LAWN CHIEF PTY LTD v JORDY HOLDINGS PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL GLEESON CJ, PRIESTLEY JA and Hope AJA 22 November 1989, 29 January 1990 [1990] NSWCA 115 SALE OF GOODS — supply of lawnmower parts washers — allegation of purchaser that goods were not of merchantable quality — HELD reversing the decision of the trial judge, that the goods were not of merchantable quality. SALE OF GOODS ACT 1923 — remedies — effect of s57 and course of dealing between parties considered. ORDERS Appeal allowed. Verdict and judgment for the respondent set aside. Judgment for the appellant. Respondent to pay the appellant's costs of the appeal and of the proceedings at first instance. If respondent is otherwise entitled, it is to have a certificate under the Suitors Fund Act. Gleeson CJ The proceedings the subject of this appeal arose out of the sale bythe respondent to the appellant of forty Quik-Kleen lawnmower parts washers. The respondent claimed payment of the agreed purchase price of $350 per unit in respect of thirty-eight of the forty parts washers supplied. Credit was given for the price of the other two, for reasons which will appear below. Mitchelmore DCJ entered judgment for the respondent in the sum of $13,300 (38 x $350), together with interest up to judgment, agreed by the parties to be $13,564. Judgment was therefore entered for a total of $26,864. Although additional issues were raised at the trial, on this appeal the appellant relies principally upon s19 of the Sale of Goods Act, contending that there were breaches of implied conditions in the contract of sale in that there were defects in the goods which rendered them unmerchantable and unfit for the purpose for which they were intended. The learned trial judge found that the goods were of merchantable quality and were not unfit for the purpose for which they were intended. He based his finding on "pragmatic evidence of the plaintiff's continuing extensive sales and wide use of the machines". The nature of that evidence will be considered below. His Honour also found that there was no condition in the contract, express or implied, that the goods would be fit for the purpose intended, which he described as the safe cleaning of lawnmower parts. In his Honour's view, even if such a condition could otherwise have been implied into the contract, the appellant had not relied on the respondent's skill or judgment. The central issue in this appeal concerned an attack on the trial judge's finding on the issue as to whether the goods in question were of merchantable quality. The appellant contended that his Honour failed to take into account evidence of defects given by people who purchased units from the appellant and by expert witnesses called for the appellant. The proceedings arose against the following background. The appellant and the respondent both conduct businesses concerned in one way or another with the supply and service of lawnmower parts. The appellant's business is in South 2 UNREPORTED JUDGMENTS Australia, and the respondent's is in New South Wales. The appellant and the respondent had been involved in a trading relationship which commenced in 1979. In the course of that relationship the respondent had supplied to the appellant, for further supply to the appellant's customers, lawnmower parts. In July 1981, Mr Morton, a director of the appellant, ordered a parts washer from Mr Courtney James, manager of the plaintiff company. This was with a view to considering selling such units in South Australia. The unit w as delivered in July 1981, and paid for in September, 1981. As a result of certain expressions of interest and orders he obtained from his customers, Mr Morton ordered a further forty units in August 1981, which were delivered in November 1981 and invoiced on 27 November 1981. The Quik-Kleen parts washer consists of a basin resting on a steel drum. A submersible pump circulates solvent from the drum into the basin through a small hose, and the solvent is used by an operator to clean engine parts, including carburettors. The solvent then drains back into the drum. Fire is an obvious risk. The basin has a lid with a PVC catch or keeper attached, which is intended to burn through in the event of a fire in the basin, allowing the cover to fall, thereby extinguishing the fire. A light fitting, which consists of an exposed light globe in a metal casing, is attached to the fire lid. The first parts washer delivered to the appellant included a basin made from fibreglass. According to Mr Morton's evidence, Mr Courtney James told him that he would be sent forty of their new model, which included a basin made from polyurethane, or plastic. In the event, the forty units delivered to the appellant comprised three different types, classified by Mr Morton on the basis of the material of which the basin was made, as follows: type 1, a fibreglass basin; type 2, a plastic basin without the name Quik-Kleen upon it; and type 3 a plastic basin with the name Quik-Kleen emblazoned upon it. The delivery comprised five of type 1, seven of type 2 and twenty-eight of type 3. Mr Morton said that he complained to Mr Courtney James that the units were not all of the new model but those complaints were brushed aside. During December 1981, Mr Morton sold units to four customers: Messrs Lee, Duggan, Paterson and Dakin. At some unspecified time he also sold a unit to a Mr Cobbing. Messrs Lee, Duggan and Cobbing paid for their units, but Messrs Paterson and Dakin, although invoiced, did not. In February 1982 the appellant also sold a unit to a it to a Mr D Smith. Two further units were sold through the Mower Specialists Association of Australia (MSAA), to Mr Lee Smith and Mr K Schuppan. Messrs Lee Smith and Schuppan paid the plaintiff directly, although their machines were supplied by the appellant. They are the two units for which credit was given in calculating the amount of the judgment. Complaints by purchasers about defective units led in some cases to their replacement by the appellant. Mr Duggan's type 1 unit was replaced with a type 2 unit, Mr Lee's type 1 unit by a type 3 unit and Mr Paterson's type | unit with a type 2 unit which was again replaced with a type 3 unit. One unit was destroyed in tests conducted on the machines. Thus, it seems that, in all, thirteen of the forty machines were disposed of by the appellant in one way or another. There was some confusion about the exact number when this matter was raised on the appeal. At one stage counsel suggested that the number was twelve. However, an examination of the evidence indicates that it should be thirteen, of which at least four were in the hands of, and in use in one way or another by, purchasers from the appellant in March 1983. URJ LAWN CHIEF PTY LTD v JORDY HOLDINGS PTY LTD (Gleeson CJ) 3 In December 1981 Mr Morton received the first complaints from customers about defective machines. On Mr Morton's evidence, he advised Mr Courtney James by telephone of those defects in December 1981 and January 1982, and in February 1982 he told Mr Courtney James that the parts washers were not of merchantable quality or fit for the purpose intended and that Mr Courtney James should regard the goods as on consignment and arrange to take them back at the plaintiff's expense. Evidence was given of a prior delivery of defective die compressors which had been returned to the respondent at the respondent's expense and it appears to have been common ground that the parties dealt on the basis that defective goods would be taken back. Indeed the respondent, whilst denying that the party washers were defective, took the stand that if the appellant would pay the return freight to Sydney and compensate the respondent for interest on the money tied up in the units, then it would credit the appellant with the price. The appellant's attitude was that it should not have to bear such costs but that, at least as to those units which were still available, the respondent should remove them at its own expense. What was to be done in relation to the other units was left unclear, but the appellant denied any liability to pay for them. Mr Courtney James said that he was not made aware of problems with the goods until March 1982. He said that he offered to go to Adelaide in March 1982 to assist the appellant to sell the units, because he regarded the problem as a sales problem, particularly as the machines were being sold successfully in New South Wales. On his evidence, the appellant did not reject the goods until April 1982, whereupon Mr Courtney James said that he would take back the units if Mr Morton would agree to pay the freight and/or make an allowance for the interest on the money the plaintiff would have had if payment had been made within 30 days as arranged. The learned trial judge expressed reservations about Mr Morton's veracity, based on the circumstance that the first mention in writing of the defects complained of was in a letter dated 2 July 1982. However, it is clear from Mr Courtney James' evidence, although he is somewhat equivocal about dates, that he was aware of complaints in early 1982. Furthermore, he agreed in his evidence that towards the end of April 1982 Mr Morton rang and said: "The goods are faulty, so you should take them back at your cost; it should not cost me anything." His Honour seems to have overlooked the fact that Mr Morton's evidence on this point was not disputed. In March 1983, after a report he received from Mr McGee, an aeronautical engineer, Mr Morton recalled all units still in operation in South Australia. Mr Morton said that he refunded the money paid to him by Messrs Duggan, Lee, and Cobbing. Mr David Smith, who had never paid for his machine had the cost-free use of it for some 11 months. Thus by March 1983 the position had been reached where (leaving aside the units sold through MSAA) those which were still in use by the appellants customers in South Australia were recalled and the purchasers' money refunded. As was noted above, the appellant's principal attack in this appeal was directed towards the learned trial judge's finding that the units sold to the appellant were of merchantable quality. The principal complaints made concerned the tendency of the plastic bowls to sag, which had the result that the solvent did not run back into the drum as it was supposed to do, but collected in a pool in the bowl. Quite apart from any considerations of safety, this obviously represented a significant failure of the units to function as they were supposed to do. One purchaser actually gave evidence that he took to using his unit by placing a plastic ice cream 4 UNREPORTED JUDGMENTS container in the bowl, putting solvent into the container manually, and emptying it in the same way. He cleaned parts in the container. The learned judge appeared to regard this as a form of use of the unit. Clearly, however, it was not using the unit as anything other than a convenient stand for the ice cream container. Some of the units were tendered in evidence and the sag complained of was obvious and significant. This in turn had safety implications, which seemed to form a large part of the dispute at the trial. Pools of solvent are potentially hazardous. The respondent pointed out that the particular form of solvent recommended was one which was hard to ignite. The appellant countered that to it would be added other dangerous substances which were the product of washing parts. Additionally, the distortion of bowl shape resulting from the sag earlier mentioned made the lid an ineffective mechanism for extinguishing any fire that might occur. Evidence was given by Messrs Dakin, Duggan and David Smith, of the tendency of the plastic basins to change shape and sag under the weight of parts; a tendency which increased in hot weather. They also said that the sagging of the basins and the fact that they sloped forward, meant that the solvent was prevented from running back into the basin and would instead collect in pools at the bottom of the basin of their units. According to the evidence given by Mr Michael Jones, a specialist engineer employed by the Department of Labour, who examined the Quik-Kleen parts washer in March 1983, the solvent could collect foreign matter over a period of time, which might include petrol, for example, from carburettors. The result of the inclusion of lighter hydrocarbons such as petrol is that the flashpoint of the solvent is lowered and its liability to ignite is increased. The pooling of the solvent in the basin meant that the solvent could evaporate into the atmosphere and its increased accessibility to ignition sources created a significant fire hazard. Messrs Duggan and Smith testified to the fact that the PVC catch for the fire lid stretched in the heat, causing the lid to be gradually lowered so that it be came a hindrance to the workmen. The light globe, unprotected in its casing, was then exposed to solvent splashes and the risk of possible breakage by a workman, thereby creating a danger of an electrical short circuit. Evidence was given by an electrician, Mr Sanders, from the Electricity Trust of South Australia, who examined the machine in 1985. He testified as to the inadequate earthing and insufficient cord anchorage which he observed in the machine and noted that the electrical components were neither flame proof nor explosion proof. His Honour seems either to have rejected the above evidence (which was in fact not directly challenged) or to have regarded it as irrelevant. He considered that the evidence given by Jones and Sanders related only to matters of intrinsic safety and did not render the machine unfit for the safe cleaning of lawnmower parts. He considered the appellant's contention that the units were a significant fire hazard and concluded as follows: "My general impression was that, by strict standards, there might be some increased safety precautions for more abundant caution, but the practical situation was that the machines did not catch fire readily even when they were actively torched. The units burnt very slowly and there would have been ample opportunity to put the fire out by fairly mild means." His Honour relied also on the fact that there was no record of any actual fires or any workers' compensation claims for damage caused by the parts washers. His Honour appears to have ignored much of the expert evidence called for the appellant. URJ LAWN CHIEF PTY LTD v JORDY HOLDINGS PTY LTD (Gleeson CJ) 5 AMr Metcalf, called by the respondent, said that he had serviced parts cleaners for nine years and had 400-500 customers. According to his evidence, about one in three owned Quik-Kleen units. He said that all spare parts cleaners have some solvent left in the basin. His Honour accepted this evidence, together with the evidence of two satisfied New South Wales customers, neither of whom had experienced any problems with their machines. His Honour attached great significance to evidence of a long and successful history of sales in New South Wales. However he does not appear to have given consideration to the question of exactly what changes might have been made to the units over the years. Evidence was given of a type 4 machine, an improved version of the parts washer, in which, according to Mr Morton, most of the defects complained of in types 2 and 3 had been remedied. Mr Morton said that he had seen examples of this later version in Victoria in 1985 and 1986, in which the basin was constructed of stronger, thicker plastic, its gradient corrected, the opening at the back covered, the catch wire d and the light globe sealed. There was a suggestion that at least many of the successful sales in New South Wales had been of the type 4 machine. In September 1985 a report was prepared at the appellant's request by a Mr Luke, for the Australian Mineral Development Laboratories (AMDEL). Mr Luke compared types 2, 3 and 4 and found that some defects had been remedied in type 4. Around hole replaced the jagged hole through which the electrical lead had run in the earlier models. The light fitting had been earthed. Most importantly, the basin wall thickness had been increased from 6mm in type 2 and 6.5 mm in type 3 to 7.5 mm in type 4. The thicker plastic did not sag, so that solvent could drain back into the basin. Mr James denied having deliberately altered the specifications for the manufacture of the basins. However there seems no doubt that, for whatever reason, the thickness of the plastic bowl was Increased. With respect, the learned judge's reasoning on this issue is unconvincing. He seems to have given little if any weight to the virtually unchallenged evidence of deficiencies in the units sold in South Australia, including evidence both of and from complaining customers, and scientific evidence. The effect of all this evidence cannot be regarded as displaced by general evidence of absence of complaints about other units which were not sold to the appellant, but were distributed in New South Wales, especially where an unspecified number of such units were shown to have been differently constructed in a possibly material respect. Quite apart from the safety implications, which his Honour's judgment minimised in a fashion which is difficult to reconcile with the expert evidence, the very fact that a significant quantity of the solvent would not drain back into the drum as it was supposed to do gave rise to an inability of the unit to operate as specified in a respect that cannot be dismissed as immaterial. This is not a case in which the units in question were potentially saleable for a variety of purposes. They were to be used for one purpose only. The evidence makes it clear that the units sold to the appellant were defective in significant respects. Applying the test of "merchantable quality" formulated by Dixon J in Australian Knitting Mills Ltd v Grant (1933) 50 CLR 387 at 418, I would conclude that a buyer, fully acquainted with the relevant facts and knowing of the defects, would not buy them without a significant abatement in price. Various alternative tests are to be found in the authorities, but none of them would produce a different result in t he present case. The appellants contention that the units were not of merchantable quality has been made good. 6 UNREPORTED JUDGMENTS That finding gives rise to certain further questions, which the learned trial judge found it unnecessary to consider. It was common ground that the contract of sale between the respondent and the appellant was governed by the Sale of Goods Act 1923 of New South Wales. The sale was by description. It follows that there was a breach of a condition implied by s19. (If the sale had been by sample the result would not be materially different). There was no attempt at the hearing to prove what, if any, actual value the units may have had. Presumably at the least they had some scrap value. However, we were told that no point was taken about this at the trial. Further, since prima facie thirteen of the units had been dealt with in a manner inconsistent with the respondent's ownership, there was at least a question as to whether, or to what extent, it was too late to treat the alleged breach of condition as anything other than a breach of warranty.Once again, however, we were informed that no such issue was raised at the hearing. On this appeal the appellant's primary submission was that goods were rejected and that the appellant was entitled simply to refuse to pay the purchase price and to require the respondent to remove them at the respondent's expense. However, the position is somewhat more complicated. As to twenty-seven of the thirty-eight units in question, they were rejected in about April 1982 and remain available for collection by the respondent. Ten of the remaining eleven were at various times up to March 1983 delivered to various customers of the appellant but they were either returned or recalled and the appellant was either never paid for them at all or refunded the price. One was used for tests by the scientific aspects. In working out the rights and liabilities of the parties in the instant case two matters are of particular significance. First, the defects in the units were latent, and only came to the appellant's attention after it had made some sales and deliveries to its customers. Even then there was only a gradual understanding of the nature of the problem, involving a period of testing and attempts to substitute one type of unit for another, and over that period there was disagreement between the parties as to whether there were any defects at all in the units. Consequently there was no clear-cut acceptance or rejection of the units for a substantial period of time. Secondly, that problem was itself exacerbated by an aspect of the matter which is of both practical and legal significance. At all relevant times the respondent maintained that if it were satisfied that the units were defective it would take them back. The practical effect of this was that it rather blurred the picture as to the stances being adopted by the respective parties. The legal effect arises by reason of s57 of the Sale of Goods Act. The respondent's attitude was a manifestation of what it acknowledged as its general course of dealing, and as its course of dealing with the appellant, which had been implemented on a previous occasion. It was willing to take back goods which were defective, even if they had previously been accepted by the purchaser. In other words, just as no point was taken at the trial to the effect that it was, by March 1983, too late for the appellant to do anything other than pursue a claim for breach of warranty (giving a right to damages or extinction of the purchase price), so in its ordinary course of dealing with the appellant the respondent took no such point. By virtue of s57 this produces the consequence that, in the circumstances of the present case, the appellant is still entitled to treat the breach as a breach of condition and is not liable to pay for any of the defective units, even though, in the case of at URJ LAWN CHIEF PTY LTD v JORDY HOLDINGS PTY LTD (Priestley JA) 7 least eleven of them, and perhaps in the case of all of them, property had passed to the appellant, and eleven of them had been dealt with in a manner inconsistent with the respondent's ownership. In the result the appeal should be allowed, and the verdict and judgment for the respondent should be set aside. In lieu thereof there should be judgment for the appellant. The respondent should pay the appellant's costs in this appeal and of the hearing at first instance. If the respondent is otherwise entitled it should have a certificate under the Suitors Fund Act. Priestley JA For the reasons given by the Chief Justice relating to the non-merchantable quality of the items in question in the present case, I am of the opinion that the buyer's contention that the units were not of merchantable quality should have been found to be established at the trial. In many cases resembling the present, that conclusion would lead to the position where the buyer could set up the unmerchantability against the seller in diminution of extinction of the price; s54(1)(a) of the Sale of Goods Act 1923. This would be on the basis that the buyer, by its dealing with the goods, including the resale of a significant number of them, had elected to treat the breach of the condition of merchantable quality as a breach of warranty, thereby becoming obliged to pay the price of the goods, but could diminish or extinguish the liability to pay that price by proof of the breach of warranty. Such cases are part of the bread and butter of legal theory with which lawyers routinely become acquainted in the District Court and other jurisdictions. There were some features in the present case, however, which do not appear in the common sort of case I have just described. For the buyer, evidence was given that it had been involved in the lawnmower parts business since 1968, and that it was the general practice in that business that where an order was placed for particular items, the order fulfilled, the items delivered, delivery taken, the items then resold, and subsequently found to be defective, then they would be returned to the seller, and a credit allowed for them. This evidence was given without objection and was not the subject of cross-examination. The chief witness for the seller had earlier said that both it and the buyer were "in the lawnmower business. We would buy some pieces from them and they would buy from us." This witness also said that that relationship of trading had, by July 1981, been in existence about two years. Evidence was given for the buyer that in January 1981 it had bought 300 die compressors from the seller, had received some of them, had sold about twenty, had received complaints from customers that they would not work properly, and had then returned them to the seller. The buyer was given credit for the full purchase price and the seller bore the cost of their return. This evidence was not challenged in cross-examination either, counsel for the buyer contenting himself with a question, based upon the speedy return of the die compressors, asking in effect whether the buyer should not, upon receiving the invoice for the units in question in the present case, have immediately contested the charge in the invoice for them. When the witness answered no to this question, counsel did not take the matter further. The foregoing aspects of the evidence make it necessary, in the present case, to consider whether s57 of the Sale of Goods Act had any application. This section says in part that where any right, duty or liability would arise under a contract of sale by implication of law, it may be negatived or varied by the course of dealing between the parties, or by usage, if the usage be such as to bind both parties to the contract. 8 UNREPORTED JUDGMENTS It seems to me that the buyer was entitled to rely upon the evidence concerning the general practice in the lawnmover parts business and also the course of dealing between it and the seller indicated by the incident of the die compressors. The evidence was not voluminous, but neither was it contradicted. In these circumstances, to say that when the parties came to trial, the buyer owed the seller the price for the units and an obligation lay upon the buyer under s54 to set up against the price the breach of warranty of merchantability in diminution or extinction of it, would be to use the Sale of Goods Act more like a bed of Procrustes than the terms of the Act itself warrant. In early editions of his book on the Sale of Goods Act, Sir M. D Chalmers, who was a principal draftsman of the Act, made the following comment on s57(s55 in the UK Act): "This section is merely an application of the general maxims, Expressum facit cessare tacitum, and Modus et conventio vincunt leqem. As Pothier has pointed out, sale is a consensual contract, and the parties may alter at will the obligations which the law implies from the general nature of the contract: see, eg, Ward v Hobbs (1887) 4 App Cas; 13 (diseased pigs sold 'with all faults'). Lord Blackburn, discussing the correlative obligations of payment and delivery, says, 'There is no rule of law to prevent the parties from making any bargain they please;' Calcutta Co v De Mattos (1863) 32 LJQB at 329 and Lord Esher says, "Merchants are not bound to make their contracts according to any rule of law': Honck v Muller (1881) 7 QB at 103, CA. Bedarride accurately expresses the similar rule in France. 'C'est surtout de la vente commerciale qu'on peut dire qu'elle peut se plier a toutes les modalites, sans autres exceptions que celles qui resulteraient d'une disposition de la loi prohibitive, ou des exigeances de |' ordre de la morale ou des bonnes moeurs.' Des Achats et Ventes, p226." (Third edn, 1896, at 106) In the 14th edition, (1963), the quotation from Bedarride was dropped, but I have left it in here because it conveniently emphasises that in commercial contracts between traders such as the parties in the present case, the legal result of their transactions will depend upon their actions, dealings and agreements between themselves; that is, in Australia as in England and France, the courts will facilitate the carrying out of commercial men's intentions, rather than impose upon them a result based upon preconceptions which they themselves did not share when dealing with each other, subject only to statutory prohibition, "exigeances de l'ordre de la morale" or "des bonnes moeurs". In these days, the last two items would in Australian contract law be, I think, dealt with under the rubric of unconscionability. Whether the content of Bedarride's qualifications is precisely replicated in current Australian law does not need to be considered in the present case, where no such doctrines were relied on. Further, it appears that the principal issue litigated at the trial was whether or not the units were of merchantable quality. It seems clear that the buyer was relying upon their lack of merchantability as an answer to the seller's right to payment, and was not merely relying upon s54, and that this was the issue joined between them. Although by no means conclusive in itself, this provides an indication that the parties themselves regarded the question of merchantable quality as governing the buyer's liability for the price, conformably to the course of dealing between them. The result is that in the circumstances of the present case I agree with the Chief Justice that the buyer should have been held by the trial judge not to be liable to pay for any of the defective units. I agree with the orders proposed by the Chief Justice. URJ LAWN CHIEF PTY LTD v JORDY HOLDINGS PTY LTD (Hope AJA) 9 Hope AJA I agree with Gleeson CJ and Priestley JA. Appeal allowed. Verdict and judgment for the respondent set aside. Judgment for the Appellant. Respondent to pay the appellant's costs of the appeal and of the proceedings at first instance. If respondent is otherwise entitled, it is to have a certificate under the Suitors Fund Act. oa RYNP 10 Counsel for Appellant: R Ellicott QC and P Little Solicitors for Appellant: Price Brent Counsel for Respondent: PR Graham QC and JA Kearney 15 Solicitors for Respondent: Christopher McGrath and Co