Zaps Transport (Aust) Pty Limited v Richland Express Pty Limited

HIS HONOUR: These proceedings involve claims brought by the Plaintiff, Zaps Transport (Aust) Pty Limited (“Zaps”), a company now in liquidation, against Richland Express Pty Limited (“Richland”), arising from what is alleged to have been an agreement between them, relating to goods held in a bonded warehouse (“the Warehouse”) in Smithfield, a suburb of Sydney, located about 30 kilometres west of the Sydney central business district.

Zaps relied upon a further amended Statement of Claim filed on 11 August 2017, in which it claimed amounts totalling $986,610.97, interest, and costs. (The Statement of Claim commencing the proceedings was filed on 10 December 2014.) A minor, non-controversial, amendment to the pleading was made, with leave, on the first day of the hearing. Nothing turns on that amendment.

Just before the final submissions in reply were concluded, an application was made, on behalf of Zaps, to amend Paragraph 30 of the further amended Statement of Claim by adding the words “and in breach of the agreement”. Despite the opposition of Richland, and because I considered that Richmond could not have been prejudiced by the proposed amendment, including by reference to costs considerations, the Court granted leave to Zaps to make the amendment and the Paragraph has been read with those words included.

In permitting the amendment, I formed the view that what was alleged had been foreshadowed, expressly, in a reply to a request for particulars dated 21 August 2017 (Ex. C/44), and that, in this way, Zaps had taken steps to ensure that Richland was cognisant of the issues sought to be raised.

An important question for determination is whether Zaps, the warehouse licensee from whose bonded warehouse dutiable goods were stolen, is able to recover from Richland the amounts of two demands, made under s 35A of the Customs Act 1901 (Cth) (“the Customs Act”) by the Commissioner of Taxation.

The answer to that question may be based upon the answer to the question whether Zaps and Richland adopted, as the binding agreement governing their relationship, an earlier agreement made between Westin Tristar Logistics Pty Limited (“Westin”) and Richland, or whether there was a novation of that agreement.

Alternatively, the question is whether there was an agreement between Richland and Zaps, requiring Richland to insure the goods, in order to meet any liability imposed under s 35A of the Customs Act upon Zaps, for the loss of the goods whilst the goods remained in the Warehouse. Indeed, Zaps puts its case as “claims against [Richland] in respect of a failure by [Richland] to properly insure for claims arising pursuant to Section 35A of the Act, and in circumstances in which [Zaps] claims that [Richland] was under a duty to have done so”: Paragraph 3 of Zaps’ Case Outline.

Although a question of a warehouse lien was raised in the pleadings, that claim was not pressed. In any event, it was accepted that Zaps “no longer has possession of the relevant goods” and that to persist with the claim would be futile: T186.08 – T186.13.

All of the questions, initially, must be considered in light of written documents between Westin and Richland, to which reference will be made later in these reasons. It is accepted, that none of these written documents were entered into between the parties to this litigation, and that there are no written documents, relied upon by Zaps, in which it and Richland, are parties.

Richland maintained that the written agreement between Westin and Richland was not novated, or adopted, by the parties to these proceedings. By its Defence to the further amended Statement of Claim, Richland denied any liability to Zaps whatsoever. In broad terms, it asserted that there was no agreement between Richland and Zaps that incorporated an obligation to meet any liability imposed under s 35A of the Customs Act upon Zaps, for the loss of the goods whilst the goods remained in the Warehouse. In relation to the allegation of a breach of the term to obtain insurance, Richland also asserted that there was no such agreement between Zaps and Richland. It maintained that, in any event, Richland had insurance. In this regard, it was submitted, in writing, that Zaps had not alleged that Richland:

Two Cross-Claims filed in the proceedings were discontinued, the first Cross-Claim in August 2017 and the second Cross-Claim in July 2017. Nothing needs to be written about the first Cross-Claim. In relation to the second Cross-Claim, all that needs to be stated is that Richland brought a claim, by way of the second amended Statement of Cross-Claim, filed on 28 June 2016, against Hamilton Brokers Pty Limited (“Hamilton Brokers”), a company that carried on the business of an insurance broker and which was said to have been retained by Richland to procure a valid policy of insurance for amongst other things the “duty component” of tobacco stock stored in the Warehouse. The basis upon which the second Cross-Claim was discontinued was not the subject of any evidence in the proceedings.

There were separate proceedings, also listed for hearing with these proceedings, involving the same parties (2015/154800: Richland Express Pty Limited v Zaps Transport (Aust) Pty Limited). At the commencement of the hearing, counsel for Richland, which was the Plaintiff in those separate proceedings, confirmed, without objection, that those proceedings were to be dismissed. On the second day of the hearing, the Court was provided with a signed Consent Order, in accordance with which orders were then made concluding those proceedings.

Thus, the only matter for determination is the case brought by Zaps, based upon the further amended Statement of Claim (with the two amendments to which I have referred).

At the hearing, Mr T Hall, solicitor, appeared for Zaps and Mr S C Ipp, of counsel, appeared for Richland. The matter was listed for 3 days and was just concluded within that time.

It is convenient, next, to provide some of the factual background in order to put the claims, and the submissions of the parties, into context. I start with the facts that I am satisfied have been established on the balance of probabilities.

Zaps was an Australian proprietary company, limited by shares. It was first registered in New South Wales on 17 October 1994. There were two issued ordinary shares, each with a value of $1.00: Ex. B/1-6.

Zaps is now in liquidation pursuant to orders made by the Federal Court on 28 November 2016. The liquidators appointed were Mr N R Cussen and Mr M J Billingsley, each of whom is a Court appointed liquidator: Ex. B/Tab 25.6. (It appears that the liquidation was as a consequence of the failure by Zaps to meet the demands, to which reference will be made.)

Between 17 November 1996 and 13 September 2016, John Zappia (“John”) was a director of Zaps. Rose Zappia, John’s wife, had been a director between 5 May 1997 and 30 June 1999, and again from 13 September 2016 until its liquidation. Giovanni Zappia, a cousin of John, was a director between 17 November 1996 and 5 May 1997: Ex. B/Tab 25. Only John gave evidence in these proceedings and he was cross-examined.

Zaps, prior to its liquidation, employed about 25 employees in the Warehouse, one of whom was John’s son, Domenic Zappia (“Domenic”), who was employed as the general manager and the Warehouse manager. He was the person who dealt with the day-to-day operations of the Warehouse. Domenic gave evidence in these proceedings, and he was cross-examined.

At relevant times, Zaps operated the Warehouse, which was a facility for the storage of bonded goods. It was an operator which provided bonded warehouse facilities to, inter alia, importers of various goods. It had been granted a warehouse licence, issued under Part V of the Customs Act, to operate the Warehouse (“the Warehouse Licence”). The licence authorised it to store tobacco and tobacco products, and other goods, subject to customs control (other than petroleum and like products).

In accordance with the standard condition of the Warehouse Licence requiring Zaps to notify the Australian Taxation Office (“ATO”), in writing, of the persons “participating in the management or control of the warehouse”, each of John and Domenic was identified as such.

On 23 June 2017, Mr John Zappia, (who is not the John Zappia to whom reference has been made, but who is an accountant bearing the same name), was appointed as Controller of Zaps’ causes of action (Ex. D). (There had been an Assignment of Debt and Securities dated 21 December 2016, entered into between various parties, relating to, in part “debts and obligations of Zaps Transport (Aust) Pty Limited”.) The circumstances surrounding the appointment of Mr Zappia and how the Assignment of Debt and Securities had come to be entered into, were not the subject of evidence.

In the Notification to ASIC that a person has been appointed controller (a copy of which formed part of Ex. D), under the heading “Schedule of Property”, the “causes of actions” included these proceedings.

Westin, which was an Australian proprietary company, limited by shares, was first registered on 4 August 2006. It was placed into voluntary liquidation at a General Meeting of Members on 10 December 2013, and Mr B W Morelli was appointed as liquidator. There was a notice of meeting of creditors on 13 December 2013 and notice of proposed deregistration initiated by ASIC on 22 December 2015: Ex. B/Tab 26.

The circumstances of Westin’s winding up were not the subject of any evidence in the proceedings other than in a Notice to Creditors pursuant to s 508 of the Corporations Act 2001 (Cth) dated 16 February 2015: Ex. 2. Westin was deregistered on 22 February 2016.

Relevantly, the directors of Westin were John, between 4 August 2006 and 17 February 2013; Domenic, between 23 November 2006 and 22 February 2016; and Vojislav Voya Ilich (called “Voya Ilich” during the hearing) between 23 November 2006 and 14 March 2012.

There were 10 issued ordinary shares in Westin, each with a value of $1.00, of which 3 fully paid shares were held by Voya Ilich, 4 fully paid shares were held by John, and 1 fully paid share was held by Dejan Tadic (the last two of whom have played no part in these proceedings): Ex. B/26.

Relevantly, between about 2009 and 2013, Westin conducted business, including providing freight, transport and warehousing services to various customers, including importers of dutiable goods. It was described by the Liquidator in the Report referred to as having “traded as a logistics warehousing business”.

In relation to the warehousing services provided by Westin, there was said to be a business relationship between Westin and Zaps, the precise nature of which was not made clear in the evidence. John gave evidence that Westin traded from the Warehouse and that there was “an ongoing fee, [an] internal fee charged” by Zaps, to Westin, in relation thereto: T52.14 – T52.17.

From about 15 August 2013, Zaps came to be the holder of the name “Westin Tristar Logistics (NSW)”, a registered business name, and it began to trade as “Westin Tristar Logistics (NSW)”. It was asserted (although the evidence in support of this assertion is far from clear) that “the trading arrangements of [Westin] had been taken over by [Zaps] on about 15 August 2013” and that Westin’s business, thereafter, was conducted by Zaps through Westin Tristar Logistics (NSW).

There was tendered (Ex. 1) an Asset Purchase Agreement between Westin and Zaps in accordance with which Westin agreed to sell, and Zaps agreed to purchase, a number of identified assets (which appear to be six motor vehicles). Although not dated, it refers to the “Completion Date” which is stated to be “22/11/2013”. The total purchase price was $159,485.42 including GST. (The relevance of this document was not made clear.)

The land on which the Warehouse is situated is owned by JRZ Harley Pty Limited (“JRZH”). From 25 June 1999 until 9 August 2016, John was the sole director of JRZH. From 9 August 2016, Domenic was appointed as its sole director and secretary: Ex. B/Tabs 27, 28, and 29. (JRZH played no role in the proceedings.)

Richland is an Australian proprietary company limited by shares. It was first registered in New South Wales on 11 September 2007. It has 850,000 ordinary shares with a value of $1.00 each: Ex. B/Tab 24.32 - 24.41.

Its current directors and shareholders have played no part in these proceedings, although the Court was informed that one of them had been present in Court on two, of the three, days of the hearing: T181.45 – T182.09.

Richland is an importer of goods, including cigarettes and tobacco products. Its business involves the sale and distribution of bonded goods, including those goods placed in storage at the Warehouse the subject of the demands to which reference will be made. In the present case, the “bonded goods” were cigarettes and tobacco products.

Between about 2008 and 2015, Richland imported tobacco products, principally from Germany, Luxembourg and Indonesia, and sold them to major retailers in Australia.

In about late 2009, Richland was looking to find an alternative warehouse at which its imported tobacco products could be stored until they were “entered for home consumption” (i.e. sold into the domestic market). It was in these circumstances that it came to deal with Westin.

In October 2015, Richland employed about 20 staff. Paul Andrew Daly was a director of Richland between 3 October 2008 and 15 October 2015. On the latter date, he ceased employment with Richland and he resigned as a director. He gave evidence, on behalf of Richland, and he was cross-examined.

Edward Cheung is Richland’s accountant, having commenced his role as such in August 2010. He is “responsible for all aspects of [Richland’s] finances and daily operations”. He oversees “the arrangements with [Richland] for the payment by [Richland] to bond store operators storing tobacco products owned by [Richland]”. He gave evidence, on behalf of Richland, and he was cross-examined.

It seems that the regulation of warehouses that store excise equivalent goods, which includes cigarettes, has been administratively delegated by the Comptroller General of Customs to the ATO by the appointment of ATO staff as officers of Customs for the purpose of exercising the powers of a Collector under the Customs Act. The ATO now administers the Customs Act.

Dominic gave evidence that “[I]n about September 2009, Mr Paul Daly … had a number of discussions with me for the purposes of Westin … taking over the storage and distribution of Richland’s tobacco products…” and that soon after, Mr Daly met with him and Mr Ilich, at the Warehouse, “for the purposes of [Mr Daly] viewing Westin’s storage facilities”. This evidence was not the subject of any dispute by Mr Daly.

By letter dated 19 March 2010, Mr Ilich, under Westin’s name, wrote to Mr Daly, on behalf of Richland, submitting a tender for the supply of logistics services to Richland. In the letter, Mr Ilich stated, amongst other things, that “[W]e are now fully licenced for Tobacco storage and distribution…”. He included a rate schedule for the different services offered.

The letter was sent under cover of an email of the same date, and it was in the email that there was a reference to the address of the Warehouse and stated “we have been fully approved and been issued a licence to distribute and store tobacco”. (This statement was clearly erroneous as it was not suggested that Westin, at any time, was the holder of the Warehouse Licence.)

The email also suggested a meeting at “our premises” (the address of the Warehouse) “to go through the proposal together and discuss a plan moving forward”.

The tender documents sent to Mr Daly were returned to Westin, having been signed by Mr Daly, on behalf of Richland, on 26 March 2010 (“the March 2010 Agreement”): Ex. A/21-29.

It is not in dispute that by the March 2010 Agreement, Westin agreed to store Richland’s tobacco products “under bond” at the Warehouse. (There is no actual reference in the documents to the address of the Warehouse, although the business hours of “the warehouse” were stated and the security procedure was identified.)

Relevantly, the March 2010 Agreement contained the following provisions:

The Terms and Conditions of Warehousing (Ex. A/27 - 28) were stated to “govern the provision of warehousing and storage services to the Customer defined in the Schedule by Westin Tristar Logistics Pty Ltd [(“Westin”)] (which was identified as the “Company”). “The Company” was said to mean “[Westin] …its employees, servants, agents, and sub-contractors”.

The Terms and Conditions were said to “apply to each and every service provided by [Westin] and may only be varied, amended or waived in writing signed by or on behalf of the party against whom the amendment variation or waiver is to be alleged”.

The opening two Clauses of the Terms and Conditions of Warehousing, which formed part of the contractual documents provided:

The Terms and Conditions, relevantly, then went on to provide that:

The tender documents also included an application form for a Commercial Credit Account entered into between Westin and Richland, which was completed, subsequently (on behalf of Richland), in the handwriting of Mr Paul Daly and Ms Tanya Daly: Ex. A/29.

There was no dispute that the goods that came to be stored in the Warehouse were tobacco products, including cigarettes.

Neither John, nor Domenic, gave any evidence of the circumstances in which the goods were delivered to the Warehouse. John simply asserted in his affidavit sworn 9 October 2015, that following discussions in about September 2009, “Mr Daly arranged for Richland tobacco products to be stored by us at” the Warehouse (my emphasis).

Whilst it seems likely, from the evidence of Mr Daly, that the date stated by Domenic is wrong, the word “us” in John’s affidavit must have related to Westin. This conclusion is inevitable, since, at the time of the transportation of the goods to the Warehouse, there is no suggestion that the March 2010 Agreement was with any entity other than Westin. (There is certainly no suggestion in the evidence that it was with Zaps and Zaps is not referred to.)

Mr Daly, in his affidavit, stated, at [41] – [42], that:

There is evidence confirming that on 4 May 2010, approval of the application by Richland for permission to move goods was issued: Ex. A/37-38.

Thus, whilst it is correct to submit, as counsel for Richland did, that Zaps did not attempt “to identify in its pleadings, or assert in its evidence, ANY date on which it says Zaps received Richland's goods”, the evidence, given by Mr Daly, upon which evidence he was not cross-examined, satisfies me that, on 6 May 2010, Richland’s goods were transported to the Warehouse. (Of course, on its own does, establishing this fact does not mean that Zaps received Richland’s goods on that date, but only it was on that date that the goods were delivered to the Warehouse, in respect of which the bondholder licence was held by Zaps.)

As stated, there is no evidence that, at the time of receipt into the Warehouse, Richland had any knowledge of Zaps being the holder of the Warehouse Licence. Indeed, bearing in mind the email correspondence sent to Richland prior to the goods being delivered, and prior to the March 2010 Agreement having been entered into, Richland was entitled to, and did, believe that it was Westin which held the licence.

In early May 2010, Richland obtained insurance quotes from its broker, Hamilton Brokers, for insurance cover that Hamilton Brokers considered included "all risks in Customs", i.e. for liability to Customs for unpaid duty. Richland and Westin exchanged emails in which details of the proposed insurance cover was discussed. Separately, thereafter, Westin made its own enquiries with Hamilton Brokers regarding the proposed insurance cover.

On 6 May 2010, Richland obtained insurance cover for itself through Hamilton Brokers. On that date, Insurance Policy VEIOX165XY10 was issued naming Richland as the insured.

The insurance cover that Richland obtained was described by Hamilton Brokers as "Option 1" for Marine Stock Throughput Insurance for "full cover as per the ICC Institute Cargo Clause (A) on complete journey through to DC's" (distribution centres) in Australia, i.e. from the time the tobacco stock left port in Germany and/or Luxemburg, whilst it was in transit by ship to a port in Australia, then to a Customs' warehouse and finally to a distribution centre.

There is no evidence of how often Westin sent invoices, for the services it provided, to Richland after the March 2010 Agreement was entered into (or, for that matter, after the August 2012 Agreement, to which I shall next refer).

On about 27 August 2012, the terms of the March 2010 Agreement were varied in writing (“the August 2012 Agreement”). Relevantly, the “main change” was said to be to Clause 12 of the Terms and Conditions of Warehousing (set out above) so that it provided:

The written notice concerning this change, together with “Updated Terms and Conditions”, was sent by Westin to Richland under cover of an email dated 17 August 2012 (Ex. A/180). (It was not suggested that there were any other material amendments, or variations, to the March 2010 Agreement.)

Mr Daly “reviewed” the Updated Terms and Conditions, and, on 27 August 2012, he accepted, on behalf of Richland, the documents, each page of which was initialled, and he returned the signed documents to Westin.

In Richland’s Outline of Submissions dated 29 October 2018, it was accepted that “this variation reflected the actual insurance position as Richland had already obtained insurance required by clause 12”.

On 30 March 2014, there was a burglary at the Warehouse, as a result of which some of Richland’s bonded goods were stolen. The Warehouse, subsequently, was attended by the police and a police report was prepared. On 8 August 2014, Richland confirmed the quantity of its missing goods: Ex. A/283.

By letter dated 18 August 2014, the ATO made a demand against Zaps, John, and Domenic, concerning the recovery of unpaid duty and excise in respect of Richland’s bonded goods. The amount claimed as a penalty for allegedly failing to keep the dutiable goods safe, was $667,257.82, and GST on Importation of Goods, assessed at $69,248.08. The amount claimed was due to be paid by 16 September 2014: Ex. A/274 - 285.

Dominic forwarded a copy of the demand to Mr Daly and Mr Cheung by email dated 20 August 2014: Ex. A/286. In his affidavit, Mr Daly stated that he had received the email and the attached documents and that a copy of the documents had been forwarded to Richland’s insurance broker.

On 21 August 2014, Hamilton Brokers, Richland’s broker, notified Richland that the insurer would be likely to decline to indemnify in respect of the demand because Zaps was not a named party on the policy of insurance. The letter went on to state that “I have forwarded the information to Midas and to our legal advice providers for confirmation”: Ex. A/296.

By letter dated 2 September 2014, a firm of solicitors, Hall Partners, on behalf of Zaps, wrote to Richland enclosing a copy of the ATO’s demand served on Zaps “following the recent theft of Bonded Stock from our Client’s warehouse … and that your company has insurance to cover these matters…”: Ex. A/298.

On 7 October 2014, Richland received an invoice of the same date, from Zaps, in the amount (including GST) of $736,505.90. The invoice stated that it was “[O]n account of assessed duty and related imports charges to Zaps as warehouseman by the Commissioner for taxation against Richland stock holdings”.

Subsequently, Zaps asserted a statutory lien against Richland's tobacco goods that had not been stolen and that had remained in storage at the Warehouse. (The issue of the lien was resolved between the parties, and although it was thought to be an issue raised in these proceedings, the parties agreed that it was not: T19.18 – T19.27.)

On 10 December 2014, Zaps commenced proceedings, in the District Court of New South Wales, against Richland, claiming, amongst other things, the sum of $667,257.82.

On 31 August 2014, there was a second burglary at the Warehouse, as a result of which other bonded goods, owned by Richland, were stolen. Domenic telephoned Mr Daly and informed him of the theft. Mr Daly then went to the Warehouse and met with John and Domenic.

By letter dated 11 December 2014, the ATO made a second demand concerning the recovery of unpaid duty in respect of Richland’s bonded goods which had been stolen. The amount claimed as a penalty for allegedly failing to keep the dutiable goods safe was $226,713.20, and GST on Importation of Goods assessed at $23,391.87. The amount claimed was due to be paid within 28 days from the date of the letter: Ex. A/309 - 315.

On about 11 December 2014, Richland received an invoice dated 11 December 2014, from Zaps, in the amount of $250,105.07, for Zaps’ liability to the Commissioner of Taxation in relation to the second burglary at the Warehouse. The second invoice stated “Duty – stolen cigarettes”.

On 23 May 2015, yet another burglary occurred at the Warehouse and another large quantity of the cigarettes owned by Richland was stolen.

By letter dated 27 August 2015, the ATO made a further demand concerning the recovery of unpaid duty in respect of Richland’s bonded goods. The amount claimed as a penalty for allegedly failing to keep the dutiable goods safe was $188,032, and GST on Importation of Goods assessed at $19,314.76. The amount claimed was due to be paid by 25 September 2015: Ex. A/319 – 321. (This demand does not form part of Zaps claim. Apparently, the claim has been dealt with between the parties.)

Meanwhile, on 15 April 2015, the Chief Executive Officer of Customs varied Zaps’ Licence, withdrawing its authority to store cigarettes in bond. The consequence was that, thereafter, the only goods subject to customs control that Zaps could store at the Warehouse were alcohol products.

On about 1 May 2015, Richland sent a letter of that date to Zaps, under the signature of Mr Daly (Ex. A/318) acknowledging receipt of the notice, dated 1 April 2015, sent by the ATO. In this letter, Mr Daly stated that Zaps no longer held a licence to receive or store customable (imported) tobacco or tobacco products and that “[I]n the circumstances, [Richland] terminates its storage agreement and will be making arrangements to collect its stock”.

Mr Daly gave evidence, in cross-examination, that when he wrote the letter dated 1 May 2015, the agreement to which he referred therein as being terminated was “the agreement signed … initially in 2010 and re-signed, with the amendment in 2012”: T172.16 – T172.42.

Pursuant to orders made by this Court on 26 May 2015, Richland’s stock was removed from the Warehouse to other premises. Pursuant to orders of this Court, made on 19 August 2015, Richland’s stock was moved again to other premises.

The Customs Act, s 30(1) imposes Customs control on certain goods that are imported into Australia. Under the scheme of the Customs Act, when goods are imported into Australia, they must forthwith be entered for home consumption, for warehousing, or for transhipment: s 68 of the Customs Act.

Tobacco products imported into Australia are "excise-equivalent goods" within the meaning of s 4 of the Customs Act, and, therefore, become legally subject to the control of Customs at the time of their importation.

Certain tobacco products, including cigarettes, imported into Australia, attract customs duty (Customs Tariff Act 1995 (Cth), ss 15, 16, 19AB, 19AC, Sch 3, Ch 24) and are “dutiable goods” within the definition of that expression in s 4(1) of the Customs Act. Pursuant to Item 1 in s 132AA(1) of the Customs Act, import duty must be paid at the time of the entry of dutiable goods for home consumption (sold into the domestic market). Goods to be entered for home consumption remain subject to the control of Customs until delivered into home consumption in accordance with an authority given by Customs to take them into home consumption. GST, where also imposed, is payable on the amount of that duty.

The warehouse licensing system, administered by the Australian Customs Border Protection Service (“Customs”) (which is now the Australian Border Force), provides owners of imported goods with the ability to defer the payment of customs duty until the owner is ready to enter the goods for home consumption. Importers of dutiable goods are able to store them in a bonded warehouse, also called a “bond store”, licensed under Part V of the Customs Act.

Duty on these imported goods does not become payable until they are entered for home consumption: ss 68, 99, 71C, 132AA(1) of the Customs Act; CEO of Customs v John Deere Limited (2006) 155 FCR 208, at 214; [2006] FCA 1280, at [17]; Pearce v Coynes Freight Management Group Pty Ltd (2010) 183 FCR 540; [2010] FCA 320.

Goods held in this manner are referred to as "underbond", that is goods on which customs duty is payable but is yet to be paid.

The obligation to pay duty arises on the importation of dutiable goods, but when the goods are stored in a bonded warehouse, the duty is not due to be paid until the goods are released onto the market. This is because the obligation to pay the duty is suspended until the goods are released from the bonded warehouse onto the market, as whilst bonded, they do not enter home consumption.

The obligation to pay duty falls, in the first instance, on the "owner" of the goods in question: s 165(1)(b) Customs Act.

Warehoused goods, such as imported cigarettes, in respect of which duty has not yet been paid, remain subject to “customs control”: ss 30(1)(a)(vi) and 30(1B)(b) of the Customs Act. However, by s 165 of the Customs Act, duties constitute debts payable, in the first instance, by the owner of the goods and are recoverable in any court of competent jurisdiction.

Part V of the Customs Act contains a legislative licensing regime for the holders of a warehouse licence. It contains provisions for the grant, suspension and cancellation of warehouse licences by the Comptroller-General of Customs. It makes clear that a warehouse licence is required by a person (company or natural person) who participates in the management or control of a warehouse.

A "warehouse" is defined in s 4 of the Customs Act to mean “a place that a person or partnership is licensed under section 79 to use for warehousing goods”.

The Comptroller-General of Customs may grant to a person or partnership, upon written application, accompanied by the warehouse licence application charge, a licence in writing, known as a warehouse licence, to use a place described in the licence for warehousing goods. Such a licence may be renewed under s 84: s 79 and s 80 of the Customs Act.

A bonded warehouse, or bond store, is a storage facility, that has been inspected and approved, described in the warehouse licence, for warehousing goods generally, goods included in a specified class, or specified classes of goods, or goods other than goods included in a specified class or specified classes of goods, for a specified period under customs control. The warehouse licence may authorize blending, or packaging, processing, manufacture of excisable goods, trading, or other activities specified in the licence to be carried on in the warehouse: s 79 of the Customs Act.

In Chief Executive Officer of Customs v Tony Longo Pty Ltd (2001) 52 NSWLR 458; [2001] NSWCA 147, at [113], Heydon JA (as his Honour then was) noted that warehouses were:

Relevantly, a Warehouse Licence was issued to Zaps by the Commonwealth, under the hand of the delegate of the Chief Executive Officer, Customs, on 27 June 2011, but the licence was said to commence on 3 July 2010. The licence remained in force until 30 June 2012, unless it was cancelled. (A Licence had first been granted to Zaps in 2007. A copy of that Warehouse Licence was not in evidence.)

The Warehouse Licence was renewed in 2012. A Certificate of Renewal was issued to Zaps on 29 June 2012 confirming that the Warehouse Licence had been renewed from 1 July 2012 to 30 June 2013. A Certificate of Renewal was again issued to Zaps on 25 June 2014 confirming that the Warehouse Licence had been renewed from 1 July 2014 to 30 June 2015: Ex. E.

Although a Certificate of Renewal confirming that the Warehouse Licence renewal from 1 July 2013 to 30 June 2014 was not produced, there was no dispute that the Warehouse Licence had been renewed. Following the completion of the case, Mr Hall forwarded to the Court, presumably with the consent of Richland’s legal practitioners, an email relating to Domenic not having been able to locate the renewal of the Warehouse Licence for the period 1 July 2013 to 30 June 2014. Included with the email correspondence is a copy notice, issued on 13 May 2014, by the ATO, which states that “Your licence number 6379 to store customable goods at [the Warehouse] is due to expire on 30 June 2014”. I have had this document marked Exhibit F.

It was pursuant to the Warehouse Licence that Zaps was entitled to store tobacco products, alcoholic beverages and spirits at the Warehouse.

Under the Warehouse Licence, Zaps was required to pay a bond. This bond was identified in the Warehouse Licence as “Zaps Bond”. It was shown as issued against reference number FW82A in the records maintained by the Commonwealth: Ex. A/322. There was no evidence of the nature, or value, of the bond.

It was another condition of the bond that Zaps was not permitted to transfer ownership of the Warehouse Licence, and that it was required to be surrendered, if the ownership of the bonded warehouse business changed: Ex. A/323-7.

It was accepted by Mr Daly that statutory requirements relating to warehouse licensing were well known to persons conducting business in the industry, who were dealing in, or carrying on, business, as either a provider of storage facilities concerning bonded goods (like Westin and Zaps), or a user of those facilities, and persons carrying on business in trading bonded goods (like Richland).

Relevantly, the liability of the holder of a warehouse licence in respect of customs duty arises in this way.

The Customs Act seeks to ensure that goods imported into Australia for home consumption are not released until the applicable duty has been paid, or at least secured: Goben Pty Ltd v The Chief Executive Officer of Customs (No 2) (1996) 68 FCR 301, at 304.

The Act requires a person who has, or has been entrusted with, the possession, custody, or control, of dutiable goods that are subject to customs control, and who fails to keep those goods safely, or when so requested by a Collector, fails to account for those goods to the satisfaction of a Collector in accordance with s 37 of the Customs Act, to pay on demand in writing, made by a Collector, to the Commonwealth, an amount equal to the amount of the duty of Customs which would have been payable on those goods if they had been entered for home consumption, on the day on which the demand was made: s 35A of the Customs Act.

The Collector may recover the amount from that person as a debt due and payable to the Commonwealth.

It is as a result of two of the three demands made against Zaps, as the holder of the Warehouse Licence, that these proceedings are concerned. It appears that neither of the first two letters of demand was complied with and those demands remain unsatisfied. As I have mentioned, the third demand was not the subject of Zaps’ claim in these proceedings.

Other proceedings, involving the liability of Dominic, have been litigated up to the High Court, namely: Re Zaps Transport (Aust) Pty Ltd and Comptroller General of Customs [2017] AATA 202; Zappia v Comptroller General of Customs (2017) 254 FCR 363; [2017] FCAFC 147; Comptroller General of Customs v Zappia [2018] HCATrans 51; and Comptroller General of Customs v Zappia [2018] HCATrans 140.

On 8 August 2018, the High Court constituted by Kiefel CJ, Bell, Gageler, Nettle and Gordon JJ, heard argument relating to whether the majority of the Full Federal Court had erred in holding that an employee of an entity holding a license to warehouse dutiable goods was not capable of being a “person who has, or has been entrusted with, the possession, custody or control of dutiable goods” within meaning of s 35A(1) of the Customs Act; and whether the majority had also erred in holding that on the proper construction of s 35A(1), a demand issued by the Comptroller General of Customs to Domenic was invalid and of no effect. Judgment was reserved.

The parties, whilst acknowledging that the High Court would be dealing with the interpretation of s 35A(1) of the Customs Act, accepted that “the liability stands against Zaps as the matter sits today” (T3.06) and that “Zaps took no action to apply to set aside the demand that was served on it. The effect of that inaction is that Zaps’ right to set the liability aside has passed. The ATO has the right to prove in the winding up of Zaps for the debt reflected in the statutory demands served on Zaps” (T6.11 – T6.14).

It appears to be the position that the issue on the High Court appeal was a narrow one, being whether, on the proper construction of s 35A(1), an employee is capable of being a person who has, or has been entrusted with, the possession, custody or control of goods: Comptroller General of Customs v Zappia [2018] HCATrans 140.

On 14 November 2018, the High Court delivered its judgment: Comptroller General of Customs v Zappia [2018] HCA 54. Relevantly, it was held that liability, in respect of s 35A(1), may extend to several persons who “may each possess power or authority to the requisite degree within a chain of command or hierarchy of responsibility”: at [37].

The High Court then stated, at [38] – [39]:

The High Court, thus, has concluded that Domenic was a person who “had the possession, custody or control of the stolen goods” and “failed to keep those goods safely”. Consequently, the notice of demand made under s 35A(1) of the Customs Act and served on Domenic was not invalid.

(Following notification of the High Court judgment, I caused an email, dated 14 November 2018, to be sent, to each of the legal representatives of the parties asking whether any further submissions were required, and if so, suggesting that the matter would be re-listed. On 15 November 2018, the solicitor acting for Richland, Mr Jack Chen, responded that Richland did not wish to make any submissions. Also, on 15 November 2018, the solicitor for Zaps responded that he was considering whether any further submissions were required and that he would respond by 5:00 p.m. on 16 November 2018. No further response was received from him, so it has been assumed that no further submissions were required to be made.)

For the purposes of these proceedings, there was no dispute that on the making of each demand, Zaps was liable under s 35A of the Customs Act to pay an amount equal to the duty which would have been payable on the goods had they been entered for home consumption on the day the demand was made. Thus, Zaps had the primary obligation to pay the amounts claimed in the demands the subject of the proceedings.

This is not to say parties to agreements relating to the storage of goods in a bonded warehouse cannot reach agreement to allocate the ultimate burden of paying that duty amongst themselves.

As stated, Zaps submitted that it had assumed the role of carrying on Westin’s business, doing so whilst trading under the Westin name (i.e. by adopting the business name “Westin Tristar Logistics (NSW)”); that the relevant Bond (“the Zaps bond”) remained unchanged throughout the whole of the history of the parties’ trading relationship; and that Richland’s goods were only ever stored pursuant to the terms of the Zaps bond.

It is convenient, next, to consider whether, and if so, when, Richland came to know of these matters. In this regard, it is important to record that Zaps acknowledged that “[T]he evidence as to what [Richland] knew of the transfer of the arrangements under which Westin (as it then was) previously carried on [Zaps’] business as a provider of bonded dutiable goods storage services is not as clear as it could be”: Paragraph 27 of Zaps’ Case Outline.

The August 2012 Agreement was performed by Richland and Westin without incident until early October 2013. On that date, Westin informed Richland, in writing, that bank account details had changed, and that Richland should direct future payments in respect of the stored goods to the new bank account. The variation was in writing, but it was not signed on behalf of Westin by the chief executive officer. Rather it was sent under the name “Tamara J Knight Accounts Administration”.

The change in the banking details, apparently, followed, Zaps, in August 2013, having registered the business name "Westin Tristar Logistics (NSW)”. Dominic gave evidence that “on and from 15 August 2013, Zaps became the holder of the name ‘Westin Tristar Logistics (NSW)’ … and Zaps traded as Westin Tristar Logistics (NSW)”.

Also in early October 2013, Zaps, trading as Westin Tristar Logistics (NSW), commenced issuing invoices to Richland. The invoices did not refer to Zaps by name. The invoices were issued under the name "Westin Tristar Logistics (NSW)", but contained Zaps' Australian Business Number and Australian Company Number.

The copy invoices, in the name of Westin, that form part of the evidence, at Ex. A/241-256, were sent to Mr Cheung under cover of an email dated 4 October 2013. It was not until the email dated 11 October 2013 (Ex. A/257), enclosing two further invoices (Ex. A/258-260) that “new details were attached”, in the name of Westin Tristar Logistics (NSW), including the new bank details sent as an attachment, which I have mentioned: Ex. A/261.

Relevantly, the attachment, including the new bank details appears under Westin’s letterhead.

John was asked some questions about the attachment referred to, at T104.49 – T105.36:

Notably, in cross-examination John also accepted that the invoices “are almost identical but for the change to the ACN and the ABN”, as well as one other difference, that being the earlier invoices were issued under the name “Westin Tristar Logistics Pty Ltd”, while the later invoices issued under the name “Westin Tristar Logistics (NSW)”: T103.42 – T104.15.

The following evidence was then given by John, at T104.17 – T104.33:

It is difficult to accept John’s evidence in regard to the intent of the sender of the documents.

Domenic also gave evidence on this topic. In cross-examination, he accepted that he supervised Ms Knight and that it was quite possible he had instructed her to send the email. He also gave evidence that in the attachment, there was “no reference to Zaps on that document”: T130.26 – T131.04.

Domenic, when questioned about whether one of the earlier invoices issued by Westin (Ex. A/250) was in “almost identical form” to a later invoice issued by Westin Tristar Logistics (NSW) (Ex. A/258), he replied “Yes, not fully identical but almost”: T131.20 – T131.21. He also accepted that the Western Tristar Logistics (NSW) invoice had a “different ACN number and a different ABN number”; that it had a reference to “‘(NSW)’ after Logistics whereas the [earlier] invoice … simply has Westin Tristar Logistics Ltd”; and that this “was done deliberately”: T131.23 – T131.35.

He gave the following evidence at T131.37 – T131.45:

Richland was not subsequently informed that Westin, in December 2013, had been placed into voluntary liquidation. Each of Mr Daly and Mr Cheung gave evidence, which I accept, that he did not know of that event until much later. Furthermore, Richland did not know of Westin Tristar Logistics (NSW) (and, therefore, Zaps) until about the same time.

Mr Daly, whilst admitting that he had a close relationship with John and Dominic, denied that he had been told of any restructure, or restructuring proposal, to Westin, or that Zaps, trading as Westin Tristar Logistics (NSW), had taken over the business previously conducted by Westin: T166.30 – T166.41. He gave evidence that he had found out about the re-structure and Zaps involvement after August 2014, when the insurer had stated that the insurance in place would not cover the demand made by the ATO: T167.03 – T167.08. I accept his evidence.

Mr Cheung gave evidence in his affidavit sworn 5 April 2016, at [22] – [24], on the topic of the re-structure, and in particular, how he became aware that Zaps was issuing invoices under the trading name Westin Tristar Logistics (NSW). He wrote:

Furthermore, in cross-examination, Mr Cheung accepted that whilst he understood now, that Westin “went into liquidation in December 2013”, it was only in September 2014 that “we found out Zaps is another company holding … with the name of [Westin Tristar Logistics (NSW)]”: T139.14 – T139.27. I accept his evidence.

Richland was not informed that Zaps, trading as Westin Tristar Logistics (NSW), had assumed responsibility for Westin’s obligations under the August 2012 Agreement. There is no evidence that any variation to the August 2012 Agreement, as to parties, was communicated to Richland.

Mr Daly and Mr Cheung each gave evidence that he became aware that Zaps held the Warehouse Licence only following receipt of the copy demand made upon Zaps. Indeed, as I have mentioned, Mr Cheung gave evidence that in about September 2014, he discovered that Westin Tristar Logistics (NSW) was a registered business name of Zaps and that the earlier invoices, sent in October 2013, were issued by Zaps and not by Westin. I accept his evidence.

Sending the change of bank details and invoices that referred to Westin Tristar Logistics (NSW), rather than Westin, in my view, did not provide effective, or even sufficient, notification to Richland that Westin was no longer supplying the warehousing and storage services, or that Westin was no longer doing business, and rather that Zaps was now providing those services to Richland through its registered business name, Westin Tristar Logistics (NSW).

Importantly, in its reply to the request for particulars, Zaps seemed to admit that Richland was not informed by any officer, or employee, of Westin that Westin was ceasing to, or that it had ceased to, perform the August 2012 Agreement and that Zaps was assuming responsibility to perform it. What was relied upon was Richland’s “knowledge as to change of contracting companies arose from the request that the company bank account was changed and monies commenced to be paid to the new account of the [P]laintiff following that request” and that it continued paying them thereafter: Ex. C/47-48.

It was accepted by Zaps’ solicitor, in my view correctly, that “there was nothing on those invoices that actually refers to Zaps”. Yet, it was submitted that “[I]t is those invoices which form the best evidence in these proceedings as to the knowledge of [Richland] of the change of the provider of the services of [Zaps]”: T191.00 – T191.08. That is not evidence that, in my view, leads to the conclusion advanced.

The parties had entered into two agreements, each in writing. A reasonable expectation would have been that an important matter, like the identity of the supplier of the warehousing and storage services, would have been communicated expressly, rather than in the way it was, leaving it to Richland to discover the alteration to the form of invoices. Something clearer and more definite would have needed to be done by Zaps and Westin to change the August 2012 Agreement in such a material way. Clause 14 of each of the written Agreements should also be remembered.

This is so despite the fact that after December 2013, nothing in the storage arrangements of Richland’s goods changed. The evidence is that Richland’s goods continued to be stored at the Warehouse until the thefts and until 1 May 2015, the date on which Mr Daly sent an email terminating the agreement. For its part, presumably Zaps continued to send invoices to Richland, which invoices were paid.

It was not in dispute that nowhere in either the March 2010 Agreement or the August 2012 Agreement (Ex. A/12 – 29; Ex. A/180 – 205) was there any reference to the holder of the Warehouse Licence being Zaps.

I am also not satisfied that Richland was informed about the re-structure that had occurred, that Westin had gone into liquidation, or that the entity that was supplying the warehousing services, after August 2013, was Zaps trading as Westin Tristar Logistics (NSW).

Furthermore, it seems likely that had Richland been informed that Westin had gone into liquidation, it would not, without further investigation, have simply continued on with the August 2012 Agreement. Mr Daly referred to the need to “have delved into a lot greater [detail] to satisfy myself that there wasn't some further underlying problem and it would have been a discussion point to say, ‘All right, if, if that has happened, what do we all need to do to try and make sure that everything is line’”, the “need to change your contracts” to “notify the insurance company” and to have “brought it up with the other directors of the board of Richland … and certainly [with Mr Cheung], [because] … that's a major change”: T168.28 – T168.43. I accept his evidence in this regard.

Having read, and heard, the evidence on this topic, I am not satisfied that Richland had knowledge of Zaps being the holder of the Warehouse Licence until about 21 August 2014, when Richland received a copy of the Commissioner’s first demand pursuant to s 35A of the Customs Act to which reference will be made. Prior to that date it had no reason to disbelieve the assertion made to it, prior to Richland entering into the March 2010 Agreement, and not varied thereafter, that Westin had been “fully approved and been issued a licence to distribute and store [t]obacco”: Ex. A/1.

In reaching the above conclusion, I have also considered the letter dated 19 April 2010 (Ex. A/31), sent to Richland, in which Mr Daly was informed that Westin was “prepared to accept goods under bond”, that it would “accept responsibility for goods on receipt into our bond”, that “Our bond name is ZAPS BOND”, and that “Our warehouse establishment bond number is – Customs FW82A”.

Mr Daly, in answer to questions from the Bench, said that he recollected seeing the original letter dated 19 April 2010 at, or about, the date it bore; that if he had wanted to know anything about the identity of the bond holder, he would have read "Our bond name is Zaps Bond" with an establishment bond number and reference; that he could have ascertained the identity of the holder of the bond licence if he had chosen to do so by going to Customs and asking about the reference FW82A; and that his “concern was not necessarily who the [holder] of the bond licence was, [his] concern was that there be a legitimate bond store into which Richland's goods were being stored”. He added that he believed that there was a “legitimate bond” in place: T174.19 – T174.42.

In my view, a fair reading of this letter would not have led to the conclusion that a corporate entity, other than Westin, was the holder of the Warehouse Licence. This is evidenced by the reference to “Our warehouse establishment bond number” (my emphasis). I am not satisfied that the receipt of this letter by Richland would have provided it with knowledge of the identity of the holder of the Warehouse Licence, or that the holder of the bond licence was other than Westin.

In the absence of something clear and definite on the part of Westin, or Zaps, Richland was entitled to assume that the August 2012 Agreement was continuing with Westin being the supplier of warehousing and storage services.

There is no evidence of copy invoices sent after 21 August 2014, but it may be inferred that invoices were sent after that date and at least until May 2015. At about the earlier date, it is likely that Richland did know of Zaps involvement in the storage of its goods.

There is no evidence of any documents other than the two written agreements between Westin and Richland relating to the provision of the storage of Richland’s goods. There is no written agreement between Zaps and Richland in this regard.

Even if Westin had sub-contracted the storage of Richland’s goods to Zaps, (about which there was no evidence), there was no contractual relationship created by the August 2012 Agreement between Zaps (as the sub-contractor) and Richland. There was no evidence of any separate, and properly concluded, contract, entered into between Zaps and Westin, or between Zaps and Richland that would found liability in Richland.

Further, and in any event, it was not asserted in the amended Statement of Claim that there was any sub-contract, or that the terms of any sub-contract, was, or were, communicated to Richland. In those circumstances, it can hardly be suggested that there is a basis to find that Richland, as principal, was liable to Zaps, as sub-contractor.

Although it was not specifically pleaded as a novation of the August 2012 Agreement, Zaps submitted that by virtue of the matters referred to that a novation of the August 2012 Agreement had occurred. I am satisfied, bearing in mind the way in which the case was conducted, including the written submissions made on behalf of Richland provided to the Court before the commencement of the hearing, that the issue of novation was before the Court.

In Buchanan v Sirocco Area Leases Ltd (2008) 20 PRNZ 256 (HC); [2008] NZHC 766, at [21], novation was described:

In New Galaxy Investments Pty Ltd v Thomson [2017] NSWCA 153, Sackville AJA, at [147], dealt with the concept of novation as follows:

Zaps relied upon what Slattery J recently has written in Fu Tian Fortune Pty Ltd v Park Cho Pty Ltd [2018] NSWSC 528, at [73] – [77]:

The case decided by Slattery J involved the defendant, Park Cho Pty Ltd, having contracted, as vendor, to sell commercial real estate, a motel and restaurant, on the Pacific Highway at Belmont to the second Plaintiff, Mr De Fu Zhang as purchaser. Park Cho Pty Ltd claimed that the contract for sale was novated to the first Plaintiff, Fu Tian Fortune Pty Ltd, which then assumed the obligations under it as purchaser. Fortune disputed that a novation occurred and maintained that Mr Zhang remained the purchaser.

Importantly, after setting out the evidence going to the issue, Slattery J concluded, at [56], that:

The decision of Slattery J was upheld in Fu Tian Fortune Pty Ltd v Park Cho Pty Ltd [2018] NSWCA 282. Barrett AJA (Macfarlan JA and Gleeson JA agreeing), wrote at [44]:

Relevantly, in outlining the principles of novation, the Court of Appeal emphasised the importance of intention of each party to a novation, stating, at [31] – [33]:

H G Beale (ed), Chitty on Contracts (29th ed, 2004, Sweet and Maxwell) at 1201, states:

The effect of a novation is not to assign, or transfer, a right or liability, but rather to extinguish the original contract and replace it by another. Parties to the novation agreement are not to be taken as if they were original parties to the novated agreement.

In determining whether a novation has occurred, the Court looks at the surrounding circumstances, including the conduct of the parties. Whether novation has taken place must depend on that conduct, and the intention of the parties. That conduct may establish the requisite intention. If the parties have conducted themselves on the basis that a novated contract existed between them, a court may readily infer that such a novated contract has been brought into being: Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473; [1999] NSWCA 323 at [83] – [86].

The onus with respect to establishing a novation is on the party wishing to set up the novation, in this case, Zaps. It must show that all the parties to the novation had full knowledge of the relevant facts.

There is no suggestion that there was a written novation agreement entered into, at any time, between the parties and Westin. Indeed, as I have written, Zaps did not produce any document going to the events of October 2013 to explain what had occurred between Westin and Zaps and the true nature of the transaction was not illuminated in any material way (other than in respect of the purchase of certain motor vehicles).

From the available evidence, what Westin alleged that it had purported to do, in October 2013, was to transfer its rights and obligations under the August 2012 Agreement to Zaps. Even if that had occurred, and there is no evidence thereof, Zaps did not directly inform Richland of the intention to transfer, or, in fact, that there had been any transfer of its rights and obligations under the August 2012 Agreement to Zaps.

Furthermore, there was no clause in that Agreement permitting Westin to substitute a non-contracting party for a contracting party. To do so would have required a new contract. An event like an assignment was neither anticipated, nor accommodated for, in the August 2012 Agreement. Whilst that Agreement permitted Westin “to sub-contract the whole or any part of the warehousing”, that is not what was suggested as having occurred in 2013.

In any event, it can be seen from the passages quoted above concerning novation that it is essential for the consent of all parties involved to be obtained to effect a novation, even though that consent may be inferred from conduct without express words.

I am not persuaded that the Court should infer the existence of a novated contract from the acts of the parties, when Richland was not aware of the intention of Westin to transfer its contractual obligations, liabilities and benefits to Zaps; was not aware of the involvement of the entity, being Zaps trading as Westin Tristar Logistics (NSW); and was not aware that Zaps was the holder of the Warehouse Licence.

Even if the Court were to infer the existence of a contract from the acts of the parties, as well as, or in the absence of, words, and so from the totality of the dealings between them, the existence of a contract of novation, that contract of novation would not have come into existence until after Richland became aware of Zaps being the new provider of the warehousing services, or at the very least, aware of Zaps being the holder of the Warehouse Licence. As stated previously, this was not until about 21 August 2014.

There is an even a more fundamental problem in regard to finding a novation of the August 2012 Agreement, and that is that there is simply no evidence, at all, that Westin before its liquidation, or the liquidator of Westin following liquidation, consented to it at any time. For there to have been a novation, the consent of all three parties was required. There was no evidence of that consent.

The matters relied upon by Zaps, referred to previously, in my view, cannot form the basis for the conclusion that Richland consented to Zaps being substituted for Westin. With Richland’s lack of knowledge before 21 August 2014 of the circumstances, it is difficult to see how Richland could have made an agreement that a new contract between it and Zaps would be substituted for the August 2012 Agreement that had already been made.

Novation being an issue of fact, I am not satisfied that Zaps has established that prior to 21 August 2014, there was any novation of the August 2012 Agreement. It follows that Zaps cannot succeed in relation to the first demand that was made by the ATO.

That however, does not end the matter. I have earlier referred to the consistent conduct of the parties, some time after 21 August 2014, that is relied upon to support the inference that a novation might have occurred, without further conditions, and that Richland was content to treat Zaps, and not Westin, as the provider of warehousing services.

Nothing in the parties’ mutual dealings from very shortly after 21 August 2014 gives any suggestion that either party had any doubt that Zaps was the supplier of the warehousing services that had been provided by Westin under the August 2012 Agreement. However, there is no evidence that either side applied its mind to the matter of the precise terms of their contract after 21 August 2014. Indeed, no evidence suggests that there was any discussion between the representatives of each in relation to the issue of the terms upon which a relationship would continue.

Whilst it is correct to say that there is no specific date on which Richland came to accept that Zaps was involved, it seems that it was aware of Zaps involvement after the first demand was made.

Adoption of a contract can occur other than via novation of a contract: Australian Securities and Investments Commission v Letten (No 13) (2011) 86 ACSR 174 at 192; [2011] FCA 1151 at [71] – [72].

Zaps submitted that, by 10 December 2013, when Westin was placed into liquidation, its trading arrangements had already been taken over by Zaps on about 15 August 2013. From the date at which Zaps had first received Richland’s goods into the Warehouse, or alternatively, on and from the date at which Westin was placed into liquidation, the August 2012 Agreement embodying the Terms and Conditions between Westin and Richland were carried on in identical terms, and that the prior terms became the terms of a continuing agreement between the Plaintiff and the Defendant. It pleaded that the August 2012 Agreement “forms the basis upon which [Richland’s] goods were stored in [Zaps’] warehouse”: Paragraphs 24 and 25 of the amended Statement of Claim.

Zaps also asserted that Richland adopted, and continued with, the August 2012 Agreement after 11 October 2013, in that it met all of the invoices sent to it by Zaps, trading as Westin Tristar Logistics (NSW), for the services provided by Zaps, and it continued to pay into Zaps’ bank account the amounts owed pursuant to the invoices that were sent. Zaps also relied upon the fact that nothing changed after 21 August 2014, the date on which Richland was informed that a demand had been made on Zaps as the holder of the Warehouse Licence. It also relied upon the conduct of Richland in “terminating the agreement” in correspondence to which I have referred.

Zaps also asserted that at all material times, the Warehouse Licence was issued to Zaps and this never changed. It was in the Warehouse that Richland’s goods remained stored after August 2013 and that also did not change.

In particular, in its Case Outline, Zaps relied upon a number of matters in submitting that the Court could be satisfied that “an arrangement under which Zaps provided the bonded warehouse services under the contract were identical to the arrangements under which Westin had previously provided them and that included an obligation on the part of Westin to have insured”. These included:

I am not satisfied that any of these matters, even if established, go to the proposition that there was an agreement made between Richland and Zaps as alleged. As I have found, it was not in about August 2014, that Richland came to know of Zaps’ involvement, and thereafter, none of the matters relied upon establish that Richland accepted that there was a contract between it and Zaps in the same terms as the August 2012 Agreement.

Although there was some debate during submissions regarding the effect of Mr Daly’s evidence, in cross-examination, that when he wrote the letter dated 1 May 2015, the agreement to which he referred therein as being terminated was “the agreement signed … initially in 2010 and re-signed, with the amendment in 2012”, this does not demonstrate, to my mind, when taken with all the other evidence, that Richland adopted either the March 2010 Agreement or the August 2012 Agreement. More than the subjective view of Mr Daly is required. I respectfully agree with the submission that Richland would have had to accept that the obligations owed to Westin under each of those Agreements were owed to Zaps. I am unable to conclude that it did.

In this case, there is no satisfactory evidence of any election by Richland to comply with, and perform, all of the terms and conditions of the August 2012 Agreement. It simply continued to store the goods at the Warehouse and pay the invoice charges for storing the goods there. Merely doing so, did not make it personally liable to indemnify Zaps when the demands were made by the ATO.

There is simply no satisfactory evidence that Zaps agreed with Richland to be liable for Westin's obligations to Richland under the August 2012 Agreement so that Zaps would stand in the shoes of Westin.

In Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93 at 144; [1957] HCA 10, Taylor J wrote:

The passage was cited, with approval, by Wilson and Dawson JJ in Dan v Barclays Australia Ltd (1983) 46 ALR 437, at 448.

I have also considered what has been written by the Federal Court of Appeal in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424; [2001] FCA 1833, at [369]:

The Court would need to consider a combination of surrounding circumstances including conversations, documents and conduct none of which provide a definitive form of words. The issue becomes one of fact: what did the parties agree?

Relevantly, in the amended Statement of Claim, Zaps pleaded, at [18]:

(Clause 1 referred to Richland authorising “the Company (if it should think fit to do so) to sub-contract the whole or any part of the warehousing”.)

Even if that Paragraph of the pleading is read to mean that after about August 2014, Richland accepted the bonded warehouse services that were being provided by Zaps, and that Richland had complete knowledge of Zaps’ involvement in the warehousing, Zaps would need to establish that Richland did so on the same terms as were contained in the August 2012 Agreement.

Indeed, there was no evidence at all, in writing or oral, adduced by Zaps, of any agreement made in or after August 2014, remembering that Mr Cheung gave evidence “we found out Zaps is another company holding … with the name of [Westin Tristar Logistics (NSW)]”), relating to the terms upon which Zaps would provide the bonded warehouse services.

There was no evidence of any term discussed that Richland would indemnify Zaps in respect of any demand that was made in the event of the loss of Richland’s goods from the Warehouse. There was no correspondence, other than, presumably, the invoices that were sent to Richland. Nor were there any conversations to consider between the relevant party’s representatives.

It is not possible to determine the intention of the parties even if no narrow, or pedantic, approach is warranted, as this was a commercial arrangement: Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429 at 437; [1968] HCA 8 (per Barwick CJ).

Even if a contract may be inferred from the acts and conduct of Zaps and Richland, in the absence of words, those acts and that conduct must be capable of proving all the essential elements of the contract relied upon. There was a paucity of evidence on this topic.

Of course, I must address the following evidence, which was adduced from Mr Cheung during the hearing (at T144.32 – T145.20):

Whilst it is relevant that Mr Cheung referred to continuing pay money in accordance with “the old agreement”, I take this to mean no more than referring to an obligation to pay for the storage of those goods at the rates previously agreed to. No other obligation under the August 2012 Agreement was referred to, and it was not put that there was any other obligation accepted by Richland.

After 21 August 2014, what may be accepted is that Richland continued to store goods at the Warehouse; that it continued to pay the invoices submitted by Zaps trading as Westin Tristar Logistics (NSW); and that it continued to maintain its own insurance for the goods stored at the Warehouse. That is not enough to impose upon Richland an obligation to indemnify Zaps, as the holder of the Warehouse licence, for any liability arising from a demand made under s 31A of the Customs Act.

(There was no mention of the legal obligations that would arise as bailee (Zaps) and bailor (Richland) and whether those obligations would, in any event, be independent of contract.)

In the circumstances, Zaps cannot succeed and the further amended Statement of Claim is dismissed with costs.

Assuming that I am wrong in the conclusion set out above, I turn to the construction of the August 2012 Agreement so far as it relates to the obligation to insure imposed by Clause 12 of the Terms and Conditions of Warehousing (as amended). As stated by Richland, this issue only arises if the Court finds that there was a contract between Zaps and Richland.

I have already referred to the terms of each of the March 2010 Agreement and the August 2012 Agreement relating to insurance of the stored goods. There is a question raised as to the interpretation of these terms.

The meaning of these Agreements, being commercial documents, is to be determined objectively, by reference to what a reasonable person in the position of the parties to the transaction would have understood them to mean. This requires consideration not only of the text, but also of the surrounding circumstances known to the parties and the purpose and object of the transaction: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]–[51]. Commercial agreements should be given a businesslike, or commercial, construction, which takes into account business common sense, so as to avoid it “making commercial nonsense or working commercial inconvenience”. Appreciation of the commercial purpose, or objects, is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7, at [35].

The ostensible meaning of language in a contractual term prevails unless its application produces a result which is plainly absurd in which case the Court will endeavour to apply any interpretation to avoid that absurdity: Westpac Banking Corp v Tanzone Pty Ltd (2000) 9 BPR 17,521; [2000] NSWCA 25 at [19]–[22]).

There was no dispute that the ultimate objective, in contract interpretation, is to establish the meaning the parties intended the words of the contract to bear. Extrinsic evidence, in order to be admissible, must be relevant to that question. The language used by them, appropriately interpreted, is the only source of the intended meaning of the parties. The inquiry concerns what a reasonable and properly informed person, namely the Court, would consider the parties intended the words of their agreement to mean. To be properly informed the Court must be aware of the commercial, or other, context in which the agreement was made and of all the facts and circumstances known to, and likely to be operating on, the mind of the parties.

It is helpful to refer to Cherry v Steele-Park (2017) 96 NSWLR 548; [2017] NSWCA 295, in which the Court of Appeal considered the applicable principles when construing a commercial contract. It was observed, at [72], that “[t]he starting point and the ending point of the construction of a written commercial contract is the language chosen by the parties to record their bargain” and, at [75], that the “ultimate question” is whether the written language, “when considered in light of legitimately relevant surrounding circumstances, permits a constructional choice” between “different legal meanings”. It was also written, at [76], that whether there is such a constructional choice “cannot be determined without first at least considering evidence of surrounding circumstances”. Importantly, also, at [85], Leeming JA wrote that whether a provision in a commercial contract is ambiguous (that is to say, permitting a constructional choice to be made between two different legal meanings) is “a conclusion, which can only be assessed after regard has been had to context”. In general terms, see [68]–[71]; [76]–[86]; [123]–[124].

In this case, the intention of Westin and Richland, in relation to the insurance of the stored goods requires consideration. Ultimately, there was really no dispute about the facts and what each had intended the relevant Clause of the March 2010 Agreement, and the August 2012 Agreement, to mean. Whilst what follows relates to events after the date the March 2010 was signed, these events relate to the intentions of Westin and Richland.

In late April 2010, Mr Daly on behalf of Richland, and Domenic on behalf of Westin, orally agreed that each would make its own enquiries, through insurance brokers, to obtain cost effective insurance cover that would enable Westin to charge a cheaper rate of storage than what was originally agreed in the March 2010 Agreement.

On 30 April 2010, Mr Daly sent an email to Richland’s insurance broker and to Domenic and Voya Ilich, in the following terms (Ex. A/35):

There was subsequent email correspondence on 30 April 2010 and shortly thereafter, passing between Mr Daly and Richland’s brokers but this correspondence is not relevant: Ex. A/36; Ex. A/39-54. There was, however, no correspondence from Domenic, or Mr Ilich, responding to Mr Daly’s email.

Richland and Westin exchanged emails in which details of the proposed insurance cover was outlined: Ex. A/80-95.

Separately, Westin had made its own enquiries regarding the proposed insurance cover.

Following confirmation that Richland had obtained insurance cover, on 12 May 2010, Domenic sent an email to Mr Daly confirming that “[a]s a result of you sourcing your own insurance, we have reduced your carton storage charge down by $0.03 per carton from $0.60 to $0.57”: Ex. A/96.

In the subsequent years, Dominic sought from Richland a copy of the Certificate of Currency for the insurance of the stock then currently being held in the Warehouse: Ex. A/97; Ex. A/110.

There was no dispute that the amount of cover could only have been calculated by reference to the value of the goods. In the Cover Note of 6 May 2010, the following was stated (Ex. A/69):

In cross-examination, the following was put to Domenic, in reference to that cover note (T119.41 – T120.06):

Moreover, in cross-examination, the following evidence was given by Mr Daly, at T152.09 – T152.29:

At T160.31 – T 160.43, he added:

Relevantly, in Mr Daly’s affidavit, sworn 6 April 2016, he had stated at [83] – [84]:

In cross examination, the following exchange also occurred (at T165.36 – T165.43):

The following questions were also put to Mr Daly from the Bench (at T175.07 – T176.01):

Even if the events referred to are not relevant in ascertaining the intentions of Westin and Richland in relation to the March 2010 Agreement (because they occur after that Agreement was entered into, they are clearly relevant to the August 2012 Agreement as they all occurred before that Agreement was entered into).

I am satisfied that as between Richland and Westin, the parties regarded the obligation to arrange insurance to cover an obligation to pay for the liability for the loss of stock as being the responsibility of Richland. The evidence of Mr Daly in this regard was very clear. He agreed that:

However, as stated, I am not satisfied that after 21 August 2014, Richland assumed that responsibility by agreement, so far as Zaps was concerned. Any term regarding insurance was one that had been reached between Westin and Richland, not between Richland and Zaps. Without more, Zaps could not have insisted that Richland insure its liability in the event of a 35A demand, and if it did, Richland would have had to agree to do so.

Furthermore, there is simply no evidence that Zaps did so at any time, or that Richland had agreed. Allied to this is that Zaps would also have to assert, and prove, that Richland had agreed to indemnify Zaps as the licence holder of the Warehouse. It was accepted that “there is no specific obligation to indemnify pleaded”: T 224.00 – T224.03.

In all the circumstances, the further amended Statement of Claim must be dismissed with costs.