Opinion: Dire hire triangle

By: Mitch Waters


Court considers hire charges for CHEP pallets in messy situation

Opinion: Dire hire triangle
Mitch Waters

 

A recent decision of the County Court of Victoria has confirmed the importance of proper maintenance of CHEP accounts.

In Redox v Swan Hill Chemicals & Ors (2018) VCC 531, the court dismissed a claim by Redox, which had sought orders for the retrospective removal of pallets from its CHEP account.

In addition to bearing its own costs, Redox was ordered to pay the legal costs of the three defendants to the proceeding. These legal fees were significant.

This decision is the latest in a long line of litigation arising out of the CHEP pooled pallet system.

Key facts

In May 2012, Swan Hill, the first defendant, placed an order with Redox for a large quantity of calcium nitrate, destined for agribusiness Olam Orchards Australia (Olam), later named as the third defendant. Redox supplied the calcium nitrate to Swan Hill via a facility in Altona, operated by Redox’s agent, Secon.

The calcium nitrate was loaded onto CHEP pallets and collected from Secon’s warehouse by Pickering, Swan Hill’s authorised transport agent. Following collection, Secon sought to transfer liability for the 1,956 pallets to Swan Hill. This attempt to make ‘transfer-off’ was rejected as the Swan Hill CHEP account number held by Redox had been closed since March 2011. Swan Hill ultimately accepted ‘transfer-on’ of some 530 pallets but rejected the balance of 1,426, which remained on Secon’s CHEP account and continued to accrue hire charges.

Redox accepts 'transfer on' 

Secon was of course concerned to transfer the 1,426 CHEP pallets from its account to Swan Hill to avoid ongoing liability. Swan Hill’s refusal stemmed from its belief that the pallets had already left its possession when the calcium nitrate was ultimately delivered to Olam later in 2012. Swan Hill also maintained that Olam, in February 2013, had arranged return of some 1,700 pallets, some of which were possibly provided as part of the calcium nitrate order from Swan Hill, from across its farm network.

As the Secon-Swan Hill discussions proved fruitless, Redox, with an important commercial relationship with Secon to preserve, voluntarily accepted the ‘transfer-on’ of the 1,426 pallets from Secon. This, however, came without physical possession of any pallets, leaving Redox unable to de-hire them and remove this liability from its CHEP account. Subsequent Redox attempts to negotiate transfer to Olam’s CHEP account were not successful.

Legal proceedings

The court found for the defendants. In particular, Redox’s attempts to place contractual liability on Olam were frustrated by the lack of commercial relationship between them. Olam had contracted with Swan Hill for the purchase of the calcium nitrate and otherwise did not deal with Redox.


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The court also confirmed that CHEP pallets are ‘fungible’. This means liability for 100 pallets can be satisfied by any 100 pallets rather than a specified set. The effect is that no participant in the CHEP pooled pallet system has entitlement to any specific pallet.

This was fatal to Redox’s claim against Olam in ‘conversion’. As Redox did not have an entitlement to immediate possession of particular CHEP pallets, it could not argue that Olam had interfered with such a right, meaning that Redox’s argument in conversion failed.

By the time judgment was handed down in May 2018, hiring charges in respect of the 1,426 pallets exceeded $100,000.

Notably, Redox did not rely on the CHEP terms and conditions, whereby a participant in the system could declare the pallets as ‘lost’ and effectively cap liability to a value equivalent of five years of hire charges at 50 per cent.

A cautionaly tale

This decision highlights the reluctance of courts to make formal orders for the retrospective alteration of CHEP accounts. Proper and timely transfer on and off procedures are critical. It also highlights the risks associated with the use of CHEP pallets when third parties play such a key role in the supply chain. Businesses should always ensure they have in place proper protocols and procedures to ensure their CHEP accounts accurately reflect the number of pallets held on site.

End note

The plaintiff might have considered taking on the CHEP terms and condition in respect of lost pallets, which may have been open to challenge on the basis of certain terms being void as constituting a penalty. It’s a worthwhile consideration for future situations like the one in this case.

Mitch Waters is an associate at law firm Holding Redlich.

 

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