GEORGE AND COURTIER PTY LTD v TERREY and ORS SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CLARKE, SHELLER JJA and Simos AJA 19 August 1996, 3 September 1996 [1996] NSWCA 206 CONTRACT FOR SUPPLY OF MACHINERY — WHETHER PARTY WAS AN AGENT, OR PRINCIPAL OR RESELLER — DOCUMENTATION, CONVERSATIONS AND CONDUCT CONSIDERED TO DETERMINE WHO WERE PARTIES TO THE CONTRACT In 1986 the first respondents, who were fruit growers, approached the second respondent, who were machinery agents, in order to investigate the purchase of a fruit sorter and grader for their orchards. The second respondent referred the first respondents to the appellant, which carried on business as a manufacturer and supplier of farm machinery. The appellant consequently manufactured and delivered to the first respondent a fruit sorter. Difficulties were immediately encountered with the machine and many attempts were made to rectify the problems. The first respondents sued the appellant and second respondent claiming, inter alia, that it was a term of the contract of purchase that the sorter would be reasonably fit for the purpose for which it was purchased, and that this term had been breached. Sinclair DCJ found that the contract of sale was between the first respondents and the appellant and that the breach of the contractual term had been proved. The appellant appeals from that decision on the basis that his Honour erred in concluding that the contracting parties were the appellant and the first respondents. The second respondent cross-appeals seeking indemnity against the appellant in the event that it (that is, the second respondent) is found to be the contracting party. Held: (1) Because a clear picture as to who were the contracting parties does not emerge solely from the documentation, the issue must be ascertained from a consideration not only of the documents, but also of the conversations and conduct of the parties relating to the transaction. (2) The trial judge was correct in concluding that the second respondent was merely an agent of the appellant, not a principal or reseller, and that the contract was therefore between the appellant and the first respondent. Orders: (1) Appeal dismissed with costs. (2) Cross-appeals dismissed with no order as to costs. Clarke JA The first respondents, who were the plaintiffs in the court below, conducted a soft fruit orchard near Windsor for many years prior to 1986 growing, in the main, peaches and nectarines. In about the middle of 1986 they decided to buy a new fruit sorter and grader and, in order to investigate the machines available, went to see the second respondent which carried on business as machinery agents at Freemans Reach near Windsor. Mr Spinks of the second respondent in due course introduced Mr Brian Terrey, the first named first respondent, to Mr gingham who was the manager of the PSF Equipment Division of the appellant which carried on business as manufacturers and suppliers of farm machinery. 2 UNREPORTED JUDGMENTS Following that introduction the appellant manufactured a fruit sorter, technically described as an electronic weight sizer, for the first respondents which was delivered to them in late November 1986. The first respondents immediately encountered difficulties with the fruit sorter and many attempts were made to rectify the problems of which they complained. In February 1988 the first respondents sued the appellant and the second respondent claiming, inter alia, that it was a term of the contract of purchase that the sorter would be reasonably fit for the purpose for which it was purchased and that this term had not fulfilled. Both the appellant and the second respondent defended the proceedings and the major questions which were litigated were first, whether the contract of sale was between the first respondents and the appellant or the first respondents and the second respondent and, secondly, whether the contractual term which I have identified had been breached. There were other issues which were dealt with in the trial before Sinclair DCJ but as they do not bear on the appeal I will not refer to them. His Honour found that the contract was between the appellant and first respondents and that the breach of contract had been proved. His Honour assessed the damages payable to the first respondents in the sum of $60,562.00 and, with the inclusion of interest, entered judgment for the first respondents in the sum of $110,637.00. His Honour also made consequential orders concerning cross-claims which had been brought. The appellant filed a notice of appeal and both the first respondents and the second respondent filed notices of cross-appeal. In its notice the appellant challenged a number of his Honour's decisions but in its written submissions it abandoned all grounds of appeal except one. The sole ground which was argued was whether his Honour had erred in concluding that the contract was between the appellant and the first respondents. It may be thought a trifle unusual that a manufacturer which has manufactured a fruit sorting machine which has been found to be unfit for the purpose for which it was purchased should accept the finding of fact that the machine it manufactured was defective but nonetheless seek to avoid responsibility for its faulty manufacture by contending that it was not in a contractual relationship with the ultimate purchaser, particularly when it is appreciated that the second respondent has sought indemnity against the appellant in the event that it is found that it (that is, the second respondent) was the contracting party. Prima facie it would seem that the ultimate responsibility should lie at the feet of the appellant whether that responsibility flows directly or as a consequence of an order of indemnity in favour of the second respondent. Be that as it may the appellant is fully entitled to challenge a ruling made by his Honour leading to a finding of liability and it is incumbent upon this Court to determine whether his Honour erred in his factual determination that the contracting parties were the appellant and the first respondents. The resolution of this appeal involves the evaluation of factual material about which there is no substantial dispute. Because there was no significant dispute of fact the question of credit did not really arise although his Honour did say that he thought Spinks was a less reliable witness than Brian Terrey or gingham. In these circumstances it is convenient to refer initially to Brian Terrey's evidence. I have already mentioned the fact that Brian Terrey went to see Spinks at Freemans Reach. Following that visit Spinks spoke on the telephone with gingham who, as a result, sent a letter to Spinks. He did not recall receiving this URJ GEORGE AND COURTIER PTY LTD v TERREY and ORS (Clarke JA) 3 letter but there is no reason why, in the ordinary course of business, it did not arrive at the second respondent's premises. That letter read: "Please find enclosed a copy of our catalogue. This catalogue will illustrate the range of equipment we can supply. As a reseller the net price of the equipment to you would be list price less 15% ex our works. On larger schemes where we are involved in servicing the sale and in the installation and commissioning of the machines, our other resellers have found it more convenient to have us handle the sale and pay them a service or 'spotters' feet As you can well appreciate in the large scheme the competition is very strong and these schemes cannot usually stand the extra 15% resellers fee. Within the 15% discount we offer you we would expect you to commission the equipment after installation, demonstrate to the customer how to use the machine and to do any small adjustments and service to ensure the correct running of the machines. Our normal trading terms are 30% deposit on receipt of order and balance payable upon completion of manufacture and prior to delivery. We can offer transit insurance for the equipment at the rate of 50cents per $100.00 plus stamp duty. Our company gives a 12 months warranty against faulty workmanship and parts. However for any parts that carry a specific manufacturers warranty eg motors, gearboxes, bearings, etc, then the manufacturers warranty shall apply. We know you will have success with the sale of these machines and look forward to a fruitful association with you and your Company." Pausing there, the letter makes it perfectly obvious that the appellant did not always adopt the procedure that its agents resold machinery manufactured by it but in some cases followed the course of dealing as principal with the ultimate buyer. Following the writing of that letter gingham visited Spinks at Freemans Reach and the two of them went to the first respondents' property. There a long conversation ensued between gingham and Brian Terrey. Spinks said very little during this conversation. In the early stages of the discussion gingham played a video recording of an avocado sorter which the appellant had manufactured for the 'House with No Steps' at Alstonville. According to Brian Terrey the conversation then proceeded: "Q. He said? A. He [ie Bingham] said the machine was capable of sorting and sizing 28,000 pieces of fruit per hour, we could expect the cups of that machine to be filled to approximately 70 per cent capacity. That left no doubt in our mind - Q. Don't tell us what was in your mind, just what he said and what you said. 28,000 pieces of fruit per hour - A. We would have 75 per cent approximately cupfill at the weighing rate of the computer, the machine would be more than capable of handling our sized operation. Q. What else was said about the showing of the video? A. The service of that machine - of that computer - in the event of us purchasing it would be - the electronics would be arranged through an agent in the Parramatta region. In the event of us having any problems with the machine, the previous machine they had sold, they were prepared to fly down a serviceman to put the machine right if any malfunction occurred. Q. Did he give you any opinion of how that occurred? 4 UNREPORTED JUDGMENTS A. The previous machine at Alstonville had problems to get them going, they flew servicemen down to that particular packing house. He started servicing of the machine, Queensland-based was no problem whatsoever. Our electronics would be serviced by a firm to be appointed by them in the Parramatta region. We would have backup in normal service from our agent, parts would be accessible and airfreighted down from Queensland to have minimum delay of breakdowns. Q. Did he say anything about how soon they could get a machine there? A. The machine was to be delivered to us within six weeks of the deposit being paid. Q. Tell us what you asked about? A. Lasked further questions, I was concerned about service, I was assured that service was not a problem, distance from Queensland to NSW was of no problem. I asked various point of the machine capacity to handle the equipment. Q. Tell us what you said and what he said? A. I said to him that our fruit could not be handled as roughly as the fruit was being handled on the video, soft fruit would not tolerate that type of handling. Q. What did he say? A. His reply was, "That is of no worries whatsoever', they have been in the business for many years, of manufacturing fruit - handling equipment and they could build a machine to handle any type of crops, there would be no problem in designing a machine to handle a soft-type of crop like stoned fruit." Bingham's account of the conversation was not significantly different. He said that Brian Terrey had told him that he wanted a machine to handle stone fruit, namely peaches and nectarines, and he knew that these fruits had to be handled delicately. He told Brian Terrey that the sorter came with a 12 months warranty and that at that time it (that is, the appellant) was looking at a computer service somewhere in Sydney to carry out any necessary repairs. He also acknowledged that Brian Terrey had expressed concern about the geographic location of the appellant and the problems that might therefore arise in the servicing of the sorter. gingham said that the simple servicing would usually be performed by the second respondent and anything more difficult would be done by the appellant. The conversation ended with gingham saying that he would draw up some plans. Following the preparation of the plans they were provided to the second respondent under cover of a handwritten quotation which read: 26.8.86 PSF EQUIPMENT GWS MACHINERY FOR A/C BRIAN TERRY FREEMANS REACH RD, WINDSOR NSW. 1 ONLY 2 LANE ELECTRONIC WEIGHT SIZER WITH 9 DROPS - DOUBLE SIDED WITH 4 X 1.2M (48*) DIA BINS EA SIDE LIST $25360.00 LESS 5% ($1268.00) = $24092.00 1 EACH' REVERSIBLE CONVEYER WITH VOLUME FILL ATTACHMENT 1 EACH ROLLER INSPECTION TABLE WITH VARISPEED DRIVE 2m x 0.5 m 1 ONLY ELEVATOR OUT OF DIP TANK 1 ONLY FIBREGLASS DIP TANK WITH RECIRC: PUMP 2.4m LONG X 1.2m WIDE LIST $9 340.00 LESS 15% ($1401.00) = $7937.00 $32031.00 DELIVERY and ASSEMBLY $2700.00 TOTAL NET $34731.00 TOTAL NET $34731.00 URJ GEORGE AND COURTIER PTY LTD v TERREY and ORS (Clarke JA) 5 AGENTS FEE 1268.00 AGENTS FEE 1401.00 $37400.00 SUGGESTED QUOTE TO CUSTOMER THIS QUOTE VALID UNTIL 26TH SEPTEMBER 86" [Although there were references to list price it is common ground that the machine was to be custom built for the first respondents.] Once Spinks had received the quotation he and his co-directors fixed a retail price of $38,700.00 and, using the nearest available piece of paper which happened to be a Massey-Ferguson Order for Goods, provided a quotation to the first respondents. That quotation broadly followed the wording of the one received by the second respondent from the appellant but also included the words "as per drawing", provision for the payment of a deposit and prices totalling the sum of $38,700.00. On 23 September 1986 the first respondents gave a cheque for the stated deposit to Spinks who thereupon sent the appellant a Purchase Order Form and a deposit, adjusted to accommodate the difference between the price noted on the appellant's letter of 26 August 1986 and the quotation furnished to the first respondents. This order form quoted a sales tax number. Following receipt of this order and deposit the appellant manufactured the sorter and delivered it to the second respondent in Freemans Reach in late November. The second respondent then delivered the sorter to the first respondents' property. Upon delivery Bingham installed and commissioned the sorter with some assistance from Spinks. His Honour reviewed this evidence and concluded that the only proper conclusion in the light of the oral evidence was that the first respondents intended to contract with the appellant which for its part was intending to contract as principal with the first respondents. Counsel for the appellant pointed out that his Honour had said there was no clear cut evidence in favour of either view and submitted that, having regard to the fact that the witnesses were deposing to the contents of conversations which occurred over five years before the trial, his Honour should have looked to the contemporaneous documents in order to discern the true nature of the relationship between the various parties. In his submission an analysis of these documents would have demonstrated that the second respondent was constituted a reseller, or principal, in its dealings with the first respondents and that the court could not properly conclude that the second respondent was no more than the appellant's agent. According to the appellant's written submissions the contemporaneous written documents each unambiguously identified with whom the author was dealing and set out the basis of their mutual relationship. The documents to which he drew attention were those in which the appellant advised the second respondent of the approximate sale price, the second respondent made an offer to Brian Terrey and the cheque indicating the latter's acceptance of that offer by payment of the required 20 per cent deposit. These documents alone, according to the submission, established unequivocally that the true nature of the relationship was as contended for by the appellant. In my opinion it cannot be said that a clear picture emerges solely from the documents. For instance, the appellant accepts that it gave warranties to the first respondent, that it promised delivery within 6 weeks of the payment of a deposit and that it assured the first respondent that the sorter would be suitable for stone fruit. These were all critical matters yet not a word appears about any of them in what are described by counsel as the contractual documents. Quite apart from 6 UNREPORTED JUDGMENTS those omissions the evidence demonstrates conclusively that the appellant was manufacturing this sorter specifically to meet the first respondent's requirements. This was not simply a machine taken from its catalogue. Nonetheless, the description of the machine in the documents to which the court has been referred, understood in the light of the rather basic plan drawn by Bingham, was hardly sufficient to enable the manufacturer of the machine, or the purchaser, to know the precise specifications of the sorter. In my opinion the documentation, while important, cannot stand alone. The real question is whether the first or second alternative arrangement mentioned in the appellant's letter of 1 August applied. It will be recalled that the first arrangement was the appointment of the second respondent as a reseller entitled to a commission of 15%. In the second, and alternative system, which applied in larger schemes in which the appellant serviced the sale and the installation and commissioning of the machine, the agent was to be paid a service or 'spotters' fee. In short, in the alternative system the contract was between the manufacturer and ultimate purchaser. Although difficult questions may arise as to the admissibility of particular pieces of evidence in the resolution of an issue of this nature those questions have not arisen in this case. All parties have argued the appeal upon the footing that the material to which I have referred was admissible. In these circumstances I have proceeded upon the basis that documents which were, for instance, not seen by the first respondents were available for consideration in the resolution of this issue. My conclusion is that the trial judge was correct and that the appellant has failed to make good its challenge. The reasons which lead me to that conclusion are: (a) The second respondent, who had not previously acted on behalf of the appellant, introduced the appellant to first respondents and, apart from acting as a conduit pipe thereafter and adding on its commission, it did very little, if anything, in the servicing of the sale. (b) Once Spinks had introduced gingham to Brian Terrey he took very little further part in discussion or negotiation. Terrey made known his requirements and raised his concerns directly with gingham, the manufacturer. For his part gingham gave Brian Terrey a 12 month warranty, he told Terrey that the machine was capable of sorting and sizing 28,000 pieces of fruit per hour, he told him that it would be suitable for handling the soft stoned fruit which the first respondents grew, he told him that normal service would come from the appellant's agent, presumably the second respondent, but that in difficult situations servicemen would be flown down from Queensland, he told him that the electronics would be serviced by a firm in Sydney or Parramatta which the appellant would appoint and he promised delivery within 6 weeks of the deposit being paid. Spinks was but an onlooker during almost all of this lengthy conversation. Terrey's requirements were sought by, and met by the assurances of, Bingham. At the end of the conversation all that remained was for Bingham to draw up a plan, present a quotation and for the first respondents to accept it. The existence of the agent was recognised by all parties and, as their course of dealing showed, both the appellant and first respondents intended to process further negotiation and formalisation of the contract through the agent. The agent, however, gave no warranties or assurances nor did it make any promises. In that context the later documentation is properly to be seen only as the processing to finality of the arrangement which had been discussed by Bingham and Brian Terrey. URJ GEORGE AND COURTIER PTY LTD v TERREY and ORS (Simos AJA) 7 (c) The quotation provided by the appellant to the second respondent made allowance for a discount of 5 per cent on the primary machine and a larger discount of 15 per cent on ancillary equipment. This quotation was not entirely consistent with the appointment of the second respondent as a reseller as the letter of 1 August 1986 makes clear. It was far more consistent with the appellant handling the sale, installing and commissioning the machine and paying the second respondent a service or spotters fee. (d) In a very real sense the appellant handled or serviced the sale while the second respondent, having introduced the appellant and first respondents, performed substantially an administrative role which facilitated the conclusion of the agreement. (e) When the sorter was delivered to the first respondents Bingham was present and he installed and commissioned the machine, a service which, again according to the letter of 1 August 1986, he would not have performed if the second respondent had been acting as a reseller. Although the documents are explicable in the light of the preceding discussions as administrative documents processing the sale by the appellant to the first respondents through the agency of the second respondent there are two features of the evidence which provide support contrary to the view I have expressed. The first feature is that the second respondent did not charge the suggested quote set out in the letter of 26 August 1986 but added approximately $1,000 to the figure there appearing. This is not usually the action of a mere agent but suggests that it was acting as a principal on a resale. On the other hand, there is no evidence that either the appellant or the first respondents knew, at any relevant time, that it had taken this course and without evidence of the assent of, at least the appellant, I do not think that action is sufficient to counter-balance the reasons I have expressed above. The other aspect is the quotation of the sales tax number which, given the transaction in respect of which sales tax is payable, would suggest that the agent was acting as reseller but again I do not think that a sufficient basis for rejecting the conclusion that the appellant and first respondent should be taken to have intended to have contracted one with the other in the light of the oral evidence as supplemented by the documents. The appellant also submitted that Spinks gave evidence which supported the characterisation of the second respondent as a reseller and that this reflected a correct reflection of the legal situation. I am unable to agree. In my opinion, Spinks evidence sits far more happily with the conclusion I have reached that the second respondent was, essentially, a spotter or agent and was paid as such. The appeal should be dismissed with costs; the cross-appeals should be dismissed with no order as to costs. Sheller JA I agree with Clarke JA. Simos AJA T also agree with Clarke JA and, in particular, with his Honour's view that the issue as to who was the vendor as in in the relevant transaction must be ascertained from a consideration, not only of the documents, but also of the conversations and conduct of the parties relating to the transaction. I also agree, in particular, that the 5% "agent's fee" allowed in the quotation dated 26 August 1986 from in respect of the the appellant to the second respondent, electronic weight sizer, the major item in the quotation, being less than the 15% reseller's fee referred to in the letter of 1 August 1966 from the 8 UNREPORTED JUDGMENTS appellant to the second respondent, is indicative of the fact that the appellant regarded the proposed transaction as one in which the second respondent was to act not as a reseller but as an agent for the appellant, entitled vis-a-vis the appellant to a "service or 'spotter's' fee" of 5% in respect of that item, notwithstanding that the agent's fee for the ancillary items of considerably less value was 15%. The very use of the words "agent's fee" in respect of both the major item and the ancillary items in the quotation also supports this view. The fact that the second respondent was apparently regarded as free to increase fits margin (profit) by increasing the price to the purchaser is not, in my opinion, necessarily inconsistent with this view because it is a matter for agreement between principal and agent as to whether this is permissible. Moreover, the use of the word "suggested" in the phrase "suggested quote to customer" indicates that it was in fact agreed or understood as between the appellant and the second respondent that the second respondent was to be free in that respect notwithstanding that it was an agent in the transaction. In these circumstances the undated quotation from the second respondent to the first respondent must be seen in the context of all the surrounding circumstances as a quotation from the second respondent as agent for the appellant. So far as concerns the question as to whether the letter dated 26 August 1986 from the appellant to the second respondent was received by the second respondent, I note that counsel for the appellant submitted for the purposes of the cross-appeal of the second respondent that there was evidence from which it could be inferred that the letter was received by the second respondent, and further, that that letter "evidenced the terms of the contractual relationship" between the appellant and the second respondent. In any event, as was submitted by counsel for the first respondent, that letter constituted, at the very least, an admission by the appellant as to the basis upon which the appellant intended to deal with the second respondent. To the extent to which it may be said that the quotation by the second respondent of the number of its sales tax certificate in its "purchase order" to the appellant dated 1 October 1986 is evidence which supports the conclusion that the second respondent was a reseller of the goods rather than an agent, I agree with his Honour that that fact is but one circumstance to be taken into account in conjunction with the whole of the circumstances, and in that context is insufficient to compel a conclusion that the second respondent was the vendor as principal. I would only add that the quotation of that sales tax certificate number may simply have been a mistake, more especially having regard to the fact that this was the first transaction between the appellant and the second respondent. (1) Appeal dismissed with costs. (2) Cross-appeals dismissed with no order as to costs. Counsel for the Appellant: VG Ray Solicitors for the Appellant: Malcolm Johns and Company Counsel for the First Respondent: BC Oslington QC and G Sieb Solicitors for the First Respondent: Roberts Mann Davies, Windsor Counsel for the Second Respondent: L Judge URJ GEORGE AND COURTIER PTY LTD v TERREY and ORS (Simos AJA) 9 Solicitors for the Second Respondent: John J Paine Ross and Co, Windsor