particularly inappropriate. Accordingly, so far as the pleadings made claims in Mr Brookfield's name independently of the deed of 28 October 1993, the application failed. The learned trial judge then went on to hold that an assignee cannot recover damages pursuant to s.82 of the TP Act for loss or damage suffered by the assignor for a contravention of s.52 of the TP Act, and that on the proper construction of s.82, s.477(2)(c) of the Corporations Law, which gives a liquidator power to "sell or otherwise dispose of, in any manner, all or any part of the property of the company" did not extend to the assignment of such a claim. The claim for damages made under s.82 of the TP Act therefore failed. Her Honour did not further discuss the allegations made in support of that claim, namely that the respondent engaged in conduct that was misleading or deceptive by representing that the Doc 3 pump was capable of being substituted for the KP 100 pump, and by representing that the Doc 3 and Doc 7 pumps, and the Sumprat pumps, were capable of working in waste water treatment systems produced by Brookfield "which systems were known to (the respondent)". The learned trial judge held that s.477(2)(c) did, however, authorise, as a sale of the property of Septic Products, the assignment of the company's choses in action for negligent representation and for breach of contract, a conclusion which the respondent has not sought to challenge on appeal. The alleged claim by Septic Products for negligent misrepresentation was based on substantially the same alleged representations the making of which was said to constitute the misleading or deceptive conduct pleaded as a contravention of s.52 of the TP Act. The claim failed as the trial judge considered that whatever representations were made by the respondent about the capabilities of the pumps, those representations were made to Mr Brookfield at a time before Septic Products was incorporated, and some six months before Septic Products became involved in the informal joint venture with Mr Brookfield. The pleadings did not allege, and the evidence failed to establish, any reliance by Septic Products on the representations; absent reliance, the applicants failed to establish the requisite degree of proximity between the respondent and Septic Products to give rise to a duty of care: San Sebastian Pty Ltd & Anor v The Minister (1986) 162 CLR 340 at 355. On the breach of contract claim the trial judge found that from mid March 1991 when Septic Products, pursuant to the informal joint venture, became a purchaser of pumps from the respondent, it purchased 70 Doc 3 pumps, and 71 Doc 7 pumps and a further 1 Doc 3 pump and 5 Doc 7 pumps were supplied pursuant to warranty claims. Septic Products placed no orders for Sumprat pumps (Sumprat pumps had been supplied to Mr Brookfield only between February 1991 and early March 1991). The sales of pumps by the respondent to Septic Products took place in circumstances where, pursuant to s.14 of the Sale of Goods Act, an implied condition as to merchantable quality applied to all the Doc 3 and Doc 7 pumps. Her Honour held that at least in the case of the early sales of Doc 3 pumps to Mr Brookfield there was an implied condition that the Doc 3 pumps were fit for the particular purpose made known by Mr Brookfield to the respondent. The implied condition as to reasonable fitness did not apply in relation to the Doc 7 pumps as her Honour held they were purchased under contracts "for the sale of a specified article under its patent or other trade name" within the meaning of the proviso to paragraph I of s.14 of the Sale of Goods Act. The particular purpose made known by Mr Brookfield, and through him by Septic Products, for which the Doc 3 pumps were required, was held by her Honour to be of acting as a recirculation pump in a Parco Beaver System. The breach of contract claims however failed. Her Honour held that Mr Brookfield and Septic Products did not make known to Mr Wilsdon the particular purpose for which the Doc 3 pump was required, namely for the purpose of acting as a recirculation pump in the modified Parco Beaver System or in the BPS System. Her Honour held that the modification to the filter system initially incorporated into the modified Parco Beaver System, and then into the design of the BPS System altered the working environment of the Doc 3 pumps, that the Doc 3 pump failures were related to the altered environment, and that use of the pumps in the altered environment was not a particular purpose made known to the respondent. The trial judge held that in the circumstances the applicants had not established that the Doc 3 pumps were not of merchantable quality. Her Honour applied by analogy the reasoning of Toohey J in the following passage from Jillawarra Grazing Company v John Shearer Ltd (1984) ATPR 40-441 at 45,089: "I am not persuaded that the airseeder was of unmerchantable quality in the sense in which that term has been considered by the Courts; indeed I am satisfied that it was of merchantable quality. As an airseeder or, if it is permissible to impose a gloss and say an airseeder capable of carrying out the work for which it was designed, the airseeder met the test. The experience of John Shearer with similar airseeders sold throughout Australia would indicate that the machine is one that a reasonable purchaser would accept... As I have concluded, the difficulties encountered by Jillawarra stemmed in the main from Mr. Bunter's decision to drive the airseeder with a hydromotor. I should not be taken as holding that John Shearer should not have anticipated that the airseeder might be driven by a hydraulic motor as well as by a power take-off. What I am saying is that a purchaser who decided to install a hydromotor was obliged to ensure that the hydraulic drive was appropriately designed and installed. ... The applicant did not seek the respondent's advice in this respect and the latter cannot be held responsible for any vice in the airseeder that was a consequence of an inadequate hydraulic system."