No.
6056
of
1997
- This case is brought by a Victorian Company, Playcorp Pty Ltd
("Playcorp") against a Japanese company, Taiyo Kogyo Co Ltd ("Taiyo"). In its
business Taiyo manufactured toys and in particular radio controlled toys ("R/C
toys"). For some years until 1996 Playcorp purchased such products from Taiyo
for sale to retailers in Australia and New Zealand. When the companies
commenced their dealings, and until 1991, Playcorp was known as George Tauber
Imports Pty Ltd ("GTI"). At first the distribution arrangements were informal
but by a written agreement stated to be made on 1 January 1993 and to commence
on 1 July 1993 Taiyo appointed Playcorp as its exclusive distributor in
Australia and New Zealand for the resale of products manufactured by or for
Taiyo from time to time and Playcorp agreed to sell the products and existing
Taiyo products in that territory. The agreement, which I refer to as "the
distribution agreement", was expressed to continue in force until
31 December 1998 unless earlier terminated as therein provided. A deal of
these products were designed by or for, and were manufactured by Taiyo under
arrangement with, a United States company Tyco Industries Inc, referred to in
correspondence as Tyco Toys and which I refer to as "Tyco". Although Playcorp
achieved a high level of sales in Australia differences arose between Playcorp
and Taiyo, and Tyco. It is Playcorp's case that in the circumstances Taiyo
repudiated the distribution agreement by refusing to supply products and that
on 26 or 29 March 1996 Playcorp accepted the repudiation and terminated the
agreement. On 18 June 1997 Playcorp commenced this proceeding claiming damages
in respect of two matters, namely, the profits it contends it would have earned
if the distribution agreement had run its course, and the profit lost and
repair costs incurred as a result of quantities of the products having been
delivered in a defective state.
- In final address Playcorp sought the following amounts as
damages:
1. Loss of profits: $2,347,965.
2. Defective goods: $374,605 made up as to $365,311 profit lost
on such goods and $9,294.00 as repair costs.
- Tyco denies the claims thus raised, both on liability and
quantum. There is no counterclaim.
- The trial commenced on 24 November 2000. An amended statement
of claim had been filed in May 2000. The defence and the reply were amended,
and further particulars of each were provided, during the trial. On 4 December
2000, it seeming that Playcorp might be prejudiced if the hearing were to
continue without time being granted to consider new matters, I adjourned the
hearing to a date to be fixed in February 2001. I also vacated an order made
earlier by the Listing Master that the evidence of a Japanese witness, Shohei
Suto, the President of Taiyo, be taken by video link. As it transpired, the
hearing did not resume until 19 November 2001.
- By the end of the trial Playcorp had called seven witnesses and
Taiyo six. They included, on each side, an accountant and a handwriting expert
to give opinion evidence on the loss of profits claim and the authenticity of
the signature of Suto on the distribution agreement respectively. In addition
each side had tendered a witness statement, and Taiyo had tendered an
affidavit, without the need to call the witness. There was also a significant
amount of documentary material. More specifically, the witnesses called
were:
(a) For Playcorp:
(i) Stephen William Grant, who had changed his name from Glatt on
29 July 1999. In the correspondence he is referred to by his former name. For
that reason, and to avoid confusion, it is convenient to refer to him by his
former name of Glatt. He became a director of Playcorp in 1985 and managing
director in 1988. He ceased to be a director and employee of Playcorp in
January 2000. Essentially, and critically for this case, he had been
responsible for, and the central figure in, the trading relationship with
Taiyo. He made three witness statements and gave evidence over several days.
He was extensively cross-examined. His evidence was central to establishing
the factual foundation for Playcorp's claim both on liability and quantum.
(ii) Harry Cooper, who between about 1986 and until 25 June 1999 was Chairman
of directors of Playcorp. He was also a director of a number of companies in
the Century Plaza Group of companies which included Playcorp.
(iii) Yuki Tsugu Futamura, who commenced employment with Taiyo in about 1985,
became director in charge of marketing in 1992 and who was dismissed from his
employment by Suto on 20 May 1985. Suto did not give evidence. The
reason for the dismissal was neither advanced in evidence by Taiyo nor put to
Futamura in cross-examination. He was not attacked in his credit on that
account; he was dismissed but I was not told why. In his position with Taiyo
it had been Futamura's role to deal with Playcorp. In that context he dealt
with Glatt, and they developed a strong personal relationship of mutual trust
and respect. Futamura gave evidence as to the dealings between the companies,
and with Tyco, and the signing of the distribution agreement by himself, Suto
and Glatt.
In 1996 Playcorp sought to develop some R/C toys. For this purpose a company
called Quantum Toy Concepts Pty Ltd ("Quantum") was registered on 12 July 1996
with Steven Lew, Futamura, Glatt and another person as directors. Futamura,
who was then unemployed, assisted in the endeavour. The endeavour was
unsuccessful, the activity was discontinued and Quantum was deregistered on 9
October 2000.
By reason of his concern that if he gave evidence Suto might bring civil
proceedings against him in Japan without just cause, and thereby cause him
financial harm, Futamura requested and Playcorp provided him with a written
indemnity for costs if that should happen. The indemnity was received as a
confidential exhibit.
(iv) Neil William Holland, a handwriting expert whose evidence supported the
plaintiff's case that the signature of Suto on the distribution agreement was a
genuine signature of Suto.
(v) Enzo Gatto, who gave evidence as to defects in toys supplied by Taiyo and
as to repairing defects in Taiyo toys.
(vi) John Francis Redenbach, the merchandise director of Toys R Us (Australia)
Pty Ltd, who has had extensive experience in the retail merchandising of toys
in Australia for more than 20 years, who gave evidence of matters concerning
the Australian market for R/C toys, Playcorp's role in it and other matters.
(vii) Aubrey Laurence Whitear, an accountant who gave expert evidence in
support of Playcorp's loss of profits claim.
(viii) Monica Pinda, a Japanese translator, whose witness statements concerned
her translation of a number of documents from the Japanese to the English
language. Her statements were tendered without the need to call
her.
(b) For Taiyo:
(i) Masafumi Itani, who since July 2001 has been the marketing
director of Taiyo, the position formerly held by Futamura. Overall he has been
in the employ of Taiyo for 10 years, always in the marketing department and
until his employment ceased, working under Futamura. His evidence related to a
number of aspects of the case.
(ii) Rie Imafuku, an interpreter and translator of the Japanese language. Her
witness statement contained her translations of four witness statements from
the English to the Japanese language, and certain other documents from the
Japanese to the English language.
(iii) Noritsugu Sasahara, who since July 1992 has been employed by Taiyo as an
auditor. His evidence was directed to the matter of Taiyo going public and
whether that project required an agreement with Playcorp of the nature
constituted by the distribution agreement. He also gave evidence of other
matters including a lack of knowledge of such an agreement.
(iv) Gregory Pollard Meredith, an accountant who gave evidence as to the loss
of profits claim.
(v) Gary Lindsay Storey, a handwriting expert who gave evidence as to the
genuineness of the signature of Suto on the distribution agreement.
(vi) Takeshi Tomozawa, who commenced employment with Taiyo in 1992 and has
worked throughout in the marketing department. He is now assistant manager to
Itani.
(vii) Neil Tilbor, a resident of the United States, whose witness statement was
tendered without the need to call him. In summary his evidence was concerned
with the development of R/C toys for Taiyo, the manufacturer of toys by Taiyo,
the adaptation or redesign and development of toys and the role of Taiyo and
Tyco in these matters.
(viii) Noel James Batrouney, solicitor for Taiyo, whose affidavit was tendered
without the need to call him. The affidavit was relied on to answer a
suggestion of recent invention in relation to Taiyo's allegation of forgery of
Suto's signature on the distribution agreement. The suggestion had been made
in cross-examination of Itani.
- It is convenient to note the position of Suto. He founded
Taiyo. He is President and his wife is the Vice President of the company. In
addition to them there were seven other directors, all employees of the
company, each of whom was responsible for an area of the business. The areas
were banking, accounting, research and development, tooling, production,
purchasing and marketing. Futamura, and now Itani, was the director
responsible for marketing. The directors rarely met as a board. Suto
controlled the company. No major decision could be made without his approval.
Such a decision would be whether to enter into an agreement such as the
distribution agreement. Further, Suto would have to sign such an agreement.
Hence, while a matter such as the distribution agreement was within Futamura's
area of responsibility, the agreement could not be made without the approval of
Suto. Although Tyco has had an ownership interest in Taiyo since 1992 or
1993,[1] what I have described as the manner of
operation of the business was the position at all material times.
- Taiyo's solicitors filed a witness statement and a
supplementary witness statement for Suto in October and November 2000
respectively. Among other things the statements denied that he had signed the
distribution agreement. This was to support Taiyo's case that his signature
thereon was a forgery. In accordance with practice Suto had not signed the
witness statements. They were in draft form and would not constitute evidence
until adopted by him in chief.
- Prior to commencement of the trial in November 2000 an order
had been made by the Listing Master that Suto's evidence be given by video link
from Japan. Suto was resident in Japan and not in good health. However, it
was preferable for Suto to give his evidence in court in Melbourne and in case
that became possible, and in order to ensure the matter was considered afresh,
I vacated the video link order on the adjournment in December 2000.
- In the course of the resumed hearing in December 2001 Taiyo's
counsel again raised the matter of how Suto's evidence could be taken. Relying
on up-to-date materials concerning Suto's health which indicated he was in
hospital and could not leave it until the end of the year, and that a video
link to the hospital could not be arranged, counsel sought an order that I, and
the parties representatives, travel to Japan to take his evidence. It quickly
transpired that this was not possible for the reason that Japan did not permit
such action by an Australian judicial authority. Evidence by video link was
also precluded. In the end, following the completion of all other evidence,
Taiyo's counsel did not press the matter further and closed Taiyo's case
without evidence from Suto.
Issues
- It is convenient to identify the issues or areas of contention
counsel left for determination. Summarily stated they are:
1. Was Taiyo bound by the distribution agreement? It is common
ground that this depends on whether Suto signed the document or his signature
was placed thereon by another person without his knowledge or authority. Taiyo
was bound in the former case but not in the latter.
2. If Taiyo was bound by the distribution
agreement:
(a) What products was Playcorp able to purchase under the
agreement? This is to be considered as at the date of rescission (26 or 29
March 1996) and subsequently within the period of the agreement (that is, prior
to 31 December 1998). The issue involves reference to events between Playcorp,
Taiyo and Tyco and their impact or likely impact on Playcorp's business in the
R/C toy market.
(b) Did Taiyo repudiate the agreement, and was Playcorp entitled
to rescind? Whether Taiyo did repudiate the agreement involves a consideration
of the parties' actions in relation to Playcorp's defective product claim.
Their actions are to be assessed in the context of the relevant circumstances.
Playcorp contends that Taiyo refused to supply it with products under the
agreement and that the terms and circumstances of the refusal constituted a
repudiation of its obligations under the agreement. That entitled Playcorp to
rescind and it did so by a letter on 26 or, alternatively, by a further letter
on 29 March 1996. Taiyo contends the defective products claim was false,
grossly exaggerated and unreasonably made, that it constituted an attempt by
Playcorp to force new terms of trade on Taiyo, and that the pressing of the
claim was a breach of an implied obligation to deal in good faith. In those
circumstances Taiyo contends it was entitled, as it did, to conditionally
refuse to supply products until the claim was settled. Thus its conduct was
not repudiatory. Taiyo further, and alternatively, contends that Playcorp was
not ready and willing to perform its obligations under the distribution
agreement and, that being so, Playcorp was not entitled to rescind.
(c) What damages is Playcorp entitled to receive? The claim for
loss of profits involves a consideration of what Playcorp would have done after
March 1996 in the conduct of its toy business. The case as to what it would
have done including what products it would have purchased and sold was based on
evidence of Glatt which Taiyo attacked. In addition to issues as to the amount
of any damages including a contention of Taiyo that no loss was shown, there is
an issue whether two amounts received from Tyco should be brought to account in
reduction of any damages.
3. The second head of damages concerning the defective products
claim raised issues as to the relevant terms of sale and the applicable law in
that respect, and as to the proper calculation of the claim.
Background
- Before Glatt joined GTI in 1985 the man behind the company,
George Tauber, had developed business contacts with manufacturers of toys in
Japan. One of those manufacturers was Taiyo. At this time R/C toys had been
introduced to the market in Australia and GTI was dominant in that market.
Such toys were small replica models of luxury vehicles such as Porsche and
Mercedes Benz. They were indoor toys which performed simple movements without
high speed, performance or agility. GTI was the exclusive distributor in
Australia for R/C toys manufactured by Taiyo and two other Japanese
manufacturers, Nikko and Yarezawa.
- When Glatt joined GTI in 1985 its principal business activity
was the importation and distribution of toys in Australia and New Zealand. He
identified the business opportunity of developing for the Australian toy market
a R/C toy of a different nature, namely, a larger vehicle with a motor which
could be used "off road", ride over obstacles, and which could be used by
children. He worked to develop the idea with a view to high volume sales
promoted by television advertising.
- Accordingly, in May 1985 Glatt went to Japan with Tauber to
meet suppliers and find a product suitable for promotion on television. He met
Taiyo executives including their director of sales and marketing and his
assistant Futamura (who later became director).
- As a result, in 1986 GTI marketed a Taiyo R/C toy in Australia
called Jet Hopper. It was marketed through retailers under the Metro brand
which was owned by GTI. It was heavily promoted on television. It was fast,
agile, able to clear obstacles and be used outdoors. It achieved phenomenal
sales, about 130,000 units in 1986. That led to Tyco distributing the toy in
the United States in 1987 under the name Turbo Hopper, with great success.
Naturally, Playcorp's success advanced the business relationship between GTI
and Taiyo. It is also led to many other R/C toys being successfully marketed
in Australia by GTI and later Playcorp.
- The R/C toy market developed, new toys were introduced and the
range was increased. Briefly, in 1987 Jet Hopper was an even greater success
selling more than 150,000 units, and Taiyo introduced a version on a smaller
scale called Mini Hopper, two-thirds of the size and price of Jet Hopper. It
did not possess the same performance levels, was cheaper and appealed to
younger children. It sold in large quantities without affecting sales of the
bigger R/C toys. In 1988 a third category or section of the R/C toy market was
created when Taiyo introduced the Micro Hopper which was smaller again, and
cheaper with lesser performance abilities, and which appealed to even younger
children. Thus, by 1988 there were three distinct categories of R/C toy in the
market in Australia, and that continued to be the case. They were the full or
normal size high performance vehicle, the mini and the micro. Within that
market there was a difference between toys that were promotional and those that
were not, the former being the latest or a prior very successful toy to be
promoted through various media including television commercials, at substantial
expense. Some R/C toys held their appeal and could be sold steadily for some
years. In some cases Taiyo would redesign a toy such as by a change of colour,
decal, body shape or type, or other features to retain or create
appeal.
- In 1987, reflecting its success in the Australian market, GTI
decided to distribute only Taiyo manufactured R/C toys. Over time GTI (and
Playcorp) devoted substantial sums and effort promoting Metro R/C toys obtained
from Taiyo. While the toys were developed by Taiyo from time to time Glatt's
opinion was sought about their concept. It is evident that Glatt possessed a
keen sense of what would appeal in the market. It was no coincidence that by
the early 1990's Playcorp, to use Redenbach's words
"... continued to be the dominant supplier of radio controlled toys
in the Australian market. It was well known in the industry. There was no
other company ... aggressively marketing and heavily promoting radio controlled
toys in Australia".
It was not every toy that was the subject of such promotion.
The pattern each year was to choose a new product or two considered likely to
have substantial appeal and heavily promote such product. These were called
lead items, the product possessing some special features which gave it special
appeal. Playcorp would have other Taiyo R/C toys in the three categories
mentioned of normal, mini and micro, which might be a mixture of new and old
and include redesigned toys.
- Taiyo also manufactured R/C toys for Tyco. In this
relationship Taiyo developed products from concepts introduced by Tyco. Such
toys were part of the line of toys presented by Taiyo each year and from which
Playcorp selected items for distribution in Australia. In his witness
statement Glatt described these as Tyco/Taiyo toys. In respect of such toys a
royalty of about 5% was included in the purchase price charged to Playcorp, and
which Taiyo remitted to Tyco for itself or the inventor.
- GTI sold all toys under the Metro brand. Tyco did not sell
its Tyco brand R/C toys in Australia. From about 1987 Taiyo allowed GTI (and
later Playcorp) to use certain Tyco packaging and promotional items to
advertise Tyco/Taiyo toys in Australia. In 1992 the arrangement was changed in
that Tyco required Playcorp to pay an annual fee of $10,000 for the use of
Tyco's packaging, art work and $6,000 per Tyco commercial.
- I have referred to the close relationship that developed
between Glatt and Futamura. They were in frequent (Glatt said weekly) contact
concerning the development, ordering and supply of R/C toys. It was an
informal arrangement, in that there was no written agreement by which Playcorp
was granted a distribution right, and hence the personal relationship with a
common sense of purpose and understanding was of fundamental importance to,
indeed underlay, the ongoing successful commercial relationship between the
companies. Itani agreed that the good relations between Glatt and Futamura
were in the interests of each business, and that it was a business relationship
in an industry in which personal relations were unavoidable. The fact of the
matter was that, notwithstanding the absence of a formal agreement, GTI (and
later Playcorp) was the sole distributor of Taiyo toys and Tyco/Taiyo toys in
Australia and New Zealand.
- Once a year, on a visit to Japan, Glatt would meet with Suto.
They had a cordial business relationship. It is a reflection of the
relationship and in particular of Suto's confidence in and regard for Tauber
and Glatt that they were asked to become, and accepted appointment as,
directors of two companies associated with Taiyo called Taiyo Toy (Hong Kong)
Company Limited and Taiyo Engineering Services Co Ltd. They also held shares
in the former company. Later, in 1991, it seems David Wolfe Joel, financial
controller of Playcorp, became a director of the latter company. I accept
Glatt's evidence that he did not really know what the companies did, but
Futamura told him they needed foreign directors and that Suto trusted him.
Suto was chairman or President and conducted the affairs of the companies
without reference to Tauber or Glatt who signed documents sent by Suto via
Futamura. In the case of the former company and I assume the latter Suto
provided them with a written indemnity for any personal liability as a
director.
- In June 1992 Glatt met the President of Tyco, Richard E Grey
in New York. In the course of Playcorp's business Glatt travelled overseas and
frequently met Grey and other Tyco executives at trade fairs and other
occasions. Glatt had an "excellent" personal relationship with Grey and most
of Tyco's senior sales and marketing executives. At their meeting in June
1992, Grey told Glatt that Tyco intended to establish its own distribution
company in Australia in 1993 to distribute its toys in Australia, but not
Tyco/Taiyo toys. As Playcorp, Taiyo and Tyco had a good relationship, Tyco was
content for Playcorp to remain the sole and exclusive distributor in Australia
and New Zealand for R/C toys manufactured by Taiyo including Tyco/Taiyo toys.
As long as Playcorp continued to do a good job with these products, he saw no
need to change that arrangement. Later in June Glatt received from Futamura a
copy of a letter dated 17 June 1992 from Grey to Futamura which concerned the
matters discussed with Glatt. Glatt regarded the letter as consistent with the
discussions. Nevertheless the letter should be set out as its terms reflect a
developing attitude by Tyco towards distributing its products and it is part of
the context in which future events are to be understood. It also discloses
that Tyco required annual review of the arrangement whereby Playcorp could
distribute Tyco/Taiyo toys. The letter (and Futamura's reply dated 18 June
1992) also reflects the importance and effect of the close personal
relationship between Futamura and Glatt. The letter dated 17 June 1992
stated:
As you know, I met with Steve Glatt in New York last Thursday.
We had discussions about several things, including future distribution in
Australia of radio control and our Illco pre-school toys.
Tyco has become a large toy company and our international operations are
important to the overall financial health and growth of the company.
As President of Tyco, I have the obligation to our employees and shareholders
to do what is best for Tyco. This includes protecting Tyco's distribution
rights, particularly where we have our own subsidiary company. At the same
time, we want to be considerate and fair to our special friends.
We expect to have our own distribution company in Australia in 1993. I've told
Steve that all Tyco products, including Illco pre-school, will be marketed by
Tyco beginning in 1993. This is normal procedure.
We should also do this with those ratio control products "created" by Tyco.
However, I recognise the close relationship of Yuki-san and Taiyo with Steve.
Because of this, we agree that Playcorp can continue distribution of all Taiyo
radio control, including Tyco-designed products, in Australia.
Each Year, Taiyo and Tyco should review this. If Playcorp is performing up to
reasonable levels by using heavy TV promotions, etc., then the arrangement
should continue. Otherwise, perhaps we should consider a change.
Yuki, although Playcorp pays royalty on Tyco-designed items and reasonable
charges for the use of Tyco-style packaging and Tyco TV commercials, our people
feel that Tyco should do its own marketing worldwide. However, I recognise
your difficult position. Since we are more than business associates I am happy
to help you this way at this time".
- In the wider context, the position with the overseas
distribution of Taiyo products was that Tyco was the major distributor in the
United States, Asahi Corporation distributed Taiyo products in Europe and GTI
(Playcorp) distributed Taiyo products in Australia. These were Taiyo's three
major distribution regions outside Japan. Taiyo's relationship with Tyco
developed in the 1991/1992 period. Tyco wished, and Suto approved, Tyco taking
over distribution in Europe from Asahi. The views expressed by Grey in his
letter are consistent with this change in distribution
arrangements.
- Then, on 1 October 1992 Futamura sent a facsimile to Glatt in
which he referred to the preparation of documents necessary for Taiyo to go
public. In that connection he wanted to know Playcorp's capital and number of
employees. It is the fact that Taiyo did give consideration to going public
and that over a period work was undertaken accordingly. Nomura Securities was
engaged as adviser and underwriter. As an auditor Sasahara was engaged on the
project. There were issues about this but having considered the evidence I
find that Sasahara did ask Futamura to obtain a written agreement with Tyco and
Playcorp for the purpose of the float. I should record that I found Futamura
to be an honest and reliable witness. I do not consider that his evidence was
affected by any ill-will towards Taiyo or Suto. I note too, as mentioned
above, that Taiyo's counsel were not prepared to allege anything adverse
against Futamura in relation to his dismissal. Nor were they prepared to
allege directly that he had forged Suto's signature on the distribution
agreement. By contrast I was not impressed by Sasahara. The important
position of Playcorp as an overseas purchaser of Taiyo product was made obvious
in cross examination. So too was Taiyo's case affected by a combination of an
evident lack of organisation of its contemporaneous documents and a tardy
discovery of documents which, considered overall, left me with an absence of
confidence in Taiyo's evidence as to critical documents not being in its
possession. This was reflected in not merely the late production of documents
but, for instance, the omission to discover the letter from Itani to Grey dated
28 September 1995. An element in the tardiness on discovery was, I find, a
concern as to finding, and then having to produce, documents that might not be
helpful to Taiyo's position. I find too that the witnesses remaining in the
employ of Taiyo were much affected by the dominant role and power of Suto whose
obvious wish was to defeat Playcorp in the litigation. Sasahara's evidence was
affected by these factors and, I find, relevantly tailored to suit the case
desired to be advanced by Taiyo. Sasahara was not a reliable witness.
Wherever his evidence conflicts with the evidence of Futamura or Glatt I reject
it. I add that the above finding that Sasahara asked Futamura to obtain a
written agreement is one that, regarding the evidence overall, accords with the
probabilities.
- In accordance with Sasahara's request, in 1993, Glatt states
that in or around April, Futamura told Glatt that for the purposes of the float
it was necessary for Taiyo to enter into written agreements with its
international distributors. Futamura asked if Playcorp could prepare a first
draft and Glatt agreed. There was also to be an agreement with Tyco.
- Playcorp's case is that this conversation led to the impugned
distribution agreement which is dated 1 January 1993. The relevant events
concerning it's making occur through to September 1994 when, on Playcorp's
case, it was signed by Futamura and Glatt, it having already been signed by
Suto. I return to the events when discussing whether Suto signed the
agreement.
- For the moment it is sufficient to say of the agreement that
by its terms Taiyo appointed Playcorp as its exclusive distributor for the
resale of products (defined to mean products manufactured by or for Taiyo from
time to time) in Australia and New Zealand ("the territory") from July 1993
and, unless earlier terminated as therein provided, until 31 December 1998, and
thereafter to be renewed by agreement. By cl 3, concerning "Supply of the
Product", Playcorp agreed to send all orders for the products to Taiyo's office
in Tokyo or such other address as may subsequently be notified by Taiyo, in
writing, for acceptance or objection by Taiyo,[2] and Taiyo agreed that upon receipt of orders Taiyo shall
use all reasonable endeavours to meet the delivery date.[3]
- For its part, by the agreement Playcorp agreed to distribute
and sell the products and existing Taiyo products in the territory,[4] not to appoint another person in the territory
as a distributor or agent for the products in the territory or supply any of
the products to any other person in the territory for use or resale,[5] and to use its best endeavours to promote the
sale of the products in the territory and satisfy market demand.[6] As to payment the agreement provided:
"4.3 Playcorp shall pay to Taiyo the minimum sum of $US 1,000,000
during the first calendar year of the Agreement in payment of Products. In the
event that the earned payments during the first calendar year do not equal or
exceed $US 1,000,000 then Playcorp shall pay such additional sum, which
together with the earned payment will equal $US 1,000,000 prior to 31 December,
1993.
Thereafter, subject always to Taiyo being able to continue to offer to Playcorp
a range and depth of Products not less than those available 1992/3, Playcorp
shall pay to Taiyo the minimum sum of $US 4,000,000 for the balance of the Term
in payment of Products. In the event that the earned payments during the
period until 1 January, 1998 do not equal or exceed $US 4,000,000, then
Playcorp shall pay such additional sum, which together with the earned payment
will equal $US five million prior to 31 December, 1997.
4.4 Playcorp shall account to Taiyo of all sales of Products in the Territory
on an annual basis."
- For its part, by the agreement Taiyo authorised Playcorp to
use the Taiyo trademark and copyrights in the territory on or in relation to
the products for the purpose of exercising its rights and performing its
obligations under the agreement.[7] Taiyo
further agreed to provide Playcorp with samples, catalogues, brochures and
up-to-date information concerning the products as Taiyo considered appropriate
or Playcorp reasonably required to assist with the sale of products, and
endeavour to answer as soon as practicable any technical enquiries concerning
the products made by Playcorp or its customers.[8] Clause 8.9 provided that the agreement shall be binding
upon and enure to the benefit of the parties and their assigns and successors
except that if Glatt is no longer the managing director of Playcorp, Taiyo may
terminate the agreement on six months' notice. The agreement was also liable
to termination if either party is in default of an obligation and did not cure
such default to the satisfaction of the other party within 30 days of notice to
do so,[9] or (to summarise) a party became
insolvent.[10] Finally, by cl 8.9 it was
provided that the agreement shall be construed in accordance with the laws of
Australia.
- On 14 January 1994 Taiyo and Tyco recorded a written
distribution agreement. The document was in the form of a letter to Futamura
from Grey of Tyco and was signed by Suto by way of agreement by Taiyo. It
provided for Taiyo to manufacture radio controlled toys for distribution by
Tyco on an exclusive basis world wide excluding Japan and Australia. It is
important and I set it out;
"This will confirm our Working Agreement, whereby Taiyo Kogyo Co.
Ltd. Of Japan ("Taiyo") will continue to manufacture radio control toy products
for Tyco Industries, Inc. and its worldwide subsidiaries and affiliates
("Tyco"), as follows:
1. This Agreement shall be in effect until December 31, 1994. Thereafter, this
Agreement shall be automatically renewed on a year-to-year basis unless either
party gives written notice of its intention to terminate this Agreement not
less than six months prior to the end of any calendar year. Such termination
shall become effective on the last day of that calendar year.
2. Taiyo shall manufacture certain radio control products for distribution by
Tyco on an exclusive basis worldwide, excluding Japan and Australia. Taiyo
shall continue to offer other (non-Tyco) radio control products to Radio Shack
stores. Taiyo shall continue to have the right to offer the full line of radio
control products (Tyco and non-Tyco) to Sheng Tai Toys in Singapore, New
Zealand Playcorp in New Zealand and United Trading Estates in the United Arab
Emirates. In addition, Taiyo shall continue to offer to Asahi the nine items
previously agreed to, but only until February 28, 1995. Thereafter, sales to
Asahi will cease.
3. Tyco will continue to use its best efforts to develop new product ideas for
radio control toys to be manufactured by Taiyo, including soliciting product
ideas from outside inventors. When royalties are due to outside inventors,
Tyco will be responsible for all royalties in the countries that it sells these
items, and Taiyo will be responsible for Japan, Australia, and any other
countries in which it sells to someone other than Tyco.
4. Each year Taiyo and Tyco shall meet and negotiate in advance the price for
the products Taiyo intends to sell to Tyco the following year. Taiyo shall
bill Tyco at prices and terms negotiated between the parties.
5. ...
6. ...
7. If this agreement is terminated as described in Paragraph 1, then Taiyo
agrees not to sell any items developed by Tyco to any other customer worldwide
except Japan, without the written consent of Tyco."
- In early 1994 Glatt raised concerns with Futamura about Tyco's
distribution of R/C toys in Australia. It is not necessary at this point or
later to detail all the communications. I note that Futamura took the matter
up with Grey and that Grey wrote to Futamura on 24 March 1994
saying;
"Regarding Australia, you are correct that our agreement is for
Playcorp to continue to sell all Tyco/Taiyo R/C items, and so I'm sorry if I've
made you concerned. As you have stated, however, other items such as Matchbox
or Preschool R/C are not part of the agreement, and will be sold by Croner-Tyco.
The question of licensed properties was not considered when we made our
original agreement. For example, where we have the master toy license for a
property like Looney Tunes or X-Men or Viper, and we have the basic toy line,
we feel R/C should be part of our basic line. In fact, many retailers sell the
licensed R/C in the same area of the store with other licensed toys, like
Looney Tunes R/C with other Looney Tunes merchandise, not with other R/C.
Yuki, this should not trouble you. For this year, we have already agreed that
Playcorp can handle our licensed R/C. And for future years, we have time to
discuss it further so we can explain in detail why we believe licensed R/C is
separate from Tyco/Taiyo R/C."
- Futamura and Glatt communicated about these matters.
- In June 1994 Tyco informed Futamura of not being able to find
Playcorp R/C toys in New Zealand and Futamura queried Glatt about performance.
- In late 1994 Playcorp found a number of items were being
returned as defective. This concerns the defective products claim to which I
refer later. I also pass over a difficulty that Playcorp had of obtaining
supply of a R/C toy called Rebound.
- It is convenient to move then to 16 May 1995 when Futamura
informed Glatt that he would be leaving Taiyo "suddenly as at May 20". Glatt
replied by facsimile the following day expressing shock and requesting that
Futamura arrange an appointment with Suto to discuss the future of the
Australian and New Zealand distribution of Taiyo products. At Futamura's
request Itani arranged an appointment and Glatt met Suto in Japan on 26 May. I
return to this meeting in dealing with the forgery issue.
- On 9 August 1995 Grey wrote to Glatt and Suto. The letters
are important. They followed and reflected discussions between Taiyo and Tyco.
The letter to Glatt advised of a new policy regarding Tyco developed R/C
products. From 1996 Tyco would take over distribution of all new Tyco
developed R/C items in Australia and New Zealand. In view of the importance of
the letter I set it out:
"I wanted to write to you personally to let you know our new policy
regarding Tyco developed R/C products.
In the past because of your long relationship with Taiyo, we have agreed for
Playcorp to distribute Tyco-developed R/C items in Australia and New Zealand,
even though Tyco was distributing them directly in the rest of the world.
However, we have told Taiyo that beginning in 1996, we must take over the
distribution of all new Tyco-developed R/C items in Australia and New
Zealand.
Suto-san proposed that the balance of the Taiyo line, that is, all R/C items
you are currently distributing in 1995, including Rebound, you can continue
with in 1996 and we have agreed. Hopefully, this will give both Croner-Tyco
and Playcorp exciting Taiyo R/C to sell in 1996.
I wanted to let you know before either of us committed to any customers for
1996, or showed any Australian customers our 1996 line.
We appreciate our long relationship and hope you understand that we must make
this change at this time. We wish you the best of luck in the
future".
- The letter to Suto was in the following terms:
"In the past, when we have discussed distribution in Australia and
New Zealand, you have told us that Playcorp has been a good distributor for
Taiyo, and that Taiyo feels loyalty to Steve Glatt and Playcorp.
Until now, we have agreed to let Playcorp distribute items developed by Tyco
because of Steven Glatt's long relationship with Taiyo. However, beginning in
1996, we must take over distribution of all new Tyco-developed R/C items in
Australia and New Zealand.
We agree to let Playcorp continue for 1996 with all the items they are
distributing in 1995, including the Rebound, so they will have a strong Taiyo
R/C line to sell.
I intend to send a letter directly to Steven explaining that Tyco must do this
at this time. We want to let him know now, so that he has time to make his
plans for 1996.
Suto-san, we thank you for your understanding and your continuing
cooperation."
- The letter to Glatt concerned him as it reduced the products
available to Playcorp from those available under the arrangements stated in
Tyco's letter dated 17 June 1992 and under the distribution agreement. In
response, Glatt wrote to Suto and Grey on 15 September 1995 in terms settled by
Cooper. The letters referred to and relied upon the distribution agreement,
requiring it to be performed.
- On 19 September 1995 Itani wrote to Playcorp saying that "we
are unable to locate the contract document you are talking about in our Tokyo
office". He asked if Playcorp could fax the document. On 26 September Grey
wrote separately to Glatt and Suto saying he was unaware of the agreement and
requested a copy by fax. Glatt went overseas on 27 September and
thereafter in 1995 and 1996 matters concerning the distribution agreement and
the legal implications were handled by Cooper (who is a lawyer).
- I do not set out all the communications that followed
concerning the distribution agreement. I note that on 28 September Cooper
faxed a copy to Itani, and, on the same day, Cooper faxed a letter to Grey
stating that he consented to Taiyo releasing a copy of the agreement to him but
that he considered he could not do so without Taiyo's permission. On 28
September Itani faxed the agreement to Grey with a letter
stating:
"We just received fax copies of the agreement from Playcorp. Since
Suto san does not remember he might have put his signature on it without
knowing too much about the deal. We appreciate you helping us on this matter.
Thank you and best regards,"
It is important to note that this letter was not discovered by
Taiyo; it was obtained by Playcorp from Tyco following an application to the
Court. On 29 September Grey wrote to Cooper making points about the
distribution agreement and stating that for reasons outlined it was consistent
with Tyco's intentions.
- At this time and continuing there are communications
concerning defective products and the supply of spare parts, further toys
required by Playcorp, issues between Tyco and Playcorp, and from time to time
the distribution agreement. It is not necessary to set it all out, and in
particular I defer further reference to the distribution agreement. In the
course of this Tyco and Taiyo communicated and Tyco proffered advice to Taiyo
as to how it should deal with Playcorp, in particular on the defective products
claim and the matter of future supply to Playcorp. It is evident their
relationship was becoming closer and stronger and that since the departure of
Futamura, and doubtless having regard to the far greater amount of business
done with Tyco, Suto allied Taiyo with Tyco and supported its interest against
Playcorp.
- There are seen to be two lines in the parties dealings. There
is the dispute between Playcorp and Taiyo over Playcorp's defective products
claim and requests for supply and that leads to the issue of breach of the
distribution agreement by Taiyo, repudiation and rescission. The other
concerns issues between Playcorp and Tyco which arose out of Playcorp's claim
of rights under the distribution agreement and how that affected Tyco and
Tyco's desire to sell products in the Australian market.
- Without going into all the details or tracing every step I
refer to some of the events.
- On 2 October 1995 Glatt wrote to Suto making a claim for US
$268,943 for defective products. The letter had been preceded by a deal of
effort on Glatt's part to deal with the matter. The letter
stated:
"Dear Suto-San,
Re: CLAIM FOR DEFECTIVE PRODUCTS
As we have indicated to you over several months, the repair and return
rate of both Triple Wheels, 6V Python and other categories has been
unacceptably high. Through our repair agents and returns to our warehouse we
have incurred high expenses and a warehouse full of faulty product.
We have listed below our claim which does not take into account the loss of
goodwill Playcorp has suffered as a result of the problems incurred due to a
fault with the product. This matter now requires attention and finalisation
and can no longer be delayed.
RETURNS |
US
$
|
|
Quantity
returned
|
|
7,184 |
FOB
cost
|
22.35 |
|
Freight |
1.21 |
US$
23.56
|
Total |
|
US$
169,255
|
|
|
REPAIRS |
|
|
Quantity |
|
5,864 |
Total
cost of repairs
|
|
US$
99,688
|
|
|
|
|
TOTAL
CLAIM
|
|
US$
268,943
|
Should you wish us to return to you the faulty product, shipment can be
arranged. You should be aware that faulty product is continuing to be returned
as the remaining portion of stock is sold through by the retail trade.
We look forward to a quick and positive response in order to finalise this
matter".
The amount claimed as the cost of repairs is an average cost of
US$17 per unit.
- Itani responded to the claim on 5 October 1995 in terms
drafted by Tyco. He said he wanted to finalise the matter in a way that was
fair to Playcorp and Taiyo. For this purpose he requested further
information. He requested confirmation that the returns were for Triple Wheels
and Python, and how many, and whether any 6V Scorcher had been returned and how
many. As to repairs, how many were for Triple Wheels and Python, and could
Glatt explain how the average cost was $17? That seemed very high as Taiyo had
supplied parts for repairs and it cost less than $17 to make and package a new
product. Glatt responded with the following letter on 30
October:
"Thank you for your fax of 5th October, 1995. In
response to your queries please find the following information:
RETURNS TO 10TH OCTOBER, 1995
Triple
Wheels
|
4,546 |
|
Python |
1,686 |
|
6.0V
Scorcher
|
20 |
|
9.6V
Scorcher
|
452 |
|
Wave
Albatross
|
228 |
|
FX4 |
63 |
|
Harley
Davidson Pick-Up
|
132 |
|
Rebound |
43 |
|
Firepower |
14 |
We
are expecting more returns on Firepower with time
|
|
|
7,184 |
|
The
cost of repairs is due to the fact that in Australia labour is very expensive.
It is not viable for our repair agents to fix a defective product for less than
$17.00, excluding parts. This is a negotiated agreed minimum fee with all our
service agents. They charge Playcorp a fixed minimum labour charge per
vehicle. The split up of repairs is as follows:-
|
Triple
Wheels
|
3,428 |
|
Python |
1,074 |
|
6.0V
Scorcher
|
80 |
|
Other |
1,282 |
|
|
|
5,864 |
|
|
|
|
|
Hopefully
with this information you have requested, this matter can now be settled. I
look forward to your prompt response."
|
- While this was happening, and there were communications about
spare parts and supply, on 27 October 1995 Playcorp sought information from
Taiyo of products available to it in 1996 including any new Taiyo developed
products. That was to facilitate planning and the placing of orders for the
first half of 1996.
- Also on 30 October, Glatt wrote to Suto requesting a formal
response to his letter dated 15 September (referred to at [37]) which referred
to the distribution agreement.
- Finally on 30 October, Cooper wrote to Grey taking issue with
his letter dated 29 September (referred to at [39]) and threatening
litigation to protect Playcorp's interest unless there was a compromise. The
letter stated that Taiyo would be in breach of the distribution agreement if it
did not supply Playcorp with product as defined in the agreement. That
included Tyco developed products.
- In the subsequent on-going communications between the parties,
in the course of which Taiyo and Tyco communicated including as to Taiyo's
responses to Playcorp, the parties edged closer to disputation. In this
process the issues between Playcorp and Taiyo on the one hand and Playcorp and
Tyco on the other hand were sought to be isolated by Playcorp, and it would
seem Tyco, but the underlying commercial perspective of Taiyo led to it
conflating the issues and in that respect Tyco's interest was on the Taiyo
side. As matters progressed Suto took Taiyo more and more to Tyco's side, and
in the course of doing so Taiyo sought from Tyco, and obtained, guidance as to
how to deal with Playcorp.
- On the matter of the defective product claims, Taiyo stalled.
That led to Glatt, on 15 and 27 November 1995 writing to Itani requesting a
response to the claims for faulty merchandise. In the latter letter he
observed that he had discussed the matter with Itani for many months, and that
Itani had advised him not to officially forward a claim until Tyco had
negotiated on the same matter. (That referred to the fact that Tyco, like
Playcorp, had made claims on Taiyo in respect of faulty merchandise.) Glatt
further observed that he had delayed for several further months because of
Itani's advice that Suto had other concerns.
- On 10 November 1995 Grey wrote to Cooper responding to his
letter dated 30 October. He expressed interest in finding a way to
resolve their differences in a businesslike and reasonable fashion. However
Cooper had to understand that Tyco was committed to expanding its 1995 entry
into the Australian R/C market with additional items for 1996. Tyco had
developed two new promotional items for 1996, the 6.0v Dagger and the 9.6v
Mutator. Tyco would be prepared to discuss making one of those available for
Playcorp, plus the related advertising and packaging materials, for 1996 in
exchange for the return of some of the older Taiyo products for distribution by
Tyco through Croner-Tyco.
- Cooper responded with a letter to Grey dated 24 November 1995.
He objected to cease trading in any old items as stock was still held in store,
and stated that as Taiyo produced both Dagger and Mutator, Playcorp was
entitled to them under its agreement with Taiyo. A consequence was for
Playcorp to be given the rights to one additional new product each year
commencing with Dagger in 1996 conditional upon Taiyo settling Playcorp's
faulty product claim, and on Taiyo and Tyco acknowledging that all past models
which may be re-launched in their original or a revamped form still belong
exclusively to Playcorp in Australia and New Zealand. Cooper asked Grey to
discuss the matter with Taiyo.
- Grey responded by letter dated 1 December 1995. Among a
series of points he said the following. Tyco would prefer Playcorp to
distribute Mutator, and Croner-Tyco to distribute the Dagger. Playcorp could
use the advertising and packaging materials for Mutator on the same terms as
previously given and have the distribution rights for the remaining period of
the Taiyo agreement. He noted that Playcorp had not paid Tyco's fees for use
of advertising and packaging materials for 1994 and 1995 and asked that
accounts for those fees totalling $44,000 (which were sent separately that day)
be paid. He said that beyond 1996 Tyco could not offer any further new Tyco
developed R/C toys after Mutator. However, Grey said, that would give Playcorp
time to develop its own new items for 1997 and beyond. The matter of
Playcorp's faulty product claim was between it and Taiyo and it was not
appropriate for Tyco to intervene. As to past models (distributed by Playcorp
in 1995 and prior), while Tyco could not agree not to distribute new or revised
items using some common parts or features, it did not intend to introduce
during the remainder of Playcorp's agreement with Taiyo items substantially
similar to Playcorp "past models". Finally, Grey proposed that Tyco take over
New Zealand distribution in 1996.
- On 4 December 1995 Cooper suggested to Grey that Playcorp have
Dagger instead of Mutator. Grey replied saying that was acceptable if all the
other points in his letter dated 1 December were acceptable.
- Cooper replied on 8 December 1995 stating that a
non-negotiable requirement of the settlement was attention to Playcorp's faulty
product claim, to which there had been no meaningful response. He also asked
for costs of Dagger and Mutator and some samples.
- Tyco responded on 8 December with letters to Itani and Cooper.
The letter to Itani stated that Tyco was trying to avoid a lawsuit with
Playcorp over distribution in Australia and what Tyco had offered Playcorp.
The letter asked Itani to send Cooper the FOB costs of Dagger and Mutator. The
letter also referred to Playcorp's faulty product claim stating that Playcorp
was anxious to settle it, and that it would be helpful if Taiyo could make some
offer in settlement. The letter to Cooper provided some information concerning
Dagger and Mutator, stated that Tyco had asked Itani to respond on the faulty
product claim but there was nothing further Tyco could do on that claim, and
assumed that Playcorp otherwise agreed to the terms in Tyco's letter dated 1
December 1995.
- Taiyo's response to the prod from Tyco was a letter from Itani
to Glatt dated 11 December 1995 stating that Taiyo had not neglected the
faulty products issue and that "a little more time" was needed. Glatt
responded on the following day stating that the time now elapsed in dealing
with the claim was "beyond being acceptable" and requested a conclusion. Glatt
noted that Taiyo had settled similar issues with Tyco "quite some time
ago".
- In a response to Glatt later on 12 December Itani referred
both to the faulty products matter and to a request of Playcorp concerning
distribution in 1996. The letter stated:
"I talked with Suto san today once again and passed your urgent
request on these outstanding issues. Believe it or not, Suto san does not
remember at all that he signed over the Agreement even after Mr. Cooper
previously faxed us the copy of it while you were away. He wants to conclude
the quality claims and 1996 Australian distribution issues when he actually
sees the original Agreement where you can prove it was certainly made
between you and Suto san. Would you please mail us the original
Agreement as soon as you can? As we previously advised, this paperwork is not
officially filed at Taiyo Tokyo or anywhere in our company, while we see the
Agreement with Tyco is officially filed by our managing director."
- This letter was the first time that Taiyo linked a conclusion
on the issue of the faulty product claim to distribution under the agreement.
It should also be mentioned that in his evidence Itani said that the letter was
intended to convey a strong statement that Suto had not signed the agreement
and that Taiyo was not bound by it. He also acknowledged being aware that Tyco
and Playcorp were negotiating in relation to distribution of products in
Australia and New Zealand. He was so aware from the ongoing communications
between Taiyo and Tyco. It was thus natural, and reflective of their
relationship, that on 12 December Itani provided a copy of this letter to
Tyco.
- Tyco returned a letter to Itani by facsimile later that day
(12 December). The letter provided information on the FOB cost of Dagger
and Mutator to assist advice to Playcorp. The letter stated that Tyco felt
that Taiyo should act on the two outstanding issues of supply and faulty
product:
"[A]s quickly as possible, however, we suggest you address them as
two separate issues. We don't feel they should be mixed or connected in any
way, since they are different topics. If you would please respond to both in
separate faxes, this would help keep them apart. Playcorp would then file them
in separate folders. I hope you understand."
The letter then referred to claims by Tyco for faulty products,
namely the items Triple Wheels and Python, for which debit notes were enclosed
for US$285,507.50. Tyco then suggested Taiyo offer Playcorp a market share
percentage of what Taiyo paid Tyco. On the basis that in its best year, 1994,
Playcorp had about 4-5% of Tyco's market, it was suggested that Taiyo offer 5%
of $285,507.50, or a settlement of $14,275.37. Adding a little to show "[Y]ou
are nice, reasonable guys and want to resolve this issue" Taiyo "might consider
a settlement of $18,000 or $20,000 to see what they say."
- Further communications occurred on 13 December 1995. Itani
sent a facsimile to Tyco which commenced with thanks for passing Suto's request
to Grey and then stated:
"As you know, Suto san is now ready to set his Patriot Missiles to
protect Tyco/Taiyo business. We look forward to Grey san's response.
...
1. Re: Playcorp Issue.
Thank you and Mark san for giving us helpful suggestions on the outstanding
issues. Suto san does not want to give up on these issues as he is saying Grey
san does not have to offer any kind of compromise for them, but he will handle
all by himself, if Grey san treats him to dinner in Hong Kong. Again, we look
forward to Grey san's response."
- Notwithstanding that he was the author of the letter, and, as
I find, it reflected a discussion he had had with Suto, in cross-examination
Itani was evasive as to what the reference to "Patriot Missiles" meant. The
cross-examination had been preceded by questions in his cross-examination the
previous afternoon (28 November 2001) as to the intended meaning of the
expression "patriot arm" in a letter Itani sent to Tyco on 28 March 1996. In
that letter Itani advised that, in relation to dealing with Playcorp, "Suto san
has another idea/patriot arm to protect ourselves with". Itani said he did not
know what "patriot arm" was. Although he wrote the letter he could not
remember "right now" what "patriot arm" was. He did not know if Suto told him
what it was. He was not sure exactly what Suto said, adding that "[H]e told me
similar things and I just interpreted in this way". In short, his evidence
left one unenlightened as to the intended meaning of the words or as to the
course of action which they were intended to convey or Suto had in his mind. I
thought at the time, and on reflection in light of all the evidence I consider
now, and find, that Itani's evidence was deliberately evasive and
non-responsive. In short, I find that the evidence was deliberately
false.
- I conclude in the same way in respect of the evidence he gave
the next day as to the intended meaning of the expression "Patriot Missiles" in
his earlier letter to Tyco dated 13 December 1995. I interpolate that the
production of this letter by Taiyo only occurred over the lunch break on 29
November 2001 during Itani's cross-examination. It was an example, among
others, of Taiyo's lax observance, or perhaps disregard, of the requirements of
discovery of documents. In any event, when asked as to the meaning of the
expression "Patriot Missiles", Itani skirted around without stating what Suto
had in mind, which I find Itani knew. He said that Suto was very upset and
that he was "going to talk to some press people here or something". He also
said that Suto complained that "somebody forged my signature". According to
Itani, Futamura's wife was related to Suto's wife, and Suto had said he would
talk "to his relative or whatever, something like that". Itani then agreed
that Suto was thinking of a tactic to shut Playcorp down from the Australia
market. He was then asked if the tactic was to say to Playcorp take $20,000
(for faulty products) or no more supply and he answered "I think that was
something that Mr Suto was trying to tell me". These answers exposed what
in any event I would have found was the reason for Itani's disinclination to
state the intended meaning of the expressions "Patriot Missiles" and "patriot
arm". The reason was that an honest answer, which I find lay within Itani's
knowledge to give, would have exposed Suto's state of mind as to the approach
to be taken by Taiyo in dealing with Playcorp, in particular to out-manoeuvre
Playcorp and bring their relationship under the alleged distribution agreement
to an end.
- Finally on 13 December 1995, Tyco sent a facsimile to Itani.
The letter was from the marketing manager. He had met with Grey to discuss
Itani's telephone call to Suto and "our call last night". The letter dealt
with a number of matters commencing with Playcorp. He set out revised FOB
costs for Dagger and Mutator. He requested that they not be sent to Cooper
until Suto and Grey "decide whether we will offer Playcorp any product or
not".
- On 14 December Cooper sent a letter to Itani, with a copy to
Grey. The letter pressed for resolution of the faulty product claim, which was
independent of Playcorp's 1996 distribution rights. He refused to send Itani
the original of the distribution agreement but offered the opportunity for
inspection in Playcorp's office. As to 1996 distribution, the letter said that
based on representations from Tyco and Playcorp's fault claims being met in
full, Playcorp was prepared to be reasonable with the balance of the agreement.
For that purpose he requested the FOB costs of Dagger and Mutator, and the
relevant samples and videos.
- Grey replied to Cooper on 15 December. He provided costs for
1996 of Dagger and Mutator and asked some questions relevant to the resolution
of differences.
- On 19 December Cooper wrote to Grey (with a copy to Itani) and
to Itani (with a copy to Grey). The letter to Grey was in furtherance of
negotiating a settlement. The letter to Itani noted that Tyco's price for
Dagger and Mutator was too high and requested a realistic price.
- Grey responded on 22 December. Tyco wished to settle the
issues with Playcorp. However, if Playcorp will not agree Tyco will assume no
settlement can be reached and begin distributing all Tyco-developed R/C in the
Australian and New Zealand markets in 1996. Cooper responded on 28 December
stating that settlement must be achieved with Taiyo, and that if Tyco sued,
Playcorp would counterclaim for breach of the Taiyo agreement.
- On 18 January 1996 Sullivan, Tyco's vice president, marketing,
sent a letter to Itani which recorded some thoughts and statements of Suto.
They record that Suto was sure he did not sign the Playcorp agreement, that
Suto would ask Glatt to visit Yamagata (in Japan) with the original agreement
and discuss returns with him, and that Suto had recently suggested another
strategy regarding Playcorp which Tyco will discuss and respond to next
week.
- In February and March 1996 a good deal of correspondence
passed between the parties. On 5 February Sullivan wrote to Itani advising
that Tyco's lawyers in Australia were going to write to Playcorp for payment of
the amount of $44,000 and threatening other action. The letter contemplated
settlement on the matter of distribution. Tyco expressed agreement with
suggestions of Suto that Tyco not try and take over distributing all R/C items
in Australia in 1996. Tyco "agree[d] that it may be better not to fight Steven
for the distribution this year". The letter concluded with a request for
advice of Suto's thoughts "about our plans".
- As foreshadowed, on 7 February Australian lawyers for Tyco,
Cowley Hearne, wrote to Playcorp. They sent two letters. One letter demanded
payment of the $44,000 within seven days. The other letter gave three months'
notice of termination of the licence to use Tyco's television commercials and
packaging designs in promoting the sale of R/C products.
- Also on 7 February, Cooper sent a letter to Itani with a copy
to Grey. To Itani, he requested a reply to his facsimiles of 14 and 19
December 1995, stated that Playcorp was prepared to settle along the lines
suggested by Grey but required a firm quote for Dagger and Mutator so as to
elect the product to market in 1996 as part of the compromise, requested Taiyo
confirm it was willing to supply these products and requested resolution of the
faulty product claim.
- Later on the same day (7 February) Tyco sent a facsimile to
Itani with proposed responses by Taiyo to Playcorp. On the matter of the
faulty goods, the proposal was as stated on 12 December 1995 to offer $20,000.
On the matter of Dagger and Mutator prices were proposed to be offered to
Playcorp.
- On 8 February 1996 Itani sent a letter to Cooper in which he
offered US$20,000 for the faulty product claim, and provided the FOB costs of
Dagger and Mutator. The letter was on the lines proposed by Tyco. In relation
to the defective products claim Itani stated (as Tyco suggested) that
Playcorp's market share percentage was about 4-5% of Tyco's and that Playcorp
should bear some of the responsibility as Tyco did.
- Cooper responded with letters to Itani and Grey on 26
February. In the letter to Itani, inspection of the faulty products was
invited and compensation in full was requested (Tyco's position being
irrelevant), the willingness of Taiyo to supply Dagger and Mutator was
acknowledged and the prices were accepted and samples were requested; concern
was expressed that Taiyo was deliberately refusing to respond to Playcorp's
orders for spare parts for the repair of faulty units.
- With his letter to Grey dated 26 February Cooper sent a copy
of his letter to Itani. Cooper made two proposals for settlement, each
alternate to the other. Under Alternative A Taiyo would grant Playcorp a full
credit for its warranty claims, whereas under Alternative B Playcorp would
pursue that claim against Taiyo through the courts. In addition under
Alternative B, the Taiyo agreement remained on foot until resolution of the
court case, Playcorp would pay Tyco $44,000 and distribute Dagger and Mutator.
Alternative A also included a package of terms.
- Passing over facsimiles between Tyco and Taiyo on 27 and 28
February, Grey responded to Cooper's letter on 28 February. He rejected
Alternative A as that required Taiyo to grant a full credit for Playcorp's
warranty claims, and did not involve Tyco. But Tyco could agree to Alternative
B, with certain qualifications. Grey outlined, in addition, an Alternative C
under which Playcorp pursued the claim against Taiyo for faulty product, paid
Tyco the $44,000, and Tyco paid Playcorp $100,000 in exchange for Playcorp
terminating its agreement with Taiyo, giving Tyco the right to sell all Taiyo
products in 1996.
- It was then Itani's turn. On 29 February he wrote to Cooper
rejecting Playcorp's proposal on faulty products and insisting that $20,000 was
reasonable and fair. Itani added that:
"At the same time, we are afraid that your present attitude toward
the settlement of defective product may result in an irreconcilable sort of
situation between Playcorp and Taiyo in terms of the 1996 R/C
business."
Finally, Itani denied that Taiyo was deliberately refusing
spare parts.
- Cooper responded with letters on 8 March. In a short letter
to Itani, he rejected Itani's offer on the faulty product claim as insulting,
repeated offers to Taiyo to inspect the goods, and stated that Playcorp would
pursue the claim "without interference to our 1996 RC business. Any attempt by
you to link the two will only compound the breach of our existing agreement."
He requested advice by return whether Taiyo was prepared to supply Playcorp
with 1996 product while Playcorp separately pursued the old
claims.
- In his letter to Grey, Cooper rejected Alternative C. That
left Alternative B as a basis for settlement. Playcorp was prepared to commit
to spending on further advertising in Australia in order to promote the product
instead of paying Tyco a recoupment of the 1996 packaging and advertising
expenditure. In a reply the same day Grey rejected Cooper's proposal and
suggested that a version of Alternative C giving Tyco the right to distribute
all Taiyo products in Australia and New Zealand might be the best
resolution.
- The correspondence was resumed a few days later on 11 March.
Dealing first with Taiyo, Itani sent a facsimile to Cooper which, apart from an
introductory paragraph, repeated his letter sent on 29 February. In the
introductory paragraph Itani stated that Taiyo did:
"[N]ot have a suspicion about the returns in your warehouses, but
we just feel your claim is totally unreasonable."
Cooper responded immediately stating, in particular, that
Playcorp was ready, willing and able to commence marketing for 1996 and
requesting samples of Dagger and Mutator for showing at the Toy Fair. He
warned Taiyo not to repudiate the agreement.
- In his letter to Grey dated 11 March Cooper suggested that
Tyco supply Playcorp with the Dagger and Mutator commercials as part of an "all
in" settlement with Playcorp continuing to have the Australian rights pursuant
to its agreement with Taiyo until the faulty product claim was settled. As to
Alternative C, Cooper said that if Playcorp was to step out of the picture
immediately and completely, Playcorp required US$500,000 which would cover
Playcorp's loss of profits on the three years remaining under the agreement,
Tyco's claim of $44,000 and Playcorp's defective products claim against
Taiyo.
- On 15 March Grey wrote offering to pay $156,000 net now or
$200,000 payable by three equal annual instalments commencing now. Then,
following a telephone conversation concerning settlement on 17 March, Cooper
sent a letter to Grey expressing shock, in the circumstances of the state of
the negotiations, to learn that Croner-Tyco had commenced marketing Dagger and
Mutator in Australia. He sought an explanation and made a further proposal for
resolution of the matter.
- Also on 18 March, Itani sent a letter to Cooper repeating
Taiyo's attitude to the faulty product claim and stating that:
"We strongly feel your claim for the '95 returns/high-priced
repairs and our '96 business are very much interlinked. We would prefer to
resolve last year's problem before proceeding with '96 shipments."
- Finally on 18 March, Cooper sent a facsimile to Itani
demanding pursuant to cl 6.2 of the agreement, that Taiyo provide Playcorp
with samples of Dagger and Mutator "failing which we shall have no alternative
but to take action to enforce our rights under the Agreement".
- On 19 March Cooper wrote to Grey after they had spoken on the
telephone. Cooper expressed his preference to settle on Alternative A, and
confirmed that Grey had agreed to instruct Croner-Tyco to withdraw from the
offer of Dagger and Mutator. (Under Alternative A, Playcorp was to have Dagger
and Mutator in 1996.) On that being done Playcorp would pay the $44,000 and
not sue Tyco or Croner-Tyco. Grey was also to tell Taiyo that he would not
offer those goods for sale in order not to infringe Playcorp's agreement.
Cooper then made an offer on Alternative C, as a second preference. The offer
was, further to the letter dated 11 March, to abandon all future new products
from Tyco for $500,000 minus AUD$250,000 being Playcorp's claim against Taiyo.
But Playcorp would retain its action against Taiyo and its right to continue to
buy spare parts and old Taiyo products assuming Taiyo would be willing to
supply.
- Also on 19 March Cooper wrote to Itani referring to his
conversation with Grey as to withdrawing Dagger and Mutator, and offering an
independent arbitration of the defective product matter in Australia. Cooper
requested that Itani immediately agree to supply Playcorp in accordance with
the agreement.
- On 20 March Grey wrote to Cooper confirming withdrawal of
Dagger and Mutator. He assumed Playcorp could now send the $44,000. Then, as
to Alternative B he pointed out that he could not assure that Taiyo would
supply Dagger and Mutator. That issue, combined with the cost to Playcorp of
producing new commercials, packaging and samples, made Alternative C worth
considering. Grey made a final offer of $260,000 (or $216,000 net of
$44,000).
- Having thus heard from Grey, on 20 March Cooper sent a letter
to Itani asking whether he would now agree to supply Dagger and Mutator in
accordance with the agreement. In reply, on 21 March, Itani wrote
saying:
"Please let us summarize our direction on the defective R/C's and
our '96 business once again in this fax.
1. Defective R/C's and Returns
We feel your claim is totally unreasonable because:
1. ) The defective items Playcorp has indicated as compensation had been
repaired all by yourself without Taiyo's agreement.
2. ) The problem like this should typically be settled timely.
Playcorp should not have accumulated the defectives or compensation
figures from previous years to report Taiyo.
3. ) Playcorp did not officially report anything from their incoming
inspections.
4. ) In order for Taiyo to admit your indication on the faulty goods is
genuine, Taiyo feels they all must be inspected by a Japanese lawyer,
not by an Australian lawyer.
Therefore, we strongly feel our offer of US$20,000 for your claim is very
reasonable.
2. ) '96 R/C Business
As previously mentioned, we would like to stress that the returns/high priced
repairs and our '96 business are very much interlinked. In other words, unless
you agree to our approach for the defective R/C's and returns, we are very
sorry we can not offer any R/C's including the new items, Mutator and
Dagger. We just hope you have not been showing any of Taiyo R/C's during the
Toy Fair. Another thing we would like to make clear about is that what
Mr. Richard Grey has advised you only indicates Tyco's decision toward
Playcorp, not Taiyo's decision. We would like to stress that "Tyco is
not Taiyo". We hope this will help you understand better on this matter.
Again, we are sorry that we can not agree to supply you any items, we
naturally include Mutator and Dagger, as long as you do not accept our offer of
US$20,000 as a quick settlement."
- In an attempt to find a point at which compromise might be
reached, on 22 March Glatt spoke to Itani and offered to settle the
defective product claim for US$150,000. Itani then sent a facsimile to Glatt
in which he rejected the offer. Itani said he had spoken to Suto and that the
offer was "far too high for us to consider". There was no
counter-offer.
- 26 March was a significant day. A number of events occurred.
Itani rang Glatt at Playcorp's office in North Melbourne during the morning and
advised that because of Playcorp's unreasonable attitude concerning its
defective product claim Suto no longer wished to do business with
Playcorp.
- Separately, and working from his Collins Street office, Cooper
prepared and sent a letter to Grey in response to his letter dated 20 March.
Cooper rejected the Alternative C offer. Alternative B could not come into
play because of Taiyo's attitude. As a result Playcorp was continuing with its
agreement with Taiyo still on foot. Playcorp would continue to use every
possible means to secure continued supply for the remainder of the agreement.
The amount of $44,000 was being sent to Tyco "today" in payment of Tyco's
claim. It is to be noted that earlier in March (it would seem on 13 March
1996) Tyco had served a statutory demand on Playcorp for the debt (in
AUD$57,926).
- Later in the day Karsten Malmos of Tyco, who was then in
Melbourne, contacted Glatt and Cooper. The three men met at Playcorp's office
in the afternoon. Prior to the meeting Glatt advised Cooper of his
conversation with Itani that morning.
- The meeting with Malmos occupied several hours. Malmos said
he wished to resolve the issue of Tyco distributing Tyco/Taiyo toys in
Australia and New Zealand. There was a negotiation. An agreement was reached.
It was written out by hand in point form, dated 26 March, and signed by Malmos,
Glatt and Cooper. It was agreed a formal document would be prepared recording
the agreement. The document stated:
"- Tyco will immediately refund US$44,000
- Tyco will pay US$305,000 for Playcorp not to interfere with Tyco distributing
in Aust Dagger + Mutator or any other 'new' Taiyo developed product. Payment
to be made in seven days.
- Playcorp retains all its rights against Taiyo
- Playcorp has no claim to N-Z market
- Playcorp retains rights for any 'old' product it has marketed from Taiyo in
the past."
As I understood it, it was accepted before me that the
reference to "new Taiyo" was intended as a reference to "new
Tyco".
- Following the meeting Cooper asked Glatt to telephone Itani in
Japan. Cooper wanted confirmation of Itani's advice earlier that day. Glatt
rang and he and Cooper jointly spoke to Itani on the speaker telephone. They
gave evidence that Itani said that Suto no longer wished to do business with
Playcorp. In his witness statement Cooper added that Itani further said, in
substance, that Taiyo would not supply Playcorp with any products. According
to Cooper, they told Itani they accepted the situation and would take
appropriate legal action against Taiyo. In his witness statement Itani said
that Cooper spoke with an aggressive tone and pressed him to say that Taiyo
would not supply products in 1996. Itani said that he would not commit to such
a position but wanted to resolve the claim for defective products before
discussing supply.
- The witnesses were taxed on their account of this conversation
in their oral evidence. It is not necessary to set the evidence out. It was
clear to me on Itani's evidence, and I in any event find it to be the fact,
according as it does with Suto's established prior position and the
probabilities, that Itani's response, in substance, was that unless Playcorp
accepted Taiyo's offer of $20,000 for the defective product claim Taiyo would
not supply in 1996. Itani confirmed that that was Suto's position at the time.
I reject Itani's evidence in his witness statement in so far as it is contrary
to this finding.
- Immediately following the conversation Cooper dictated a
letter to Itani which he and Glatt signed and sent by facsimile to Itani. The
letter, dated 26 March, states:
"I am writing this facsimile together with Stephen Glatt after his
conversation with you a little earlier, and our subsequent joint conversation.
You have advised that Suto san does not wish to do business with us, and will
not supply us. You further offered that if we were to accept $20,000 in full
settlement of our defective products claim you would again approach Suto san
and try to convince him to supply us with Dagger and Mutator for 1996.
As I indicated to you on the phone this is not acceptable. We do not agree to
relinquish our claim for defective products for a token sum of $20,000.
Moreover at this point in time Suto san will not supply us under any
circumstances. We do not require you to appeal that decision. We will make
other arrangements for 1996 and take immediate legal action against you for the
following:
1. Defective products claim - US$268,943 as at 26/3/1996.
2. Damages claim for loss of profits and wrongful termination of contract.
3. Legal and other costs.
Unless the full amount of US$268,943 is paid to us within 7 days we have no
other choice than to proceed against you on all the above claims.
Please advise us within 24 hours of your acceptance or otherwise. Your payment
now of our justified claims in full will save you unnecessary legal costs and
very high damages if we are forced to proceed to court."
- On 27 March Sullivan sent a letter to Itani advising that Tyco
had resolved the issue of distribution of new Taiyo/Tyco product in Australia
and New Zealand. Tyco had paid Playcorp "some money to secure the distribution
of new items". Taiyo's issue with Playcorp regarding defective returns was not
addressed. Taiyo would have to handle that issue. The letter concluded with a
suggestion that:
"[J]ust to protect yourselves, you may want to make clear to
Playcorp that you would distribute product to them if the issues regarding
defectives was resolved. That way, they cannot blame you for breaking the
contract."
- In a facsimile sent to Sullivan on 28 March Itani responded,
in relation to the resolution concerning new Taiyo/Tyco product, that he had
informed Suto who had said "That is exactly what I wanted to see". Suto also
said that Taiyo would resolve the defective product issue. As to the
suggestion in Sullivan's letter concerning distribution, Itani advised that
Taiyo had deliberately held off responding to the last fax at least until they
(Playcorp) called again. Taiyo, Itani said, is "trying to see what move they
make because Suto San has another idea/patriot arm to protect ourselves with.
Thank you for your suggestion."
- In the meantime Tyco's solicitors Cowley Hearne prepared a
deed of release in relation to the handwritten agreement, and forwarded it to
Cooper on 28 March for his consideration. Cooper responded with comments on 29
March.
- On 29 March Cooper sent the following facsimile to Itani
concerning termination of the distribution agreement. The letter
states:
"Your refusal to supply us with products, which you are obliged to
do under the distribution agreement dated 1 January, 1993 ('the agreement'),
constitutes a repudiation of the Agreement which we have accepted, or
alternatively hereby accept.
We record that our acceptance of your repudiation and the consequent
termination of the Agreement is without prejudice to our claim for damages
which we have and will suffer as a consequence thereof. In this regard, our
rights are reserved."
- Itani responded by facsimile on 1 April. He acknowledged the
last facsimile but disagreed with the content. As to the statement in the 26
March facsimile that Suto and Taiyo were refusing to sell Playcorp product in
1996, Itani said:
"What we have consistently said is that, until we resolve the issue
of returns, we can not ship you more product and risk further unreasonable
damage claims.
We hope you understand our bottom line on this matter."
- Cooper responded on 3 April with a facsimile to Itani stating
that the claim in respect of defective products is a separate and distinct
issue from supply of product under the distribution agreement. Taiyo had
refused to supply Playcorp with product.
- Tyco did not make payment of the amount of US$349,000 as
provided in the agreement made on 26 March. Nor had the deed of release been
agreed and signed. On 18 April Cooper instructed solicitors, Clayton Utz, to
commence proceedings against Tyco for recovery of the amount due. Following a
letter of demand a writ was filed in this Court, and served, on 6 May seeking
judgment against Tyco for US$349,000.
- The writ provoked a renewal of discussions concerning the
deed of release. Terms were agreed and the deed, which was duly signed by Tyco
and Playcorp, states that it is made on 30 May 1996. It is necessary to refer
to relevant provisions of the deed. I shall do so in as summary a way as
possible.
- Tyco agreed to pay Playcorp AUD$459,006 with interest from 5
April 1996 until the settlement date which was 31 May 1996 or such other time
as may be agreed.[11] It was then agreed as
follows:-
"3. THE AGREEMENTS
3.1 The parties agree that as from the settlement date Playcorp does not have
any authority or licence to distribute in New Zealand and will not distribute
in New Zealand any Tyco toy.
3.2 The parties agree that as from the settlement date Playcorp does not have
any authority or licence to distribute in Australia and will not distribute in
Australia any of Tyco's New Products.
3.3 Tyco agrees that Playcorp may (without payment of any fee or royalty)
continue to have the exclusive right to distribute in Australia (but not in New
Zealand) Tyco toys other than Tyco's New Products and (subject to clause 3.12
hereof) to use the Intellectual Property Licence in Australia in respect of
Tyco toys other than Tyco's New Products without payment of any fee or royalty.
3.4 Without prejudice to the rights of Playcorp against Taiyo for damages in
respect of any termination of the Distribution Agreement by Taiyo, Playcorp
agrees that as from the settlement date Playcorp must not seek nor will it seek
any licence or authority from any person (including Taiyo) to distribute in
Australia (other than as set out in Clause 3.3) any Tyco toys.
3.5 Playcorp agrees that as from the settlement date Playcorp must not seek nor
will it seek any licence or authority from any person (including Taiyo) to
distribute in New Zealand any Tyco toys.
3.6 Playcorp agrees that it will not take any legal action against Taiyo for
specific performance of the Distribution Agreement.
3.7 The parties agree that as from the settlement date the Intellectual
Property Licence will terminate without prejudice to the rights of Playcorp set
out in Clause 3.3.
3.8 The parties agree that as from the settlement date Tyco shall have the
exclusive right in New Zealand to the exclusion of Playcorp (whether on Tyco's
own account or through Tyco's authorised agent) to distribute Tyco toys.
3.9 The parties agree as between themselves only that as from the settlement
date Tyco shall have the exclusive right in Australia to the exclusion of
Playcorp (whether on Tyco's own account or through Tyco's authorised agent) to
distribute Tyco's New Products.
3.10 Playcorp agrees that if within the 90 day period commencing on the
settlement date, Tyco pays to Playcorp a further sum of US$195,000 then
Playcorp will immediately:
(a) covenant never to commence any proceedings against Taiyo in respect of the
Taiyo Claim; and
(b) terminate any proceedings commenced against Taiyo in respect of the Taiyo
Claim on the basis that no orders be made other than to dismiss the claims of
Playcorp.
3.11 Playcorp will take no action to prevent Taiyo supplying Tyco (or its
authorised agents) with any Tyco products to be distributed by Tyco (or its
authorised agents) pursuant to the terms of this Deed.
3.12 Nothing in this Agreement gives Playcorp any right or licence to use the
trademark or tradename 'Tyco' or any variation or combination of
it."
- The expression "Tyco's New Products" was defined in cl 1.3 as
follows:
"For the purposes of this Deed, except where the context of this
Deed otherwise requires Tyco's New Products means those Tyco toys that:
(a) Prior to 31 December 1995 have never been distributed or sold by Playcorp
in either Australia or New Zealand or in both Australia and New Zealand; or
(b) Prior to 31 December 1995 have been distributed or sold by Playcorp in
either Australia or New Zealand or in both Australia and New Zealand and on or
after the settlement date have been re-designed by or on behalf of Tyco.
For the purposes of this clause, 're-designed' means altered in any manner but
does not include:
(a) a mere alteration to the decals of a toy;
(b) a mere alteration to the colour of a toy;
(c) a mere alteration to the name of a toy; or
(d) an insubstantial alteration to the shape of a toy such that the altered toy
is substantially similar to the original toy."
The expression "Taiyo Claim" was defined to mean a claim
against Taiyo for loss and damage suffered as a result of Taiyo's repudiation
of the distribution agreement and for defective products supplied by Taiyo
under the agreement.
- The Distribution Agreement referred to in cl 3.4 and cl 3.6
is the distribution agreement between Taiyo and Playcorp made 1 January
1993.
- The reference to the Intellectual Property Licence in cl 3.7
referred to the agreement whereby Tyco authorised Playcorp to use Tyco
packaging, designs and advertising relating to Tyco toys.
- The deed of release provided that in consideration of Tyco's
payment and the provisions of the deed the parties mutually released and
indemnified each other from claims, and Playcorp agreed to discontinue the
Supreme Court proceeding.[12] Tyco duly paid
the settlement sum of $459,006 but did not pay the further amount of US$195,000
referred to in cl 3.10.
- The deed of release did not, however, settle all matters
between Playcorp and Tyco. Problems arose as to whether a product was "new" or
"old" within the meaning of the expression Tyco's New Products. The issue had
the potential to arise when a Tyco toy distributed before 31 December 1995 was
"re-designed" and introduced to the market for distribution. Clause 1.3 dealt
with "re-design" but not in an all-inclusive sense. It stated four respects
which did not constitute "re-design" but the clause left it as a matter of
judgment as to whether a "re-design" was "a mere alteration" to the decals,
colour or name of the toy, or "an insubstantial alteration to the shape of the
toy", and did not otherwise define the criteria by which to determine whether a
toy had been "re-designed".
- On 7 August 1996 Cooper received a letter from R Michael
Kennedy, senior vice president and general counsel of Tyco, seeking Playcorp's
approval to market an old product, Rebound, in Australia. He offered a royalty
for the right to do so.
- On 1 October 1996 Cooper wrote to Tyco complaining that, in
breach of the deed of release, Tyco had distributed in Australia certain old
products. He requested that such distribution cease and that Playcorp receive
an account of profits.
- Not having received a proposal from Tyco, on 2 December
Cooper wrote to Cowley Hearne threatening to issue proceedings unless a
satisfactory offer was received. The managing director of Croner-Tyco wrote to
Glatt on the subject on 20 December. He proposed that in relation to two
items, Scorcher 4x6 and Wild Thing 11, Croner-Tyco pay Playcorp the net amount
representing the profit made on their sales plus an additional amount of
compensation as consideration for a release from claims in relation to any
future product launch that could be construed to have come from an old product.
Croner-Tyco believed that from a practical point of view Playcorp will no
longer be able to source product from Taiyo. Taiyo sold 90% of its product
through Tyco's subsidiary. If Playcorp did not accept the offer Croner-Tyco
would litigate. But, in addition, it was prepared to offer an Olympics project
to Playcorp. Playcorp did not accept the offer.
- On 5 January 1997 Cooper wrote to Cowley Hearne advising that
any offer must be within the magnitude of US$300,000 since a settlement is to
cover all future "old" Taiyo products to be reintroduced to the
market.
- The dispute was not resolved. On 14 May 1997 Playcorp
commenced a proceeding in this Court against Tyco alleging a breach of the deed
of release by distributing in Australia Tyco toys other than Tyco New Products
and/or causing or permitting Croner-Tyco to sell, offer for sale or distribute
such toys in Australia. The relief claimed was an injunction to restrain Tyco
from distributing in Australia R/C toys not being Tyco New Products and
damages. In the course of the proceeding, on 22 July 1997 Playcorp
provided particulars of its loss and damage and, on 9 September 1997,
provided further and better particulars of its loss and damage.
- The proceeding was settled in December 1997. The settlement
was effected by a deed of settlement made in December 1997 and a deed of
termination and assignment made in February 1998. The parties to the deeds
were Tyco of the first part, Playcorp of the second part, and Croner-Tyco,
Mattel Inc, Mattel Pty Ltd and Matchbox Collectables Pty Ltd of the third
part.
- By the deed of settlement Tyco agreed to pay Playcorp
AUD$37,000 on or before 5 December 1997 as a contribution towards
Playcorp's costs of the proceeding.[13] Tyco
duly paid the settlement amount of AUD$37,000. In consideration of that
payment Playcorp released Tyco and the parties of the third part from all
claims in the proceeding.[14]
- By the deed of termination and assignment Tyco agreed to pay
to Playcorp AUD$340,000 on or before 5 December 1997 in consideration of
Playcorp entering into the deed.[15] Tyco and
Playcorp agreed that from the date of payment Playcorp's exclusive right to
distribute Tyco toys in Australia other than Tyco's New Products, and to use
the Intellectual Property Licence referred to in cl 3.3 of the deed of
release, is terminated and all rights or obligations arising under or in
relation to that exclusive right are terminated.[16] From the payment date Playcorp had no right or
entitlement to sell or distribute Tyco toys in Australia.[17] It was further agreed:
(a) That from the payment date the unwritten agreement dated
26 March 1996 and all rights thereunder is terminated.[18]
(b) That Tyco and the parties of the third part had no right to use any
intellectual property of Playcorp.[19]
(c) That, with the exception of Playcorp's rights to the intellectual property
in the Metro trademark, on the payment date Playcorp assigned all its right
title and interest in any intellectual property of or in relation to Tyco toys
held by Playcorp.[20]
Finally, by way of completely concluding any issues vis-à-vis Playcorp
and the other parties, Playcorp released Tyco and the parties of the third part
from all claims whatever relating to the right referred to in cl 3.3 of the
deed of release, the Intellectual Property Licence, the unwritten agreement
dated 26 March 1996, and the purchase, sale or distribution of Tyco toys in
Australia.
The distribution agreement - a forgery?
- This issue arose on the pleadings in the following way. In
the statement of claim Playcorp pleaded that by an agreement made on 1 January
1993 Taiyo granted Playcorp the exclusive right to sell and distribute in
Australia and New Zealand the toys and R/C products manufactured by or for
Taiyo. In particulars the agreement was stated to be in writing constituted by
a document dated 1 January 1993. That is the distribution
agreement.
- Taiyo's pleading to the agreement changed from its initial
defence dated 26 March 1998 to the fourth amended defence dated 27 November
2000. In the initial defence Taiyo admitted supplying products to Playcorp but
otherwise denied the allegation. Thus, the agreement was put in issue. An
amended defence dated 15 September 1999 added a number of specific grounds to
the general denial of the agreement. These included that the signature of Suto
to the document relied on by Playcorp is a forgery. The fourth amended defence
abandoned all these specific grounds with the exception of the plea of forgery.
In its final form Taiyo's defence to Playcorp's plea of the distribution
agreement is in the following form:
"3. The defendant:
(a) admits that during the period April 1994 to December 1995 it supplied toys
and radio control products to the plaintiff for re-sale in Australia and New
Zealand;
(b) otherwise denies the allegations in paragraph 3 and says further that the
alleged Distribution Agreement bears a signature on behalf of the defendant
that is a forgery.
Particulars
The Distribution Agreement relied on by the plaintiff bears, on page 7, two
signatures of directors purporting to execute the document on behalf of the
defendant. The first of those signatures is a forgery of the signature of the
President of Directors of the defendant, Mr Suto. The second signature is that
of Mr Yuki Futamura, who was until 1995 a director of the defendant. The
defendant is unable to say who placed the purported signature of Mr Suto
on the document or when it was placed on the document save to say that it was
not Mr Suto, who did not sign the document and has never done so."
- In a reply dated 29 November 2000 Playcorp denied the
allegations in para 3(b) of the fourth amended defence.
- It is an unusual feature of the case that the person whose
signature is alleged to have been forged, did not give evidence. Furthermore,
at the trial counsel for Taiyo did not put to any witness that he had forged,
or been involved in the forging of, Suto's signature. While this may be
regarded as being consistent with the particulars in the defence, it is
significant that in the course of lengthy cross-examination it was not put to
either Futamura or Glatt that he had forged the signature or was in any way
involved in the forgery. The failure to put the allegation to Futamura was
significant, considering the seriousness of the issue raised by Taiyo, which is
an allegation of dishonest conduct of a most serious type, and as the thrust of
the issue as to the making and validity of the agreement was directed at
Futamura. On Futamura's evidence it was he, and he alone, who introduced the
matter of the agreement with Playcorp, who negotiated the agreement with
Playcorp, and placed it before Suto who ultimately returned it to him duly
signed. Counsel for Taiyo challenged the factual correctness of Futamura's
account in cross-examination, and by the evidence of witnesses called by them.
He was attacked on his credit with a view to establishing a finding that his
evidence, where challenged, not be accepted. This included his evidence as to
the agreement and what he did with it at Taiyo, and his communications on the
matter with Suto.
- An important, if not essential, part of the substratum on
which the allegation of forgery rested was the relationship between Glatt and
Futamura. The inference seemed to be that the circumstances made
understandable the forging of Suto's signature. Yet, if Suto's signature was
forged, and it was not forged by Futamura with or without the involvement or
knowledge of Glatt, who had written the signature or had an interest in doing
so? Neither Taiyo, nor the evidence, pointed to any other person. On the
evidence, the only reasonable hypothesis would seem to have been that the
signature was written or caused to be written by Futamura with or without the
involvement or knowledge of Glatt. The inference was that the relationship
between Futamura and Glatt should be regarded as providing the interest which
produced the agreement (alleged not to have been required by Taiyo or in its
interest) and the forging of Suto's signature thereon.
- Yet Taiyo did not put to Futamura that he had written, or
caused to be written, Suto's signature on the agreement, or to put an
allegation of involvement or knowledge to Glatt. I find as a fact on the
evidence that the only persons who might have had an interest to write Suto's
signature on the agreement were Futamura and Glatt. It is of course true that
Taiyo was, apart from seeking to establish the plea of forgery, entitled to put
Playcorp to its proof of the agreement, and that included establishing that the
impugned signature was that of Suto. Yet, allowing for that, it was, in my
view, too artful for Taiyo to seek to build up clouds of suspicion and doubt by
reference to a range of matters directly concerning those persons, but to avoid
putting the fundamental allegation to them. It may be said (as I have first
pointed out) that the failure to put the allegation was consistent with the
terms of the defence, and with an insufficiency in instructions, and I do not
overlook the limited terms of the defence. However, the reality of the conduct
of Taiyo's case was a heavy attack on the credit of Futamura and Glatt, in
order to demonstrate unreliability in their evidence, in particular as to the
agreement and its signing.
- I conclude on this point concerning the way in which Taiyo
conducted its case of forgery by pointing out that in his evidence in chief
Futamura stated that:
"The signature on the distribution agreement is Mr Suto's. I did
not forge it."[21]
Futamura was not cross-examined on his evidence that he did not
forge Suto's signature. He was cross-examined on many things, and his credit
was challenged in many respects, but he was not cross-examined on that
evidence.
- In support of the submission that the signature on the
distribution agreement was not signed by Suto, Taiyo's counsel relied on a
range of matters which were the subject of evidence or inferences arising
therefrom. In a nutshell, in Taiyo's written submission the following was
contended: certain evidence of Storey was to be preferred to that of Holland;
from Taiyo's point of view, there was no good reason for Suto to have signed
the agreement; the agreement had not been filed at Taiyo or Playcorp; Glatt's
evidence as to the signing of the agreement was pure reconstruction; Futamura's
account of Suto having signed the agreement was incredible; non-performance
under cl 4.4 of the agreement was inconsistent with execution in 1994; Glatt's
failure to mention the agreement at his meeting with Suto in May 1995 was
inconsistent with the agreement having been signed by Suto; and, allowing for
cultural differences, Taiyo's reaction when the agreement was asserted was
consistent with Suto not having signed. Of course I have regard to the full
terms of the written submission and counsel's oral address.
- In turn, Playcorp's counsel provided a written submission of
considerable elaboration. I have regard to it all, and to the oral submission
although, as with Taiyo's submission, I do not set it all out.
- Taiyo's submission commenced with the evidence of the
handwriting experts, Holland and Storey. It was submitted that I should accept
Storey's evidence that the "hen", being the squiggly "S" like stroke which
descends through "Suto", was written first in the disputed signature whereas it
was written second (after "Suto") in the control or genuine signatures. This
was an issue of sequence - in what sequence in the writing of the disputed
signature was "Suto" written in relation to the descending "hen"
stroke?
- On a plain reading of his witness statement, Holland's view
appeared to be that the "hen" came second in the control signatures,[22] whereas in his oral evidence he said that on
stereomicroscopic examination he could not determine the sequence of the
intersections in the "Suto" and the descending "hen". He was of the same
opinion in relation to the disputed signature, which he also examined
microscopically. The evidence was inconclusive as to which came first, and
thus did not permit him to express a conclusion. When he had said in his
witness statement, having analysed the construction of the signature "Suto",
that the pen had been lifted and "a separate stroke has been made near the
middle of the signature that cuts across the "u" formation of the surname
"Suto", he explained in cross-examination that he was not implying that one was
cutting over the other, he was just saying there was an
intersection.
- Prior to the trial, after becoming aware of Storey's opinion
that the "hen" had been written first in the disputed signature, Holland
re-considered the matter, including conducting another microscopic examination,
and adhered to his opinion. He did not provide a supplementary
report.
- In his evidence in chief Holland did not refer to having
twice undertaken a microscopic examination to determine the sequence of the
signature. The matter of sequence was an important issue. It was also a
difficult issue, he considered "probably one of the most difficult and
challenging areas of a document examiner". When pressed in cross-examination
as to why he had not referred to his examinations and opinion on the matter of
the sequence of the signature he said it was "maybe an oversight" but the
reason was that he "couldn't offer any evidence because it was inconclusive, so
that's probably why I didn't go to ... paper in a report or even in my witness
statement".
- On the other hand, Storey was of the opinion that in the
genuine signature Suto had written the "hen", which he described as a
descending double "S" formation, over the "uto" of "Suto", whereas in the
disputed signature the reverse had occurred.[23] He had first examined the disputed signature on 29 June
1998 at the office of Playcorp's solicitors. At that examination he had a
magnifying glass and a stereoscopic microscope. He formed the opinion then
that the "hen" had been written first. He also formed the opinion that the
signature was a forgery. Shortly thereafter the genuine signatures were made
available and he examined them and compared them to the disputed signature. He
adhered to his initial opinion.
- In the course of his re-examination I permitted Storey to
produce and explain the operation of the stereoscopic microscope which he had
used in his examination of the documents, and which had an associated light on
a flexible arm to better enable examination from various angles. He placed the
signature page of the agreement under the microscope and demonstrated what in
substance he did when he examined the document. He said that he was of the
opinion that the image in the microscope demonstrated that the "hen" was
written first. The "hen" intersected "Suto" at six points. He conceded that
at one of those points it appeared that the "hen" was written second, but in
his opinion the other five intersections showed it was written
first.
- In a short adjournment Playcorp's counsel looked at the image
in the microscope. As they wished to then cross-examine Storey further I
looked at the image in the microscope. I did that for the purpose of better
enabling me to understand the evidence.
- In further cross-examination following the demonstration
Storey was asked why his report to Taiyo's solicitors, dated 6 July 1998, made
no reference at all to the order in which the "hen" had been written. His
answer was to repeat what he had said earlier, that he did not record all his
observations in the report. He adhered to his notes made in July 1998 having
recorded his then view that the "hen" had been written first. Subsequently, in
2000, he conducted a further examination under controlled light. It was
following that examination that, in a supplementary statement pursuant to Order
44 dated 20 October 2000 Storey stated that the "hen" had been written first.
Storey agreed that this was "the first document, at least the first court
document in which it is said that the evidence [he proposed] giving is that the
'hen' appears underneath the "uto".
- The position of Storey on this aspect is somewhat similar to
the position of Holland in relation to his omission to disclose his view that
the sequence could not be determined. But there is a difference in their
position. Storey's notes made at his original examination record that the
"hen" was "done 1st". Holland did not produce notes referring to his view.
What is more significant concerning Holland is that his witness statement was
misleading on the point. In para 5 he referred to having used a
stereomicroscope to examine "the line structure and stroke sequence ... in
detail at various magnifications". That, he said, allowed "the signature
construction to be established including: pen lifts, stroke direction,
unsteadiness, hesitations and the type of writing instrument and ink used". He
then proceeded, in para 6(a)-(g), to describe the characteristics in signature
construction revealed by the microscopic examination of the control signatures.
It was in the concluding para 6(g) that he made the statement referred to above
that the "hen" "cuts across the 'u' formation of the surname 'Suto'". The
impression given is that the "hen" was written second. Then, in para 8, he
stated that the signature of Suto on the distribution agreement exhibited the
same structural features referred to in para 6.
- This evidence indicated that Holland's opinion was that in
the disputed signature the "hen" was written second. In cross-examination
Holland disavowed possessing any such opinion. It is significant to note that
in his oral evidence in chief counsel took Holland to and had him elaborate on
a number of matters, in the course of which he was taken to para 6(a)-(f). But
counsel stopped at para 6(f), and then moved to another area without giving
Holland the opportunity to comment on para 6(g). Later in his evidence in
chief counsel took Holland to the matter of the sequence of the writing of the
"hen". The evidence which Holland then gave concerned the disputed signature,
as distinct from the control signatures, in the course of which a number of
magnified photographs were referred to and tendered. Holland stated that the
sequence could not be determined.
- It was not until cross-examination that Holland disclosed
that he was unable to determine the sequence in the control signatures. The
evidence was not wrung out of him. He gave it immediately on being asked the
question. He also said, correctly and fairly in my view, that in evidence in
chief he was "just following the line of questioning". He went on to say that
looking at it now he should have expressed para 6(g) differently as he was
not meaning to state the sequence in which the "hen" had been
made.
- It is obvious enough that in his witness statement Holland
should have clearly and directly stated his view on the matter of sequence. He
knew it was a relevant consideration. He accepted that the words in the
witness statement were his, and that they did, or had the tendency to, give a
misleading impression of his view. By the time he gave evidence Storey's view
on the matter of sequence was known, and, therefore, Holland might have
provided a supplementary witness statement dealing with the matter or counsel
could have had him state his position on the point in oral evidence in chief.
But neither course was followed and as a result Holland was exposed to
unnecessary attack in cross-examination. I say unnecessary because in my view
Holland was an honest witness and he would have stated his view in evidence in
chief, and thereby corrected any wrong impression of para 6(g), if counsel had
taken him to the issue. But counsel chose not to do so. What counsel did was
avoid para 6(g) and, at a later point, ask Holland questions about sequence in
the disputed signature. I should add that I accept Holland's evidence in
explanation of the matter.
- I further accept that the ascertainment of the sequence
followed in the writing of a signature is difficult, and was in the case of the
disputed signature in the context of the structure of the signature, the
writing instrument and the paper. In their evidence Holland and Storey
analysed the sample signatures and the disputed signature. In doing so they
referred in detail to various characteristics in formation and writing. I find
on the evidence that Suto's signature is complex. In addition, there are
variations in the writing of the sample signatures. The disputed signature was
not traced. It was written freehand with speed and good pen control. It was
not written with tremor in the hand or uncertainty.
- In the end the perhaps predictable position of the
handwriting experts is that their opinion as to the genuineness of the disputed
signature favoured the party who retained and called them. That is not to
indicate that I have approached a consideration of their evidence with an
overly cynical view as distinct from an open mind fairly appraising all that
they said. Having considered the evidence I do not find either of them to have
been dishonest. Indeed, as I have said, I found Holland to be an honest
witness. He, like Storey, stated his views. That is, they stated what they
perceived, and their views derived, on examination. But I am not bound to
accept either perception and view as correct on the balance of probabilities,
or as ultimately determinative of the issue of forgery. It is part of the
evidence to be considered in determining the probability of whether the
signature of Suto was, or was not, forged.[24]
In that process of determination the evidence of the handwriting experts is not
to be given a dominant role in relation to the other evidence bearing on the
probability that the signature was genuine or a forgery.[25]
- Storey's opinion that the disputed signature was forged was
based on several grounds in addition to the matter of sequence. In addition to
his view on the matter of sequence, he referred to a hesitation and pen lift in
the primary "S" of Suto, to a "gross" difference in the descending staff of the
"u" and the ascending stroke of the "t", and to the axis of the "hen" in the
disputed signature being different from the control signatures. In final
address Taiyo's counsel did not rely upon these additional grounds to support
the submission that Suto's signature was a forgery. In fact counsel made no
reference to them in his submission on the issue of forgery, and in submitting
that I should prefer the evidence of Storey to that of Holland. It was
understandable that counsel took this course.
- Storey's evidence on hesitation and pen lift lacked
persuasion. It impressed me as lacking a sufficient basis, as not taking
account of striations and an apparent skip of the pen at the point of the sharp
change of direction, as suffering an internal inconsistency as to the area of
pen lift, and as being argumentative for the sake of supporting Taiyo's case.
The lack of substance, and argumentative nature, of the other grounds is
readily seen in the fact that the feature in question is seen in a genuine
signature. None of the additional grounds supported the allegation of forgery.
Even if it might be considered that they did provide some support, they
represent no more than the view of Storey with which Holland disagreed. In
that circumstance the position would be like that described by Glass JA in
Gawne that the confidence of one expert that the signature was forged
was equalled by the conviction of the plaintiff's expert that the signature was
genuine.[26] That was a factor which in that
case led to a conclusion that the handwriting evidence failed to carry
conviction to the mind. In any event, as I have said, counsel did not rely on
the additional grounds.
- It is appropriate to consider these weaknesses in the
foundation for Storey's opinion of forgery, in considering his evidence on
sequence. While I accept that he gave evidence of what he considered he saw, I
am not persuaded by it whether it be considered alone as a matter of
handwriting or in the context of relevant objective or circumstantial matters.
Just from the handwriting aspect, it was accepted that ocular examination could
not identify the sequence, and hence microscopic examination was turned to.
However, regarding the matter overall in my view Storey's evidence did not
establish that the "hen" had been written first. I am quite unpersuaded by his
evidence as to that. I am not satisfied on the balance of probabilities that
his perception, or assessment based on his examination, that the "hen" was
written first, is correct. I find that Storey strained a reasonable
appreciation of what may be seen on examination of the disputed signature in
arriving at that conclusion, influenced, subconsciously I apprehend, to arrive
at a conclusion favourable to Taiyo.
- It was accepted that there will be variations in a person's
signature. Any of a number of reasons may account for such variations, such
reasons including the age and health of a person, the writing surface, the
writing instrument and the circumstances in which the signature was made. In
this case there are variations in the sample signatures. Some of the
variations are seen in the disputed signature. In fact, on examination there
is a resemblance between the disputed signature and the sample signatures.
While visual examination can detect differences between the signatures, the
disputed signature is not evidently different in the sense of not being that
person's signature.
- I reject the allegation of forgery based on the evidence of
Storey.
- I now turn to the objective or circumstantial
material.
- The first of the points made by Taiyo in this respect was
that there was no good reason for Suto to have signed the distribution
agreement. That was because, in the first place, the agreement was not
required for the purpose of the proposed public offering. Secondly, the
agreement was of little or no benefit to Taiyo. Thirdly, there were compelling
reasons for Taiyo not to make the agreement. I consider these three
contentions in turn.
- The first point has no substance in view of my finding that
Sasahara asked Futamura to obtain a written agreement with Playcorp for the
purpose of the float. He also asked Futamura to obtain an agreement with Tyco.
Futamura attended to each request.
- In support of the second point counsel relied on the fact
that the amount payable under the minimum purchase clause (cl 4.3)[27] was appreciably less than the actual value
of Playcorp's purchases. Clause 4.3 required that US$1M be paid in respect of
the period to 31 December 1993 and thereafter, in respect of the period to 31
December 1997, a further total amount of US$4M. That represents a total amount
of US$5M or, it might be regarded, US$1M per year. This level of minimum
payment was exceeded by the amount of actual purchases, which
were:
* 1992 US$1,435,743.98
* 1993 US$2,092,096.04
* 1994 US$2,528,226.36
* 1995 US$1,937,979.40[28]
The figures provide an overview of the sales by Taiyo to Playcorp in those
years. Of course, while the agreement is dated 1 January 1993 to commence on 1
July 1993, the evidence of Futamura and Glatt is that the agreement was signed
in September 1994. Regarding the matter around that time, there is a letter
from Taiyo to Playcorp dated 8 July 1994 in which it is stated that the 1994
sales "so far" totalled $2,308,596. These figures would indicate that, all
things continuing to be equal, the minimum requirement was not an onerous
obligation for Taiyo to have required of Playcorp. The submission, in other
words, is that Taiyo should have sought to do better for itself by requiring a
higher target of minimum sales. In relation to the submission, it should be
remembered that the obligation in respect of the last four years was
conditional on Taiyo being able to continue to offer to Playcorp a range and
depth of products not less than those available in 1992/1993. Hence, if
purchases fell below the minimum Playcorp might have resorted to an argument
based on that condition to justify no or a lesser sum in respect of part of the
period. Taiyo's counsel did not rely on the latter point. He relied on the
amount of actual sales as highlighting that the minimum purchase requirement
was not onerous to Playcorp, being evidently readily achievable. He emphasised
in that respect that when the agreement was signed in September 1994 the actual
sales experience until that time was known.
- Furthermore, counsel pointed out, while Playcorp was granted
exclusivity as distributor, it did not provide Taiyo with matching exclusivity
in return.
- The third point, that there were compelling reasons for Taiyo
not to make such an agreement, rested on two points. First, the fact that
Taiyo depended heavily on Tyco business, the quantity of business with Playcorp
being relatively small by comparison. Second, was Tyco's expressed interest to
commence its own distribution in Australia and New Zealand, this commencing
(for these purposes) with Grey's letter to Futamura dated 17 June 1992.[29] Counsel emphasised the impermanent nature
of Tyco's then position to restrict itself in the Australian market. The
arrangement was subject to an annual review of Playcorp's performance.
Further, the last paragraph of the letter indicated that Tyco's then decision
turned on personal relationships. Later, in March 1994, it could be seen that
Tyco was demonstrating interest in beginning its own distribution in Australia.
It would not have been, and it was not to Cooper, surprising that Tyco had such
interest in pursuing its commercial interest.
- Of course, the second and third points cannot be considered
in isolation from the fact that the Playcorp agreement was required for the
purposes of the proposed public float. That being the case, Taiyo's attack
must be that better terms should have been struck. Futamura was cross-examined
on these matters, and generally concerning his evidence as to the agreement,
with a view to his evidence not being accepted. But I have preferred, and have
accepted, his evidence on a most critical point, and I accept his evidence on
these matters also.
- Futamura stated that the minimum purchase provision was in
Taiyo's interest. The point was not to make the quantity "as much as
possible", which would be difficult to comply with. He further observed that
the economy "comes back and down and down and up, so we only need to make sure
the business going on, that's all".
- In all the circumstances it cannot be said that Futamura's
explanation lacked reasonable sense or that it was an approach that no business
person in his position might have taken in the conduct of the commercial
relationship. Indeed, in my view it was readily understandable in the overall
context including the commercial relationship between Taiyo and Playcorp, and
the then relationship with, and attitude of, Tyco. It is in this context that,
for his part, Glatt described the requirement as a "fair target", it being
"certain business" for Taiyo. It is also readily seen that it was not the
actual but the minimum. After all, it was in Playcorp's interest to purchase
from Taiyo as much product as it could, assuming a profit on resale was
obtainable. Playcorp's interest was to achieve the highest level of sales
commercially possible. Futamura understood this. He said also, on the point
that Playcorp did not give Taiyo exclusivity, that Playcorp did not buy from
others. Perhaps the agreement might have offered mutuality and exclusivity but
that was not an issue. Further, in the overall assessment of the matter the
personal relationship was an important factor which influenced the terms, and
in the way Futamura sought to, and did, protect Playcorp's interest in his
dealings with Tyco. This included not informing Tyco of the Playcorp
agreement. I concluded that Futamura considered he would be able to aid in
achieving a pragmatic resolution of the situation between Tyco and Playcorp. I
also accept that Playcorp had achieved well for Taiyo in the Australian (but
not New Zealand) market, and that the success was in Taiyo's interest to be
maintained. There was no obligation on Futamura to inform Tyco, although the
reason why he did not do so lay in his relationship with Glatt. But that did
not mean that the Playcorp agreement was a fiction, something never entered
into.
- A further factor relied on by Taiyo was that Playcorp had not
accounted to Taiyo pursuant to the obligation in cl 4.4 of the agreement.
In cross-examination Glatt said that Playcorp had never provided an account in
writing. But, he said, there were discussions and meetings with Taiyo in which
sales were discussed, and these were more frequent than annually. I accept
this evidence.
- Counsel for Taiyo then moved to attack the evidence of Glatt
and Futamura as to the signing of the agreement. In addition, Futamura was
attacked on the matter of his claimed handling of the agreement at Taiyo and
his evidence as to the signing by Suto.
- As mentioned at [126], Taiyo's counsel submitted that
Futamura's account of Suto having signed the agreement was incredible. Counsel
did not go through Futamura's evidence. Having described the evidence as being
incredible he referred to the following aspects: the agreement not being in
Taiyo's interest; that Futamura did not mention it to Tyco; that Futamura did
not inform the auditors of the agreement; and that Futamura left the agreement
on an unidentified desk in Taiyo's office with no record being made of its
execution or filing. I have already referred to the first two matters.
Consistently with the admirable brevity with which counsel approached the
submission, I shall as briefly as seems possible refer to Futamura's evidence
as to his handling of the agreement at Taiyo, in particular in relation to
Suto, and to the evidence of Taiyo's employees on the matter, all of which I
take into account. I should say again that I am left with no confidence in the
reliability of Taiyo's record keeping and its proper production of documents in
accordance with its obligation to make discovery or that it made appropriate
endeavours to locate all discoverable documents. The failure of Taiyo to
discover Itani's letter to Grey dated 28 September 1995[30] is a most significant omission in that regard, and a
singular (but not the only) instance of want of proper
discovery.
- At [24] I referred to Glatt having undertaken to prepare and
provide Itani with a draft distribution agreement. Glatt so advised Cooper who
was himself an experienced commercial lawyer. They discussed the terms of the
agreement. Cooper instructed Monica Vinson, a lawyer in the employ of the
Century Plaza Group, to prepare a draft. On 16 July 1993 Glatt sent a fax to
Futamura advising that he was working on the proposed distribution agreement
and would forward a draft very shortly. In late September 1993 Glatt travelled
to Japan. While in Tokyo he received a first draft of the agreement from his
office in Melbourne, the draft having been prepared by Vinson and reviewed by
Cooper. Glatt spoke to Vinson and requested the deletion of cl 5.2(d). On 30
September 1993, while he was still in Tokyo, Glatt received from Vinson a
revised draft agreement and gave the draft to Futamura.
- On his return to Australia on 19 October 1993, Glatt sent a
letter to Futamura asking for his comments on the proposed contract. On 20
October Futamura replied saying that he had ordered Itani to translate the
contract draft for internal review, that Itani had not completed the task, and
he would get back to Glatt. It will be necessary to refer to the evidence of
Futamura and Itani and some other Taiyo witnesses as to the relevant events at
Taiyo, and to make findings. Otherwise, as far as the Playcorp side of things
is concerned, I state the facts as I find them to be.
- On 10 November 1993 Futamura sent Glatt a letter with queries
concerning, and amendments to, the draft agreement. Glatt passed the letter to
Cooper who discussed the amendments with Glatt and Vinson. On 1 December 1993
Vinson sent Glatt a draft letter for completion and sending to Futamura. The
letter commented on the amendments and requested Futamura's response as soon as
possible so that the agreement could be finalised. Glatt completed the letter
and sent it by facsimile on 1 December.
- Within a matter of days Glatt and Futamura spoke by telephone
about the terms. Futamura said that the term of the agreement had to be five
and not ten years, and that the termination clause in cl 8.5 should be six and
not twelve months. Glatt agreed and asked Vinson to prepare a final draft.
Vinson provided the draft on 8 December. On 11 December Glatt sent the
draft agreement to Futamura, and requested advice of any other amendments. On
14 December Futamura wrote to Glatt asking for "a couple of weeks to settle
internally. There should not be a trouble."
- At this point it is convenient to note that while Taiyo's
head office was in Tokyo, where Futamura, Itani, Sasahara and Tomozawa, among
others, worked, there was also a tooling, research and development plant at
Yamagata, 400 kms north of Tokyo. Suto lived at Yamagata and rarely came to
the Tokyo office. Hence, matters or documents requiring his approval or
signature were usually sent by facsimile or courier by the company delivery
trucks which travelled each day between Tokyo and Yamagata. If a document
under the responsibility of a particular director or manager needed Suto's
signature, the system was to place the document in an envelope usually with a
covering letter. The envelope showed who the document was from. There might
be a prior telephone call advising Suto of the pending delivery. The envelope
was returned by the courier. There was no record of the items carried by the
delivery truck.
- Futamura's evidence is that on 15 December 1993 he sent a
note to Suto attached to the distribution agreement which had been translated
into Japanese by an employee, Mr Montegi. The covering note
stated:
"This part has come from GTI/Metro. The stipulation in case
Stephen William Glatt ceases to be the Managing Director was inserted at my
request. I do not know about the legal validity but there is a relation to
Tyco Australia, and emphasising the relationship of personal trust with Steve
may also help save face for the Chairman Mr Grey if anything occurs, as well as
making clear our position, which is why it was added.
I don't think there is any problem with the content and with your agreement I
will obtain the original contract from GTI and send it to you for
signing."
As to this evidence, three points should be noted. The first
is that while Futamura had initially asked Itani to translate the draft
document to Japanese, and that Itani had commenced the task, it was finished by
Montegi. Itani denies the request to translate and that he did any
translation; I refer to his evidence below. Montegi did not give evidence.
The second point concerns how the note and agreement were sent to Suto.
Futamura said in evidence that he believed he sent the documents in an envelope
by the company delivery truck to Yamagata. He further believed he may have
sent it to Suto by fax around that time. That was how he would normally have
done things. There was no separate record of the sending by the truck or of
the facsimile transmission. The third point is that also on 15 December
Futamura sent Suto a facsimile concerning the proposed agreement with Tyco. In
part the facsimile said:
"We have been requested to produce agreements with overseas
business associates as part of preparation for public listing, and we have been
asking Tyco and GTI/Metro to produce drafts. We have received the following
draft proposal from Mr Grey, Chairman of Tyco."
The reference to GTI/Metro is to be noted. It is to be noted
(see [29]) that the written agreement between Taiyo and Tyco is dated 14
January 1994 and that it was signed by Suto for Taiyo without any other Taiyo
signatory or the company seal being affixed.
- Futamura said that he spoke to Suto between 15 and 25
December 1993, that Suto asked if it was alright for Taiyo to make the
agreement with Playcorp and whether this would upset Grey, to which Futamura
said there was nothing to worry about. Suto said (in Japanese) "OK". Futamura
then, on 25 December, sent a letter to Glatt in which, inter alia, he
asked Glatt to send the original copies of the agreement "for us to sign on".
Glatt informed Cooper of Futamura's letter. Later, in mid March 1994, when he
was in Tokyo, Glatt gave Futamura two original copies of the final draft of the
distribution agreement for signing by Taiyo. It had not been signed by
Playcorp. Futamura said he would arrange for Suto to sign the
agreement.
- Futamura said that on 17 March 1994 he sent a facsimile to
Suto and the other directors of Taiyo concerning Tyco Italy and Playcorp. It
was addressed as follows: "To the President/Messrs Gotoh (Director), Usami
(Executive Director), Baba (Director), Sasahara (Auditor)". Futamura said that
he also sent it by the delivery truck. It was his usual practice to do so, and
that was the basis of the evidence. In a section concerning Playcorp he
advised that Glatt had made a hurried visit and that he:
"... brought with him the agreement that was requested as part of
preparation for public listing (of which I have been sending [you] translations
since last year, the content of which we have had amended somewhat for sections
we have noted, and which has finally been completed). I shall therefore keep
it with me, to request a signature when the President comes to Tokyo at the end
of this month."
- On 3 May 1994 Glatt sent a facsimile to Futamura asking him
for news about the distribution agreement. In a reply dated 7 May Futamura
advised that he had been holding the contract, that he thought there was no
problem, he had been busy and Suto "does not come to the office so often. So,
please give us a little more time to have his Signature. I will try to get it
in next week. Just for your information, I and Suto san will visit Hong Kong
and China from May 12th to 15th."
- Futamura went on in his evidence to say that he took two
copies of the Playcorp distribution agreement on the May trip to Hong Kong and
showed them to Suto to sign. Suto said he would sign later. Futamura retained
the documents, unsigned, and returned to Tokyo with them. He then placed
yellow stickers on the last page of each copy and made a note on the stickers
showing Suto where to sign. He placed the copies in an envelope addressed to
Suto and placed the envelope in a carton for delivery to Yamagata. A short
time later he received an envelope from Suto from Yamagata which contained the
agreements duly signed by Suto. It was normal for company documents to be
signed by Suto in this way, without Board or other formal process. Futamura
said that the distribution agreement only passed between Suto and himself, and
was not anyone else's responsibility or business. He did not tell Itani,
Tomozawa or Tyco. There was no reason not to, but it was his responsibility
and there was no reason to do so. As to Tyco, it was not necessary to inform
the company and it was not its business.
- Concerning this evidence, the following should be noted.
There was no covering note attached to the agreements when they were sent or
returned, and no other record that they had been sent or returned. Futamura
explained the absence of a covering note from himself on the basis that the
matter had already been discussed. Futamura did not say in his witness
statement, but he did venture in cross-examination, that he thought he sent a
translation with the document. Suto does not speak English. Then, as to Suto
not signing the agreements in Hong Kong and Futamura retaining them, Futamura
explained that the trip was for another purpose and that Suto only wanted to
handle that. He said he would sign when they got back. Futamura retained the
documents as he considered it would not have been courteous to have asked Suto
to have done so, as he (Futamura) could carry them and later send them to
Yamagata. I was particularly impressed by Futamura's demeanour when he gave
that evidence, and the tenor of it, and the sense of hierarchy of staff which
then and at other times in the evidence was conveyed, which made Futamura's
action in retaining the documents understandable.
- Futamura said that a short time after receiving the
agreements from Suto, he spoke to Glatt and told him that Suto had signed.
Futamura did not have a record of this conversation, but Glatt himself gave
evidence of such advice. Glatt did not have a record of the conversation and
could not recall when it occurred. He believed it was in the 25 July 1994
period. He thought he would have advised Cooper but he had no recollection of
doing so, and nor did Cooper.
- On 25 July 1994 (following, as I find, the advice of signing)
Glatt sent a letter to Futamura saying he was waiting for a copy of the signed
agreement, and requesting advice when it will be dispatched. Itani replied
advising that Futamura was then away from the office.
- Then, Glatt left on an overseas trip on 30 August, ultimately
arriving in Tokyo on 29 September 1994. Futamura met Glatt at his hotel,
the Imperial. He brought with him both copies of the distribution agreement
signed by Suto. They went to Glatt's room to sign it. Glatt looked at the
documents and saw that the last page of each had a signature which he believed
was Suto's. He noticed that it referred to being executed under seal. He did
not have Playcorp's seal with him. He told Futamura he had better call Cooper
in Australia to ask what he should do. Glatt rang Cooper from his hotel room,
explained where he was and that he was about to sign the agreement but that he
did not have Playcorp's seal. He also said that Futamura did not have Taiyo's
seal, and that Suto had already signed the agreement. Cooper told Glatt to
strike out each sealing clause and to write in lieu "Signed for and on behalf
of" Playcorp and Taiyo respectively and to initial the changes. Glatt told
Futamura what Cooper had said and amended the documents as advised. The
changes were initialled by Glatt and Futamura and Glatt signed as a director of
Playcorp and Futamura signed as a "Director" of Taiyo which word Glatt wrote in
the execution clause in place of "Secretary" which he crossed out. Glatt
retained one copy of the signed agreement, and Futamura retained the
other.
- In cross-examination Futamura said he did not have a record
of the meeting with Glatt at which the agreement was signed. Glatt's evidence
is that the meeting occurred on 29 September 1994. He did not have a record of
the meeting. Nor was he aware of any record of the receipt of Playcorp of the
signed agreement, or any record of the fact of its signing and receipt. He was
cross-examined as to the fact of the agreement including its execution. He
said that Playcorp's board did not approve the agreement, as Glatt explained he
handled the matter by and under the Chairman of the board of directors. He
acknowledged that in answers to interrogatories sworn on 12 April 1999 he had
said that the agreement was signed by him at the Imperial in Tokyo and that he
had no personal recollection of the precise date, but after making enquiries he
believed it was in the first half of 1994 and may have been between March and
May 1994. He had believed that to be true. He could not say if he had
enquired of Cooper for the purpose of answering the interrogatories. He
explained that having made further investigations, by checking his passport and
correspondence and recalling he had signed in Japan, he believed the agreement
was signed in September 1994. He did recall the events at the signing. I note
that in his evidence, which I accept, Cooper said that Glatt had not made
enquiries of him prior to answering the interrogatories. Having considered the
evidence, I find that the answer to the interrogatory was in error as to the
time of signing. I accept Glatt's evidence and find that greater enquiry and
reflection was brought to bear for the purpose of his evidence than had been
the case for the interrogatory, and that the former correctly stated the
position.
- Futamura said that he did not advise employees in his
department of the signing. This accords with evidence of Itani and Tomozawa.
Futamura said that he passed it "through to our law department" but he did not
remember to whom he passed it. A covering note was not necessary. He did not
remember sending it to Sasahara or informing him of it. He dealt with the Tyco
agreement in the same way.
- In his evidence Itani said he did not recall a distribution
agreement with Playcorp being submitted for review or approval by Suto, and
that there was no copy of the distribution agreement in Taiyo's records (unlike
Taiyo's agreement with Tyco). He said that Futamura had not ordered him to
translate a draft contract, and that he did not do so. He was surprised when
Glatt told him of the agreement in September 1995. Glatt had not referred to
the agreement at the meeting with Suto in May 1995 (to which I refer below).
Itani said that a document such as the agreement must be explained and approved
and a copy kept. He said that once he had a copy of the agreement from Cooper
on 28 September 1995 he translated it and, when the opportunity arose, spoke to
Suto about the document. I interpolate that Itani's facsimile to Grey on
28 September 1995 in which he states that Suto did not remember the
agreement but might have signed it, reflects an earlier conversation with Suto,
which Itani recognised in his evidence.
- Itani was in the witness box for some three days during which
he was extensively and rigorously cross-examined. Due to its length I do not
set out all his evidence but I have regard to it. In the course of this
cross-examination Itani confirmed that it was Futamura's responsibility to
handle a matter such as a commercial contract with a customer, and obtain
Suto's approval. It is consistent with his evidence that Futamura might not
necessarily have informed him of the agreement and its signing. He was asked
about the translation of the agreement which he said he prepared following
receipt of the agreement from Cooper, which had not been discovered by Taiyo,
and said he had translated the agreement. He was asked a number of questions
about that document and other documents that Taiyo had not discovered. In the
course of explaining this Itani said "we had a hard time" locating documents.
He further said that he could not explain why Taiyo had not discovered his
letter to Grey dated 28 September 1994. He agreed that Taiyo's records were
not kept in very good order. There was reference to documents in a warehouse
(further to which see the evidence of Tomozawa referred to below). He agreed
that it was possible that the disorder of Taiyo's files explained why he had
not been able to find the distribution agreement. I interpolate that that was
a telling concession and, I find, reflective of the true situation. Later in
the cross-examination Itani said that he did a lot of translation work for
Futamura. He did not think that Futamura asked him to translate the agreement
or that he started but did not finish the task. It was possible that that had
happened, but this would have been unusual, it was not something he did every
day, "so if he asked me to do this kind of thing, I mean I don't know he long
he asked me or I just did the one sentence, it could be possible but I don't
think so, I don't remember I did anything like that". He was overworked and it
was possible he could not get beyond starting the translation but he doubted
that. He agreed that a person called Montegi had worked in his section; he
was no longer employed by Taiyo.
- Sasahara, to whom I have already referred at [23], provided a
short witness statement and gave relatively short oral evidence. I do not
repeat the discussion and findings at [23]. He said he had no knowledge of the
Playcorp distribution agreement prior to it being signed. I have found however
that he did ask Futamura to obtain an agreement with Playcorp. In his witness
statement he said that he found no document "in my file relating to our going
public which mentioned as to making a written agreement with Playcorp" and he
had no recollection and no filing of Futamura's letters dated 15 December 1993
and 17 March 1994. As to the former, in cross-examination he said that it
was probably true that he had not seen the 15 December 1993 note and
translation of the agreement because they were sent direct to Suto. As to the
latter, Sasahara said that he never saw the translation.
- In cross-examination Sasahara said that it was Futamura's
responsibility to make a contract subject to Suto approving and signing it. He
(Sasahara) may not see a commercial contract. I do not refer to his evidence
on the issue whether he had asked Futamura to obtain an agreement with
Playcorp, for I have already found that he did.
- In his evidence Tomozawa stated that Futamura "was always
giving higher priority to Playcorp than other customers", and in that respect
instanced the supply of spare parts to Playcorp in preference to Tyco. I can
say at once that I accept Futamura's evidence in explanation as to how he
managed the supply of product in terms of managing production runs and as to
the priority concerning spare parts which related to Playcorp effecting
repairs. At the same time it is evident that the good relationship which
Futamura enjoyed with Glatt resulted in favourable consideration of Playcorp's
requirements by Futamura, but the context was still commercial and Futamura
managed it in Taiyo's best interests as he considered them to
be.
- Tomozawa went on in his witness statement to say he had never
seen any distribution agreement with Playcorp, or a translation thereof, before
one was sent from Australia in relation to the court proceeding. (In
cross-examination he clarified that to mean when Playcorp sent the agreement in
September 1995.) He had never heard it discussed apart from a comment of
Futamura in 1993 that Glatt was worried about Tyco taking over the Australian
market and that he wanted to make a contract with Taiyo as soon as possible.
Tomozawa did know about the Tyco agreement, and he reviewed it in draft
regarding the clause concerning Radio Shack. He also said that since June 1992
when his employment commenced he attended meetings with Tyco, with Suto,
Futamura and Itani, held about three times a year, at which he never heard
anything about a distribution agreement with Playcorp.
- In cross-examination he affirmed the hierarchical structure
in Tyco, and said, inter alia, that it depended on the issue whether he would
receive a copy of anything, and that he mainly assisted Futamura with Tyco and
Radio Shack. "Mainly", he said, he was not involved in Playcorp business;
sometimes he helped as an assistant as for example if Futamura and Itani were
away from the office and he would reply to Playcorp to be patient. Playcorp
was the special responsibility of Futamura. He (Tomozawa) was "only like
observer about Playcorp business". The Playcorp distribution agreement was
never his area of responsibility. He agreed that Futamura was very successful
in marketing Taiyo toys. Then, as to the nature of the meetings which he said
he attended, they were internal meetings usually concerned with sales,
production or technical matters.
- Tomozawa described the layout of Taiyo's premises in Tokyo.
I interpolate that this evidence significantly aided in understanding the
layout and how the office operated and earlier evidence of Itani as to
difficulty in locating, and whereabouts of, documents. There are two floors.
The office is on one floor. It is an open plan office with the various
departments, marketing, domestic, international, accounting, shipping, spare
parts and production all located there. All employees concerned work in this
one room at desks next to one another. On the same floor is a room which is
the showroom, and another room which holds books and documents. On an
adjoining floor is an area referred to by Itani and Tomozawa as a "warehouse"
and in which documents and files of Taiyo were stored. This evidence was
significant because it destroyed an impression one might otherwise have had
that the "warehouse" containing relevant documents was physically apart and
distant from the office thus rendering more difficult the task of locating
discoverable documents. But, far from that being the case, the discoverable
documents were either on the office floor or the warehouse floor. Of course
there may also have been documents at Yamagata. In addition, I find, as
indicated by Itani, that Taiyo's records were in a state of disorder and that
this may have been a factor in tardy discovery and failure to locate Taiyo's
copy of the agreement.
- This seems a sufficient reference to Tomozawa's evidence in
cross-examination although as with the other witnesses I have regard to all of
his evidence.
- It is important to bear in mind the reality, in terms of the
size of the office and the relative proximity to each other of employees
working at Taiyo. What Futamura did was to pass the document from himself to
the desk of another person in the same room. Why is it to be supposed that in
such a matter a covering note was necessary? The recipient could have asked
for any necessary information. Then, it is clear on the evidence that there
was no reason in the employment of Itani, let alone Tomozawa, which required
that they be informed. Further, as to not advising Itani that the agreement
had been signed, Futamura said that Itani had seen it earlier for translation
purposes. There is an issue as to this matter of the translation, but I accept
Futamura's evidence in preference to that of Itani who I considered a partial
witness.[31]
- Then there is the facsimile referred to at [166] which
Futamura said he sent to Suto and the other directors of Taiyo on 17 March
1994. The December and March notes reveal a consistency in approach by
Futamura in the way of sending information to Suto. But, more important are
the following points. First, the reference to having sent translations of the
Playcorp agreement is consistent with Futamura having sent the translation on
15 December 1993. Second, of the directors named in the 17 March 1994
facsimile only Sasahara gave evidence. In his witness statement he said that
he "never saw such translation" and never examined the translation of a draft
agreement as referred to in the facsimile. It was not in his file relating to
the possible float of Taiyo. He did not say that he did not receive the 17
March 1994 facsimile. I have already made an adverse finding concerning
Sasahara as a witness; see at [23]. But, apart from that, it is consistent
with his evidence that Futamura did send the agreement direct to Suto, and it
is consistent with his and other evidence concerning the lack of order in
Taiyo's documents and Taiyo's unsatisfactory approach to discovery, that the
agreement and the 17 March 1994 facsimile were sent but placed in a different
file or area of document storage to do with marketing, or misplaced and
forgotten, or ignored. Further, regarding the matter overall, the external
indicators provided by the communications between Futamura and Glatt support
their evidence. They are consistent with two companies in an existing
commercial situation entering into a written agreement in aid or furtherance of
their dealings, as Taiyo did with Tyco. The written communications concerning
the agreement were a fact and there is discovery of such communications by
Playcorp and Taiyo. As counsel for Playcorp submitted, the chronology of
events with so many written communications, and conducted over a substantial
period of time, belied clandestine conduct suggestive of a forgery. Futamura's
evidence that he sent the note dated 15 December 1993 on that date
together with a translation of the agreement to Japanese, is supported by the
fact that Taiyo made discovery of the note and translation in its affidavit of
documents affirmed by Itani on 17 November 1998. Further, the notes dated 15
December 1993 are consistent and show that Futamura was dealing with Playcorp
and Tyco at the same time in relation to an agreement, and keeping Suto
informed.
- I now refer to the matter of Glatt's meeting with Suto in May
1995 which I mentioned at [34]. On 16 May 1995 Glatt received a facsimile from
Futamura stating that he would be leaving Taiyo on 20 May 1995. On 17 May 1995
Glatt sent a facsimile to Futamura in which he asked him to arrange a meeting
with Suto in late May. In part the letter stated:
"Before you leave I would appreciate your assistance in a very
important matter. I wish to discuss the future of Australian and New Zealand
distribution of Taiyo products with Suto san. Would you kindly arrange an
appointment for me. I would be pleased to visit him in Yamagata. I believe
the meeting would only take about one hour at most. I have some information
for Suto san, which I believe is important and useful for Taiyo."
- The meeting was arranged and Glatt travelled to Tokyo on 25
May 1995. Itani drove him to Yamagata and acted as interpreter at the meeting.
Glatt and Itani differed in their accounts as to what was said.
- Glatt said that the meeting was very short. He told Suto he
had come to see him because of concerns as to the large number of defective R/C
toys supplied during the last ten months and Taiyo's failure to provide spare
parts for these toys, Futamura's sudden departure, Taiyo's inability to meet
Playcorp's orders of Rebound, and because he had been told that Tyco was
pressing Taiyo to supply all available units of Rebound to the US market. Suto
said he should not be concerned. Suto also said that Tyco was not pressing him
at that time. That was his evidence in chief in his witness
statement.
- The account of Itani in his witness statement was that Glatt
asked Suto for his support and for Taiyo to protect Playcorp from Tyco
distributing products in Australia and New Zealand. Glatt did not mention the
existence of a distribution agreement. Glatt said that Futamura had looked
after Playcorp's interests and provided protection from Playcorp. Suto was
President and in an even better position to look after Playcorp's interest.
Suto said he could not promise to protect Playcorp but would do his
best.
- In cross-examination Glatt denied that the principal point of
his concern was to discuss the security of Playcorp's ability to exclusively
distribute Taiyo R/C toys in Australia against the prospect that Tyco may wish
to do so. Glatt said that he wanted the meeting to understand the state of
affairs in Taiyo in relation to Playcorp because recently things had changed or
seemed different and he wanted to get a feel for what was happening. He was
naturally concerned that Futamura's departure may have an impact and he wanted
to get a feel for what to expect in the future. He could not recall what was
the "very important matter" referred to in his letter. It had occurred to him
that he should go and see Suto. He denied Itani's evidence that he asked Suto
for Taiyo's support and protection from Tyco distributing in Australia and New
Zealand. He agreed (as I understood his evidence) with Itani's evidence that
he did not say anything about the existence of a written distribution
agreement. Counsel put to Glatt Itani's evidence that he said to Suto that
Futamura had looked after Playcorp's interests and protected it from Tyco, to
which Glatt said he believed he referred to Futamura as the man who in
virtually all instances handled the business issues and he was very concerned
that he was no longer there. He denied saying that Suto was President and more
powerful and in a better position to look after Playcorp's interests. He
denied that Suto said he would do his best.
- In his cross-examination Itani said that Suto was a person
who appreciated being treated with respect and that at the meeting Glatt
conducted himself in a very respectful way. He agreed that the substance of
the meeting was to ensure that Futamura's departure would not change
things.
- The particular submission of Taiyo's counsel about this
meeting was that Glatt's failure to mention the distribution agreement was
inconsistent with the agreement having been signed by Suto. Reliance was also
placed on Glatt's inability to explain what he meant by his request for
assistance in a "very important matter" and his "wish to discuss the future of
Australian and New Zealand distribution of products with Suto".
- In considering this submission it is important to place the
meeting in context. The context was the sudden departure of Futamura and the
substantial commercial relationship between the companies which depended very
much on the strength of the personal relationship between Futamura and Glatt.
In my view Futamura's sudden departure was in itself reason enough why Glatt
would have travelled to Japan at short notice to see Suto. Glatt's concern
would have been, and plainly was, to ensure continuity in the business
relationship. But, in addition there were the matters of concern which he said
he raised with Suto, and they were understandable in light of the facts. They
were matters of current concern and it would be understandable if he raised
them. It would also be understandable in the context and having regard to Suto
being Japanese, older than Glatt, and the founder and controller of Taiyo, that
Glatt would have addressed him in a polite and well-mannered way. With
Futamura going Glatt had to ensure a smooth transition to a hopefully
continuing successful business relationship. Itani's evidence as to Glatt
conducting himself in a very respectful way stated the probability in my view,
and what I would have found in any event. It does not seem to me to be at all
likely that at the meeting it would have been diplomatic for Glatt to seek to
emphasise or speak of enforcing the distribution agreement, for several
reasons. There was the matter of approaching and speaking to Suto in a
respectful and appropriate way, and in a context in which Tyco and not Playcorp
was Taiyo's largest customer. Further, there was no issue or dispute about the
agreement as far as Glatt was concerned, Suto had signed it and was aware of
it. Why should Glatt not treat it as part of the assumed background in a very
short meeting?
- I find no criticism of Glatt in his lack of memory of what he
had in mind in writing his letter. It seems reasonable to conclude that he
used terms which he thought most likely to result in Suto agreeing to meet him.
A reasonable reading of the letter is that the very important matter was the
future of Playcorp's distribution of Taiyo products. Hence, notwithstanding
the cross-examination in which Glatt said he could not remember what he had in
mind as a "very important matter", Taiyo's submission does not support the
proposition that Glatt's failure to mention the agreement is indicative of the
agreement not having been signed by Suto. I observe that it must be implicit
in that submission that Glatt knew or had reason to believe that Suto had not
signed the agreement. That was not put to Glatt. I find that Glatt had no
such knowledge and no such reason to believe. I should add that I reject
Itani's evidence that Glatt asked Suto for protection from Tyco. Not only in
my view is it highly improbable that he would have spoken to Suto in that way,
but I prefer Glatt's evidence. I find that Itani's evidence to that effect was
a distortion of Glatt's approach. I find that Taiyo's submission concerning
Glatt's meeting with Suto does not provide support for the submission that Suto
did not sign the agreement.
- A factor relied on by counsel for Playcorp was what they
called the absence of a prior consistent complaint. That is, the absence of a
complaint by Suto, once he had seen the agreement sent by Playcorp, of a
complaint of forgery. The immediate reaction of Suto is expressed in Itani's
facsimile to Grey on 28 September 1995 (referred to at [39]) in which he states
that Suto did not remember, he might have signed the agreement without knowing
too much about the deal. A few months later, on 12 December 1995, Itani
said in a letter to Glatt that Suto did not remember signing the agreement (see
at [57]). Again, there was no protest of forgery. Playcorp's written
submission went into much detail in seeking to substantiate the submission of
an absence of a prior consistent complaint. Counsel for Taiyo submitted that,
allowing for cultural differences, Taiyo's reaction when the agreement was
asserted was consistent with Suto not having signed. In fact, it was
submitted, the 12 December letter was intended as a strong statement. I
interpolate that if that is so it indicates how the use and meaning of language
may differ between cultures. It is of course true that what is conveyed by a
word or set of words in one culture may differ from that conveyed in another
culture. And it takes no great understanding to appreciate how diplomatic and
respectful Glatt had to be in his meeting with Suto. In any event, counsel for
Taiyo pointed to times when Suto was reported to have said he did not sign the
agreement. Having considered all that the parties referred to, in my view it
is open and reasonable to observe that the statements and reactions of Taiyo do
not manifest the vigour and indignation that might have been expected of Suto
if he truly believed that he had not signed the agreement.
- Finally, the affidavit of Batrouney was filed to counter
Playcorp's contention that the allegation of forgery was a recent invention
(see at [5(b)(viii)]). This sought to show that while the specific allegation
of forgery took a while to get into the defence there was a history of
correspondence and pleadings which showed that the defence of forgery was not a
recent invention. I do not find it necessary to rule on that
issue.
- I come then to conclude on the issue of forgery. I accept
the evidence of Futamura and Glatt in preference to that of Itani, Sasahara and
Tomozawa wherever they conflict. I do not repeat my previous adverse findings
concerning Taiyo's witnesses. It is sufficient to record at this point that
they were unreliable witnesses. Their evidence was tailored to suit the case.
I find both on the balance of probabilities, and because I accept Futamura's
evidence, that it was Suto's signature on the agreement, that Suto did sign the
agreement and that Taiyo is bound by it as a result. In reaching these
conclusions I have considered all that counsel for Taiyo submitted and found
that none of the matters relied on, whether regarded individually or as a
whole, lead to the conclusion, on the balance of probabilities, that Playcorp
failed to establish that Suto signed the agreement or that his signature was
forged.
Breach, repudiation and rescission
- At [10] I outlined the issues raised in relation to these
matters. Before developing the issues it is necessary to refer to the
pleadings.
- The statement of claim proceeds in this way. By the
distribution agreement Playcorp was the exclusive Australian and New Zealand
distributor for the resale of products manufactured by or for Taiyo from time
to time from 1 January 1993 to 31 December 1998. There were terms of the
agreement that Playcorp would send orders for product "for acceptance or
objection by Taiyo", and that upon receipt of orders Taiyo would use all
reasonable endeavours to meet the delivery date. At all material times
Playcorp was ready, willing and able to perform its obligations under the
agreement. Notwithstanding its obligations, on or about 21 March 1996 and 26
March 1996 Taiyo refused to supply product to Playcorp. Such refusal was
constituted by Itani's letter dated 21 March 1996 (referred to at [88]) and
Itani's conversation with Cooper and Glatt on 26 March 1996 (referred to at
[94-95]). By that conduct Taiyo evinced an intention not to be bound by the
agreement and thereby repudiated its obligations under it. Playcorp accepted
the repudiation and terminated the agreement by Cooper and Glatt's letter dated
26 March 1996 (referred to at [96]) or by Cooper's letter dated 29 March 1996
(referred to at [100]). As a result Playcorp has suffered loss and damage in
the nature of lost profits in the sum of $10,621,260; by the conclusion of the
trial the amount claimed under this head was $2,347,965. Further, during April
1994 to December 1995 Taiyo sold and delivered products to Playcorp which in
breach of terms implied by s 19 of the Goods Act 1958 (Vic) or the
Sale of Goods (Vienna Convention) Act 1987 (Vic) were not reasonably fit
for their purpose or of merchantable quality, as a result of which Playcorp has
suffered loss and damage in the sum of $503,956.46; by the conclusion of the
trial the amount claimed under this head was $374,605.
- By its fourth further amended defence Taiyo alleged that
there were implied terms of the agreement that Taiyo would continue to supply
new Tyco product to Playcorp only for so long as Tyco consented thereto, and
that Taiyo and Playcorp would at all times act in good faith in relation to all
matters the subject of the agreement. Whereas the latter term was to be
implied by law, the former term was to be implied from several facts and
matters specified in the defence and by reason of the need to give business
efficacy to the arrangements. Tyco did not consent to Taiyo continuing to
supply new Tyco products to Playcorp in and from 1996 and notified Playcorp of
that fact by the letter dated 9 August 1995 (referred to at [35]), and Taiyo's
obligation thereafter to supply such products ceased. Playcorp was not at all
material times ready, willing and able to perform its obligations under the
agreement. And, while Taiyo admitted that it refused to supply products to
Playcorp until the faulty products claim had been resolved, it denied that such
refusal constituted a breach or repudiation of its obligations under the
agreement. Further,
(a) Playcorp's claim for faulty products was unjustified and
wholly unreasonable in that:
(i) it assumed that Taiyo was liable for all faulty product, whenever returned
and whether or not timely notice of return had been given to Taiyo;
(ii) a repair cost of US$17 per unit was claimed whereas the average actual
repair cost was less than A$17 per unit;
(iii) by its letter to Tyco dated 19 March 1996 (referred to at [85]) Playcorp
valued the faulty products claim at $250,000.
(b) In making and persisting with the faulty products claim and insisting that
payment be a condition of further dealings between the parties, Playcorp:
(i) breached the implied term to act in good faith in relation to all matters
the subject of the agreement;
(ii) asserted an obligation on Taiyo for the future which was not that under
the agreement. That is, the assertion that Taiyo was liable for all faulty
product whenever returned, and whether or not timely notice of return was given
to Taiyo, and that the repair charge was US$17 per unit.
(c) In these circumstances Taiyo was entitled, as it did, to conditionally
refuse supply.
- The defence went on in para 8 to deal with the effect of the
agreement which Playcorp made with Tyco on 26 March 1996. The agreement
limited the products which Playcorp could obtain from Taiyo, and that affected
Playcorp's ability to perform its obligations under the agreement. It was
alleged that by reason of not being able to obtain new Tyco products
manufactured by Taiyo, Playcorp was not ready or willing to perform its
obligations under the agreement and was thereby unable to rely on Taiyo's
alleged repudiatory conduct to terminate the agreement. It is important to
note that in the course of final addresses counsel for Taiyo did not rely on
the pleas in para 8(a), (ddd) and (e).
- In the balance of the defence it was denied that Playcorp had
suffered loss and damage. It was alleged that any claim for damages for loss
of profits was limited to loss from the distribution of "old" Taiyo products in
Australia (and not New Zealand) during the period from 29 March 1996 to 5
December 1997. This limitation followed from the agreement dated 26 March 1996
(referred to at [93]), the deed of release dated 6 June 1996 (referred to at
[104-109]), the deed of settlement made in December 1997 (referred to at
[116-117]), and the deed of termination and assignment made in February 1998
(referred to at [116] and [118]).
- The final pleas to note are denials that the agreement was
subject to implied terms that goods supplied be reasonably fit for the purpose
or of merchantable quality, or that any such terms were broken.
- Playcorp filed an amended reply to Taiyo's fourth further
amended defence. The pleas that are made in it will be dealt with as necessary
in considering the submissions.
- It is not to put the cart before the horse to identify, at
the outset of the consideration of the issues, when Playcorp rescinded. That
is to say, assuming repudiation by Taiyo, when, if at all, did Playcorp accept
that repudiation and rescind the agreement? Counsel for Playcorp submitted
that the obligation to supply was an essential obligation - which it
undoubtedly was - and that by Itani's facsimile on 21 March 1996 (referred
to at [88]), and his oral advice to Cooper and Glatt on 26 March 1996
(referred to at [94 and 95]), Taiyo manifested an intention no longer to be
bound by the agreement, by refusing to supply product under it.
- Playcorp's counsel submitted that Playcorp rescinded the
agreement by its letter dated 26 March 1996 and confirmed it by the letter
dated 29 March 1996. In my view neither the terms of the letter nor the
conversation of 26 March 1996 constituted advice of rescission. Playcorp's
statements on 26 March 1996 are properly to be understood as threatening legal
proceedings for damages and costs unless Taiyo advised within 24 hours its
acceptance or otherwise of Playcorp's offer to accept payment of US$268,943
within seven days. No such advice being forthcoming, and there being no advice
from Taiyo that it would supply product, Cooper wrote the letter dated 29 March
1996 which purported to rescind the agreement.
- It is then important to note the category of products which
were available to Playcorp under the agreement. This changes from time to
time, and the position and changes may be noted as follows:
(a) Under the distribution agreement Playcorp was entitled to
"such products as are manufactured by or for Taiyo from time to time". The
evidence established, and in the end there was no dispute, that the great
majority of such products were developed by Taiyo for Tyco,[32] that is they originated with Tyco.
(b) By its letter dated 9 August 1995 (referred to at [35]), Tyco advised
Playcorp that beginning in 1996 Tyco would take over distribution of all new
Tyco developed R/C items in Australia and New Zealand, but that in 1996
Playcorp could distribute all R/C items it was currently distributing including
Rebound. It is to be noted that the agreement between Taiyo and Tyco made 14
January 1994 was terminable on six months' notice. If Tyco had given such
notice it would have been entitled to prevent Taiyo from selling Tyco
originated (or "developed") products to Playcorp. A portent of such action was
contained in Tyco's letter to Taiyo dated 17 June 1992 (referred to at
[21]).
(c) By the agreement made on 26 March 1996 (referred to at [93]) Playcorp gave
up its right to distribute in Australia Dagger, Mutator and any new Tyco
developed products. It gave up totally its right to distribute any product in
New Zealand. This meant that Playcorp was free to distribute in Australia any
Taiyo product and old Tyco product.
(d) The deed of release made 30 May 1996 (referred to at [104-109]) confirmed
this position but defined what was a new Tyco product and thus clarified what
products Playcorp could sell in Australia. The definition appears at [106].
The definition establishes 31 December 1995 as the date at which it is to be
determined whether a toy is a Tyco New Product within the meaning of cl 1.3 of
the deed of release. Although cl 3.2 provides that from the settlement date,
which was 31 May 1996, Playcorp had no authority or licence to distribute
Tyco New Products in Australia, counsel for Playcorp treated the agreement in
the deed of release as flowing back to 26 March 1996. Hence, as from that
date, what remained in the basket of goods available to Playcorp were:
(i) all toys manufactured by Taiyo and devised by Taiyo, whether new or altered
toys, and
(ii) all Tyco toys manufactured by Taiyo that Playcorp had distributed or sold
prior to 31 December 1995 and which had not been "re-designed" within the
meaning of the definition of Tyco's New Products.
(e) For completeness, by the deed of termination and assignment Playcorp gave
up, from 5 December 1997, its right to distribute in Australia Tyco toys other
than Tyco's New Products. Hence, from 5 December 1997, Playcorp had no right
to distribute or sell any Tyco toys in Australia.
- I now turn to the matter of the defective products
claim.
- The first issue is whether Taiyo's refusal to supply product
amounted to a breach of its obligation to supply under the distribution
agreement. Taiyo's case is that it was entitled to conditionally refuse
supply, for the reasons stated in the summary of the defence at [200]. In this
part of the case Taiyo's counsel did not deal with the issue which Taiyo raised
on the pleadings (see at [203]) as to whether the agreement was subject to
implied terms of fitness for purpose and merchantable quality. Taiyo's counsel
developed their submission on that issue at a later point in their address when
dealing with the issue of damages for the faulty product claim (as distinct
from the loss of profits claim). On the other hand, Playcorp's counsel dealt
with the issue in the course of dealing with repudiation and recision.
- The distribution agreement provides for Taiyo to supply
Playcorp with goods by way of sale. Playcorp purchased the goods as and in the
capacity of a distributor for Taiyo products in Australia and New Zealand for
the purpose of selling to retailers at a profit, such retailers then selling
the goods to the public in the condition in which they were received from Taiyo
and sold by Playcorp save for branding with the Metro name. It was
fundamental, to the point of going without saying, that when delivered by Taiyo
the goods be in working order fit for their use by the ultimate consumers.
That was the fundamental basis of the supply arrangement. All of this is
obvious, when the matter is regarded in context, although the agreement itself
contained no express provision concerning Taiyo's obligation in relation to the
quality of the goods.
- The absence of an express provision as to quality of the
goods gave rise to Playcorp's pleading that the sale and delivery of products
by Taiyo to Playcorp was subject to the implied terms of fitness for purpose
and merchantable quality. As I have said, Taiyo denies the existence of any
such terms. In that part of the defence which makes that denial
(para 12), the defence alleges, further:
(a) that if the Goods Act is applicable, the implied
conditions in s 19 are excluded by s 61 by reason of the following
course of dealing, namely, during 1985 - 1994 no claim was made by Playcorp for
defective goods notwithstanding that some defective product was supplied, and
(b) the Sale of Goods (Vienna Convention) Act was not applicable because
Japan is not a party to the Convention or a contracting State and Taiyo's place
of business is in Japan.
- The defence did not positively plead a term as to quality to
which products supplied by Taiyo were subject or were required to meet. In
para 12 Taiyo made the plea referred to in (a) above. And in para 7
it made the plea referred to at [200] (a) (i) and (b) (ii). These pleas did
not, however, positively plead a term as to quality which the product sold by
Taiyo was required to meet, or otherwise identify whether the law pertaining to
Taiyo's obligation in that regard was the law of Australia or of some other
place and, if the latter, what the relevant law of that place was. The
submissions of Taiyo's counsel took the same tack.
- It is logical to commence by considering the issues raised by
the pleadings as they concern the identification of Taiyo's obligations as to
the quality of the products sold to Playcorp.
- As I have said, the distribution agreement itself did not
include an express provision as to quality of the product supplied.
Furthermore, it was not suggested that any order or invoice or other document
pertaining to a particular sale transaction included any relevant
terms.
- It was in the nature of the products that from time to time
they would be found to be defective in some respect or other. It was
foreseeable, and it occurred in practice, that fault was found in the mechanism
or body parts of an R/C toy, and that such toys would be returned for repair.
- In his evidence Itani identified instances in the years 1985
to 1988 inclusive when Taiyo, at its expense, repaired faulty products sold to
Playcorp (or GTI to be precise). In one instance, in 1985, when, as Glatt
said, the whole shipment was faulty and none of the product worked, Taiyo sent
two engineers to Australia who repaired the defective toys. In other instances
in 1985 to 1988 inclusive, when there were large return rates, Playcorp at
Taiyo's suggestion, returned defective toys to Taiyo who repaired and returned
them to Australia. Spare parts also were sent to Playcorp for Playcorp to be
able to carry out repairs. Itani's evidence was based on what he had found in
looking through old records. The evidence accords with Glatt's evidence. The
evidence reflects how the parties worked, without necessarily being exhaustive
of every occasion on which repairs were carried out on defective toys or spare
parts supplied.
- Glatt described how in about 1989 Playcorp established a
procedure for the repair of defective R/C toys returned by a customer to a
retailer. This procedure was to enable repairs to be effected in Australia, if
possible. This would facilitate a speedier turn around of repairs and even of
resale of the toys. For this purpose Playcorp appointed repair agents across
Australia. If a R/C toy was defective the customer would be directed to take
it to a repair agent who would assess the toy and where possible repair it.
This almost always involved fitting spare parts which were supplied by Taiyo.
If the repairer determined that the fault in the toy was the result of customer
abuse or carelessness the repair cost was charged to the customer. If the
repairer determined that the defect was the result of design or manufacturing
fault, the cost was charged to Playcorp. Glatt said that the repair agents
charged Playcorp a fixed minimum labour cost for every R/C toy repaired.
Between July 1990 and about March 1995 Gatto owned, and himself conducted, the
major repair agency for Playcorp in Australia. From February 1996 to June 1999
he was employed by Playcorp as a storeman and repair technician. Gatto's
evidence as to the agency repair set up and how matters were handled
substantially accorded with Glatt's evidence.
- Glatt added that Playcorp would report products with design
or manufacturing defects to Taiyo, and return samples to Taiyo for testing. It
was of course in Taiyo's interest to remedy defects, and this process of
testing and remedying products returned happened with markets other than
Australia.
- Not all items were able to be handled by the repair and
return of the item to the customer or resale. Sometimes retailers returned R/C
toys to Playcorp and, while some were repaired from 1994, many remained in
Playcorp's warehouse. Playcorp's standard policy was to refund to a retailer
the purchase price paid by the retailer when R/C toys were returned to
Playcorp. In his witness statement[33] Glatt
identified Schedule "C" to Playcorp's further and better particulars as setting
out the identity and quantity of defective R/C toys returned by retailers
between 1994 and 1996. This schedule was replaced, during the trial, by an
amended schedule, Exhibit S. The schedule is attached to the judgment as
Schedule A. It sets out in relation to eight products including Triple Wheels
and Python, in respect of the period 1994 to the end of 1996, the quantities of
defective products returned by retailers to Playcorp and in respect of which a
credit note was given, the quantities or defective products remaining in the
warehouse as per a count by Gatto in 2000, the average wholesale price of the
products counted in the warehouse in 2000, and the price lost on the goods in
the warehouse. The credit notes refunded the purchase price paid by retailers
for those defective R/C toys. The refund was invariably made by way of a
set-off of the price against future purchases. As stated in Exhibit S, credit
notes were raised for 7,313 R/C toys returned, and 6,418 returned products
were counted in the warehouse. The figures in Exhibit S are admitted by Taiyo.
Taiyo also admits the amounts stated as the wholesale price and the calculation
of the lost price in the last two columns of Exhibit S. The total figure in
the last column, $365,311, is the amount claimed for defective products. The
amount of $9,294 for repairs is separately stated. It is seen that the amount
of $365,311 is the product of the quantities counted in the warehouse
multiplied by the relevant unit cost.
- Among the R/C toys returned in this period (1994 to 1996) two
were most prominent, Triple Wheels and Python. According to Exhibit S, the
quantities of these toys returned by retailers and in respect of which credit
notes were issued was 3,783 and 1,537 respectively, and the quantities counted
in the warehouse were 4,139 and 1,402 respectively. It was the problems with
those two toys that led to the faulty product claim, in my view. Glatt said,
and there is no doubt that he was correct, that the level of returns for Triple
Wheels and Python due to defects in the quality of materials and manufacture or
assembly was abnormally high. It was, I find, quite unusual and beyond any
reasonable expectation of the parties based on past experience. There were, in
addition, the other returns and repairs quantified in Exhibit S aggregating to
the total numbers referred to above. Glatt said that the number of customer
returns for, and dissatisfaction with, Triple Wheels and Python, was so great
that retailers would refund money to customers, return the toy to Playcorp for
credit and cancel outstanding orders of that product. Further, the high rate
of returns, particularly for Triple Wheels and Python, produced a greater need
for spare parts from Taiyo. For the sake of clarity, Triple Wheels and Python
were by far the worst, but were not the only toys causing trouble. Glatt's
point about dissatisfaction leading to lost sales is seen demonstrated when in
January 1995 Playcorp cancelled an order for 2,400 Mini Triple Wheels. That
was because the quality control problems with Triple Wheels had affected sales
of Mini Triple Wheels.
- Tyco also experienced defects in Triple Wheels and Python.
Tyco sought, and obtained, financial redress for loss suffered as a result of
being supplied these faulty products. I referred to this at
[59].
- Futamura explained how, as a result of the complaints of
Playcorp and Tyco, Taiyo carried out improvements to Triple Wheels. One
improvement was to change the material for the transmission from ABS plastic to
polycarbonate. He stated, and I accept, that the defect in Triple Wheels was
discovered after most of Playcorp's orders for it had been completed, whereas
most of Tyco's orders were manufactured after improvements were made to the
transmission. Futamura also referred to the problems with Python.
- There was some evidence of the rate of return of faulty R/C
toys. Itani said that in his experience the need for repairs or rectification
of faults arose in less than five per cent of total sales, and that this was
factored into a distributor's pricing and profit margin on sales. That was
said in his witness statement, but in terms which produced an objection to
admissibility. Consequently, counsel sought elaboration in Itani's oral
evidence in chief. On being asked what the basis of his "experience" was,
Itani responded that for the special feature sophisticated R/C toys the return
rate would "be more, at least five per cent, is a standard return rate". He
was asked what experience he had which enabled him to say that the rate of
return is factored into a distributor's pricing. His answer commenced by
saying that "everybody knows" there are returns, at which point there was an
objection. The objection was properly made. Itani's evidence of his
"experience" was a generalised assertion as to the rate of return, and there
was no admissible evidence, or evidence of any weight, to establish the
assertion as to distributors' pricing. As I understood Itani's evidence, he
had not discussed the rate of returns with Glatt, but in a discussion about
returns Glatt had said that as long as Taiyo kept a good relationship with
Playcorp "he wouldn't specially bring up the subject".
- Glatt was cross-examined about the rate of returns. He said
that the rate of return experienced was "somewhere less than" five per cent.
He did not recall or believe that Playcorp included a specific percentage in
its pricing to allow for returns of faulty product, warranty costs, or costs
associated with having Taiyo remedy faulty products. Nevertheless, Glatt
agreed, Playcorp's pricing took account of, or factored in, the overhead costs
of running the business, and an item of such costs was Playcorp's "warranty
costs experience". He was referred to Exhibit 2, which was a document prepared
for Cooper on 20 March 1996, and specifically to the item "warranty costs", in
response to which he said that he could not recall that selling costs were
constructed with a provision for warranty costs, as distinct from their being
an understanding of the overhead costs of the business.
- Cooper agreed that rates of return "of the order of something
up to [five per cent] were the norm". He said that such rate of return was not
factored into Playcorp's pricing. Playcorp did not have a policy that it
"would just take in and write off" the first five per cent or up to five per
cent, otherwise Playcorp would not have kept the returned product in its
warehouse.
- He said further that returns "might have been accepted
reluctantly without further recourse in an ongoing and healthy relationship
with Taiyo, but we kept them because we had - our policy was to send them back
for repairing and ultimately get them back. We never wrote anything off."
Playcorp kept product and if it could be repaired, and there was a sufficient
number to send them back in a container, "we hoped to send them back and have
them repaired and then bring them back and sell them as refurbished stock".
This evidence reflected how Playcorp had operated with Taiyo over the
years.
- I prefer the evidence of Glatt and Cooper as to the rate of
returns and on the matter of the costs associated with returns being taken into
account as part of the overhead costs. I find that the rate of returns was
something less than, but up to, five per cent. However, as a result of the way
returns were dealt with, it does not necessarily follow that Playcorp actually
lost that five per cent.
- The claim made by Playcorp on 2 October 1995 (see at [43])
was the first claim by Playcorp for financial recompense for faulty product.
At Itani's request the claim was particularised in Glatt's letter dated 30
October 1995 (see at [44]). The claim was for all faulty product returned and
in the warehouse at 10 October 1995. The claim made no allowance for (what
counsel referred to in cross-examination as) normal rates of return of product.
Glatt said that there had never previously been any need for such a claim
"because Taiyo offered us a solution one way or another". And there had never
been such a "massive failure rate" as Playcorp experienced with multiple
products in 1995 particularly with Triple Wheels; "it never happened before in
that kind of volume". Cooper explained the position thus - "in the past they
had always come to the party by repairing our faulty product one way or the
other".
- While the distribution agreement itself does not contain a
term as to the quality of the product to be supplied under it, it is plain that
Taiyo manufactured and supplied the products on the basis that they be fit for
their intended use as toys. It is also plain that Playcorp relied on Taiyo's
ability, by reason of its skill and experience in the design and manufacture of
such toys, to provide toys that were fit for the purpose of being sold to and
used by members of the public. Not only is this plainly the case but it is
consistent with, if not confirmed by, the way in which the parties acted in
relation to faulty products. Allowing for the fact that Playcorp, for
commercially sensible reasons, undertook and expedited the repair process, from
the outset of the relationship Playcorp relied on Taiyo (as the manufacturer,
possessing the necessary and associated research and quality control
departments) to effect or facilitate repairs, identify and rectify faults and
return such products to Playcorp, and provide spare parts. What Taiyo did was
to recognise and accept responsibility for faults in the product it had
supplied, knowing that it was relied on to provide product that was fit for its
intended use.
- Playcorp pleaded that Taiyo sold the faulty products on
implied conditions that they be reasonably fit for their use and of
merchantable quality. Taiyo's pleading denied that allegation. No allegation
was made by Taiyo, and none was developed in final address, that for some
reason or other the implied conditions in s 19(a) and (b) could not have
been applicable or satisfied. That is to say, there is no argument that
addressed the terms of s 19(a) and (b) and contended that some element or
other of those provisions was not satisfied by the facts of this case. For
instance, on the faulty products claim, it was not submitted by Taiyo that the
relevant goods were not defective. Taiyo could hardly have done that as it
had steadfastly refused to undertake any inspection of the returned product in
Playcorp's warehouse.
- Subject to the discussion that follows concerning Taiyo's
defences, I am of the view that in the present circumstances a term of fitness
for purpose was to be implied in the supply contracts whether by reason of the
facts or circumstances of the case and because it is a proper case for the
implication of such a term, or by implication of the condition in s 19(a).
It is unnecessary to consider whether the condition of merchantable quality
would also be implied.
- The only positive plea concerning the applicability of the
conditions implied by s 19(a) and (b) was that they were excluded by the
operation of s 61 of the Goods Act by reason of the course of
dealing between the parties. Section 61 provides that:
"Where any right duty or liability would arise under a contract of
sale by implication of law it may be negatived or varied by express agreement
or by the course of dealing between the parties or by usage if the usage be
such as to bind both parties to the contract."
- Taiyo relied on the second leg of the section, of a course of
dealing between the parties. That is, Taiyo did not contend that the parties
made an express agreement that no implication under s 19(a) or (b) be
made, and it did not seek to establish a usage that bound the parties to the
same effect. Only the second leg of a course of dealing between the parties
was relied on. In particulars, Taiyo stated that the course of dealing was
that during the period 1985 to 1994 no claim was made by Playcorp for defective
products notwithstanding that some defective product was
supplied.
- In my view the reliance on s 61 is utterly without
substance. The reason why no claim was made was that Taiyo, recognising its
responsibility for defective products, which it had supplied to Playcorp who
had relied on Taiyo's skill and judgment to supply product that was fit for the
purpose, voluntarily came to Playcorp's assistance and attended to repairs and
provision of spare parts. The actions which Taiyo took were adequate and
sufficient in the context of the ongoing commercial relationship to lead
Playcorp to not make a claim for financial recompense. In these circumstances
no question of a "right, duty or liability" arose between the parties, let
alone any reference by Playcorp to s 19(a) or (b). Taiyo's actions saw to
that. But that state of affairs could subsist, or was only likely to subsist,
as long as Taiyo continued to act in the commercial relationship in that way.
There is not the slightest indication in anything that either party said, or
did, regarded in context, that indicated that if Taiyo were to cease acting in
the way that it had been, the implied conditions in s 19(a) or (b) were to
be treated as excluded by the course of dealing. For these reasons the plea
based on s 61 fails.
- It will be recalled that Playcorp relied on art 35 in the
Convention set out in Schedule 1 to the Sale of Goods (Vienna Convention)
Act to establish the implied conditions of fitness for purpose and
merchantable quality. It is also to be noted that under s 6 the
provisions of the Convention prevail over any other law in force in Victoria to
the extent of any inconsistency. It was not suggested that there was any
material difference or inconsistency between the provisions of art 35 and
s 19(a) and (b) and because of that and the way the case was conducted, it
is unnecessary to consider whether there is. As I understood it, counsel
proceeded on the basis that there was no material difference or inconsistency.
As a matter of logic, the provision in s 6 would lead one to consider the
Convention before the Goods Act. Nothing turns on the fact that I have
reversed that order in the present discussion. I have simply followed the
order in the pleadings.
- Article 1(1) provides that the:
"Convention applies to contracts of sale of goods between parties
whose places of business are in different States:
(a) when the States are Contracting States; or
(b) when the rules of private international law lead to the application of the
law of a Contracting State."
- In the defence Taiyo stated that the Convention was not
applicable because Japan was not a Contracting State. (Of course, the
respective places of business of Playcorp and Taiyo were in different States.)
It was accepted that Japan was not a Contracting State. Hence, para (a)
is not satisfied and, subject to the position under para (b), the
Convention is not applicable. Under art 1(1)(b), however, the Convention will
apply if the rules of private international law lead to that application.
- Counsel for Taiyo submitted that the Goods Act did not
apply to the contracts by which Taiyo sold product to Playcorp. This was
because the law of Victoria was not the proper law of the contract, or at least
was not the proper law in respect of matters of performance. Counsel did not
expressly state that the submission was made also in relation to art 1(1)(b) of
the Convention, but I take the submission as extending to that.
- This issue as to the proper law of the contract was not
mentioned in the pleading. It was introduced by Taiyo and included as part of
its contentions at trial. The contention was argued in a negative way in the
sense that while submitting that the Goods Act (and art 35 of the
Convention) was not applicable, it was not suggested which foreign law was the
relevant proper law and no evidence of the content of any such foreign law was
given or established.
- The course of Taiyo's submission may be summarised as
follows. The preferable law was the law of the place of performance.[34] The goods were ordered by purchase orders
sent from Melbourne; under each contract the goods were shipped FOB Malaysia or
Singapore, where the goods had been manufactured, to Playcorp in Melbourne;
Taiyo invoiced Playcorp from Japan, and payment was normally secured by letters
of credit in US dollars which were probably drawn down in Japan.
- In these circumstances performance was complete when the
goods were placed on board, which, it was further submitted, probably also
constituted acceptance of Playcorp's orders. It was submitted that cl 8.9
of the distribution agreement, which provided that the agreement be construed
in accordance with the Laws of Australia, merely related to construction of the
agreement and did not govern matters of performance. Even if cl 8.9 might
be taken as indicating an intention that Australian law governed performance,
it was only one indication of the parties intention and it was outweighed by
the combination of the place of making the contacts and the place of
performance.
- Counsel for Playcorp submitted that the issue of defective
products was governed by Victorian law. The sales of goods took place under
the aegis of the distribution agreement which by cl 8.9 was to be
construed in accordance with Australian law. The question was whether upon the
proper construction of the agreement the Court may properly infer that the
parties intended their agreement to be governed by reference to a particular
system of law.[35] If the agreement is
to be construed in accordance with Australian law, it can scarcely be doubted
that the parties intended that their rights be governed by the Australian law,
referring to the language of Upjohn J in In re Claim by Herbert Wagg.[36]
- Apart from the fact and force of cl 8.9, it was
submitted by Playcorp's counsel that the system of law with which each sale had
its closest and most real connection was the law of Victoria.[37] On delivery in Victoria the toys were rebadged "Metro",
and sold to retailers and then to consumers. Damages were suffered in
Victoria. Repairs were effected and refunds were made in Victoria. These
factors are not outweighed by the foreign factors relied on by Taiyo. The
place of shipping was concerned with Taiyo's obligation to supply, risk and
title passed on shipment, and payment was purely a financial
arrangement.
- Finally, Playcorp's counsel stated that the issue is academic
for the reason I mentioned earlier. Taiyo had neither pleaded nor proved the
content of some foreign law as the system of law which it said governed the
question. If one scans Taiyo's submission, Australia, Malaysia, Singapore and
Japan are referred to as countries in which some act occurred. But the
references were not by way of a submission that identified, and sought to
establish, that the law of one or other of those countries governed the
question. Taiyo's submission did not condescend to that point. It was merely
negative in the sense of contending that the proper law of the contract was not
Victorian law. In this situation it is well established that Victorian Law is
the law to be applied. The legal position is conveniently stated in Dicey
and Morris on The Conflict of Laws:[38]
"(i) Foreign law must be pleaded. The general rule is that
if a party wishes to rely on a foreign law he must plead it in the same way as
any other fact. Unless this is done, the court will decide a case containing
foreign elements as though it were a purely domestic English case.
(4) Burden of proof. The burden of proving foreign law lies on the
party who bases his claim or defence on it. If that party adduces no evidence
or insufficient evidence, of the foreign law, the court applies English
law."
- The application of this principle of private international
law means that either the Goods Act or the Convention applied to the
sales contract. It is thus unnecessary to consider the earlier submissions as
to the proper law of the contract. As I have stated, the Convention has the
benefit of paramountcy over the Goods Act in the event of any
inconsistency between the two. As I have said, no such inconsistency was
suggested, and having regard also to the way in which the case was conducted,
it is appropriate to proceed on the basis that there is none.
- I now consider Taiyo's contention that its refusal to supply
products to Playcorp did not constitute a breach of its obligation to supply
under the distribution agreement. I referred to the relevant parts of Taiyo's
defence at [200]. In short, Taiyo admitted that it had refused to supply
products to Playcorp "until a claim for allegedly faulty products had been
resolved" (para 6 and 7 of the defence), and alleged that for the reasons
and in the circumstances referred to at [200] it had been entitled to
conditionally refuse to supply (para 7 of the defence).
- The first point to clarify concerns the reference in the
defence to the products the subject of Playcorp's claim being "allegedly"
faulty. I reject the allegation of "allegedly". While the respective number
of items of product in Exhibit S differs from the number in Playcorp's letter
dated 30 October 1995,[39] the fact is that
there were faults in a range of the products and, as I have said, Taiyo
admitted the figures in Exhibit S of the quantities in respect of which
Playcorp gave a credit note on the return of the product, and of the quantities
of product in the warehouse. Even apart from that evidence and the admissions,
it is apparent that in the period 1994 to 1996 a deal of the items, and in the
case of Triple Wheels and Python a very great deal, proved faulty. That was
the experience in other markets. It did not simply manifest itself in the case
of Playcorp. It happened elsewhere. Quite simply, it is not a question of
"allegedly", the fact is that Taiyo supplied Playcorp with faulty product.
- Essentially, what changed was the magnitude of the problem
caused by the abnormally high rate of defects, and returns, in Triple Wheels
and Python. Notwithstanding that, as the contemporary correspondence shows,
Taiyo supplied (at Playcorp's request) spare parts (particularly for Triple
Wheels and Python) to enable faulty products to be repaired, and Taiyo worked
on rectifying defects. However, the nature and extent of the problem exceeded
anything that had occurred in the past and that Playcorp was reasonably able to
manage.
- Taiyo's counsel made a point that it was not until the letter
dated 2 October 1995 that Playcorp made a claim for financial recompense, and
that no such claim had ever previously been made. But the letter stated that
Playcorp had indicated to Taiyo "over several months [that] the repair and
return rate of both Triple Wheels, 6V Python and other categories has been
unacceptably high". It is without dispute that Taiyo was aware of the faults
being found in toys, as it was in the ordinary course for such information to
be provided by Playcorp. (Moreover, as mentioned, faults were being
experienced in other overseas markets.) Such advice of defects was of the
essence of the relationship in which Playcorp relied on Taiyo's skill and
experience in the design and manufacture of R/C toys, and Taiyo wished always
to remedy defects in its products. In his evidence Futamura said that:
"[I]f faulty product was reported, I reported to our R & D and
Mr Suto all about what is reported by Mr Glatt and waited their
response. What is the problem and what the reason of the faulty. If the
faulty belongs to Taiyo we discussed internally how to fix it. If we cannot
understand the reason of the faulty we asked them to send samples to make sure
what is problem. That is what I did.
Was there any special problem so far as you were aware with faulty products at
the time you left in May 1995? - - - I was told the returns of Python and
Triple Wheels was substantial, that's what I was told before I leave.
Mr Glatt told you that, did he? - - - Yeah."
- Glatt said in evidence that prior to sending the letter dated
2 October 1995 he had, over a period of months, continually raised Playcorp's
claim in relation to defective products directly with Itani. He was taxed on
this in cross-examination. He stated that apart from requests for spare parts
for several other items, Triple Wheels and Python were the object of the
correspondence listed in para 45 of his first witness statement.[40] That is, insofar as Playcorp brought the problem of
defects and returns to Taiyo's notice by written communications to Taiyo
between August 1994 and February 1995 the products in question were Triple
Wheels and Python. Then, at another point in his cross examination, Glatt was
asked what report had been made to Taiyo of problems with products other than
Triple Wheels and Python. Glatt answered that he could recall "some telephone
calls about odd issues with ... the Scorcher". That, he said, was about all he
could recall "at this time". It is clear from this evidence, and in any event
I find, that it was the problem with Triple Wheels and Python that caused
Playcorp's substantial concern.
- Tyco experienced the same faults with Triple Wheels and
Python as Playcorp had encountered. Itani told Glatt not to pursue Playcorp's
claim but to wait until Tyco had finished negotiating its claim for defective
products. Glatt referred to this in a facsimile to Itani dated 27 November
1995. Glatt had waited and, after Taiyo's negotiations with Tyco finished he
delayed several further months because Itani said that Suto had other pressing
concerns and he (Itani) did not want to raise it then. I note that, as stated
by Taiyo's counsel, Tyco settled its claim against Taiyo in respect of faulty
Triple Wheels and Python in July 1995; I referred to the debit notes which
Tyco raised against Taiyo at [59].
- In his letter dated 11 March 1996 Itani stated that Taiyo did
not have a suspicion about the returns in the warehouse, but felt that the
claim was totally unreasonable. In his evidence Itani said he had been dealing
with Playcorp about problems with Triple Wheels and Python but was "surprised
by the size of the amount claimed and suspicions of the claim". He said that
Playcorp's level of problems and quantity of returns were not experienced to
the same extent in other markets. In his witness statement, for instance, he
compared the return rate of Triple Wheels and Python in Japan of 2.494 per cent
and 2.875 per cent with Australia of 12.67 per cent and 6.72 per cent
respectively. He also said that Playcorp's claim for the cost of repairs was
larger than that experienced in Japan or by Tyco in the United States. No
other rates of return were significant. Itani wrote to Glatt on 5 October
1995 (referred to at [44]) and asked for further details. He received the
reply dated 30 October 1995.
- To summarise, Taiyo knew there were defects in Triple Wheels
and Python, just as it knew when other toys had defects. It was continually
engaged in quality control, and the problems with Triple Wheels and Python were
addressed by Taiyo's research and development section. Taiyo also provided
free spare parts to Playcorp and other distributors to try and overcome the
problem.
- This is a sufficient reference to expose Taiyo's position.
It did not dispute the fact that items were defective. It did not bother to
have anyone inspect the products returned to Taiyo, or Playcorp's records for
the light they might throw on the quantity of returned product, the condition
of returned products, credit notes passed, or repairs effected. On several
occasions as Playcorp pressed for a resolution of the claim, it suggested that
Taiyo undertake an inspection, but Taiyo never did. On 19 March 1996 Cooper
offered arbitration, but that was rejected. And Itani's evidence made it clear
that Taiyo rejected any idea of passing credit notes against future
purchases.
- Reference may be made in this context to Cooper's letter to
Itani dated 7 February 1996 in which he referred to having reiterated on a
number of occasions that the faulty products were available for inspection at
Playcorp's warehouse, or that Playcorp would ship them back to Taiyo on
confirmation that Playcorp would receive full compensation. I accept the
statements in the letter as being correct.
- In this context it is pertinent to note that on 8 November
1995 an employee of Tyco (Hong Kong) Ltd suggested to Itani that he ask
Playcorp to ship back the returns to Taiyo in Malaysia and that Taiyo repair
them and send them back to Playcorp. The labour costs would be lower than in
Australia and Itani would get the benefit of being able to analyse "a large
defect population in order to determine where and how the problems are
occurring". Itani did not take up that suggestion. Clearly, it was not a
course that Taiyo wished to take. The probability is, in my view, and I so
find, that Taiyo took the view, knowing that Playcorp had a substantial number
of defective toys, that if it commenced to inspect them it might become
enmeshed in a process that would be hard to control and which would result in
an undeniable liability on its part. The preferable course was to sit tight,
string Playcorp along and then stick to the offer of US$20,000. This is
consistent with Taiyo's objective, as it became clear and which I referred to
at [62], of seeking to out-manoeuvre Playcorp. In this situation no great harm
would be done if Playcorp accepted the offer. The faulty product claim would
be resolved inexpensively, and the strategy of cutting Playcorp out of the
picture could continue.
- In the defence it was stated that Playcorp's claim was
unjustified and wholly unreasonable for the reasons set out at [200]. In their
submissions counsel for Taiyo expanded the plea. The claim was described as a
false and grossly exaggerated one, the making of which was unreasonable. This
was based on the following matters:
(a) The claim was for all returned product in the warehouse,
dating from January 1994 in the case of the 9.6V Turbo Scorcher, and with no
allowance for the ordinary rate of returns.
(b) The repair cost per unit was much less than the claimed agreed minimum
repair charge of US $17 per unit.
(c) Playcorp had at trial only proved repair charges of $9,294 as compared to
the claimed repair charges of US$98,688.
(d) Playcorp had at trial proved that a lesser number of Triple Wheels and
Python were returned than had been claimed in the letter dated 30 October 1995.
The differences were, for Triple Wheels, 4546 claimed compared to 3783, and for
Python, 1686 claimed compared to 1537. The lesser numbers are referred to in
Exhibit S.
(e) Playcorp could have repaired product for resale at a fraction of the cost
of returned product stated in Playcorp's letter dated 2 October 1995. On
the basis of Gatto's evidence, the returned Triple Wheels and Python could have
been repaired for $80,628 as against the cost of the product of US$169,225.
(f) Taiyo relied on a further matter which showed that the claim was
unreasonable. In the letter to Taiyo dated 19 March 1996 (referred to at [85])
Cooper had valued the faulty products claim at AUD$250,000. This may be
compared to Glatt's offer of US$150,000 on 22 March 1996. Further, the
amount of US$195,000 in cl 3.10(a) in the deed of release dated 30 May 1996
included the defective products claim.
- What is the position in relation to these matters? As it is
stated, point (a) is correct, but something should be said by way of explaining
how the claim is put (as set out in Exhibit S). The claim is based on, or
limited to, the quantities of defective product inspected and counted by Gatto
in Playcorp's warehouse. The claim is not calculated on the basis of the
defective products for which a credit note was issued. The latter figure
(which totals 7,313) in Exhibit S goes in aid of establishing or supporting the
case. But it is because the claim is based on, or limited to, defective
product remaining in the warehouse that the numbers in the two columns in
Exhibit S differ. They also differ from the numbers in Playcorp's letter of
claim dated 30 October 1995. As I have already noted, Taiyo accepts the
accuracy of the figures in Exhibit S. I find that Exhibit S correctly states
the quantities of product and the other matters stated therein. I also find
that the quantity recorded as being counted in the warehouse in 2000 does not
necessarily equate to all items of each product returned. That is seen in the
fact that in some instances credit notes were issued for more items than were
counted in the warehouse. The fact is that the claim is based only on those
items of defective product which remained in the warehouse when Gatto did his
count. And, more particularly, the claim is limited to toys of the type listed
in Exhibit S. In this respect it is important to note that the lists in
Exhibit S and Playcorp's letter dated 30 October 1995 do not entirely
correspond; some toys are in one but not in the other. On this point,
Attachment B to Taiyo's written submission purports to chart returned products,
for which credit notes were issued, commencing in 1994. Again, this list does
not correspond with the list in Exhibit S.
- It is to be noted that Exhibit S discloses that the 6,418
items counted in the warehouse comprise eight different toys, and Triple Wheels
(4,139) and Python (1,402) account for 5,541 or about 86.5 per cent of the
total. In relation to credit notes, about 72 per cent were issued in respect
of Triple Wheels and Python. But, more particularly, the shipping history in
Schedule B enables a calculation of the quantities of defective product
returned on the basis of the quantities in Exhibit S. If one is to take, in
relation to each item, the higher figure in the first or second column in
Exhibit S, only Riptide, Triple Wheels and Python exceed or are greater than
five per cent. But there is a difficulty in making the calculation, and that
is in equating the figures in the two columns. Furthermore, there is Itani's
evidence as to the level of Playcorp's returns of Triple Wheels and Python (see
at [252]) which exceeds five per cent. It does not seem to me to be possible,
on the evidence, to be able to satisfactorily ascertain, in relation to each
product, the actual quantity of defective items that were returned.
Furthermore, the concept of allowing for an "ordinary" rate of returns was one
thing, but how was it to operate fairly and reasonably in the changed trading
conditions constituted by the exceptional rate of defects and returns and
Taiyo's changed attitude to dealing with defects? By crediting the wholesale
price Playcorp had lost that price and hence any profit on that item which, in
view of the number of returns, affected the fairness or reasonableness of
Playcorp bearing an "ordinary" rate of returns. The significant underlying
factor in the claim being made for all returned product in the warehouse was
that Taiyo changed the commercial relationship from that of a reasonable amount
of give and take on both sides, leaving Playcorp with significant purchases of
defective products.
- Point (b) is correct. The amount of US$17 is the average
cost of the amount stated for repairs in Playcorp's letter dated 2 October
1995, and the subsequent letter dated 30 October 1995 affirmed that as the
"negotiated agreed minimum fee with all our service agents". That was not a
correct statement. All that Playcorp established by evidence was that which
Gatto deposed to. In his evidence Gatto set out a fixed price scale for labour
costs for the repair of Taiyo R/C toys. That ranged from $10 for a transmitter
repair to $18 for a circuit board repair. Spare parts were additional.
Whatever the cost might have come to, from the point of view of Playcorp, Gatto
was speaking in Australian dollars. There was no evidence that Playcorp had
negotiated an agreed minimum fee of US$17 per unit with its service agents, as
stated in Playcorp's letter dated 30 October 1995. Nor was there a minimum
figure per vehicle. There was a range of figures, and they were in Australian
dollars. It may have been that the costs to Playcorp worked out to be at or
somewhere near AUD$17 per unit, but not US$17 per unit on the evidence. The
calculation which produced the figures in the 2 October 1995 letter was
not put in evidence. The suggestion in the evidence of Glatt and Cooper was
that they relied on information provided to them by an employee of Playcorp,
David Joel who headed the accounting department. (It is a reasonable inference
that he would be the David Wolfe Joel referred to at [20]). Glatt said that
the figures in his letter dated 2 October 1995 were provided to him by Joel,
and that he relied on them. Glatt's subsequent letter dated 30 October was
also based on information provided to him. Playcorp did not call Joel, nor any
other person who could establish the facts stated in those letters. The
failure to call Joel or any other such witness, to establish these matters, in
particular the US$17 figure, was significant. Glatt and Cooper could not
establish the matters stated in the October letters from their knowledge. I
conclude that the claim was put on the high side, in US dollars, for bargaining
purposes. Beyond that, the figure of US$99,688 was not established. It is a
reasonable inference that it could not be.
- Point (c) is correct. It compares the amount claimed for
repairs in Playcorp's letter dated 2 October 1995 with the amount proved
at trial. While allowing for the difference between the US dollar amount in
the claim and the Australian dollar amount proved at trial, the claim proved at
trial did not, I find, represent all repair charges in Australia. It
represented what was established by Gatto, the one witness called to
substantiate repairs and their cost. It is also to be noted that initially in
the statement of claim endorsed on the writ the amount claimed for repairs was
AUD$118,671 and this was increased by $2 in subsequent particulars. This was
less than AUD$17 per unit repaired, and very much less than the US dollar
amount claimed on 2 October 1995. Following on from point (b), Playcorp did
not establish how the amount of US$99,688 was calculated or arrived at.
Playcorp rested on the admitted proof of its repair claim at $9,294. It is
clear that Playcorp was not, by admissible evidence, able to establish a claim
in the amount of US$98,688 or even the particularised claim of AUD$118,673.
- Point (d), I find, represents no more than different numbers
in terms of proof at trial. What has happened in relation to points (c) and
(d) is often found in claims of the present type. As a dispute gets closer to
a trial, and proof on the balance of probabilities is required by the lawyers,
the claim and the amount or number of items concerned can be reduced.
Further, as mentioned, the quantity in respect of credit notes is not
necessarily every defective product returned, as I understand it.
- Point (e) relied on some evidence of Gatto in relation to the
value of goods returned as stated in Playcorp's letter dated 2 October 1995.
It was submitted that Cooper wanted to repair product for resale and that on
Gatto's evidence the returned product could have been repaired at a fraction of
the amount claimed by Playcorp as the purchase cost of 7,184 items of returned
product. This point relates to point (b). The point assumes that it was
practicable to repair and resell every item or defective product, which having
regard to the poor market reputation of Triple Wheels and Python must be
doubtful at the least. Indeed I am satisfied that in the circumstances such
an apparently simple solution was not practicable.
- Point (f) refers to no more than amounts which Playcorp put
forward in seeking a resolution of the defective products claimed.
- Taiyo's submission was that Playcorp's claim was "false and
grossly exaggerated". It is necessary to understand what was happening.
Playcorp was seeking to deal with a problem of Taiyo's making. It was not
Playcorp's fault or responsibility that it had purchased from Taiyo numbers,
which reached abnormally high levels, of defective goods. It was not
Playcorp's fault or responsibility that Taiyo determined to shun its prior
manner of dealing with Playcorp and not address the situation in a manner which
produced commercial satisfaction and, in the process, accept responsibility in
relation to defective products. If Taiyo had acted as it had in the past, or
as it did with Tyco in giving appropriate credits, the situation would likely
have been resolved. Taiyo strung Playcorp along, and while that was happening
Cooper could sense that the actions, or forces, of Tyco and Taiyo were moving
in the direction of closing the door on Playcorp's future distribution. The
circumstances provoked a monetary claim. I find that Taiyo's conduct led
Playcorp to put the claim at the highest level for the purpose of subsequent
negotiations to resolve the claim. It is indisputable that there were
defective products and, in my view, in the circumstances it was not
unreasonable for Playcorp to make, and press, a monetary claim. While the
figures at trial turned out to be less than those claimed on 2 October 1995,
especially in relation to the cost of repairs, the quantity of returned product
and the repair costs were always verifiable and would have been expected to be
verified in the ordinary course. It was in the nature of the claim that it was
likely to be subjected to a process of verification, discussion and
negotiation. It is not surprising that Playcorp would open the process at the
top end of a possible range. But, in the context of the commercial
relationship between these parties, is Playcorp's claim fairly to be described
as false, grossly exaggerated and unreasonably made? I do not consider that
the differences in the actual quantities of returned product in respect of
which the claim was made in October 1995 and the claim as it is now put, could
fairly warrant the claim being characterised as false, grossly exaggerated or
unreasonably made. The real sting, in my view, lies in the area of the claim
for the cost of repairs, which was based on the unestablished average figure of
US$17 per unit. Not only was it not established by evidence, there was no
attempt to establish it. As I have pointed out, or would find, the repair
costs were not more than AUD$17 per unit. And, in the end, all that was proved
was AUD$9,294, an amount so much less than US$99,688 as, without explanatory
evidence, to make one wonder how it could have been arrived at. I accept that
it was advised to Glatt and that it had some basis but in the absence of
evidence I can make no conclusion as to the cogency of that basis. As events
have transpired it appears a very considerable exaggeration. I must refer
however, to the earlier finding that Playcorp incurred repair costs greater
than the $9,294. How much greater I am unable to find.
- I have not overlooked Taiyo's plea of an implied term that
the parties would at all times act in good faith in relation to all matters the
subject of the distribution agreement. Counsel referred to Commonwealth
Bank of Australia v Renstel Nominees Pty Ltd[41], and Bamco Villa Pty Ltd v Montedeen Pty Ltd.[42] By its reply to this plea, Playcorp denied
any such implication and alleged that if a term is to be implied by law it is
that each party would do all such things as were reasonably necessary on its
part to enable the other party to have the benefit of the distribution
agreement. Counsel for Playcorp referred to Secured Income Real Estate
(Australia) Ltd v St Martins Investments Pty Ltd,[43] and to a number of cases in some of which a term of good
faith and fair dealing had been implied, and in some of which it had not. I
have regard to the various authorities referred to.
- In my view the term contended for by Taiyo is not properly to
be implied by law in this case. The term is of such width and uncertainty as,
in the circumstances, to belie its implication as a matter of law. The present
is a commercial contract between two independent parties providing for the
international sale of goods. Each party is a substantial organisation well
able to attend to its own interests.[44] It
is not a contract under which, relevantly, one party is to consider whether,
and how, to exercise a power that will affect the ability of the other party to
have the benefit of the contract, as, for instance, in Renard Constructions
(ME) Pty Ltd v Minister for Public Works.[45] And it is not a contract in which, relevantly to the
present issue, there is a need to imply a term of good faith. The case
concerns no more than the supply of goods, some of which were defective, and,
consequently, a claim by one party against the other for monetary compensation.
The party against which the claim is made is a substantial international
manufacturer and supplier of such products which had been, and remained, well
able to consider its course of action and take all such investigative steps it
considered appropriate. Taiyo was well able to look after its own interests.
Taiyo could have, but advisedly chose not to, undertake any check or
verification of Playcorp's claim. If Taiyo had acted reasonably in its own
interests by checking Playcorp's claim, it could readily have ascertained the
true position concerning quantities and quantum.
- For these reasons I hold that the distribution agreement was
not subject to the alleged term to act in good faith. If I was wrong in that
conclusion I would nevertheless hold that the term was not broken in Playcorp's
making of the claim. I would also hold that a term or duty of the type
referred to in Secured Real Estate was not broken by Playcorp in making
the claim.
- Taiyo's case, assuming there was a term to act in good faith,
was that in making, and persisting in, the faulty product claim, and insisting
that payment be a condition of further dealings between the parties, Playcorp
breached the term of good faith.
- The first step in the case is that the claim was false,
exaggerated and unreasonably made. For reasons discussed above, this
contention could have substance only in relation to the part (the lesser part)
of the claim that sought the repair costs. The balance of the claim was not
unreasonably made. It was provoked in the circumstances, and while items other
than Triple Wheels and Python were raised, Taiyo had been well able to receive
and deal with such matters in the past, and could well have dealt with the
matter of returns. As to the claimed US dollar cost of repairs, this is, as I
have said, an exaggeration but to an extent I am not able to determine. It may
be said to have been unreasonably made, in the sense that it was considerably
more than the actual costs (which were not established). But while
exaggerated in that sense, the claim was not false in the sense of there being
no basis for a claim of that type. And if the exaggeration meant that it could
be said the claim was unreasonably made, that went to quantum (as it often does
with such claims) and not to a total denial of the claim as though it were a
bogus claim. It did not mean that the claim was made in bad faith.
Furthermore, as I have said, the claim was readily able to be checked.
Moreover, accepting for present purposes that the repair cost component of the
claim was unreasonably made, it was made in the context of Taiyo's unreasonable
approach to receiving Playcorp's claim and failure to deal with it fairly on
the merits. There was as much, if not a greater degree of, unreasonableness on
Taiyo's side as there was on Playcorp's.
- I further find, contrary to Taiyo's submission, that in
pressing its monetary claim Playcorp did not insist that payment of it was a
condition of further dealings between the parties. For its part Playcorp was
at pains to keep separate, and to have Taiyo deal separately with, the matters
of the faulty product claim and future supply. That is the very thing that
Taiyo ultimately would not do. It was Taiyo that linked the two, not Playcorp.
Taiyo did so over Playcorp's protest. It was Taiyo, and not Playcorp, who
insisted that resolution of the claim be a condition for further dealings.
Moreover, in making and pressing its monetary claim Playcorp did no more than a
party might do in such circumstances. It sought recovery and, quite obviously,
a commercial resolution by negotiation. Taiyo could have accepted orders for
further supply. The critical differences in the situation were the high level
of returns for Triple Wheels and Python and Taiyo's changed approach to the
commercial relationship. But for the latter, Playcorp's claim would readily
have been negotiated, in my view. Even were there a term of good faith, or a
requirement to do that which was reasonably necessary to enable Taiyo to have
the benefit of the agreement, neither the term nor such requirement was broken
in the way alleged.
- This conclusion means that a further plea of Taiyo must fail.
That is the plea that by making and persisting with the faulty products claim
and insisting that payment of that claim be a condition of further dealings
between the parties, Playcorp asserted an obligation on Taiyo in the future
which was different from the obligations it had under the distribution
agreement. As the premise of this plea does not exist, the plea must fail.
- These conclusions remove the factual basis relied on by Taiyo
in its pleading for the allegation that Taiyo was entitled to conditionally
refuse supply. I would in any event find that Taiyo had not been entitled to
refuse supply as it did. In insisting that further dealings between the
parties depended on Playcorp accepting its offer on the faulty products claim,
which it had not genuinely or reasonably considered, Taiyo was in breach of the
distribution agreement. At one point Taiyo's counsel submitted that Taiyo's
offer of US$20,000 was reasonable "given that the discussion had become focused
on monetary compensation". In part, the submission that the offer was
reasonable was based on its being calculated by reference to the market share
of Playcorp in relation to Tyco's share (see at [73]). This assumed, it would
seem, that the comparison was in all respects equal. That is, there was no
factor which might have meant that Tyco received no greater percentage of
defective Triple Wheels and Python than Playcorp. But at least in respect of
the instance referred to at [222] this was not the case. Furthermore, the
offer was the suggestion of Tyco, whose interest was adverse to Playcorp, and
did not reflect an informed appreciation by Taiyo of the value of Playcorp's
claim. Indeed, it could not have been an informed offer, as Taiyo had put
aside undertaking an investigation of Playcorp's claim. It was thus that the
discussion was focussed on monetary compensation. That was the direction in
which Taiyo's approach took the matter. In the circumstances, the offer of
US$20,000 on 8 February 1996 can be described as "a reasonable proposal" only
in the context of being a low offer, unrelated to the actual experience or loss
of Playcorp, in an attempt to dispose of a claim admittedly arising out of the
supply of defective product. In that sense, perhaps the same as Playcorp's
excessive figure for its claim for repair costs, the proposal was reasonable.
But that did not mean that it represented the reality or a fair
figure.
- Of course, Taiyo's position was clear on 29 February 1996
when Itani insisted that the US$20,000 offer was reasonable and fair and he
stated that Playcorp's attitude may result in an irreconcilable sort of
situation in terms of 1996 business (see at [77]). In so stating Taiyo's
position Itani was reflecting the attitude of Suto. This is disclosed by the
facsimiles between Tyco and Taiyo on 27 and 28 February 1996 referred to at
[76]. The facsimile of 27 February was from Sullivan of Tyco to Itani. In
summary, Sullivan said that having reviewed the facsimiles between Cooper and
Grey he would like to pass on his thoughts to Suto. It was not worth spending
a lot of time and money fighting Playcorp in court regarding distribution and
returns. "We should concentrate on building R/C sales around the world -
including Australia - and put Playcorp issues behind us." Tyco's lawyers
believed it would be difficult to prove the distribution agreement was a fake
and that Playcorp could probably sue Taiyo and win. Playcorp could probably
also win on the repairs issue. It did not seem fair for Playcorp to expect 100
per cent repayment for the Triple Wheels and Python problem, but it would waste
Taiyo's time and money to fight in court. Sullivan proposed a settlement under
which Playcorp would receive half of the claimed US$268,943, on the basis that
Taiyo and Tyco pay half each. It was understood that Playcorp would take
Taiyo's payment as a credit towards orders of Dagger. Sullivan requested an
answer the next day.
- Itani replied to Sullivan on 28 February 1996 in the
following terms:
"Please thank Grey san for the suggestion and kind offer for Suto
san. I just talked with Suto san over the phone and passed your word to him.
Unfortunately, he said that he still wanted me to write Playcorp exactly what
he told me yesterday. He wanted me to write 'We do not want to deal with a
company who demands that kind of totally unreasonable payment/settlement any
more'. He is not actually afraid of being sued by them. I guess this is what
I will write them tomorrow. I hope you understand. Thank you
anyway."
- Itani's facsimile disclosed Suto's intention. Playcorp had
made an unreasonable claim and Suto will no longer deal with Playcorp. One has
to remind oneself that Playcorp's claim had a legitimate basis and that Taiyo
had deliberately not investigated it. The fact which I would have found,
objectively, quite apart from this facsimile, is that Suto decided to quit
Taiyo of Playcorp and that he decided to use the faulty products claim as a
means to achieve that end. Hence, as Itani said in evidence, Suto decided to
link the supply of product in 1996 with the faulty products claim. The linkage
being made, the offer on the faulty products claim was one which Playcorp was
unlikely to accept. If it did accept the offer, not much would be lost in the
long run.
- In all of the circumstances, the state of affairs that
existed on 29 March 1996 was that Taiyo was, and had for some time been, in
breach of the agreement by reason of supplying defective products and leaving
Playcorp to bear the burden. Furthermore, Taiyo made clear its position that
it would not supply product under the distribution agreement if Playcorp did
not accept its offer of US$20,000 for the faulty product claim. The supply of
product was essential to the operation of the agreement. The two matters,
supply and the faulty product claim, were separate, as Playcorp stated.
Taiyo's linking of them was a pretext for achieving a purpose that was contrary
to the continued operation of the agreement according to its terms and purpose.
Indeed the object was to bring the trading relationship to an end. This was
manifested, if anything, by the fact that the offer on the faulty product claim
was not calculated on the basis of an investigation or an informed assessment
of the claim. Together with the fact that Taiyo was in breach, the condition
attached to supply was a strong arm tactic applied to force a situation on
Playcorp. The conclusion is inescapable, in my view, having regard to all of
the relevant circumstances, that Taiyo's conduct evinced an intention no longer
to be bound by the essential obligation to supply.
- Taiyo's counsel submitted that even if Taiyo's conduct was
repudiatory, Playcorp was not entitled to rescind. It was submitted that
Playcorp, on 29 March 1996, was not ready, willing or able to perform under the
distribution agreement for the following reasons.
- By the agreement made on 26 March 1996 Playcorp gave up its
right to distribute Dagger, Mutator, and any new Tyco developed products, in
Australia, and all of its rights to distribute in New Zealand. The products
left available for Playcorp were any Taiyo product and old Tyco products. It
was critical to the performance by Playcorp of its obligations under the
distribution agreement that it should have available new Tyco products to sell.
This was recognised in the evidence of the importance to Playcorp of each year
being able to present to the market promotional toys with innovative or special
features. Such toys, and advertising, led the market. In practice the
majority of the R/C toys obtained from Taiyo were originated by Tyco. And
whether or not Exhibit 1 was admissible, it is clear enough that the greater
number of promotional special feature toys were new Tyco toys. Taiyo's counsel
submitted that, regarding the circumstances overall, Playcorp had rendered
itself incapable of performing the distribution agreement. That was because
sales of Tyco originated special feature toys were central to the products
supplied under the agreement. It was further submitted that when, on 26 March
1996, after making the agreement with Tyco, Cooper pressed Itani to say that
Taiyo would not supply, Cooper was seeking to establish a basis on which to
construct a claim against Taiyo. Counsel relied on Itani's evidence concerning
that conversation; I note my conclusion concerning that evidence at [95].
Thus, by 29 March 1996, when it purported to rescind, Playcorp had deprived
itself (for a substantial consideration from Tyco) of the ability to sell new
Tyco product in Australia and had given up New Zealand totally. That
significantly reduced Playcorp's ability to perform its obligations under the
distribution agreement.
- It was further noted that after 26 March 1996 Playcorp did
not attempt to obtain old Tyco product from Taiyo which, it was submitted,
suggested that it did not consider such product alone could enable it to trade
profitably. And that suggested that Playcorp probably did not intend, as at 29
March 1996, to continue to deal with Taiyo at all. At that time Playcorp's
concern was to extract money for the faulty product claim.
- Thus, even if it be assumed that Taiyo's conduct did amount
to a repudiation, Playcorp was not entitled to rescind. It was not ready,
willing or able to perform its obligations at the time of acceptance. As to
the relevant principles concerning repudiation and rescission counsel referred
to D T R Nominees Pty Ltd v Mona Homes Pty Ltd[46] and Foran v Wight.[47] I have regard to them and the authorities referred to by
counsel for Playcorp.
- Counsel for Playcorp submitted that the 26 March 1996
agreement was the culmination of negotiations between Cooper and Grey after
Tyco told Playcorp that beginning in 1996 Tyco would take over the distribution
of all new Tyco developed R/C items in Australia and New Zealand. Tyco's
letter to Playcorp, dated 9 August 1995, advising of this position, stated
that Suto proposed that Playcorp could continue with the balance of the Taiyo
line including Rebound in 1996 and that Tyco had agreed to that. I find that
in discussions between Tyco and Taiyo preceding that letter, Suto had agreed to
Tyco's proposal on the basis stated in the letter. Cooper objected and wrote
to Suto and Grey accordingly. The point to be made is that Taiyo concurred
with what Tyco stated was to be the position. This position was unilaterally
imposed, or sought to be imposed, on Playcorp. Taiyo never withdrew from that
position. It did of course lie in Tyco's power, subject to its agreement with
Taiyo referred to at [29], to give six months notice of withdrawal of its
licence to Taiyo. Tyco's letter may have been effective for that purpose in
relation to Playcorp to the extent stated, because it stated Tyco's position
and Taiyo concurred in it. On that basis the new arrangement was to operate
from the beginning of 1996. Taiyo's defence (para 4B) appears to contend that
the letter did so operate. However, the case was, I think, conducted on the
basis that for practical purposes the change may be treated as made on 26 March
1996. For this reason I consider that it is not necessary to deal with the
issue whether there was an implied term of the distribution agreement (alleged
in para 4A of the defence) that Taiyo would continue to supply new Tyco product
to Playcorp only for so long as Tyco consented thereto.
- Unsurprisingly, Tyco's letter dated 9 August 1995 led to
commercial negotiations. They resulted in the 26 March 1996 agreement.
In the period from August 1995 to March 1996 inclusive Tyco and Taiyo
maintained regular contact, informing each other of what was happening with
Playcorp. They were aware of what was happening in their respective
communications with Playcorp. The course that Tyco took with its letter dated
9 August 1995 and the agreement made on 26 March 1996 met with Taiyo's
approval. It suited Taiyo that the restriction on supply of Tyco products came
from Tyco, having regard to the distribution agreement. In the circumstances,
it was too narrow and unrealistic a proposition for Taiyo's counsel to describe
Playcorp's action in agreeing to give up new Tyco products as a unilateral
decision under the distribution agreement. Further, at 29 March 1996 Playcorp
was still able to order under the distribution agreement any Taiyo product and
old Tyco product.
- I find that were it not for the repudiation by anticipatory
breach of the essential term of supply and Playcorp's rescission, Playcorp
would have ordered product in 1996 and thereafter under the distribution
agreement with a view to making a profit. The evidence shows that Playcorp was
preparing for orders for the first half of 1996, and had sought supply of
product. The evidence establishes that Playcorp intended to trade in 1996, and
it maintained that position into March 1996.
- Playcorp had made profits from its trade in Taiyo supplied
R/C toys in the past and I find, accepting evidence of Glatt and Cooper, that
it would have continued to seek to do so in the future. I find that Playcorp
would have applied its undoubted skill and expertise in ordering and marketing
the products available to it. It would make no sense for Playcorp not to have
done so, as against giving up a profitable situation. Indeed Playcorp's
subsequent attempts in the market support that likelihood. I accept the
evidence of Glatt and Cooper that Playcorp would have sought to continue to
purchase goods under the distribution agreement.
- I do not overlook any of the submissions of Taiyo, including
as to the importance of Tyco originated toys. It is correct that they were
important in driving the market and in achieving profit for Playcorp and Taiyo.
Nevertheless, their unavailability to Playcorp did not prevent performance
under the distribution agreement in accordance with its terms. The agreement
could operate, even if at lower levels of sales, and Taiyo had the protection
of the minimum purchase provision. That provision was always Taiyo's
protection. I reject the submission that by the 26 March 1996 agreement
Playcorp rendered itself incapable of performing under the distribution
agreement, or placed it in the position that it was not able to perform its
obligations under the agreement.
- Taiyo made a further submission on the issue of whether
Playcorp was ready, willing and able to perform under the distribution
agreement. This submission concerned the credibility of Playcorp's claim that
after 26 March 1996 it would have sought to continue to purchase product from
Taiyo under the distribution agreement. The submission subjected evidence of
Whitear and Glatt to critical analysis. It was submitted that the projections
in the evidence of the sales that Playcorp would have achieved were based on
false assumptions, incorrect facts, and a failure to allow for changed business
circumstances, among other things. The net result was that Playcorp's evidence
of sales that would have been achieved was unreliable and should be rejected.
In these circumstances, it was submitted, even if the test of ability to
perform under the distribution agreement was to be judged by reference to
whether Playcorp could have re-arranged its business affairs so as to continue
to trade profitably as it claimed, it was plain that it could not do so. I do
not accept that submission. I find that Playcorp was ready, willing and able
to continue to perform under the agreement, that it would have exercised
reasonable endeavours in doing so, including seeking to maintain a profitable
line of business, and that in the course of doing so it would have adjusted its
manner of conducting the business as necessary and as it was reasonably able to
do in the circumstances.
- A further point that should be mentioned arose in Cooper's
cross-examination. He was asked if his letter to Cowley Hearne dated 29 March
1996 (referred to at [99]) was sent before or after his letter to Itani on the
same date (referred to at [100]). The letter to Itani was the letter
rescinding the distribution agreement. But the letter to Cowley Hearne, which
commented on, and suggested changes to, the deed of release, in particular
cl 3.6, was inconsistent with the distribution agreement having been
rescinded. That is, in the Cowley Hearne letter Cooper was writing on the
basis that the distribution agreement was still on foot. Thus the question as
to which letter was sent first. In answer Cooper said that he could not
remember. I am not satisfied, on the balance of probabilities, that the letter
to Cowley Hearne was sent after the letter to Itani.
- I find that Playcorp was ready, willing and able to perform
its obligations under the distribution agreement. Rather than affirm, it took
the course open to it of electing to rescind the agreement by accepting Taiyo's
unequivocal anticipatory breach of the essential term of supply.
Damages - loss of profits
- In the statement of claim endorsed on the writ, Playcorp
claimed $10,621,260 as damages in the nature of profits lost as a result of the
termination of the distribution agreement. That was the sum which it would
have earned as profit if the agreement had run its course from April 1996 to 31
December 1998. Playcorp advised of an increase in the amount claimed to
$11,792,617 in further and better particulars dated 5 May 1998. It was alleged
that that sum represented the aggregate of the loss of profit for the financial
years ended 1995 to 1997 inclusive, and the six month period ended 31 December
1998.
- Expert accounting evidence to substantiate Playcorp's claim
for loss of profits was given by Whitear. He provided three reports dated
February 2000, 4 May 2000 and 8 June 2000 (being a correction to the 4 May 2000
report), all of which were attached to his witness statement which was admitted
as Exhibit DD. In the report dated February 2000, Whitear calculated
Playcorp's loss of profits on three different scenarios as being $3,082,620,
$5,531,115 and $6,621,466. The calculation was based on the erroneous
assumption (which Whitear had been asked to make) that Playcorp continue to be
entitled to sell all R/C toys manufactured by or for Taiyo. In the 4 May 2000
report, Whitear re-calculated these estimates and made an alternative
calculation of Playcorp's loss. As re-calculated, the above figures reduced to
$2,415,169, $5,265,668 and $5,611,922. The alternative calculation was
$4,546,592. The calculations in this report were based on a number of
assumptions including the restricted range of toys available to Playcorp as a
result of the May 1996 deed of release and the 1998 deed of
termination.
- As a result of discovery of documents by Taiyo shortly before
the resumption of the trial in 2001, Playcorp's advisers realised that the
claim for loss of profits had to be considered and calculated afresh. That was
because it was apparent from the discovered documents that Playcorp (by Glatt),
and thus Whitear in his calculations, had proceeded on an erroneous basis as to
which products were Taiyo and which were Tyco originated within the meaning of
the deed of release and the deed of termination. In short, Playcorp and
Whitear had to consider and prepare a case on the basis of the facts thus
disclosed.
- The result was that when Glatt resumed his evidence in
November 2001 he provided a third witness statement dated 19 November 2001
which was admitted as Exhibit U. The purpose of this evidence was, as Glatt
said, "to deal some more with the question of future trading". He went on to
state that if the agreement had not been terminated in March 1996, Playcorp
"would have chosen to order from Taiyo and sell and distribute in Australia a
selection of" toys which the discovered documents showed Taiyo offered for sale
from 1996 to 1998. He went on to identify the particular toys, the quantities
that Playcorp would have ordered and the approximate wholesale prices. This
evidence was used by Whitear as the basis for a schedule setting out Playcorp's
sales (Appendix 5 to the report) and a schedule calculating the net profits
that Playcorp would have earned from the sale of the products in Appendix 5
(Appendix 6). The calculation in Appendix 6 was based on the assumption that
all products ordered by Playcorp would have been sold in the years in which
they were ordered, and certain percentages which Whitear had agreed with
Meredith. On these bases, Playcorp's loss was $2,347,965.
- It is in these circumstances that Playcorp's claim for lost
profits was reduced to $2,347,965, calculated as appears in Appendixes 5 and 6
on the assumptions referred to and on the basis of Glatt's evidence in his
third witness statement. That is not to say that there is not relevant
evidence in Glatt's first witness statement, but the third witness statement is
relied on to establish how Playcorp would have acted in the purchase and sale
of goods after March 1996. For convenience, Appendixes 5 and 6 are attached to
the judgment as Schedules C and D.
- In view of the fact that Whitear's reports in Exhibit DD were
based on false premises, Playcorp abandoned reliance on Whitear's calculations
of lost profit in those reports. In lieu, Playcorp relied only on Whitear's
Appendixes 5 and 6.
- I referred earlier to Meredith who Taiyo called to give
expert accounting evidence. He prepared reports dated 20 March 2000 and 14
June 2000 which, together with a witness statement, were admitted as Exhibit
13. A supplementary report dated 1 December 2000 was admitted as Exhibit 14.
These reports addressed Whitear's reports and recorded Meredith's opinions as
to the profits lost by Playcorp. Of course, as was later recognised, Whitear's
reports were based on false premises and relevant misunderstandings as to the
products available to Playcorp. False premises also affected Meredith's
initial calculation. In addition, there were differences in approach between
the two accountants. It is not necessary to set out the various calculations
of Meredith. One, however, should be mentioned. That was his old product
calculation in the 1 December 2000 report which produced either a net loss of
$54,185 for the period April 1996 to December 1998 or, alternatively, a net
profit of $72,461. The calculations took account of the reduced range of
products available to Playcorp after the 1996 deed of release and the 1998 deed
of termination. The alternative calculation was arrived at after eliminating
Triple Wheels and Python and treating the battery pack products as derivative
products of the 6V promotional products. The effect of excluding Triple Wheels
and Python was to increase the gross profit margin for the 1995 calendar year
from 31.68 per cent to 38.97 per cent.
- The old product calculations were based on a product life
analysis of Meredith. The analysis was of Playcorp's sales of particular
products between 1992 and 1995. The analysis purported to record the yearly
sales of each product. From the analysis, Meredith drew conclusions as to the
extent of the life of products in the market. He concluded that products had a
relatively short life. Commencing with sales in the first year being 100 per
cent, where products were subsequently sold, the records showed that in the
second, third and fourth years of sales respectively, the level of sales was
13.50 per cent, 6.83 per cent and minus 0.03 per cent of the sales in the first
year. An alternative calculation without Triple Wheels, Python and the 6V
battery pack and charger produced the same figures, with the exception of the
second year in which sales were 12.62 per cent.
- It became clear that Meredith's product life analysis was
factually flawed and unreliable. It misapprehended and incorrectly reflected
Playcorp's actual purchase and sales experience in each year. The result was
that the analysis did not, as in fact Playcorp submitted, present a true
picture of the saleability of Playcorp's range of R/C toys between 1992 and
1995. Indeed, the picture presented was of a negative and misleading nature.
It ignored the fact that each year Playcorp sold a very high proportion of what
it purchased, which reflected favourably on Playcorp's ability to market R/C
toys. The matter is explored in Playcorp's written submission.
- In essence, the purpose of the analysis was to establish
Playcorp's past trading pattern and, on that basis, to project what would have
happened after March 1996. Hence, there are two elements to the exercise. The
first element concerns the accuracy of the information in the analysis. As I
have said, the factual bases and structure of the information is flawed, thus
resulting in an unreliable analysis.
- The second element concerns the application of the analysis
as a means of projecting sales and profits or losses after March 1996. In that
respect too, for reasons in Playcorp's written submission, the approach was
flawed. For one thing, the negativity in Meredith's conclusions stands in
stark contrast to the facts as to Playcorp being the market leader in R/C toys
in Australia with a well experienced and successful business including a sales
force and necessary infrastructure. In each of the years 1992 to 1995,
Playcorp had purchased from Taiyo between US$1.5 and $2.5M worth of R/C toys.
Allowing, as Meredith should have, for Playcorp's willingness and ability to
adapt to the limited product range, in order to seek to continue earning
profits from this established line of business, a small net loss or profit in
the area opined by Meredith was not likely.
- Prior to the trial, Whitear and Meredith met pursuant to
orders of a Master with a view to finding common ground. This resulted in a
statement of agreed facts dated 9 October 2000 which was signed by Whitear and
Meredith and filed as a document in the case. There was agreement as to the
following matters, which were set out in the statement:
(a) The actual gross sales by Playcorp of all R/C toys
manufactured by Taiyo and sold by Playcorp in the period July to December 1992,
and in the years 1993 to 1996 inclusive (that is, on a calendar year basis
which Meredith contended was the appropriate basis for the purpose of
calculating the loss of profits).
(b) The actual gross sales by Playcorp of Taiyo R/C in the financial years
1992/1993 to 1994/1995 and in the nine month period 1 July 1995 to 31 March
1996.
(c) The weighted average of sales by Playcorp of Taiyo R/C expressed as a
percentage of total sales by Playcorp of Taiyo was -
(i) in July to December in the calendar years 1992 to 1994, 80.5
per cent;
(i) in April to June in the calendars years 1993 to 1995, 18 per
cent.
(d) Historical gross profit figures expressed in Australian
dollars and as a percentage of total sales by Playcorp of Taiyo R/C
toys:
(i) on a calendar year basis, and
(ii) on a financial year basis.
(e) That the variable cost percentage to be applied in any
calculation of Playcorp's lost profits on the sale of Taiyo R/C is 17 per
cent.
- Whitear used certain of the figures in the agreed statement
of facts in his revised calculation in Appendix 6. They are the agreed
percentages in (c) and (e) above. He also applied a gross profit margin of
41.47 per cent to the sales per year set out in Glatt's third witness
statement. These percentages are stated at the start of Appendix 6. The
calculation which produced the margin of 41.47 per cent is set out in para 8 of
Whitear's second witness statement, as follows:
|
|
Year to 30 June
|
|
Gross Profit
$
|
|
Gross Profit
Margin on Sales
%
|
|
-
|
4,047,651
|
|
1,587,854
|
|
|
|
-
|
4,517,579
|
|
1,865,153
|
|
|
|
-
|
7,726,597
|
|
3,303,553
|
|
|
|
|
16,291,827
|
|
6,756,560
|
|
41.47
|
- One of the issues on which Whitear and Meredith differed was
whether the 1995 calendar year, or the 1994/1995 financial year, was the most
appropriate representational year to forecast future sales. According to the
statement of agreed facts, in the calendar year 1995 Playcorp's gross sales of
Taiyo R/C products fell to $3,833,075 whereas in the 1994/1995 financial year
gross sales were $7,726,597. These differences were reflected in the agreed
figures of gross profit for those periods. And they produced variations in the
gross profit margin as follows: for the calendar year 1995, 31.7 per cent, and
the 1994/1995 financial year 42.8 per cent. Meredith favoured the calendar
year approach whereas Whitear favoured the financial year approach.
- In my view, the financial year approach is to be preferred.
It is fairer and more representative, as it avoids distortions created by the
problems with Triple Wheels and Python and lack of supply of Rebound.
- Another issue was the gross profit margin to be used in the
calculation of future profits. As mentioned, in his second witness statement
Whitear calculated, on the basis of sales and gross profit in the financial
years 1993 to 1995, a gross profit margin of 41.47 per cent. By contrast,
Meredith arrived at a gross profit margin of 31.68 per cent in his report dated
March 2000. Then, in his further report dated June 2000, Meredith calculated
an alternative margin of 38.97 per cent after removing Triple Wheels and Python
because of their abnormally high returns. Again, the elimination of these
items for these purposes is reasonable and appropriate.
- The issue remained however as to whether it was appropriate
to use that margin to calculate profits to be derived from the sale of products
after March 1996. In other words, was it appropriate to apply the margin
derived from the historical experience up to March 1996 to the changed
circumstances applying from then? For his part, Whitear considered it was and
used the 41.47 per cent figure in Appendix 6. On the other hand, Meredith
adopted no set gross profit margin. Instead, he used his analysis of
historical sales and profit levels to project forward. I have concluded that
Meredith's approach was flawed and unreliable. But the issue remains as to the
appropriateness of using the 41.47 per cent figure. Taiyo contends that it is
not appropriate.
- Taiyo also contends that in the changed circumstances of
supply after March 1996 it is not appropriate to use the agreed variable cost
percentage of 17 per cent. I return to this issue, and the issue as to the
gross profit margin, later.
- Consistently with my findings at [287] I find that if the
distribution agreement had not been terminated, Playcorp would have sought to
continue to obtain R/C toys from Taiyo and distribute them in Australia. They
were Taiyo toys and old Tyco toys as defined in the 1996 deed of release and,
after December 1997, only Taiyo toys. Playcorp was ready, willing and able to
do so. As a result of the termination Playcorp lost the business opportunity
it would have had under the agreement and hence suffered loss. That is clear
as a matter of probability. The question is, what is the value of that loss?
The principle on which damages for breach of contract are awarded is that the
innocent party is to be awarded such sum of money as will place him or her in
the same situation as if the contract had been performed.[48] The application of this principle requires a
consideration of how Playcorp would have traded after March 1996 in the changed
circumstances of supply under the distribution agreement. Glatt's third
witness statement was designed to provide evidence to establish Playcorp's case
on this aspect, and Whitear's Appendix 6 was designed to place a dollar value
on the case thus made.
- Glatt's third witness statement set out the evidence in the
following way. On 14 November 2001 he was shown some documents obtained from
Taiyo from which he saw that during 1996 and 1997 Taiyo was offering for sale
the following toys (among others):
"(a) 9408 Rebound;
(b) 9342 6V Battery Pack and Charger;
(c) 9340 6V Jet Turbo Battery Pack;
(d) 9101 Micro Super Bandit;
(e) 9109 Super Fast Traxx;
(f) 9123 Turbo Hammer;
(g) 9402 Rampage;
(h) 9401 Fire Power;
(i) 9409 Micro Scorcher;
(j) 8816 Micro Wild Thing;
(k) 9016 Ripe Tide Boat;
(l) 9015 Fast Traxx;
(m) 9030 Mini Traxx;
(n) 8901 Mini Blaster;
(o) 8817 Micro Nitro Invader."
Having identified those toys, Glatt said:
"9. Each one of those toys or products was a toy or product which
Playcorp had sold and distributed in Australia prior to 31 December 1995.
Under the agreement made with Tyco in 1996, Playcorp was entitled to sell old
Tyco toys that it had sold or distributed prior to 31 December 1995 as well as
old and new Taiyo toys.
10. As the person responsible, year by year, for deciding the range and variety
of the goods to be ordered from Taiyo, I say that if the distribution agreement
with Taiyo had not been terminated in March 1996, Playcorp would have chosen to
order from Taiyo and sell and distribute in Australia a selection of those toys.
11. Throughout all of its trading with Taiyo, Playcorp each year selected a
range of R/C toys for sale to retailers in Australia. Even if confined in 1996
and 1997 to old Tyco toys and old and new Taiyo toys, there is within the toys
I have listed above the sorts of toys which would have made up a marketable
range or basket of goods in which Playcorp could have traded in 1996 and 1997.
12. Each year, Playcorp ordered approximately 100,000 to 150,000 units of R/C
toys from Taiyo. Under the distribution agreement Playcorp had to make minimum
annual purchases of US$1,000,000.
13. I make the following comments about the toys listed above and the
quantities that Playcorp would have ordered during 1996 and 1997:
(a) Rebound
In my first witness statement I described Rebound as a sensational R/C toy that
I believed would capture the imagination of children and be a great success in
the Australian market. My initial impression of Rebound turned out to be
correct. I also said in my first witness statement that Rebound was the most
popular toy in memory. In 1995 Playcorp purchased 24,000 units of Rebound. As
I stated in my first witness statement, Playcorp would have purchased an
additional 40,000 units of Rebound in 1995 if Taiyo had been able to supply
them. As a result, Playcorp did not satisfy the market demand for Rebound in
1995. Based on my experience in the toy industry as described in my first
witness statement, I believe that the demand for Rebound would have continued
throughout 1996 and 1997. Accordingly, in 1996 Playcorp would have ordered a
minimum of 40,000 units of Rebound based on the unsatisfied demand for the
product in 1995. In 1997 Playcorp would have ordered at least another 30,000
units of Rebound. The wholesale price for which Playcorp sold R/C toys to
retailers can be seen from Playcorp's Product Sales Reports which are contained
in SCB 43-146. The wholesale price for which Playcorp sold Rebound was
approximately $60 per unit."
- Glatt then proceeded to refer to each of the above toys with
the exception of Fire Power and, in relation to each, to give evidence along
the lines of Rebound. In each case the evidence is brief. In fact, the
evidence for Rebound is the more extensive, while that for Turbo Hammer is the
most brief. In relation to Turbo Hammer he said:
(f) Turbo Hammer
In 1992 Playcorp purchased 1,360 units of this R/C toy. Playcorp sold these as
an exclusive item to Myer. It was a large, chunky and robust toy. Playcorp
would have ordered approximately 600 units of this toy in 1996. The wholesale
price for which Playcorp sold Turbo Hammer was approximately $85 per
unit."
- That is sufficient to indicate the nature and extent of his
evidence in relation to the period from April 1996 to December 1997. Glatt
then turned to the products that were available in 1998. He ascertained from
statements of Sasahara (and which were accepted by Playcorp) and Taiyo's
1997/1998 catalogue that Taiyo were offering for sale the following Taiyo R/C
toys:
"(a) 9614 Micro Blaster
(b) 8831 Micro Nitro Invader
(c) 9031 Porsche 911 Cabriolet
(d) 9416 Mini Hopper
(e) 9616 Mini Blaster
(f) 9502 Chevy Pick Up
(g) 9701 Off Road Tiger".
He then said that on the basis that these toys were Taiyo toys
and available to Playcorp during 1998, Playcorp would have ordered quantities
in 1998 as follows:
"(a) Micro Blaster, Micro Nitro Invader
Given that in 1998 Playcorp was not able to distribute any Tyco toys, Playcorp
would have distributed a reduced range of micro R/C toys. It would have
ordered approximately 6,000 units of micro R/C toys during that year. The
wholesale price for which Playcorp sold micro R/C toys was approximately $15
per unit.
(b) Porsche 911 Cabriolet
Playcorp would not have chosen to order any Porsche 911 toys as
Playcorp had not marketed any replica motor vehicle toys for some
years.
(c) Mini Hopper, Mini Blaster
Playcorp would have ordered approximately 5,000 units of these
mini R/C toys during 1998. The wholesale price for which Playcorp sold mini
R/C toys was approximately $35 per unit.
(d) Chevy Pickv Up, Off Road Tiger
I am not familiar with these vehicles. It is unlikely that
Playcorp would have ordered more than a few thousand of these items in
1998."
- It is seen that Whitear based Appendix 5 on this evidence of
Glatt. That is, he carried into Appendix 5 the quantities which Glatt stated
that Playcorp would have ordered.
- Counsel for Playcorp submitted that Glatt's projections
provided the best guide as to how Playcorp would have traded after March 1996.
His projections as to the particular products that Playcorp would have
purchased in 1996 and 1997 were consistent with Playcorp's past practice.
Furthermore, Playcorp had the necessary financial capacity, marketing
expertise, sales force, infrastructure, relationship with retailers and the
confidence of customers. It had the right to distribute the highly successful
Rebound which, as a lead item, would have brought with it sales of battery
products and other past promotional, mini and micro R/C toys.
- The tenor of the submission might have suggested that
Playcorp was seeking to establish its damages on the balance of probabilities.
But, in fact, Playcorp's counsel contended that having established that loss
was suffered as a result of the loss of the business opportunity, the actual
damages should be ascertained by reference to the principles concerning the
ascertainment of damages for loss of a chance. The chance here being the
business opportunity which Playcorp was not able to exploit. The applicable
principles therefore were those stated in Malec v J C Hatton Pty Ltd,[49] Commonwealth of Australia v Amann
Aviation Ltd,[50] and Sellars v
Adelaide Petroleum NL.[51]
- Taiyo's counsel disagreed that the present was a case of
assessing damages for loss of a chance. He submitted that the issue was to be
determined on the probabilities.
- While Playcorp's counsel referred to several passages in the
cases mentioned, the submission, I think, was that the present case was within
the fourth example of the cases referred to by Deane J in Amann
Aviation.[52] Deane J
said:
"[It] is neither desirable nor practicable to seek to formulate an
exhaustive comprehensive rule defining the circumstances in which it is
appropriate for a court to assess damages on the basis that what has been lost
or inflicted is the probability or possibility of benefit or detriment as
distinct from the benefit or detriment itself. It suffices for the purposes of
the present case to say that damages should be assessed on that basis in a case
where the extent of the final loss or injury actually sustained by reason of
the repudiation or breach depends upon what would have happened or what will
happen and the circumstances are such that the court can identify or estimate a
precise or approximate proportionate chance of benefit or detriment but can do
no more than speculate, on the basis of probabilities and possibilities, about
what would have or will actually come about. Some examples of such cases are:
...(iv) other cases where lack of information, insufficiency of current
knowledge or the unpredictability of hypothetical or future conduct or events
precludes a non-speculative finding about what would have actually occurred or
will actually occur but evidence (e.g. expert opinion evidence), common sense
or common experience enables an estimate of the approximate extent of the
chance that a particular benefit would have been or will be actually obtained
or that a particular detriment will be or would have been actually
sustained."
- Yet, at its threshold, the case rests on an acceptance of
Glatt's evidence. His evidence, and its credibility, was heavily criticised by
Taiyo's counsel who submitted that it, and what it sought to establish, should
be rejected. In the first instance therefore, I turn to those
matters.
- There is no doubt that Glatt was highly successful and
experienced in the R/C toy market. He was instrumental in Playcorp having
attained the pre-eminent position in that market in Australia. Indeed,
Playcorp was primarily responsible for developing that market. He had a very
good sense, or judgment, of what toy would succeed in the Australian market.
He was, for instance, correct in his assessment of the likely success of Dagger
and Mutator. In all the circumstances, his opinion or prediction as to what
Playcorp would have done is therefore given from a position of real knowledge
and expertise of the relevant industry and market.
- Redenbach gave evidence that was supportive of, or confirmed,
Playcorp's position in the market. He stated that Playcorp was a very reliable
supplier of R/C toys, that each year it offered a good range of products, and
that they were competitively priced. By the early 1990's Playcorp continued to
be the dominant supplier of R/C toys in the Australian market. There was no
other company aggressively marketing and promoting R/C toys in Australia.
Rebound was extremely popular and captured the imagination of the market. He
said (as did Glatt) that R/C toys are an established category in the toy market
and, as such, will continue to be purchased by consumers at fairly constant
levels. Higher sales will be achieved where a good range of R/C toys are
available which are heavily promoted, competitively priced and are fast, agile
and durable. I accept Redenbach's evidence and find that Playcorp was
successful in choosing products that met these requirements. That success
reflected Glatt's expertise. Playcorp also marketed aggressively and Glatt
said that it would have continued to do that.
- In their submissions counsel for Playcorp referred not merely
to Playcorp's past profits as a relevant indicator of what it could achieve in
the R/C toy business, but also referred to, and sought to gain some mileage
from, Whitear's earlier calculations of lost profit. In his second witness
statement Whitear re-calculated his earlier calculations taking into account
the matters in the agreed statement of facts and using the gross profit margin
of 41.47 per cent. The re-calculations were attached to his witness statement
as Appendixes 1-4. In final address, Playcorp's counsel abandoned reliance on
these calculations, and confined Playcorp's case to the calculation in Appendix
6. The calculations were abandoned because in the case of Appendixes 1-3, they
were based on the erroneous approach of Glatt in his first witness statement,
the effect of which was that the limitation on the products available to
Playcorp was of no practical significance. That was because Playcorp was
entitled to old and new Taiyo and old Tyco product and because it had the
ability to have Taiyo make modifications to old products to make them "new".
Appendix 4 was abandoned because it was based in part on the erroneous
assumption that old toys which had been substantially modified remained old
Tyco products. It follows that the abandoned calculations produced figures
that are irrelevant simply because they did not address the situation that
obtained after termination of the agreement.
- It was only by Glatt's third witness statement that Playcorp
addressed that situation. That is the situation created by the circumstance of
restriction on availability created by the 1996 deed of release and the 1998
deed of termination. As a result of the deed of release, Playcorp had
available Taiyo products and what is conveniently referred to as old Tyco
product, which meant Tyco products which prior to 31 December 1995 had not been
distributed or sold in Australia or New Zealand and which had not been
"re-designed". There was, of course, a further limitation on the availability
of old Tyco product which was that the product was actually manufactured by
Taiyo in 1996-1998, and thus would have been able to be ordered by Playcorp
under the distribution agreement if it had subsisted. It was these matters
which Playcorp finally came to appreciate and which were recognised in, and
were the basis of, Glatt's third witness statement and Whitear's Appendix 6.
- Counsel for Taiyo submitted that Playcorp's claim depends
entirely on acceptance of Glatt's evidence in his third witness statement, and
that unless that is accepted Playcorp's claim for lost profits must fail as
there is otherwise no evidence of lost sales and profits. There are several
aspects to this submission. First, a number of reasons were advanced as to why
the claim should be considered unreliable. Secondly, these factors include
that Glatt adopted a partisan approach in giving his evidence which should thus
be regarded as unreliable. On that basis, the claim would not be supported by
credible evidence. Thirdly, the ratio analysis reflected in the agreed
statement of facts in relation to the gross profit margin and variable costs
percentage could not apply in the fundamentally changed circumstances existing
after March 1996.
- The factors relied on by Taiyo to establish the lack of
credibility or reliability in the claim are:
(a) Glatt's evidence was hindsight reconstruction.
(b) Glatt now states that Playcorp would have ordered certain toys which prior
to termination it had ignored.
(c) Glatt's projected orders of Rebound were inconsistent with the projections
for Rebound in Exhibit 9.
(d) Glatt's projections generally are inconsistent:
(i) with the previous proportions, purchased by Playcorp, of products
distributed worldwide by Taiyo.
(ii) with the sales Tyco was able to achieve to September 1997 of items in
respect of which Playcorp obtained compensation, and with the assertion that
Playcorp would have made those sales.
(ii) with Playcorp's historical experience of sales of old products.
(e) Glatt's scenario would require a significant change of operation by
relaunching old products and undertaking substantial marketing and advertising
of those products.
(f) There is no contemporaneous or other material evidencing attention to the
conduct of the business in the changed circumstances including as to costs.
(g) Glatt assumed that the products listed are old Tyco products on the basis
that old product numbers are retained.
(h) Playcorp never attempted to obtain old Tyco product from
Taiyo.
- This reasonably summarises the factors relied on by Taiyo's
counsel, in addition to the second and third areas of argument referred to
above. In case I have summarised to the extent that it might be thought a
factor has been omitted, I add that I take into account all that Taiyo's
counsel said in their written and oral submissions. I now discuss these
matters in turn.
- Points (a) and (f) are correct. There is no evidence at all
that prior to rescission on 29 March 1996 or at any subsequent time until
Glatt's third witness statement that Playcorp considered how it would or might
have conducted business with Taiyo under the distribution agreement after March
1996 in light of the 1996 deed of release and the 1998 deed of termination. No
business plan, or financial model, was ever developed or considered, or, if it
was, it was not put forward in evidence. There is no contemporaneous note or
discussion as to the approach that Playcorp would have taken if it had sought
to continue business with Taiyo under the agreement. There are the exaggerated
profit forecasts including that in the abandoned Exhibit 9. It was not until
Glatt carried out his exercise in his third witness statement that Playcorp
ventured a statement as to how it would have conducted business in the changed
circumstances. It is evident from Glatt's witness statement that Glatt
undertook this exercise only between 14 and 19 November 2001. That was well
over five years after termination. And Glatt had not been involved in the toy
industry since leaving Playcorp in January 2000. Even before his departure
from Playcorp, following termination of the Taiyo agreement, Playcorp engaged
in selling its stocks of toys obtained from Taiyo but never sought to purchase
further product from Taiyo. It went through the process, which Glatt was
responsible for, via the company Quantum, of developing a R/C toy called
Reactor; see at [5](a)(iii). The board of directors decided not to continue
the project, it would seem with some displeasure directed towards Glatt. But,
in summary, that was it. That part of Playcorp's business activities came to
an end. It follows that since termination Playcorp had no experience of
engaging in the R/C toy market, save to the extent mentioned, and thus there is
no reference to or reliance on any such experience in Glatt's third witness
statement. He has had to fall back on his experience and on that basis express
his opinion as to what Playcorp would have done. Accordingly, Glatt's exercise
is hindsight reconstruction. This must be weighed in the balance with Glatt's
evident experience and knowledge of the Australian market. But a sense of the
market is not the whole story, and Taiyo correctly points out that Glatt
effectively had no present or recent experience of the cost of conducting such
a business. Playcorp has left this aspect to Whitear and he has sought to
cover the situation by using percentages derived from the agreed statement of
facts.
- This reference to costs leads to (e), for the following
reason. The percentages used by Whitear were derived from the business as it
was conducted prior to termination. Under that regime, for example, Playcorp
had the advantage of Tyco advertising, and that was important because it was
principally Tyco toys that were the lead or promotional items and which, as
such, led the market. In addition, Playcorp paid for the preparation of
advertising and promotions for toys. But, as new Tyco products came on to the
market, including redesigned toys, Playcorp would not have access to such toys
or the advertising relating to them prepared by Tyco. The likelihood to be
faced was that Playcorp would have to undertake a significantly increased
advertising and promotional budget to promote Taiyo toys. That is because
Taiyo, unlike Tyco, did not provide (whether for a fee or otherwise)
advertising of lead or promotional toys in the way that Tyco did. No account
has been taken of this item in Appendix C. It has been assumed that the
historic cost experienced would have been applicable.
- I now turn to (b). The shipping history discloses the toys
which Playcorp purchased in each of the years 1992 to 1995 inclusive. Each
year Playcorp chose a selection of toys from Taiyo's current catalogue. The
history reveals that each year Playcorp chose a number of new toys. Sometimes
Playcorp did not choose a toy that it had purchased in a prior year, even
though the toy might have been successful and available for the next or a
subsequent year. Some of the toys which Glatt states that Playcorp would have
purchased in 1996 to 1998 are in this category. Indeed, in Glatt's
cross-examination it was clarified that all of the toys in Glatt's third
witness statement were in this category with the exception only of Rebound and
the battery packs and chargers which were purchased in 1995. It was submitted
by Taiyo that it was open on the evidence to infer, and that it should be
inferred, that the reason why Playcorp chose not to select these items in a
year or years prior to 1996 was that it had assessed them as being not worthy
of sale.
- The relevant part of Glatt's cross-examination, in which the
particular toys and Taiyo's point is referred to, is at pages 571 to 591 of the
transcript. I take account of all that is said there, but rather than set it
all out I state my views on the submission as follows.
- Each toy in Glatt's list had been purchased by Playcorp and
sold in Australia prior to 31 December 1995. That is a convenient date for
this purpose as the shipping history records the sales on a calendar year
basis. Australia was a relatively small market for R/C toys. In each of 1992,
1993 and 1995 only 11 types of toy were purchased, with the number in 1994
being 12. It is seen that in each year relatively much larger quantities were
ordered of several toys than the quantities ordered of the toys constituting
the balance of the basket. There was a balance between the mini, micro and
larger promotional toy which was heavily advertised and led the market. The
quantities ordered reflected Playcorp's assessment of the likely level of sales
of the various categories of toy which appealed to different groups in the
market. It is pertinent to note some evidence of Glatt which I accept. The
special feature items, of which Jet Hopper and Rebound are but two examples,
were the subject of television promotion and in general sold better than the
more basic items, and were more lucrative for Playcorp in that they sold at
higher prices. Glatt referred to there being each year two or three television
advertised items, or sometimes only one, and a lot of other little items and
that the percentage of one to the other varied each year. But the bulk of the
business was in the former category. Glatt further agreed that the special
feature television promoted items were very significant to the ability of
Playcorp being able to sell the full line. It is clear on this evidence that
it was critical to Playcorp's ability to maintain its position in the market
and achieve turnover and profit that it had the large selling promotional
items. This indicates the importance of the loss of new Tyco products as the
promotional television items had principally been Tyco products.
- But it was not necessary that the promotional item be new to
the market each year. Furthermore, it is apparent that in Australia and
elsewhere particular toys, in light of their success, could be in Taiyo's
catalogue for years, and that toys could be revived with or without new
packaging, decals or change to the body or mechanics. It was then for a
distributor such as Playcorp to decide which toys to include in its basket for
the year. It may be that a toy was dropped from the catalogue for a year or
years and was subsequently "revived". It could also have been that a toy
previously available but not purchased by Playcorp was added to the Playcorp
basket in a later year because of Playcorp's assessment of its likely sale
success.
- Taiyo's submission is to be considered in this context. As
mentioned, Taiyo did not refer to Rebound and the battery packs and charger
because the former had been purchased in 1995 and the latter is shown as having
been purchased in 1994 and 1995. I accept Glatt's description of Rebound as a
sensational toy and his evidence that the demand for it would have continued in
1996 and 1997. Indeed, this was confirmed by Itani who described Rebound as
the most exciting item Taiyo ever had and agreed that it could have been a lead
item for Playcorp in 1996 and 1997. Rebound, Itani said, was "very hot
everywhere". He agreed that Rebound would bring with it other toys, meaning
that it would lead to sales of other toys. I accept Itani's evidence as
stating the facts concerning Rebound. It is consistent with his evidence, and
that of Glatt, that Taiyo's records reveal that Rebound was its most successful
international toy in 1996 (with 616,864 units sold), and its second highest
selling toy in 1997 (with 354,694 units sold). In all, Rebound was marketed
and sold between 1994 and 1998. Bearing in mind that Playcorp was not supplied
with the quantities of Rebound it had required in 1995, and, hence, that the
market in Australia was under supplied in 1995, I accept as a sound judgement
Glatt's evidence of the quantities which Playcorp would have ordered in 1996
and 1997. I note that Redenbach expressed the view that Toys R Us would have
purchased 2,000 - 3,000 each year. As Rebound was an old Tyco toy it
would not have been available after 1997.
- The 6V battery products were marketed and sold by Taiyo
between 1993 and 2000. These were sold in relation to 6V R/C toys such as
Rebound, Fire Power and Rampage. Such toys were powered by a 6V battery which
was not included with the toy. Accordingly, in most cases when such a toy was
purchased a battery pack and charger was also purchased. Redenbach said that
Toys R Us would purchase one battery pack and charger for every Rebound.
Hence, there is a direct correlation between the quantity of 6V toys and
battery pack and charger units. It took about four hours to recharge a 6V
battery pack and in use it would operate a toy for about 8 - 10 minutes.
Accordingly, some consumers bought extra battery packs to enable the toy to be
operated for longer periods. Redenbach gave evidence consistent with this.
Playcorp would generally order one extra battery pack for every four 6V toys
ordered.
- The point made about Fast Traxx was that whereas Playcorp had
purchased it in the 1990 to 1993 period, it had not done so in 1994. It is to
be noted that Glatt said the quantities purchased were 20,000 units in 1990,
30,000 in 1991 and 7,500 in 1993. The shipping history does not include 1990
or 1991, but lists 2,500 units in 1992 and 7,488 in 1993. The second point to
note is Glatt's evidence that in October 1995, Glatt wrote to Taiyo asking if
Taiyo was able to produce Fast Traxx even though it was not in Taiyo's current
catalogue. As it has transpired, Taiyo did manufacture Fast Traxx in 1996 and
1997. This is an example of a R/C toy that was reintroduced, obviously because
of its popularity. Further, the fact that Playcorp enquired as to its
availability in 1995, and that Taiyo did reintroduce the item, evidences the
quality of Playcorp's judgement of the likely success of the toy. Another
example of a toy that was reintroduced successfully by Taiyo was Mini Typhoon
which was first sold in 1991 and reintroduced in 1996. At one point in
cross-examination Itani agreed that "If you market it right" it was possible
that some old toys could come back such as Typhoon, Micro Wild Thing, Fast
Traxx and Riptide.
- Taiyo's point concerning Fast Traxx was that Playcorp had not
ordered it in 1994 when Taiyo's catalogue showed it was available. The fact is
that Playcorp did write in October 1995 enquiring as to the availability of
Fast Traxx. That indicated that Playcorp was considering reintroducing Fast
Traxx in 1996, if it was available. I find that the reason it was not
purchased in 1994 was simply that in the mix of products selected for that year
Playcorp omitted it and went with other products. Taiyo did not make Fast
Traxx available in 1995.
- The next toy is Mini Traxx which Playcorp had purchased in
1992. Glatt said that if Playcorp re-launched Fast Traxx it made sense to
relaunch Mini Traxx at the same time. Playcorp had not purchased Mini Traxx in
1993 although Glatt said that in 1993 Playcorp had purchased Mini Traxx Pick Up
which was Mini Traxx with a pick up body on it. It is described in the
shipping history as a new item and as having a model number different from Mini
Traxx. That is an example of the way in which a toy could be changed. It is a
pertinent example, but Playcorp purchased only 252 units of Mini Traxx Pick Up
and that was for a particular customer. Mini Traxx was available in 1993 but
Playcorp chose not to sell it. Taiyo's records reveal that Mini Traxx was
available in 1996 and 1997, and that in 1996 Taiyo manufactured 2,500 units for
Tyco Australia. Taiyo also sold the toy in 1997 and 1998. Glatt's evidence is
that Playcorp would have purchased 6,000 units in 1996 and 4,500 in 1997. It
had purchased 14,400 in 1992. Again, I do not draw an adverse inference from
the fact that Playcorp did not purchase the toy in 1993. It had other strong
lines, and determined to proceed with a basket of toys that included only three
out of the eleven toys in the 1992 basket.
- The next toy is Super Fast Traxx. This toy too had been
purchased only in 1992 and, like Mini Traxx, would have been ordered in 1996 if
Fast Traxx was relaunched. And, like Mini Traxx, the toy was available in 1993
but was not purchased by Playcorp. The quantities in question here are small:
Playcorp purchased only 660 units in 1992 and Glatt was speaking of 600 units
in 1996. It was put to Glatt in cross-examination that Taiyo's minimum
production run was of the order of 2,000 units. Glatt said he was not aware of
that and that in practice he would have worked out with Taiyo what could be
done. Save for what might have occurred in that regard, Super Fast Traxx is in
the same position as Mini Traxx.
- The next toy is Turbo Hammer, of which Playcorp purchased
1,360 units in 1992 as an exclusive item to Myer. Glatt said that Playcorp
would have purchased approximately 600 units in 1996. Again, this item was
available in 1993 but not chosen for sale by Playcorp. In my view this falls
into the same category as the other toys. This is also an example of a toy
that was reintroduced several years after its first introduction. First sold
in 1992, it was reintroduced by Taiyo in 1996.
- The next toy is Rampage, of which Playcorp had ordered 1,800
units in 1995. Glatt said that was the Turbo Scorcher with a truck body.
Glatt said that he had not promoted trucks and that was probably because he
thought they would not do well in Australia. He also said that there were
"better options". Yet, as to ordering this toy, it was the Scorcher, which was
a "fantastic" toy, but with a different body. Playcorp promoted the Scorcher.
Rampage was available in 1996 but Glatt's evidence was that Playcorp would have
relaunched it in 1997 to supplement orders of Rebound and Fast Traxx in that
year. It would have ordered 6,000 units. Glatt was cross-examined as to why
Playcorp would not have ordered Rampage in 1996. He explained he had prepared
a plan of items from the Taiyo and old Tyco basket of items available to
Playcorp and, in effect, this is how it turned out. It would not, he said,
have been "a clever plan to put every single item in the first year". He was
confident Playcorp could have sold 6,000 units in 1997 even though the 1995
order had been for only 1,800 units. He based his confidence on Playcorp's
marketing ability. For the relaunch, Glatt contemplated that there would have
been new packaging, decals and advertising and it seems evident that in this
case that must have been so. That would involve an unidentified cost factor
although Playcorp always incurred costs on advertising and promotion and had a
sales force. As to whether it had ever occurred that a product sold two years
before, but not in the intervening year, was relaunched by Playcorp, Glatt
could not answer although it had possibly occurred with a micro or mini, but
there had been no reason to do so. I accept Glatt's evidence, but I consider
that his view that Playcorp would have ordered Rampage in 1997, and not in
1996, and to the extent of 6,000 units, was the result of wanting to keep the
quantities up and above 100,000 units in each year.
- Next as a group are the four micro toys. Glatt said that
between 1992 and 1995 Playcorp ordered approximately 20,000 to 30,000 units of
micro R/C toys. He said that in 1996 and 1997 Playcorp would have ordered
approximately 18,000 units from this group of four micros. It is to be noted
that such toys have established longevity, Taiyo's records revealing that in
1996 Taiyo was manufacturing micro toys that were first sold in 1998 and 1991.
None of the four micros was new. Glatt's projections were not made on the
basis that the toys would be changed. Playcorp would take the toys as they
were produced.
- The next toy was Riptide Boat/Wave Albatross of which
Playcorp purchased approximately 3,000 units in 1994. Glatt said that every
few years Taiyo released and Playcorp ordered an aquatic R/C toy. He said that
Playcorp would have ordered approximately 2,400 units of this toy in 1996 and
1,200 units in 1997. It had been available in 1995 but was not taken up by
Playcorp. Glatt explained that Australia was a small market, that it was
understood (with Taiyo) that he would concentrate on new items (which is
supported by the profile in the shipping history), and that Playcorp had to
make a selection. I accept Glatt's evidence.
- The final 1996/1997 toy is the Mini Blaster, of which
Playcorp purchased substantial quantities in 1990 and 1991. It was based on
the very successful Jet Hopper style of R/C toy. It was an all terrain fast
vehicle which sold at a moderate price point. Playcorp would have placed
orders in 1996 and 1997 for quantities which were appreciably less than the
earlier purchases. Taiyo's records reveal that Taiyo sold this toy from 1996
until 1998. This is another example of a toy having longevity, as it was
developed in 1989. Glatt did not contemplate any changes being made to the toy
when it was relaunched. I accept this evidence.
- I turn then to Glatt's 1998 prediction. These concern two
micro and two mini items. Glatt stated that as Playcorp was not able to
distribute any Tyco toys, Playcorp would have distributed a range of micro R/C
toys. Playcorp would have ordered approximately 6,000 units made up from Micro
Blaster and Micro Nitro Invader. It would also have ordered 5,000 units made
up from Mini Hopper and Mini Blaster. These are Taiyo toys which were
available in 1998. Glatt referred to the Chevy Pick Up and Off Road Tiger,
with which he was not familiar, and stated that it was unlikely that Playcorp
would have ordered more than a few thousand in 1998. No allowance is made for
any such orders in 1998 and I ignore these toys as a source of revenue.
Meredith did not prepare any material to deal with these projections in Grant's
third witness statement. That would seem to be because he was instructed to
ignore 1998 in any old product loss of profit calculations he
undertook.
- Glatt said in cross-examination that what Playcorp would have
been able to do in 1998 would have depended on the co-operation received from
Taiyo including whether Taiyo was prepared to bring items back into production
that were not otherwise being produced. What he meant was that if Taiyo was
willing, old Taiyo products, of which there was a large bank, could be dusted
down and relaunched with or without modification. That could produce an
"infinite" range and the toys selected could be promoted to the market. This,
he said, was a "possibility, if Taiyo would co-operate in the way a normal
manufacturer would co-operate with a supplier".
- This evidence of Glatt must be considered and weighed in the
context of the differences that had arisen between Playcorp and Taiyo and
existed at the time of rescission in March 1996, the fact that Tyco was a
vastly more important customer to Taiyo than Playcorp, and that Taiyo preferred
Tyco's interest and could be expected to have done so from April 1996 to
December 1998. As against that, Taiyo also had the commercial interest to make
profits and hence to co-operate with Playcorp to a reasonable degree. And
Playcorp's claim, as put by Glatt, is based on what Taiyo had available in its
catalogues and does not depend on Taiyo co-operating with Playcorp in a one-off
way as by specially reviving and manufacturing a toy for Playcorp. The only
possible exception to that is Rampage in respect of which Glatt referred to a
change to the decals.
- A further aspect of this matter of co-operation from Taiyo is
whether Taiyo could actually supply all of Playcorp's orders predicted by
Glatt. This issue concerns the physical problem of being able to satisfy all
of the orders received from various distributors. Rebound provides an example
of the situation that can arise, particularly perhaps with a successful
product. Taiyo did not supply Playcorp with the quantities it ordered. It
could not satisfy the various orders for the toys. In my view, Playcorp was
left unsatisfied, not merely because of the pressure to fill orders for other
markets, but because Tyco was a far more important customer and relations with
Playcorp gradually deteriorated during 1995.
- The distribution agreement did not make express provision for
the situation where Taiyo had difficulty in filling orders for product. It was
a two party agreement for the ordering and supply of products. It seems clear
that there must have been reasonable limits on how the agreement could operate
from the point of view of both parties. It could not have been that Playcorp
could have been entitled to order whatever quantity of product it required, say
of Rebound, and that Taiyo was bound to supply it, or be in breach of the
agreement if it did not. There had to be a sense that orders would be
satisfied, all things being equal, or, to put it another way, that Taiyo would
exercise reasonable endeavours to do so but, having exercised such endeavours,
it would not be in breach of the agreement if it could not supply all or part
of a particular order. The issue existed also in relation to the timing of
production runs, and the ability to fit in a small Playcorp
order.
- Considerations such as these are relevant in an assessment of
Playcorp's claim. That is because the claim assumes that whatever Playcorp
ordered would be supplied by Taiyo as and when required. That might not have
been able to occur in every respect. While saying this, it is important to
bear in mind that the problem with the supply of Rebound had not previously
been experienced. Hitherto, and while Futamura was at Taiyo, Playcorp's
requirements had been satisfied.
- I return to Taiyo's points, and to point (c), that Glatt's
projections for Rebound were inconsistent with Exhibit 9. This point has no
weight. Exhibit 9 was not explained by a witness. It is not at all clear
where Rebound falls within it. It is an unexplained document which related to
an abandoned claim.
- Point (d) concerns several alleged inconsistencies. The
first is to be found in an analysis of the proportion of products purchased by
Playcorp in the past to products distributed worldwide by Taiyo. The analysis
is Annexure C to Taiyo's written submission. The analysis relates only to
seven products in Glatt's third witness statement. They are Rebound, battery
pack and charger, Jet Turbo battery pack, Super Fast Traxx, Turbo Hammer,
Rampage, and Chevy Pick Up and Off Road Tiger. The last two can be ignored as
Playcorp's claim is not based on them. So there are four toys and two battery
packs. The other toys are not included because the international sales chart
does not list products with an identification number less than 9,101 and does
not include micro products. Subject to that, the analysis generally, but not
in every instance, is of Playcorp achieving greater annual sales of the
products in the 1996 and 1997 years than previously. The analysis was relied
on as an indication that Glatt's projections were unsound. That is, the
projections were put at too high a level. The analysis cannot be accepted as a
complete truth, as it were. It may amount to an indication of higher levels of
sales of particular product in Australia than previously, but the comparisons
are simplistic and must, for their validity, be subject to a range of unknown
factors. The figure for Rebound, for instance, is affected by a shortage of
supply in Australia in 1995.
- The next inconsistency was the level of sales Tyco was able
to achieve to September 1997 of items in respect of which Playcorp claimed
compensation, and with the assertion that Playcorp would have made those sales.
The assertion relied on was made in particulars of loss and damage filed by
Playcorp on 22 July 1997 in the proceeding it brought against Tyco; see at
[115]. The particulars alleged that by reason of Tyco's breach of the deed of
release, Playcorp was deprived of goods (being old Tyco toys) which had been
sold in Australia and which, if given supply, Playcorp would have sold.
Playcorp alleged that it would have been able to sell the toys in question and
claimed a loss of profit. In subsequent particulars, Playcorp set out a list
of toys including the quantity sold by Tyco in Australia, the information
having been, as I understand it, provided by Tyco.[53] The list records total sales of only US$376,000 and
includes only two old Tyco products which are included in Glatt's projected
sales for 1996 and 1997. They are Micro Nitro Invader (9,006 units) and Mini
Traxx (2,496 units). That, it was submitted, represented a radically different
picture in terms of what Tyco did compared to what Glatt now states that
Playcorp would have done. In other words, in the litigation in 1997, Playcorp
alleged that it would have sold all of the items in the list if it had been
given supply. But in the present litigation Playcorp has abandoned that
position and relies on only two of the products in the list. Moreover,
Playcorp's case is that it would have sold more product than Tyco did. The
example is Mini Traxx of which Playcorp sold 2,496 but of which Glatt states
that Playcorp would have ordered 10,500 units. On that point I find,
relevantly, that Playcorp had a well established successful business operation
whereas Tyco was more in the position of commencing in Australia. It is a
vital difference. Nevertheless, there is the wider inconsistency mentioned.
It is to be explained, I think, because in the 1997 litigation Playcorp sought
the benefit of what Tyco had achieved in sales without actually undertaking the
exercise which was required for the purpose of this case and which was finally
undertaken by Glatt. The course taken by Playcorp in the 1997 litigation was
an easy, adventitious way of handling the matter.
- The final inconsistency is with Playcorp's historical
experience of sales of old products. It was submitted that even if Meredith's
product life analysis was not precisely accurate it demonstrated the gap
between historical achievement and Glatt's projections. The submission
recognised that Meredith's analysis was flawed and I have made a finding as to
that. One respect in which Meredith's analysis was flawed was his
misapprehension of the fact that Playcorp achieved a very high level of sales
of each toy in its year of purchase. That reflected Playcorp's good judgement
in selecting toys for sale and its skill in achieving sales. These factors
seem evident in the record with Turbo Scorcher. For one might suppose, and it
was generally the case, that in years subsequent to the first year Playcorp
would purchase a reduced, or reducing, quantity of a toy. But Turbo Scorcher
shows that that could not be held to be an invariable situation. In 1993, 1994
and 1995 Playcorp purchased 41,996 units, 9,600 units and 12,000 units
respectively. Furthermore, in making this submission Taiyo's counsel referred
to the historical experience as providing the best indication of what would
happen if Playcorp sought to change its business and tried to sell old product
without the benefit of new product to sell. The submission overlooks the fact
that Playcorp had the advantage of the especially successful Rebound as a lead
item. Moreover, Glatt said, and I accept, that a lead item did not have to be
a new item. Rebound was as good as a new item, particularly given that in
Australia supply had been limited in 1995.
- Point (g) is not a point of substance in my view. It was not
submitted that Glatt had included in his 1996 to 1998 basket of toys any that
were not within the category of toys available to Playcorp in that
period.
- Point (h) relied on the fact that following rescission
Playcorp did not attempt to obtain old Tyco product from Taiyo. It was
submitted that it may be inferred that it would have done so, even if both
parties regarded the distribution agreement as terminated, if it could
profitably have sold such product. It was submitted that Glatt's projections
of what Playcorp would have done were inconsistent with its failure in fact to
seek to purchase product from Taiyo. Rather than attempt any such purchase it
took the route of seeking money from Tyco. This submission is simplistic and
erroneous in my view. It ignores the facts of the deteriorating relationship,
that Taiyo stated it would not supply unless the offer for the faulty product
claim was accepted, that the offer was not accepted, and that Playcorp
rescinded the agreement. And Playcorp did not conduct its toy business on the
basis of an odd purchase of product here or there on a non-exclusive basis
hoping to make some sort of profit on such item or items as it might be able to
procure. It was a substantial business and would most unlikely operate on such
a basis. And, critically, there was not any evidence that Taiyo would have
supplied product on such a basis or in the circumstances. Furthermore, the
reality of the situation is seen in the course that Playcorp took. It sought
to establish a product (Reactor) but was not able to do so to the satisfaction
of the board of directors.
- The next broad point was the attack on Glatt's reliability as
a witness. It was submitted that he had adopted a partisan approach and
advocated Playcorp's cause in his first witness statement. The assertion in
that statement that loss of new Tyco products would have made no difference to
Playcorp's business was untenable, it was submitted. The reason for, and
strength of, his partisanship was said to have emerged at the conclusion of his
cross-examination. Glatt was asked if he had an interest in the outcome of the
case. He said that he did not have a financial interest and that he had not
been remunerated for giving evidence. His interest, he said, was "in seeing
justice done and in seeing the right outcome of this issue". He thought "that
Taiyo dealt with Playcorp really badly after Playcorp really performed very
well for Taiyo over a long period of time, and I think their behaviour was
under-handed and I'd like to see justice done, and that's my interest". He
agreed that he felt strongly about the matter. Finally, he was asked as to his
relationship with those who owned Playcorp. He answered that the owner is
Solomon Lew, who is married to his sister. He said that he had very little to
do with Lew and that Lew's son is in the business.
- At this point the cross-examination was concluded. Glatt was
noticeably tired. In all, after commencing his evidence on 28 November 2000,
Glatt had been giving evidence over five days. He had left Playcorp in January
2000, and the demands of giving evidence must have significantly intruded into
his time. Notwithstanding that, over the time he gave evidence he was
attentive to and concentrated on the task, and in my view answered questions in
a responsible and considered way. I have already made findings concerning his
evidence, and I do not repeat them. In making those findings, and accepting
his evidence, I bore in mind the present attack on his credibility. I accept
Glatt's evidence on the matter of whether he had an interest in the outcome of
the case. I formed the view, having observed Glatt over a long period, that he
was an honest man who had been somewhat bruised by the loss of the Taiyo
business and the subsequent unsuccessful attempt to continue in R/C toys, and
had a genuine sense of regret and disappointment at the turn of events which he
considered should not have occurred having regard to Playcorp's high level of
success in dealing with Taiyo. The views which he expressed as to the way in
which Taiyo had dealt with Playcorp had a factual foundation. I do not
consider that Glatt's statement as to seeing justice done rendered him a
partisan witness in the sense of affecting the credibility and reliability of
what he said. Why should an honest and reasonable person not be possessed of a
feeling of injustice? He was entitled to. Nor do I consider that the family
relationship, while I take it into account in assessing his evidence, led to
him being partisan or argumentative. Certainly he sought to advance Playcorp's
case but, whether the points of Taiyo's attack are regarded on their own or
taken together, I reject the attack on Glatt's reliability.
- That is not to say, however, that I accept his evidence of
projected sales in every respect or detail. The projections are, for one
thing, based on a very best case scenario and must be tempered somewhat.
Relevant factors in respect of the projections include that Appendix 6 assumes
that all products ordered by Playcorp would have been sold in the year of
purchase. While Playcorp's historical record of sales indicated very high
sales in the year of purchase, even in and around the 90 per cent or so level,
100 per cent was an over-statement to an extent of less than approximately 10
per cent.
- Another factor is that the projections assume that what is
ordered will be supplied. The obligation on Taiyo in this respect would seem
to have been that it was required to exercise reasonable endeavours to satisfy
Playcorp's orders to ensure that Playcorp had the benefit of the agreement, but
Taiyo was not a guarantor of supply. In the present exercise it could not be
assumed that Taiyo would have been able to fill every order projected by Glatt,
and as and when it was required. The competing demands of other distributors,
and factors concerned with matters such as the manufacturing plant, may have
meant that Taiyo could not satisfy every order.
- Another factor is that with more reliance on Taiyo's
products, and with competition from Tyco Australia, there would have been some
addition to the advertising and promotion budget. A related factor is that
without new Tyco products from 1996 to 1997 and then no Tyco products in 1998,
and access to the related Tyco advertising, an appreciable or fundamental
change had occurred. The question raised was what extra costs would have been
occasioned as a consequence of seeking to continue the business with the more
limited range. I accept Glatt's evidence that, all things being equal,
Playcorp could have managed successfully, but that would have required extra
effort and associated extra costs. While, in principle and as an
approximation, an additional 10 per cent or so on the advertising and promotion
budget might be allowed, the availability of Rebound must be taken into
account. Rebound was already known and would have led the market. Further,
its success by way of substantial sales would have drawn sales across the
board. Playcorp would reasonably have anticipated this and been able to limit
its advertising and promotion costs accordingly. I find that the consequence
of Taiyo's inability to supply Rebound is that Playcorp would not have had to
incur the additional 10 per cent or so, but an amount appreciably less, in the
order of five per cent or so, in my estimation.
- In addition, there are the matters of the appropriate
application of the historic percentages for the gross profit margin and
variable costs. I now deal with those matters. On the former there is the
fact that Playcorp's profit margin may have deteriorated with the change in
available product. As I have pointed out, the highly successful Rebound was
available and this must significantly make up for the loss of new products in
Glatt's projection. Yet the fact is that the shipping history indicates that
each year Playcorp introduced a number of new items along with including some
old items to produce a successful mix. And there was evidence of Whitear that
he was instructed that sales of new products involved a higher margin than old
products. The significance of that point related, in particular, to the loss
of new Tyco product, as Taiyo's counsel said. But Rebound was a Tyco product
and it still had a very large unsatisfied potential in Australia. I do not
consider that the projections in Appendixes 5 and 6 should be rejected because,
by reason of the use of the historic gross profit margin, they assume the
availability of new Tyco product which obtained a higher margin. While it may
be that a margin somewhat less than 41.47 per cent should be considered more
likely, the result that Playcorp's claim should be rejected in toto on this
account would constitute an injustice that the due administration of justice
should not readily permit. It would be a manifest and gross injustice. The
same is true of the submission that unless Glatt's third witness statement was
accepted in its entirety no evidence of lost sales and profit was offered by
Playcorp. It was for the reason of pressing this submission that counsel for
Taiyo submitted that Playcorp's case on damages is to be determined on the
probabilities. Hence, unless Playcorp established the balance in its favour to
an extent, say, of 51 per cent the claim must fail. That is not withstanding
that it has clearly and indisputably suffered loss.
- This is not a case in which a claim for lost profits must
fail on account of a lack of evidence. This is a case in which, although
attended with some difficulty and uncertainty of ascertainment, the Court,
doing its best, can make an assessment which is just and reasonable in the
circumstances. In Fink v Fink[54] it
was observed by Dixon and McTiernan JJ that:
"Where there has been an actual loss of some sort, the common law
does not permit difficulties of estimating the loss in money to defeat the only
remedy it provided for breach of contract, an award of damages."
The approach of the common law reflected in that statement is
apposite to this case.
- The difficulty, which extends to a measure of uncertainty, is
to assess that loss. Having regard to matters already discussed I am of the
view that Glatt's projections must be regarded as suffering from over-optimism,
and a failure to make due allowance for contingencies such as the inability to
obtain supply to the extent and as and when required, and not selling all items
in the year of purchase. Being old and proven products, it would not seem
necessary to allow for the possibility of excessive returns as happened with
Triple Wheels and Python. Furthermore, the projections in Glatt's third
witness statement are based on taking products from Taiyo as they are
manufactured and not altering them. The possible change to the decals on
Rampage was not in that category of alteration.
- On the matter of over-optimism, I was concerned with Glatt's
evidence as to the order of 6,000 units predicted for Rampage. In my view that
was overly optimistic or an exaggeration of the likelihood. I was simply
unpersuaded by that part of his evidence. An order to the extent of more than
3,000 or so units was possible but not probable in my view. No such findings
should be made in relation to the other products. But, including that
reduction for Rampage, an allowance may and should be made, overall, for the
various contingencies already mentioned, to arrive at a figure that reasonably
measures the loss and is just and reasonable between the parties. I conclude,
on balance, that an appropriate allowance is in the order of 40 per cent of the
projected sales.
- That leaves the percentages. I am satisfied that Taiyo's
contention as to the inappropriateness of the historic margin exaggerates the
effect of the changed business circumstances, especially having regard to the
availability of Rebound. Taking all relevant matters into account I conclude
that it is appropriate to adopt 40 per cent as the applicable gross profit
margin that would have been achieved. That margin is lower than Whitear's
historic margin of 41.47 per cent and higher than Meredith's 38.97 per cent.
- I also conclude also that the variable cost percentage to be
allowed is 17 per cent. There are two bases for this conclusion. The first is
that the agreed statement of facts states that the percentage to be applied in
any calculation of Playcorp's lost profits on the sale of Taiyo R/C is 17 per
cent. The statement was signed by Whitear and Meredith following a Court
ordered meeting, and filed in the Court, with a view to narrowing the issues.
The case was conducted on that basis. It would not be appropriate to permit
Taiyo to resile from that agreement. The second basis is that I am satisfied,
in any event, that even allowing for some differences in costs (including in
relation to advertising and promotion) 17 per cent is a sufficient
approximation of the variable cost percentage and it is reasonable and
appropriate that it be adopted. If it were not for these matters, particularly
the first, I would have required that in the recalculation process that is to
be undertaken, a calculation be made on the basis of an additional five per
cent for advertising and promotion costs. Such a calculation could readily be
undertaken.
- It will be necessary for Appendix 6 to be recalculated in
order to arrive at the amount of lost profit.
Credit for Tyco's payments
- Taiyo submitted that the amounts which Tyco paid Playcorp
under the 1996 and 1998 agreements should be off-set against Playcorp's damages
for lost profits. The amounts received were $459,006 on 31 May 1996 and
$340,000 on 5 December 1997. It was submitted that these amounts were received
as compensation for the same lost profits on sales of new and old Tyco profits
that Playcorp now claims. The payments were for exactly the same losses which
Playcorp now seeks to recover. It was submitted that no Taiyo products were
worth considering for this purpose. In other words, it seemed to be said that
to the extent that Playcorp is seeking profits lost in respect of sales of
Taiyo product in its present claim, that part of the claim should be ignored or
treated as being a claim in respect of Tyco product. In support of the
submission counsel referred to Monroe Schneider Associates (Inc) v No 1
Raberem Pty Ltd,[55] Cade Pty Ltd v
Simmons,[56] British Westinghouse
Electric and Manufacturing Company Limited v Underground Electric Railways
Company of London Limited,[57] and
Masters Dairy Limited v Gabor Martin Nagy.[58] Counsel for Playcorp contended that on the facts Taiyo's
submission must fail.
- The issue thus raised turns on the character in which the
payments were received. In Wollington v State Electricity Commission (Vic)
(No 2)[59] Young CJ and Menhennit J said
(at 98) that:
"The answer to the question whether a particular receipt by a
plaintiff does or does not diminish the liability of the wrongdoer must in our
opinion in the absence of any other rule of law depend as a matter of principle
upon the character of the receipt. In other words, it is necessary to ask
whether the receipt is of such a character that it does diminish the liability
of the wrongdoer."
- Subsequently, in Redding v Lee[60] Mason and Dawson JJ said:
"... the issue turns on the character and purpose of the particular
financial benefit which the plaintiff receives: Was the benefit conferred on
him independently of any right or redress against others and so that he might
enjoy the benefit even if he enforced the right?"
- It is therefore necessary to consider the terms of the
agreements under which the payments were made.
- The payment made under the May 1996 deed of release was made
in consideration of Playcorp agreeing to cease the distribution of Tyco toys in
New Zealand and to cease the distribution of Tyco's New Products in Australia.
That, in summary, was the essence of what Playcorp gave up, although the deed
contained, in addition, a series of further agreements by Playcorp. The
provisions of the deed are referred to at [105] - [109]. It is important to
note that in the extensive recitals to the deed it is stated that Tyco and
Playcorp are in dispute as to Playcorp's claim to be entitled exclusively
(until 31 December 1998) to distribute Tyco toys in Australia and New Zealand,
and to a dispute between them as to payment of the licence fee, among other
matters. It is also recited that Playcorp has said it intends to sue Taiyo for
loss and damage which it has allegedly suffered and will continue to suffer as
a result of Taiyo's repudiation of the distribution agreement and, further, for
allegedly defective product supplied by Taiyo (called the Taiyo Claim). Then,
cl 3.10 (set out at [105]) provided for an additional payment by Tyco which, if
made, would have had the effect that Playcorp would not bring the Taiyo Claim.
Tyco did not make the payment.
- It is seen that the deed represented an agreement between
Playcorp and Tyco on a composite of matters, and that the overall amount to be
paid by Tyco was not apportioned to any of them. It was a single composite
amount. Furthermore, the deed made separate reference to Playcorp's claim
against Taiyo and Playcorp covenanted to give it up in consideration of an
additional payment. That payment not having been made, the covenant never fell
in.
- Playcorp's counsel submitted that as Playcorp made no claim
for profits from the sale of Tyco New Products in Australia or from the sale of
Tyco toys in New Zealand, the amount paid by Tyco should not be off-set. In my
view that result follows not merely for that reason but in consequence of the
provisions in the deed and the clear reservation of the claim against Taiyo.
Having regard to the complex of provisions in the deed it cannot be said that
the amount was received in diminution of Playcorp's right against Taiyo. The
amount was paid and received, in my view, independently of Playcorp's right to
claim against Taiyo.
- There is an additional and separate reason for this
conclusion. The point that is taken by Taiyo is one of mitigation of loss on
which it bears the onus. In this case, where there is a single payment in
consideration of a series of covenants by Playcorp, the onus is on Taiyo to
establish the extent (in dollar terms) that the composite amount was received
in diminution of the Taiyo claim.[61] Taiyo
has not done so. That is, it has not identified a component of the total
amount which represented the New Zealand side of the bargain on the one hand,
and the Australian side of the bargain on the other hand, to reduce the complex
of the agreement provisions to a simple analysis. The result is that no amount
is, or on the evidence could be, established as representing the amount to be
off-set.
- The second payment was made under the February 1998 deed of
termination. The payment was made in consideration of Playcorp entering into
the deed. The deed provided that from the date of payment Playcorp's exclusive
right to distribute Tyco toys in Australia other than Tyco's New Products is
terminated. There are a number of terms but they are all directed to achieving
that object. There was no reference to Taiyo.
- Taiyo's counsel submitted that the payment under the deed was
for Playcorp's loss of profits on old Tyco product. Playcorp's counsel
submitted that the payment should not be taken into account as Playcorp made no
claim in the proceeding for profits it would have made under the distribution
agreement from the sale of old Tyco toys in Australia after 5 December 1997.
As a result of the deed of termination Playcorp had (it is conceded) excluded
old Tyco products from the basket of Taiyo products available to Playcorp.
That was effective from the date of payment on 5 December 1997. The
consequence was that in so far as Playcorp had a right to recover lost profits
from Taiyo, from that date no loss could be attributable to old Tyco products.
The payment made by Tyco was the price which Playcorp received for giving up
any entitlement to distribute old Tyco product in Australia. In effect,
Playcorp received that price in satisfaction of any claim it may have against
Taiyo for profits lost in respect of old Tyco product. Playcorp's claim in
respect of 1998 is confined to Taiyo product. It must follow, in my view, that
Tyco's payment was received independently of Playcorp's right of redress
against Taiyo in respect of Taiyo product.
Damages - defective product claim
- I have already largely dealt with the issues argued in
relation to this claim. Playcorp concluded its arguments on this claim with a
submission that the claim was flawed as a matter of approach and that, as a
consequence, the quantum was not proved. For that reason the claim should
fail.
- The submission was put in this way. Playcorp was able to
cheaply repair product. Cooper had referred to Playcorp's manner of conducting
business in this regard, that is, in regard to repairing defective product with
a view to it being returned to the consumer or re-sold. This was the purpose
of Taiyo supplying spare parts. The vast majority of Playcorp's claim results
from not having repaired returned defective product. The true measure of any
loss is the cost of repair. Playcorp had not established that cost. It would
seem, although it was not expressly stated, that it was conceded that Playcorp
had established repair costs to the extent of the admitted $9,294 but no more
than that.
- Instead of establishing its loss, Playcorp had claimed the
wholesale price of the goods. That is the cost to acquire the goods plus the
full margin added to make up the wholesale price. If it were otherwise
appropriate to claim a figure other than repair costs, it could not be the
wholesale price. At most the claim could be for the purchase cost and loss of
net profit less the value of the returned product. Playcorp had not
established that loss, or even sought to do so.
- Playcorp's submission was that as it had paid Taiyo the price
to acquire the goods its loss was the sales price refunded to the retailer.
Playcorp had refunded to retailers the wholesale price they had paid for at
least the 6,418 items referred to in column B in Exhibit 5.
- Several things may be said about these submissions. Taiyo's
submission, which is one of mitigation, assumes that in the circumstances which
confronted Playcorp it was a practicable course, and one reasonably to be
expected to be undertaken, for Playcorp to plough on regardless in the repair
of all returned defective product for which the wholesale price was refunded.
Playcorp's actions in this respect should be considered in the commercial
context in which they occurred. It is sufficient reference to this context
(which I have discussed at length earlier) to refer to the abnormally high rate
of returns of Triple Wheels and Python, to Taiyo's failure to respond
reasonably and in a timely manner to Playcorp's difficulties caused by the
supply of substantial quantities of defective product, and to the bad
reputation of those products in the market place. The very large numbers of
Triple Wheels and Python in relation to the 6,418 items had the effect of
swamping the balance of the toys, the problems with which may otherwise have
been dealt or coped with. In short, the submission was premised on a
commercial situation that did not obtain.
- It was understandable, and not unreasonable, that Playcorp
did not proceed to incur the cost of repairing the defective goods and seek to
re-sell them. If they could not reasonably be offered to the market for resale
it was hardly worth incurring the cost and effort of repairing them. The
point is really one of mitigation and the answer to it is, first, that Playcorp
was not contractually obliged to repair the defective goods and offer them for
resale and, secondly, it was in the circumstances reasonable that Playcorp did
not do so. It is a reasonable inference that in their returned defective
condition the 6,418 toys had, and have, no resale value. They plainly could
not be sold and used for the purpose for which they were supplied by
Taiyo.
- The next point is the measure of Playcorp's loss. In the
first instance it is the cost of the acquisition of the goods. In addition
Playcorp has lost its profit on resale. That is not the full gross margin.
There must be an allowance for relevant costs in earning the profit.
Playcorp's submission is therefore erroneous in claiming the full wholesale
price. Playcorp's counsel did not identify the net profit in their
submissions. Indeed the submission fairly clearly eschewed any attempt to do
so.
- There is evidence which enables Playcorp's purchase price of
the goods to be ascertained. That should be done and I should be informed
accordingly for the purpose of fixing the amount for damages. Then, the
average wholesale price of the goods is known and admitted, and there is the
agreed variable cost percentage. If the evidence is not sufficient to enable a
calculation of the net profit, it must follow that Playcorp has failed to
establish that component of its loss. That would seem to be the situation
having regard to the limited terms of Playcorp's submission. In that situation
the damages will be limited to recovery of the cost of purchasing the goods
plus the amount incurred on expenses, $9,294.
Conclusion
- Playcorp is entitled to damages for loss of profits and in
respect of defective products. The amount to be awarded under the former head
is to be ascertained by a recalculation of Appendix 6 in accordance with these
reasons at [362]-[364]. The amount to be awarded for the latter is to be
ascertained by a calculation in accordance with these reasons at [382]-[383].
I will stand the matter over to a convenient time to enable the calculations to
be made and I will then hear counsel as to the terms of the orders and
costs.
SCHEDULE A
AMENDED PARTICULARS IN SCHEDULE
(see Court Book 33)
DEFECTIVE PRODUCTS
|
|
A.
Quantities returned
(see credit notes)
|
B.
Quantities in warehouse as counted
|
C.
Average wholesale price
(see credit notes)
|
D.
Lost price on goods in warehouse
|
|
(Item 219) - Mini Scorcher (no. 9409)
|
578
|
324
|
AUD$46.01
|
$14,907
|
|
(Item 221) - 9.6V Turbo Scorcher (no. 9203)
|
386
|
6
|
$72.93
|
$437
|
|
(Item 227) - 9.6V Harley (no. 9336)
|
156
|
14
|
$77.84
|
$1,089
|
|
(Item 235) - Riptide Boat (no. 9016)
|
67
|
178
|
$51.80
|
$9,220
|
|
(Item 240) - 6 V Triple Wheels (no. 9335)
|
3,783
|
4,139
|
$56.34
|
$233,191
|
|
(Item 241) - 6 V Python (no. 9322)
|
1,537
|
1,402
|
$60.25
|
$84.470
|
|
(Item 244) - Fire Power (no. 9401)
|
417
|
181
|
$62.45
|
$11,303
|
|
(Item 246) - Rebound (no. 9408)
|
389
|
174
|
$61.46
|
$10,694
|
|
|
7313
|
6,418
|
|
$365,311
|
|
|
|
PLUS repairs:
|
$9294
|
SCHEDULE B
PLAYCORP. SHIPPING HISTORY (1992 - 1995)
1992
|
TOY#
|
DESCRIPTION
|
QUANTITY
|
AMOUNT
|
REMARK
|
|
|
|
|
US$
|
|
|
8813
|
9.6V TURBO BANDIT
|
144 SETS
|
3.391.20
|
NEW
|
|
8816
|
MICRO WILD THING
|
23,988 SETS
|
142,968.48
|
NEW
|
|
8901
|
MINI BLASTER
|
3,000 SETS
|
40,980.00
|
`91 ITEM
|
|
8915
|
MICRO BLASTER
|
4,800 SETS
|
28,244.00
|
'91 ITEM
|
|
9015
|
9.6V FAST TRAXX
|
2,600 SETS
|
67,756.00
|
'91 ITEM
|
|
9030
|
MINI TRAXX
|
14,400 SETS
|
215,280.00
|
NEW
|
|
9109
|
7.2V SUPER F/TRAXX
|
660 SETS
|
27,172.20
|
NEW
|
|
9116
|
MINI WILD THING
|
17,994 SETS
|
245,798.04
|
NEW
|
|
9117
|
MINI BANDIT
|
102 SETS
|
$1,604.46
|
NEW
|
|
9123
|
9.6 TURBO HAMMER
|
1,360 SETS
|
45,260.80
|
NEW
|
|
9912
|
9.6V WILD THING
|
27,926 SETS
|
617,308.80
|
NEW
|
|
TOTAL
|
|
96,974 SETS
|
$1,435.743.98
|
|
1993
|
TOY#
|
DESCRIPTION
|
QUANTITY
|
AMOUNT
|
REMARK
|
|
|
|
|
US$
|
|
|
8816
|
MICRO WILD THING
|
3,600 SETS
|
21,168.00
|
'92 ITEM
|
|
8915
|
MICRO FX-4
|
24,000 SES
|
141,120.00
|
NEW
|
|
9004
|
NISSAN/FERRARI
|
5,982 SETS
|
61,016.40
|
NEW
|
|
9015
|
FAST TRAXX
|
7,488 SETS
|
89,856.00
|
'91 ITEM
|
|
9101
|
MICRO BANDIT
|
6,000 SETS
|
37,800.00
|
NEW
|
|
9106
|
MINI FX-4
|
9,600 SETS
|
134,208.00
|
NEW
|
|
9203
|
TURBO SCORCHER
|
41,996 SETS
|
1,122,973.04
|
NEW
|
|
9205
|
TURBO HI-JACKER
|
11,988 SETS
|
304,615.08
|
NEW
|
|
9212
|
TURBO FX-4
|
7,200 SETS
|
175,872.00
|
NEW
|
|
9326
|
MINI TRAXX PKUP
|
252 SETS
|
3,467.52
|
NEW
|
|
TOTAL
|
|
118,106 SETS
|
2,092,096.04
|
|
1994
|
TOY#
|
DESCRIPTION
|
QUANTITY
|
AMOUNT
|
REMARK
|
|
|
|
|
US$
|
|
|
8915
|
MICRO FX-4
|
12,000 STS
|
70,920.00
|
'93 ITEM
|
|
9016
|
9.6V RIPTIDE
|
1,200 SETS
|
38,400.00
|
NEW
|
|
9101
|
MICRO BANDIT
|
3,600 SETS
|
22,788.00
|
'93 ITEM
|
|
9203
|
9.6V TURBO SCORCHER
|
9,600 SETS
|
255,508.00
|
'93 ITEM
|
|
9322
|
6V PYTHON
|
16,732 SETS
|
379,816.40
|
NEW
|
|
9328
|
MICRO HARLEY PKUP
|
4,800 SETS
|
64,032.00
|
NEW
|
|
9335
|
6V TRIPLE WHEELS
|
29,992 SETS
|
670,320.40
|
NEW
|
|
9336
|
TURBO HARLEY PKUP
|
2,392 SETS
|
73,554.00
|
NEW
|
|
9338
|
MICRO X-MEN
|
3,000 SETS
|
34,500.00
|
NEW
|
|
9340
|
6V BATT PACK
|
12,000 SETS
|
58,800.00
|
NEW
|
|
9342
|
6V BATT PACK/CHAR
|
48,000 SETS
|
393,600.00
|
NEW
|
|
9343
|
MINI SCORCHER
|
21,552 SETS
|
426,771.56
|
NEW
|
|
|
WAVE ALBATOROSS
|
1,824 SETS
|
39,216.00
|
NEW
|
|
TOTAL
|
|
166,692 SETS
|
2,528,226.36
|
|
1995
|
TOY#
|
DESCRIPTION
|
QUANTITY
|
AMOUNT
|
REMARK
|
|
|
|
|
US$
|
|
|
9203
|
9.6V SCORCHER
|
12,000 SETS
|
328,920.00
|
'93 ITEM
|
|
9306
|
6V SCORCHER
|
6,000 SETS
|
117,480.00
|
NEW
|
|
9322
|
6V PYTHON
|
4,260 SETS
|
96,702.00
|
'94 ITEM
|
|
9335
|
6V TRIPLE WHEELS
|
3,000 SETS
|
67,050.00
|
'94 ITEM
|
|
9342
|
6V BATT PACK/CHAR
|
36,000 SETS
|
301,500.00
|
NEW
|
|
9343
|
MINI SCORCHER
|
3,640 SETS
|
72,727.20
|
'94 ITEM
|
|
9401
|
6V FIRE POWER
|
9,600 SETS
|
195,480.00
|
NEW
|
|
9402
|
6V RAMPAGE
|
1,800 SETS
|
33,444.00
|
NEW
|
|
9408
|
6V REBOUND
|
24,000 SETS
|
544,800.00
|
NEW
|
|
9409
|
MICRO SCORCHER
|
17,994 SETS
|
109,892.20
|
NEW
|
|
9413
|
9.6V RAMPAGE
|
2,400 SETS
|
69,984.00
|
NEW
|
|
TOTAL
|
|
120,694 SETS
|
1,937,979.40
|
|
GRAND TOTAL 502,466 SETS US$7,994,045.78 (1992-1996)
SCHEDULE C
APPENDIX 5
PLAYCORP PTY LTD v TAIYO KOGYO CO LTD
SALES OF TAIYO PRODUCTS PER STEPHEN GRANT'S THIRD WITNESS
STATEMENT
|
|
|
1996
|
1997
|
1998
|
|
Products
|
Price
|
Quantity
|
Sales
|
Quantity
|
Sales
|
Quantity
|
Sales
|
|
|
$
|
Units
|
$
|
Units
|
$
|
Units
|
$
|
|
Rebound
|
60
|
40,000
|
2,400,000
|
30,000
|
1,800,000
|
|
|
|
6V Battery Pack and Charger
|
26
|
40,000
|
1,040,000
|
30,000
|
780,000
|
|
|
|
6V Jet Turbo Battery Pack
|
15
|
10,000
|
150,000
|
8,000
|
120,000
|
|
|
|
Fast Traxx
|
65
|
9,000
|
585,000
|
6,000
|
390,000
|
|
|
|
Mini Traxx
|
35
|
6,000
|
210,000
|
4,500
|
157,500
|
|
|
|
Super Fast Traxx
|
95
|
600
|
57,000
|
-
|
-
|
-
|
-
|
|
Turbo Hammer
|
85
|
600
|
51,000
|
-
|
-
|
-
|
-
|
|
Rampage
|
58
|
-
|
-
|
6,000
|
348,000
|
-
|
-
|
|
Micro Super Bandit, Micro Scorcher, Micro Wild Thing, Micro
Nitro Invader
|
15
|
18,000
|
270,000
|
18,000
|
270,000
|
-
|
-
|
|
Rip Tide Boat/Wave Albatross
|
47
|
2,400
|
112,800
|
1,200
|
56,400
|
-
|
-
|
|
Mini Blaster
|
47
|
7,500
|
352,500
|
5,500
|
258,500
|
-
|
-
|
|
Micro Blaster, Micro Nitro Invader
|
15
|
-
|
-
|
-
|
-
|
6,000
|
90,000
|
|
Porsche 911 Cabriolet
|
0
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Mini Hopper, Mini Blaster
|
35
|
-
|
-
|
-
|
-
|
5,000
|
175,000
|
|
Chevy Pickup, Off Road Tiger
|
0
|
-
|
-
|
-
|
-
|
-
|
-
|
|
TOTAL
|
|
134,100
|
5,228,300
|
109,200
|
4,180,400
|
11,000
|
265,000
|
SCHEDULE D
APPENDIX 6
PLAYCORP PTY LTD v TAIYO KOGYO CO LTD
Profits calculation of sales of Taiyo products based on Stephen Grant's
3rd witness statement
Agreed Facts
Variable Cost as Percentage of sales 17%
April - June Weighted average sales 18%
July - Dec Weighted average sales 80.5%
If Court finds:
|
Sales Per Year based on:
|
Stephen Grant's 3rd witness statement
|
|
Gross Margin is:
|
41.47%
|
|
April - June 1996
|
Rate
|
$
|
|
Sales
Less Cost of Goods Sold
Gross Profit
Less Increase in Costs
Variable Costs
Loss of Profits
|
18%
41.47%
17%
|
941,094
550,822
|
|
|
|
390,272
|
|
|
|
159,986
|
|
|
|
230,286
|
|
June - Dec 1996
|
Rate
|
$
|
|
Sales
Less Cost of Goods Sold
Gross Profit
Less Increase in Costs
Variable Costs
Loss of Profits
|
80.5%
41.47%
17%
|
4,208,782
2,463,400
|
|
|
|
1,745,382
|
|
|
|
715,493
|
|
|
|
1,029,889
|
|
1997
|
Rate
|
$
|
|
Sales
Less Cost of Goods Sold
Gross Profit
Less Increase in Costs
Variable Costs
Loss of Profits
|
100%
41.47%
17%
|
4,180,400
2,446,788
|
|
|
|
1,733,612
|
|
|
|
710,668
|
|
|
|
1,022,944
|
|
1998
|
Rate
|
$
|
|
Sales
Less Cost of Goods Sold
Gross Profit
Less Increase in Costs
Variable Costs
Loss of Profits
|
100%
41.47%
17%
|
265,000
155,104
|
|
|
|
109,896
|
|
|
|
45,050
|
|
|
|
64,846
|
[1] There is some vagueness,
indeed conflict, as to the extent of the interest but it is accepted that Tyco
has such an interest. From the evidence of Itani and Sasahara it seems that
Tyco acquired an interest in 1992 or 1993. The interest was either 19% or
"probably" 10% increasing to 19% by September 1995.
[2] Cl 3.1.
[3] Cl 3.2.
[4] Cl 2.2.
[5] Cl 2.3.
[6] Cl 6.1.
[7] Cl 7.
[8] Cl 6.2.
[9] Cl 5.2(c).
[10] Cl 5.2(a) and (b).
[11] Cl 2.1.
[12] Cl 4.1.
[13] Cl 2.1.
[14] Cl 3.1.
[15] Cl 2.1.
[16] Cl 3.1 and cl 3.2.
[17] Cl 3.5.
[18] Cl 3.5.
[19] Cl 3.7.
[20] Cl 3.8.
[21] Exhibit Y, para 43.
[22] Exhibit D.
[23] Exhibit 15 paras 16 and 17.
[24] See generally in relation to expert
evidence Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705.
[25] Gawne v Gawne [1979] 2 NSWLR 449
at 453.
[26] Gawne at 455.
[27] See at [27].
[28] Court Book Vol 2 p 438-439.
[29] See at [21]
[30] See at [39].
[31] See the earlier findings concerning
Itani at [60]-[61] and [94].
[32] See Sasahara's witness statements
Exhibit 10 pp 12-14 and 20-21.
[33] Exhibit A para 44
[34] As to which counsel referred to
Benaim and Company v Debono [1942] AC 514 at 520 (PC); N V Handel MY
J Smits Import Export v English Exporters (London) Ltd [1955] 2 Lloyds LL
Rep 317 at 322 -323; The Nile Co for the Export of Agricultural Crops v H
& JM Bennett (Commodities) Ltd [1986] 1 Lloyds L R 555 at 580-581.
[35] Akai Pty Ltd v Peoples Insurance Co
Ltd (1996) 188 CLR 418 at 441.
[36] [1956] Ch 323 at 340 - 341.
[37] See Bonython v Commonwealth of
Australia (1950) 81 CLR 486 at 498; Akai Pty Ltd v The People's
Insurance Co Ltd (1996) 188 CLR 418 at 434.
[38] 13th ed, Vol 1,
p 221-232; and see Australian Private International Law, Sykes and
Pryles, 3rd ed, p 276-277; Cross on Evidence
6th ed at [41005].
[39] The letter dated 30 October 1995 lists
returns to 10 October 1995 whereas Exhibit S includes credit notes issued up to
31 December 1996 and quantities counted in the warehouse in 2000.
[40] Exhibit A.
[41] [2001] VSC 167 at [47] where Byrne J
refers to several cases including Hughes Aircraft Systems International v
Airservices Australia (1997) 146 ALR 1, and Alcatel Australia v
Scarcella (1998) 44 NSWLR 349.
[42] [2001] VSC 192.
[43] (1979) 144 CLR 596 at 607.
[44] See GSA Group Ltd Siebe (1993)
ATPR 41, 240 at 41,260.
[45] (1992) 26 NSWLR 234.
[46] (1978) 118 CLR 423 at 433-434.
[47] (1989) 168 CLR 385 at 397-402, 406-408,
423-425 and 451-453.
[48] Robinson v Harman (1848) 1 Ex.
850 at 855.
[49] (1990) 169 CLR 638 at 643.
[50] (1991) 174 CLR 64.
[51] (1992) 179 CLR 332.
[52] (1990) 174 CLR 64 at 120-121.
[53] The list is at page 517 of the Court
Book.
[54] (1946) 74 CLR 12 at 143.
[55] (1991) 33 FCR 1.
[56] (1998) 71 SASR 571.
[57] [1912] AC 673.
[58] (1998) 156 ALR 262.
[59] [1980] VR 91.
[60] (1983) 151 CLR 117 at 137.
[61] See Monroe Schneider Associates (Inc)
v No 1 Raberem Pty Ltd (1991) 33 FCR 1 at 29 per Burchett J.
Pace Law School
Institute of International Commercial Law - Last updated August 5, 2003