FEDERAL COURT OF AUSTRALIA Sirway Asia Pacific Pty Ltd v Commonwealth of Australia [2002] FCA 1152 TRADE PRACTICES – Misleading and deceptive conduct and unconscionability alleged against Commonwealth in connection with acquisition of crockery for use of armed forces – Conduct engaged in by officers of Department of Defence – Whether Commonwealth deemed to be a corporation for purposes of Trade Practices Act – Whether Commonwealth carrying on a business. Trade Practices Act 1974 (Cth) ss 2A, 2C, 52, Pt IVA, 82 Hughes Aircraft Systems v Air Services Australia (1997) 76 FCR 151 cited Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41‑703 cited Wenzel v Australian Stock Exchange Ltd (2002) 40 ACSR 557 cited Corrections Corporation of Australia Pty Ltd v Commonwealth of Australia (2000) 104 FCR 448 considered Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 cited J S McMillan Pty Ltd v Commonwealth (1997) 77 FCR 337 considered Smith v Capewell (1979) 142 CLR 509 cited Hungier v Grace (1972) 127 CLR 210 cited Fasold v Roberts (1997) 70 FCR 489 considered Mid Density Development Pty Ltd v Rockdale Municipal Council (1992) 39 FCR 579 cited Saitta Pty Ltd v Commonwealth (2001) 162 FLR 35 cited NT Power Generation Pty Ltd v Power and Water Authority (2001) 184 ALR 481 cited Suatu Holdings Pty Ltd v Australian Postal Commission (1989) 86 ALR 532 cited Sun Earth Homes Pty Ltd v Australian Broadcasting Commission (1990) 98 ALR 101 cited Thomson Publications (Australia) Pty Ltd v Trade Practices Commission (1979) 40 FLR 257; (1979) 27 ALR 551 cited Tytel Pty Ltd v Australian Telecommunications Commission (1986) 67 ALR 433 cited National Management Services (Australia) Pty Ltd v Commonwealth (1990) 9 BCL 190 cited Easts Van Villages v Minister Administering the National Parks and Wildlife Act (2001) ATPR (Digest) 46‑211 cited Hamod v State of NSW [2001] FCA 157 cited Paramedical Services Pty Ltd v The Ambulance Service of NSW [1999] FCA 548 cited SIRWAY ASIA PACIFIC PTY LTD V THE COMMONWEALTH OF AUSTRALIA VG 504 OF 1999 SUNDBERG J 18 SEPTEMBER 2002 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 504 OF 1999 BETWEEN: SIRWAY ASIA PACIFIC PTY LTD (ACN 078 540 182) APPLICANT AND: THE COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: SUNDBERG J DATE OF ORDER: 18 SEPTEMBER 2002 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant pay the respondent's costs of the application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 504 OF 1999 BETWEEN: SIRWAY ASIA PACIFIC PTY LTD (ACN 078 540 182) APPLICANT AND: THE COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: SUNDBERG J DATE: 18 SEPTEMBER 2002 PLACE: MELBOURNE REASONS FOR JUDGMENT BACKGROUND 1 The applicant has sued the respondent for a declaration that the respondent has unlawfully terminated a Standing Offer Agreement ("SOA") for the supply to the respondent of chinaware for use by Defence personnel, and for damages for breach of the SOA. It also seeks a declaration that the respondent has engaged in misleading and deceptive conduct in relation to the SOA contrary to Part IV of the Trade Practices Act 1974 (Cth) ("the Act") and damages under s 82 of the Act. Although the application does not seek relief under Part IVA of the Act, the amended statement of claim pleads a case under that Part. THE FACTS 2 In June 1996 Eric Giammario, a director of the applicant, obtained a copy of a Request for Tender for the "supply of chinaware on standing offer for the period 30 September 1996 to 30 September 1999 for the Department of Defence (in accordance with Specification DEF (AUST) 5192C)". On 18 September 1996 the applicant submitted a tender together with samples of items of crockery identified on a packing list. The samples had been manufactured by the applicant's supplier in China. If the applicant's tender was successful, it was its intention to obtain any required chinaware from that supplier. 3 In early May 1997 Mr Giammario met with Gino Carrazza and Paul Windsor who were officers of the Materiel Management Group of the Department of Defence. One of them told Mr Giammario that some of his samples did not match DEF (AUST) 5192C ("the Specification"). The officer appears not to have identified the non‑conforming samples, though Mr Giammario said he would need to know this in order to inform his supplier. After the meeting Mr Giammario spoke to Rod Darby, an officer of the Army Technology and Engineering Agency. He asked Mr Darby what items had been referred to at the earlier meeting. Mr Darby said he was generally happy with the standard of the samples, though he had some concerns about the shape of some of them and the badging. He said Mr Giammario should obtain relevant details from Mr Carrazza. On 16 May Mr Giammario sent a fax to Mr Windsor asking for details of the items that did not match the Specification. 4 In late May Mr Giammario met with Mr Darby and handed him a sample of chinaware with badging on it. Mr Darby approved the badging. Mr Giammario said they then discussed the prices of three platters that Mr Darby thought were out of kilter with the prices of other items. Mr Giammario claimed Mr Darby intimated that the applicant's prospects of becoming the successful tenderer would be enhanced if the prices of the platters were reduced. Mr Darby denied he said this. He said his input was only of a technical nature. Issues of pricing were handled by Mr Windsor. I accept that Mr Darby did not make the observations attributed to him. Pricing was not part of his expertise or function, and it is unlikely he would have ventured outside his bailiwick in this regard. Mr Giammario said the price of the platters was again mentioned after a meeting on 30 July between Mr Giammario and Messrs Carrazza and Windsor. Again the parties' accounts differ. It will be necessary to return to the detail of what was said. See par 67. After the meeting Mr Giammario negotiated a price reduction on the platters with his supplier, and informed Mr Carrazza of the new price on 31 July. 5 By letter of 1 August Mr Carrazza informed the applicant that its tender had been accepted. On 4 August Mr Giammario signed the SOA constituted by the acceptance of the tender. The offer was for the period 1 August 1997 to 31 July 2000. The SOA had a number of terms and conditions. The following terms and conditions are relevant to the proceeding: "1.1 Any contract entered into pursuant to the Standing Offer shall be subject to the terms and conditions appearing herein …. 4.1 Supplies shall be in accordance with Specification DEF (AUST) 5192C. 10.1 The contractor shall submit to the Contract Authority or his representative a working sample in accordance with the contract standard within 20 working days of receipt of this Standing Offer. 10.3 Any approved sample will be labelled for purposes of identification. The contractor shall not commence manufacture of bulk supplies until notification of approval of a working sample has been received. 10.4 Notwithstanding anything in this clause or elsewhere to the contrary in the contract, the contractor shall be under an obligation to deliver supplies which shall conform to the specification in all respects unless express approval, in writing, of the Commonwealth has been given to a modification or alteration of such specification. 16.1 The Standing Offer shall be in force from 01 August 1997 to 31 July 2000 with an option of a further 12 month extension (01 August 2000 to 31 July 2001), if required by the Commonwealth but in the event of the Contractor failing in any manner to carry out any contract entered into pursuant to the Standing Offer to the satisfaction of the Commonwealth, the Commonwealth may forthwith determine the Standing Offer …." 6 At a further meeting between Mr Giammario and Mr Carrazza on 13 August, Mr Carrazza gave Mr Giammario samples of most of the chinaware items then in use to take with him to China so that moulds could be made up. He said he would obtain the balance of the items as soon as possible. Mr Giammario collected the outstanding items in early September, just before he left for China. The samples had been supplied by an earlier contractor, Australian Fine China ("AFC"), and met the Specification. 7 On or about 15 August the respondent raised the first purchase order under the SOA. Immediately preceding the list of items required appear the words: "All items are to be in accordance with Specification DEF (AUST) 5192C. The terms and conditions of this order are as per Standing Offer No FB27007." An annexure to the purchase order headed Standard Instructions contains provisions dealing with delivery of goods, mode of payment, packaging and other matters. Clause 4.1 is as follows: "The goods are to be manufactured in accordance with: (a) Specification: DEF (AUST) 5192 (b) Sealed Sample: N/A (c) Drawings: N/A" 8 Clause 1.1 of the Specification provides: "This Specification when read in conjunction with AS 4371 CERAMIC TABLEWARE covers the requirements for tableware, china, based upon fine hotel chinaware, for use in all wardrooms and messes within the Department of Defence." In clause 2.1 it is said that reference may be necessary to the latest issue of Standards Australia AS 4371 – Ceramic Tableware ("the Standard"). Clause 4.1 deals with "Design". Clause 4.1.1 is as follows: "All Items The items covered by this Specification are listed in ANNEX A. The design of the tableware shall be as depicted in ANNEX B, unless otherwise specified. All items shall incorporate a foot on the base. Tenderers shall submit samples of the design of each item intended for supply, at the time of tendering. The successful tenderer's samples will be sealed as the design for the applicable contract." Clause 4.2 deals with requirements relating to manufacture. Clause 4.2.1 provides: "Working Samples Where considered necessary by the Procurement Authority, working samples conforming to the quality established by this Specification, shall be sealed as the standard for bulk production. Working samples shall be produced by the same production methods and tooling as will be used to produce the contract quantity ordered." Clause 4.2.2 provides: "Dimensions and Capacities The dimensions and capacities of each item specified in ANNEX B are only a guide for tenderers. The successful tenderer's samples shall constitute the requirements for the applicable contract." Clause 4.4.1, under the heading "Test Requirements", provides: "Testing of all items shall be in accordance with AS 4371 CERAMIC TABLEWARE and those additional tests required by ANNEXES C and D of this specification." Annex A lists nineteen crockery items. Annex B contains a description of each of the items together with dimensions, and includes diagrams. A footnote to each page states that the dimensions and capacities are "nominal". 9 The objective of the Standard is expressed to be "to provide a means of determining minimum performance levels of ceramic tableware in aspects which are relative to public health". Clauses 6, 7 and 8 are as follows: "6. WATER ABSORPTION When the tableware is tested in accordance with Appendix B, the mean of the two results obtained for each sample shall not exceed 0.4%. 7. CHIPPING When the tableware is tested in accordance with Appendix C, there shall be no chips of glaze and body removed and no development of a crack, visible to the naked eye, at more than one location tested. 8. THERMAL SHOCK When the tableware is tested in accordance with the procedure below, there shall be no cracking or glaze crazing." 10 On 22 August Mr Giammario met with Mr Darby at the latter's office. Mr Darby had in front of him a number of the applicant's samples delivered with its tender. He told Mr Giammario that the three types of platters were satisfactory, but all the other items would require new moulds. They went through the items listed in Annex A to the Specification, and Mr Giammario wrote in the right hand margin beside each either "OK" or "M", the latter indicating that a new mould was required. In the left hand margin he wrote the letter "S" to indicate that the "Army has supplied sample". This was a reference to samples of AFC crockery Mr Darby had with him, which met the Specification. For example, beside the two cup items Mr Giammario wrote both "S" and "M" and the words "Handle should be like our sample … ie enough room for finger". The "our sample" is the AFC sample produced by Mr Darby. The handle of the sample provided by Mr Giammario did not have enough room for a male finger. Beside the pepper shaker Mr Giammario wrote "S" and "M" and the words "Bung to be as per Army sample". The "Army sample" is again the AFC sample. In relation to the items Mr Darby said were unacceptable, he showed Mr Giammario an AFC product to indicate what, in terms of appearance, the Department wanted so as to make clear the difference between the desired product and the applicant's sample. Mr Giammario claimed Mr Darby said the applicant had to "replicate" the AFC product. Mr Darby denied having said this. He said he told Mr Giammario it was not a matter of copying the AFC products, because if he did that he would run the risk of double contractions or double shrinkages, making the new moulded samples 'out of spec' or 'out of tolerance'. I find that the conversation accorded with Mr Darby's account. Given the technical nature of his job, it is very unlikely he would have told Mr Giammario to replicate or copy AFC products if that involved the risks of which he was aware. At the end of the meeting Mr Giammario took the applicant's tender samples away with him. Mr Giammario said that either at the 22 August meeting or shortly thereafter Mr Darby told him he should submit two sets of working samples to replicate the AFC samples for inspection and testing by Mr Blake. If these were approved, they would be sealed as the contract standard for the SOA. Mr Darby denied he discussed any contractual matters with Mr Giammario. 11 Mr Giammario said he was upset by what was said at the meeting, because he was being requested to replicate another company's wares "without any tolerance". Notwithstanding this he added: "At the conclusion of this meeting I thought that because the applicant had already been offered the first purchase order under the Standing Offer Agreement it was worth the applicant persisting [with] the Standing Offer Contract and at least requesting the manufacturer try to produce the new chinaware. I thought the applicant should attempt to perform the agreement on the basis that the respondent now requested by replicating precisely the chinaware of AFC to the standard of the samples submitted by the applicant in September 1996." 12 On 24 August Mr Giammario wrote to his agent in China informing him of the successful tender. The letter continued: "Wang Li and I will leave Australia on the 05-06 September 1997 for China. We have all the samples of each item to show the manufacturer …. 1. The manufacturer must make new moulds to the sizes and specificationsfor items: 1, 2, 3, 4, 5, 11, 12, 13, 18 and 19. Items 9, 14, 15, 16 and 17 have been accepted as the correct size. 2. You must supply us, by 20/09/97 a working sample of each item. These samples must be completed according to the specifications and have all relevant markings according to clauses 4.3, 4.3.1 and 4.3.2. … 4. Once we have the working samples they will be brought back to Australia to be measured and approved by the government …. On approval I will notify you in writing to commence manufacture of our order. YOU MUST NOT COMMENCE MANUFACTURE OF BULK SUPPLIES UNTIL THIS NOTIFICATION OF APPROVAL HAS BEEN RECEIVED. 5. The working samples are required only once. They will be sealed by the government and kept as the standard of quality to be met on all other subsequent orders …." On his trip to China Mr Giammario was accompanied by his wife, Wang Li. She reads and speaks Chinese and acted as Mr Giammario's interpreter when dealing with the Chinese agent and manufacturer. 13 On 30 September, having received samples from China, Mr Giammario had a meeting with Mr Blake. They discussed the visual aspects of the samples and in particular the dimensions of the breakfast cup. Mr Blake said it needed a larger handle. Other suggestions for the improvement of items were made. Mr Giammario told Mr Blake the manufacturer was concerned that it was being asked in effect to copy another manufacturer's product which was new to it. Mr Blake replied that the final working samples should be the best that could be produced. By letter of 3 October Mr Blake informed Mr Giammario that the samples had not been approved for reasons he set out. Mr Giammario responded on 6 October saying that the reasons Mr Blake had given for not approving the samples were "easily rectified and will be done". He said he wanted to meet Mr Blake "to finalise instructions so that the new working samples can be made". 14 On or about 17 October the applicant received a second purchase order. At meetings on 17 and 21 November Mr Giammario said he told Mr Carrazza the manufacturer had informed him it was not possible to reproduce the AFC items with zero tolerance. Mr Carrazza did not recall any reference to "zero tolerance", and said he did not ask or require Mr Giammario to reproduce the AFC products. Mr Giammario decided to go to China to oversee production of the working samples. He brought back with him new samples which he gave to Mr Carrazza on 23 December together with a packing list describing each item. He told Mr Carrazza these items were "the final working samples". By letter of 16 January 1998 Mr Blake informed Mr Giammario that the samples submitted on 23 December 1997 had been approved. The letter continued: "This acceptance in no way relieves the contractor of the obligation to meet all requirements of the specification and conditions nominated in the order. Please note that Production samples will be selected at random during the period of the Standing Offer and tested by an approved authority for compliance …." 15 On 27 January the applicant placed an order with its agent in China for goods to fill the first and second purchase orders. The order told the manufacturer to produce them in accordance with the Specification, and that all items were to be of the same quality as the approved working samples. The applicant received the goods from China in late April 1998. On 29 April in the company of Mr Giammario, Messrs Windsor and Blake attended the warehouse where the goods were stored and took away selected items for examination. On 1 May Mr Blake telephoned Mr Giammario and told him that on visual inspection all items appeared to be acceptable. He said he needed to see more of a particular platter because one of the random samples was slightly pitted. Mr Giammario provided a carton of the requested platter, and Mr Blake was satisfied. The applicant provided Mr Blake with a Certificate of Conformity stating that the goods "are in accordance with the requirements of the order/drawings and specifications relative thereto and conform in all respects with the conditions and requirements of the contract and all approved amendments". Mr Giammario said he told Mr Blake the applicant was not obliged to provide a Certificate because it was not the manufacturer, and would only sign it if the words "and all approved amendments" were added to the standard form: "to acknowledge that there had been amendments to the contract ie we were supplying a replication of the AFC product and not our original product as stated in the Standing Offer." The words "and all approved amendments" were added. On 6 May the goods were despatched to the assigned delivery point. 16 On 22 May Mr Windsor telephoned Mr Giammario and said that most of the items had not passed the water absorption test in the Standard, and that the applicant's Chinese agent should be asked to put everything on hold. On 27 May a meeting attended by Mr Giammario and Messrs Blake, Windsor, Hands and Lt Colonel Mathieson took place. Mr Hands was Director, Materiel Management, Combat Support. Colonel Mathieson was his deputy. Mr Giammario was asked to provide test reports from the manufacturer. There was some discussion about the future of the contract. After the meeting Mr Giammario asked the agent for water absorption test reports, but was told that reports were not available. Another meeting was held on 16 June, attended by those who were at the 27 May meeting. Again there was discussion about the future of the contract. Mr Giammario was told there were only two laboratories that could perform the tests on the chinaware required by the contract – Scientific Services Laboratory ("SSL"), a Business Unit of Australian Government Analytical Laboratories, and AFC. On 22 June Mr Hands sent Mr Giammario notification of non‑acceptance of the goods delivered under the first and second purchase orders. Test reports by SSL were enclosed. They disclosed that all items passed the water absorption test and all failed the chipping test. 17 On 29 June a further meeting occurred with the same persons present together with the applicant's solicitor, Mr Buchler. There was discussion about whether the respondent would help the applicant find another use for the goods. By letter dated 30 June Mr Buchler wrote to Mr Hands confirming the outcome of the meeting as follows: "Point 1: Agreement by you to apply your best endeavours to investigate all available avenues and means by which the current shipment of goods comprising the above Purchase Orders, which do not meet your standards, can be disposed of by Eric to give him the opportunity to mitigate his losses and refresh his finances …. Point 2: Agreement by Eric to investigate all means available to enable him to guarantee that any future shipment of goods meets all your specifications in relation to desired standards within an acceptable level of variation …. Point 3: Agreement by you to continue to permit Eric to store the goods comprising the abovementioned Purchase Orders on your premises … until 13 July 1998." The letter went on to say that Point 1 was pivotal to the applicant's ability to pursue Point 2, and requested Mr Hands to state his position on Point 1 as soon as possible. 18 On 13 July another meeting, with the same persons in attendance, took place. There was discussion as to whether the respondent would accept some or all of the goods at a discount. Mr Giammario agreed to provide six working samples of each item of future production, with four sets to be submitted for testing and two to be retained by the applicant. It was agreed that the respondent would pay for the cost of the working samples to be delivered to Australia. Between 22 July and 4 August there were negotiations about the respondent purchasing the goods at a discount. This resulted in an agreement to that effect. Colonel Mathieson informed Mr Giammario that the first and second purchase orders would be cancelled and a new purchase order for the same goods would be issued at the price of $154,006. 19 On 29 September Mr Giammario wrote to Colonel Mathieson as follows: "It is with great regret that I must inform you that our manufacturer cannot give a 100% guarantee that all the bulk produced chinaware will meet the DEF (AUST) 5192 in every detail without any allowable variance especially with the testing under the Australian Standard 4371 (AS 4371). Our QA manager, Mr Wang recently returned from China with two sets of working samples and four sets were received via air freight. Based on Mr Wang's report on the testing procedures, quality management and the samples, we have made the decision that the standard set by the AS 4371 is impossible for the manufacturer to achieve a 100% pass rate for all items with no allowance for standard variation or development variances within the manufacturing process." After noting the manufacturer's complaint that it had quoted in relation to its own product only to be told later on that it had to copy AFC goods, the letter set out two options suggested by the manufacturer: "(A) Agree to vary the contract standard to allow for the standard established by the current working samples, ie the supplier seeks to vary the obligation between the parties by changing the scope of the requirement and/or the terms and conditions. (B) Accept the chinaware as originally tendered according to Clauses 4.1.1 and 4.2.2." Mr Giammario then added the applicant's further option: "(C) To have an Expert Appraisal. An independent expert appointed by the parties to give a determination. The parties may decide that the determination of the independent expert is final or may use the determination as a basis for negotiating a settlement. The letter concluded as follows: "We ask you to decide which option is acceptable. If none of the options are acceptable we need to negotiate a settlement and come to a mutual agreement to end the contract due to it being frustrated by the inability to produce chinaware that meets your requirement without variation." 20 On 6 October Colonel Mathieson asked Mr Giammario to suggest an expert by 8 October. Mr Giammario said he was having trouble finding an independent commercial expert. Finding an independent expert was discussed at a meeting on 7 October between Mr Giammario and Messrs Windsor, Hands and Colonel Mathieson. Mr Hands raised the question of reviewing the Standard to determine whether it was above normal commercial and Defence needs. There were further exchanges about the appointment of an independent expert. On 9 October Mr Giammario supplied further samples to Mr Blake. At this stage Mr Giammario had still not suggested an independent expert. Later on 9 October Mr Blake commissioned SSL to test the samples Mr Giammario had given him for chipping and water absorption. On 16 October SSL submitted its report ("the October test report"). Of the eleven items tested, three failed the water absorption test and seven failed the chipping test. On 20 October Mr Giammario wrote to Colonel Mathieson, referring to earlier discussions, and agreeing to Defence's suggestion that an unnamed retired Defence employee give an expert appraisal with reference to the third option. However he expressed his reservations at having a person with prior Defence involvement, and said he would prefer someone totally independent. It will be necessary to examine the events of this period in more detail later. See pars 39‑44. 21 A file note made by Mr Blake of a conversation with Mr Giammario on 22 October records that he informed Mr Giammario of the Department's intention to use SSL to assess the Standard, that Mr Giammario was still not convinced because SSL was associated with the government, but "he did not object to our request to go ahead and request report." On 23 October Mr Blake requested SSL to "review the [ceramic tableware] standard for overall relevance and specifically comment on the following: (a) Tolerances/test levels for chipping and water absorption and supply a basis for any proposed amendments and (b) The reliability/uniformity of test results from one production batch to another." On or about 23 November SSL provided its report on the review ("the Standard report"). It recommended a relaxation of the chipping test levels, and that a water absorption target of 0.2% should be applied with a maximum of 0.4% permissible. 22 Mr Giammario said that when he was informed of the outcome of the Standard report, he complained that he had never agreed to the appointment of SSL. At a meeting on 16 December attended by Mr Giammario and Messrs Windsor, Hands and Blake and Colonel Mathieson, Mr Giammario was told the SOA was cancelled. He was handed a letter which is in part as follows: "You are advised that as a result of your company's breaches of the requirements of the above Standing Offer, including failing to deliver Supplies in accordance with the requirements of the Standing Offer and failing to take action to remedy these breaches upon being requested to do so, the Commonwealth now exercises its rights under clause 16.1 of the Standing Offer and terminates the Standing Offer forthwith. In the alternative, your company's breaches of the terms of the Standing Offer and failure to rectify these breaches demonstrates an inability to perform its obligations under the Standing Offer and accordingly the Commonwealth accepts this repudiation of the Standing Offer and terminates the Standing Offer." 23 A file note prepared by one of the Defence personnel at the meeting records the key matters discussed: "Mr Giammario questioned, under reletting of the contract how would his tender be viewed by Defence during the selection process. Defence representatives explained that Sirway would be treated equally. In addition, Mr Giammario expressed concern that the other tenderers would now know his price that he submitted under the original Standing Offer and therefore [he] would be disadvantaged in the reletting of the contract. Defence explained to Mr Giammario, that it would be unfair to other crockery suppliers if Defence were to lower the Standard and place further orders with Sirway, without giving those other suppliers an opportunity to tender for the new contract. Mr Giammario questioned why Defence had chosen to cancel, indicating that from the last meeting it was his impression that the Standard would be lowered and further orders placed with Sirway. Defence indicated that this was not the case and that Defence had always maintained that it would reserve the right to cancel the current Standing Offer if Sirway could not meet all testing requirements of the Standard and Specification. Mr Giammario questioned why no dialogue had occurred on the SSL validation test result. Mr Giammario further indicated that he informed Defence by facsimile, that he wanted to be advised in writing of the SSL results. Mr Giammario indicated that he could not understand the contents of the validation report. Defence representatives then explained to Mr Giammario the contents of the SSL validation report …." It is not clear when Mr Giammario was provided with a copy of the Standard report. It appears to have been either shortly after 7 December or at the 16 December meeting. 24 On 19 January 1999 Colonel Mathieson wrote to Mr Giammario informing him that Defence intended to release the tender documentation for the reletting of a new Standing Offer for crockery, under revised test levels, at the end of January or early February. The applicant would be invited to tender. Any tender it submitted would be considered on its own merits together with any other tenders. The applicant did not submit a tender when a new Standing Offer was relet. The applicant commenced the present proceeding in September 1999. CONTRACT CLAIMS Breach of Standing Offer 25 The applicant claims that what occurred at the meeting between Mr Giammario and Mr Darby on 22 August 1997 was a breach of the SOA. It is alleged that Mr Darby "informed the applicant that the contract standard for the Standing Offer Agreement was to be, in part, varied". The findings recorded in pars 10 and 11 do not support this characterisation of what transpired at the meeting. The context in which the meeting occurred is important. In early May 1997 Mr Carrazza told Mr Giammario that some of the samples delivered with the tender did not match the Specification. In a conversation following that meeting, Mr Darby said he had concerns about the shape and badging of some of the items. Mr Giammario sought details of the aspects of the samples that did not match the Specification, but these were not provided until 13 August when Mr Carrazza gave him samples to assist him to produce the configurations required by the Specification. See par 6. Mr Carrazza's file note records that he was to get the three outstanding items to Mr Giammario as soon as possible because he needed them to take to China. At the meeting on 22 August Mr Giammario and Mr Darby had before them the applicant's samples together with AFC products that conformed with the Specification. As appears from the account in par 10, Mr Darby pointed out the respects in which some of the samples did not accord with the comparable conforming items. Mr Giammario took away with him the list on which he had identified the items that were satisfactory, those that required new moulds, and those that had to accord with the AFC product. He also took away the applicant's tender samples. Although Mr Giammario was disappointed at the turn events had taken, he went along with the course proposed by Mr Darby. As appears from his evidence recorded in par 11, he decided he would attempt to perform the agreement on the basis that Mr Darby wanted him to "replicate" the AFC chinaware, though this is not the word Mr Darby used. Mr Giammario's conduct thereafter is entirely consistent with this. He instructed the applicant's agent to arrange with the supplier to make new moulds for the items marked "M" on the list. He took with him to China the AFC samples to show the manufacturer what the required items were to look like. In those circumstances it cannot be said that what happened at the meeting was a breach of the SOA. 26 Mr Giammario seems to have thought the effect of the meeting was to change the obligation the applicant had assumed under the SOA. It was not. The applicant was required by the terms of the SOA to produce chinaware in accordance with the Specification. There were two aspects to this. The first related to the shape or configuration (dimensions and capacities) of the items. The requirements in this respect were set out in Annex B to the Specification. The second aspect related to the technical requirements contained in the Standard – water absorption and chipping. At the time of the August meeting it was known that some of the samples did not satisfy the requirements in Annex B. The easiest way of identifying the respects in which they did not comply was to provide items that did. That is what Mr Darby did. The requirement that the chinaware comply with this aspect of the Specification was unchanged. Indeed the applicant was being assisted by the provision of AFC products to understand the changes that needed to be made to produce complying samples. That was why he took the AFC products to China to show the manufacturer. All the evidence was to the effect that the configurations in Annex B were the same as those of the AFC product. Mr Darby's evidence was that the request for tender configurations were based on the AFC items. In cross‑examination he repeated this and was not challenged about it. Mr Carrazza said that on 13 August 1997 he gave Mr Giammario samples of the chinaware then in use to assist him to produce the configurations required by the Specification. In cross‑examination Mr Giammario accepted that at the August meeting Mr Darby told him the drawings in the Specification were based on AFC's Macquarie range. He repeated this in re‑examination, saying "The drawings that appear in the Specification I believe are based on [the Macquarie] range". The other aspect of the Specification, the Standard, was also unchanged, though at the time of the meeting no issue relating to the Standard had arisen because the bulk of the samples did not have the required dimensions and capacities, and no occasion to test them against the Standard had arisen. 27 In its statement of claim the applicant alleges that · on or about 22 December 1997 it submitted to the respondent two working samples of each item on order, one for testing and the other to be sealed as the contract standard under the SOA · on or about 16 January 1998 the respondent informed the applicant it had approved the December samples · the respondent knew the applicant would act on the approval of the December samples as the contract sample · the applicant acted on the approval of the December samples and performed the first purchase order · the chinaware delivered under the first purchase order was identical to the December samples · in breach of the SOA and the first purchase order the respondent rejected the chinaware. Although not entirely clear, the contention seems to be that once the December 1997 samples were approved by the respondent they became the contract standard in lieu of the Specification. There are several obstacles to the success of this argument. Its starting point is the packing list that accompanied the working samples. This contained a request by Mr Giammario that Mr Carrazza test one of each of the samples as soon as possible. If approved, the second set of samples "should be sealed as the standard for the contracts". Mr Giammario's statement of what he desired to happen in the event of approval of the samples cannot effect a variation of the SOA so as to displace the distinct requirement that the goods conform with the Specification (clause 4.1). Further, clause 10.4 obliged the applicant to supply goods conforming to the Specification unless the respondent had given written approval to modification of the Specification. There was no such approval. 28 The letter of 16 January 1998 does not constitute an approval of the goods that would have the effect asserted by the applicant. Mr Blake, the writer of the letter, examined the samples to check finish, colour and the physical dimensions of the products. They were not sent to SSL for testing against the Standard. Mr Blake's approval related only to the examination he had carried out. At about the time he wrote the letter he told Mr Giammario about the result of his examination and that the samples had not been tested against the Standard. In the course of Mr Blake's cross‑examination this exchange occurred: "I suggest to you that you told him simply, 'Mr Giammario, your goods have been approved, letter to follow'? --- I would have explained the whole testing procedure over the phone or in a letter, which I've already submitted here, that I did a check for brightness, measurements et cetera, but they were still to be tested. … You were telling him that they'd been tested. Why would you be telling him they're still to be tested? --- No, they were being examined for measurements and colour but they had yet to be tested to the Australian standard. … Why did you tell him that? Your evidence is, they weren't tested to the Australian standard? --- No, we're looking at two different types of criteria. The criteria I had a look at in December was for measurements, whiteness, warpage, that type of thing, which is in the defence standard. Now I also explained at one time or another, by letter or telephone or whatever, that the product still had to be tested by a testing authority to see if it was in accordance with the Australian standard for chipping, water absorption et cetera, and I stated … that at some stage during production we would be withdrawing samples to have these tests carried out." All this is consistent with the approval letter of 16 January 1998, which is set out in par 14. After stating that the samples had been approved, the letter warned that this acceptance "in no way relieves the contractor of the obligation to meet all requirements of the specification and conditions nominated in the order". It went on to refer to the testing of samples by an approved authority for compliance. 29 I accept Mr Blake's oral account of his conversation with Mr Giammario. That is to say I accept, as Mr Giammario deposed, that Mr Blake did not say the goods had not been tested by SSL, as he claimed in his affidavit. Rather Mr Blake said he had measured them, but they had not been tested to the Standard. In cross‑examination Mr Blake accepted that he probably had not said the goods had not been tested by SSL. The significance of this is that on Mr Giammario's evidence he had not at that stage heard of SSL. 30 It was an incessant theme of Mr Giammario's evidence, and of the presentation of the applicant's case, that because of clauses 4.1.1, 4.2.2 and 4.2.5 of the Specification the samples provided with the tender in September 1996, or those provided in December 1997, constituted the contract standard. These clauses have been set out in par 8. It is clear that the words in clause 4.1.1, that the successful tenderer's samples will be sealed "as the design for the applicable contract", relate only to matters of design. It is also clear that the words in clause 4.2.2, that the successful tenderer's samples "shall constitute the requirements for the applicable contract", relate only to the dimensions and capacities of the samples. Similarly the statement in clause 4.2.5, that the samples will be sealed for colour for the applicable contract, relates only to colour. The first purchase order 31 It is not clear whether the allegations in pars 28 and 28A of the statement of claim give rise to live issues. These paragraphs are as follows: "28. In breach of either or both of: (a) the Standing Offer Agreement as varied; or (b) the first purchase order, the respondent agency rejected the chinaware delivered under the first purchase order and refused to pay for it. 28A The rejection of the chinaware delivered under the first purchase order by the respondent was unlawful." The reason for my uncertainty lies in par 29: "The dispute between the applicant and the respondent agency concerning the first purchase order has been resolved and the applicant and the respondent agency have mutually released each other from all claims arising thereunder." The respondent admits par 29. In the light of that it does not seem necessary for me to decide whether in rejecting the chinaware delivered under the first purchase order the respondent was in breach of contract and acted unlawfully. However, in case I have misunderstood the applicant's position, I should say, for the reasons appearing in pars 27 to 30, that the respondent was entitled to reject the goods and did not act unlawfully in so doing. On receipt of the goods in May 1998 the respondent sent them to SSL for testing. All but two items failed either the water absorption or resistance to chipping tests in the Standard, though all passed the thermal shock test. The goods failed to satisfy the Standard and were thus not in accordance with the Specification (see clause 4.1 of the SOA). Termination of standing offer 32 The respondent relies on the agreement pleaded in par 29C of the Defence as a justification for terminating the SOA. This paragraph reads: "… after the resolution of the dispute between the applicant and the respondent concerning the first purchase order, the applicant and the respondent agreed: (a) that the applicant would provide new samples of 11 items which would be scientifically tested against the requirements of Specification DEF (AUST) 5192C; (b) the further samples would be provided to determine whether the applicant was able to meet the specifications contained in the Standing Offer; (c) if the applicant was unable to meet the specifications of the Standing Offer, the Standing Offer would be terminated." The evidence does not establish par (c). The correspondence referred to in the particulars does not support it. The evidence relied on in written submissions (namely that of Mr Hands and Colonel Mathieson) merely establishes that when it appeared that on testing by SSL the new samples failed to satisfy the Standard, Mr Hands decided to terminate the SOA. 33 The parties were agreed that it was an implied term of the SOA that the respondent could terminate it at any time if the applicant was unable to perform its obligations thereunder. The respondent also relied, as a ground for termination, on the applicant's anticipatory breach of contract constituted by its stated inability to provide products that satisfied the Standard. Its alternative ground of termination stated in Mr Hands' letter of 16 December 1998 (par 22) appears to be directed to this latter ground. It refers to the applicant's breach of the terms of the SOA and its failure to rectify the breach as demonstrating an inability to perform its obligations under the SOA, a repudiation of the SOA which the respondent accepted. There is ample evidence that the applicant was unable to perform its obligations under the SOA. Mr Giammario agreed that at the time of the 16 December meeting he accepted that the applicant could not supply chinaware in accordance with the Standard. In his letter of 29 September 1998 he informed Colonel Mathieson that the manufacturer could not give a 100% guarantee that all the bulk produced chinaware would meet the Specification, especially when tested under the Standard. He went on to say the applicant had decided that the Standard was impossible for the manufacturer to achieve with 100% success, and that the contract was "frustrated by the inability to produce chinaware that meets your requirement without variation". Mr Windsor said that at a meeting at Victoria Barracks in late 1998 Mr Giammario said he couldn't guarantee to provide products that met the Specification. Finally, as a result of the October test report, it was clear that after several attempts to satisfy the Standard, the applicant was unable to do so. See par 20. 34 The applicant's propounds three answers to the respondent's case that it was entitled to terminate for breach of the implied term. The first is that the applicant performed its obligations by delivering chinaware in accordance with the samples it submitted on 23 December 1997 which the respondent approved by its letter of 16 January 1998. I have dealt with and rejected this contention in par 28. The second answer is that the respondent accepted the first delivery, and accordingly the applicant must be taken to have met its obligations under the first and second purchase orders. The first part of this answer is correct. The second is not. The parties compromised their positions in respect of the first delivery. The applicant reduced its price and the respondent accepted the goods. The price was reduced because the respondent refused to accept the goods as complying with the Specification, including the Standard. I find that they did not comply, and that is why the applicant reduced its price. In any event, the fact that the respondent accepted the goods provides no answer to its claim that the applicant was unable in the future to supply goods that met the Specification, including the Standard. 35 The applicant's third answer is that the respondent could not be satisfied the applicant was unable to perform its obligations as to the future, on and from 16 December 1998, because it had decided the Standard was too severe and had to be replaced. By 16 December SSL had submitted the Standard report. It recommended that the chip resistance level be relaxed. However the maximum water absorption level remained unchanged at .4%. In October eleven of the applicant's products had been tested by SSL for water absorption and three of them failed the .4% test. They absorbed too much water. Mr Hands' evidence was that it was the October test report that caused him to decide to terminate the SOA. The applicant could not guarantee to supply goods that met the water absorption test. It follows that while the respondent may, because of the Standard report, have been of the view that the Standard was too severe with respect to chip resistance, it was not of that view with respect to the maximum water absorption level. The respondent's goods had not satisfied the water absorption test because they absorbed too much water, and SSL did not recommend any change to the maximum permissible absorption. The applicant's third answer thus fails. 36 For the reasons given in par 33, the respondent was entitled to terminate the SOA pursuant to the implied term. In view of this conclusion, I need not decide whether clause 16.1 of the SOA (referred to in the termination letter) provided an alternative ground. Was the Standard commercially achievable? 37 The applicant contends it was an implied term of the SOA that the Standard was a reasonable standard and one that could be met in the commercial production of chinaware. Assuming in favour of the applicant that such a term is to be implied, it was not broken. The Standard report discloses that thirty two ceramic items were purchased and tested, representing eight items each of dinner plate, bowl, cup and platter. It was intended that the items would be sets of two from each of four manufacturers. However, not all categories could be obtained from those manufacturers, and make up items were purchased from additional manufacturers. Sixteen sets of ceramic tableware were tested for chip resistance. The report states: "Chip test results indicate that the expensive brands such as Steelite and Australian Fine China can meet or easily meet the current AS/NZS 4371: 1996 specifications for chip resistance whilst moderately priced brands such as Tognana can meet or nearly meet the specifications …. In nearly all instances the cheaper Chinese brands … fall well below chip resistance specifications." Turning to the water absorption test, the report states: "The vast majority of the water absorption test results easily met the current AS/NZS 4371: 1996 Standard specification that the mean of the two results for each sample shall not exceed 0.4%. However [a Chinese brand cup and] food platter far exceeded the value. It is likely that these items are either earthenware or incorrectly fired vitrified products with low density due to an open pore structure." Since the "vast majority" of products "easily met" the water absorption aspect of the Standard, and the expensive brands easily met or met, and moderately priced brands met or nearly met the chip resistance limb, it cannot in my view be said that the Standard was unreasonable or could not be met in the commercial production of chinaware. Furthermore, Diana Mead, the Projects Officer of Standards Australia International Limited ("SAI"), deposed that SAI's records showed that it had not received any statements or correspondence that suggested that the Standard was not commercially achievable. SAI and Standards New Zealand formulated the Standard in 1996. Ms Mead said that interests represented on the Joint Standards Committee, which drew up the Standard, included the Australian Ceramic Society, the New Zealand Ceramics Industry Group, the Potters Society of Australia, the Australian Government Analytical Laboratories and the Retailers Council of Australia Limited. She said the Standard is still the current Standard, and since no complaint or concern has been raised regarding it, it is not likely to be reviewed in the immediate future. Agreement to appoint independent assessor of the Standard 38 The applicant contends that after the resolution of the dispute over the first and second purchase orders the parties made an agreement containing these terms: · the applicant would provide new samples of eleven items that would be tested against the Standard in order to determine whether it was appropriate for the commercial production of chinaware · the testing would be undertaken by an independent expert to be agreed between the parties · no chinaware would be submitted to the expert without the terms of engagement being agreed by the applicant and considered by its solicitor · until the result of the test was known, the applicant would remain the successful contractor · if the result of the test was that the Standard was not appropriate for the commercial production of chinaware, the applicant would remain as the successful contractor and be obliged to provide chinaware satisfying the appropriate standard for the commercial production of chinaware · if the result of the test was that the Standard was appropriate for the commercial production of chinaware, the parties would negotiate a termination of the SOA. The applicant alleges that it provided the samples, but in breach of the agreement the respondent submitted them to SSL for testing and not to an independent expert who had been approved by both parties. 39 In the applicant's letter to Colonel Mathieson of 29 September 1998 Mr Giammario raised a third option for dealing with the "frustration" of the contract, namely to "have an Expert appraisal (see par 19). In the applicant's letter to Colonel Mathieson of 20 October 1998 Mr Giammario said: "We agree that you ask your nominated person (who was mentioned at our meetings as a retired Department of Defence employee) to act to give an expert appraisal with reference to Option 3 of our letter dated 29 September 1998. However, we express our reservations of having a person who has had prior involvement with your organisation and prefer to use a person who is totally independent. Furthermore, this agreement is conditional on our solicitor seeing and agreeing to the terms of reference given to the expert." The other correspondence relied on to support the agreement does not take the matter further. 40 In his affidavit Mr Giammario said that after his 29 September letter Colonel Mathieson telephoned him to make an appointment for 7 October to discuss the matter, and said the third option was the most likely to be adopted. On 6 October Colonel Mathieson asked Mr Giammario to suggest an expert by 8 October. Mr Giammario told him he was having difficulty finding an independent commercial expert. At the meeting on 7 October the working samples were discussed, as was finding an independent expert. Mr Giammario said he was told the "contract specification were to be reviewed and testing levels downgraded". Mr Hands denied that anyone said the levels were to be downgraded. He said there was discussion about reviewing the Specification to see if it was appropriate to Defence needs, that is, whether it constituted a standard above normal commercial and Defence requirements. I accept this account of what was said in preference to Mr Giammario's version. The probabilities do not favour an account that has Mr Hands pre‑empting the result of the review. On 9 October Mr Giammario delivered new working samples to Mr Blake. He "believed this was done to initiate the appointment of an independent expert to appraise the working samples as had been agreed". On 19 October Colonel Mathieson telephoned and discussed choosing an independent expert. Mr Giammario says he told Colonel Mathieson that no expert was to be briefed or engaged before the terms of reference were seen by his solicitor and agreed by both parties. Colonel Mathieson agreed with this. Mr Giammario said he confirmed this in his letter of 20 October (pars 20 and 39). 41 In cross‑examination on this topic Mr Giammario said the respondent had agreed with the third option in a meeting. The cross‑examination continued: "That's an agreement to have an expert appointed by the parties to give a determination. The parties may decide that the determination is final or can use it as a basis for negotiating? --- Yes, that's what I put forward. Which part of that did they agree on? --- They agreed to have an expert appraisal. And do what with it? --- And then we were to review the Australian Standard. What was the appraisal going to be of? --- The appraisal was to be of the standard, Australian Standard, which was then done. Then what was to happen with that? --- Well, originally, when we first talked about it we were going to look at the Australian Standard and see if it was achievable. Once we had checked the Australian Standard, that's when we would have sat down and worked out what we were going to do. Prior to that, the agreement which I requested from them and they agreed to was based on them showing my solicitor the terms of reference." He went on to say that either Mr Blake or Colonel Mathieson telephoned him and said an unnamed ex‑Defence employee who had tested crockery for Defence was willing to do the testing. He then sent his letter of 20 October. He said he was asked whether he would agree to instruct SSL, and whether he could suggest anyone else. He said he went to RMIT, and approached some of the members of the committee that had prepared the Standard, but could not find anyone who would agree to do the testing. 42 Mr Hands, who was at the meeting on 7 October, disagreed with the suggestion that the applicant's samples were to be used in the appraisal of the Standard. In the course of cross‑examination this exchange occurred: "But getting back to … the samples that are delivered on 9 October, I suggest to you, were delivered for the purpose of this validating the standing offer agreement as agreed on 7 October …? --- That's not my understanding of it. These samples were further samples against the contract to confirm or deny the ability of the contractor to meet the spec. They were not for validation of what we might do in the future. They were against the contract. … I'm sorry, so your understanding of what is delivered [on 9 October] is that it was simply to see whether the material passed the standard as you saw it? --- No, this was the next lot of samples that we agreed to accept in one of the meetings there. Again, to see if it could meet our contract requirements and this is in satisfaction of the contract. In other words, 'Can you ever meet this' …. What they were saying is they would, you know, provide more samples and we would test these to see if they could actually meet the contract standard. I didn't see that as part of a validation of our specification because quite frankly we didn't need to test samples to validate our specification. We needed to review expert advice from any source that we could get and say, 'Is this an appropriate standard for us to keep for the future given that it's a tough one for people to meet'." 43 The applicant relies on numerous documents which it says evidence the making of the agreement alleged. Some of them merely record the view held in September 1998 and later that the Standard's levels for chipping and water absorption may be unrealistic. Several record that the decision to have the Standard validated by an accredited laboratory was "initiated by Defence and Sirway". Two documents record conversations between Mr Giammario and Mr Blake about locating an expert. The first, which is undated, records Mr Giammario saying SSL was too close to Defence. Mr Blake asked him to "source an appropriate arbiter and inform this office within the next couple of days … urgent". The second (22 October 1998) would appear to record a conversation shortly after the first. While Mr Giammario was "still not convinced" that SSL should be used, he did not object to using SSL. This is the file note referred to in par 21. 44 The applicant's letter of 29 September 1998 speaks of an "Expert appraisal", without indicating what it is that is to be appraised – sample chinaware or the Standard. The applicant's letter of 20 October throws no light on the matter. I am not satisfied that the parties agreed that the samples the applicant was to provide were to be tested to determine whether the Standard was appropriate for commercial production of chinaware. Mr Giammario's evidence is inconsistent with the agreement pleaded. In his affidavit he said that on 9 October he delivered six sets of new working samples to Mr Blake. He believed these samples were for use by an independent expert "to appraise the working samples as had been agreed". His fax to Colonel Mathieson of 8 October, advising that the samples would be delivered to Mr Blake the next day, supports the view that this was the purpose of providing the samples: "Also note that I will include an invoice for the cost of transporting the working samples to Australia from China and the cost of the six sets according to the standing offer price. We will bear all other costs associated with the batch productions to reach the current standard and all tests done in China." The emphasis has been added. Mr Giammario's account of his conversation with Colonel Mathieson on 19 October is to the same effect. Mr Giammario believed the expert was to "appraise the working samples as had been agreed". His statement in the discussion with Colonel Mathieson that no expert was to be briefed before the terms of reference had been agreed, is to be understood as a reference to the appointment of an expert who was to appraise the working samples. Further, Mr Giammario's evidence is that on 7 December Mr Blake telephoned him and asked whether he had seen SSL's report on the testing of the eleven crockery items. Mr Giammario said he had not, and complained that he had not been consulted about the identity of the expert and the expert's terms of reference. Once again, this account relates not to an appraisal of the Standard but to the testing of further samples. I accept Mr Hands' account of what was agreed, namely that the samples provided by Mr Giammario were to be tested against the contract, and not in order to validate the Standard. As Mr Hands said, Defence did not need samples of the applicant's products in order to validate the Standard. As I have said, Mr Giammario's evidence accords with Mr Hands' account. This conclusion is also supported by the only unambiguous contemporaneous document, namely the applicant's fax of 8 October. The applicant has failed to establish that the parties agreed that fresh samples of its product would be used to determine whether the Standard was appropriate for the commercial production of chinaware. It follows that the terms the subject of the first four dot points in par 38 are not made out. Further, Mr Giammario's evidence set out in par 41 demonstrates that the terms the subject of the last two dot points in par 38 are not established. Unfairness 45 The applicant submits it was an implied term of the SOA that the respondent would act in good faith, fairly and not capriciously in exercising a power conferred by the contract. See Hughes Aircraft Systems v Air Services Australia (1997) 76 FCR 151 at 191‑193, Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41‑703 at 43,014 and Wenzel v Australian Stock Exchange Ltd (2002) 40 ACSR 557. Two instances of unfairness/capriciousness are alleged. The first is said to lie in Defence arranging for SSL to review the Standard "behind the applicant's back" after it had agreed to have the review conducted by a mutually approved independent person. Having regard to my findings in par 44, there was no unfairness or capriciousness involved. The agreement referred to is the agreement to have the applicant's further samples used to validate the Standard. There was no such agreement. 46 The second unfairness/capriciousness alleged is expressed in the applicant's written submissions before trial in this rather indefinite way: "When the Respondent became aware of the report of SSL in October 1998 that AS 437 was not appropriate the Respondent should have accepted that it was contractually bound to the Applicant. This required the Respondent to conduct itself as bound by the agreement and obliged to do what the Respondent could to make the agreement work. At the very least the implied term of 'fair dealing' obliged the respondent to inform the applicant of the results of the SSL test before the Respondent acted to terminate the agreement." The allegation was not repeated in final submissions. Apart from informing it of the result of the test, the applicant did not identify what it was the respondent should have done "to make the agreement work". The submission is based on confusion between the October test report and the Standard report. The former was provided to Defence on 16 October. The latter was provided to Defence on 23 November and to the applicant either shortly after 7 December or at the 16 December meeting. Even if the allegation is treated as a complaint that the Standard report was not drawn to Mr Giammario's attention until the 16 December meeting, and that allegation is made out, no unfairness or capriciousness has been established. The Standard report did not recommend any reduction in the maximum water absorption level, and the October test report established that three of the final samples provided by the applicant exceeded that level. In other words the Standard was not relevantly inappropriate. Standard not given to manufacturer 47 The source of the applicant's difficulty in satisfying the Specification lay at its own door. Mr Giammario had examined the Specification closely. He was familiar with its terms. In his evidence he showed a familiarity with the various clauses that bore on the events that had happened. He knew the chinaware had to satisfy the Standard. The Standard is mentioned in clause 1 of the Specification – the Specification must be "read in conjunction with AS 4371 CERAMIC TABLEWARE". Clause 2 informed the reader that reference may need to be made to AS 4371 – Ceramic Tableware. Clause 4.4.1 provided that testing of all items was to be in accordance with the Standard. 48 The applicant obtained the quotation and the tender samples from its supplier without drawing its attention to the Standard. The supplier was thus unaware of the need to comply with the water absorption and chipping requirements. The following exchange occurred in the course of Mr Giammario's cross‑examination: "Did you read the DEFAUST specification before you tendered? --- Yes. Did you notice that that referred to the Australian Standard? --- As a test? Yes? --- Yes. Did you get a copy of the Australian Standard at that stage? --- No. When was the first time you ever looked at the Australian Standard? --- Phil Blake said, 'Have you ever seen the Australian Standard' in about June, after all the crockery had been tested, and I said …. June what year? --- June 1998, sorry, and I said no. He said, 'Well, I better get you a copy', and he handed me a copy at a meeting at Victoria Barracks. You know now, because of all this fuss, that the Australian Standard has a measure of water absorption levels? --- Yes. It says in particular that the absorption should not exceed 0.4 per cent? --- 0.04 I think is the right figure. I might be wrong there. … And that the Commonwealth rejected the goods on the basis that some of them failed the water absorption test, among other reasons? --- Yes." The matter was taken up again later: "I'm suggesting to you that you didn't tell the manufacturer or the agent that they were required to meet the water absorption level? --- Correct. Until after the event? --- I didn't tell them, period, until after the dispute, yes. You're right. … So when you entered into the tender, you did not know whether the crockery you were supplying ---? Correct. … met the standard? No, I did not know. … And I suggest to you that when you raised it with the Chinese in June 1998 – so we're talking about June 1998? --- Yes. That the agent replied that had you informed him or the factory before the orders were signed 'we would have tried to meet that requirement'? --- He may have said something like that. … I'm suggesting to you that he said to you at that time – this is in June 1998 – that the 0.4 per cent level was much lower than they were used to producing? --- He may have said that too. And that he said to you that if you told them about the 0.4 per cent, they thought they could get to about 0.5 per cent? --- That's all correct …." Mr Giammario's wife confirmed that the supplier said it "can't promise all this under the .5 per cent … - very few need figure higher than .5 per cent". In the circumstances Mr Giammario has only himself to blame for the predicament in which the applicant found itself. TRADE PRACTICES ISSUES Does the Act apply to the dealings between the parties? (a) Section 2A 49 The applicant alleges that the respondent engaged in misleading and deceptive conduct in contravention of s 52 of the Act and unconscionable conduct contrary to Pt IVA of the Act. Because the respondent does not have the character of a corporation as defined in s 4(1) of the Act, s 52 must be read in conjunction with s 2A. Section 2A relevantly provides: "(1) Subject to this section and section 44E, this Act binds the Crown in right of the Commonwealth in so far as the Crown in right of the Commonwealth carries on a business, either directly or by an authority of the Commonwealth. (2) Subject to the succeeding provisions of this section, this Act applies as if: (a) the Commonwealth, in so far as it carries on a business otherwise than by an authority of the Commonwealth; and (b) each authority of the Commonwealth (whether or not acting as an agent of the Crown in right of the Commonwealth) in so far as it carries on a business; were a corporation." Section 52 and Pt IVA will therefore only apply to the respondent if it was carrying on a business and in the course of carrying on that business engaged in the conduct that is the subject of the claim. If these questions are answered in the affirmative, the applicant must also establish that the respondent engaged in the alleged conduct in trade and commerce. It is not axiomatic that the conduct will have a trade or commercial character merely because the respondent is held to be carrying on a business, although such a conclusion would normally follow. The definition of the term "trade and commerce" in s 4 of the Act, which makes no reference to business, may be contrasted with that in, for example, s 4 of the Fair Trading Act 1987(NSW) which provides that "trade or commerce includes any business or professional activity". (b) "carries on a business" 50 The Act offers some assistance in determining what amounts to carrying on a business. Without limiting the things that do not constitute carrying on a business, s 2C provides that the following activities do not amount to carrying on a business: · imposing or collecting taxes, levies or licences; · granting, refusing to grant, revoking, suspending or varying licences whether conditional or not; · transactions involving only government entities; and · the acquisition of primary products by a government body under legislation unless the acquisition occurs because the body chooses to acquire the products or does not exercise its discretion not to acquire the products. Section 4 provides that a business includes a business that is not carried on for profit. 51 What amounts to carrying on a business has been considered in many cases, Finkelstein J in Corrections Corporation of Australia Pty Ltd v Commonwealth of Australia (2000) 104 FCR 448 ("Corrections Corporation") cited with approval the observation of Mason J in Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 that the term "business" is not capable of a precise definition and its meaning is to be derived from the context in which it is used. Finkelstein J summarised (at 451) the context in which the meaning of the term is to be considered for the purposes of s 2A as: "…legislation that is, generally speaking, concerned with the conduct of trading corporations and financial corporations that compete in a market for the provision of goods and services (Pt IV of the Trade Practices Act), or that are engaged in trade or commerce or are otherwise involved in the provision of goods and services (Part V of the Trade Practices Act)." His Honour then concluded that the expression carrying on a business in s 2A is intended to refer to activities of the Commonwealth that are "undertaken in a commercial enterprise or as a 'going concern'". 52 The meaning of carrying on a business was considered in some detail by Emmett J in J S McMillan Pty Ltd v Commonwealth (1997) 77 FCR 337 ("McMillan"). His Honour adopted the statement of Gibbs J in Smith v Capewell (1979) 142 CLR 509 at 517 that: "the expression 'carry on a business', in its ordinary meaning, signifies a course of conduct involving the performance of a succession of acts and not simply the effecting of one solitary transaction." Emmett J, however, was of the view that repetition and the related indicia of system and regularity are not sufficient of themselves to establish that a business is being carried on. Likewise, their absence alone does not indicate that an organisation is not a business. See Barwick CJ in Hungier v Grace (1972) 127 CLR 210 at 217. The significance of repetition, system and regularity may depend on the nature of the enterprise that is being scrutinised. Sackville J in Fasold v Roberts (1997) 70 FCR 489 ("Fasold") was of the view that the less commercial the character and objectives of an organisation, the greater the degree of system and regularity required to establish that it carries on a business. 53 In McMillan Emmett J also sought to distinguish between those activities of the Commonwealth that are purely governmental and regulatory and those that constitute the carrying on of a business. In that case his Honour held that the Commonwealth, in the guise of the Australian Government Publishing Service ("AGPS"), was carrying on the business of providing general printing services, dispatch and distribution services, graphic design services and editorial services, albeit that the services were rendered in connection with government. In Mid Density Development Pty Ltd v Rockdale Municipal Council (1992) 39 FCR 579 Davies J held that neither the carrying out a function of government in the interests of the community nor the performance of a statutory duty in respect of which fees may be charged is a trading activity for the purposes of the definition of corporation in s 4(1). See also Saitta Pty Ltd v Commonwealth (2001) 162 FLR 35 ("Saitta"). 54 As s 4 provides, the pursuit of profit is not an essential characteristic of a business. Consequently, the Commonwealth's provision of services for a commercially inadequate fee does not preclude a finding that a business is being carried on: McMillan. Likewise, a business may still be carried on when the activities engaged in are purely altruistic or charitable in scope: Fasold. 55 The effect of s 2A is that the Act applies only insofar as the Commonwealth carries on a business. Thus the ambit of the business activities of the particular Commonwealth enterprise must be examined to see whether the impugned conduct was engaged in as part of the carrying on of a business. In McMillan Emmett J held that while the Commonwealth through the AGPS was carrying on the business of publishing, printing and distributing government information, the conduct under scrutiny had not been engaged in in the course of carrying on that business. The relevant conduct was the Commonwealth's issue of a request for tenders for the purchase of different areas of the activities of the AGPS and its dealings with the prospective tenderers. His Honour found that such conduct was divorced from the carrying on of the business as it was distinct from the activities performed by the Commonwealth through the AGPS, pertained to the cessation of the business, and had been the responsibility of officers of the Commonwealth who had nothing to do with the daily operations of the AGPS. His Honour said (at 356): "Persons dealing with the Commonwealth in relation to the actual conduct of a business will have the same protection as when dealing with a private trader who is carrying on such a business but will not have protection when entering into other dealings with the Commonwealth." See also NT Power Generation Pty Ltd v Power and Water Authority (2001) 184 ALR 481. 56 Having identified the principles to apply when determining whether the Commonwealth (or indeed any entity) is carrying on a business, it is useful to summarise the earlier decisions. The AGPS, the Australian Telecommunications Commission, the Australian Postal Commission and the Australian Broadcasting Commission have all been held to be businesses of the Commonwealth: McMillan, Tytel Pty Ltd v Australian Telecommunications Commission (1986) 67 ALR 433, Suatu Holdings Pty Ltd v Australian Postal Commission (1989) 86 ALR 532 and Sun Earth Homes Pty Ltd v Australian Broadcasting Commission (1990) 98 ALR 101. The Commonwealth has been held not to be carrying on a business by engaging in the following activities: · operating detention centres: Corrections Corporation · inviting tenders to be submitted and dealing with prospective tenderers: McMillan, Corrections Corporation · providing pharmaceutical, sickness and hospital benefits and medical and dental services in its administration of the National Health Act 1953 (Cth): Saitta · operating the Trade Practices Commission: Thomson Publications (Australia) Pty Ltd v Trade Practices Commission (1979) 40 FLR 257; (1979) 27 ALR 551 · leasing and developing a site for the purpose of establishing Cabinet and Ministerial offices: National Management Services (Australia) Pty Ltd v Commonwealth (1990) 9 BCL 190. Applying the analogous test in s 2B of the Act to the Crown in right of the State of New South Wales, the courts have concluded that the following activities do not constitute carrying on a business: · managing a national park: Easts Van Villages v Minister Administering the National Parks and Wildlife Act (2001) ATPR (Digest) 46‑211 · providing police and corrective services: Hamod v State of NSW [2001] FCA 157. The State of New South Wales was found to be carrying on a business through the Ambulance Service of New South Wales by providing ambulance services at sporting events and first aid training for reward: Paramedical Services Pty Ltd v The Ambulance Service of NSW [1999] FCA 548. (c) Was the respondent through the Department of Defence carrying on a business? 57 The applicant pleads that in calling for tenders, accepting tenders and entering into the SOA for the supply of chinaware, the Department of Defence was carrying on the business of trading in chinaware. Its submissions are more confined. The conduct in question is identified as entering into the SOA, and the business is defined as the business of acquiring chinaware in industrial quantities. Although the applicant focuses on its interaction with the respondent as the business operator, that is the applicant's participation in the tender process and the conclusion of the SOA, it must first establish that the respondent was carrying on a business when it engaged in such activities. It is not sufficient that it establish the commercial nature of the respondent's behaviour and the transaction; such behaviour must relate to the respondent's carrying on of the alleged business. See McMillan and the discussion in par 64 below. I will therefore consider whether the respondent was carrying on the business of trading in chinaware or acquiring chinaware in industrial quantities, and if so whether it invited and dealt with tenders and concluded the SOA in the course of carrying on that business. The respondent admits that it is liable for the acts or omissions of the Department. (i) The business of trading in china or acquiring china in industrial quantities 58 The Department's core function is the defence of Australia and its national interests. The business it is alleged to carry on is supportive of, if not integral to, that core function. That is, it is essential to the defence of Australia that army and air force barracks and naval vessels are furnished with chinaware so that the service personnel charged with the actual task of defending Australia can be fed in a civilised manner. In determining whether by acquiring chinaware for this purpose the Department is carrying on a business, it is relevant to bear in mind that the Department's primary activity does not amount to the carrying on of a business. 59 The applicant offered no evidence that the respondent was carrying on the business of trading in or acquiring chinaware in industrial quantities other than the fact that the Department called for tenders, accepted tenders and entered into the SOA and acquired large quantities of chinaware. The SOA itself indicates that the Department was to place orders for chinaware with the applicant from time and time during the intended three year period. Indeed it did so on two occasions prior to the demise of the parties' relationship. The respondent's evidence is more illuminating. Norm Thomas, an employee of the Department, who was responsible for procuring supplies including chinaware, said that chinaware purchased by the Department is delivered to a depot and issued on an "as required" basis to the army, navy and airforce ("the Services"). The Services do not pay the Department for the chinaware, nor is any damaged or excess chinaware re‑sold by the Department or the Services. The evidence also establishes that prior to entering into the SOA, AFC supplied chinaware to the Department. 60 The nature of the SOA, and in particular the contemplation that there be repeat transactions with the applicant for the supply of chinaware, suggests that there was some repetition, system and regularity. See McMillan, Hungier and Fasold. However, such indicia are not in my view sufficient to establish that the respondent was carrying on a business when the circumstances in which the business is alleged to operate are more confined than those that pertain to non-governmental enterprises. In this case, the alleged business relates to the acquisition of goods by the respondent from only one entity, that is the applicant, and the market for which the goods are acquired or to be traded in is not the world at large but is restricted to the Services. The oft cited example of a person making repeated deposits with a bank demonstrates that caution should be exercised when relying on regularity indicia. Closer to the present case is the shopper visiting his or her supermarket on a weekly basis. There can be no doubt that this shopper is not carrying on the business of acquiring provisions notwithstanding the existence of repetition, system and regularity. 61 The "as needs" basis upon which the chinaware is supplied to the Services by the Department, and the existence of a depot for distribution also evince some repetition, system and regularity in respect of the Department's handling of the chinaware once acquired. This is relevant to the trade aspect of the business. Section 2C of the Act, however, provides that for the purpose of s 2A, a transaction involving only persons who are acting for the Crown in the same right does not amount to carrying on a business. As the Department and the Services act for the Crown in the same right, any transactions between them for the distribution of the chinaware do not constitute carrying on a business. The applicant is therefore unable to rely on the interaction between the Department and the Services to support its contention that a business is being carried on. 62 Because the Department's trade in or acquisition of chinaware so obviously relates to the execution of a government function which is in the interests of the community, it does not have the characteristic of carrying on a business. See McMillan, Mid Density Development and Saitta. As I have said in par 58, the Department's acquisition of chinaware was done for the purpose of sustaining men and women of the Services so that the primary task of defending Australia and its national interests can be pursued. This activity does not constitute the carrying on of a business because it does not have the flavour of a commercial enterprise. Rather is inextricably linked with a function of government. Because I am considering an activity that is of a subsidiary priority when compared to the Department's main function, my conclusion regarding the true purpose for which the activity is performed is informed by the principal government duty that is discharged by the Department. (ii) The business of the tender process 63 The courts have sometimes drawn a distinction between the business that is the subject of the tender process and the business of the tender process itself. In Corrections Corporation Finkelstein J considered whether the Commonwealth was carrying on a business when operating a detention centre and, in the alternative, when issuing a request for tenders and dealing with prospective tenderers. He did not treat the tender process as conduct that was engaged in in the course of carrying on the business of operating a detention centre, but dealt with the tender process as if it could constitute a separate business in itself. The applicant does not seek to draw any such distinction. The only business pleaded is the trade in or acquisition of chinaware in industrial quantities rather than, for example, a general business of calling for and dealing with tenders or acquiring goods. I therefore need not consider whether the invitations for and acceptance of tenders in this instance constituted a business distinct from that of trading in or acquiring chinaware in industrial quantities. The tender process is relevant only to the question whether it amounts to conduct that was engaged in by the respondent in the course of carrying on the alleged business. (d) The tender and the SOA: conduct in the course of carrying on a business? 64 Having decided that the respondent was not carrying on a business of trading or acquiring chinaware in industrial quantities, I need not consider whether it was acting in the course of carrying on that business when it initiated and engaged in the tender process and when it entered into and executed the SOA. As Emmett J held in McMillan, s 2A requires that the Commonwealth not only carry on a business, but that the conduct which forms the basis of the claim made pursuant to the Act be carried out in the course of carrying on that business. Given that a connection between the respondent carrying on a business on the one hand and the tender process and the conclusion of the SOA on the other is lacking, s 2A and hence the Act does not apply. What if the Act does apply? 65 In case my conclusion that the Act does not apply to the respondent is wrong, I will consider whether the conduct relied on by the applicant constitutes a contravention of s 52 or Part IVA. In pars 38, 39, 40 and 41 of the statement of claim numerous representations are relied on as constituting misleading and deceptive conduct and unconscionable conduct of the respondent. In written submissions filed before the hearing the applicant relied on only three instances of misleading and deceptive conduct, and one instance of unconscionable conduct. Otherwise it simply relied on the allegations in pars 38 to 41 of the statement of claim. In written closing submissions the applicant merely contended that the matters particularised in those paragraphs are made out. For want of any particulars of certain of the matters alleged, or any submissions elucidating or explaining them, it is not possible to deal with those matters. What follows is a brief statement of my reasons for rejecting such of the claims as I have been able to understand. 66 Misleading and deceptive conduct (1) The respondent represented in August 1997 that if the applicant replicated AFC china the respondent would accept it under the SOA. For the reasons given in pars 26 and 28 to 30, Mr Giammario's discussions with Mr Blake on 22 August 1997 related to dimensions and not compliance with the Standard. In his letter of 16 January 1998 Mr Blake approved the samples, but went on to say they must nevertheless meet all the requirements and conditions of the Specification and conditions nominated in the orders. These included the requirements of the Standard. He then referred to the testing of production samples by an approved authority, which is plainly a reference to testing for compliance with the Standard. See par 28. This representation has not been established. (2) The respondent induced the applicant to believe the respondent had examined the December 1997 samples when it had not. I refer to what I have said in pars 28 and 29. Mr Blake examined the samples for measurements and colour, but did not test them against the Standard. He explained this to Mr Giammario. I refer again to the letter of 16 January 1998. (3) The specification was misleading or ambiguous because it did not make clear whether the dimensions and capacities had to be as set out in Annex B or in accordance with the tenderer's samples. Assuming this to be so, it does not lead anywhere. In May 1997, before the SOA was entered into, the applicant undertook, orally and in writing, to provide chinaware that met the dimension/shape requirements. Mr Giammario assured Mr Darby his supplier would be able to make any physical dimensions that were required. In Mr Giammario's letter of 16 May 1997 he said that items that did not match the Specification in reference to shape, size etc "will be manufactured as required". See also the discussion of the 22 August meeting in pars 25 and 26. (4) Clause 15.3 of the request for tender stated that tenders would be evaluated according to the Specification, whereas clause 40.1 stated that supplies would be assessed in accordance with DEF (AUST) 5670, a copy of which was never given to the applicant. DEF (AUST) 5670 has never been an issue in the case. No reliance has been placed on it, and no complaint has been made that the applicant has not complied with it. (5) The respondent represented that the requirements of the Standard could be satisfied whereas they could not practically be satisfied. On the assumption that a representation to that effect was made, it was neither false nor misleading. I refer to what I have said in par 37. (6) The respondent's reliance on the Standard was misleading and deceptive "because the reference to the specification in 2.1 is not mandatory but applicable only at the option of the respondent". The meaning of this claim was never explained. Clause 2.1 of the Specification tells the reader it may be necessary to refer to AS 4371 – Ceramic Tableware. That is a warning to, inter alios, the tenderer, that it may need to refer to the Standard. It is plain from clauses 1.1 and 4.4.1 that goods supplied under the Specification must be in accordance with the Standard. There is no substance to this claim. (7) The respondent failed to inform the applicant until after the SOA came into existence of the respects in which the tender samples did not comply with the dimension requirements. I refer to what I have said under (3) above. (8) Despite the agreements between the parties that they would jointly consider the appropriateness of the Specification and/or the Standard, the respondent, covertly and without notice to the applicant, took advice from SSL. In view of the findings in pars 44 and 46, this claim is not made out. 67 Unconscionable conduct (1) The respondent used its purchasing power to prevail on the applicant to accept the variation of the SOA on 22 August. For the reasons explained in par 26, there was no such variation. (2) The respondent permitted the applicant to believe that if it created chinaware that precisely replicated AFC china, the respondent would accept it in performance of the SOA. As explained in par 26, "replication" related to dimensions and capacities, not to satisfying the Standard. If the applicant believed that all it had to do was copy the dimensions and capacities of the AFC product, that was its own fault for not attending to the requirements of the Standard. It was not a state of mind induced by the respondent. See the discussion in pars 47 and 48. (3) The respondent used the applicant to obtain AFC replicas at a lower price than AFC charged. No unconscionability is involved in the respondent's attempt to obtain chinaware that satisfied its requirements as to shape and durability at a lower price than that charged by its former supplier. (4) The respondent used its power to terminate the SOA for the ulterior purpose of terminating a public controversy. There is no evidence to support this claim. (5) After the tender was lodged and before it was accepted, the respondent stated that if the applicant lowered the price of the platters its tender would be accepted. This was said to amount to "indirect intimidation" of the applicant. It was also said that the applicant was thereby "put upon" by the respondent. Mr Giammario said that after the 30 July 1997 meeting (see par 4) Mr Carrazza told him he would have to lower his prices on three platters by about 17 to 20%. Mr Giammario then negotiated a price reduction on the platters with his supplier and informed Mr Carrazza of the adjusted prices. Mr Carrazza denied having said what was attributed to him. He said there seemed to him to be an "anomaly". By this he meant that the platter prices seemed too high in the light of the prices of the other items. He wanted Mr Giammario to check that there had not been some mistake. I accept Mr Carrazza's account of the conversation. In my view Mr Giammario has reconstructed what happened based on jottings placed by Mr Carrazza on a copy of the applicant's letter to Mr Carrazza advising of the reduced prices. There was unchallenged evidence from Mr Carrazza that when he read the account in Mr Giammario's affidavit of the percentage reductions he was alleged to have insisted on, he decided to work out what the percentage reductions in fact were. On Mr Carrazza's account of the exchange, there was no indirect intimidation and the applicant was not put upon. Even if what Mr Carrazza said was calculated to achieve a reduction in the price of the platters (and he accepted that he was not inviting Mr Giammario to increase the price), I would not discern unconscionability. It was a legitimate commercial ploy. The respondent's officers were trying to save money. Mr Giammario was able to negotiate a deal with his supplier which he passed on to the respondent. His tender was accepted. 68 Other claims of unconscionability are pleaded. But in the absence of particulars disclosing the factual matters relied on, or any submissions directed to them, I am unable to deal with them. The claims of misleading and deceptive conduct are repeated as instances of unconscionable conduct. The reasons I have given for rejecting the former apply to the latter. CONCLUSION 69 The application must be dismissed. I certify that the preceding sixty-nine (69) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg. Associate: Dated: 18 September 2002 Counsel for the Applicant: T Hurley Solicitor for the Applicant: Jack Buchler Counsel for the Respondent: C M Scerri QC and M Moshinsky Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 12 and 13 June 2002 Date of Judgment: 18 September 2002