New South Wales Supreme Court CITATION : BHP v Robertson [2002] NSWSC 336 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 2231/02 HEARING DATE(S) : 16/04/02 JUDGMENT DATE : 19 April 2002 BHP Steel Limited - Plaintiff HH Robertson (Australia) Pty Limited (Administrator Appointed) - First Defendant HH Robertson (Australia) Pty Limited - Second Defendant Bruce Samuel Sperling - Third Defendant PARTIES : Peter Randal Sperling - Fourth Defendant Lynne Schibeci - Fifth Defendant Shamsher Hassanali Moti Kanji - Sixth Defendant Praful Devchand Chandaria - Seventh Defendant Kenneth John Broadfoot - Eighth Defendant Russell Hill - Ninth Defendant JUDGMENT OF : Barrett J Mr S.D. Epstein SC - Plaintiff COUNSEL : Mr J.R. Roland, Solicitor - First Defendant Mr B.A.J. Coles QC/Mr M. Cibian - Second and Sixth to Eighth Defendants Gadens - Plaintiff SOLICITORS : Blake Dawson Waldron - First Defendant Kanji & Co - Second and Sixth to Eighth Defendants CATCHWORDS : SALE OF GOODS - passing of property and risk - transfer of title by non-owners - title retention clause - whether buyer may effect sub-sale as agent of owner - whether despite title retention clause property passes to buyer Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Re Diplock [1948] 1 Ch 465 CASES CITED : Downing v Aira Pty Ltd (1996) 14 ACLC 1068 Re Hallett's Estate (1880) 13 ChD 696 Re Nevill; Ex parte White (1871) 6 Ch App 397 Puma Australia Pty Ltd v Sportsman's Australia Ltd (No 2) [1994] 2 QdR 159 DECISION : Separate question answered "no" - 1 - IN THE SUPREME COURT REVISED OF NEW SOUTH WALES EQUITY DIVISION JUSTICE BARRETT FRIDAY 19 APRIL 2002 2231/02 - BHP STEEL LIMITED v ROBERTSON (AUSTRALIA) PTY LIMITED (ADMINISTRATOR APPOINTED) & 8 ORS JUDGMENT 1 These proceedings concern ownership of certain steel products sold by the plaintiff to the first defendant which subsequently sold the whole of its assets and undertaking to the second defendant. One element of the proceedings concerns the effect and operation of retention of title provisions included in the terms and conditions of sale said by the plaintiff to be applicable to the sale by it to the first defendant. By consent, I made on 16 April 2002 an order under Part 31 of the Supreme Court Rules that the following question be separately decided before the balance of the proceedings: "Whether on the proper construction of the General Terms and Conditions of Sale a copy of which is Exhibit 'LD2' to the affidavit of Lube Dimovski sworn 12 April 2002 and, in particular, clause 1(ii) of Section B and, in the event that those Conditions of Sale were incorporated as terms of any sales between the plaintiff and the first defendant, such Conditions of Sale are capable of having the effect of the plaintiff retaining legal and beneficial property in the product sold by the plaintiff, notwithstanding a later purported sale of that product by the first defendant to a third party?" I then proceeded to hear submissions on this separate question. 2 The significance and meaning of the separate question will be clear from clause 1(ii) of Section B of the General Terms and Conditions of Sale which should be set out in full: "Furthermore: a) Neither legal nor beneficial property in the product supplied to the customer by BHP (in this term referred to as 'the product') shall pass to the customer until payment in full for all product supplied by BHP to the customer has been received by BHP. b) Risk in the product will pass at the time of delivery and the customer must insure the product against all loss or damage, however caused, and must keep the insurance current until property in the product passes to the customer. The policy must name BHP as an insured. c) The customer acknowledges that until full payment is made for the product, the customer holds the product as bailee of BHP and that a fiduciary relationship exists between the customer and BHP. d) Until payment is made for the product, the customer shall store the product separately and in such a manner that they are clearly identified as the property of BHP, and so that they can be cross-referenced to particular BHP invoices. e) If payment is not made within 14 days of final demand in writing by BHP, and without prejudice to any other remedies, the customer grants BHP a license to enter the premises where the product is located at any time and take possession of the product. The customer will be liable for all costs associated with the exercise of BHP's rights under this paragraph. f) The customer acknowledges that if it sells any of the product, it sells the product as fiduciary agent of BHP provided that such sales shall not give rise to any obligations on the part of BHP. g) The customer further acknowledges that if it sells any of the product before making full payment for them, the customer shall hold that part of the proceeds of sale that is of equal value to the amount owing to BHP in a separate account in trust for BHP. h) If the customer uses the product in manufacturing or production and sells the finished product in the ordinary course of business (which it is authorised to do unless otherwise notified in writing), the customer shall hold that part of the proceeds of the finished product relating to BHP's product in a separate account in trust for BHP. That part will be taken to be of equal value to the amount owing by the customer to BHP at the time of receipt of the proceeds. i) The amounts to be held on trust under paragraphs (g) and (h) above must be kept in a separate account and may not be mixed with any other monies, including the customer's own monies. j) The customer may not assign debts owed to it in respect of the product or finished product sold without the prior written consent of BHP." In the observations which follow, I shall adopt the nomenclature of these provisions, so that "BHP" refers to the plaintiff and "the customer" refers to the first defendant. 3 Under clause 1(ii), property in goods will continue to reside in BHP despite a purported sub-sale by the customer if two conditions are satisfied: first, property has not passed from BHP to the customer at or before the time of the sub-sale; and, second, the customer does not, as agent of BHP as undisclosed principal, transfer to the sub-buyer property retained by BHP. I shall consider these two matters in reverse order. 4 As to whether the customer becomes BHP's agent, empowered to transfer property residing in BHP, it is true that there is no statement, in terms, that the customer may sell as BHP's agent. But there are two paragraphs, (f) and (g), containing acknowledgments by the customer expressed to apply "if it sells any of the product". In the case of par (g), the full form of words is, "if it sells any of the product before making full payment for them". The last six words do not appear in par (f) but must, in my view, be implied: if the customer sells after making full payment to BHP, the customer is necessarily selling its own property since, on any view, retention of property by BHP does not continue beyond that full payment. 5 By pars (f) and (g) which, for this reason, I consider to reflect the parties' bargain in the event of sale by the customer before full payment, the customer acknowledges, first, that the sale it makes is made as the "fiduciary agent" of BHP; second, that "such sale shall not give rise to any obligations on the part of BHP"; and, third, that the part of the sale proceeds equal to the amount owing to BHP will be held by the customer in a separate account in trust for BHP. 6 On one view, being the view advanced by Mr Epstein SC on behalf BHP, pars (f) and (g) do not confer any power of the customer to sell as agent of BHP and are concerned only with spelling out the consequences of what is a conversion, a breach of bailment or a breach of contract - or perhaps all three. 7 Mr Epstein pointed out that there is nothing in the provisions to prevent the customer selling at a gross under-value or in an uncommercial transaction involving a related party, and that BHP cannot be taken to have intended that the customer would be empowered to sacrifice BHP's interests in that way. Mr Epstein also pointed to the aspect of par (f) which says that a sale by the customer will not give rise to obligations on the part of BHP. An obligation to give property is fundamental to a sale, so that denial of all obligations on the part of BHP (in which property resides) is inconsistent with the notion that the customer can pass that property to a sub-buyer. 8 I am unable to accept that this reflects the intent manifested by pars (f) and (g) or, for that matter, the terms and conditions as a whole. It seems to me quite easy – I would go so far as to say essential - to imply a power to sell, if such an implication is necessary. I do question, however, whether it is necessary since the statement by the owner to a bailee, "If you sell, you do so as my agent", seems to me necessarily to mean, "You may sell as my agent", without any need for an implied term and simply as a matter of construction of the words. 9 Mr Epstein's point that the customer as seller may sacrifice BHP's interests as owner is I think hard to make in view of the words "fiduciary agent". The reference to "fiduciary agent" seems to me to convey two messages over and above mere agency. The first is that there is an intention to adopt a legal label used to identify a situation where tracing applies. The many cases applying the principles in Re Hallett's Estate (1880) 13 ChD 696 and Re Diplock [1948] 1 Ch 465 often resort to the term "fiduciary agent" as an indicator in such a situation. Whether the adoption of the label is sufficient to achieve the objective of making the agent a fiduciary in such a way as to attract tracing rules is a question in its own right, which does not arise here. The question is discussed in Puma Australia Pty Ltd v Sportsman's Australia Ltd (No 2) [1994] 2 QdR 159. Fiduciary relationships cannot, of course, be created merely by contract and, in the absence of some indication of intention that the principal's interests must be afforded precedence, an agent as such is not necessarily a fiduciary: see Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 71-72 per Gibbs CJ. 10 This leads to the second message I consider to be conveyed by the label "fiduciary agent", namely, a message of reinforcement that the agent, in exercising the agency, is required to subordinate its own interests and must, as in the case of a fiduciary, prefer the interests of his principal. That means, in the present context, that the customer in on-selling must safeguard and promote the interests of BHP in being paid its original contract price, so that a sale which will not achieve that end, although effectively made by the agent in exercise of the agency, is made in breach of the contract between principal and agent. The point is not so much whether the customer becomes a fiduciary (that is, whether the agency carries a fiduciary characterisation), but that the contract, by use of the word "fiduciary", requires him to act as if he were a fiduciary, regardless of whether technically he is one or not. 11 As to the point that any sale does not give rise to any obligations on the part of BHP, I do not consider that to be an indication against a power for the customer to sell as agent. It is rather an indication that the agent of BHP, as seller, cannot give warranties or assurances binding on BHP. To refer to a sale, and to contemplate sale by an agent, in circumstances where no obligation to pass property can be imposed by the agent on the seller is a nonsense. The obligations precluded are obligations subsisting beyond completion of the sale. By completion of the sale, I mean the passing of property. What is precluded is some continuing exposure for BHP over and above what the customer as agent does by transferring property to the sub-buyer. 12 I should now refer to the decision of the High Court in Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588. I do so not because that case involved sub-sale of unaltered goods in relation to which there was a provision allowing sale by the customer as agent of the party equivalent to BHP, but because of the form of the clause with which the High Court did have to deal, being the clause about incorporation of the particular goods into something produced by a manufacturing process. 13 The relevant clause began with the following words: "In the event that the [Buyer] uses the goods/product in some manufacturing or construction process of its own or some third party, then the [Buyer] shall hold such part of the proceeds of such manufacturing or construction process as relates to the goods/product in trust for the [Seller]." The structure of that clause is similar to that of pars (f) and (g) in the present case. It states consequences that are to follow if the customer uses the goods in a manufacturing or construction process, just as pars (f) and (g) state consequences that are to follow if the customer sells any of the product. In each case, the consequences include consequences as to the proceeds arising from the customer's actions in relation to goods. In neither case is it explicitly said that the act giving rise to the consequences may be performed by the customer. 14 Questions about those consequences qua proceeds were the substantive issue litigated in Associated Alloys. The High Court, like the Court of Appeal and Bryson J at first instance, accepted apparently without question that the clause dealing with the proceeds of a manufacturing or construction process entailed a permission for the customer to use or incorporate the goods in that way. In other words, the specification about the treatment of the proceeds of the particular activity which would otherwise have been a conversion or breach of bailment carried with it a licence to engage in that otherwise wrongful activity. Words such as "the customer may incorporate the goods into something produced by a manufacturing process" were obviously not seen as necessary to justify the finding of permission to incorporate. 15 The same approach, as it affects a resale provision of the kind relevant here rather than a manufacturing provision, was quite clearly taken by Ashley J in Downing v Aira Pty Ltd (1996) 14 ACLC 1068. The clause there was as follows: "Property in goods shall not pass until payment in full has been effected. If the buyer re-sells the equipment or materials prior to making full payment to the company, the buyer shall hold the proceeds of sale on trust for the company." Ashley J did not appear to entertain any doubt that this simple title retention clause also dealing with proceeds in the event of re-sale carried with it a power for the buyer to effect a re-sale as agent. 16 A point of commercial reality needs to be addressed here. Goods of the nature presently in question, steel products, are obviously needed by customers for commercial purposes. They are not goods of a kind which anyone keeps either simply for the sake of having and enjoying them or to put them to some continuing use. They are different therefore from a painting or a piece of furniture or a machine. The common expectation must be that the customer will turn items such as steel products to account by re-sale or by consumption in some process, if only because that is the most obvious way in which the customer is going to generate cash to pay the outstanding price. Commercial reality leans against the idea that the customer must keep the goods idle lying in the store provided for in par (d), hoping somehow to generate cash from some other source to satisfy the price. To the extent that it may be necessary to imply the missing words of positive authority or permission to sell as agent (and I have already said that I doubt the necessity), I think these commercial circumstances cause them to be applied according to the principles in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337. 17 I turn now to the first possibility with which I began. It may well be that, despite the agency terminology, the true intent of the parties is that the customer, in on-selling, does so on its own account. That possibility is referred to in the judgments of Shepherdson and Williams JJ in the Puma case. It is based on the reality that it is the customer alone who decides if and when to sell, for how much and in what circumstances, in exactly the same way as the owner would do. In addition, the customer is at liberty to consume the goods in some manufacturing process. All this may well reflect a true intention of the parties that the customer is the owner and that, despite the title retention provision in par (a), property is not retained by BHP at all. The denial of recourse against BHP through the words in par (f) militates in favour of such a characterisation of events. These matters are canvassed in Professor Jane Swanton's article, "Romalpa Clauses: The Fundamental Flaw", (1994) 68 ALJ 404. I might also note that a power for the buyer to process goods property in which is supposedly reserved to the seller has been regarded as inconsistent with a true intention of such retention: see for example Re Nevill; Ex parte White (1871) 6 Ch App 397. 18 The separate question I must determine goes to the capacity or capability of the contract between BHP and the customer, on its proper construction, to have the effect of causing BHP to retain legal and beneficial property in the product notwithstanding a later purported sale of that product by the customer to a third party. On the view I take, the answer is that the contract, on its proper construction, does not have that capacity or capability. When the customer purports to effect a later sale to the third party, the customer either causes BHP's property to pass to the third party, the customer being BHP's agent for sale, or, in the alternative (which I consider less likely), the customer in any event already has the property in the goods and passes that property to the third party. I therefore answer the separate question "no". 19 That point having been reached, I think the best approach is that I grant to all parties liberty to apply on two days' notice to the Duty Judge in the Equity Division for directions as to progress or disposition of the proceedings. ********** Last Modified: 04/24/2002 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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