Australia: "Palliative Care": Conversion and Damages in the Pallet Hire Business

Summary

The New South Wales Court of Appeal held in Bunnings Group Limited v CHEP Australia Limited [2011] NSWCA 342 that the use by Bunnings of CHEP's wooden pallets for the delivery of goods from its distribution centres to its stores constituted an intentional dealing with CHEP's lawful property that was repugnant to its ownership rights, thus being a tort of conversion.

Refusal by Bunnings to comply with CHEP's lawful demands for return of its property amounted to unlawful detinue.

Damage was the loss of potential hire revenue.

Facts

In its usual business, Bunnings acquired wooden pallets owned by CHEP when Bunnings received stock from suppliers. It used these pallets to display goods on its shop-floors; and to store goods not immediately required for stock replenishment. On many occasions Bunning's distribution centres also used some of the pallets owned by CHEP to transport its own goods to and from its distribution centres and stores.

CHEP's primary business is the operation and administration of a pallet pooling service to its customers on a temporary hire basis. By CHEP's standard terms and conditions, it retains complete ownership of all the pallets hired to its customers. Any pallets hired to customers that are unaccounted for attract compensation charges.

In the late 1990's, CHEP identified the holding and usage by Bunnings of a substantial number of its wooden pallets despite it not being one of its contracted clients. On 16th May 2002, CHEP informed Bunnings that it formally withdrew consent for the continued non-commercial use of its wooden pallets by Bunnings.

In November 2005, executives of CHEP met senior Bunnings managers suggesting that Bunnings immediately enter into a hire agreement with CHEP or face legal demands and potential court action for return of all of its pallets held by Bunnings. Bunnings asserted that wooden pallets owned by CHEP in its possession were lawfully in Bunnings use, as between it and its suppliers, who Bunnings presumed were CHEP customers.

On 30th May 2007, an unequivocal demand was issued for return of all wooden pallets owned by CHEP in Bunnings' possession. Bunnings responded on 18 June 2007, pointing out the practical difficulties of compliance, specifically with identifying the pallets owned by CHEP that were or were not part of existing commercial agreements in its possession.

Judgment in First Instance

McDougall J, held Bunnings liable to CHEP in conversion and detinue in respect of pallets owned by CHEP. Damages were awarded by reference to lost hire revenues, amounting to $9,375,798, plus interest of $4,100,002.

Commercial Implications

• This appeal case follows the High Court of Australia's stipulations on the essential elements of conversion in Penfolds Wines Pty Ltd v Elliot [1946] 74 CLR 204: "An intent to do that which would deprive 'the true owner' of his immediate right to possession or impair it may be said to form the essential ground of the tort."Allsop P's majority judgment makes it clear however, that not every use of CHEP pallets outside the confines of a hire agreement is necessarily a conversion, as it's use may not be a deprivation of the owners rights. Examples include the use by Bunnings of CHEP pallets in ways contemplated by the pallet pooling system and commercial custom.
• Detinue requires an unequivocal and unconditional notice and/or demand as to the lawful rights of the lawful owner.
• The correct measure of damages in conversion of hire goods is compensatory, not restitutionary. The quantum of damages is to be assessed by reference to lost hire revenues by the wronged party. Bunnings submitted that CHEP had not asserted any financial loss or damage and therefore could not make out a claim for compensatory damages. Bunnings further argued that CHEP had already collected compensatory payments for the pallets from its own clients when they became unaccounted for, and that any award by the court would be doubling-dipping in terms of compensation. The Court of Appeal disagreed. There was no link between the compensation CHEP received from its clients as per their contractual agreement in respect of unaccounted for pallets and compensation due from Bunnings conversion and detinue of them. Assessing damages in such an instance does not require proof of the extent of financial damage or loss by the wronged party. The damage suffered was the loss of commercial opportunity.

Impacts of the Personal Property Securities Act 2009 ("PPSA")

The PPSA and its Regulations¹create a register and accompanying regime that allows transactions and obligations secured by or against personal property (excepting land and some other statutory forms of property) to be catalogued, providing a streamlined regime of enforceability of interests and a system of priority between competing interests.²

This decision would not have been decided differently if the PPSA had already commenced subject to registration by CHEP of its client hire-agreements in ways that meet the requirements of attachment³, perfection⁴, and being in writing⁵. The hire-agreements between CHEP and its suppliers would be 'PPS Lease' security agreements⁶, attracting the super-priority status of a 'Purchase Money Security Interest', making its interest in the property the subject of the hire-agreements fully enforceable against any and all lower priority parties⁷.

However, if CHEP had failed to register its hire-agreements with its clients and Bunnings subsequently registered an interest in the same property meeting the requirements of attachment and perfection or control⁸, then failing dishonest or intentionally tortious dealings or actual and constructive notice⁹, Bunnings claims would trump CHEP. The basis of the PPSA is that buyers or lessees for value "take-free" of unperfected security interests.¹⁰

Following the commencement of the PPSA from 30th January 2012, parties to transactions that secure any undertakings or obligations with proprietary interests should register the interests to gain the fullest protection of them.

Registration can be done according to serial number of individuals items of property¹¹ or according to classes or sub-classes or property¹². Registration can be made of commingled goods¹³. Registration also can be made once in respect of a whole sequence of like transactions between parties¹⁴.

The assistance of Michael Hislop, Clerk, of Addisons in the preparation of this article is noted and greatly appreciated

Footnotes

¹ Reference here is to the Personal Property Securities Regulations 2010 (Cth)
² For an overview of the PPSA, see PPSA, s3
³ "Attachment" refers to the linking of specific collateral to a financial transaction or the performance of some obligation. PPSA, s19
⁴ "Perfection" refers to completion of all the required steps necessary to make registration of the security interest effective and enforceable. PPSA, s21
⁵ PPSA, s20
⁶ For a statutory definition of a 'PPS Lease', see PPSA, s13.
⁷ A 'Purchase Money Security Interest', is a security interest arising from the conditional assistance given another to acquire a specific property and/or inventory, see PPSA, s14.
⁸ PPSA, s341
⁹ For a definition of 'actual and constructive notice' and its applicability, see PPSA, ss197, 298, 299.
¹⁰ PPSA, s43
¹¹ PPSA, s153 and Personal Property Securities Regulations 2010 (Cth), Schedule 1 Part 2
¹² PPSA, s153 and Personal Property Securities Regulations 2010 (Cth), Schedule 1 Part 2
¹³ PPSA, s99
¹⁴ PPSA, ss21(4), 153

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