Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

No 8153 of 2001

ENVIRONMENTAL SYSTEMS PTY LTD (ACN 001 386 456)

Appellant/Cross-Respondent

PEERLESS HOLDINGS PTY LTD

(ACN 004 280 979)

Respondent/Cross-Appellant

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JUDGES:	NETTLE, ASHLEY and DODDS-STREETON JJA
WHERE HELD:	MELBOURNE
DATES OF HEARING:	27 and 28 November 2007
DATE OF JUDGMENT:	26 February 2008
MEDIUM NEUTRAL CITATION:	[2008] VSCA 26

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CONTRACT – Construction – Express term – Whether exhaustive statement of contaminants with which odour incineration equipment required to deal – Implied term – Whether warranty of fitness for purpose implied as necessary to give business efficacy or by s 19(a) of the Goods Act 1958 – Damages – ‘Liquidated damages’ – Whether such as to include costs of purchasing and installing equipment – ‘Consequential loss’ – Whether restricted to losses falling within second rule in Hadley v Baxendale (1854) 9 Ex 341 – Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 applied; Alexander v Ajax Insurance Co Ltd [1956] VLR 436, considered – Millar’s Machinery Co v David Way & Son (1935) 40 Com Cas 204, Croudace Construction v Cawoods Concrete Products [1978] 2 Lloyds Rep 55, doubted – Goods Act 1958, s 19(a).

TRADE PRACTICES – Misleading and deceptive conduct – Failure to warn of risk to functionality of equipment posed by fats and oils in air stream – Damages – Whether reduced by amount respondent would otherwise have outlaid on alternative equipment – Time for bringing action – Whether cause of action accrued before equipment installed ready for use – Sellars v Adelaide Petroleum NL & Ors (1994) 179 CLR 332, distinguished; HTW Valuers v Astonland Pty Ltd (2004) 217 CLR 640, considered; Karedis Enterprises Pty Ltd & Anor v Antoniou & Anor (1995) 59 FCR 35, referred to – Trade Practices Act 1974 (C’th), ss 52 and 82.

WORDS AND PHRASES – ‘Liquidated damages’; ‘Consequential loss’.

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APPEARANCES:	Counsel	Solicitors
For the Appellant/Cross-Respondent	Mr A G Uren QC with Mr B F Quinn	Monahan & Rowell
For the Respondent/Cross-Appellant	Mr P D Santamaria SC with Mr S R Horgan	Clayton Utz

NETTLE JA:

This is an appeal from a judgment given in the Commercial and Equity Division in favour of the respondent (‘Peerless’). The judge awarded damages of $1,536,480 for misleading and deceptive conduct on the part of the appellant (‘Environmental Systems’) in relation to the supply of a REECO Regenerative Thermal Oxidiser (‘RTO’). There is also a cross-appeal as to damages for breach of contract to which the respondent contends it was entitled.

The facts

Peerless is a privately owned company involved in organic recycling, production of technical fats and the processing and marketing of edible oils and margarines. At relevant times it conducted an animal rendering plant at Merino Street, Laverton, North, close to a residential neighbourhood. The business was conducted under a licence granted by the Environment Protection Authority (‘EPA’) and one of the terms of the licence was that odour emissions were to be dealt with satisfactorily. For some years leading up to 1996, Peerless used an afterburner to incinerate gaseous emissions and thereby to destroy the odour. By 1996, however, the afterburner was reaching the end of its serviceable life. It was unable to cope with the volume of air needed to be treated and it was an inefficient user of energy. Peerless determined to replace it.

Environmental Systems is a wholly-owned subsidiary of a publicly listed company, The Environmental Group Ltd. It has operated in the air pollution control industry for over 20 years. It specialises in the supply of vapour emission control systems and engineering services to the oil, gas and petrochemical industries.

In 1997, Peerless made enquiries of a number of suppliers, including Environmental Systems, as to the availability and cost of a replacement afterburner. After some initial discussion, Environmental Systems proposed to Peerless a RTO to replace the afterburner. That led to Environmental Systems submitting to Peerless a written Proposal, dated 17 October 1997, for the supply of a RTO ‘sized to cope with the increased air volume requirements’ for a price of $698,500.

So far as is relevant, the terms of the Proposal were as follows:

1.1 BACKGROUND
Peerless Holdings operate a rendering plant in West Footscray, an industrial suburb of Melbourne. An existing afterburner no longer provides adequate emission control and a system with a larger air volume is required. A more efficient incineration technology is also desirable, to reduce plant operating costs.
1.2 PROPOSED SYSTEM
Environmental Systems (ES) are proposing that Peerless replace their existing afterburner with a REECO RE-THERM RL Regenerative Thermal Oxidiser (RTO), sized to cope with the increased air volume requirements. The advantages of utilising a REECO RL RTO are:
a) Substantially lower running costs, compared to afterburner style technologies.
b) Self cleaning design, utilising the standard ‘bake out’ feature to remove the build up of organic residues in the heat transfer section of the incinerator.
c) More efficient combustion, leading to comparatively lower NOx levels than afterburner technologies.
d) ‘State of the art’ RTO design, incorporating features which minimise capital cost and running costs, whilst maximising emission control efficiency. In addition, the RL design is significantly simpler in design compared to competitor’s RTOs and as a result can be expected to offer increased reliability and greatly simplified maintenance requirements.

1.3 PERFORMANCE
The proposed system has the following guaranteed performance:
a) 99% greater conversion of VOCs[1] present in the inlet airstream, which represents current world’s best practice in emission control.
[1]Volatile organic compounds.
b) Natural gas consumption of 35 m³/hr or less, which equates to a an 88% reduction in gas consumption from the existing afterburner on the site, with a 150% increase in the process air volume being treated.

[Section 2 contained a description of the activities and capabilities of Environmental Systems. Clause 2.1 stated that Environmental Systems had been acting for over 20 years in the conditioning and control of gases, vapours and odour emissions. Clause 2.2 stated that Environmental System’s engineering expertise was integrated into all aspects of projects at each stage of development. Section 3, Design Parameters, is important and I set it out.]
3.1 PREFACE
The design parameters for the design of the incineration system are as nominated by Peerless Holdings. As time is of the essence, assumptions have been made, to enable a proposal to be prepared.

3.2     DESIGN PARAMETERS
The basic design parameters upon which our proposal is based are as follows:
a)     System Air Volume:   15,000 Am³/hr
b)      Air Temperature:   50^º C
c) Contaminants:   Various mercaptans, amines, ammonia, sulphides, aldehydes and ketones.
d) Contaminant Concentrations:      H₂S: 29 g/min. (max.)
CO: 51 g/min. (max.)
VOC: Unknown

e) Purification Temperature: 760º C (min.)
f) Residence Time: 0.3 sec (min.)

3.3 SYSTEM ASSUMPTIONS
Based on the recent discussions with Peerless, we made assumptions with a view to ensuring that the system will perform as intended, whilst minimising capital cost.
a) The ductwork system provided by Peerless, upstream of the RTO inlet coalescor filtration chamber, will incorporate a cyclonic or baffle style knock out device, to remove the bulk of condensibles.
b) The exhaust stack will be able to be located such that at least part of its height can be braced to an existing structure, not freestanding, as previously offered.
c) The use of S.S. 304 as a material for the gas contacted components on the inlet side of the RTO system will give satisfactory corrosion resistance, based on your experience of using this material in the existing afterburner duct system.
d) The inlet airstream is essentially an odour emission. This implies that the calorific value of the VOCs and other contaminants in the process airstream is very low and will not be sufficient when combusted, to overheat a 95% T.E.R. (Thermal Energy Recovery) Regenerative Thermal Oxidiser.

Note: If the calorific value is ultimately higher than anticipated, the T.E.R. ratio of the RE-THERM can be lowered if necessary, with minor modifications.

[So far as relevant, Section 4, System Description, stated:]
4.1 EMISSION SOURCES
The odourous emissions which are to be controlled are emitted from a number of process vents, associated with the rendering of meat products. The capture of these emissions is being engineered by Peerless Holdings.

4.2 VAPOUR COLLECTION DUCTWORK SYSTEM
The vapours captured at the various emission sources are to be conveyed to the REECO RE-THERM RTO, via S.S.304 ductwork which is to be designed, supplied and installed by Peerless Holdings. As the emission is comprised of a high concentration of liquid condensibles, it is assumed that either a cyclonic or baffle type knock-out device will be incorporated in the ductwork system prior to connection to the RE-THERM inlet flange, by Peerless Holdings.

4.3 INLET FILTRATION
From the inlet flange of the system to be supplied by ES, the process airstream will initially pass through a filtration unit, which will incorporate coalescor style, fibreglass filtration media, to provide an additional level of mist elimination and particulate capture, prior to the airstream entering the RE-THERM.

4.4 POSTIVE DRAFT FAN
Once prefiltered, the process airstream will pass through the positive draft fan, into the RE-THERM incinerator.

4.5 RE-THERM RTO
Upon entering the RE-THERM RTO, the air passes through the proprietary REECO design rotary valve, which directs the inlet airstream to 5 of the 12 internal chambers which comprise the heat transfer section of the unit. The air then passes upwards through these chambers and is preheated by the ceramic heat transfer media, before entering the combustion chamber.
Once in the combustion chamber, the vapours are thermally oxidised, at a design temperature of 900ºC for this application. The vapours are exposed to this temperature for a minimum period of 0.5 sec in this unit. Any additional heat required to maintain the combustion temperature is provided by a burner located in the combustion chamber.
Following combustion, the purified air travels downwards through another 5 chambers of heat transfer media, heating the ceramic media in these chambers. The purified air then passes though [sic] the rotary valve and out of the RE-THERM RTO.
To enable the heat recovery process to be continuous, that rotary valve indexes approximately every 15 sec, to reverse the flow direction in 2 of the heat transfer chambers and also allow the ‘purging’ of an intermediate chamber with purified air. This purging ensures that no uncombusted odours pass into the exhaust airstream.
The RE-THERM is a skid mounted, fully automatic unit which should require minimal operator scrutiny. The operation is PLC controlled and features charge recording of the unit’s function for demonstration of incineration performance.

4.6 EXHAUST STACK
Upon leaving the RE-THERM RTO, the purified air will pass to [the] atmosphere through a 23.5m high exhaust stack. To minimise costs, it has been assumed that the exhaust stack and RTO can be located such that the exhaust stack can be braced for part of its height, to an adjacent structure.

[Section 5 described among other things the RTO’s component elements, as follows:]
• Energy Recovery Feature
• Burner Zone
• Flow Control System
• Exhaust System
• Insulation
• Supports and Access
• Control System

5.2.2 Bake-out System
The vertical flow configuration is advantageous not only structurally, but it makes the unit tolerant of particulate. Solid contaminants are passed through the unit, [and] destroyed if organic. The constant reversal of air flow, blown vertically through the regenerative chambers, will clear any particles that may become lodged within the media.
Bake-out is inherent in the design of the RL. It is used on applications that contain organic particulate, aerosols, and condensibles in the process exhaust stream as a means of removing these deposits. This feature functions in the same fashion as a self-cleaning oven in that the temperature of each bed is raised to approximately 315-485ºC to burn or bake-out the organic deposits which may have accumulated.
The frequency and temperature of bake-out will depend on the specific site application. In most cases, the bake-out cycle requires approximately 1.5 hours to complete.
Additional controls are provided to monitor the cold face temperature on each chamber and control the sequencing during the bake-out cycle.
...

5.4 FLOW CONTROL SYSTEM
5.4.1. Inlet and Outlet Manifold
The inlet and outlet manifold is constructed of ...
The inlet manifold is fitted with a drainage plug to facilitate removal of any condensed moisture. The inlet manifold will also be located under the RE-THERM, beneath the valve, to prevent condensate and contaminants from flowing into the RTO.

[Section 6, as the judge put it, dealt with commercial matters commencing in cl 6.1 with the price, as follows:]
6.1 PRICING SCHEDULE
With reference to our design outline of the proposed system, and the included drawings, we have pleasure in confirming our proposal pricing for the supply and installation of the necessary equipment to effectively complete the project.
To supply, install and commission the RTO project herein outlined, designed to address the design parameters as stated in Section 3 of this proposal;
Base offer ...................................................... $698,500.00
The above pricing is exclusive of appropriate sales tax on all procured items.
Please note exclusions and terms of payment applicable.

[Clause 6.2 specified items and services that were excluded from the scope of the offer but which may be included if required. They included ‘Vapour collection ductwork system and knock out device’. In cl 6.4, Manufacturing and Installation Period, it was stated that:]
It is anticipated that this entire project could be completed within 24 – 26 weeks of receipt of your official order to supply and install the system as proposed. This is based on the present availability of labour and materials.

[Clause 6.10 stated that the costings included the services of one commissioning engineer for a maximum of 5 days. Should additional commissioning services be required for any reasons whatsoever then an additional fee for such service would be applicable. Section 7, Guarantees and Penalties, provided:]
7.1 EMISSION GUARANTEES
We would offer the following guarantees as part of this contract:

7.1.1 VOCs
We guarantee that the RE-THERM will convert 99% or more of the total volatile organics in the inlet stream to carbon dioxide, water and non-combustibles, down to a minimum of 10 ppm measured as CH₄ in the exhaust stream.

7.1.2 NOx
We guarantee that the RE-THERM’s outlet emission of NOx will not exceed 10 ppm measured as NO₂(uncorrected), provided there are no NOx or nitrogen bearing compounds contained in the inlet stream to the RE-THERM.*

7.1.3 CO
We guarantee that the RE-THERM’s outlet emissions of CO will not exceed 30 ppm, measured as CO (uncorrected), provided there is no particulate contained in the inlet stream to the RE-THERM.

7.1.4 General Conditions
The following provisions apply to all of the above guarantees:
- The process exhaust flow will not exceed the specified value and the process conditions are as stated in Section 3 above.
- The performance will be based on five test samples taken consecutively, of which the high and low values will be discarded. The test result will be the arithmetic average of the three remaining tests.
- The performance guarantees apply only during normal operation, not during any maintenance procedures.
- If the RE-THERM fails to meet the Performance Guarantee, we will be given reasonable time to investigate and take corrective action within the scope of this contract.
- All performance tests will be arranged and paid for by PEERLESS HOLDINGS.** We will be notified in writing 14 days prior to the tests.
- U.S. EPA Methods 7E, 10 and 25A are used to determine NOx, CO and VOC performance, respectively.

- Methane is excluded from the outlet emissions.

- The RE-THERM is operated in accordance with our Operating and Maintenance Instructions.

* We would note that there is the likelihood that nitrogen bearing compounds, such as amines, in the inlet stream. This will lead to higher NOx levels than guaranteed above however, due to the lack of detailed knowledge of the inlet emission. For this reason we would not be able to guarantee an outlet level of NOx. We would also note that the RTO is a very efficient form of incineration technology which typically produces less NOx than less sophisticated incineration technologies, such as recuperative afterburners. Should NOx levels become a compliance issue in the future, there are ‘add-on’ technologies which can be applied to specifically reduce NOx emissions.
** Performance tests are to be conducted within 30 days from receiving advice by ES of readiness for testing. If performance tests are not conducted within 30 days from advice of readiness, and through no fault of ES, the equipment shall be deemed to have been accepted by Peerless Holdings and in compliance with all contractual requirements.

7.2 FUEL USAGE GUARANTEE
The natural gas usage of the RE-THERM will not exceed 35 m³/hr, during normal on-line operation. In practice, the fuel usage may be lower than this figure, should any significant calorific value be present in the process inlet airstream.

7.3 RTO RELIABILITY
REECO advise that normal system availability is 95% plus. A guarantee of availability may be possible, but will be subject to conditions relating to operation and maintenance, adequate spare parts holdings and bi-annual REECO inspections.

7.4 PENALTIES
In accordance with the request from Peerless Holdings, we are prepared to accept the following penalties, should the RE-THERM RTO not perform as guaranteed above.

7.7.1 VOC Conversion Efficiency
Should the VOC conversion efficiency, measured as the percentage reduction in the VOC concentration between the inlet and outlet of the REECO RTO be less than 1.5% below that guaranteed, the following pre-determined liquidated damages would apply:

•	For efficiencies less than 97.5% and greater or equal to 95%, a penalty of 1% reduction in the contact (sic) value, for every 1% loss (or part thereof) in VOC conversion efficiency.
•	For efficiencies less than 95%, a penalty of 2% reduction in the contact (sic) value, for every 1% loss (or part thereof) in VOC conversion efficiency.
•	The maximum penalty which can be incurred will be 10% of the contract value.

7.7.2 Fuel Consumption Penalty
Should the RE-THERM RTO natural gas fuel consumption, when being operated as described in the General Conditions in Section 7.1.4 above be greater than 35 m³/hr, which may occur in order to assure that the VOC conversion efficiency guarantee is met, then the following pre-determined liquidated damages would apply:

•	1% Reduction in contract value, for every 5 m³/hr (or part thereof) of additional natural gas used in excess of 35 m³/hr, up to a maximum of 10% of the order value placed on ES.

7.7.3 Maximum Penalty Limitation
The overall penalty which could be incurred due to lack of VOC Conversion or excessive natural gas consumption or a combination of both penalties, would be limited to a maximum aggregate of 10% of the contract value.

[So far as is relevant Section 8, General Contractual Conditions, stated that:]
8.3 DEFECTS LIABILITY & WARRANTY PERIOD
Our defects liability and warranty period extends until the sooner of;
(i) 18 months from the date of delivery or scheduled delivery, or
(ii) 12 months from the date of commissioning or original scheduled date of commissioning.

Our liability is limited to workmanship and materials only.
...
8.9LIQUIDATED DAMAGES AND/OR CONSEQUENTIAL LOSS
As a matter of policy, Environmental Systems does not accept liquidated damages or consequential loss. Environmental Systems is motivated to achieving agreed milestones through respect for the client’s needs and the obvious financial advantage gained from completion of projects in the shortest possible period.

After some further negotiation, to which it will be necessary to refer later in greater detail, Peerless accepted the Proposal by a purchase order dated 24 October 1997, at a reduced price of $675,000.

The lead time to supply, install and commission the RTO was 24-26 weeks. Following installation, the commissioning of the RTO began in October 1998 with EPA approval. But despite considerable efforts to make the RTO work as intended, it was found that it was unable to deal with the odour satisfactorily. Eventually, in late July or August 2001, Peerless shut down the RTO and reverted to use of an afterburner.

The judge found that the cause of the odour was fatty particulate in the airstream entering the RTO and polymerising on the cold face of the RTO. It may also have polymerised in the ducting prior to reaching the RTO. As a result, it by-passed the combustion chamber and was stripped off the cold face by the warmer gases exiting the RTO. Thence, it was dispersed into the atmosphere as a source of odour. There was also some evidence of valve problems leading to odorous gas or liquid passing directly from the inlet chambers to the outlet chambers and so by-passing the combustion process. Additionally, the bake-out facility referred to in Section 5 of the Proposal failed to work as expected. The judge found that, although it did remove some of the fatty material from the RTO, it did so by means of a combustion process which discharged smoke, which was itself a source of odour and which had to be treated in the existing afterburner.

The case in contract

At trial, Peerless sought damages for breach of contract and further or alternatively for damage suffered by reason of misleading and deceptive conduct in contravention of the Trade Practices Act 1974. It succeeded in both but elected to take damages for misleading and deceptive conduct; the latter as assessed by the judge being slightly more than the damages as awarded for breach of contract. It is necessary now, however, to revisit the claim for breach of contract, because the respondent contends[2] that it was entitled to more damages for breach of contract than were allowed by the judge and the appellant contends[3] that the claim in contract should have failed altogether.
[2]By its cross-appeal.
[3]As part of its appeal.

The respondent’s case in contract was that there were terms of the contract for the supply of the RTO, which it alleged Environmental Systems had breached, as follows:

(a) an implied term that the RTO would provide odour destruction on its installation at the Plant;
Particulars

The term was said to be implied in order to give business efficacy to the Sale Agreement in view of the express terms of the Proposal, in particular, clauses 1.1, 1.2, 1.3, 3.1 and 4.5 thereof and the surrounding facts and circumstances referred to in paragraphs 3, 4, 5, 6, 7 and 8 hereof.
(b) an express term that the RTO would provide lower No_xemissions than lower efficiency afterburner systems (clause 1.2(c));
(c) an express term that the installation of the RTO would substantially lower the running costs compared to afterburner style technologies (clause 1.2(a));

(d) an express term that the RTO was tolerant of particulate (clause 5.2.2);
(e) an express term that solid contaminants are passed through the unit and are destroyed, if organic (clause 5.2.2);
(f) an express term that the constant reversal of air flow, blown vertically through the regenerative chambers, will clear any particles that may become lodged within the media (clause 5.2.2);
(g) an express term that the bake-out feature, used in an application that contains organic particulate, aerosols and condensables, will remove deposits of organic particulate, aerosols and condensables by burning or baking such deposits out (clause 5.2.2);
(h) an express term that the inlet manifold would facilitate removal of any condensed moisture to prevent condensate and contaminants from flowing into the RTO (clause 5.4.1);
(i) an express term that the RTO incorporated a self-cleaning design utilizing the standard “bake-out” feature to remove the build up of organic residues in the heat transfer section of the incinerator (clause 1.2(b));

Particulars

The terms in subparagraphs (b) to (i) above are express and are contained in the ES’ Proposal dated 17 October 1997.

(j) an implied term that the RTO would be fit for the Purpose; and
(k) an implied term that the RTO would comply with the description referred to in paragraph 15(b).
Particulars

The terms referred to in subparagraphs (j) and (k) were said to be implied and arise by operation of law and in order to give business efficacy to the Sale Agreement.

Breach of express terms

Based on the findings earlier referred to, the judge held that Environmental Systems had breached the express terms alleged in paragraphs (d), (e) and (f), in that:

During normal operation, the RTO was not tolerant of particulate, solid organic particles were not destroyed, and particles lodged in the media were not cleared by the air flow. On the contrary, fatty particulate accumulated on the cold face of the RTO, which led to the RTO’s failure to control the emission of odour.[4],

and also the express term as to the bake-out facility which was alleged in paragraph (g), in that:
… although the bake-out system did remove some of the deposits of organic particulate, aerosols and condensables, the bake-outs were often smoky and created further odour problems. This resulted in the need to perform more than just one bake-out. I accept that, eventually, the bake-out system did remove some (but not all) of the deposits of organic particulate, aerosols and condensables, but in a way that conduced to odour emissions and smoke. It might be thought that as the fourth term found in cl 5.2.2 referred only to removal of deposits (and not to the consequences of that removal, in the sense that there was no statement that odour would not be generated as a result), strictly speaking the defendant did not breach the term. However, to regard the matter that way would be to ignore the overall context with which cl 5.2.2 and cl 1.2(b) were concerned and the purpose of the RTO to control odour emissions. Further, the bake-out did not remove all of the contaminating deposits. As a matter of substance, it is to be readily understood that the bake-out problems to which I have referred above, contributed to the RTO’s overall failure to control the emission of odour.[5]

[4]Reasons, [753].

[5]Reasons, [753].

It followed, his Honour held, that:

…the failure of the RTO to control the emission of odour was due to the RTO not operating as provided in the terms alleged in para 16(d)-(i) of the statement of claim. What this means is that when operated in accordance with the terms of use stipulated in cl 3.3 and Section 4, the RTO failed to perform in accordance with the specified terms of the sale agreement. I add as to the inlet manifold, that while I did not understand the case to be separately developed that non-performance in this area was a cause of the RTO not controlling odour emission, the failure of the RTO to perform was in part due to the failure of the inlet manifold to prevent condensate and contaminants from flowing into the RTO.[6]
[6]Reasons, [754].

Appellant’s contentions as to breach of express terms

The appellant does not contest the judge’s findings that the RTO was unable to deal with particulate in the conditions in which it was operated. It does not dispute that, in those conditions, the RTO failed to destroy solid organic particles and that its design was such that particles which lodged in the media were not cleared by the air flow. It accepts, as it did below, that fatty particulate accumulated on the cold face of the RTO and that it was that phenomenon which led to the RTO’s failure to control the emission of odour in the manner envisaged by clause 5.2.2 of the agreement.

The appellant contends, however, that clause 5.2.2 of the agreement was not promissory as to ‘any particular degree of tolerance of the RTO for any particular degree, type or amount of particulate or contaminant in the exhaust process stream entering the RTO’, or as to ‘the operation of the RTO without regard to any particular degree, type or amount of contaminant, particulate or other content of that process steam.’[7] The appellant argues that, upon the proper construction of clause 5.2.2:

any promises by Environmental Systems which clause 5.2.2 contained as to the operation of the RTO were limited to its operation in processing an airstream with the specifications and in the circumstances set out in Section 3 of the Sale Agreement.[8]
[7]Appellant’s written submissions at [11].
[8]Appellant’s written submissions at [12].

More precisely, the appellant submits that Section 3 required the airstream as it passed into the inlet of the RTO, or at least as it passed into the incinerator of the RTO, to be ‘essentially free’ of any contaminants other than those specified in the design parameters in clause 3.2 and that, since the airstream in fact contained significant quantities of fat (a contaminant not mentioned in clause 3.2(c)), and it was fat that was productive of the RTO’s shortcomings, there was no breach of clause 5.2.2.
The content of the airstream

The judge rejected the idea that clause 3.2(c) was intended to be an exhaustive list of contaminants. In his Honour’s view, the contaminants mentioned in the clause were just some among a larger number known to be present. He reasoned that:

…cl 3.2 on its own terms and in the context of the relevant provisions of the proposal, understood … in the factual matrix in which the proposal was proffered and the sale agreement was made…did not require that the airstream provided to the inlet of the RTO or the airstream as it passed to the incinerator of the RTO contain no contaminant other than those specified in the design parameters in cl 3.2… objectively considered the proposal did not provide that the RTO was to deal with the contaminants and concentrations thereof referred to in cl 3.2 and none other. It was to deal with the airstream that came into it from the prefilter having come to the prefilter from the cyclone which removed the bulk of the condensables. It follows, as the plaintiff submitted, that the RTO was to deal with the airstream that thus passed into it, including fats that remained after the cyclone.[9]

[9]Reasons, [726].

The appellant attacks that reasoning at several levels. First, it contends that it is contrary to the express terms of the agreement properly construed. It submits that the plain and ordinary meaning of the words of Section 3, and their obvious purpose,[10] was to make clear that the RTO was for processing an airstream with the attributes delineated in clause 3.2 and, in particular, with the only contaminants being as specified in clause 3.2(c).
[10]McCann v Switzerland Insurance Australia Ltd (2003) 203 CLR 579, 589[22] (Gaudron J), 600 [73]-[74] (Kirby J); Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235[7]-[13].

Secondly, the appellant argues that the judge’s interpretation of clause 3.2 is contrary to the intention which a reasonable observer would impute to the parties.[11] As the appellant would have it, a reasonable observer would not for a moment imagine that a supplier intended to warrant the RTO’s ability to process an inlet airstream regardless of the content of the airstream; especially given that the final proposal referred specifically to listed contaminants in the manner of clause 3.2(c). To the contrary, the appellant says, a reasonable observer would infer an intention precisely to define the task which the RTO was intended to perform and thereby to limit the supplier’s liability under the guarantees in Section 7 by reference to an airstream of which the content was exactly delineated by clause 3.2(c).
[11]Codelfa Contruction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 352; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 461[22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165,179[40].

Thirdly, the appellant says that, although clauses 3.3(a), 4.1 and 4.2 provided for the respondent to take steps to clean up the process stream before entry into the RTO, at the time of the agreement the appellant had no knowledge of the devices that the respondent might use for that purpose and it was not envisaged that the appellant would have any say in or control over those devices. In the appellant’s submission, it follows that the plain and ordinary meaning of the agreement was to leave it up to the respondent to decide whether and how it could process the air stream in order to meet the requirements of clause 3.2 and, according to the appellant, that is a further reason to conclude that clause 3.2(c) was an exhaustive description of permissible airstream contaminants.

(i) Plain and ordinary meaning of express terms

In my view those submissions should be rejected. Beginning with the words of Section 3, and the statement in clause 3.1 that the appellant had made a number of assumptions, it is by no means self evident that all of the assumptions were stated in the proposal. As a matter of textual analysis, it was at least equally possible that some such assumptions went to a matter or matters not specified in clause 3.2.[12] And in that connection, as the judge said, it was significant that there was a difference between the language of clause 3.1, which referred to ‘The design parameters’, and clause 3.2, which mentioned ‘The basic design parameters’.[13] Prima facie, the difference implied knowledge on the part of both parties that the airstream to be treated contained more contaminants than those listed in clause 3.2(c), including ‘cooker non-condensibles’ and ‘solid and fat aerosol particles’.
[12]Ibid.
[13]Ibid.

Counsel for the appellant placed emphasis on the provisions of Section 7 of the agreement. In his submission it was significant that the performance guarantees given in that section were limited to the destruction of contaminants mentioned in clause 3.2(c): namely, VOCs and CO (and NOx, provided there were no NOx in the inlet airstream[14]), and that each of the guarantees was subject to the condition that ‘[t]he process exhaust flow will not exceed the specified value and the process conditions are as stated in Section 3 above.’ Counsel argued that, inasmuch as the guarantee went no further than the destruction of the listed contaminants (and then only to the extent provided for in Section 7), it implied a contractual intention, applicable generally throughout the agreement, that the only contaminants with which the RTO should have to deal were those listed in Section 3.
[14]See clause 7.1.2.

In my view that reasoning is not persuasive. The preparedness of a vendor expressly to warrant only one or some aspects of a product’s operation does not necessarily or even usually imply a contractual intention that the product be incapable of performing other aspects of its intended operation. Logically, it does not follow from the fact that the guarantees were here limited to the contaminants listed in clause 3.2(c) that the RTO was not intended to deal with any other contaminant. And even if the only contaminants which the RTO was intended to destroy were those mentioned in clause 3.2(c), it does not follow that there was a contractual intention applicable generally to the agreement that the airstream entering the RTO not contain any other contaminant. To the contrary, clauses 4.2 and 4.3 expressly acknowledged that the production stream would be comprised of a high concentration of liquid condensables and also include particulate and, subject to the effects of the knock-out device and filter mentioned in those clauses, that such or at least some part of such contaminants would remain in the airstream entering the RTO.

Further, as his Honour said, when one reads clause 3.2(c) and the rest of the agreement against the background of facts known to both parties at the time of their entry into the agreement,[15] it is tolerably clear that section 3.2(c) was not intended to be an exhaustive list of contaminants.
[15]Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289, 292 [10]-[12] (Gleeson CJ and Gaudron, McHugh, Gummow, Hayne and Callinan JJ), 316 [104] (Kirby J); (2002) 76 ALJR 436.

Beginning with clause 1.1 of the proposal, the judge emphasised that the three reasons stated as being the reasons for the proposal were that the respondent’s existing afterburner was not providing ‘adequate emission control’; a system with larger air volume was required; and the respondent was seeking more efficient incineration technology so as to reduce operating costs.[16]
[16]Reasons, [667].

I interpolate that this and the next step of his Honour’s reasoning assume particular significance once it is remembered that the respondent went to the appellant for a new afterburner to deal with the process stream for which the respondent’s existing afterburner had become inadequate, and that the appellant recommended the RTO in preference to a replacement afterburner. Hence, as the judge found, the appellant knew exactly the process stream to which the RTO was intended to be applied and, in particular, knew that the process stream contained a variety of other contaminants, including fat.

Secondly, his Honour noted that clause 1.2 stated the advantages of using a RTO and clause 1.3 reinforced that statement by the provision of performance guarantees (in the form of Section 7) as to conversion of VOCs and gas consumption. As his Honour put it, those clauses were directed at quickly and clearly identifying the advantages of a RTO over an afterburner.[17] They were, however, anything but a comprehensive description of the respondent’s requirements as stated in clause 1.1, and that conclusion was reinforced by evidence given by Mr Pappas (who was the sales development engineer employed by the appellant with principal responsibility for preparation of the proposal) that:

The reason for the purchase of a new unit was because the existing system could not accommodate the required increased capacity, the plant had high NOx discharge rates, the exiting afterburner had no NOx energy recovery capabilities and the approximate usage of natural gas to fire the afterburner was expensive.[18]

And that:
The proposal I provided at this time was for the provision of a final odour emission control device to remove the odour emissions from the rendering process. The proposal was that the RTO be installed at the end of [the respondent’s] existing processes and using [the respondent’s] odour collection devices. [19]

[17]Ibid.

[18]Witness Statement of Mr Pappas, AB 4, 219 [19].

[19]Witness Statement of Mr Pappas, AB 4, 222 [26], emphasis added.

Thirdly, the judge noted that whereas the statement in clause 3.1 of the Proposal (that the respondent had nominated the design parameters for the design of the incineration system) was directed at information which the respondent provided to the appellant by facsimile on 4 July 1997, in fact the respondent had provided the appellant with a good deal more information than that.

I interpolate that the fax of 4 July 1997, which was from Mr Peter Johnson of the respondent to Mr Pappas, was the first written communication in the course of the respondent’s correspondence with the appellant as to whether it could supply a new afterburner to replace the existing afterburner. It was as follows:

Details of Afterburner requirements are:
Air to be treated comprises of non-condensable vapours from the high temperature cooking process, drier non-condensable, pressor vapours, point sources throughout the plant. Generally the vapour sources are high intensity odours not suitable for chemical scrubber treatment or biofilter treatment.
Treated Air Flow  250m³/min[20]
Min Temperature   760˚ C
Min Tetention Time at min temp      0.3 Sec

Vapours to be treated comprise of mercaptans, amines, ammonia, sulphides, various aldehydes and ketones, steam.
Afterburner design must exhibit maximum energy recovery in the form of either steam or preheating of vapours.

[20]As first sent, the fax stated 500 m³/hr but that was amended by a subsequent fax to what is set out above.

Following that fax, there were further communications which made clear that the respondent’s knowledge of the airstream was limited but that it was seeking a system which would remove the odour emissions from the rendering process whatever the constituents of the airstream. Thus, for example, after visiting the respondent’s plant between 23 July 1997 and 7 August 1997, and viewing the respondent’s existing afterburner, Mr Pappas faxed to the appellant’s American suppliers, REECO, on 12 August 1997, as follows:

Because of a meeting held last week between Environmental Systems [the appellant] and the Client [the respondent] we advise the following:
HISTORY
Currently they have an afterburner system that treats approximately 100 m³/min. To eliminate the odour problem capacity of the existing unit has to increase to approximately 250-300 m³/min @ 50 deg C.
We show arrangement of the existing afterburner system in the attached.[21] They installed the system in 1971.
[21]Mr Pappas drew the diagram during his visit to the respondent’s plant.
They will replace the existing afterburner system because
-     Cannot accommodate the required increased capacity.
-     high NOX [sic] discharge rates.
-     no energy recovery capability.
-     high usage of natural gas (290 m³/hr ie. $280,000 to $300,000 per year)

Please find attached:
-     sampling test reports performed late 1995.
-     copy of the EPA waste discharge licence.[22]
[22]The respondent gave a copy of the EPA licence to the appellant when first making enquiries. It included a condition, inter alia, that:
‘No odours shall be discharged…which might reasonably be expected to be offensive to the senses of human beings in a residential area or in a public space adjacent to a residential area.’
-     original enquiry from the Client [the fax of 4 July 1997].
-     copy of your fax dated 24^th July ’97.

The client requires a firm proposal by 15^th August ’97. Expenditure has been approved for eliminating the odour problem. Currently three companies bid for the job and your prompt response will be appreciated. [23]
[23]Emphasis added.
The odour treatment unit has to be in place and operating by summer (Nov/Dec). During summer the odour problem escalates due to high ambient temperatures.
The client was unable to provide a more detailed composition analysis. Their argument is that the vapour emissions are typical of a rendering plant.[24]
[24]Emphasis added.
The selection process will be based on maximum energy recovery in the form of steam, hot water or preheating of vapours.
Your prompt attention to the following is required:
1. Price and expected delivery.
2. Design data including approximate dimensions.
3. Consider the alternative of Environmental Systems to fabricate the Re-Therm unit locally.
4.Approximate savings using a RE-THERM unit compared with an afterburner system.

Should you require any additional information please do not hesitate to call me.
Your prompt attention will be appreciated. I will call you to discuss further.

Fourthly, as the judge observed, the expertise in the application of a RTO lay with the appellant, not the respondent. As appears from Mr Pappas’ report to REECO, the respondent provided such further information as it had on the composition of the airstream but otherwise left it to the appellant to assemble whatever additional information might be needed to advise the respondent as to the suitability of the RTO for eliminating the odour problem.[25] And, as might be expected, the appellant did in fact undertake its own research into the likely composition of the airstream.
[25]Reasons, [669].

In a fax dated 24 July 1997 from REECO to Mr Papas, REECO wrote among other things:

It appears from the data given that this stream could be handled by our RE-THERM RL-Model R10-V1-95. Material of construction would surely need to be some type of alloy (expensive). You mention [indecipherable] compounds other than those shown on the test report you sent. It is very important for us to know quantities of the other compounds mentioned. Please send more detail…[26]

[26]AB 4, 251.

Mr Pappas responded by fax of 19 August 1997 attaching a table headed ‘Odorous Compounds in Rendering Plant Emission’ which he had extracted from an Air Pollution Engineering Manual prepared by the Air & Waste Management Association and edited by Anthony J. Buonicore and Wayne T. David. Mr Pappas’ evidence was that the publication was held in the appellant’s library and used because the respondent could not provide any further information as to the composition of the airstream.[27] It listed among the ‘Odorous Compounds in Rendering Plant Emissions’: Acetaldehyde, Ammonia, Butyric acid, Dimethyl amine, Dimethyl sulfide, Dimethyl disulfide, Ethyl amine, Ethyl mercaptan, Hydrogen sulfide, Indole, Methyl amine, Methyl mercaptan, Skatole and Trimethyl amine. The article also included several observations on the existence in the airstream and the need to remove or treat ‘cooker non condensibles’ by means of a ‘combination scrubber and entrainment separator of proper design’ and the advisability of treating ‘gas streams containing solid and fat aerosol particles with a preconditioning device, such as a low-to-medium-pressure-drop venturi scrubber, to remove this particulate before passing to the chemical scrubber’[28] (and, significantly, that list contains contaminants not listed in clause 3.2(c)).
[27]Witness Statement of Mr Pappass at [25], AB4, 221.
[28]AB4, 227-244.

In light of the facts known to both parties, the judge considered that it was reasonable to construe the agreement - particularly Sections 3, 4 and 7 of the agreement - as reflecting an assessment of commercial risk to the appellant of liability under the guarantees in light of the appellant’s knowledge of the fact that there would be fats and oils in the airstream and of the threat which they represented to the functionality of the RTO.[29]
[29]Reasons, [719]-[724].

With respect, I agree with that conclusion.

(ii) Reasonable observer test

I turn then to the test of the reasonable bystander, and in particular whether he or she would attribute to the parties an intention that the RTO be capable of destroying odour despite the presence of fat in the airstream.[30]
[30]Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288, 300; Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912 (Lord Hoffman); Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181, 188[11] (Gleeson CJ and Gummow and Hayne JJ).

In addition to the matters already mentioned, the evidence showed that on 2 September 1997 there was a conference between representatives of the appellant and representatives of the respondent at which the appellant made a presentation of the REECO RL-10. In the course of the conference, the respondent disclosed to the appellant that, as well as looking at the RL-10, the respondent was talking to other suppliers about the alternative of using a two stage heat recovery afterburner and an afterburner coupled to a novell water preheat/boiler/system. In a note of the conference, Mr Pappas recorded that:

They [the respondent] are concerned about these [alternative] systems since the lack of automatic self cleaning caused tars to leak and foul on other similar units they have seen. These [alternative] suppliers recommend additional front end demisting/condensation/filtration is done.[31]

[31]AB 7, 325.

It was also apparent that the representatives of the respondent sought and were given a number of assurances about the functionality of the RTO in the presence of fat. So in a fax dated 8 September 1997 to REECO from the National Business Development Manager of the appellant, the appellant sought answers to the following questions:

… The rendering project will be decided in the next two months and hence my telephone message. We need to address the following points:
·   Is the unit off line during bakeout, how often will it need to be done (a fine oil mist may be present) and in Reeco’s experience does smoking occur?
·   For the RL design can the fan be downstream to avoid contamination or is it preferred to have it before the RTO.
·   Do you have experience with rendering applications?
·   As pricing will be very competitiv[e] against two stage heat recovery afterburners and a recouperative (steam and hot water) incinerator we need to source the key components as economically as possible…[32]

[32]AB 7, 321, emphasis added.

The response was recorded in a fax of 11 September 1997 from the appellant to the respondent, in which the following points were included:

RTO’s have been used successfully at Petfood plants in the US which share a common odour to Peerless (at least Uncle Ben’s in Albury does anyway).
The bakeout feature is done offline (ie when the unit is not handling fumes from the plant). It can be fitted with an optional vent recycle for use during bakeout. This feature retreats the bakeout gases in the RTO significantly reducing the visible emissions. Bakeouts are usually done after the second shift at night. It is a matter of judgment in each case depending on how fast a bed needs regeneration and the contaminant itself. If reasonable inlet filtration is done then the bakeout may only be an irregular event.
We checked on the ability of the RTO to handle Oil mists. Experience has shown that provided it gets into the unit OK it is not a problem since the gas stream progressively rises in temperature after entry….[33]

[33]AB 7, 323, emphasis added.

Another fax of 24 September 1997 from Alistair Johnson of the appellant to REECO recorded that the respondent had expressed some concern about the rarity of application of RTO’s to rendering operations and had sought a reference list of RTO applications.

In a fax of 26 September 1997, Mr Johnson relayed the following further assurances to the respondent:

Further to our conversation earlier this week, please find on the following pages, a partial reference list for REECO Re-therm Installations.[34] As you advised, the application of RTO’s to rendering operations is rare, however, the principle of the destruction of the VOC’s present in the airstream (which create odour) is universal and the destruction of the odours is therefore assured.
...
With respect to process guarantees, it is naturally very difficult to provide ironclad process guarantees, when the composition of the inlet conditions are not clearly defined. Regardless of this, REECO are confident to guarantee at least 99% conversion of the total volatile organics in the inlet stream to carbon dioxide, water and non-combustibles, down to a minimum of 10 ppm measured as CH4.[35]

[34]The list of 18 applications included two pet food plants, one in Canada and one in Australia; the rest were to do with unrelated industries.

[35]AB 7, 358.

There was a meeting of 1 October 1997 at which Peter Johnson asked Alistair Johnson if the Esbjerg plant on the reference list provided was a fish mill plant, and for a contact for the Canadian pet food plant.[36] He also asked Alistair Johnson about system guarantees on destruction efficiency, fuel usage and reliability. He wanted penalties against the guarantees to be included. He told Alistair Johnson that the process stream contained a substantial quantity of fat and oil mist. Alistair Johnson replied that the bake-out feature would take care of that organic material. Peter Johnson asked how often the bake-out facility would have to run. Alistair Johnson said that he did not know and would ask REECO but added that, because of the presence of fats and oils in the process stream, the respondent should consider a simple pre-filtration filter being built into the RTO. There was no reference to a knock-out pot.[37]
[36]The judge observed as an aside evidence that Peter Johnson had visited the Esbjerg plant some years earlier and had had some contacts with an equipment supplier in Denmark. He then contacted the Danish supplier and asked them to make contact with the plant; he was subsequently informed that it was a different application from the respondent’s. He was also unsuccessful in attempting to contact the Canadian plant.
[37]Reasons, [249].

On 7 October 1997, Alistair Johnson sent a facsimile to REECO passing on Peter Johnson’s request for information concerning the Esbjerg plant, a contact at the Canadian plant, and guarantees on destruction efficiency, fuel usage, reliability and performance penalties. In that fax he noted that:

... the client may experience losses in thermal efficiency, due to buildup of organic condensibles and the bake out feature will be an important feature of this unit for that reason. Would you specify a minimum bake out frequency to ensure that operating efficiency remains high?[38]

[38]Reasons, [253], emphasis added.

The same day REECO responded:

Bakeout frequency is always hard to call. We would want to specify a bakeout frequency but it is difficult to determine until after the unit is on line. The organic buildup will have little effect on thermal efficiency unless it is allowed to go ‘way too far’.[39]

[39]Reasons, [254].

On 8 October 1997, Alistair Johnson sent a facsimile to Peter Johnson, providing additional information and revised pricing as requested.^.The information included details as to the Esbjerg and Canadian plants and information as to the guarantees which finished up in Section 7 of the proposal. Then, under the heading ‘Inlet Prefiltration’ it was stated that, in accordance with ‘our discussions, we agree that a simple prefiltration system, prior to the inlet of the RTO would be advisable’, and that such a unit was included together with a gauge to enable visual monitoring of the filter condition. The letter concluded with a revised price of $737,950 to supply and install the RTO.[40]
[40]Reasons, [255].

On 14 October 1997, Alistair Johnson and Mr Vandewalle (who was another engineer employed by the appellant) presented their proposal to representatives of the respondent. During the presentation, Peter Johnson asked about fat build up in the honeycomb of the RTO. Mr Vandewalle replied that the fats in the appellant’s process stream were an advantage in respect of the efficiency of the RTO, in that any carbon based material in the inlet stream would provide an additional fuel source to reduce reliance on natural gas supplied while maintaining the RTO’s required operational temperature. Mr Vandewalle also said that the appellant had experience of a hydrocarbon waste stream into one of its RTO units which had substantially reduced fuel consumption to the point of 99% efficiency.

Following the meeting on 14 October 1997, Mr Vandewalle, asked Mr Evans (another engineer employed by the appellant) to contact the respondent and ascertain whether there was anything in the process stream that might include corrosives, and as to the respondent’s experience with deposits in the ducting leading to the point where the appellant expected the RTO to pick up the process stream. As the judge found, Mr Vandewalle had those enquiries made because he wanted to know as much as possible about the operation before finalising the proposal.

The next step was that, on 15 October 1997, Mr Evans prepared a list of questions for the respondent to deal with issues that Mr Vandewalle wanted resolved before the proposal was finalised. The document was headed ‘Questions for Peerless’ and included the following questions and answers (the answers being based on information provided by the respondent):

1.What is the current experience with build up of fatty or gummy deposits?
- On Ducts - On Hoods - In the KO Drum
A.Constant buildup and flow of fluid from all of the above.

About 2 litres/min from the KO drum.
2.How much buildup is there of fat or gum or their combustion products, on the existing incinerator internals?
A.None on the incinerator internals because they are getting all burnt off.

3.It is suggested that the new fan and ducts be made from Stainless Steel. How corrosive is the vapour and or deposits on the materials that you currently have things made out of?
- The Fan - Materials - Corrosion
- The Incinerator exhaust stack - The Knock Out Drum
A.There is a mild sulphur content and this is probably the main corrosive element. Mild steel or galvanised ducts have been badly corroded. 304SS has been successfully used for these wetted bits.

The incinerator exhaust stack is mild steel and this is OK except for its burnt off paint finish – it ain’t half hot mum!
A.The KO Drum is mild steel and is corroded to a very thin wall now.

4. What type of stainless steel did you have in mind?
- 316L SS - 2RK65 - 2205 or 2507 Duplex Stainless
A.They have used 304 SS and it works fine. 3CR12 or 5CR12 have also been used in other locations and it is also fine. 3CR12 is a lot cheaper than 304.

5. Are there any explosive vapours in the vapour stream?
Is there any requirement for Ex ‘d’ or Ex ‘e’ electrical classification?
This question not asked. We will exclude EX design from our supply scope.

6.Do you intend to leave the existing KO drum in the process stream before it enters the new Regenerative Incinerator?
A.They had not intended to have one but can see the merits of leaving it in the larger design rationale. Can we offer a price adder to design and supply a suitable KO Drum in 3CR12?

7.Can the cost be reduced by locating the new Regenerative Incinerator adjacent to an existing high building or structure and attaching (bracing) the stack to it so that it would not have to have large foundations and inherit self supporting strength requirements?
A.Good idea. Base pricing on location near a 14m high x 3 m dia Flood Tank from which suitable support could be gained. Will check with his Civil guys.

As the judge said, this information made it clear (if it were not already) that both parties were proceeding on the basis that the process stream contained fat and oil, with the fatty or gummy deposits referred to.[41]
[41]Reasons, [282].

On 15 October 1997, Alistair Johnson sent a long facsimile to REECO advising that the respondent had confirmed the appellant as the preferred supplier and would place an order next week subject to successful technical and commercial negotiations. A conference call was confirmed for later that day (US time) ‘to discuss various issues which need to be resolved prior to us responding to [the respondent] with our final offer’. Alistair Johnson then set out a series of questions for consideration prior to the conference call, and they included a number of concerns about the fatty and gummy nature of the process stream and its effect on, and treatment in, the RTO:

(a)What was REECO’s experience with the new capillary refractory bricks on applications with fatty or possibly gummy vapours?
(b)Was there the possibility for blow down or gravity drainage of any liquid or condensable deposits from the bottom of the rotary valve plenum?
(c)Did the bottom rotary valve assembly have a sheer cut-off action on the chamber interface dividers such as would ensure a cutting action through any potential build up on the chamber inlet surfaces? After reference to the defendant having severe problems with the old metal seated butterfly valves on the VF series Retherms, because of the design and function of the valve, which allowed a build up of particulate on the valve seats which ultimately bypassed excessive vapours and affected overall performance.
(d)The standard VOC destruction efficiency is stated as 99% removal. If in handling this possibly gummy process stream we find that the inlet vapours condense out or coalesce to the capillaries of the inlet bricks, will the outlet stream strip these untreated VOCs from the brickwork when it becomes an outlet chamber and thereby reduce the apparent removal efficiency of VOCs?
(e)…remember ‘that our process stream is likely to have a reasonable fatty/gummy nature which may coat out on the upstream ducting and instrumentation so whatever is providing the input signal needs to be sensitive enough to read low pressures ... yet be robust enough to handle sticky gooey deposits’. [42]

[42]Reasons, [279].

In cross-examination Alistair Johnson conceded that the questions came about because he was told that there were vapours and ‘gummy stuff’ coming in the inlet; that this information raised an alarm bell in his mind; and that it raised a whole new element in his mind as to whether the RTO would function on the process stream. In effect, as the judge said, Alistair Johnson had anticipated the very problem which later emerged; the build up of fats on the cold face of the RTO, and that led to the inclusion of clauses 3.3(a), 4.1 and 4.2 in the final proposal.

Against that background, the judge concluded that:

a) although clauses 3.1 and 3.2 appeared in the final proposal of 17 October 1997 in the same terms as they had appeared in a previous proposal of 25 August 1997, clause 3.3 was not introduced until the final proposal of 17 October 1997;

b) the statement in clause 3.3 that assumptions were based on ‘the recent discussions’ was a reference to the discussions about fat which took place in October 1997;

c) the idea of a knock-out device (referred to in clause 3.3(a)) was not raised until 15 October 1997;[43]
[43]Ibid.

d) regarding the matter overall, the statement in clause 3.1 that ‘assumptions have been made’ was to be seen as an open ended and potentially self serving statement, but no more;[44]
[44]Reasons, [672].

e) so viewed, there was nothing in the proposal which was inconsistent with the RTO being intended to operate satisfactorily despite the presence of fat in the airstream;

f) indeed, the inclusions of clauses 3.3(a), 4.1 and 4.2 following the October conferences were positive indications of an intention that the RTO should be capable of so operating provided it were fitted with the devices for which those clauses provided; and so

g) viewed through the eyes of an objective observer with knowledge of the facts known to both parties to the agreement, it would have been clear that the ‘assumptions’ referred to in clause 3.1 were not intended to be synonymous with ‘the system assumptions’ stated in clause 3.3 of the final proposal of 17 October 1997.

With respect, I agree with his Honour’s reasoning. Having regard to the mutually known facts to which his Honour referred, I consider that a reasonable observer would not hesitate to conclude that the meaning of Section 3 (read in conjunction with Sections 4 and 5) was that the RTO was intended to operate satisfactorily in the operating conditions in which it was in fact operated: a process stream containing fat and oil productive of fatty or gummy deposits feeding through a cyclone and filter and then directly into the RTO.

Moreover, contrary to the appellant’s submissions, that does not mean an intention on the part of the appellant to warrant the RTO’s ability to process an inlet airstream regardless of the content of the airstream. It means that, although the appellant may not have identified each of the volatile hydrocarbons within the airstream, it knew more or less precisely the essential nature of the airstream which had to be dealt with. It knew that the emissions were typical of a rendering plant and, as it told the respondent, the principle of the destruction of the VOCs present in the airstream (which create odour) was universal and the destruction of the odours was therefore assured. It knew that there was water and fat and oil productive of fatty or gummy deposits in the production airstream. And it specifically provided for what it considered would be the deleterious properties of that airstream (in particular the water and fat which it knew to be in the airstream), by adding clauses 3.3(a), 4.1 and 4.2 to the final proposal.

As the judge put it:

If [Enviromental Systems] intended by any of these provisions that the inlet airstream be free of fat, either absolutely or to some stipulated extent or proportion or even as to particle size, it could have stated that in simple and clear terms. But it did not do so, even though it knew of the risk presented by fats in the airstream to the functionality of the RTO. It also knew that it was not possible to completely remove fat from the airstream. What it did in cl 3.3 and Section 4 was proceed by the route of requiring removal of the bulk of the condensables which would have the consequence of removing contaminant matter including fats. The conclusion is irresistible that the [appellant] assessed that as being a satisfactory way in which to remove contaminants including fats from the airstream such that following treatment in the prefilter it would pass into the RTO in a state suitable to be treated by it, and, following treatment, with the ultimate consequence of satisfactory odour emission control.[45]

(iii) Respondent’s responsibility to remove other contaminants?

[45]Reasons, [717].

Counsel for the appellant laid stress on the terms of clause 3.2(d). He submitted that, properly construed, they had the effect of requiring the airstream to be as described – that is ‘essentially an odour emission’ - and, therefore, that it be ‘essentially free from fats’ and from ‘any other unspecified contaminant’. He acknowledged that the treatment of the process stream would not necessarily remove 100% of fats and other contaminants. But he argued that the presence of some fat (or other contaminant) in the airsteam was not inconsistent with the notion of the airstream being ‘essentially’ free from fat (or other contaminants).[46] In his submission, the effect of clause 3.2(d) was to require that there be no more than ‘inessential quantities’ of fat in the airstream; and the same, he said, would apply in the case of any other contaminant.
[46]See reasons AB15E 259-256[663], 268[686]-270[689].

In my view that is not so. This was a commercial agreement drafted by engineers against a background of mutually known facts. Pre-eminently, those facts included that the production stream was saturated with water and fat; was known to contain a variety of contaminants in addition to those mentioned in clause 3.2(c); and was intended to be fed directly into the RTO after being subjected to no more pre-treatment than by the cyclone and pre-filter for which clauses 3.3(a), 4.2 and 4.3 expressly provided. If the appellant’s contention were correct, it would mean that mere mention of the airstream as ‘essentially an odour emission’ was enough to require the respondent to procure the removal from the airstream, by means unspecified and unknown, of all but an ‘inessential quantity’ of every contaminant known to man (except for those few contaminants listed in clause 3.2(c)). In my view, honest and reasonable business persons would regard that suggestion as risible.

His Honour reached a similar view. He concluded that the effect of clauses 3 and 4 was to require the respondent to remove the bulk of condensables, it being assumed that to do so would remove the bulk or at least sufficient of the fat, and that ‘essentially’ in clause 3.2(d) was to be equated to ‘substantial’ in clause 3.3(a) and thus with ‘bulk’ in clause 3.3(a). As his Honour put it:

In my view, regarding cl 3.3 overall, and having regard to Section 4, the [respondent] was required to remove the bulk of the condensables with the result that the inlet airstream would be ‘essentially an odour emission’. What the latter was [intended to mean] was uncertain, although the word ‘essentially’ should be read as ‘substantially’ or ‘the greater part’ like the word ‘bulk’. Not only does this produce a symmetry of approach within cl 3.3 but it acknowledges the reality that the inlet airstream will likely contain VOCs and other contaminants and certainly fats, which the second sentence in cl 3.3(d) recognises as being able to cause overheating unless the calorific value is very low. I add that in the above discussion I do not regard a simple majority, or 51 percent, as constituting substantially or the greater part.[47]
[47]Reasons, [715].

With respect, I agree with his Honour’s analysis.
Breach of clause 5.2.2

Counsel for the appellant rightly accepted that, if he failed in his argument that clause 3.2(c) was an exhaustive list of the contaminants with which the RTO was required to deal, it would follow that the judge was right to hold that the failure of the RTO to tolerate particulate, and the consequence that solid contaminants were not passed though the unit and destroyed if organic, and the inability of the RTO to clear particles that became lodged within the media, was a breach of the agreement.

He contended, however, that, even in those circumstances, the judge was wrong to hold that the functioning or malfunctioning of the bake-out system (described in the second paragraph of clause 5.2.2) amounted to a breach of the agreement. In his submission, the bake-out feature was not an aspect of operation of the RTO but simply a facility which enabled it to be serviced, and then only when the RTO was ‘off-line’ or in other words not in use.

I do not accept that submission either. No doubt the bake-out facility was for the servicing of the RTO when it was offline. But as clause 5.2.2 makes clear, it was ‘inherent in the design’ of the RTO as the means of removing deposits which would otherwise prevent the RTO functioning as it should, and evidently there were no other means of achieving the same result. So far as the evidence went, if the bake-out facility did not operate as intended, sooner or later the RTO would not operate at all as intended; and in fact that is what occurred. It follows in my view that the judge was right to hold that the inefficacy of the bake-out facility was no less a breach of clause 5.2.2 than was the failure of solid contaminants to pass through the unit and be destroyed if organic, or of the constant reversal of air flow to clear any particles that became lodged within the media.

Implied terms

In addition to the express terms alleged in paragaraphs 16(d) to (i) of the statement of claim, the judge found that the agreement contained the implied terms alleged in paragraphs 16(a) and (j) of the pleading, namely, a term that the RTO would provide odour destruction on its installation at the Plant and a term that the RTO would be fit for the purpose of providing adequate control of the emission of odour (or the control of odorous emissions) from the Plant.[48] In his Honour’s view it was necessary to imply those terms in order to give business efficacy to the agreement[49] and further or alternatively that the term as to fitness for purpose was implied by s 19(a) of the Goods Act 1958.[50]
[48]Reasons, [793].
[49]Secured Income Real Estate (Australia) Ltd v St. Martin’s Investments Pty Ltd (1979) 144 CLR 596, 606 (Mason J); Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 404 (Brennan J); Byrne v Australian Airlines Ltd (1995) 185 CLR 410, 422(Brennan CJ and Dawson and Toohey JJ) and 441-2 (McHugh and Gummow JJ); Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516, 574[157] (Gummow J).
[50]Reasons, [796]-[797].

The appellant attacks those parts of his Honour’s reasoning as well. It contends that it was not necessary to imply the term in order to give the agreement business efficacy and that the prerequisites to the engagement of s 19(a) of the Goods Act were not made out – in particular, that the only particular purpose which the respondent expressly or by implication made known to the appellant as being that for which the RTO was being required was the purpose of treating the particular airstream described in clause 3.2(c).

If it matters, I doubt that it was necessary to imply terms in order to give the agreement business efficacy. As at present advised, it seems to me that the agreement was capable of operating satisfactorily on the basis only of its express terms, properly construed. On the other hand, I see no reason to doubt the application of s 19(a) of the Goods Act. The correspondence to which I have referred shows that the respondent did expressly make known to the appellant the particular purpose for which the RTO was required, namely, eliminating the odour problem, so as to show, as was the fact, that the respondent relied on the appellant’s skill and judgment. Clearly, the RTO was goods which it was in the course of the appellant’s business to supply. And, despite reference in the proposal to the RTO as a ‘REECO Re-therm RL Regenerative Thermal Oxidiser’, I do not consider that the proposal was for the sale of a specified article under its patent or other trade name.[51]
[51]Baldry v Marshall [1925] 1 KB 260, 266 (Bankes LJ); Sutton, Sales and Consumer Law, 4^th Ed at [9.27]–[9.30].

It is, however, unnecessary to reach a concluded view about the implication of terms on either basis. For as counsel for the respondent properly conceded, the respondent’s claim for breach of implied term could not have succeeded unless the respondent also succeeded in its claim for breach of the express terms of clause 5.2.2. Accordingly, it is sufficient for the disposition of this part of the appeal that the respondent has succeeded in establishing the breach of the express terms of clause 5.2.2. for which it contended.

Damages for breach of contract

The respondent claimed four basic categories of loss by way of damages for breach of the agreement. They were:

a)$1,275,520 in respect of purchasing, installing and commissioning the RTO, attempting to make the RTO functional and repairing the existing afterburner;
b)$223,560 being the cost to the plaintiff of its employees involved in attempting to make the RTO functional;
c)$34,000 plus GST as the cost of dismantling and disposing of the RTO; and
d)additional energy costs incurred by the respondent as a consequence of the RTO not being functional (the additional energy costs of operating the old afterburner from 1 January 1999 to 31 December 2013 were $1,448.881 or to 31 December 2018 are $1,712,419).

The judge found that the respondent had incurred the costs of $1,275,520 and $223,560 in purchasing, installing, commissioning and attempting to make functional the RTO. But his Honour held that the claims for damages in those amounts were claims for ‘liquidated damages’ within the meaning of clause 8.9 and so rendered irrecoverable by that provision. The judge also rejected the claim for the cost of dismantling and disposing of the RTO, but on the basis that, if the agreement had been performed, those costs would have been incurred in any event.[52] His Honour, however, allowed a sum for additional energy costs up to 30 June 2009[53] of $1,127,536.00[54] less the purchase price of the RTO ($675,000.00) and of the cyclone ($8,149.00) and the costs of installation ($291,995.94),[55] producing, as I calculate it, a net amount of $152,391.06.
[52]Reasons, [829].
[53]That date being based on a finding that the respondent would be able to replace the existing afterburner and cease to incur additional energy costs associated with it eight years after the date of the RTO shutting down (reasons [872]).
[54]Reasons, [872].
[55]Reasons, 2^nd judgment, [11].

(a) Cost of labour

The appellant complains that, in calculating cost to the respondent of its employees involved in attempting to make the RTO functional, the judge held that ‘directly and immediately that which the [respondent] lost as a result of the abandonment of the RTO project was the benefit of the labour of its own employees’ rather than the cost of employing alternative labour.[56] According to the appellant the proper measure of damage in respect of labour costs was the additional cost of hiring external labour to perform the tasks that the respondent’s own employees would have performed if they had not been diverted to attempts to make the RTO functional. In the appellant’s submission, the external labour costs reflected moneys actually expended by the respondent as a consequence of the RTO not operating as intended. The appellant also relied on the fact that the cost of external labour was the measure of loss in respect of labour costs preferred by Mr Hutton, the respondent’s own expert quantum witness.[57]
[56]See reasons AB15E 323 [828].
[57]See reasons AB15E 321 [822].

I accept that submission. The amount which the respondent paid to hire external labour was $216,494, and so, in my view, the amount allowed as damages for additional labour should be reduced, by the sum $7,066, to that amount.

The appellant contends further that the amount which the respondent paid to its own employees was a sum which had to be paid in any event, and that it was not shown that there was other work which they were prevented from doing, whilst working on the RTO, which occasioned economic loss to Peerless.

I reject that contention. It is contrary to the evidence, which is essayed at paragraph [822] of his Honour’s reasons for judgment.

(b) Additional gas costs

The appellant complains that, in assessing the additional gas costs, the judge assumed that the maximum gas consumption of the respondent’s existing afterburner (with a new burner installed in it) would be 11 gigajoules per hour, and that there was no evidence on which to base that assumption.

I reject that complaint. There was uncontradicted evidence that the gas consumption of the existing afterburner working at full capacity was 11 gigajoules per hour and the judge’s finding was in accordance with that evidence.[58] The judge noted the appellant’s contention that future afterburner gas consumption may be lower than that projected by the appellant, because the appellant will probably fit a more efficient burner to the afterburner. But as his Honour observed, although there was a quote for the new burner, which said that the capacity was 8 gigajoules per hour, there was no evidence as to the gas consumption of the burner with respect to the process flow which would actually be fed to it and, in the absence of additional evidence, his Honour did not could consider that he could speculate further about the matter. Thus his Honour accepted the appellant’s figure of 11 gigajoules per hour as being the gas consumption of the existing afterburner, working at full capacity. I see no error in that.
[58]Hutton’s first Witness Statement: AB 5 C 520-545, especially at AB C 527; Hutton’s second Witness Statement: AB 5 C 542. Transcript of evidence AB 4 B 1356 l24 – 1358 l9. P Johnson first Witness Statement: AB 4 C 12-57, at AB 4 C 43 [156]. P Johnson Supplementary Witness Statement: AB 4 C 49-57 [10]–[16].

The judge found further that the respondent was entitled to and did in fact rely on the expertise of the appellant, and reasonably so understood the effect of the proposal. He also held that if the respondent had warned of the risk to functionality with the result that the RTO might not provide adequate emission control, the respondent would not have agreed to the proposal. His Honour found too that the appellant was aware that it was likely that the respondent would so react and that the appellant had acted advisedly in not informing the respondent of the risk and by putting forward ‘carefully formulated’ terms designed to minimise the appellant’s own exposure to the risk. It followed as his Honour held that the appellant had engaged in conduct in contravention of s 52 of the Trade Practices Act 1974 and s 11 of the Fair Trading Act1985 (Vic). The appellant does not contest those findings.

As to damages, the judge held that the respondent was entitled to such amount of damages as would put it in the position it would have been had it not purchased the RTO, and thus was entitled to recover the costs of acquisition and installation of the RTO, the costs incurred in endeavoring to make it operate and the costs of its demolition and removal.[90] But, as the judge observed, the respondent was not entitled to anything for the lost gas savings since, if it had not purchased the RTO, there could not have been any gas savings.
[90]Gates v The City Mutual Life Assurance Society Ltd (1986) 160 CLR 1, 6-7, 12; Kizbeau Pty Ltd v W G &B Pty Ltd (1995) 184 CLR 281, 291; HTW Valuers (Central Queensland) Pty Ltdv Astonland Pty Ltd (2004) 217 CLR 640, 656[35], (Gleeson CJ).

The appellant contests that analysis on two bases: first, it argues that the claim was time barred; and secondly, it says that, if the claim were not barred, the amount awarded in damages should be reduced by the cost of the RTO.

(i) Time bar

At relevant times, s 82(2) of the Trade Practices Act 1974 provided that an action under s 82(1) for damages for misleading and deceptive conduct could be commenced at any time with three years after the day on which the cause of action that relates to the conduct accrued. By item [20] in Schedule 1 to the Trade Practices Amendment Act 2001, the time period was increased from three years to six years in relation to conduct engaged in on and after the commencement of that item (namely, 26 July 2001) and in relation to conduct before that date (but only if the period of three years had not expired as at 26 July 2001).

The appellant contended below and now contends on appeal that the respondents’ cause of action accrued on 24 October 1997 on entry into the agreement and accordingly that the cause of action was already time barred by 26 July 2001. The judge rejected that contention. His Honour reasoned that it was only after the initial commissioning of the RTO was completed in October 1998 that the respondent appreciated or ought reasonably to have been appreciated that the RTO was inadequate for the task at hand, and therefore only then that the respondent suffered any loss or damage.

The appellant bases its argument to the contrary on the decision of the High Court in HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd.[91] It submits that when a misleading and deceptive representation or other misleading and deceptive conduct results in a plaintiff purchasing a disadvantageous asset which it would not otherwise have purchased, or for which the plaintiff would not otherwise have paid as much as it agreed to pay, the plaintiff suffers loss at the time of purchase and it matters not that the plaintiff may not have appreciated and could not reasonably have been expected to appreciate that the asset was not as represented. It follows, according to the appellant, that the respondent’s cause of action accrued upon entry into the agreement and was barred as at 26 July 2001.
[91](2004) 217 CLR 640, esp 654-655 [28].

I reject the argument. As I apprehend the decision in HTW Valuers, the point which the High Court was making was that, where a plaintiff is induced by misleading and deceptive conduct to pay more for an asset than it is ‘truly worth’,[92] the plaintiff thereupon suffers a loss equal to the difference between the true worth of the asset and the amount agreed to be paid. As their Honours put it:

If the plaintiff had learned the day after entering the contract to buy the Plaza, or the day after completing that contract, that the defendant's conduct had been misleading in the sense ultimately found by the trial judge, it could have started proceedings then and there. There was unchallenged evidence from Mr Dodds that on either of those dates the plaintiff was in fact worse off as a result of the defendant's breach, since the market value was less than the price. It was not necessary to wait for nearly two years to ascertain that some loss had been suffered. The plaintiff could have found out at once that it had bought something which was worth less than that which it had agreed to pay and did pay. It could have recovered at least the difference between the price paid for, and the market value of, the Plaza. The limitation period would have begun to run.[93]

[92]Gould & Anor v Vaggelas & Ors (1985) 157 CLR 215, 255 (Brennan J).

[93]217 CLR 640, 654 [28] (Gleeson CJ, and McHugh, Gummow, Kirby and Heydon JJ), emphasis added.

As can be seen, that reasoning was expressly conditioned on the fact that there was ‘unchallenged evidence that on either of those dates the plaintiff was in fact worse off as a result of the defendant's breach, since the market value was less than the price’ and that ‘[t]he plaintiff could have found out at once that it had bought something which was worth less than that which it had agreed to pay and did pay’. Furthermore, their Honours went on later in their reasons for judgment to contrast the case with one in which the damage alleged consists in the plaintiff purchasing an asset for a particular purpose for which it proves ill adapted. As their Honours there explained:

Nor is the present case - the purchase of an asset at an over-value - similar to Henville v Walker[94] where ‘land was purchased for a specific purpose and ... the development project involved not only the acquisition of the land but also the building and marketing of units’.[95]

In my view, a similar analysis is applicable in this case.

[94](2001) 206 CLR 459, esp 471 [22] (Gleeson CJ).

[95]Ibid [31].

Of course, Henville v Walker was concerned with the amount of recoverable damage as opposed to the time at which it is suffered. The plaintiff, who was an architect, was induced by misleading and deceptive conduct to purchase land for the purpose of constructing home units for sale at a profit. There was nothing wrong with the land as such but it was not possible to sell units once constructed on the land for anything like the profits represented. In the result the plaintiff suffered losses equal to the amounts outlaid in purchasing the land and constructing the units less the price received on the sale of the units. As Gleeson, CJ observed:

No one suggests that it is proper to regard the present as a case where the only relevant effect of the misleading conduct was to induce the purchase of an asset at an over-value, or that the damage is to be measured by comparing the price paid by the appellants for the real estate with the true value of the real estate at the time of purchase.[96] The land was purchased for a specific purpose and, as the respondents' understood, the development project involved not only the acquisition of the land but also the building and marketing of units, and the borrowing of most of the money required for that purpose.[97]

[96]cf Potts v Miller (1940) 64 CLR 282.

[97]Henville v Walker (2001) 206 CLR 459, 471 [22].

Nevertheless, in HTW Valuers the High Court referred to those observations as part of their explanation of the different points at which the limitation period under s 82(2) begins to run in four different types of cases. As there stated, the first class is the sort considered in HTW Valuers, where misleading and deceptive conduct results in the purchase of an asset at an over value. In such a case, time runs from the date of purchase (subject, perhaps, to the plaintiff being able to ascertain the true or real value[98]). The second class of case is of the sort that was dealt with in Wardley Australia Ltd & Anor v The State of Western Australia,[99] in which misleading and deceptive conduct results in the incurrence of a contingent obligation (in that case, as a guarantor). In that sort of case, it is said that no loss is incurred and therefore time does not begin to run until the liability crystalises (as when payment under the guarantee is first demanded). The third class of case is of the sort considered in Murphy & Anor v Overton Investments Pty Ltd,[100] where a contingency is hidden by the defendant’s conduct and might or might not come to pass (for example, where it is within the power of a landlord to increase tenancy charges but, at the time of entry into agreement, the landlord is yet to decide to increase the charges). Once again, it is said that time does not begin to run until the contingency occurs. The fourth class, of which Henville v Walker was put forward as an example, consists in misleading and deceptive conduct which results in the purchase of an asset for a particular purpose for which it is unsuited. And as to that, although the Court did not state expressly the point at which time begins to run, their Honours appear to have concluded that, since there was no evidence of undervalue at the time of purchase, time did not begin to run until losses on the redevelopment were incurred.[101]
[98]See the second of the emphasised sections of the passage from the judgment set out above in paragraph [102].
[99] (1992) 175 CLR 514 at 532 (Mason CJ, Dawson, Gaudron and McHugh JJ).
[100](2004) 216 CLR 388, 401-402 [26].
[101]HTW Valuers v Astonland Pty Ltd (2004) 217 CLR 640, 654 [28]-[31].

In the result, I take the law to be that where a plaintiff is induced by misleading and deceptive conduct to purchase an asset for a particular purpose for which it is unsuitable, and there is no evidence that the asset is worth less than the price agreed to be paid for it, no loss is incurred until and unless the asset is applied to the particular purpose for which it is purchased and is as a result found not to be as the plaintiff was induced to believe that it would be.

I am encouraged in that view by the analysis undertaken by Sackville J in Karedis Enterprises Pty Ltd & Anor v Antoniou & Anor,[102] in which his Honour considered the permissibility of extending (or more accurately applying by analogy) the reasoning in Wardley to cases in which a plaintiff is induced by misleading and deceptive conduct to purchase an asset for a particular purpose. In that case the asset was a lease and the particular purpose was the use of the leased premises for the conduct of a café. His Honour held that:

Whatever the position in relation to the acquisition of an asset, the present is a case where the Antonious obtained both advantages and disadvantages from the lease transaction, which they were induced to enter by the appellant's misleading conduct. It was not the entry into the lease which of itself produced the loss. The lease may have enabled the lessees to pursue a profitable undertaking. The losses claimed by the Antonious flowed from the pursuit of a particular business which they were encouraged to undertake by the appellants' representations. Only when the course of events allowed the lessees the opportunity to ascertain that the business could not succeed was loss sustained in the relevant sense.
In a case of this kind, in order to determine whether loss had been sustained at a particular stage after the lease had been entered into, I think it is necessary to inquire whether the lessees had ascertained, or could reasonably have ascertained, that they were worse off than if they had not entered into the transaction. In the circumstances of the present case, it is difficult to see how the Antonious, acting reasonably, could have failed to ascertain by the second half of 1989 that they had sustained losses in the relevant sense. However, I agree that the matter should be remitted to his Honour to make findings of fact on the issue.[103]

[102](1995) 59 FCR 35.

[103]Ibid 48, emphasis added.

I do not suggest that time does not run until the plaintiff discovers, or could on reasonable inquiry have discovered that damage has been sustained. Although the High Court is yet to decide the point squarely, its rejection is implicit in what was said in Wardley about the English approach to the purchase of property at an undervalue, and in what was said in HTW Valuers about the distinction between the purchase of property at an undervalue and a transaction in which loss is no more than contingent at the time of entry into the transaction.[104] Similarly, in Hawkins v Clayton[105] the High Court rejected the idea that, in the case of claims in negligence for economic loss, time does not run until the plaintiff discovers or could by reasonable inquiry have discovered that damage has been sustained (and the High Court recently reiterated that view in Commonwealth v Cornwell).[106] In the absence of more specific guidance, I assume that the same applies to cases for misleading and deceptive conduct.
[104](1992) 175 CLR 514, 530-531.
[105]Hawkins v Clayton (1988) 164 CLR 539, 548 (Mason CJ and Wilson J), 587 (Deane J), 599-600 (Gaudron J).
[106](2007) 81 ALJR 933, 936 [6].

But as the High Court also emphasised in Commonwealth v Cornwell, with cases for economic loss there has to be some actual damage before the cause of action accrues, and there is no actual damage before the existence of loss is ascertained or ascertainable.[107] So, although the prospect of loss may be inherent in a transaction, it is not until the loss has been necessarily and irretrievably sustained that the cause of action accrues.[108] Accordingly, apart from ‘transaction cases’, where property is sold or acquired at a disadvantageous price,[109] or the opportunity of the lucrative exploitation of contractual rights or of some other commercial opportunity is lost,[110] it is usually not unless and until a transaction generates loss that time begins to run.[111]
[107]Ibid 938 [16], citing Wardley Australia Ltd v Western Australia (1992) 165 CLR 514, 527 (Mason CJ, Dawson, Gaudron and McHugh JJ).
[108]Commonwealth v Cornwell (2007) 81 ALJR 933, 941 [36].
[109]HTW Valuers v Astonland Pty Ltd (2004) 217 CLR 640.
[110]Sellars v Adelaide Petroleum NL & Ors (1994) 179 CLR 332, 349-350 and 355.
[111]Commonwealth v Cornwell, ibid [38].

In this case, the respondent was induced by the appellant’s misleading and deceptive conduct to purchase a RTO for $675,000. So far as appears from the evidence, the RTO was worth that amount. Accordingly, this was not a transaction case in which property was acquired at a disadvantageous price. But it was one in which the respondent, acting in reliance upon the appellant’s misleading and deceptive conduct, spent further sums of approximately $600,000 and $223,000[112] in attempting to install and commission the RTO. In the result, the respondent suffered loss when it was left with a device that was useless for the purpose for which it was acquired and cost a further $34,000 plus GST to dismantle and take away.
[112]Reasons: 2^nd Judgment, [12].

It may be that the prospect of loss was inherent in the transaction from the outset. Presumably, with the right guidance, the respondent could have ascertained at the outset that the RTO was never going to work in the application for which it was acquired. But that does not mean that loss was incurred when the RTO was acquired. As the High Court said in Wardley, that is not an acceptable basis of identifying loss where the contract measure of damages is not applicable.[113]
[113](1992) 175 CLR 514, 531.

It is also true that, where relief is claimed on the basis of misleading and deceptive conduct which induces entry into a transaction, and a series of losses flows from the transaction, the cause of action for damages for misleading and deceptive conduct may accrue at the time of incurrence of the first loss (even if the plaintiff is unaware that a cause of action exists).[114] But, as has been seen, in this case there was no loss upon entry into the transaction. There was no evidence that the RTO was worth any less that the respondent agreed to pay for it. And so, just as with the architect in Henville v Walker, whose loss was held not to have come home until he developed and attempted to sell the units on the land that he was induced to purchase; or the café proprietor in Karedis Enterprises Pty Ltd v Antoniou, whose loss was held not to have been suffered until he used the leased premises for the café business that it was represented would be productive of profits, the existence of the respondent’s loss was not ascertained or ascertainable until the respondent had incurred the costs of installing and commissioning the RTO for the purpose for which it was falsely represented to be suited.
[114]HTW Valuers v Astonland Pty Ltd (2004) 217 CLR 640, 655 [28]-[33]; Christie v Purves [2007] NSWCA 182 [35]-[41].

Counsel for the appellant submitted that upon entry into the agreement the appellant came under an obligation to pay the purchase price of the RTO and thus that it suffered loss at that point. Alternatively, he pointed to the fact that the appellant paid instalments of the purchase price before October 1998 and submitted that the respondent suffered loss at each of those points. But those submissions take the matter no further. On the evidence, there was nothing to show that the RTO was worth any less than the price which the respondent agreed to pay for it. There was no loss necessarily and irretrievably sustained until the respondent incurred the costs of installing and commissioning the RTO for the purpose for which it was falsely represented to be suited.

Finally, counsel for the appellant argued that, upon entry into the agreement, the respondent lost the opportunity to purchase and install a two stage recuperative afterburner in lieu of the RTO, and thus suffered loss at that point. I do not accept that argument.

Ironically, the appellant contended before the judge below that:

…the [respondent] would not necessarily have purchased a two stage recuperative afterburner. The capital cost was quite high, as were the annual gas costs, compared to the RTO. It would have been many years before the gas savings made the capital investment worthwhile and, subject to working out the figures, there may well have been no saving at all. The [respondent] may well have found it more advantageous to do what it is presently doing, by which I assume the [appellant] was referring to the continued use of the existing afterburner.[115]

The judge rejected that contention and found that the respondent would have entered into a contract for a two stage recuperative afterburner.[116] Now the appellant seeks to say that the respondent’s loss was ‘necessarily and irretrievably sustained’ at that point. The turn around is remarkable.

[115]Reasons, [917].

[116]Reasons, [914] and [919].

But be that as it may, in my view the answer to the appellant’s contention is the same as that which was given by High Court in response to a similar argument in Commonwealth v Cornwell.[117] On the evidence, it remains a matter of speculation as to whether the respondent would have been better or worse off if it had purchased a two stage recuperative afterburner. As the judge put it:

The evidence did not enable me to find the amount of the benefit the plaintiff had lost in not purchasing a two stage recuperative afterburner rather than the RTO.[118]
…as counsel for the [appellant] was at pains to point out, there was simply no evidence as to what installation of the two stage afterburner proposed by the [respondent] would have required. This was not a consideration in vacuo, it required attention to the work required at the plaintiff’s plant to install and commission that afterburner. Modifications to the existing ductwork might have been required. New support structures and operating procedures might have been required. The two stage afterburner may not have fitted properly into the available space, thus requiring building works. Counsel for the [respondent] of course accepted that some modifications would be required and indeed accepted that expense would inevitably be incurred, but he maintained that the total cost of any such infrastructure/installation works would not exceed those actually incurred for the RTO. Although that may well have been the case, the argument is based on speculation rather than evidence. For this reason, I am of the view that the inference, and finding, sought by the [respondent] is not open or reasonably to be made. Having failed to prove the amount it would have spent on installation/infrastructure costs of the two stage afterburner, it is not possible to calculate the [respondent’s] loss under this head of damage.[119]

[117]Commonwealth v Cornwell (2007) 81 ALJR 933, 941[38].

[118]Reasons, 2^nd Judgment at [13].

[119]Reasons 2^nd Judgment at [31].

In that state of affairs, it could not be said consistently with the remarks in Sellars v Adelaide Petroleum NL[120] that in 1997 the respondent sustained loss of a commercial opportunity which had some value, as a matter of the degree of probabilities and possibilities.[121]

(ii) Reduction of damages for misleading and deceptive conduct

[120](1994) 179 CLR 332, 353.

[121]Commonwealth v Cornwell (2007) 81 ALJR 933, 941 [38].

Counsel for the appellant contended that, even if that were so, the judge ought to have deducted from the damages awarded under s 82 of the Trade Practices Act the amount which it would have cost the respondent to purchase and install a two stage afterburner.

As I understood the argument, it was that, because the damages to which the respondent was entitled were limited to the amount necessary to put the respondent in the position in which it would have been if the appellant had not engaged in the misleading and deceptive conduct and, because the judge found that, in the absence of the misleading and deceptive conduct, the appellant would have purchased a two stage after burner, the amount of damages should be reduced by the cost of the two stage afterburner. The argument then proceeded that, because the respondent failed to prove that the costs of purchasing and installing a two stage afterburner would have been any less than the costs of purchasing and installing the RTO, the respondent had failed to prove that it had suffered any loss and the judge had erred by awarding any damages.

In my view that argument is untenable. The respondent suffered loss in that it was induced by the appellant’s misleading and deceptive conduct to spend money in purchasing and installing a device which was useless for its purpose and which once installed had no value to anyone else. Consequently, to put the respondent back in the position in which it would have been, required that the respondent be paid damages equal to those moneys which it had outlaid; not those moneys less an amount which it might or even would have spent on purchasing something else which was suited to its purpose. The appellant’s argument amounts to saying that, if a plaintiff is induced to buy something which is worthless in place of something else at the same price, the plaintiff’s recoverable damage is nil.

It would be different if the proper measure of damages were the value of a commercial opportunity forgone. Then it would be necessary to bring to account against additional revenue or costs savings foregone the capital expenditure which would have had to be incurred in order to generate that additional revenue or those cost savings. But, as has been explained, in this case it could not be said consistently with the remarks in Sellars v Adelaide Petroleum NL[122] that the respondent sustained loss of a commercial opportunity which had some value.
[122](1994) 179 CLR 332, 353.

Conclusion

For the reasons I have given, I consider that the judge should not have rejected the respondent’s contractual claim for damages for costs incurred in purchasing, installing and commissioning the RTO (ie $1,275,520). Contrary to his Honour’s view, I do not consider that those costs were “liquidated damages” within the meaning of clause 8.9.

I consider that the judge was right to reject the respondent’s contractual claim for $223,560 for the costs of labour incurred in attempting to make the RTO operate. As I see it, however, the claim was properly to be rejected because it was a claim for ‘consequential loss’ within the meaning of clause 8.9; not ‘liquidated damages’ as the judge held.

In my view, the judge should not have allowed the respondent’s contractual claim for additional gas costs, which his Honour assessed in the sum of $152,391.06. In my view, it too was a claim for ‘consequential loss’ within the meaning of clause 8.9.

As to the trade practices claim, I consider that the judge was correct in allowing as damages the respondent’s costs of acquisition and installation of the RTO; all but $7,066 of the costs of labour incurred in endeavouring to make it operate; and the costs of its demolition and removal, in the amounts which his Honour assessed.

It follows, as I see it that, although the respondent would have been entitled to recover as damages for breach of contract a larger amount than the judge was prepared to allow, the amount was still less than the amount of damages which his Honour properly awarded in respect of the respondent’s trade practices claim (which the respondent elected to pursue to the exclusion of its contractual claim).

In the result I would allow the appeal in part, and vary the judgment below by reducing the amount of damages awarded by $7,066. Otherwise, I would dismiss the appeal and the cross-appeal.

ASHLEY JA:

I agree with Nettle JA, for the reasons which his Honour gives, that the appeal should be allowed in part and that the cross-appeal should be dismissed.

DODDS-STREETON JA:

I have had the benefit of reading in draft the reasons prepared by Nettle JA. I agree with his Honour’s disposition for the reasons he states.

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[2008] VSCA 26

26 February 2008