Turkalert when 'it wasn't my fault, so pay me the money!' doesn't quite cut it

When ‘It wasn’t my fault, so pay me the

Pieter Oomens and Effie Dimos | July 2013 | Commercial Disputes and Transactions

A recent case shows that an otherwise straight forward claim arising from the sale and delivery of goods might be undone so as to thwart winding up proceedings.

Creditors should be aware that standard form trading terms cannot deal with every possibility and agreeing to a customer’s supply schedule might have significant ramifications. A creditor’s statutory demand which refers to a debt which is not genuinely disputed may nonetheless be the subject of an offsetting claim which will make the demand ineffective.

The plaintiff in the case, In the matter of GO Electrical Pty Limited [2013] NSWSC824, Class Electrical Services Pty Limited (‘CES’) was able to obtain an order to set aside a creditor’s statutory demand that was served on it by the defendant, GO Electrical Pty Limited (‘GO’). The application was successful not on the ground that there was a genuine dispute between the parties about the existence or the amount of the debt, but because it was found that CES had an offsetting claim arising from delays and other problems caused not by GO, but by the suppliers to GO. The case is also important because it gave an insight into the attitude of the Court in assessing an offsetting claim.

Background: In 2006, CES entered into a contract to purchase goods on credit from GO. Years after establishing the account, CES, which was an electrical contractor, ordered goods from GO so that it might install them on a building project. CES had been engaged on the project by the builder, Cockram.

Commencing in mid-2011 and continuing until early 2012, CES placed in excess of $2 million worth of orders with GO. Critically, when placing orders with GO, CES indicated its required delivery times. GO prepared a schedule which it provided to its suppliers and sourced the goods from two particular suppliers.

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money!’ doesn’t quite cut it…

There were delays in the delivery of goods by GO’s suppliers such that the delivery times set by CES were not met. Additionally, Cockram advised CES that some of the goods which it had installed were faulty, not fit for purpose and required replacement.

Cockram subsequently wrote to CES indicating that it would be withholding a substantial amount of money on the project and the cost of the audit and replacement of the faulty fittings would be withheld from monies outstanding to CES. Further, Cockram informed CES that it would no longer award any further work to CES as a consequence of CES’s failure to meet Cockram’s requirements on this project.

CES alerted GO to the fact that it believed that it had a claim against GO because of the issues complained of by Cockram. At the same time, CES proposed a payment schedule (although that payment schedule contemplated that there would be some compensation to CES thereby reducing the amount of GO’s claim).

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Pieter Oomens and Effie Dimos | July 2013

CES commenced proceedings in the Supreme Court of New South Wales to set aside the statutory demand on two alternative bases - that there was a genuine dispute about the existence or the amount of the debt and that it had an offsetting claim.

Was there a genuine dispute?

One of the initial affidavits filed by CES in support of the originating process to set aside the creditor’s statutory demand alleged that GO did not provide $50,000 worth of goods invoiced. A subsequent affidavit was filed by CES in which it was alleged that goods to the value of $950,000 had not been provided by GO. GO denied that the goods ordered had not been delivered and objected to the admission of the further affidavit. In doing so, GO relied upon the ‘Graywinter’ principle – Graywinter Property Pty Limited v Gas & Fuel Corp Superannuation [1996] 70FCR 4FT at 587. This principle is to the effect that the plaintiff seeking to set aside a creditor’s statutory demand must file and serve affidavits containing the evidence it seeks to rely on within 21 days from the service of the creditor’s statutory demand. Whilst the evidence contained in affidavits filed and served in the requisite 21 day period can be expanded upon in later affidavits, evidence supporting other grounds not raised in the affidavits filed and served within the requisite 21 day period cannot be relied upon. His Honour, Rein J, found for GO on this point and agreed that CES’s ‘swelling’ of the claim from $50,000 to $950,000 could not be accepted as an amplification or legitimate clarification within the scope of the Graywinter principle.

In making this finding, his Honour also pointed out that there was no correspondence before the issue of the creditor’s statutory demand that

alleged that GO had not delivered goods that were ordered and invoiced. In his view, if CES had genuinely believed that goods to half the value of the orders placed had not been supplied, one would have expected that letters or emails would have been sent well before February 2013 when an affidavit was filed and served containing this substantial claim. His Honour thus concluded that there was no genuine dispute about the existence or the amount of the debt.

Was the debt subject to an offsetting claim?

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Some payments were made by CES to GO but ultimately GO served on CES a creditor’s statutory demand for the payment of an amount of $1.8 million. This amount took into account payment that had been made by GO and also made allowance for an estimated figure which had been claimed by CES as loss arising from the supply of faulty goods.

CES claimed that it was entitled to an offset by reason of delays in the delivery of equipment and defects in the equipment supplied, both of which resulted in a substantial loss. CES put its claim on two bases. One was that there was a contractual right based on breach of terms express or implied by virtue of the Sale of Goods Act 1923 (NSW) for delivery within a specified time, or within a reasonable time. The second was that CES had a claim under section 18 of the Australian Consumer Law (CTH), schedule 2 of the Competition and Consumer Act 2010 (CTH) for misleading and deceptive conduct. CES also contended that a party to a sale of goods contract which is breached by the vendor is entitled to claim economic loss resulting from loss of reputation as a consequence of the vendor’s breach.

In dealing with the second argument (misleading and deceptive conduct), his Honour said that it was clear that to make a promise which is not performed or a prediction that is not fulfilled is not, without more, misleading or deceptive.

It is only where the making of a promise or prediction contains an implied representation of present fact, such as a representation that the promisor is capable of performing the promise, that the promise or prediction can be misleading or deceptive. Alternatively, if the promise can be construed as a representation with respect to a future matter, and the promisor does not have reasonable grounds for making the representation, it is taken to be misleading.

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In the result Rein J considered that it was not necessary for him to dwell on the misleading and deceptive claim because the sale of goods claim was sufficiently made out. He found that the material presented demonstrated that CES had grounds for a claim against GO based on GO’s failure to deliver goods in a timely fashion, despite the fact that the delays and the provision of faulty goods were ultimately as a consequence of the actions of the suppliers to GO. Having found that a breach of contract gave rise to a claim by CES against GO, the next question was whether such a claim was one that could constitute an offsetting claim under the Corporations Act - was there a realistic prospect that the claim would equal or exceed that which was referred to in the creditor’s statutory demand?

His Honour indicated that he only needed to be satisfied that there was a genuine claim to an offsetting amount of at least the sum referred to in the creditor’s statutory demand. He found that on the face of the material presented in relation to Cockram’s potential claim against CES as articulated in Cockram’s correspondence with CES and the likelihood of a claim for damage to good will which was also referred to in correspondence, he was so satisfied.

In particular, Cockram had: • • • •

foreshadowed a claim against CES for ratifications obtained a quotation for rectification costs in the sum of $1.6 million engaged others to perform rectification work threatened to take action against CES to recover all of its losses in respect of the rectification work

In the result, the creditor’s statutory demand was set aside. GO was ordered to pay CES’s costs.

Lessons

sold and delivered goods and was not paid and the failure to pay (even despite promises to do so) means that the debtor is insolvent. Before a statutory demand is relied upon however issues such as the genuineness of the debt and the potential for any offsetting claim ought to be considered.

The second important lesson for creditors is to understand that standard trading terms invariably found in credit applications will not necessarily deal with every exigency. Having established credit terms, suppliers and customers often enter into agreements on a project by project basis that impose obligations concerning delivery times, not to mention assurances as to quality of goods.

These agreements may give rise to ramifications outside the scope of standard trading terms found in credit applications.

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Pieter Oomens and Effie Dimos | July 2013

For more information please contact: Pieter Oomens Partner T: 02 8257 5709 M: 0417 268 334 pieter.oomens@turkslegal.com.au

Effie Dimos Lawyer T: 02 8257 5786 M: 0415 504 486 effie.dimos@turkslegal.com.au

The first lesson the case presents is that care should be taken by a creditor in determining to serve a statutory demand. A creditor might believe that its case is virtually one dimensional - it

www.turkslegal.com.au Syd | Lvl 44, 2 Park St, NSW 2000 T: 02 8257 5700 | F: 02 9264 5600 Melb | Lvl 10 North Tower, 459 Collins St, VIC 3000 T: 03 8600 5000 | F: 03 8600 5099