Australia: Pan Pharmaceutical’s Representations Misleading And Deceptive But Not Negligent

Last Updated: 8 April 2009
Article by Jocelyn Kellam

McGrath; in the matter of Pan Pharmaceuticals Ltd (in liq) v Australian Naturalcare Products Pty Ltd [2006] FCA 1403 (first instance); [2008] FCAFC 2 (appeal)

  • A failure to meet ongoing supply and quality assurance may constitute misleading and deceptive conduct.
  • The claim for pure economic loss in negligence failed because the plaintiff was not owed a duty of care as it had failed to protect itself by insurance and appropriate contractual terms.

Readers may remember that Pan Pharmaceuticals Limited was a substantial contract manufacturer of complementary medicines. It held a manufacturing licence until 28 April 2003 when it was suspended by the Therapeutic Goods Administration (TGA). Pan ceased manufacturing, became insolvent and was ultimately wound up.

Naturalcare subsequently sued Pan's liquidator for compensation for the disruption to its business.

Naturalcare's case, in summary, was that, in one way or another, Pan guaranteed the continued supply of products that complied with TGA regulatory requirements in respect of quality assurance.

The trial judge's decision [2006] FCA 1403

Justice Gyles at first instance found that by its conduct Pan had engaged in misleading and deceptive conduct but rejected claim in negligence.

Justice Gyles was satisfied that Pan had represented that: first, it would so conduct its manufacturing processes so as to comply with regulatory requirements (the Quality Assurance representation); and second, that Pan would continue to supply all, or most of, Naturalcare's requirements as to therapeutic goods (the Supply representation). Both of these representations were with respect to a future matter and the judge was satisfied that no reasonable grounds were established for making the representations. Under section 51A(1) of the Trade Practices Act, a representation with respect to any future matter is misleading if the maker of the representation does not have reasonable grounds for making it. Under subsection (2), the maker is to be deemed not to have had reasonable grounds for making the representation unless it adduces evidence to the contrary.

Naturecare's claim in negligence for pure economic loss not successful. To win, Naturecare had to prove that it was "vulnerable" to Pan in the sense that it was unable to protect its own interests. Naturalcare argued that it was vulnerable because Pan was in control of its own manufacturing processes and, to the extent that Naturalcare might have taken steps to protect its own interests, it was induced not to do so by Pan's express representations and conduct. Justice Gyles, however, disagreed saying that it could have protected itself saying: "Particular contractual provisions can be framed, insurance can be sought, alternative suppliers located and so on."

The appeal [2008] FCAFC 2

Neither party was in agreement with Justice Gyles' decision. The liquidators appealed the findings that Pan had engaged in misleading and deceptive conduct. Naturalcare also filed a cross-appeal in relation to the negligence claim. Both appeals were unsuccessful.

Pan's appeal related to the interpretation of section 51A of the Trade Practices Act that is, what was "evidence to the contrary" preventing a representation as to a future matter from being deemed to be misleading and deceptive. Knowing what a difficult question this can be, the Full Court was divided.

Justice Allsop, with whom Justice Emmett agreed on this point, concluded that evidence "to the contrary" is evidence that tends to establish, or that allows the inference to be drawn, that there were reasonable grounds for making the representation. If evidence is adduced by the maker that is said to be evidence to the contrary, it is for the court to determine whether it is to the contrary in this sense. If it is, the deeming provision will cease to operate.

Naturalcare's cross appeal in relation to the dismissal of its claim in negligence was also unsuccessful. The Full Court held there was no duty of care.

The Full Court thought that the fundamental problem with Naturalcare's argument that it was owed a duty of care was that the relationship between Naturalcare and Pan was that of buyer and seller and was governed by contract. It would have been open for Naturalcare to stipulate a contractual term requiring Pan to manufacture and supply to Naturalcare for the term of the manufacturing agreement the goods customarily acquired by Naturalcare from Pan in the quantities customarily obtained by Naturalcare from Pan but there was no such promise in their contractual arrangements.

In the Full Court's view, Naturalcare was not "vulnerable" in the legal sense in that it knew that there was a risk that Pan could not maintain its supply and Naturalcare could have not protected itself from that risk. Naturalcare had sought assurances from Pan and this indicated that Naturalcare understood that there was a risk. Naturalcare's problem was that it chose to rely on non-contractual assurances rather than to stipulate for a contractually binding promise by Pan.

According to Justice Emmett:

"There is no reason for the law to impose a duty on one of two contracting parties to act in the interests of the other party in relation to a matter that the parties have not by express conduct or necessary implication included into the terms of their contractual relationship. While vulnerability is an important requirement in cases where a duty of care to avoid economic loss arises, vulnerability in that context is not to be understood as meaning only that the claimant was likely to suffer damage if reasonable care was not taken. Rather, vulnerability is to be understood as a reference to the claimant's inability to protect itself from the consequences of a wrongdoer's want of reasonable care, either entirely or at least in a way that would cast consequences of loss on the wrongdoer (Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16; (2004) 216 CLR 515 at [22] and [23])...

...the risk of a supplier of goods not being able to maintain supply is an everyday incident of commercial life. Many regulatory requirements regulate manufacturers and suppliers of goods and there is always a risk that, if the applicable codes and regulatory requirements are not complied with, the supply of goods may be prohibited or suspended. Various strategies to minimise risks of that kind and their impact are available to an intending purchaser. All of those strategies were open to Naturalcare. It elected not to adopt the obvious one of stipulating in its contract with Pan for compliance with the applicable codes and regulatory requirements to ensure that it continued to be the holder of a licence under the TG Act that enabled it to manufacture therapeutic goods."

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.

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