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Federal Court of Australia |
Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632, considered
DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423, considered
HongKong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, applied
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549, applied
Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] 1 QB 44, applied
MICHAEL JOHN BATES T/AS RIOT WETSUITS v. OMAREEF PTY LIMITED T/AS QUIKSILVER WETSUITS & ORS
NG 230 OF 1994
EMMETT J
SYDNEY
16 OCTOBER
|
IN THE FEDERAL COURT OF AUSTRALIA | |
| NEW SOUTH WALES DISTRICT REGISTRY | NG 230 of 1994 |
|
BETWEEN: | MICHAEL JOHN BATES t/as riot wetsuits
Applicant |
|
AND: | OMAREEF PTY LIMITED (acn 004 010 806)
t/as quiksilver wetsuits Respondent |
|
quiksilver garments pty LIMITED (acn 005 575 548) second Respondent | |
|
john eric howitt third Respondent | |
|
BRUCE ERNEST RAYMOND Fourth Respondent | |
|
THOMAS VICTOR CARROLL Fifth Respondent | |
|
RODERICK ANTHONY BROOKS Sixth Respondent | |
|
ALISTAIR (ALSO KNOWN AS ZOC) ZORICA Seventh Respondent | |
|
BRUCE ANDREW EDWARDS Eighth Respondent | |
|
JUDGE: | EMMETT J |
| DATE: | 16 October 1997 |
| PLACE: | SYDNEY |
HIS HONOUR:
In these proceedings, the applicant ("Mr Bates") makes claims both under the Trade Practices Act 1974 (Cth) and under the general law. The principal claim, as appears from the pleadings and from the conduct of the trial, is for damages for repudiation of contract against the first respondent, Omareef Pty Limited ("Omareef"). Other claims are made in the statement of claim against all other respondents indiscriminately. However, the claim under the Trade Practices Act is expressed in the application to be for breach by the first and second respondents of sections 51A and 52 of the Trade Practices Act. The second respondent is Quiksilver Garments Pty Limited ("Quiksilver").
THE CONDUCT OF THE TRIAL
When the trial began, Mr Bates was not represented. After all evidence in chief, cross-examination and re-examination of the witnesses called by Mr Bates had been completed, but before his case was formally closed, Mr Malcolm Duncan of counsel announced his appearance for Mr Bates. In order to afford Mr Duncan the opportunity of familiarising himself with the evidence to that stage, I adjourned the hearing of the proceedings for six days. Upon their resumption, Mr Duncan continued to appear for Mr Bates and did so until the completion of the hearing.
Because of the circumstances which I have just described, one could not be confident that Mr Bates' case was conducted in the initial stages as it might have been had Mr Bates been receiving the advice of experienced counsel. In the course of his case in chief, I raised matters which appeared to me to be obvious and which I would have expected competent counsel to deal with. On a number of occasions, Mr Bates effectively took up suggestions which I made. However, there were instances where he appears to have ignored the matters which I raised. That may have some bearing on the approach which might be taken to apparent evidentiary deficiencies in his case.
THE PARTIES
From about 1984, Mr Bates had conducted a small manufacturing business in Wollongong, trading under the name "Riot". At the end of 1990 his efforts were concentrated principally on the production of neoprene medical supports for supply to a company called Kendall Australia Pty Ltd ("Kendall") under a contract made in 1987. The business also produced wetsuits and other types of surfing wear including lycra garments which were sold solely from a retail shop conducted by Mr Bates adjacent to his home situated in Mt Ousley Road, Wollongong.
In the years leading up to December 1990, Mr Bates derived a small profit each year. He readily conceded that his business was not efficiently run during that time. In the period 1987 to December 1990 the Riot business was in a state of flux and Mr Bates found it difficult to plan and budget. He agreed that he did not take a lot of notice of his bank manager or accountant.
By mid 1990 Kendall was apparently slow in paying, which inevitably impacted on Mr Bates' cash flow from his business. The consequence for Mr Bates was that by the end of 1990 his financial situation was becoming difficult. For some time prior to then, he had been "re-investing" in his business the tax which he had deducted from employees' wages and he had ceased paying group tax to the Taxation Department. Mr Bates has not lodged a tax return for any year since, at latest, 1989. He said that he was "flippant" in his attitude to the Taxation Department, that he did not take his responsibilities seriously and that he did not make payment of tax a high priority. Mr Bates knew his failure to pay group tax was wrong but said that he believed the ends justified the means in what he perceived as desperate circumstances.
Notwithstanding his financial circumstances, which in his mind apparently justified his attitude to his revenue responsibilities, Mr Bates believed at the end of 1990 that his business was poised to expand and was in such good order that 1991 was going to be a big and very successful year. Indeed, in November 1990 he purchased more land in Mt Ousley Road and had plans to construct a factory on the site, plans which appear extravagant in his circumstances. He conceded that he was a bit of a dreamer (an observation in which his wife, Ms Kennedy, concurred) and that he was prone to developing grandiose ideas. With expansion of his business in mind, Mr Bates commenced looking for larger factory premises in about October 1990 and determined not to take up the option which he held on his existing rented premises.
In October 1990, shortly after it was incorporated for that purpose, Omareef was granted a licence by Quiksilver to use trade marks owned by Quiksilver in connection with the manufacture and sale of wetsuits in Australia and New Zealand. Omareef's first wetsuits were manufactured for it by Lala-Lerace in Fiji. By November 1990 Omareef was experiencing problems with the quality of the Fijian product and was also experiencing difficulties in obtaining supplies of wetsuits from Fiji in sufficient numbers to meet its requirements.
The third, fourth and fifth respondents (respectively "Mr Howitt", "Mr Raymond" and "Mr Carroll") were at the relevant times the only directors and shareholders of Omareef. The day to day running of Omareef's business was left in the hands of, Mr Howitt, its managing director. Mr Raymond was also a director and the chief executive officer of Quiksilver. The sixth respondent ("Mr Brooks") was a consultant of Quiksilver. The seventh and eighth respondents (respectively "Mr Zorica" and "Mr Edwards") were employees of Omareef.
THE DISPUTE
It was common ground that an oral agreement ("the contract") was entered into in January 1991 between Mr Bates and Omareef whereby Mr Bates would manufacture and supply to Omareef, on a "cut, make and trim" or "CMT" basis, rubber wetsuits of varying sizes and styles for which Omareef would pay to Mr Bates a price of $25 per "steamer" wetsuit and other prices for other styles.
It was also common ground that a CMT basis required that Omareef supply at its own cost all of the materials and components necessary for the manufacture of the wetsuits. Mr Bates was to manufacture and Omareef was to take a minimum of 100 steamer wetsuits per day or the equivalent in monetary value in other styles. There was a dispute as to whether that number was varied but, in the events which occurred, that dispute does not have any great significance.
It is generally common ground that there was a term to the effect that Mr Bates would cease manufacturing his own brand name "Riot" wetsuits and would proceed to close down his retail shop. However, there was some dispute as to the timing of the proposed cessation and closure.
Omareef terminated the contract without notice on 9 May 1991. Mr Bates contended that that was a repudiation of the contract which he accepted and in respect of which he claims damages. Mr Bates also claimed damages in respect of additional costs said to have been incurred by reason of delay on the part of Omareef in supplying the materials and components necessary for the manufacture of the wetsuits.
Omareef, on the other hand, contended that it terminated the contract on 9 May 1991 by reason of conduct on the part of Mr Bates which constituted repudiation of the contract by him. It was alleged that by 9 May 1991, Mr Bates had evinced an intention no longer to be bound by the contract in that he had:
(a) failed to maintain production at the rate of 100 wetsuits per day;
(b) attempted to interfere with the contractual relations between Omareef and Quiksilver and to secure for himself the licence which Quiksilver had granted to Omareef,
(c) continued to manufacture his own brand of wetsuits and had not closed his shop.
The substantial dispute concerning the terms of the contract was as to the period during which it was to remain in force. Mr Bates contended that the contract would have an initial minimum period of three and a half years which would be further extended and continued upon satisfactory performance by Mr Bates throughout the period during which Omareef owned, or used or operated, the trade mark or name of "Quiksilver".
Omareef, on the other hand, contended that the contract would run from January 1991 to June 1991 at which time performance of the contract would be reviewed and a new contract negotiated if Omareef was satisfied with the performance of the contract to that time. In the course of the hearing, it emerged that Omareef's contention was that the contract was for Mr Bates to manufacture Omareef's requirements of wetsuits for the winter season which it was expected would require manufacture at the rate of 100 suits per day from January to June.
There was also a dispute as to precisely when the contract was made. There were significant differences between witnesses called by Mr Bates on the one hand and witnesses called by Omareef on the other as to the time at which significant discussions took place relating to the formation of the contract. Omareef contended that the contract was made no later than 10 January 1991. Mr Bates, on the other hand, originally contended that the contract was made on 22 January 1991. He subsequently asserted that the contract was made no earlier that 19 January 1991.
The date on which the contract was entered into was not, of itself, of significance. The significance of that dispute was its bearing on the reliability of witnesses in relation to critical questions as to the period during which the contract was to be in force. It will be desirable, therefore, to deal in some detail with evidence concerning the succession of communications between Mr Bates and the representatives of Omareef which led to the making of the contract.
It was common ground that Mr Bates did not manage to produce wetsuits at the rate of 100 per day during the first weeks of the operation of the contract. Mr Bates asserted that that was the result of shortages in the supply by Omareef of components and raw materials and claimed damages for alleged loss of profits. Omareef, on the other hand, said that the shortfall was the consequence of breach of the contract by Mr Bates and claimed damages from Mr Bates in a cross-claim.
In addition, Mr Bates made a number of non contractual claims said to arise out of the relationship between Omareef and himself. He asserted that Omareef and Quiksilver engaged in conduct which contravened section 52 of the Trade Practices Act. He also made claims based on alleged unconscionable conduct, estoppel, conspiracy to injure and wrongfully inducing breach of contract. While all of those claims were maintained throughout the hearing, the only claim which appears to have had any real substance was that based on the alleged repudiation of the contract.
I have formed the view that all of the non contractual claims and the claims arising out of the shortfall in production should fail. I shall deal with each of those claims first and then deal with the claim arising from the termination of the contract.
After amendments made during the course of the hearing, the claim under the Trade Practices Act was that Omareef and Quiksilver between about 22 January 1991 and 9 May 1991 represented to Mr Bates that:
the respondents would continue to order from Bates an increasing number of wetsuits commencing with the minimum of one hundred (100) per day from early February 1991 and more from then on throughout the period of Contract 1 (as varied) and any extension of the term of Contract 1 (as varied)...
the respondents would continue to supply materials to Bates in order for him to continue to manufacture and supply to the respondents at the rate of one hundred (100) to one hundred and fifty (150) Steamer wetsuits per day.
It was said that in reliance upon those representations and induced thereby Mr Bates:
(i) proceeding to engage and continued to engage and train additional staff;
(ii) acquired, installed and brought into operation new machinery;
(iii) progressively ceased to manufacture and sell his brand of wetsuits - "Riot" wetsuits;
(iv) proceeded to cancel existing long term contracts for the manufacture and supply of "Riot" wetsuit products and in particular to cancel a long term contract for the manufacture and supply of neoprene medical supports for Kendall;
(v) continued to wind down the manufacture and supply of all and any other products at his factory other than the respondents' products;
(vi) proceeded with the closing down of his retail outlet;
(vii) commenced to direct and order staff to work additional shifts in order to meet the respondents' orders and demands for wetsuits;
(viii) continued in his attempts to meet the respondents' requirements for wetsuits in a timely and efficient manner, notwithstanding the failure by the respondents to perform their obligations under the contract.
It was said that the representations were made in contravention of the Trade Practices Act and that Mr Bates suffered loss and damage as a consequence of the contravention.
It is clear that the claims must fail against the individual respondents. Indeed, while the statement of claim contains an assertion that the representations were made by the non-corporate respondents on behalf of themselves as well as on behalf of Omareef and Quiksilver, there is no claim made in the application against the individual respondents.
The claim under the Trade Practices Act is peculiar in that it appears to constitute no more than an assertion that representations were made by the respondents that they would all perform Omareef's obligations under the contract. However, notwithstanding that that is how the pleading reads, I did not understand the matter to be put that way in submissions. Rather, it was put that Omareef made the representations.
Further, the evidence does not support a conclusion that representations to the effect alleged were made by the respondents. In so far as representations were made by individuals, it is clear that they were acting in their respective capacities as officers of Omareef and that, if representations were made, they were made by Omareef. That is how I understood counsel for Mr Bates to put the case in so far as it was based on the Trade Practices Act.
There is no doubt that Mr Bates believed that a contract had been made with Omareef. There was no evidence from Mr Bates that he acted in any way in consequence of or in reliance upon the alleged representations differently from the way in which he would have acted if they had not been made. In other words, while Mr Bates may well have engaged in the conduct alleged in paragraphs (i) and (viii) above, he did so, not in reliance upon any representation but because he believed, as was the fact, that Omareef was bound, as a matter of contract, to continue to order wetsuits from him and to continue to supply materials to him in order for him to continue to manufacture and supply wetsuits.
UNCONSCIONABLE CONDUCT
The statement of claim also includes a claim that the conduct of the respondents was unconscionable as a consequence of which Mr Bates suffered loss and damage. It is fair to say that this claim was not strongly pressed. I do not consider that there was any juridical basis for the claim, quite apart from the absence of a factual basis for the claim.
The thrust of the claim was as follows:
1. At the request of the respondents, Mr Bates progressively ceased production of his own product line of goods and substantially wound down his retail outlet business and subsequently became wholly dependent upon the respondents for his day to day operations relating to the manufacture of wetsuit products.
2. The respondents refused to perform fully the contract by wrongfully:
(a) determining not to continue to supply requisite materials;
(b) adopting a position that it would take over from Mr Bates the manufacturing process once developed and perfected by Mr Bates;
(c) adopting internal policy procedures which were contrary to the terms and conditions of the contract;
(d) adopting market and manufacturing criteria which were contrary to the basis upon which the contract was agreed;
(e) adopting the course of conduct to sabotage Mr Bates' ability to comply with his obligations under the contract;
(f) amalgamating both the manufacturing and marketing procedures into one procedure under the auspices of the respondents' label;
(g) regarding Mr Bates to be in fault in terms and conditions of the contract in not manufacturing 100 or more wetsuits per day.
3. Mr Bates did not have any other substantial source of materials from which to manufacture.
4. Mr Bates continued to perform his obligations and became dependent and reliant upon the respondents for the then and future viability of his business.
5. The respondents knew or ought to have known that as a consequence of imposing the conditions in respect of the closing or substantial closing down of the prior manufacturing, production and distribution of "Riot" wetsuits, Mr Bates would be deprived of his alternate sources of work from which he had derived a source of profit and income for a period of 11 years.
6. As a consequence, Mr Bates was deprived of any independence or any funds to pay his debts and suffered loss and damage.
The factual basis of the claim appears to be that Mr Bates progressively ceased production of his own product line of goods and became totally dependant on the respondents. That is not borne out by the evidence. First, as indicated elsewhere in these reasons, while there may be some argument as to the extent of continued production, it is clear that Mr Bates did not cease production altogether. Indeed, Omareef relies on the failure to do so as a repudiation of the contract by Mr Bates. Further, while Mr Bates terminated his arrangements with Kendall to be an exclusive manufacturer of their products, he did so, not in order that he might devote his sole attention to the contract with Omareef, but with the hope of entering into arrangements with competitors of Kendall. In the event those hopes were dashed.
In addition, the significant complaint against the respondents under this head is that they failed to perform the contract according to its terms. That of course is the question which arises in relation to the claims for damages for breach of contract. If Omareef acted in breach of contract, the ordinary consequences would flow. If there were no breach of contract, there would be no factual basis at all for the claim.
I do not consider that the factual assertions made in the statement of claim are made out. Even if they were, I am not satisfied that they disclose a cause of action. The written submissions on behalf of Mr Bates stated simply that in terminating the contract in the way they did, the actions of the respondents were unconscionable. In oral submissions the matter was not taken much further. Counsel said that if the facts did not support a breach of contract then I could not find that "it was unconscionable". Further, counsel also said that if I did not make a finding under the Trade Practices Act the unconscionable conduct claim could not be pressed for anything else. In the circumstances, the claim based on unconscionable conduct must fail.
ESTOPPEL
Next, there was a claim said to be based on estoppel. The contention may be summarised briefly as follows:
1. The respondents allowed Mr Bates to proceed upon the assumption and belief that the representations referred to above were true and correct and would be acted upon and met by the respondents in their entirety.
2. In reliance upon those assumptions Mr Bates acted to his detriment in that he proceeded to do things in the performance of his obligations under the contract.
3. In the circumstances, it was unconscionable for the respondents to act contrary to those representations.
4. The respondents are estopped from denying that they agreed to the terms of the contract as varied.
Such a case appears to be based on an expectation that there would be a denial of any contract between Omareef and Mr Bates. I do not consider that a case based on such an estoppel can go any further than the case in contract for the reasons which I have outlined briefly above in relation to the claim based on the Trade Practices Act. That is to say, if I found that statements were made as asserted by Mr Bates, I would find the contract as contended for by him. In that case, he would not need to rely on the estoppel pleaded. If I found that the statements were not made, then there would be no factual basis for the estoppel in any event. Counsel for Mr Bates conceded, as I understand the position, that the estoppel case does not go beyond the Trade Practices Act.
CONSPIRACY
There was also a claim of conspiracy to injure Mr Bates in the conduct of his business. The precise nature of the claim which was finally pressed is somewhat doubtful. The claim was pleaded as follows:
1. From about 17 December 1990 to May 1991 and to date the respondents wrongfully and maliciously conspired and combined to defraud and to injure Mr Bates in the carrying on of his business, administration, financial, manufacturing and production affairs.
2. In pursuance and in furtherance of the conspiracy, the respondents engaged in certain overt acts, as follows:
(a) The respondents wrongfully represented to Mr Bates' employees that they were duly authorised by Mr Bates to obtain detailed knowledge of technical and confidential information.
(b) The respondents wrongfully obtained such knowledge and know how.
(c) The respondents wrongfully entered upon and trespassed upon Mr Bates' business premises with the intention of interrupting and preventing his employees from continuing to operate the business.
3. The respondents engaged in that conduct with the intent and for the purposes of disrupting interfering with and preventing Mr Bates from carrying on or attempting to carry on his business and in furtherance of the conspiracy.
4. In further pursuance and furtherance of the conspiracy:
(a) The respondents caused Mr Bates to incur substantial costs in carrying out research and development for the respondents without any reward.
(b) The respondents caused Mr Bates to incur substantial costs in carrying out his obligations under the contract in the knowledge that the turnaround time for each manufactured wetsuit was forty five minutes but by delaying supply of the materials so that that rate could not be met by Mr Bates.
(c) The respondents caused Mr Bates to incur substantial costs in relocating, upgrading machinery and expanding both his staff and scope of operations.
Counsel for Mr Bates, in the course of address, appeared to rely upon a different conspiracy which was not pleaded. I declined to give Mr Bates leave, at that late stage, to rely on such a conspiracy. In the circumstances, the pleaded conspiracy claim was not pressed. In any event, I do not consider that there was any factual basis for it. Accordingly, it must fail.
PROCURING BREACH OF CONTRACT
There was also an allegation that, in the circumstances alleged elsewhere in the statement of claim, the respondents other than Omareef intentionally induced and or procured a breach of the contract or hindered, interfered or prevented Omareef and Mr Bates from further performing the contract.
The most that was said by counsel for Mr Bates in support of this contention was that the individual respondents, in so far as they were responsible as agents of either Omareef or Quiksilver, for conduct which was relied upon as constituting a breach of contract by Omareef, induced the breach of contract on the part of Omareef. I consider that the claim is misconceived. It was not suggested that Quiksilver authorised any of its officers to act in a way which was unlawful and which bought about the breach of contract. The conduct by those respondents who were officers of Omareef was engaged in by them in their capacity as such officers. That of itself cannot constitute inducing a breach of the contract. The claim was not seriously pressed and it must fail.
As I have said Mr Bates made a claim for damages in respect of alleged loss of income resulting from shortfalls in production occasioned by shortages of supply. There was also a cross-claim by Omareef for loss of profits in respect of sales lost by reason of the shortfalls in production.
Evidence was adduced on behalf of Omareef to demonstrate the levels of production achieved by Mr Bates during the period when the contract was on foot. While there was some initial disputation as to the date by which manufacture ought to have been commenced by Mr Bates, Omareef accepted that, because of the unavailability of some components, Mr Bates could not have commenced production at the rate of 100 per day before 12 February 1991.
In the first few weeks of production from that time, Mr Bates did not achieve production at the rate of 100 per day. The evidence indicates that by Good Friday, 29 March 1991, after 34 days' production, there was a shortfall of approximately 1300 wetsuits. However, from Easter until the termination of the contract, which involved about 27 working days, the shortfall was reduced to approximately 900. Thus, in that period, production significantly in excess of 100 wetsuits per day was achieved. Whether or not Omareef might have been entitled to take steps because of the shortfall in production prior to Easter it did not do so. By the time of termination, Mr Bates was clearly complying with the requirement to produce at least 100 wetsuits per day.
A substantial part of the evidence was taken up with the reasons why the production levels were not achieved in the early stages. Mr Bates alleged in the statement of claim that there were breaches by Omareef of the term of the contract requiring Omareef to provide Mr Bates with all necessary materials and component parts to enable him to cut out, print, sew together and complete the wetsuits. While those allegations appeared to play a large part in Mr Bates' case, the evidence relating to them was not totally satisfactory. After material contained in affidavits filed on behalf of Mr Bates was rejected as not being in a satisfactory form, oral evidence was given by Mr Bates and a number of his former employees concerning delays in the delivery of components.
From 21 March 1991, Ms Goldman had kept or supervised the keeping of a record of materials that were requested of Omareef and when the materials were supplied. No record was kept prior to that date and, accordingly, the record does not assist to any significant degree in determining the reasons for the shortfall in production prior to Easter. Another document, bearing the date 8 April 1991, contained Ms Goldman's estimate of components which were required to maintain production to the end of April. Once again, the document does not throw any significant light on the reasons for shortfalls in production before Easter.
Neither document actually records any shortfall in supplies. The first document indicates only that requests were made and subsequently complied with, usually within a matter of days. The document does not indicate that supplies had actually run out. The second document is no more than an estimate of requirements for the future, again without indicating that supplies had run out.
Mr Howitt, who was charged with responsibility of ensuring that supplies were available, acknowledged that there were shortfalls of some components. He accepted that on one occasion Mr Bates ran out of a size of zips and that there was an occasion where there was a problem with ink when the supplier said that they were out of the ink in question. While Mr Howitt also acknowledged that Mr Bates continually asked for more rubber, he did not concede that Mr Bates ever actually ran out of rubber.
There was evidence of a delay in the supply of kneepads for steamers. Indeed, it was the delay in the supply of knee pads which led to acceptance by Omareef that no complaint could be made about failure to commence production before 12 February 1991. However, it was not accepted that lack of supplies of kneepads was a cause for delays in production after that time. The only real evidence, therefore, of delays in supply of materials and components was the oral evidence given by Mr Bates and his employees.
Several of Mr Bates' former employees gave evidence that there were regularly shortages of kneepads. Thus, Ms Sobin said that there were shortages once a week. She said that a couple of weeks after they started there was a shortage of kneepads. Mr O'Donnell also gave evidence that there were numerous occasions when there was a shortage of kneepads. Once again, however, there was no evidence to link such shortages with a specific delay in production.
Ms Rosemary Goldman was employed by Mr Bates as the factory manager. Ms Goldman gave evidence that she regularly asked Mr Zorica for adhesive for gluing kneepads to the suits. Ms Cotter, another employee, also said that on a number of occasions the factory floor actually ran out of glue. She could not be specific as to when those occasions were.
Mr Bates said that there were shortages of ink at the commencement of production. Mr Bates said that he had a recollection that there was no white ink on 15 February 1991. He said that while they never stopped manufacturing because of shortages of ink, efficient manufacturing was affected by absence and shortage of ink. He was unable recall any instance where production was delayed by reason of the shortage of ink or where the production would have been greater had there been more ink.
Ms Cotter, on the other hand, said that there was a time when production had to stop because there were no printed garments ready for machining because of the absence of ink. She said that machining stopped for a week, maybe a week or two weeks after the first batch had been delivered. She could not remember when that was but said that it might have been April or May. I do not accept her evidence of a delay of a week or more as reliable. A number of other witnesses also gave evidence concerning the specific shortage of ink during February 1991 but none suggested that the shortages contributed to any delay in production.
Mr Bates also gave evidence that there was a shortage of rubber at the end of February which interfered with production although he said there was no other time where a shortage of rubber actually interfered with production. Ms Cotter confirmed that rubber started running out at the end of February and there was a time when work had to stop because no rubber was available. Ms Cotter's recollection as to the time of that occasion was very hazy in that she said it might have been March or April. She also said that it was probably a matter of days when there was no rubber. In cross-examination she could not remember dates with any specificity.
Ms Sobin also said than in the period from the end of February to the end of March the factory ran out of 3mm rubber which was necessary for the making of winter wetsuits. Her reason for saying so, however, was because she was told to go on to making summer wetsuits which did not require 3mm rubber. Her evidence, therefore is somewhat equivocal.
One difficulty for Mr Bates in contending that the shortages of supply led to shortfalls is that Mr Bates accepted that he utilised his own stocks of components and materials to make up for shortages of supply. He subsequently reimbursed himself from stocks supplied by Omareef but in the meantime he was able to avoid many delays which might otherwise have occurred. All of these considerations lead me to conclude that I am not satisfied that any particular shortage in the supply of components or materials resulted in any specific shortfall in production. I am unable, on the evidence before me, to conclude that any particular shortfall in production was the result of any particular shortage of supply. Accordingly, I am not satisfied, on the balance of probabilities, that the shortages in supply caused any quantifiable loss to Mr Bates. It follows that Mr Bates' claim for lost profits while the contract was on foot must fail.
On the other hand, the evidence in support of Omareef's cross-claim was also unconvincing in the sense that there was no documentary record of sales which had been lost. Nor was there any evidence of a specific order which could not be fulfilled at any specific time by reason of the ultimate shortfall. There was simply an assertion, in unspecific terms, that orders which had been placed but which could not been fulfilled by reason of the shortfall in production had been lost to Omareef.
Mr Howitt said there were orders for the 1991 winter season which Omareef could not fill and which were lost. He did not have any specific recollection of particular orders that were lost. The most that he was able to say was that he had a recollection that the percentage of the orders that were not filled was in excess of 30 per cent. Mr Zorica said that in the period from mid February to the beginning of May 1991 there were more orders for wetsuits than Mr Bates was producing but he was unable to recall how many more orders there were than wetsuits were produced.
Mr Howitt said that records of orders which were not fulfilled were not retained after the end of the season. However, neither he nor Mr Zorica gave any evidence as to when the orders which they say were lost were actually placed with Omareef. For example there was evidence from Mr Howitt that Omareef had orders in January. It is not possible to say, therefore, whether orders that were lost were already lost before Mr Bates was able to commence production on 12 February 1991.
The claim under the cross-claim was quantified by reference to a hypothesis as to the profits that would have been generated on additional sales of the shortfall in production. I do not regard the evidence of Messrs Howitt and Zorica to which I have just referred as being of sufficient weight or credibility to conclude, on the balance of probabilities, that there were specific sales lost by reason of any shortfall in production. That conclusion is reinforced by my being satisfied that there were some difficulties occasioned to Mr Bates by reason of shortages in supply of components. Accordingly, the claim by Omareef for loss of profits must fail.
THE TIMING OF THE CONTRACT
As I have said above, the time when the contract was made is not directly an issue in the proceedings. However, the evidence as to when the contract was made is material to the credibility of Mr Bates and the witnesses called on his behalf.
Mr Bates' plans for the development of his business in 1991 included the notion of hiring of a salesman. In discussions with a prospective applicant for that position, Mr Tim Butler, Mr Bates first heard of the problems which Omareef was experiencing with the manufacture of wetsuits in Fiji. Mr Bates agreed with Mr Butler's suggestion that Omareef's difficulties might provide a fertile opportunity for a manufacturer like Mr Bates.
During December 1990 Mr Bates contacted Omareef by telephone and left several messages for Mr Howitt. Mr Howitt returned Mr Bates' calls sometime in the week commencing 17 December 1990. There followed a number of meetings in the period shortly before and after Christmas 1990 and early in 1991. The express terms of the contract arose out of the conversations at those meetings.
The first meeting took place in Wollongong within a day or two of the initial telephone conversation between Mr Bates and Mr Howitt, probably on 20 December 1990. Mr Zorica, who accompanied Mr Howitt to the meeting, recalls that it was the day before the Omareef Christmas party which was held on 21 December. Mr Bates denies that Mr Zorica attended the first meeting. However, Ms Roslyn Kennedy, Mr Bates' wife, recalls seeing Mr Howitt and Mr Zorica at a meeting with Mr Bates at Mr Bates' Mt Ousley Road residence in late December. That was certainly the first meeting as Mr Zorica was holidaying in Victoria from 22 December to around 5 January 1991. Mr Bates' recollection of this and the second meeting, which he claims Mr Zorica attended, is clearly erroneous.
Ms Goldman said in an affidavit that she remembered a meeting with Mr Howitt on 17 December 1990. Mr Bates originally said that the first meeting occurred on 17 December but subsequently revised his recollection of when the first meeting with Mr Howitt took place. Ms Goldman did not. I was not impressed by Ms Goldman as a witness in the light of some answers which appeared to be deliberately unhelpful. For example, she was asked questions about entries in her diary concerning the manufacture of "Riot" wetsuits in the factory during April 1991. In answering, she appeared to be reluctant to acknowledge that which was obvious, namely, that Mr Bates was manufacturing "Riot" brand wetsuits in April 1991.
Ms Goldman's affidavit would put her as having participated in the first meeting whereas both Mr Howitt and Mr Zorica deny that the conversations to which she deposed took place. While I do not necessarily accept either of them as being totally reliable witnesses concerning the critical conversations, I prefer their evidence as to the conversations in December to that of Ms Goldman.
Ms Kennedy also gave evidence about discussions which she said took place "on one occasion in or about late December 1990". She said that the discussions involved Messrs Howitt and Zorica although she did not say anything about the substance of the discussions which then took place.
The first meeting was preliminary in nature with some discussion taking place about the possible terms upon which Mr Bates might manufacture wetsuits for Omareef. Mr Howitt explained to Mr Bates that Omareef was looking for an on-shore manufacturer and that it did not want any more suits manufactured in Fiji. He outlined the "ground rules" which would need to be satisfied if Mr Bates was to be considered as a manufacturer for Omareef. In all but minor respects, Mr Bates accepted Mr Howitt's version of the discussions at the first meeting when it was put to him in cross-examination. By the end of the first meeting, Mr Bates understood that manufacture for the upcoming winter season was being discussed.
It was made clear to Mr Bates at the first meeting (and reinforced at later meetings) that Omareef would require that Mr Bates stop manufacturing and selling wetsuits under his own brand whilst he was manufacturing for Omareef. Despite Mr Bates' initial reluctance to embrace such a requirement, his enthusiasm at the prospects of an association with the "Quiksilver" name and his financial position and desire for a cash flow militated in favour of agreeing to such a term, which he ultimately did.
Mr Bates was sufficiently confident after the first meeting on 20 December 1990 to send a facsimile communication to Kendall, saying, inter alia, the following:
Now affecting our present and foreseeable situation has been the concluding of negotiations for Riot Wetsuits to manufacture the entire Australian range of wetsuits for Quiksilver International, a huge and famous leisurewear [sic] company.
That was an overstatement since, without question, the first meeting led to no finality. Mr Bates, in his initial version of the meeting, which he put at 17 December 1990, said that the meeting "finished on a very positive note". He said Mr Howitt said, at some stage: "I am pleased you are going to be manufacturing for Quiksilver". According to Mr Bates' version, however, there was no agreement at that meeting as to price or other significant terms.
There was clearly a desire on the part of both parties to progress the discussions. Omareef was motivated by the prospect of losing time and consequently orders for its first winter season, particularly in light of its recent Fijian experience. Mr Bates was probably motivated by financial concerns and the desire for cash flow which he communicated to Mr Howitt.
A second meeting occurred during the week between Christmas and New Years Eve 1990, probably on 28 December 1990. Contrary to Mr Bates' recollection, Mr Howitt was unaccompanied at the meeting. Mr Zorica was not in NSW and could not have attended the meeting as Mr Bates asserted. Mr Howitt and Mr Zorica both said that Mr Zorica accompanied Mr Howitt at the first meeting but did not accompany him at the second meeting. I see no reason to doubt Mr Zorica's recollection that he was in Victoria from 22 December until early January and, accordingly, I conclude that Mr Bates was mistaken. It may be that he reversed the meetings in his mind. Whatever the cause I do not regard his recollection as reliable in that regard.
The evidence all points to the conclusion that at the second meeting all the principal terms of the proposed agreement were discussed and agreed in principle, including price and terms of payment. Mr Bates agreed that the principal terms of the agreement had been discussed with Mr Howitt by the conclusion of the second meeting prior to New Years Eve.
However, the second meeting concluded with Mr Howitt informing Mr Bates that he had to confer with his fellow directors before making a decision to proceed. Mr Howitt was satisfied that he had outlined all Omareef's requirements to Mr Bates and Mr Bates had satisfied him that he could meet them. Nevertheless, he wanted to ensure that Mr Raymond supported the arrangement and wanted to have Mr Brooks assess Mr Bates' capacity to meet Omareef's requirements.
It is common ground that there was no finality reached between the parties at the second meeting although all the principal terms of a possible agreement had been the subject of discussion by that time. Mr Bates agreed that there had been discussion that the contract would be a CMT type of contract, that Omareef would provide the neoprene and other components and Mr Bates would do the manufacturing of the finished product. Mr Bates was told that Omareef would pay "$25 per steamer". He agreed that he may have been told that there would be a minimum of 100 steamers per day or equivalent in other styles. He also agreed that he may have been told that he would be paid on the first of the month for the previous month's production up to the 20th. He denied that there had been discussion about a production break of 4 to 6 weeks in June or July although he accepted that a discussion on that subject occurred with Mr Brooks in late February 1991.
Mr Bates accepted in cross examination that no contract was concluded at the second meeting. He would not deny that Mr Howitt told him that he had to discuss the matter with his co-directors. Mr Howitt said in his affidavit that at the conclusion of the meeting he said that he would "have to go and discuss all of this with my directors". Mr Bates kept a day book in which he made notes. An entry which he said was probably written on New Years Eve when he was "drunk" was written after the discussion with Mr Howitt at the second meeting. It is apparent for those notes that he did not consider that any finality had been reached.
Mr Howitt had a third meeting with Mr Bates on or about 7 January 1991. He was accompanied by Mr Raymond. Mr Raymond simply recalls that the meeting was in early January. That is consistent with the evidence of Ms Goldman who says the third occasion on which she saw Mr Howitt at Wollongong was the time he was accompanied by Mr Raymond and was prior to the delivery to Mr Bates' factory of the first consignment of neoprene rubber on or about 15 January 1991. That the meeting took place on 7 January 1991 also gains some support from Mr Brooks' evidence that he was contacted on that day by Mr Howitt who informed him that arrangements had been made for Mr Brooks to inspect Mr Bates' premises on Wednesday 9 January 1991.
Mr Bates said in his affidavit that he had a third meeting with Mr Howitt on 3 January 1991. Mr Howitt denied having attended a meeting on that day. Mr Bates said that he showed Mr Howitt plans for a proposed new factory. He also said that the question of moving the factory was discussed at the meeting as was the question of the time taken to train staff. I consider that there was there was no such meeting on the 3rd of January and that in so far as Mr Bates described a meeting between himself and Mr Howitt alone, he was confusing that occasion with the occasion between Christmas and New Year 1990.
Mr Bates also said in his affidavit that his first meeting with Mr Raymond was on or about 22 January 1991 although he subsequently revised that assertion to say that it might have been between 17 and 22 January 1991. That revised version appears to have been prompted by the production by Mr Raymond of contemporaneous documentary evidence indicating that he had been in Victoria from 21 January to 26 January 1991. That, of itself, casts considerable doubt on the reliability of Mr Bates' evidence of a discussion involving Mr Howitt and Mr Raymond on the date originally asserted by Mr Bates.
Although Mr Bates' version was corroborated by affidavits sworn by Ms Kennedy and Ms Goldman, I do not regard their versions as reliable. Their affidavits were in fact prepared by Mr Bates himself. While I do not conclude that either of them was deliberately fabricating evidence, I do not consider, in the circumstances, that their detailed versions of conversations said to have taken place with Mr Raymond on 22 January 1991 should be accepted.
I am satisfied that no meeting took place between Mr Raymond and Mr Howitt on the one hand and Mr Bates and Ms Goldman and Ms Kennedy on the other in the second half of January 1991 at which discussions relating to the terms of the contract took place. One possible explanation is that Mr Bates, Ms Goldman and Ms Kennedy were mistaken as to the date of the discussion to which they refer. Nevertheless, they were adamant that the discussion took place in the second half of January and did not take place on 7 January 1991.
Mr Bates and Mr Raymond agree that they met during a weekend in late January. Mr Bates said it was on 26 January 1991. However, the meeting appears to have been essentially a social one, when Mr Raymond went to Wollongong to go surfing. Mr Raymond and his wife and children went surfing with Mr Bates and his son. There may have been some brief discussion concerning the proposed business relationship, but both agree that that meeting was not significant as to the terms of any contract.
I shall return below to the assertions made by Mr Bates, Ms Goldman and Ms Kennedy as to the substance of the conversation which they said took place on 22 January 1991. However, the objective circumstances lead me to the conclusion that the parties regarded themselves as being bound no later than 10 January 1991. It follows that evidence of Mr Bates, Ms Goldman and Ms Kennedy as to the discussions on 22 January are mistaken at least as to the date. None of them was prepared to acknowledge that the discussions may have taken place prior to 10 January. I conclude that if discussions along the lines suggested did take place, they were not contractual discussion. I am not prepared to conclude that they were discussions which actually occurred.
Mr Raymond's version of the discussions which took place on 7 January 1991 is not significant as to the period of the operation of the contract. He did not suggest that the topic was raised. Mr Howitt also did not suggest that the topic was discussed at that meeting. The important matter discussed was the cessation by Mr Bates of manufacture and sale of his own brand of wetsuit. I shall return to that question below.
The final discussion before 10 January 1991 occurred at a meeting on 9 January 1991 at Mr Bates' premises attended by Mr Bates, Mr Howitt and Mr Brooks. Mr Howitt says Mr Zorica was present as does Mr Brooks. Mr Zorica's recollection, however, is that his second meeting with Mr Bates was on 17 January 1991. Mr Bates confirmed that a meeting took place with Mr Brooks and Mr Howitt on 9 January 1991. He did not mention the presence of Mr Zorica. While I regard Mr Brooks as a reliable witness and accept his version of discussions generally, he is probably mistaken as to the presence of Mr Zorica on 9 January 1991.
Mr Brooks did not give evidence of any significant discussion as to contractual matters at the fourth meeting and did not say that there was any discussion concerning the period of the operation of the contract. The meeting appears to have been concerned with technical aspects of manufacture of wetsuits by Mr Bates. Mr Brooks said that he expressed concern about the layout of Mr Brooks' factory. Mr Bates responded by taking him to see the proposed new factory site in Ellen street. There may also been some discussion about the purchase of machinery by Mr Bates but that appears to have been the extent of discussions.
On 10 January 1991 a meeting took place between Messrs Howitt, Raymond and Brooks at Omareef's Newport Beach office. Mr Brooks says that he made a comment to the following effect during discussion at that meeting:
Well, it may suit you to go with Bates for this winter but I think you should continue to think about doing the production yourself. I honestly think it is the best way to go for the long term. I think Bates' quality is good, but I am still concerned even if he moves to his new factory about his ability to produce commercial quantities. I hope it works for the season, but I think you should continue to think about Omareef doing its own manufacture.
Mr Howitt said that on that day, following the meeting, he telephoned Mr Bates and said:
We have just made a decision to go with you on the terms we discussed. I have made some arrangements and you should be receiving in the next couple of days a container load of neoprene from Japan. You should get approximately 2,220 sheets.
Mr Howitt said that Mr Bates replied, saying:
John, that's great. We'll be prepared for it.
Mr Brooks' diary records the following for 10 January 1991:
ALL DAY IN SYDNEY
TODAY'S MEETING: OMAREEF WISH TO NOW
PULL ALL THEIR RUBBER OUT OF FIJI
ADAM DEVILLE WILL FLY TO FIJI SUNDAY
AND A CONTAINER HAS BEEN BOOKED BY OMAREEF
ADAM WILL INSPECT THE SHIPPMENT [SIC] AND OMAREEF WILL PAY LOTUS GARMENTS FOR THE LAST SHIPPMENT [SIC] OF WET SUITS [SIC] AND PRINTING
A decision to ship stocks of neoprene rubber from Fiji to Wollongong is consistent with a commitment to Mr Bates. In fact a container of rubber from Japan was subsequently delivered to Mr Bates' new factory premises at Ellen Street on 15 January 1991.
On 10 January 1991, Mr Bates created a document call "CMT Extras". Its purpose was to record all work done by Mr Bates for Omareef which was outside the scope of the contract and which would have to be the subject of a separate charge by Mr Bates to Omareef. That book reveals that Mr Bates was performing work for Omareef from 10 January 1991. It contains entries for 10,11,14,15,16,17,18,19, and 21 January 1991.
Also on 10 January 1991, Mr Bates sent a facsimile communication to Kendall saying, inter alia, as follows:
...I have decided that our relationship has degenerated to the point that as of today, 10th January 1991 Riot Wetsuits wishes to formally withdraw from our contract with Kendall, contract dated on or about 14 July, 1987.
While the decision to cancel the contract with Kendall may be equivocal, the date is significant.
On 11 January 1991, Mr Bates wrote to the Commonwealth Employment Service setting out, "a profile of the type of employee we are currently seeking". He agreed that the employees he was seeking were for the Quiksilver work. It is more likely than not that Mr Bates would only begin seeking new employees after he believed he had a commitment from Omareef.
On 15 January 1991, Mr Bates signed a lease for the proposed new factory premises at 29 Ellen Street. As I have said, arrangements were made for delivery to those premises of a container of neoprene rubber. Omareef wrote to its insurance brokers on that day indicating that Omareef would be manufacturing wetsuits in Wollongong and needed to insure neoprene stocks in Wollongong.
Mr Bates was in communication with Quiksilver on 16 January 1991 concerning screens for printing on the rubber for wetsuits. On 18 January 1991, Mr Bates sent a facsimile to Mr Howitt setting out a number of items that were required for manufacture. Mr Zorica responded on 21 January dealing with each of the items. The exchange covered zips, kneepads, adhesive for kneepads, velcro for the back of suits, size labels and thread. It is unlikely that such communications would occur between parties which had not entered into any formal contractual arrangement.
On 18 January 1991, Mr Bates sent a facsimile communication to Johnson and Johnson seeking new business. The facsimile contained the following:
...Riot Wetsuits, now manufacturing for Quiksilver Wetsuits, will soon become one of Australias [sic] largest neoprene finishers. With the purchasing power alone that such a position allows, Riot may be able to offer savings on material purchases as well as our well known quality of manufacture and fast turn around time....
On 21 January 1991, Mr Bates also sent a facsimile communication to BDF Australia Ltd seeking business. That facsimile contained the following:
...Just a short note to confirm a number of changes at Riot Wetsuits that should be of benefit to a future relationship between Riot and BDF.
Firstly, Riot is now manufacturing wetsuits for Quiksilver, the worlds [sic] largest surfing company. Because of this and other orders, we at Riot expect to be Australias [sic] biggest wetsuit company within the next eighteen months!...
While Mr Bates had shown that he was prepared to anticipate matters by his facsimile to Kendall on 20 December 1990, the above communications suggest that Mr Bates was confident that he had already begun manufacturing for Quiksilver.
All of the above considerations taken together lead me to the conclusion that Mr Bates and Omareef both considered that a binding arrangement had been entered into no later than 10 January 1991. It follows that I regard the evidence given by Mr Bates, Ms Goldman and Ms Kennedy as to conversations said to have taken place on 22 January 1991, to which I shall refer in more detail below, as quite unreliable.
THE TERM OF THE CONTRACT
The discussion at the first two meetings between Mr Bates and Mr Howitt was confined to production of Quiksilver suits for the winter season only. Mr Bates essentially conceded that by the end of the first meeting he knew that the negotiations concerned manufacture for the upcoming winter season and that it was in effect to be a trial period for him.
Notwithstanding that the negotiations were confined to production for the winter season, Mr Bates was optimistic that he had real prospects of a long term relationship and hoped that that is what he would ultimately achieve by subsequent agreement with Omareef, upon the successful conclusion of the winter production. That optimism was doubtless founded on the hope expressed by Mr Howitt in the conversations referred to above. There is good reason to assume that the hope and expectation of suitable arrangements eventually being made for the post winter season future were mutual.
Mr Bates did not, in his version of the first two meetings, contained in the affidavits which he swore some time before the hearing began, say that the period of the contract was discussed. Mr Howitt's initial version of the first meeting made no mention of the period during which the contract was to remain on foot. Mr Zorica also made no mention of that matter in his affidavit.
In the course of cross examination, Mr Bates agreed that manufacture for the winter season was what Mr Howitt talked about but said that "what I was hearing was that we were being offered a real lot of work". He agreed that the winter season was mentioned and that they "talked about winter". However, he did not agree that what he was offered was the winter season. While they "talked about winter", he understood Mr Howitt was offering "working for Quiksilver".
In his affidavit, Mr Howitt recounted a conversation at the second meeting in which he said the following:
Omareef would not have work in June or July and that would probably mean that there would be no production for 4 to 6 weeks during that time. That is the norm in the industry. Hopefully, if you manufacture for our winter season and you turn out to be a suitable manufacturer you and Omareef can consider whether you should produce for the summer season......Any deal Omareef would have with you would be until June. Then there will be a production break. Omareef could then assess the situation, including performance and the requirement for the new season. If all is well, Omareef may be able to discuss with you an arrangement in relation to the production of the new season's styles using 100 steamers per day as a guide.
It may be that there was some discussion to which Mr Bates was a party concerning the relationship between Quiksilver and Omareef. Indeed, Mr Raymond says that he explained to Mr Bates in his meeting in early January just what that relationship was. It may also have been the case that there was a hope and expectation on the part of Mr Bates and Mr Howitt that the proposed relationship between Mr Bates and Omareef would continue indefinitely. Mr Howitt accepts that he intimated that if, come June or July, Mr Bates had performed, there would be every chance of further work being offered to Mr Bates.
In his affidavit, Mr Bates said that at a meeting which he said took place on 22 January 1991 he asked Messrs Raymond and Howitt:
For how long does Riot get to manufacture these suits for Quiksilver?
He said Mr Howitt replied:
You'll have a licence with Quiksilver Wetsuits whilst ever Quiksilver Wetsuits has a licence with Quiksilver.
and that Mr Raymond said:
While we have the licence you have the contract.
He said that Raymond also said:
...At the present time the contract has another three and a half years remaining. But that is not the end of it. It is up to Riot to make sure that the product and supply is good enough that will ensure that the contract gets renewed beyond the present three and a half years. So you have at least three and half years. But only if you do a good job. And doing a good job means getting out there and saving the day.
Both Mr Howitt and Mr Raymond deny that anything of that nature was said. The evidence of Ms Goldman and Ms Kennedy would corroborate the evidence of Mr Bates if their evidence were to be accepted. However, for the reasons indicated above, I do not regard their evidence as reliable in that respect. In the light of the matters which I have described above, I do not consider that a discussion took place to the effect deposed to by Mr Bates.
One curious matter is the reference to the period of three and a half years in the evidence of the witnesses called on behalf of Mr Bates. An agreement entitled "Trademark Licence and Manufacturing Agreement" and expressed to be between Quiksilver and Omareef bears the date 16 October 1990. That agreement was to operate for a period of five years from the date of its execution by both parties. There was no evidence to suggest that that date was other than 16 October 1990. In those circumstances, it would be highly incongruous for Mr Raymond or Mr Howitt, in late January 1991, to refer to the unexpired term of that agreement as being three and a half years. As at 22 January 1991, only three months of the term of the licence had elapsed.
One explanation for the evidence as to three and a half years is that at some stage during the relationship between Mr Bates and Omareef, mention was made of the existence of a licence agreement and of a term of five years. There is some suggestion in the evidence that Ms Goldman and Ms Kennedy were under the impression that Omareef had been having wetsuits manufactured in Fiji for approximately eighteen months before the arrangements were made with Mr Bates. It is possible that that misapprehension led them to conclude that the licence had been in operation for that period.
If that is the explanation, it would suggest that their evidence is a reconstruction at best and a fabrication at worst. Whatever the explanation, it appears to me that it is highly unlikely that Mr Raymond, the chief executive officer of Quiksilver and a director of Omareef, would have referred to the balance of the term of the licence agreement in that way. That is a reason for rejecting the evidence of Mr Bates, Ms Goldman and Ms Kennedy that there was ever any contractual discussion to the effect that the arrangement between Omareef and Mr Bates would continue for three and a half years or for the unexpired period of the licence agreement between Quiksilver and Omareef.
No witness called on behalf of Mr Bates suggested that there had been any discussion prior to 10 January 1991 concerning an arrangement which would have a fixed term or a term of operation beyond the manufacture of Omareef's requirements for the winter season. It is, accordingly, improbable that the discussion deposed to by Mr Bates, Ms Goldman and Ms Kennedy as having taken place on 22 January 1991 or, perhaps, several days before that time, occurred.
On the other hand, as I have said, it is clear enough that there was discussion about the winter season in so far as it was conceded by Mr Bates that the winter season was the subject of discussion with Mr Howitt. There was no clear evidence as to what the contemplation of Omareef was, as at December 1990 and January 1991, concerning the time which would be required to complete manufacture for the winter season. However, there was some evidence to indicate that there were two seasons of manufacture, one for the winter season and one for the summer season.
Mr Bates, in a facsimile to Mr Raymond of 8 February 1991, said:
Now Riot is to commence in earnest the manufacture of perhaps 7,000 steamers with moulded knee pads attached.
That would indicate approximately 70 days' production at 100 steamers per day. It is clear that Mr Bates was to manufacture not only steamers, but other styles as well, indicating that the parties may have had in contemplation something in excess of 70 days' production by Mr Bates. However, there was no evidence that the production for the winter season was expected to be significantly greater than that number.
Mr Howitt agreed in cross-examination that his expectation as to the production from February would be in the order of 6000 wetsuits. That is the equivalent of 60 days' production. It is also apparent that the directors of Omareef were concerned in late December 1990 and early January 1991 to provide for the production of the winter season's requirements. They had experienced problems with manufacture in Fiji of the summer seasons requirements.
There is other support in the evidence for a finding that the term of the contract was for a period ending no later than June 1991. Thus, Mr Bates told his new staff that they were all on trial and that after production of the Quiksilver winter line his staffing needs would be reassessed. Further, Mr Bates rented his new factory premises for a period ending in June 1991.
In a letter dated 23 January 1991 addressed to a Japanese supplier of neoprene rubber, Mr Bates said that the "Riot" label had to be withdrawn "at least in the short term". That is not consistent with an expectation that the contract would last for at least three and a half years. The reference in Mr Bates' facsimile of 8 February 1991 to the production of 7000 steamers suggests 70 working days at the agreed rate of production and is consistent with a contract period extending from approximately February to June.
Mr Bates claims that on 25 February 1991 Mr Brooks told him that there would be no production in June and July. Though this raised something which was inconsistent with the agreement Mr Bates claims he had made, he did not raise the matter with anyone from Omareef. Mr Bates' explanation for not doing so was that in his assessment Mr Brooks was talking about something about which he did not have authority or full knowledge. That explanation is inherently improbable having regard to the fact that Mr Bates later turned to Mr Brooks rather than the directors of Omareef in respect of his proposed trip to Fiji and in respect of his trip to Torquay on 9 May 1991 to which I shall refer later.
A draft "Toll Manufacturing Agreement" was bought into existence in early June 1991. On 30 April 1991, Mr Raymond spoke to Mr W.D. King of Corrs Chambers Westgarth, Quiksilver's solicitors. Mr Raymond told Mr King that he was having a problem with Mr Bates. In the course of the telephone conversation, Mr Raymond said to Mr King:
Quiksilver is going to pull out in a month.
On the following day Mr Raymond sent a facsimile communication to Mr King which summarised some of the obligations of Omareef and Mr Bates under the contract although it omitted mention of the consideration payable to Mr Bates and omitted mention of the duration of the arrangement. However, it contained the following comment:
RIOT CAN INCREASE PRICES MID SEASON AND QUIKSILVER CAN NOT BARGAIN FROM A POSITION OF ANY STRENGTH.
.............................................................................................................................
.......THEREFORE WE REQUIRE A MANUFACTURE AGREEMENT WHICH INCLUDES THE CONDITIONS AS SET OUT EARLIER IN THIS LETTER.
IF NOTHING ELSE, IT WILL FORCE THE PARTIES TO SIT DOWN AND SETTLE THE CONDITIONS ONE WAY OR ANOTHER.
Those comments are not consistent with an understanding that there is a long-term arrangement in force. If there were a long term arrangement, it would not have been possible for Mr Bates unilaterally to increase the price for manufacture. Indeed, it is inherently unlikely that Mr Bates would have committed himself to the manufacture of wetsuits for a period of three and a half years for a fixed price without any mechanism for adjustment of the price to take account of increases in the cost of manufacture. Further, there would be no reason to "sit down and settle the conditions one way or another" if long term arrangements had already been made.
Mr King's office produced a draft agreement by use of a precedent. The precedent referred to a head licence agreement and provided for a term equivalent to the term of that head licence agreement. The draft, incorporating a similar provision, was sent by Mr King to Mr Raymond on or about 7 May 1991 under cover of a letter which contained the following:
In addition, you will see that the Manufacturing Agreement has been drafted so that the term of the agreement is for as long as the Licence Agreement between Quiksilver and Omareef remains on foot. If you would like the Manufacturing Agreement to have a shorter term please inform me accordingly so that I can arrange for the appropriate change to be made.
In the events which occurred, the draft agreement was never submitted to Mr Bates because the contract was terminated on 9 May 1991.
I do not consider that any support for Mr Bates' position as to the term of the contract can be obtained from the terms of the draft agreement. Indeed, the contemporaneous communications and record of communication between Mr Raymond and Mr King suggest an expectation on the part of Mr Raymond that the arrangement would not be long lasting. Mr Raymond's intention appears to have been to have Mr Bates sign an agreement which would afford protection to Omareef following termination which was intended to be soon afterwards. It was never intended to record a long term relationship.
In a report to the non-executive directors of Quiksilver dated 12 August 1991, Mr Raymond said that Omareef had guaranteed to Mr Bates "400 units of work per week except June-July (6 weeks)". The reference to "400 units" appears to have been a mistake but there is no reason to think that the report represented other than Mr Raymond's genuine understanding at that time. The reference to the break in June or July is significant in confirming that there may have been an expectation that the production for the winter season would be completed by sometime in June.
While Mr Raymond's report appears to contemplate that the arrangement may have continued after the June-July break, that would also be consistent with an expectation that, if Mr Bates production was up to standard, a further arrangement may well have been entered into. I do not consider that it is inconsistent with a commitment for no more than the winter season's production.
I do not consider it probable that Mr Bates would have approached Quiksilver to discuss the grant of a licence if he believed that his contract with Omareef still had more than three years to run. His actions in going to Torquay on 9 May indicate that he believed that the contract was about to come to an end because the production for the winter season was almost complete. Those considerations reinforce the view expressed above that I should not accept the evidence of Mr Bates, Ms Goldman and Ms Kennedy that there was a discussion in the latter part of January concerning a period of three and a half years.
Accordingly, I find that there was no express reference in any contractual discussions to a term of three and a half years or to a period equal to the balance of the term of the licence from Quiksilver to Omareef. However, I find that there was discussion about the winter season's manufacture, which would be expected to be finished by sometime in June. I conclude, therefore, that the contract between Mr Bates and Omareef was for the manufacture of Omareef's requirements for wetsuits for the winter season and that, in the ordinary course, that manufacture would have been completed no later than the end of June 1991 and probably midway through the month of June.
TERMINATION OF THE CONTRACT ON 9 MAY 1991
Omareef decided to terminate the contract well before 9 May 1991. Mr Howitt's evidence was that shortly after speaking with Mr Bates in late April about a proposed trip to Fiji by Mr Bates, he had a conversation with Mr Raymond as follows:
Raymond: I am concerned about this. Bates has not ceased manufacturing Riot wetsuits and he has in fact improved the quality of Riot wetsuits using Quiksilver developments such as stretch inks. He has continued operating his Riot shop and has threatened to ruin our season. He is also piggybacking on Quiksilver's reputation as can be seen from the article in ASL magazine. These things put Omareef in breach of its licence agreement with Quiksilver and cannot be tolerated.
Howitt: I agree. We must end our relationship with Bates.
Mr Howitt said that shortly after that he started to look for new premises. Mr Raymond's version of the conversation was as follows:
Howitt: Michael Bates has now told me he is going to remove his production to Fiji and take advantage of off-shore manufacturing incentives.
Raymond: I am amazed that Michael Bates would even consider doing such a thing without consulting us in advance. I am also concerned that Riot's quality has improved and there has been increased production of Riot's suits. Bates has given us lip service in relation to our conditions. He seems to have his own agenda. I think we should finish the relationship and collect our materials as soon as possible.
Mr Howitt appears to have confused conversations with Mr Raymond in early April and late April. Nevertheless, it is clear that, by the end of April, Messrs Howitt and Raymond had decided to terminate the contract. Further, in cross-examination, Mr Howitt acknowledged that, if Omareef were going to set up a manufacturing operation, it needed to obtain the neoprene in Mr Bates' factory, otherwise Mr Bates would have used it all in May and June. Therefore, on 9 May 1991 having learnt that Mr Bates was proposing to visit Mr Brooks in Torquay, Victoria, Mr Howitt decided to take the neoprene and terminate the contract.
Accordingly, while Mr Bates was engaging in discussions with Mr Brooks in Torquay, Mr Howitt and Mr Zorica, together with Messrs Edwards and possibly Mr Griffiths, travelled to Mr Bates' factory at Ellen Street, Wollongong and physically took possession of sheets of neoprene rubber, zippers and ink which had been supplied by Omareef to Mr Bates. Those items were loaded into a van which had been hired by Omareef for that purpose. That action was taken in circumstances where Mr Howitt and Mr Zorica decided to act as they did because Mr Bates was out of New South Wales in Torquay and they knew that Mr Bates had no knowledge of their intentions.
The conduct of Mr Howitt, and those who acted with him, was somewhat extraordinary. Mr Howitt attempted to justify the conduct by saying that he had reached the view that Mr Bates "was an unpredictable - and possibly unstable - person and that Omareef's neoprene may be at risk". He said that he did not believe that Mr Bates could be trusted. That conclusion was said to have been reached as a result of a telephone conversation between Mr Howitt and Mr Brooks in which Mr Brooks told him that Mr Bates was going to see Mr Brooks and that Mr Brooks thought that Mr Bates "may be inquiring about the licence to manufacture wetsuits".
Mr Howitt also sought to justify his conduct on the basis of Mr Bates' visit to Fiji. Mr Howitt said that in late April 1991 Mr Bates telephoned him and arranged a meeting at Omareef's Newport office. During the meeting Mr Bates said, according Mr Howitt, that he was planning to start production in Fiji and that he was travelling there the next day, "to check it out". Mr Howitt said that he had told Mr Bates that "Omareef does not want to do anything in Fiji due to the previous problems". He acknowledged that Mr Bates responded by saying that Omareef's "previous problems in Fiji were due to unskilled management" and that he would be taking his "white management team to Fiji". He said that Mr Bates said that he was "confident we will be able to do it".
Mr Howitt's reaction to Mr Bates' proposal to manufacture in Fiji, however ill-advised the proposal may have been, is difficult to understand. It is clear enough that Omareef had had what was considered to be a bad experience with manufacture in Fiji. However, it is not self evident that Mr Bates' proposal, even if it was ill-advised, was completely without merit. It was hardly justification for Mr Howitt's precipitate action when he heard that Mr Bates "may" be seeking to discuss with Quiksilver the possibility of acquiring a licence to manufacture under the Quiksilver trademarks.
It is apparent that there was a complete breakdown in the relationship between Mr Bates and Mr Howitt between early January 1991 and early May 1991. One explanation for Mr Howitt's loss of confidence in Mr Bates was an incident which occurred in March when Mr Bates asserted that he would "ruin" Omareef's winter season if Mr Howitt did not agree to an increase in price for certain styles. Such a threat, which was not denied by Mr Bates, was hardly calculated to engender confidence and, if carried out, would clearly have been actionable by Omareef. The reason for the breakdown in the relationship between the two men was also the subject of address by counsel. It was suggested, for example, that Mr Bates, as he acknowledged in cross-examination, was prone to daydreaming and it may be that Mr Bates had a far greater notion of what he might be able to achieve from his relationship with Omareef and Quiksilver than was justified in the circumstances. It may also be that Mr Howitt bitterly resented such an attitude on the part of Mr Bates, particularly when coupled with the threat to ruin the winter season.
I am unable, on the evidence before me, to form a view as to the real cause of that breakdown. I am not confident, from my observations of Mr Howitt, that I would rely on his uncorroborated evidence. On the other hand, nor would I be confident of relying upon Mr Bates' uncorroborated evidence. It may be that the respective personalities of Mr Bates and Mr Howitt were such that they could never have got on in the relationship which the informal contract with Mr Bates and Omareef required.
REPUDIATION OF THE CONTRACT
The statement of claim alleged that Omareef failed to give or provide Mr Bates with any or with any reasonably adequate notice of its intention to terminate the contract and that, in those circumstances, Omareef repudiated the contract. It was said that Mr Bates orally communicated his acceptance of such repudiation on 10 May 1991 and thereby determined the contract. However, the defence and cross-claim filed on behalf of Omareef asserted that, by on or about 9 May 1991, Mr Bates himself had evinced an intention no longer to be bound by and had thereby repudiated the contract in that he had:
(a) failed to maintain production levels at a minimum of 100 steamer wetsuits per day;
(b) continued to manufacture his own brand of wetsuits, "Riot" wetsuits;
(c) not ceased or suspended retail sales of his own brand of wetsuits;
(d) attempted to interfere in the Omareef contractual relations between Omareef and Quiksilver and secure for himself the licence which Quiksilver had granted to Omareef.
It was asserted that, by its conduct on or about 9 May 1991, Omareef accepted Mr Bates' repudiation of the contract and terminated it.
Thus, each party alleges repudiation of the contract by the other. Further, it is clear that Omareef's termination was a repudiation unless Mr Bates himself previously repudiated the contract so as to entitle Omareef to terminate. It is necessary, therefore, to consider whether any conduct of Mr Bates up to 9 May 1991 constituted a repudiation of the contract.
One way of formulating that question is whether Mr Bates was in breach of a condition or an essential term of the contract. That formulation, however, begs the question of what is a condition or an essential term. A condition or an essential term is a term the breach of which will excuse the innocent party from further performance or will entitle the innocent party to terminate.
According to the above formulation, it will be necessary to determine whether any terms which Omareef alleged were breached by Mr Bates were conditions or were essential terms. Whether a term of a contract is essential or not is a question of construction which is to be answered with due regard to the general nature of the contract considered as a whole, and to its particular terms. In Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641-2 Jordan CJ said:
The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor;... If the innocent party would have not entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight. (My emphasis)
The quality of essentiality depends for its existence on a judgment which is made of the general nature of the contract and its particular provisions, a judgment which takes close account of the importance which the parties have attached to the provision as evidenced by the contract itself as applied to the surrounding circumstances (see DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 at 431). Those observations are almost too general to be of great assistance in resolving any particular question as to essentiality.
The conventional categorisation of contractual terms has been into conditions and warranties. Terms which are essential are conditions and other terms are warranties. Breach of a condition by one party entitles the other to terminate. Breach of a mere warranty will not normally entitle the innocent party to terminate. Nevertheless, a breach of some terms, if serious enough, even if not conditions may lead to a right to terminate. That possibility has given rise to the suggestion of a tripartite categorisation of terms. In addition to conditions and warrantees there are intermediate terms, a serious breach of which will give rise to a right to terminate.
Thus, in HongKong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 65, Diplock LJ suggested that the question of repudiation does not so much depend upon the characterisation of a term which has been breached as upon the consequences of the breach. The judgment of Diplock LJ was referred to with approval by the High Court in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549 at 562. Diplock LJ said:
Every synallagmatic contract contains in it the seeds of the problem: in what event will a party be relieved of his undertaking to do that which he has agreed to do but has not yet done? The contract may itself expressly define some of these events, as in the cancellation clause in a charterparty; but, human prescience being limited, it seldom does so exhaustively and often fails to do so at all. In some classes of contracts such as sale of goods, marine insurance, contracts of affreightment evidenced by bills of lading and those between parties to bills of exchange, Parliament has defined by statute some of the events not provided for expressly in individual contracts of that class; but where an event occurs the occurrence of which neither the parties nor Parliament have expressly stated will discharge one of the parties from further performance of his undertakings, it is for the court to determine whether the event has this effect or not.
The test whether an event has this effect or not has been stated in a number of metaphors all of which I think amount to the same thing: does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?
It is of course open to the parties to a contract to agree, either expressly or by implication, that breach by a party of a particular term will entitle the other party to terminate. Omareef's defence and cross claim alleged that it was a term of the contract that the contract would be terminable by Omareef without notice in the event that:
(i) Bates continued to manufacture "Riot" wetsuits during the term of the contract; or
(ii) Mr Bates did not cease or suspend all sales of his own brand of wetsuits as soon as the stock which was held in his shop ran out or by the end of February 1991 whichever occurred first; or
(iii) Mr Bates did not maintain production of wetsuits at a level of at least 100 per day.
There was no evidence of any discussion which could lead to a finding that there was an express term that Omareef would be entitled to terminate without notice in any of the events specified. There was simply no discussion between Mr Bates on the one hand and any of Messrs Howitt, Raymond or Brooks on the other concerning the circumstances in which Omareef would be entitled to terminate without notice. I conclude, therefore, that the contract was not terminated in accordance with any express term to the effect alleged by Omareef. It was not suggested that a contractual right to terminate should be implied.
It is necessary to consider, therefore, whether, by reason of any of the matters relied on by Omareef, Omareef was deprived of substantially the whole of the benefit which the parties intended that Omareef should obtain from the contract. That requires a determination of the general nature of the contract and a determination of whether, in the light of that general nature, any term breached by Mr Bates was such that it was apparent to Mr Bates that substantial performance of it was required by Omareef. It is then necessary to determine whether there was a failure of substantial performance. I shall deal in turn with each of the matters relied on by Omareef although, as I understand Omareef's submissions, while each matter is relied on separately, all matters are also relied upon cumulatively as constituting repudiation of the contract.
Shortfalls
As I have said, much of the evidence concerning shortages of supply of components was unspecific and the witnesses acknowledged only a hazy recollection. It is therefore not possible to relate a shortfall in production at any given time to any particular shortage of supply of components. However, while I do not consider that I can safely conclude that the shortages were the cause of the whole of the shortfall, there is sufficient evidence to conclude that there were difficulties with supply which could excuse the failure to maintain production of 100 wetsuits on some days.
While it was clearly important for Omareef that the level of production of 100 wetsuits per day be achieved, the essence of the contract was that Mr Bates produce Omareef's requirements for the winter season. There was nothing essential about the daily production level as long as supplies would enable Omareef to satisfy its orders for the winter season. I do not consider that the shortfall in production which had occurred prior to Easter 1991 was such that Omareef did not obtain substantially what it had bargained for. At the time of termination, Mr Bates was achieving production at a rate in excess of 100 per day. Accordingly, while there may have been a breach of the contract by Mr Bates, in failing to achieve 100 wetsuits per day throughout the currency of the contract, it was not such as would, of itself, justify termination without any notice to Mr Bates.
Interference with the Omareef licence
Mr Brooks said that on 8 May 1991 he received a telephone call from Mr Bates saying that he had booked himself on a flight to Melbourne for the following morning and would like a meeting with Mr Brooks at about 11 am. Mr Bates said that he would also like to meet with Mr Alan Green, a non-executive director of Quiksilver. Mr Brooks responded that Mr Bates would not be able to meet with Alan Green on the following day, but that Mr Bates could meet with Mr Brooks. Mr Bates met Mr Brooks at the Quiksilver factory in Torquay on 9 May 1991. Mr Brooks said that he had a conversation with Mr Bates in which Mr Bates said the following:
Look Rod, I am really worried about reliability of the rubber supply from Omareef. I don't think they are committed enough to the production and I think you should take the Quiksilver licence away from them and give it to me.
He also said the following:
My new factory is on a short lease which will have to be renewed by 30 June. I do not have enough confidence in my relationship with Omareef to renew the lease - I think the relationship will not last more than the next two weeks. If you can't give me Omareef's licence, then give me the licence for the rest of the world.
There was considerable dispute as to precisely what Mr Bates was asking. He denied that he was seeking to oust Omareef as a licensee from Quiksilver. I am satisfied from the evidence that Mr Bates did raise the question of a licence from Quiksilver to himself. Whether he was inviting Quiksilver to terminate the licence with Omareef may be a different question. However, Mr Bates' journey to Torquay, if it was for the purposes of endeavouring to persuade Quiksilver to terminate the licence to Omareef and grant one to him, would be an indication of an intention no longer to be bound by the contract with Omareef only if it were inconsistent with the contract.
As indicated above, I have concluded that the contract would have run its course by the end of June at the latest. Indeed, the discussion which Mr Brooks had with Mr Bates constitutes, in my view, a recognition of that position. That is to say, I do not consider that Mr Bates would have gone to Torquay to discuss a possible licence from Quiksilver in circumstances where he believed that his contract with Omareef still had more that three years to run. Rather, the fact of the approach to Mr Brooks in Torquay tends to confirm that Mr Bates did not understand that the contract with Omareef would continue to be in force very much longer.
It was not inconsistent with the contract for Mr Bates to approach Quiksilver with a view to negotiating the grant of a licence to operate after the contract with Omareef had come to an end within a matter of weeks. I do not consider that the approach to Quiksilver evinced an intention on the part of Mr Bates not to perform the contract which, in the ordinary course, was due to run its course within a matter of weeks. That of itself was not a repudiation of the contract by Mr Bates.
Production and Sale of Riot Wetsuits
A question could of course arise as to whether a requirement such as that alleged by Omareef would contravene sections 47(1) and 47(4) of the Trade Practices Act which deal with exclusive dealing. Indeed, in the course of final address, counsel for Mr Bates sought leave to rely on section 47(1) and section 47(4) of the Trade Practices Act. I refused leave to amend to raise that matter at such a late stage in the proceedings. It would have raised the possible application of section 47(10) of the Trade Practices Act which provides that the prohibition contained in section 47(1) would be applicable only if the conduct in question had or was likely to have the effect of substantially lessening competition. That had never been an issue in the proceedings and, it would have been inappropriate to permit it to be raised at that late stage in the proceedings.
The statement of claim itself contains an assertion by Mr Bates that the terms and conditions of the contract included express terms as follows:
26.2. Bates was to progressively cease manufacturing his own brand name, "Riot Wetsuits" and proceed to close down his retail shop in consideration of the respondents entering into the said long term contract with Bates.
26.3. Bates was to manufacture wetsuits solely for Omareef and not to manufacture any other products which may compete with any Quiksilver products.
The statement of claim asserted that the relevant promises were given in consideration of Omareef entering into a long term contract for three and a half years. I have dealt with that question above. On the other hand, the statement of claim asserted that Mr Bates carried out his promises to cease manufacture and sale of "Riot" brand wetsuits. Indeed, that was the basis for the allegation of unconscionable conduct.
The fact of Mr Bates' agreement to such a term is also supported by the evidence that he initially contacted and ultimately engaged a sign writer to paint a "closing-down sale" sign on his shop and that he referred, in correspondence with a third party, to the "Riot" label being "withdrawn from the market in the short term". That is also evidence of intention to comply with that term.
Nevertheless Mr Bates acknowledged, for the purposes of the proceedings, that he was to cease manufacturing his own brand name of wetsuits, albeit progressively, and was to close down his retail shop. The essential difference between the respective assertions of Omareef and Mr Bates in that respect was one of timing. That is to say, Omareef asserted that the manufacture of "Riot" wetsuits was to cease immediately and the sale of wetsuits at Mr Bates' shop was to cease, at the latest, by the end of February 1991. Mr Bates, on the other hand, did not assert that the arrangement had any specific time for performance. The resolution of those differences requires consideration of the precise manner in which the relevant terms were formulated by the parties.
Mr Howitt said that at the first meeting on or about 20 December 1990 he said to Mr Bates:
You will need to stop the manufacturing and selling of competitive products. Unless you are prepared to do that, we will have nothing to talk about. That would breach the licence agreement with Quiksilver Garments. Also, it would be a conflict of interest for you to run your own retail shop selling competitive products at the same time as manufacturing for us.
Mr Howitt said that at the second meeting with Mr Bates between Christmas and New Year 1990, he told Mr Bates that it was "absolutely essential" that Mr Bates cease manufacture of "Riot" wetsuits. Mr Howitt also said that at the meeting with Mr Raymond in early January, Mr Raymond said that if Omareef decides to use Mr Bates, an agreement would have to be signed "catering for my concern that you do not manufacture and sell a brand in competition with Quiksilver".
Mr Raymond said that in his initial meeting with Mr Bates he said, inter alia, the following:
I think it is important you understand that Omareef cannot offer any production to Riot if Riot continues to make its own suits and sell them. That would breach Omareef's licence agreement with Quiksilver Garments. There would be a concern that confidential product developments could be used to assist another competing label. There may also be a problem because our production would not have priority.
Mr Raymond said that Mr Bates told him that he would need some time to run down his stock, and that the end of February would be a reasonable period. Mr Brooks did not say that he said anything concerning that question when he visited Mr Bates on 9 January 1991.
Mr Bates' version of the discussion concerning the question of cessation of competition was somewhat less specific. His original affidavit evidence of the discussion at the first meeting with Mr Howitt in December 1990 was that Mr Howitt said:
The only condition that Quiksilver require of you Michael is that you have to close your own label Riot down. That might seem like a big ask but think about what we are offering in return. It is not as if Riot has set the world on fire to date. I don't think it is such a big ask really.
I do not consider that the use of the word "condition" is in any way decisive. Neither Mr Howitt nor Mr Bates would have appreciated the distinction between conditions and non conditions as contractual terms.
Mr Bates said, incorrectly, that Mr Zorica attended the second meeting between Christmas and New Year 1990. He said that Mr Zorica said:
You will have to close your Riot shop. We can't have you competing with Quiksilver.
If that was said, it must have been said in the meeting on 20 December 1990. Mr Bates also said in his affidavit that he had the following conversation with Mr Zorica:
Zoc said: You must close the retail by the end of January, 91.
I said: I don't think it is necessary or fair that the Riot shop should have to close. If the contract with Quiksilver Wetsuits is to hinge on whether or not I close the retail outlet then I will close it but I don't believe that it is truly necessary.
Mr Bates said that after pointing out that he had a large amount of stock on hand he said that he would "just have to give it away" and that Mr Howitt said "yes, it is that important. You will have to give up the shop". Mr Bates said that Mr Zorica said:
Michael - because of these conflicts of interest with Quiksilver, you are going to have to give up the shop and stop making those products that conflict with Quiksilver. Riot can make other products, but nothing that conflicts with Quiksilver.
Mr Bates incorrectly said that his first meeting with Mr Raymond was in late January. He said that in his first meeting he had a conversation with Mr Raymond as follows:
Bates said: I have being doing business up until a month ago without planning for this contract. My factory and shop have stock levels that will not easily be sold off.
Raymond said: You can close the shop anyway whichever way makes you the most money.
Bates said: The stock means more to me than its effect on Quiksilver [sic] sales short term. After all, we have been running a business, a separate entity to Quiksilver, for the past eleven years until just a month ago, and I have quite valuable levels of goods still in the factory and shop. I will get rid of our stock quickly but sensibly.
Mr King swore an affidavit in which he reconstructed, from his contemporaneous notes, the conversation which he had with Mr Raymond on 30 April 1991. Mr King's reconstruction of what Mr Raymond said is as follows:
...The owner of Riot Wetsuits has an ego problem as he believes that his wetsuits are the best being made in Australia.
One of the conditions of Omareef appointing Riot as a manufacturer was that the owner would shut down his own business and only make "Quiksilver" wetsuits and not "Riot" wetsuits. This hasn't happened.
The owner of Riot wetsuits isn't communicating with us and won't talk to us. He is starting to manufacture overseas in Fiji and is getting involved in the clothing business.
It is significant that Mr Raymond did not mention a time by which Mr Bates was to shut down his own business and make only "Quiksilver" wetsuits and not "Riot" wetsuits.
Mr Raymond's facsimile to Mr King on the following day contained, inter alia, the following statement of the terms of the arrangement between Omareef and Mr Bates:
RIOT WOULD - CEASE MANUFACTURE OF RIOT WETSUITS AND MAKE EXCLUSIVELY FOR OMAREEF (QUIKSILVER).
- CLOSE DOWN THE RIOT RETAIL OUTLET....
AS IT STANDS TODAY, RIOT HAS CONTINUED TO MANUFACTURE WETSUITS UNDER THE RIOT LABEL. THE RETAIL OUTLET IS STILL OPEN AND QUIKSILVER SOURCED INKS ARE BEING USED ON RIOT WETSUITS.
RIOT CONTINUING TO MANUFACTURE ITS OWN LABEL MAKES THE COMMITMENT ONE-SIDED. RIOT IS NOT AS OBLIGED TO WORK WITH QUIKSILVER AS QUIKSILVER CURRENTLY IS WITH RIOT. QUIKSILVER HAS ONLY ONE MAJOR SOURCE OF MANUFACTURE. (SO THAT QUIKSILVER CAN FULFIL THE OBLIGATION TO PROVIDE 400 ORDERS PER WEEK. AND HAS.)
Again, it is significant that Mr Raymond did not mention a time by which Mr Bates was to cease manufacture of "Riot" wetsuits. In the absence of any specific reference to the end of February in Mr Raymond's communication with Mr King, I am not prepared to accept Mr Raymond's version of the conversation referring to the end of February as the deadline for the completion of the sale of stocks on hand. That conclusion is very relevant to the question of whether the terms in question were essential terms. I would be slow to conclude that a term is a condition when the parties have not fixed a time for its performance.
It is necessary to determine, having regard to the general nature of the contract, and its particular provisions, whether the terms in question were regarded by the parties as essential. It requires an examination of the purpose for which the terms were included in the contract. It does not entail an examination of the subjective state of mind of the parties but an examination of the objective circumstances including the communication between the parties.
Mr Raymond said that his reason for requiring that Mr Bates cease manufacture and sale was that it was necessitated by the terms of the licence from Quiksilver to Omareef. Mr Howitt had not seen the licence from Quiksilver to Omareef but relied on what Mr Raymond told him about the licence. Mr Raymond said he relied on the following provisions of the licence for the view which he said he had formed:
2. TRADEMARK LICENCE
Subject to the terms and conditions of this agreement, the Company [Quiksilver] grants to the Licensee [Omareef] a sole and exclusive licence throughout the Territory to use each of the Trade Marks as a trade mark on or in relation to the Products.
3. NO OTHER LICENCES
3.1 Undertaking as to no other Licence
The Company undertakes that there are no other licences of the Trade Marks in relation to the Products current in the Territory and agrees with the Licensee that the Company shall not, during the Term, grant any further or other licence to any other manufacturer or distributor of products within the scope of this agreement to use the Trade Marks in the Territory.
.............................................................................................................................
9. INSPECTION OF PRODUCTION FACILITIES BY THE COMPANY
The Company shall have the right... to inspect any production facilities where any Products are being manufactured for the purpose of enabling the Company to determine whether the Licensee is adhering to the requirements of this agreement relating to the nature and quality of the Products and use of any of the Trade Marks in connection with the Products.
.............................................................................................................................
15.1 Licensee not to sell Products outside the Territory
...the Licensee agrees and accepts that it will not knowingly sell any Products directly or indirectly outside the Territory.
15.2 Licensee not to export Products
...the Licensee undertakes....not to export any of the Products out of the Territory or to fill any orders for the Products knowing that such orders are intended for resale outside the Territory and further to prohibit any of its distributors or retailers from exporting any of the Products from out of the Territory or filling any orders for the Products knowing that such orders are intended for resale outside the Territory.
.............................................................................................................................
24. NO COMPETITION BY LICENSEE
...the Licensee... shall not directly or indirectly act as an officer, director, employee or paid consultant of, nor have any other interest in any company, firm or business in direct competition with the Company or Licensee...
25. NO MANUFACTURE OF UNLICENSED PRODUCTS
The Licensee agrees that, during the Term of this agreement, the Licensee shall not manufacture or sell unlicensed products that are in direct competition to the Products.
.............................................................................................................................
32. PERFORMANCE BY THIRD PARTIES
Either party is entitle to perform any one or more of its obligations according to this agreement by appointing third parties to do so on its behalf provided that the written approval of the other party is first had and obtained.
Those provisions cannot reasonably be understood as prohibiting Omareef from having goods manufactured by a manufacturer simply because the manufacturer was manufacturing goods for a competitive retailer or distributor. The provisions are clearly concerned with competition by Omareef with Quiksilver. They are not concerned with competition with Quiksilver by a third party who happened to be a subcontractor to Omareef. I do not accept that Mr Raymond genuinely believed that the licence would be in jeopardy by reason of Mr Bates' manufacturing his own brand of wetsuits. Nor am I satisfied that Mr Howitt was told that by Mr Raymond. That therefore renders unlikely the version of the conversation in which the licence was said to be the reason for requiring cessation of manufacture and sale of "Riot" wetsuits.
It was also suggested that Messrs Howitt and Raymond were concerned that the quality of "Riot" brand wetsuits might improve by the use of know how acquired from Omareef. However, that concern would not be effectively eliminated by cessation of manufacture and sale by Mr Bates. There was nothing to prevent Mr Bates from recommencing manufacture and sale after the contract came to an end. If he did so, Mr Bates would be in a position in competing with Omareef and Quiksilver to make use of any know how he obtained during the course of the contract.
Mr Raymond was aware when he visited Mr Bates in mid to late April that the manufacture of "Riot" wetsuits was underway. That appears to have prompted no complaint from Omareef. The most that Mr Raymond said he did was to raise the matter with Mr Howitt. He said that he told Mr Howitt that Mr Bates "does not appear to be honouring the conditions we have agreed". Mr Howitt said that, having been informed by Mr Raymond of that matter, he decided that, "given Mr Bates' apparent hostility, it would be better for all concerned if I limited my contact with Mr Bates". Mr Zorica who had responsibility for the day to day dealing with Mr Bates, said in his affidavit that he raised the matter of closing the retail shop in March 1991. He asked Mr Bates "When is your retail shop closing down?" However, there was no evidence of the matter being raised again and even at that stage, he did not say he was concerned about breach of an essential term of the contract.
Omareef was prepared to countenance Mr Bates' continued manufacture of items for Kendall. It follows that the terms in question were not designed to ensure that Mr Bates' production facilities were devoted exclusively to the contract with Omareef. Further, it is common ground that competitive sale was to be permitted to the extent that Mr Bates was entitled to sell "Riot" brand wetsuits from his shop until stocks were exhausted. There was no evidence as to the extent to which wetsuits were partly made as at 10 January 1991 or as to the stocks of completed wetsuits which existed at that time. However, it would be probable that the parties would contemplate that the arrangements would permit Mr Bates to complete the manufacture of partly made wetsuits, and to sell in his shop the resultant wetsuits and wetsuits already completed.
All of those considerations indicate that I should not accept the evidence of Mr Howitt and Mr Raymond that there was a concern that continued involvement of Mr Bates in manufacture would jeopardise the licence from Quiksilver to Omareef. I consider that it is more probable than not that Messrs Raymond and Howitt were motivated by a concern to prevent competition by Mr Bates. That was the effect of the term that he cease production and sale of "Riot" wetsuits.
The conversations which I have recounted above, even on Mr Bates' version, indicate that there requirement that Mr Bates cease manufacture and sale of "Riot" braced wetsuits was of very considerable significance to Omareef. However, the requirement was incidental to the manufacture of wetsuits in accordance with the contract. It did not bear directly on the manufacture at all but was entirely collateral to the manufacture. Once it is accepted that the purpose of the term was to prevent competition, and that it was permissible to dispose of existing stocks of completed wetsuits and possibly to complete partially completed wetsuits, it follows, in my opinion, that it was not essential that there be no manufacture at all. Accordingly, Omareef would not necessarily be deprived of substantially what it bargained for just because there was some manufacture and sale. Whether Omareef was substantially deprived of the benefit of its bargain would depend upon the extent and seriousness of the breach.
Seriousness of the Breach
It is clear that there was continued production of "Riot" brand wetsuits at least as late as April 1991. It is unlikely that wetsuits which were partly made in January were still being completed by April 1991. However, there was no suggestion that Mr Bates brought in new components or raw materials after the contract was entered into. Accordingly, to the extent that he was manufacturing "Riot" wetsuits in April and May 1991, he was using components and materials which he held in January. In so far as that constituted a breach of the contract, the question is the extent and consequences of that breach.
On discovery Mr Bates produced a document bearing the date 5 April 1991. Mr Bates said that his view of the document was that Ms Goldman had taken a phone call from Ms Mason, who managed his shop, as to the sizes of wetsuits required in the shop. He agreed that it was stock to be sold in the shop under the "Riot" brand name. He confirmed that it was his intention at that time to manufacture some 80 wetsuits of the types specified in the document for sale through the shop. He also said that that is what happened in the sense that his employees in the shop would have attempted to sell them although he was unable to say whether the wetsuits had in fact been sold. He confirmed, however, that the wetsuits were manufactured and put in the shop for sale.
Mr Bates then agreed that he used raw materials that belonged to him in the manufacture of the wetsuits referred to in the document. However, while he was not prepared to accept that the manufacture of "Riot" wetsuits in April 1991 was a breach of his contract with Omareef, he acknowledged that, ultimately, as he understood it, the manufacture of "Riot" wetsuits would be breaching his arrangements with Omareef.
Further, he agreed that he systematically, throughout the period January 1991 to May 1991, continued to manufacture "Riot" wetsuits. He said that it was a "coping mechanism" but, nevertheless, agreed it was "part of the system". He said that the wetsuits manufactured in that fashion were sold through his shop during that period. He agreed that he sold wetsuits which he manufactured in that fashion through his shop in that period and that is why the shop was kept open.
In her evidence in chief, Ms Goldman said that by the middle of February 1991, stocks of "Riot" wetsuits had begun to dwindle in Mr Bates' shop. However, Ms Goldman, in cross-examination, agreed that her diary contained an entry for 16 April 1991 which indicated that Mr Bates was producing "Riot" wetsuits at that time. A similar entry for 20 April 1991 records that "Riot" wetsuits were being produced at that time as well.
Mr Gary Woods, who was employed by Mr Bates as a printer, gave evidence that his diary indicates that on 8, 9 and 10 April 1991, he worked for approximately 8 hours on printing collars and sashes for "Riot" wetsuits, sorting those pieces and printing designs on the front and collar pieces of "Riot" wetsuits. He said that before commencing to do that work, Mr Bates told him that stock was needed for the shop.
Further, Mr Raymond gave evidence that he went to visit Mr Bates' factory sometime around mid to late April 1991 as he "was keen to come back and see how everything was getting along". He said he was "overwhelmed by how much production was going on of "Riot" wetsuits and how few if any, Quiksilver wetsuits were either in production or hanging or anything like that". Such evidence is not of great weight because of its lack of specificity. However, it tends to confirm that, at least during April 1991, there was production of "Riot" wetsuits at Mr Bates' factory.
When Mr Howitt visited Mr Bates' factory on 9 May 1991, he saw, he said, boxes of wetsuits. He was unable to give a precise number but it was somewhere between five and ten boxes. He said he looked into the boxes and saw "Riot" wetsuits in various stages of manufacture. He said that there could have been between five and ten units in each box.
I conclude, from that evidence, that as at 9 May 1991 Mr Bates was continuing to manufacture wetsuits under the "Riot" name, albeit from components and materials which he held before the contract was made. It is clear that by mid to late April, Omareef was aware of the apparent breach but did not consider it necessary to terminate the contract for that breach. Indeed, Omareef did not purport to justify the ultimate termination by reference to such a breach, except ex post facto. Certainly, if a right to terminate exists, albeit unknown to an innocent party, that right may be relied upon for termination (see Shepherd v. Felt and Textiles of Australia Ltd [1931] HCA 21; (1931) 45 CLR 359). The critical question, however, is whether the continued manufacture was such as to deprive Omareef of the benefit of a condition or an essential term of the contract made between Omareef and Mr Bates on 10 January 1991 or alternatively whether it was a sufficiently serious breach of a term which was not a condition or essential term. In other words, did the continued manufacture and sale deprive Omareef of the substantial benefit it intended to receive from the contract as a whole?
The evidence of Mr Raymond and Mr Howitt is indecisive as to the extent of the breach by Mr Bates. The evidence does not enable me to reach a conclusion as to the extent of the production by Mr Bates after the contract was made. In particular, it does not enable me to make a finding as to the numbers of "Riot" brand wetsuits which were actually sold.
Where it is alleged that the breach of an intermediate term has given rise to a right to terminate the onus of proof rests on the party so alleging. In Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] 1 QB 44, it was held that a term for goods "shipped in good condition" was not a condition, but rather an intermediate stipulation which gave no right to reject unless the breach went to the root of the contract. Since the goods in question were used for their intended purpose, the breach did not go to the root of the contract and the buyers, though entitled to damages, were not entitled to reject the goods. Lord Denning observed (at 61) that the finding that not all the goods were shipped in good condition did not say how many were bad. In any case, the goods ended being used for their purpose and therefore the breach did not go to the root of the contract.
The contract between Mr Bates and Omareef was to manufacture wetsuits for Omareef's winter season at the rate of 100 wetsuits per day. Although he continued to make "Riot" brand wetsuits, Mr Bates continued substantially to perform that contract. Omareef was not deprived by the continued manufacture of the "Riot" wetsuits of the substance of the contract, namely, the manufacture of "Quiksilver" wetsuits for the winter season.
There was no evidence of how many "Riot" wetsuits were sold after the contract commenced. Mr Raymond said that he went to the factory in April and found "Riot" wetsuits being made. Mr Howitt said that on 9 May, when he entered the factories, he found boxes of "Riot" wetsuits. However, there was no evidence as to the numbers of wetsuits which had been manufactured. While it may be possible to draw the inference that if systematic manufacture was continuing in May, wetsuits were systematically being sold, it is not possible to say how many were being sold in comparison with the position before the contract was made.
While the cross-claim brought by Omareef seeks damages for the failure to achieve 100 wetsuits per day, there was no claim for damages in respect of failure to comply with the requirement that Mr Bates cease manufacture and sale of "Riot" brand wetsuits. While that is by no means decisive, it does have a bearing on the seriousness of the breach of the requirement. It appears, that whatever the extent of the breach, it was not such as caused sufficient damage to Omareef to warrant making a claim for damages in respect of it.
In the circumstances, I do not consider, having regard to the general nature of the contract, that the evidence was such as to enable me to conclude that any breach which occurred by reason of continued manufacture and sale of "Riot" wetsuits during the period of the contract deprived Omareef of the substantial benefit for which it bargained. I do not consider that the additional circumstances of the failure to produce at the rate of 100 wetsuits per day before Easter 1991 and the visit to Torquay to seek to obtain a licence from Quiksilver affect the position. They did not deprive Omareef of the substantial benefit of the promise to produce Omareef's requirements of wetsuits for the winter season. I conclude, therefore, that the termination of the contract on 9 May 1991 constituted a repudiation of the contract by Omareef.
DAMAGES FOR REPUDIATION
Having regard to that conclusion, it is necessary to determine the quantum of the loss suffered by Mr Bates as a consequence of that repudiation. The loss must be measured by reference to the profits which Mr Bates would have derived from the continued performance of the contract according to its terms. That raises two questions. The first is how long the contract had to run, bearing in mind that Omareef had intended to bring it to an end in the near future. The second is the profitability of the contract to Mr Bates.
I have concluded that the contract was for the manufacture of Omareef's requirements of wetsuits for the winter season and would ordinarily have been completed midway through the month of June. It is necessary to consider further only the question of profit and ability.
In relation to the quantification of his claim, Mr Bates relied on an affidavit sworn by Mr J .P. O'Donnell, a chartered accountant who is a partner with KPMG Wollongong. Annexed to Mr O'Donnell's affidavit was a report in which he expressed his opinion, on the basis of assumptions stated in the report, as to losses suffered by Mr Bates as a consequence of the termination of the contract with Omareef. Mr O'Donnell's terms of reference were to determine the amount of the loss incurred by Mr Bates as a result of the terms of the draft toll manufacturing agreement to which reference is made above not being fulfilled. In the light of the conclusions which I have reached concerning the terms of the contract, the conclusions in Mr O'Donnell's report based on that assumption are of no relevance.
A further difficulty with Mr O'Donnell's report is that many other assumptions were made by him concerning the costs incurred by Mr Bates in manufacturing wetsuits. No attempt, however, was made to prove most of those assumptions despite several observation made by me during the course of the trial that it would be necessary for Mr Bates to prove the assumptions if he wished to rely on Mr O'Donnell's report.
There was, nevertheless, some evidence from which it is possible to reach a conclusion as to the quantum of loss suffered by Mr Bates as a consequence of termination of the contract. Mr Bates was in the habit, during 1991, of recording information relating to his business in a computer system. Mr Bates was cross-examined in relation to a report produced by that system which was last updated on 8 May 1991. The report showed a figure for weekly wages which corresponds to the wages cheque drawn by Mr Bates on 8 May 1991. Senior counsel for Omareef accepted that the report is capable of constituting evidence of the profit which the manufacture of wetsuits was generating for Mr Bates as at the time of termination of the contract. There is no other evidence from which I can draw any conclusion as to that matter.
The report shows that Mr Bates' weekly profit, after allowing direct costs and share of overheads, was $1606.74. If it was expected that there would be a break of approximately six weeks in June and July, it would follow that production would have ceased by the second week of June rather than the end of June. Accordingly, there would have been only about four weeks production remaining as at 9 May 1991. On that basis, the loss of profit would be $1607 per week for slightly in excess of four weeks, say $6,600.
The report also shows that the profit per wetsuit, on the assumptions made for the purposes of the report, was $2.90. The report itself suggests that the total number of suits was to be 6800. That is generally in line with Mr Bates' comment in early February that he was commencing with the production of 7000 suits. Mr Howitt, in the course of cross-examination, said that he expected that at least 6000 suits would have been manufactured. In fact, something in the order of 5090 suits were manufactured. Thus, it can be concluded that Mr Bates would have manufactured approximately 2000 more wetsuits which would have required four more weeks. If the appropriate measure is by reference to the number of suits yet to be manufactured, the loss of profit would be $2.90 per suit in respect of 2,000 suits or $5,800.
Those considerations lead me to the conclusion that Mr Bates' loss was between $5,800 and $6,600. I consider that there should be judgment in favour of Mr Bates in the sum of $6,200, together with interest under s 51A of the Federal Court of Australia Act 1976 (Cth).
The question of the costs of the proceedings arises. Whilst I have concluded that Mr Bates is entitled to a judgment and has been successful in the defence of the cross-claim, the contract which I have found is not the one alleged by Mr Bates and the amount of the judgment is insignificant when compared with the quantum of the claim made in Mr O'Donnell's report. Further, a significant part of the evidence was devoted to the other allegations made by Mr Bates in the statement of claim, such as conspiracy to injure, unconscionable conduct and misleading conduct. All of those were persisted in throughout the hearing and Mr Bates has been unsuccessful. Mr Bates has failed in his actions against all respondents other than Omareef.
My present view, without having heard the parties on the question, is that it would not be appropriate for an order for costs to be made in favour of Mr Bates. A question also arises as to whether any order should be made against Mr Bates at least in favour of the respondents other than Omareef, although the same solicitors and counsel represented all respondents. However, since I have not heard argument on the question of costs, I propose to give the parties the opportunity of making submissions on the question of costs before I make any orders.
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I certify that this and the preceding fifty-six (56) pages are a true copy of the Reasons for Judgment herein of the Honourable
Justice Emmett |
Associate:
Dated: 16 October 1997
|
Counsel for the Applicant: | M. B. Duncan
R. Freeman M. Thangaraj |
| Solicitor for the Applicant: | Burt & Allen |
| Counsel for the Respondents: | L.G. Foster SC
P. R. Whitford |
| Solicitor for the Respondents: | Corrs Chambers Westgarth |
| Dates of Hearing: | 21-24 July, 29-31 July, 1 August, 5-8 August, 12-13 August, 19-20 August, 22 August, 25-29 August,
1 September, 3-5 September, 8-9 September 1997 |
| Date of Judgment: | 16 October 1997 |
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