Fryer Holdings v Liaoning MEC Group [2012] NSWSC 18 (30 January 2012)

Last Updated: 2 February 2012

Supreme Court New South Wales

Case Title:	Fryer Holdings v Liaoning MEC Group
Medium Neutral Citation:	[2012] NSWSC 18
Hearing Date(s):	30 January 2012
Decision Date:	30 January 2012
Jurisdiction:	Equity Division - Commercial List
Before:	McDougall J
Decision:	Plaintiff entitled to judgment for $1,830,954.50 and interest. Stand over for draft orders to be brought in.
Catchwords:	CONTRACT - identifying terms of contract - what terms were implied in the contract from the United Nations Convention on Contracts for the International Sale of Goods (CISG) - whether goods supplied were fit for purpose and of merchantable quality - whether implied warranty of fitness for purpose had been breached - whether circumstances of termination had any direct relevance to the quantification of damages - DAMAGES - contract - assessment of damages - whether direct losses were sustained - whether indemnity for compensation could be claimed - whether plaintiff could claim damages for loss of profit due to breach.
Legislation Cited:	Evidence Act 1995 (NSW) Sale of Goods (Vienna Convention) Act 1986 (NSW)
Cases Cited:	Australian Knitting Mills Ltd v Grant [1933] HCA 35; (1933) 50 CLR 387 Castel Electronics Pty Ltd v Toshiba Singapore Pte Ltd [2010] FCA 1028
Texts Cited:
Category:	Procedural and other rulings
Parties:	Fryer Holdings Pty Ltd (In Liquidation) (Plaintiff) (ABN 75 084 185 017) Liaoning MEC Group Co Ltd (First Defendant) Xuzhou Rutai Glass Product Co Ltd (Second Defendant)
Representation
- Counsel:	Counsel: D Edney (Solicitor) (Plaintiff)
- Solicitors:	Solicitors: MCW Lawyers (Plaintiff)
File number(s):	2008/290587
Publication Restriction:

JUDGMENT (EX TEMPORE)

1. HIS HONOUR: The plaintiff (Fryer) carried on the business of bottling alcoholic and non-alcoholic drinks. That business came to an end when Fryer went into voluntary administration on 4 March 2009. (It is now in liquidation.)

2. On 1 June 2008, Fryer entered into a written contract with Angostura Limited (Angostura) whereby Fryer undertook to bottle and package drinks manufactured by or to the specifications of Angostura for distribution and sale within Australia. In turn, Angostura undertook that during the term of the agreement (4 years from 1 June 2008) it would not give the bottling business to anyone else.

3. For reasons that are not entirely clear on the evidence, the practical and commercial relationship that Fryer pursued thereafter was not with Angostura but with a company known as island2island Beverage Co Pty Ltd (i2i). On the evidence, I am satisfied that Fryer and i2i each regarded themselves as doing business with the other on the terms of the agreement made between Fryer and Angostura.

4. Fryer needed to acquire equipment to perform its obligations under the agreement. (I shall use that term to describe both the formal written agreement and the de facto agreement that undoubtedly arose between Fryer and i2i). It bought a bottle-washing line and bottling line from the first defendant (MEC Group). Fryer also needed to acquire a supply of glass bottles made for the specific requirements of Angostura (or i2i) products. In effect, Fryer arranged with MEC Group that MEC Group (a corporation in the People's Republic of China) would source glass bottles made to the appropriate specifications, from within China, and would sell and deliver bottles to Fryer as required.

5. It appears that MEC Group sourced bottles from the second defendant. However, since the second defendant has neither been served nor deemed to be served, it can be put aside.

6. Between 4 and 17 November 2008, i2i received some six complaints from consumers that glass fragments had been found by them in bottles of Angostura products bottled for i2i by Fryer. Not surprisingly, i2i caused those complaints to be investigated. The investigator was a Mr Martin Stone, a director of a company known as HACCP Australia Pty Ltd (HACCP). HACCP is apparently a food science consultancy specialising in food safety issues. Its areas of expertise include consulting on products and equipment used in the food industry. Mr Stone holds a Bachelor's degree in Food Technology and has worked within the food industry for 25 years. For some ten of those years he has worked as a director of HACCP. He is a certified Food Safety Auditor.

7. I mention those matters because the principal evidence as to the defects and their likely cause comes through a series of reports furnished by HACCP, but prepared either by or with the involvement of Mr Stone. In substance, those reports show that the six bottles in question contained between five and 15 fragments of glass of a colour and appearance consistent with the glass in the bottles (obtained by Fryer from MEC Group) used in bottling the Angostura products. Mr Stone observed that the fragments of glass "were entirely consistent with small fragments of glass generated from a bottle break". However, his observations suggested to him that the fragments did not come from within the particular bottles involved. He thus concluded that it was likely that the glass fragments entered the bottles at some stage during the washing or filling process and before the bottles were sealed, (as of course, ultimately, they were), by metal caps.

8. Mr Stone conducted a number of investigations and made a number of observations. He concluded that there were significant variations from bottle to bottle within the bottles obtained from MEC Group. Those variations related to wall thickness; squareness of the base; the overall shape and flat areas; neck and thread alignment and positioning; and the finish of the bottles themselves.

9. Those observations are confirmed and supplemented by observations made by Mr Gregory Keith King, the former sole director of Fryer, who (after Fryer experienced a number of problems with abnormal failures of bottles on the bottling line) conducted a random investigation of samples of bottles supplied by MEC Group. He observed that there were significant variations in wall thickness, among other things. In particular, Mr King observed that the walls of the bottles that he examined were, in places, thinner than the 2.5 millimetre minimum thickness that had been agreed between him and Mr Wang Jiang of MEC Group (as documented in one of many email exchanges between them). I should note, too, that Mr King agreed, in substance, with the observations made and opinions expressed by Mr Stone.

10. Mr Stone said that the variable quality of the glass was "a key contributing factor" to the failure of the bottles. In this context, it should be noted that Mr King gave evidence that in general, on a bottling line such as that operated by Fryer, bottle failures could be expected on average every one to two hours. Sometimes there might be no failures at all on a particular day or a particular shift; and on other occasions, several; but in Mr King's experience, failures in the order of every one to two hours on average were "normal". By contrast, Mr King observed the bottles obtained by Fryer from MEC Group failed (on average) either every five minutes or every five to ten minutes during the bottling process. That failure might occur when the bottles were being washed, but more generally when they were being filled. When a bottle failed, it would "explode" and send glass fragments everywhere. When that happened, Mr King said, the bottling line was shut down and washed. He conceded that it was at least possible, particularly bearing in mind the high sugar content of the beverages concerned, that the washing was inadequate to remove all glass fragments from the filling machinery.

11. Mr Stone shared that view. He said that in his opinion, the most likely point of glass contamination was that poor quality or damaged bottles entered the filling line, and that from time to time they would explode as they were pressurised for filling. When that happened, the bottle passed out of the filling line and a new bottle came in. If glass fragments had been dispersed by the explosion and not washed off, they would be deposited into the next bottle (if it too, did not explode) from the vent of the filling machine.

12. Mr Stone said that there might be other possible causes of the contamination, but in his view, whatever the causes were, they had their ultimate foundation or cause in the defective quality of the bottles. Further, he thought, those other possible causes could not explain all the observations that had been made of the nature of the failures.

13. As I have said, Mr King agreed with the views expressed by Mr Stone. Mr King accepted that, although the bottling line should have been stopped and washed clean, the procedures that were undertaken might have been insufficient. It is clear that glass fragments could not enter the bottles once they were capped unless, contrary to Mr Stone's observations and opinion, they came from within the bottle. Thus, they must have entered at some stage during the washing or filling process. The evidence shows that during the washing process the bottles were inverted, i.e., with their open mouths pointing downward, no doubt to enable them to drain. In those circumstances, if the proper washing procedure was efficient, any glass fragments that were in the bottles would be removed as part of that process. There is no evidence that the washing process was other than effective (in particular, Mr Stone's observations did not, as I read them, cast any doubt on the integrity or efficiency of the washing line).

14. In those circumstances, I conclude that it has been shown, at least on the balance of probabilities (which is the onus of proof with which I am concerned), that a likely effective cause (of course, there may be more than one) of the failure of the bottles, during the bottling process, was the deficiencies in their manufacture attested to by both Mr King and Mr Stone. It is inherently likely that if bottles are manufactured with walls thinner than required, and with walls of uneven thickness, then the process of applying mechanical and pneumatic force to them in the bottling process would lead to failures of the kind observed. I take into account, in addition, that the expert evidence does not disclose any other plausible cause (apart from possible inadequate cleaning procedures) which does not involve, at least as a substantial element, the deficiencies in the bottles.

15. There is no doubt that there was a contract, or perhaps there were individual contracts, between Fryer and MEC Group for the supply by the latter to the former of the bottles in question. That is evidenced, apart from anything else, by the terms of the orders and contract notes passing from one party to the other in the course of their dealings. The contract in question, is thus one between parties in different states for the purposes of the United Nations Convention on Contracts for the International Sale of Goods (the Convention). That Convention applies as part of the law of New South Wales pursuant to the Sale of Goods (Vienna Convention) Act 1986 (NSW): see s 5. It may be noted that the sales contracts or purchase orders passing between Fryer and MEC Group, do not specify any choice of law.

16. The Convention provides that there is an implied term of a contract for the sale of goods (to which the Convention applies), that the goods must be fit for the purposes for which such goods would ordinarily be used, and for any particular purpose made known by the buyer to the seller either expressly or by implication when the contract is made. See art 35(2). In this case, in circumstances where the bottles are required to be manufactured with an embossed (or moulded) brand for the Angostura products, it is clear that they must have been perceived to be bottles to be used for the purposes of holding Angostura products. In any event, it is obvious that an ordinary purpose for which soft drink (or for that matter alcoholic beverage) bottles are used is to be filled with the relevant beverage and sold to consumers, so that the contents may be consumed by them.

17. In those circumstances, I conclude that there was an implied obligation on MEC Group, pursuant to the sales contract or contracts that have been proved, to ensure that the bottles sold by it to Fryer would be fit for the purpose of being filled with Angostura beverages to be sold to the general public for consumption by them.

18. In those circumstances, although there is evidence that MEC Group supplied not only the bottles but also the washing and bottling line (which would also confirm its understanding of purpose), it is unnecessary to go to that other evidence.

19. Were the goods fit for purpose? The test which has been applied in this country is that fitness for purpose equates to being of merchantable quality. See, for example, Castel Electronics Pty Ltd v Toshiba Singapore Pte Ltd [2010] FCA 1028 at [123]. It seems to me that I should follow that test, particularly since it has been applied in other common law jurisdictions.

20. The test of merchantable quality requires that the goods should be in such an actual state that a buyer fully acquainted with both latent and patent defects within them, and not limited to their apparent condition, would buy them without abatement of the price that would be paid if they were in fact in reasonably sound order and condition. See Dixon J in Australian Knitting Mills Ltd v Grant [1933] HCA 35; (1933) 50 CLR 387 at 418.

21. In this case, I cannot imagine that a buyer fully acquainted with both latent and patent defects in the bottles (and it is clear from the evidence that there were both) would have bought them at all for the purpose of filling them with carbonated soft drinks. It follows that I am satisfied that such a buyer (which must be the reasonable buyer in full knowledge of the relevant facts) would not buy them without abatement of what appears to have been otherwise the market price for such goods "in reasonably sound order and condition".

22. Thus, I am satisfied that the implied warranty of fitness for purpose has been breached.

23. That leads to the question of damages. By way of background, it is necessary to note that i2i terminated the contract for what it said was unrectified breach. Fryer disputes the validity of that determination. It says that there was a dispute resolution process to be followed (see cl 16) which was not. I am not in a position to make any judgment on that. It would be necessary for Fryer to show that the written agreement between it and Angostura did indeed apply in full between it and i2i. But even if Fryer could show this, it would have to show also that it had not been given notice in accordance with cl 16. There is a dispute about this. But in any event, it seems to me, at least prima facie (and I have not heard full argument on the point because of the absence of a contradictor), that it was reasonable for i2i, notwithstanding the exclusive dealing clause, to source bottles from other suppliers so that it could continue its business operations. To the extent that the termination was invalid, and there is a claim for damages, there would need to be offset against it any increased claim for loss of profits that i2i could be entitled to make if it had been forced to wait longer to vindicate its rights.

24. Thus, I do not think that the circumstances of termination have any direct relevance to the quantification of damages.

25. The damages claimed by Fryer falls into three categories. The first category is direct losses that it says it sustained. Those losses relate to stock that was useless or became unsaleable: stock acquired specifically for the purposes of fulfilling the contract with i2i and otherwise unusable, and the like matters. I am satisfied, on the evidence of Mr King (which is entirely clear on this point), that those losses total $430,954.50, and that this is the amount that Fryer is entitled to recover from MEC Group under this first head.

26. The second category claimed is indemnity for compensation claimed by i2i against Fryer. i2i quantifies that claim at a little under $645,000. It has to be said that the claim (or the claimant) does not appear to overlook any cent of possible recovery. But it is unnecessary to express a concluded view on this, for two reasons. The first is that i2i is apparently indebted to Fryer for amounts totalling about $345,000 which it has not paid. On any view, any such amount should be set off against any amount claimable by i2i and payable to it. The second point is that Fryer has not paid any part of i2i's claim, nor has its liability to do so been established. On ordinary principles, therefore, it is not entitled at this stage to recover damages in respect of that claim. It is however, I think, entitled to a declaration that MEC Group is liable to indemnify it for such amounts as it may be lawfully found (or as by reasonable settlement it may agree to pay) to i2i.

27. The third category of claim relates to loss of profits. There are problems with that claim. The first is that it is "proved" by an unverified report prepared by a Mr Katehos and Ms Marks of Furzer Crestani Services. That report has not been verified. Mr Edney, who appeared for Fryer, submitted that UCPR r 31.21 provides that the report be admitted into the evidence without verification. I do not think that this is right. Rule 31.21 says that unless the Court otherwise orders, an expert's evidence-in-chief must be given by the tender of a report or reports. It does not say that the report should not be verified in the usual way. Section 21 of the Evidence Act 1995 (NSW) says that a witness must either take an oath or make an affirmation before giving evidence (with an irrelevant exception). In this case, either Mr Katehos or Ms Marks is to "give evidence" in accordance with the report. That requires that he or she be sworn, or affirmed, before doing so.

28. The course I propose to take is to act on the basis that the report will be put into evidence, but to direct (as I do) that an affidavit verifying it be sworn or affirmed and filed by 5.00 pm tomorrow, 31 January 2012. If that is done, I will make orders in accordance with these reasons.

29. The report sets out a number of assumptions, many of which are proved by the evidence to which I have referred. However, one of the difficulties relates to the growth rates for the sale of the products in question. One scenario assumes a growth rate of 7.5 per cent for the part year ending 31 May 2009, reducing thereafter. Another assumes 18.5 per cent, reducing thereafter. There is nothing in the evidence which would justify either assumption, except such inference as may be drawn from the fact that sales in the past were shown to have increased from year to year. A related difficulty is that the discount rate (which might be expected to accommodate these problems) appears to have been assessed on what the authors regard as a conservative basis for the business in question.

30. On one scenario, the loss of profit is quantified at $1,709,707. On the other (with the higher growth rate), it is quantified at $2,299,191.

31. It is impossible to make any definitive judgment as to which, if either, of those scenarios should be adopted; or as to what (if any) adjustment should be made to the discount rate to reflect the inherent uncertainties.

32. In those circumstances, and bearing in mind that the hearing has proceeded in the absence of MEC Group, I think that I should take a cautious approach to the assessment of damages for loss of profit. In particular, I take into account that the party which had the means of proving growth (Fryer) has not done so in any way which I regard as satisfactory.

33. On any view, even without growth, there would have been a loss of profit. However, the difference between the two scenarios shows just how important the underlying growth rate is taken to be. If it were assumed to be (for example) no different to changes in the Consumer Price Index, then the lower figure would be reduced yet further.

34. Taking those matters into consideration, and making the best assessment I can, I conclude that $1,400,000 should be allowed for loss of profit.

35. For the reasons that I have given, and on the assumption that an affidavit verifying the expert report is filed as I have directed should be done, I will enter judgment in accordance with these reasons, including a declaration of the kind indicated. It is also clear that there should be an order that MEC Group pay the plaintiff's costs.

36. The only formal order that I shall make is to stand the matter over to a time convenient to Mr Edney, to enable him to bring in short minutes of order to reflect these reasons once the necessary affidavit has been filed.

37. I stand the matter over to 9.30 am on 2 February 2012 before me for orders.

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