New South Wales Supreme Court CITATION : Mesh v Australian Steel [2001] NSWSC 1030 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 4056/01 HEARING DATE(S) : 12/11/01 JUDGMENT DATE : 11 December 2001 PARTIES : Mesh & Bar Pty Ltd v The Australian Steel Company (Operations) Pty Ltd JUDGMENT OF : Master Macready at 1 COUNSEL : Mr R. MacFarlane QC & Ian Pike for plaintiff Mr B.A. Coles QC for defendant SOLICITORS : Kanji & Co for plaintiff Clayton Utz for defendant CATCHWORDS : Corporations Law. Application to set aside demand under s 459G of the Corporations Act. Demand reduced due to offsetting claim. No matter of principle. DECISION : Paragraph 25 1 MASTER: This is an application to set aside a demand under s 459G of the Corporations Act. The plaintiff is a company which deals in mesh and reinforcing bar products. It purchases them from a steel supplier and makes them up for resale to builders and other contractors. For some time the plaintiff had purchased its steel from the defendant until a dispute arose between them. 2 The statutory demand claims an amount of $675,237.88 being for goods sold and delivered. 3 There is no dispute as to the amount of the debt and the only question which was raised on the present application is whether the plaintiff has an offsetting claim against the defendant. It puts forward as an offsetting claim a breach of contract by the defendant and suggests that there are damages of $736,000. This amount, of course, exceeds the amount in the statutory demand. 4 The defendant denies that there has been any breach of contract given the proper construction of the contract and in any event says that the damages, if there is found to be a triable issue on breach, would not amount to the sum claimed. It also submits that there should be conditions attached to any setting aside of the demand. 5 It is useful if I remind myself of some principles which apply. First it is clear that a claim for damages for breach of a contract will be a cross demand and thus be an offsetting claim. The level of satisfaction in respect of the establishment of the offsetting claim is expressed somewhat differently from whether there is a genuine dispute. In Collier Nominees Pty Ltd v Consolidated Constructions Pty Ltd Santow J 3 July 1998 his honour said the following:- The notion of "offsetting amount", in requiring genuineness, is to be understood not as requiring that the offsetting amount can be only established if in turn there is no genuine dispute about it. Rather, it is another related way in which the original claim the subject of the statutory demand becomes the subject of genuine dispute. Thus the offsetting amount ceases to be genuine only if it fails to rise to the level of a plausible contention requiring further investigation, or perhaps more aptly in the case of an offsetting claim — if it fails to establish a triable issue; see, for example, R E Morris Catering (Aust) Pty Ltd (supra), Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (supra) and Federico's Restaurant Pty Ltd v Warwick Entertainment Centre Pty Ltd (1995) 18 ACSR 702. Clearly an offsetting amount based merely on a vexatious or frivolous claim would not suffice, nor one based on mere assertion." 6 The reference to the claim not being one based upon mere assertion is picked up in a number of other cases. See for instance, Brankson v Colonial First State Property Ltd Master Sanderson unreported 24 May 2001 and Edge Technology Pty Ltd v Lite-On Technology Corporation (2000) 18 ACLC 576. Breach of Contract Claim 7 The plaintiff commenced its operations in October 1998 and it purchased all its requirements of welded mesh and reinforcing bar from the defendant. Shortly prior to June 2000 there was a conversation between Mr Patel of the plaintiff and Mr Hicks of the defendant. In that conversation they discussed the ability of the defendant to supply the plaintiff and then moved on to discuss the possibility that the plaintiff might purchase from someone else and the disruption that that would cause the defendant. The conversation concluded with Mr Hicks asking whether the plaintiff would agree to buy all their requirements of reinforcing products from the defendant for one year to which the response was, "Yes, if you give me better prices". Mr Hicks undertook to do that and the parties then entered into arrangements which are set out, apart from some irrelevant amendments, in a letter of 22 June 2000. That letter was signed by both parties and commenced with these words: "We wish to confirm our revised agreement for supply of fabric and deformed bar (in both stock and process) for the period 1 June 2000 to 30 June 2001." 8 The letter then went on to deal with rates for different products and included that freight had to be added to those prices but allowed a "freight rebate". Subsequent correspondence referred to this as the supply agreement. On the back of the letter of 22 June were standard conditions and clauses 3.1 and 3.2 of those conditions were in the following terms:- "3. Orders 3.1 Subject to sub-clause 3.2 a contract will be deemed to have been created upon receipt by Supplier of an oral or written order from Purchaser for supply of goods and acceptance of that order by Supplier either by: (a) written notice of acceptance; or (b) delivery of goods to Purchaser. 3.2 Supplier may in its absolute discretion refuse to supply goods where - (a) goods are unavailable for any reason whatsoever; (b) an order has not been received by Supplier; (c) credit limits cannot be agreed upon; (d) agreed credit limits have been exceeded; or (e) where Supplier has not agreed to extend credit to Purchaser, payment for the goods has not been received by Supplier." 9 The defendant's submissions on the construction of the contract were to the effect that there was no contract for sale of goods until such time as there was an order and an acceptance of that order by the supplier. In its submission the letter of 22 June was one which only fixed the prices that would apply to orders if they were given and accepted. In particular the defendant pointed out that the arrangement which the plaintiff asserted was completely one-sided and contained no apparent obligation on the plaintiff's part to buy any particular quantity of steel product or any steel product either at all or at any particular time. In these circumstances it was said that the court would be slow to find an agreement in the terms suggested by the plaintiff. 10 The plaintiff's answer to this is that the agreement was both oral and in writing. The oral part was the commitment by the plaintiff to purchase all of its requirements from the defendant. In the context of several years of increased trading this was a commercially real arrangement. The plaintiff relied upon the terms of clause 3.1 and 3.2 as assisting its case that the agreement was for the supply of product rather than merely as to the prices at which the parties would contract in the future. The very existence of clause 3.2 was said to point to the fact that the acceptance referred to in clause 3.1 is not something which is at the pleasure of the defendant. If it were to be at the pleasure of the defendant then there would be no need for clause 3.2. 11 The defendant's submissions in reply referred to matters which, if one were dealing with the final hearing, would need examination. However, in my view there certainly is a triable issue as to the existence of the contract contended for by the plaintiff. Thus there is a triable issue as to its breach. The claim for damages. 12 From 19 December 2000 the defendant refused to meet orders from the plaintiff. The parties are not at issue on this fact. This continued until 5 January 2001 when supplies were restored. Thereafter from 16 March 2001 the defendant refused to accept any orders for purchases. On 20 and 23 March 2001 the plaintiff lodged orders with the defendant but these were rejected. The plaintiff quantified his losses in a number of ways. In the relevant periods it had to go out and purchase supplies from other suppliers at what it says were higher prices. It quantified its losses in this regard in accordance with the usual Sale of Goods Act principles. In addition it claimed a number of consequential losses under the following headings:- 1. Additional staff required in its cut and bend facility to meet customers' requirements. 2. Additional senior management time. 3. Losses as a result of a 2% decline in sales of mesh. 4. Rent for a factory next door which had to be set up so that a higher level of stock could be maintained. 5. Costs associated with the installation of a new mesh machine. 6. Costs incurred through substitution of products as a result of short notice of refusal of supply. 7. Costs of increased credit term facilities. 8. Loss of profits because of knowledge in the market place that supply had been stopped to the plaintiff. 13 I turn to the losses in respect of Mesh & Bar based upon the purchase from other suppliers. There were submissions by the defendant that the various documents which have been tendered did not justify the conclusions reached which were set out in the letter of 18 June 2001 from the plaintiff's company to the defendant which dealt with the losses incurred. As a result there has been further evidence from Mr Patel which is not objected to by the plaintiff in which a number of missing invoices are supplied as a result of that material. 14 Apparently the plaintiff claims an additional cost amounting to $129,106.88. There is a dispute as to the inclusion of freight in these calculations. It would seem from paragraph 9 of the letter of 22 June 2000 it was appropriate to allow a rebate of $23 per tonne which has been taken into account in the calculations. 15 So far as the bar losses are concerned, since the matter was concluded, there has been further consideration of that claim which is now put at $155,141.97. This figure seems to be justified from the documents. Given the nature of the evidence as to the costs I am satisfied that this figure certainly raises a triable issue on this aspect. 1. Additional staff required in its cut and bend facility to meet customers' requirements. 16 The evidence as to this claim which is in paragraph 7 (3)(a) of the letter of 18 June 2001 relates to the employment of additional workers to adapt delivery systems and to put on a third shift from January 2001. This is said to be due to the need to reorganise the facility in order to supply and meet customers requirements. Given the fact that there were further people employed I think this is at least a triable issue in the amount of $49,800. 2. Additional senior management time. 17 This claim is that there was additional management time required due to supply uncertainties. There does not seem to be any suggestion of additional people being put on or extra wages paid. It merely seems to be a reorganisation of staff priorities and, accordingly, it seems to me that this is a somewhat speculative claim. For the purpose of determining the quantum of the offsetting claim, I would not allow it. 3. Losses as a result of a 2% decline in sales of mesh. 18 This is predicated upon there being a level of mesh sales which were less than expected, namely, 2% negative growth and the failure to achieve a 13% growth which was achieved with bar sales. The logic of this claim was criticised but there is an arguable basis for it. There was also criticism of the margin rate claimed which was inconsistent with some other evidence advanced. Using a margin of $152 per tonne I would propose to allow an amount for this of $26,480. 4. Rent for a factory next door which had to be set up so that a higher level of stock could be maintained. 19 The evidence is that this factory was necessary in order to able to store material from any other source when it was obtained. It seems to be a claim in respect of something which was precipitated by the change of supply agreements. It is at least arguable and, accordingly, I would allow $42,000 for this rent. 5. Costs associated with the installation of a new mesh machine. 20 The evidence as to the causal connection for this item seems to be non- existent. In the circumstances I would not allow the claim. 6. Costs incurred through substitution of products as a result of short notice of refusal of supply. 21 These costs appear to be ones incurred because of the short notice of cessation of supply. They involve the use of bigger diameter stock to fulfil orders and will be allowed at $8,500. 7. Costs of increased credit term facilities. 22 After the hearing there was further evidence from Mr Patel which quantified these costs based upon the difference between the credit terms allowed by the defendant and those allowed by its suppliers. The amount claimed is $16,666 which appears reasonable. 8. Loss of profits because of knowledge in the market place that supply had been stopped to the plaintiff. 23 This is a claim for $184,800 for what are alleged to be lost profits as a result of it not being able to competitively price products. Evidence was given of some jobs which were not able to be priced because of the higher price which had to be paid. Quantification of the amount is based on Mr Patel's estimates of what would be an increase in sales for the year 2001. Such evidence seems to be no more than speculation on his part. Although the figure of gross profit is now substantiated by accounts, at least on a prima facie basis, the estimate of the amount of the loss was so vague that it cannot be relied upon for these purposes. In addition there was criticism that the amount was a double counting of what was claimed under paragraph 3 above. In my view it is and I would not allow this amount. 24 The result is that the offsetting claim is quantified in the sum of $427,694.85. 25 The defendant suggests that circumstances had arisen for there to be a conditional order by the court under s 459m of the Act. He suggested that the conditions would be that the plaintiff pay into court the amount of the demand and undertake to commence proceedings and prosecute them with due diligence within 14 days. Alternatively it was suggested that the demand be reduced to approximately $450,000. Given the level of the estimates provided and the views which I formed about whether there are triable issues in respect of these various amounts of damages under the cross claim I think the appropriate order is that the statutory demand be varied by reducing the amount from $675,237.88 down to $247,543.03 effective from 21 days after service of the demand and I so order. The plaintiff has only been partially successful and, subject to submissions, I order the defendant to pay 75% of the plaintiff's costs of the proceedings. ************** Last Modified: 12/12/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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