Farallon Pty Ltd & Anor v Nu-Lec Industries Pty Ltd [2008] QSC 151

SUPREME COURT OF QUEENSLAND CITATION: Farallon Pty Ltd & Anor v Nu-Lec Industries Pty Ltd [2008] QSC 151 PARTIES: FARALLON PTY LTD ACN 010 170 751 (first plaintiff) AND GREGORY JAMES NUNN (second plaintiff) v NU-LEC INDUSTRIES PTY LTD ACN 085 972 425 (defendant) FILE NO/S: BS 9733 of 2006 DIVISION: Trial Division PROCEEDING: Application for summary judgment ORIGINATING COURT: Supreme Court of Queensland DELIVERED ON: 21 July 2008 DELIVERED AT: Brisbane HEARING DATE: 13 June 2008 JUDGE: McMurdo J ORDER: 1. The application for summary judgment is dismissed. 2. The plaintiffs pay the defendant’s costs of the application. CATCHWORDS: CONTRACT – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – Clauses dealing with the measure of the liability of a vendor to a purchaser of a business where the contract specifically deals with prior liabilities and product liability COUNSEL: Mr PH Morrison QC with Mr PJ McCafferty for the plaintiffs Mr W Sofronoff QC with Ms MA Hoch for the defendants SOLICITORS: Gadens Lawyers for the plaintiffs Allens Arthur Robinson for the defendants -- 1 of 8 -- 2 [1] These proceedings arise from a contract for the sale of a business. The vendors were three companies, now deregistered, which were under the control of the second plaintiff, Mr Nunn. The purchaser was the defendant. Mr Nunn and the other plaintiff, Farallon Pty Ltd, guaranteed the vendors’ performance of that contract. [2] The defendant has demanded sums in excess of $8,000,000 from the plaintiffs under their guarantees. The plaintiffs say that they are not liable at all to the defendant and by these proceedings they claim various declarations to that effect. [3] This is an application by the plaintiffs for summary judgment. The issues within this application concern the interpretation of the contract of sale. There are also factual issues between the parties but the plaintiffs concede for the purposes of this application that they are triable issues. [4] The business which was sold involved the design, manufacture and sale of electrical equipment, including what is called a “recloser”, which is a computerised circuit breaker designed to be mounted on power poles, in order to automatically stop the flow of high voltage current in the event of a short circuit. Part of the property sold under this contract was the vendors’ stock of 150 reclosers. Also sold was the vendors’ intellectual property relating to the design and manufacture of the reclosers. The assets were sold on 31 May 2000 which was the date of the contract of sale. As is presently conceded, the defendant thereafter supplied 4,001 reclosers to various customers and distributors around the world. They included the stock purchased from the vendors and the balance were manufactured by the defendant according to the vendors’ design. [5] The defendant’s case is as follows. Those reclosers were defective. They had a design defect which made them dangerous in their operation with an undue risk to personal safety and to other property. The defendant sold them on terms by which it warranted that they were fit for the purpose and of merchantable quality, and they were sold in breach of those terms. The defendant says that it was also liable to purchasers by contravening s 52 in representing that the reclosers were safe, and further because it breached a duty of care which it says that it owed to them. On each of these bases, the defendant became liable to purchasers for damages. The defendant has set about rectifying each of the 4,001 reclosers. The total of what it has spent and will spend in doing so is $8,053,000. It says that this has been necessary because of the defendant’s legal obligations to purchasers. By rectifying the reclosers the defendant has reduced or removed its exposure to damages. [6] It further alleges that the vendors owed a duty of care to any ultimate purchaser of a recloser manufactured to its design, and that this design was negligent. Thus it is claimed that the vendors were liable to the owners of the reclosers and that, in effect, the vendors were obliged to rectify them as the defendant has done or will do. -- 2 of 8 -- 3 [7] The defendant also claims to have lost profits from this defective design. It says that it has not been able to sell as many reclosers as it could have sold but for that defect. [8] Most of those factual allegations are denied within the plaintiffs’ Reply and Answer. But as mentioned, for the purposes of their summary judgment application, the plaintiffs concede that there are issues to be tried in relation to those facts. They argue nevertheless that upon the proper interpretation of the contract, those facts could not result in their being liable to the defendant. [9] By clause 19.2 of the contract, each of the plaintiffs guaranteed to the defendant “the due and punctual performance and observance by each Vendor of its respective obligations under this Agreement …”. [10] By clause 19.3, each plaintiff indemnified the defendant “against all liability or loss arising from, and any costs, charges or expenses incurred in connection with, a breach by any Vendor of this Agreement.” [11] There is no issue concerning the interpretation of those clauses. The dispute is as to the liability of the vendors to the defendant in the above circumstances. [12] The defendant says that it is entitled to the costs of rectifying the reclosers, and to its loss of profits, pursuant to clause 7.6 of the contract, or alternatively clause 3.2. [13] Clause 7.6 is as follows: “Unless otherwise provided in this Agreement, the Vendors are liable for all acts and omissions in the conduct of the Business until Completion and indemnify, and must keep indemnified, the Purchaser against any liability or loss arising from, and all costs, charges and expenses incurred in connection with, any such acts or omissions. Unless otherwise provided in this Agreement, the Purchaser is liable for all acts and omissions. Unless otherwise provided in this Agreement, the Purchaser is liable for all acts and omissions in the conduct of the Business after Completion and indemnifies, and must keep indemnified, the Vendors against any liability or loss arising from, and all costs, charges and expenses incurred in connection with, any such acts or omissions.” [14] The defendant says that the vendors’ design of the reclosers involved acts and omissions on their part for the purposes of clause 7.6, and that as a result the vendors were liable to indemnify the defendant “against any liability or loss arising from” that design, and “all costs, charges and expenses incurred in connection with” that matter. On the defendant’s case, it is or was liable because of the defective design, and the costs already or to be incurred in rectifying the reclosers are “in connection with” that act or omission of the vendors. In the same way, the -- 3 of 8 -- 4 manufacture of reclosers by the vendors is said to have engaged clause 7.6, although that involves only 150 of them. [15] The other alleged source of the vendors’ obligations to the defendant is clause 3.2. Clauses 3.1 and 3.2 are as follows: “3. ASSUMPTION OF SPECIFIED LIABILITIES 3.1 The Purchaser agrees to assume the Specified Liabilities on and with effect from Completion. 3.2 Except to the extent expressly provided by this Agreement: (a) no Liabilities are being assumed by the Purchaser; and (b) the Vendors remain solely responsible for the payment, satisfaction and discharge of all Liabilities. Except to the extent that a Liability is expressly assumed by the Purchaser under this Agreement, the Vendors undertake to pay, satisfy and discharge each liability in full and on time.” [16] The defendant’s case is that the vendors’ liability to an owner of a recloser is a “liability” within this clause, which the vendors promised to the defendant that they would discharge. Because the vendors did not compensate the owners or rectify their reclosers, the vendors failed to discharge their liabilities, so that defendant has suffered or will suffer loss by having to do so at the cost of $8,053,000. The term “liability” is defined by the contract, by the definition of “Liabilities”, as follows: “… the liabilities (including obligations) of each Vendor connected with the Business or the Assets … known or unknown and whether actual, contingent or prospective.” The term “Assets” was defined to include the stock in trade and the intellectual property sold by the contract. [17] In my view, without reference to other terms of the contract, each of these provisions would oblige the vendors to pay to the defendant what it has paid or is likely to pay in the rectification of the reclosers. Clause 3.2 would not appear to provide a basis for the recovery of loss of profits. Their recovery under clause 7.6 may be different, but there was no argument specifically addressed to that question. [18] However the plaintiffs say that when other terms of the contract are considered, clauses 3.2 and 7.6 do not have the effect which they appear to have when considered alone. In particular the plaintiffs say that they must be read with clauses 13 and 16. [19] Clause 13 provided for warranties to be given by each side of the transaction. On the vendors’ side, they were given by the “Warrantors”, who were the vendors and -- 4 of 8 -- 5 the plaintiffs. By clause 13.1 it was provided that the Warrantors represented and warranted to the defendant that each of the “Vendors’ Warranties [was] true and correct and not misleading or deceptive on Completion.” And by clause 13.2 each of the warranties and representations was to remain in full force and effect on and after the Completion Date. [20] Clause 13.5 imposed time limits upon claims by the defendant for breach of any warranty. For the present purposes, the time limit was two years after the Completion Date. [21] One of the warranties was as follows: “15 Defective Products 15.1 As far as the Warrantors are aware after making all reasonable enquiries, there is no deficiency or defect in any product manufactured or service supplied or provided by the Vendors … in respect of the Business (including a product manufactured but not sold before Completion) which may result in a successful claim being made against the Vendors …”. [22] The plaintiffs argue that there is an irreconcilable tension between clause 13 and this warranty on the one hand, and the alleged liability or responsibility of the vendors under clauses 3.2 and 7.6 on the other. The specific warranty given for defective products was limited in two important respects. First it was limited to defects of which the Warrantors were or should have been aware. Secondly there was that time limit of two years from completion. Clause 13.7 provided that the time limit would not apply in the event of “fraud or wilful default”, but that is not alleged by the defendant. Nor does it plead that the Warrantors were aware or should have been aware of any deficiency or defect in the reclosers. And the defendant’s claim for these monies was made well outside the two year period. Accordingly, on the facts pleaded, there could be no claim by the defendant for breach of this warranty. [23] The warranty in clause 15 was that there was no deficiency or defect “in any product manufactured or service supplied or provided by the Vendors”. As already mentioned, only a small number of these reclosers were manufactured by the vendors. The warranty would provide no benefit to the defendant for the allegedly defective design. At least in relation to the defective design and liabilities or losses arising from the defendant’s manufacture and supply of reclosers to that design, there is no irreconcilable tension between the warranty and clauses 3.2 or 7.6. I am not persuaded that clause 13 and this warranty are provisions to the contrary of clause 3.2 or clause 7.6. But if they are, they would remove from the ambit of clauses 3.2 and 7.6 only a loss to the defendant from reclosers manufactured by the vendors, and the plaintiffs do not seek, in the alternative, some declaration which is limited to those items. -- 5 of 8 -- 6 [24] Next the plaintiffs rely upon clause 16.4 of the contract. It is necessary to set out clause 16 in full: “16. PRODUCT LIABILITY 16.1 After the Completion Date the Purchaser must: (a) remedy any defect in the goods and services supplied by the Vendors in the Business before Completion; (b) supply after-sales services which the Vendors undertook to perform in respect of the goods and services supplied by the Vendors in the Business before Completion; and (c) perform the obligations which the Vendors undertook to perform under any guarantee or warranty given in respect of goods or services supplied by the Vendors in the Business before Completion, To the extent only that any Vendor has or would have had (but for Completion) a legally enforceable obligation arising under contract or statute to remedy the defect, supply the after sales service or perform the obligations. 16.2 Subject to clause 16.3, each Vendor indemnifies the Purchaser and agrees to hold the Purchaser harmless against the costs of direct materials and direct labour of personnel engaged in the conduct of the Business which are incurred in connection with the performance by the Purchaser of its obligations under clause 16.1. 16.3 The Purchaser may not make a claim under the indemnity under clause 16.2 unless: (a) the aggregate amount of the claim exceeds $200,000 in connection with: (i) any customer, irrespective of the number of events or occurrences; (ii) any product, irrespective of the number of events or occurrences; (iii) any component, irrespective of the number of products in which it is used or the number of events or occurrences; (b) the Vendor has or would have had (but for Completion) a legally enforceable obligation arising under contract or statute to remedy the defect, supply the after-sales service or perform the obligations referred to in clause 16.1; and (c) before incurring the costs, the Purchaser has informed and consulted with the Vendor regarding the amount of the costs and the course of action the Purchaser proposes to take to remedy the defect, supply the after-sales service or perform the obligations referred to in clause 16.1. 16.4 Subject to clauses 16.1 to 16.3, after Completion the Vendors will be liable for damages under any product liability or other claim or action (whether in tort, under contract or statute or otherwise) arising in relation to the -- 6 of 8 -- 7 goods and services of the Business designed, manufactured and/or sold prior to Completion.” [25] The plaintiffs’ argument about clause 16.4 is as follows. Clause 16.4 makes the vendors liable for damages under any claim or action arising in relation to goods designed, manufactured and/or sold prior to completion, and this includes what the plaintiffs describe as a “liability in respect of defective design”. They then argue that clause 16.4 “delineates, when and to whom the [vendors] will be liable for damages for defective design or manufacture”, and that if the defendant’s interpretation of clauses 3.2 and 7.6 were correct, clause 16.4 would be otiose. In terms of clause 3.2, clause 16.4 (like the warranty provisions) is said to be an express provision which ousts the operation of clause 3.2. Similarly it is said that it is a provision “otherwise” which ousts the operation of clause 7.6. [26] There is some tension between clauses 16.1 to 16.3 and clause 7.6, concerning defective goods sold prior to completion. But the defendant’s case no longer includes a complaint about reclosers sold prior to completion, and there is now no case in reliance upon clauses 16.1 to 16.3. [27] The plaintiffs’ argument is that clause 16.4 is a specific provision which, where it is applied, would preclude the operation of clause 3.2 or clause 7.6. But the logical end point of this argument, as counsel for the plaintiffs seemed to accept, is that the defendant could base its case instead upon clause 16.4. It would appear to follow from the plaintiffs’ argument that if the vendors were obliged by the common law to compensate owners for their defective design, their failure to do so would be a breach of clause 16.4. for which the plaintiffs would then be responsible. As to that, it is pointed out that clause 16.4 is not pleaded by the defendant. But if, consistently with the plaintiffs’ argument, they would be liable, not by the terms pleaded but by clause 16.4, it would be wrong for the plaintiffs to be given summary judgment, and specifically a declaration that they are not liable at all. [28] It follows that on the present arguments the plaintiffs have not demonstrated that they are entitled to judgment. [29] I should mention something which was not argued by the plaintiffs. It concerns the terms of clause 16.4. As set out above, this provision appears within clause 16 which is headed “Product Liability”. Clause 16.1 required the purchaser to remedy a defect in goods supplied by the vendors and to supply after-sales services and perform warranty obligations to the extent that any vendor was obliged to do so. Clause 16.2 then entitled the purchaser to be indemnified by that vendor and clause 16.3 provided some conditions upon that entitlement. It is in this context that clause 16.4 then appeared. It would not have been surprising to find within clause 16.4 some words of limitation: something which was to the effect that the vendors would not otherwise be liable for defective products which were designed, manufactured and/or sold prior to Completion. Instead, on its face, clause 16.4 imposes a further liability on the vendors. It does so in the widest possible terms, as a liability for damages “under any product liability or other claim or action (whether in tort, under contract, statute or otherwise) arising in relation to the goods and services …”. It -- 7 of 8 -- 8 does so without limiting the persons or the classes of person to whom the vendors would be so liable. It is difficult to discern a logical connection between such a broad provision and the closely prescribed regime within clauses 16.1 to 16.3. However, there is no pleading or argument by the plaintiffs that, for example, clause 16.4 should be rectified or interpreted as if the word “not” appeared before the words “be liable”. [30] The application for summary judgment must be dismissed, and subject to any further argument, the plaintiffs must pay the defendant’s costs of the application. -- 8 of 8 --