Any demand for the return of goods ought be given serious consideration. Continued use of someone else's goods without intention to "convert" may be conversion, and refusal to deliver up the goods may be detinue. Poor record keeping and ignorance are no excuse. Refusing audits to ascertain ownership will not be looked upon favourably by a Court.
For financiers, this decision is important when enforcing security, as third parties may hold converted stock.
In Chep v Bunnings  NSWSC 301 (7 May 2010), the plaintiffs ("Chep") hired out pallets under a system whereby a hirer would take a quantity of Chep branded pallets on hire, use them, and either return the same quantity (not necessarily the same pallets) to Chep, or pass them onto another hirer who would accept responsibility for hire fees. Where hirers delivered goods on Chep pallets to non-hirers, hirers remained liable for hire fees.
Despite being a non-hirer, Bunnings was in possession of Chep pallets for several years up until October 2007. It would receive goods from suppliers on Chep pallets, and unload the goods, or sell/store goods on the pallets. Where Bunnings retained possession of pallets, the supplier would:
- exchange them with an equivalent number of empty Chep pallets; or
- take an "IOU" for the number of pallets (although none were in evidence).
Bunnings claimed the Chep pallets were the subject of hire contracts between Chep and suppliers, and if it paid hire fees, Chep would be "double dipping".
Since about 2002, Chep alleged Bunnings held more pallets than could be accounted for by IOUs. In May 2007, Chep demanded the return of pallets. Court orders were made in August 2007 requiring the return of pallets. Bunnings returned pallets in October 2007. Chep claimed in conversion and detinue in relation to 64,690 pallets returned in October 2007, and lesser numbers held in previous years.
Right to immediate possession
Chep had to show it had an immediate right of possession. Bunnings argued it obtained the pallets from sources with a right to possession (the hirers). To succeed in this defence of jus tertii, Bunnings had to show it had a better right to possession than Chep.
Clause 4(d) of the hire contract gave Chep a right of immediate possession of all pallets. McDougall J held that the hire contract was terminable at the will of Chep.
The Court held that Bunnings had Chep pallets which were not the subject of a hire contract between Chep and Bunnings' suppliers ("Non-hire Pallets").
The returned pallets
In October 2007, Bunnings returned 82,216 pallets, of which 17,526 were found to be the subject of hire contracts, by a "reconciliation process" carried out by Chep. Chep asserted the balance were Non-hire Pallets.
Bunnings criticised Chep's reconciliation process for being inadequate in flushing out the remaining legitimate IOUs. His Honour found that the process was reliable, especially as Bunnings also sought to identify all IOUs. It was in Bunnings' interests to identify as many as it could. It could not take advantage of deficiencies in suppliers' records. If Bunnings chose to deal with Chep pallets without adequate records of IOUs, and when Chep maintained they were not subject to hire contracts, Bunnings did so at its own risk. It was not open for Bunnings to criticise Chep's reconciliation process.
From 2002, Chep undertook informal counts at some Bunnings stores. From enquiries with suppliers, Chep concluded that only about 10% of pallets were subject to IOUs. This percentage was applied to the total number of stores. His Honour accepted this method of ascertaining Non-hire Pallets held historically. The number of pallets held from 2002 to 2007 ranged from 46,326 to 64,690.
His Honour noted that Bunnings' refusal to participate in an audit process "[did] not do it much credit". Whilst Bunnings asserted the pallets were subject to IOUs, it never made inquiries as to whether that was true. The judge accepted evidence of a meeting in 2005 where Bunnings representative said words to the effect of:
His Honour concluded that Bunnings knew by late 2005 that it had accumulated more pallets than could be accounted for under IOU arrangements.
Refusal to hire/deliver Chep pallets
His Honour found that Bunnings refused to hire or deliver up the Non-hire Pallets in its possession.
No implied licence nor estoppel
His Honour held that neither the implied licence submission propounded by Bunnings nor estoppel would answer the claim. There was no evidence of any representation, nor reliance on the alleged representations. Chep always maintained that Bunnings ought hire or return the pallets.
Conversion and detinue
Conversion is when one deals with a chattel in a manner repugnant to the immediate right of possession of the true owner. Subjective intention to convert is unnecessary.
Detinue is the wrongful detention of goods, when one refuses to deliver up goods to a person having the immediate right to possession. Often, there is a demand for return, and a refusal, but that is not essential. Where the defence shows the defendant would have refused to comply, then a formal demand would have been futile.
Bunnings argued the torts are in respect of specific chattels, and up until 30 May 2007, no specific chattels had been identified.
His Honour held Bunnings had converted the pallets, especially as it understood Chep did not consent to Bunnings' use of the pallets. It was not open for Bunnings to refuse audits on the one hand, and on the other, argue Chep's demands did not relate to specific chattels. Bunnings could not be in a better position through ignorance, especially where self-inflicted.
Chep succeeded in detinue. The demands made over the years were sufficient, even though they were conditional because Bunnings was never prepared to accept the condition (i.e. to hire pallets). Also, a formal demand would have been futile.
Bunnings submitted that Chep did not suffer loss as it always had a pool of other pallets available for hire, and there was no evidence that the pallets held by Bunnings would have been hired.
It is not open for those who have wrongfully detained property to hypothesise that the owner may not have found a hirer. Damages ought be assessed "robustly" against a wrongdoer where the tort itself makes quantification of damages more difficult. His Honour held that damages should be assessed at Chep's usual rate of hire.
To take into account Chep's business model which meant it always had a portion of pallets available to be hired, a 10% discount was applied to reflect the fact that, on average, 90% of Chep's pallets were on hire. Chep's claim was for almost $11 million. His Honour ordered the parties to update the calculations to reflect the 90% discount, and the adjusted relevant period. The judgment did not disclose the final amount of damages ordered, but it appears damages would be around $10.5 million plus statutory interest.
The assistance of Peggy Wong, Solicitor, of Addisons in the preparation of this article is noted and greatly appreciated
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.