Fletcher Insulation (Vic) Pty Ltd v Renold Australia Pty Ltd
[2006] VSC 269
•28 July 2006
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 4172 of 2004
| FLETCHER INSULATION (VIC) PTY LTD (ACN 083 169 402) and | Plaintiffs |
| V | |
| RENOLD AUSTRALIA PTY LTD (ACN 004 270 179) | Defendant |
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JUDGE: | BYRNE J | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 22, 23 February, 1, 2, 3, 6, 7, 8 March 2006 | |
DATE OF JUDGMENT: | 28 July 2006 | |
CASE MAY BE CITED AS: | Fletcher Insulation (Vic) Pty Ltd v Renold Australia Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2006] VSC 269 | |
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Sale of Goods – Sale of chains for production line – Chains failed –Whether term as to reasonable fitness – Whether breach of term – Whether chain failure due to seller’s breach – Measure of damage – Cost of replacement – Loss of production.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr L Glick SC | Clayton Utz |
| For the Defendant | Mr RL Berglund QC with Ms B Lim | Norris Coates |
TABLE OF CONTENTS
The Supply Agreement..................................................................................................................... 3
The Facts......................................................................................................................................... 3
The terms........................................................................................................................................ 8
The Chain Failure............................................................................................................................ 11
The Cause of the Failure............................................................................................................. 16
Mr May’s Hypothesis.............................................................................................................. 22
Misalignment........................................................................................................................... 24
Want of Inspection and Maintenance...................................................................................... 25
Undue stress on the pitches..................................................................................................... 26
Broken Tension Rod................................................................................................................. 26
A Breach of the Supply Agreement.......................................................................................... 28
Negligence Issues............................................................................................................................. 28
Renold’s duty of care to Fletcher.............................................................................................. 28
Breach of duty.............................................................................................................................. 29
Contributory Negligence........................................................................................................... 29
Proportionate liability................................................................................................................ 29
Contribution from Laminex....................................................................................................... 30
Loss and Damage............................................................................................................................. 30
Has Fletcher suffered any loss?................................................................................................. 30
Cost of replacement of the chains............................................................................................. 33
Consequential losses................................................................................................................... 34
HIS HONOUR:
In 2001 there was a factory in Dandenong which manufactured fibreglass insulation products. Part of this process involved passing the product through large ovens on chain conveyors. There were in fact two chain assemblies for each oven, an upper and a lower chain assembly; and two ovens, the D1 oven and D2 oven. Each chain assembly comprised two chains connected by flights at every link. This case concerns the chains which were purchased for the D1 oven in or about August 2001 and installed during the following Christmas shutdown and which failed after about 14 months in service. The fact of their failure was not in issue nor the fact that this failure was premature, so that the chains required replacement. The question here is whether the supplier, the defendant, Renold Australia Pty Ltd, trading as Ace Chains (“Renold”), should bear the cost of this as well as the consequential losses claimed by the plaintiffs.
The contract for the supply of the D1 chains (“the supply agreement”) was made on or about 29 August 2001 with the secondnamed plaintiff, then called Amatek Ltd, which conducted the factory under the trade name, “Insulation Solutions”. This company is now called Laminex Group Ltd and I shall refer to it in this judgment as “Laminex”.
By a sale agreement which came into effect on 1 July 2002, that is some six months after the installation of the chains and before their deficiencies became apparent, Laminex sold the Insulation Solutions assets to the firstnamed plaintiff, then called Insulations Solutions Pty Ltd. Insulations Solutions Pty Ltd has subsequently changed its name to Fletcher Insulation (Vic) Pty Ltd and I shall refer to it in this judgment as “Fletcher”.
The deficiencies in the chains became apparent in February 2003 and they were replaced, the lower chains in July 2003 and the upper chains in November of that year, with chains provided by LK Morgan Conveyor Co Pty Ltd (“Morgan”). I shall refer to these chains as “the new Morgan chains”.
By deed of assignment dated 31 December 2003, Laminex on 1 January 2004 assigned to Fletcher its “right, title and interest in all Claims arising out of or in connection with the Supply Agreement or in connection with the design, manufacture and supply of the two chains...”
The point taken on behalf of Renold when the matter was called on for trial in February was that the supply agreement was entered into with Laminex but that any loss was suffered by Fletcher. At that stage, the only plaintiff was Fletcher which sought to overcome this difficulty by asserting that it might sue as assignee of the right of Laminex as contracting party. In its amendment of 24 February 2006 Fletcher added Laminex as a necessary party for the purpose of enforcing this assignment.[1] The alternative basis[2] of the Fletcher claim was for damages for Renold’s breach of duty of care owed to it.[3]
[1]Statement of claim para 3A.
[2]The Fletcher claims based on contraventions of the Trade Practices Act and the Fair Trading Act were not pursued.
[3]Statement of claim paras 19-21.
With the assistance of counsel it has been possible to identify the issues which this litigation raises –
(a) The Supply Agreement
·Was the supply agreement entered into between Laminex and Renold one whereby Renold had a design obligation?
·Was it a term of the supply agreement that the chains be reasonably fit for use in the Insulation Solutions ovens?
·Was there a term as to merchantability of the chains?
(b) The Failure of the Chains
·What was the cause of the failure of the chains?
·Was there a breach of the terms of the supply agreement?
(c) Negligence Issues
·Did Renold owe to Fletcher a duty of care in the design and manufacture of the Ace chains?
·Was there a breach of that duty?
·Is Fletcher guilty of contributory negligence?
·Should the liability of Renold to Fletcher be apportioned between Renold and Laminex as concurrent wrongdoer pursuant to Wrongs Act 1958 Part IVAA?
·Is Renold entitled to contribution from Laminex pursuant to Wrongs Act 1958 s 23B?
(d) Loss and Damage
·Has Fletcher suffered any loss?
·Do these losses include any and what sum as the cost of replacement of the chains?
·Is Fletcher entitled to any and which consequential loss?
The Supply Agreement
The Facts
The D1 oven was first installed in 1980 with conveyor chains provided by a firm called Rexnord. These Rexnord chains were operated for some 10 years until 1990 when they were replaced by chains manufactured by Morgan (“the first Morgan chains”).
In February or March 1999, Simon Peter Davidson, a sales representative of Renold, made what he described as a cold call at the Dandenong factory and inspected the D1 oven conveyor system in operation. Mr S Davidson was provided with a sample of the first Morgan chains and he carried out a wear check on its components. His report on this was submitted on 17 March 1999. At about the same time, he provided to Laminex a quotation for the supply of spare links for this chain. But nothing came of this.
In April or May 2001, Laminex formed the view that the first Morgan chains for the D1 oven were nearing the end of their life. Its engineering manager, Ajay Chandnani, then instructed a technical officer Ronald George Bodley to seek quotations for their replacement. This was done by a fax dated 25 July 2001 which was sent to a number of manufacturers, and quotes were received from six of them, including Morgan, GCB International and Renold. The Renold quotation was dated 30 July 2001.
About the same time, Laminex called for tenders to replace the chains for its other oven, the D2 oven. Although these chains were similar to those on the D1 oven, the contract for the D2 chains was let to another manufacturer. This decision was made because it was not thought prudent to put all their eggs in one basket, as it were, and because the successful tenderer, GCB International, could supply the flights as well as the chains themselves.
In the Laminex fax of 25 July 2001, Mr Bodley included two extracts of a drawing of the links of the first Morgan chains. In this context links are sometimes called pitches. He may also have provided to Renold a large size drawing from which the extracts were taken, but nothing turns on this. The drawings showed the dimensions of the pitches. About this time Mr S Davidson again visited the Dandenong factory and spoke with Mr Bodley about the performance of the first Morgan chains. Mr Bodley told him that there were problems with them: there were problems with pitching, that is, the chains were not lining up square, and, second, they were experiencing lubrication problems. Mr S Davidson said that he told Mr Bodley that Renold could produce a chain with an improved lubrication system which would assist with the lubrication and wearing problems. Mr S Davidson said that he then received a copy of Mr Bodley’s large size drawing, number 801-05-009-162, which had been prepared for the manufacture of the first Morgan chains in 1990. The drawing extracts which were faxed to prospective tenderers on 25 July were A4 extracts from this large drawing showing Section A and part of the plan view of the pitches. Mr S Davidson thought he may also have been provided with samples of the Morgan pitches.
In the Laminex 25 July fax prospective tenderers were also requested to provide information as to the proposed materials for the pins, rollers and bushes. They were told that link plates and attachments might be of mild steel.
The request for quotation required a price for 378 links for the upper chains and 378 links for the lower chains for the D1 oven for delivery in November 2001. The Renold quotation is dated 30 July 2001. It included a price for the chains as specified of $40.50 per pitch plus GST. It then went on to provide a price for a non-conforming chain which it described as a special chain. The special chain which was offered for both the upper and lower chains would have six features which departed from the design of the first Morgan chains:
“1.Open up the pin & bush clearance, while still maintaining correct pitch
2.Bush to extend out past the inner plate to give clearance between the inner & outer side plate
3. Bush to have 2 slots in either end to allow oil to flow to the pin
4. Bush to have 2 oil holes to allow oil to flow to the roller
5.Bush to be made 38.1mm dia. to give the bush a thicker wall/thicker wearing area
6.Bush can be made from either G431 heat-treated Stainless Steel or En 36a alloy casehardened material”
The quotation, then, offered to provide the special chain made in G431 stainless steel for $53.50 per pitch plus GST. As a further alternative, the special chain was offered in EN36a alloy for $50.50 per pitch plus GST. The quotation then concluded with the following:
“Ron, after talking to yourself & your maintenance people, I feel that although the initial cost of the special feature chains are higher than the standard chain, I believe that the features would help with the lubrication/wearing problems you are currently having, therefore increasing the chain life.”
There appear to have been some negotiations after the submission of this first quotation and these are recorded in version 2 and version 3 of this quotation. The third and latest version, No 78-3-3, is dated 6 August 2001. The number of pitches in this quotation was 756 for each of the upper and lower chains. In terms of the features of the special chain, the material of the bush was to be of EN36a alloy steel case hardened and tempered to 58-62Rc; the roller was to be of steel case hardened and tempered to the same hardness 2-3 mm deep. The price was reduced to $46.50 per pitch plus GST for both the upper and the lower chains.
Laminex was a company within the Owens Corning Group. Owens Corning is a substantial United States corporation with considerable experience and expertise in the manufacture of glass products and the operation of factories similar to that of Insulation Solutions. Before accepting the Renold offer and placing an order on Renold, Mr Bodley submitted the design changes contained in the Ace special chains quotation to the parent company for comment. On 21 August Bud Snider of Owens Corning sent his comments. Mr Snider described himself as a specialist in ovens and flights. In his response, he addressed the two features of the special chains; the material for the bushing and the extensions of the bushing. Mr Bodley considered his comments and wrote to Ace’s chain products estimator, Peter John Davidson, in these terms:
“They [Owens Corning] expressed interest in the idea of the extended bushings with slots in them to allow oil to penetrate to the pin, but their main comment on this which I feel is fairly valid, is that the smaller diameter hardened bushing with slots may act like a cutter and grind into the softer side plates. I would like to talk to Simon about this as soon as he gets back next week so could you please leave a message for him to contact me as soon as he is available.”
Mr P Davidson responded the same day in these terms:
“So far we have found that the bush design with oil slots has not caused any problems with gouging the outer side-plates, in the chains that we have previously manufactured, using this design.
The added lubrication around the bush and pin has helped in this regards as there has now been the introduction of improved lubrication between parts which were previously ‘running dry’.
The concern raised by your parent company is appreciated and has been noted for discussion upon Simon’s return.”
It seems that Mr Bodley was not altogether comforted by this response. On 24 August 2001 he again wrote to Mr P Davidson:
“Thank you for the drawings of the chain that you sent to us yesterday. Currently we are very concerned with the point that I mentioned to you in my last fax regarding the possibility of the extended hardened bush wearing into the mild steel side-plates. At the time of discussion with Simon [Davidson] we had not considered the possibility of that happening, but now that the point has been raised, it has to us now become a distinct possibility. When Simon originally proposed this concept of the extended bushes with slots, the only thing that we could discern that could go wrong is that the slots could very quickly block with resin, glass and dry oil which currently coats the externals of our oven chains. But our reasoning was that if this did happen we would be no worse off than we are currently as regard to the lack of lubrication to the pin. But now we have the very likelihood of being worse off because not only can the slots block but we may gouge into the side-plates and that is something that we are not willing to chance. When Simon comes back on Monday could you please get him to contact me on this matter.”
In his evidence, Mr Bodley did not recall taking this matter further. Mr S Davidson said that he told Mr Bodley generally that the possibility that the extended hardened bush would wear into the mild steel plates was remote. In the witness box he said that 90% of the conveyor chains that Renold manufactured had extended bushes and that he would have told Mr Bodley that this was their standard design.
Laminex had already placed its order number 41376 dated 15 August 2001 upon Renold for the manufacture and delivery of 780 pitches for each of the upper and lower chains. As a matter of chronology, this order was placed after the Renold special chain proposal had been submitted to Owen Corning for comment, but before their comment was received. The Laminex order contained the following conditions:
“1) Att Chain 6” Pitch C/W 4” Rollers’.
2) Based on drawing 801 05 009-161.[4]
[4]It will be seen that this drawing number is different from that provided to tenderers which is referred to at para [12] above. Nothing was made of this by any party.
3) Improvements: Per Quotation;
Ref #78-3-3 on 06/08/2001
4) Drawings to be supplied and approved prior to manufacture.
5) Deliver To:
Bayline Industries
6 Reserve Rd
MELTON 3337.”
The Laminex order form contains a number of printed conditions on the back but nothing turns on these.[5]
[5]Defences depending upon these terms were abandoned at trial.
Pursuant to condition (4) of the order Renold prepared and submitted two drawings, BC 5603-1 and BC5603-2, for approval. These were approved and signed and returned to Renold on 29 August 2001.
The other matter which was resolved at this stage was the materials to be incorporated in the special chain. The materials specification that Renold sent to Laminex on 21 August was submitted by Laminex to an independent evaluator[6] and its report was sent to Renold on 13 September. The response of Renold was to modify slightly the materials to be used. These were described in the Renold fax of 14 September in these terms:
[6]Mr Robin May who was the principal expert witness called on behalf of the plaintiffs at trial.
“ROLLER/Material – S1214, Carbo nitrided to 60 Rc, 2-3 mm deep, tempered back to 56 Rc.
BUSH/Material – En36a, Carburised to 60 Rc, 40 thou deep, tempered back to 55 Rc.
PIN/Material – Either S1214 or 8620, Carbo nitrided to 60 Rc, 40 thou deep, tempered back to 52Rc.”
The fax continues:
“We believe that the materials we are using (As per our owners – Renold, the largest chain manufacturer in the world use) are more than adequate for this style & application of chain.
The critical factor with your chains is the lack of lubrication getting to round components. We believe the proven design we are offering is the biggest advantage over our competors. – No motorcar engine runs for long when there is no lubrication, no matter how good the materials are.”
The material for the side plates remained as mild steel. This material specification was confirmed by Renold in its fax of 17 September 2001.
Ace, then, set about manufacturing the chains for delivery in late 2001.
The terms
Against this background, which was largely uncontroversial, Laminex pleaded[7] that it was an express or an implied term of the supply contract that the chains as designed, manufactured and supplied, would be of merchantable quality[8], and, further, that it was an implied term that the chains would be reasonably fit for their specified purpose.[9] In its defence[10], Renold denies that it had a design obligation; its contract was merely to manufacture and supply the chains[11]. It does not admit the express term as to merchantability[12] but admits the implied terms as to merchantability and as to fitness for a purpose.[13] Neither party in its pleading specifically identifies this purpose. It appears, however, from paragraph 6 of the statement of claim that Laminex sees this purpose as being that for use in its Insulation Products manufacturing process. In final address, counsel for Renold put it that the purpose was for use in the D1 oven, provided it was properly installed, operated and maintained. Nothing much may turn upon this, but I would prefer the purpose to be expressed so as to accommodate the operating environment in which Mr S Davidson knew it was to operate. This would include a regard to the nature of the D1 oven, of the fibreglass product it was to operate with, including the abrasive residue which it produced. I would, however, accept that, if the chain was reasonably fit for that purpose, Renold would not be in breach if the chain failed due to inadequate installation, operation or maintenance. It is that I would see these as breach or, perhaps, causation issues rather than as pre-conditions for the existence of the term as to fitness.
[7]Third further amended statement of claim filed 1 March 2006.
[8]Statement of claim, para 7(b), 8(b).
[9]Statement of claim, para 8(a).
[10]Defence to the third further amended statement of claim filed 27 February 2006.
[11]Defence, para 6.
[12]Defence, para 7.
[13]Defence, para 8. It says as to the term as to fitness, that this arose in order to give business efficacy rather than under s 19(a) of the Goods Act 1958.
In argument, the principal point of difference emerged as to whether Renold had a design function or whether it was simply to manufacture the chains in accordance with the approved drawings and the specified materials.
It is clear from the correspondence between the parties that, by suggesting in its quotation that Laminex purchase a special chain with a modified specification, Renold assumed a design function and the consequent obligations of a designer in these circumstances. These obligations include a warranty as to fitness for the disclosed purpose. That this is a feature of the contractual arrangement between the parties is apparent from the terms of the Laminex order. It is admitted by Renold in its defence.
What was put on behalf of Renold was that, by submitting the design of the special chain to its US parent for expert comment, Laminex acted upon this comment rather than upon the recommendations of Renold. The terms of the correspondence do not support such a contention; it is clear that the Laminex order was placed on 15 August 2001 and that Renold issued its production invoice on the same date, about a week before Mr Snyder’s response was received, although I place little reliance upon this. More important, it seems clear from the tenor of the correspondence which followed 15 August 2001 that the detail of the specification was still being worked out. It is not necessary for me to determine that a binding contract had been entered into on 15 August for, even if that were the case, it is apparent that each party saw itself as ready and able to modify the specification as late as mid-September. In my assessment, any concerns of Mr Bodley and of Laminex about the fitness of the design of the special chain were dispelled by the confident assurances of Renold and its staff in August. I am satisfied that Renold warranted that its special chain design was reasonably fit for the purpose for which Laminex required the chains, that is, for the operation of the D1 oven. This purpose and the operation of the oven were well known to Renold from the information supplied to it in the correspondence and from the information acquired by it upon the inspections of the oven in operation by Mr S Davidson in 1999 and again in 2001.
In the pleadings and in argument no distinction was drawn between the design of the special chains, including their configuration and dimensions, and the specification of the materials from which they were to be constructed.
The materials for the first Morgan chains, as appears in drawing 801-05-009-161, were as follows:
Rollers – CS 1030 min case hardened 0.030" RC 60-62
Bush – S 1214 min case hardened 0.030" RC 60
Pin – AS 1214 min case hardened 0.030" RC 60
Side Plates – AS 1204 GE 250 65mm x 6mm flat
In the Laminex invitation to quote of 25 July 2001 this may not have been disclosed to tenderers, but, in any event, they were asked to propose appropriate materials. The Renold materials specification was given in circumstances where there arose a warranty that the materials were reasonably fit for the purpose of use with the proposed special chains for operation in the D1 oven.
As I have mentioned, the Renold materials specification was submitted to independent evaluation. Pursuant to the recommendation that the steel for the pins and rollers be of a higher grade than proposed in the quotation, Renold modified the materials for these components. It is apparent from the evaluation that the parties contemplated that the chains would be operating in an oven at between 300 and 400°C. The Renold materials modifications were proffered in its fax of 14 September which I have quoted above[14] and in its fax of 17 September. The terms of these faxes, including the assurances contained in them, satisfied Laminex which apparently accepted the materials specified. Again, I am satisfied that these materials were proffered and accepted with a warranty as to their fitness for the purpose of Laminex to which I have referred.
[14]At para [20].
In argument, there did not appear to be a point taken by either party as to the significance of the provenance of the implied term as to fitness – whether it is implied at common law or by s. 19(a) of the Goods Act 1958. I see no point in addressing this matter.
I am satisfied, too, that there is in the supply contract an implied term as to merchantability.
The Chain Failure
I attach to this judgment a copy of Renold approved construction drawing BC 5603‑1[15] and schematic sketches prepared by Robin Frank May of CMET Pty Ltd of a vertical section and a horizontal section through the chain roller assembly. In concept, it is rather like a bicycle chain with a series of links held together by pins. The significant difference between it and a bicycle chain is due to the presence of a wheel or roller at each pin. It will be seen from the sketch that the roller is a wheel which revolves around a relatively stable shaft or bush. This bush is fixed on each side of the roller to the inner side plates. Within the bush and extending beyond it on each side of the roller is a pin which itself is fixed to the outer side plates. As the chain moves forward the roller rotates against the relatively fixed bush.
[15]Approved construction drawing BC5603-2 was for present purposes identical.
The chains were each 115 metres long and ran around two sprockets, one of which was driven by a motor. The turning of the driven sprocket wheel meant that the pitches as they approached it were in tension.
I have mentioned that there were two chain assemblies for the D1 oven, an upper chain assembly and a lower chain assembly. In fact there were four chains, for the upper chain assembly comprised a pair of chains running in parallel around the same sprocket wheel shaft. Each pitch included two side plates: an inside side plate and an outside side plate. The jointing of the pitches was such that, at that point, each of the inside side plate and the outside side plate overlapped. This meant that, at this overlap, there were two inside side plates, an inner and an outer inside side plate, and two outside side plates, an inner and an outer outside side plate. This appears from the attached drawing and sketches. Each of the chain assemblies comprised two chains running in parallel. These two chains were connected horizontally by a series of metal plates or flights. In order to provide a point of connection for these flights, the inside side plates (both inner and outer) had a flight support lug. This was made by bending part of the vertical inside side plate to a right angle so that, on the top of each of the pitches, there was a horizontal area upon which the end of each flight was supported and to which it was bolted. These inside side plates (both inner and outer) with their lugs were referred to as the K1 side plates, as distinct from the outside or plain side plates (both inner and outer) which were referred to as plain side plates. Apart from these lugs, the K1 side plates were identical in dimension and profile to the plain side plates.
So as to facilitate the bending of these K1 plates to provide the flight support lugs, the manufacturer had cut a notch on the vertical plate adjacent to the lug. This was to relieve stresses in the metal during the bending process.
Each of the upper and lower chains was continuous and ran around a sprocket at the entry end, that is, the end from which the chain and the product entered the oven, and the exit end, that is the end from which the product emerged and which was powered by the motor. Since each of these chains ran in pairs, there were at each end two sprockets for the upper chain and two for the lower chain. These pairs of sprockets were at the ends of a common sprocket shaft. The lower chain flights carried the product as it passed through the oven; the upper chain flights served to compress it.
The chains failed – all four of them within an unacceptably short period. This was not in dispute. For the purpose of analysing the nature and extent of these failures and of identifying the cause or causes, each party engaged and called as a witness an expert metallurgist engineer. The plaintiff's engineer was Mr May of CMET and the defendant's Harry Better of HRL Technology Pty Ltd.
The experts were not in disagreement as to the nature and extent of the failures. Mr Better, in his report of April 2005, accepts without adverse comment the CMET reports of 16 May 2003 and 4 July 2003. In these reports Mr May identifies the following areas of concern:
(1)Side plate fractures on the lower chains. These were the result of metal fatigue which initiated at the notch of the K1 side plate. Similar cracking was observed in the upper chain but no fractures.
(2)A serious wear issue was identified which had caused severe degradation of the side plates. This was observed at the following locations:
(a)Roller/side plate interface. This appeared to have been caused by the rotation of the hub against the softer steel of the inner side plates.
(b)Bush/side plate interface. This appeared to have been caused by the rotation of the bush against the soft steel of the outer side plates.
(c)Bush/side plate interface. This appeared to have been caused by the rotation of the case hardened bush in the mild steel inner side plates.
(d)Pin/side plate interface. This appeared to have been caused by the rotation of the case hardened pin in the mild steel outer side plates.
(e)Sprocket tooth/side plate contact interface. This appeared to have been caused when the loss of fit led to misalignment of the chain as it passed over the sprocket.
Before I turn to the evidence as to the cause or causes of these observed failures, I will address a preliminary objection made by counsel for the plaintiffs. He contended that I should decline to accept the report of Mr Better and his evidence on the ground that his report was defective in form. This is because the report does not set out sufficiently the assumptions he made and does not show how he arrived at the opinions which he professed to hold. I ruled that I would accept the report in evidence but that the matters now complained of would bear upon the weight which I would give to the witness's conclusions.
It is true that the Better report is most unsatisfactory. In paragraph 2 he sets out the factual basis for his conclusions. These are:
·the two CMET reports to which I have referred;
·an ERTS[16] report VMM03-8022 evaluating certain unidentified new chain links; and
·a Renold file note on the chain failure.
In addition, “a number of worn and fractured components from the broken D1 chain were made available to [him] for examination”. It appears from paragraph 4 of his report that Mr Better contented himself with a visual inspection of a small number of these otherwise unidentified components. It does not appear that he inspected the D1 oven or its operation.
[16]ERTS is part of the HRL group.
The Renold file note was not identified or produced for inspection until the witness was cross-examined. Upon inspection, it appeared to be an email memorandum from one Charlie Grasso to one Warren Cutler of Renold Austasia dated 10 September 2004. In this email Mr Grasso sets out what he describes as his recollection of what they [presumably, the plaintiffs] claimed and what we [Renold] claim. The plaintiffs’ claims he summaries as follows:
“• The chain failed as a result of the design
• The chain wore out prematurely
• The tension shaft broke as a result of the chain failure.”
It will be noted that the third was not asserted at trial. Nor do I think was it asserted in any of the correspondence in evidence.
As to the Renold’s claims Mr Grasso’s recollection is set out in 10 propositions:
“• The chain was operated misaligned.
•The misalignment caused the chain to fail due to premature wear on the sideplates caused by the rollers wearing away at the side plates.
•The cause of the premature wear was due to the tension shaft breaking and misaligning the chain.
•This was exacerbated by the two chains being fixed by rigid cross flights.
• A lack of maintenance also contributed to the premature failure.
•The suggested inspections failed to notice any wear characteristics or an increase in drive motor load.
•We were told that there were several fires in the oven which would have contributed to the soften of the sideplates and other chain components.
•The round components showed signs of ‘gawling’ which was caused by a lack of lubrication.
•The broken tension shaft exhibited oxidisation suggesting the shaft broke well before the chain failed.
•There was no overload mechanism facility installed which would have transferred all load onto the chain when a jam up occurred.”
Mr Better in paragraph 3.4 of his report notes what he describes as five significant points in this Renold file note. I set them out.
“•Misalignment of the chain was a cause of the excessive wear of the side-plates;
•The misalignment was caused by the breakage of the tension shaft, which is part of the tensioning mechanism for the chain. The fractured shaft apparently exhibited oxidisation on the fracture surface suggesting that fracture had occurred prior to the breakage of the chain;
•Lack of maintenance contributed to the failure – suggested inspections of the chain did not identify the excessive wear of the chain components;
• There was no overload mechanism installed in the chain drive;
•Fires in the oven also contributed to the wear problem and eventual failure.”
It will be seen that Mr Better’s first and second points are not altogether consistent with the email. Nor is it apparent why he, as an independent expert, accepted as correct and adopted as his own opinion the claims contained in the email.
The Cause of the Failure
In his discussion, in paragraph 5 of his report, Mr Better sets out in seven subparagraphs his opinion on various matters which were, for the most part, not in dispute. He concluded that the chain failure was the result of fatigue and ductile rupture which he observed in the damaged components. Mr May agreed with this. He observed that the fatigue appeared to have been caused bilateral bending of the side plates. Again, Mr May agreed. Mr Better does not pursue the cause of the observed ductile rupture. In the fifth subparagraph Mr Better makes three points.
“•Lateral forces should not be acting on the chain links unless the chain is misaligned or is operating under abnormal conditions.
•The loading mechanism causing the excessive wear noted on the side-plates would also induce alternating stresses to side-plates that could cause fatigue damage.
•The excessive wear could in fact increase the stress range causing the fatigue.”
Mr May agreed with the first and third points but he maintained that the lateral forces in this case were due to the chain operating under abnormal conditions, namely, the condition where the chain itself had substantially deteriorated significantly. Mr May disagreed with the second point because he apprehended that Mr Better was assuming that the loading mechanism which caused the fatigue was the same which caused the wear. This is the precise point of disagreement between the experts. I shall return to it.
Mr Better then concluded that the misalignment of the chains was the most likely cause of the lateral forces and “could have occurred due to poor maintenance or the broken tension shaft or both”. His report, it will be noted, is predicated upon the assumption which he records in his first significant point in paragraph 3.4,[17] that misalignment was the cause of the excessive wear of the side plates. This was, of course, not a fact he was asked to accept, but a claim that he was to investigate and assess. Moreover, he was not told anything as to the nature or extent of the misalignment and in any event, he made no attempt to relate the “premature wear on the side plates” to the observed fatigue and ductile rupture.
[17]See par [42] above.
Mr Better’s report then concludes, for what it is worth, that fatigue was not the root cause of the failure; it was most likely caused by misalignment of the chain assembly which caused “wear on the side plates and other component parts”.
By the time he came to give his evidence in court, Mr Better focused his attention upon an observed misalignment between the sprocket shaft at the entry or take up end of the upper and lower chains. This appeared from a survey carried out at the behest of Laminex on 9 June 2003, that is, before the Ace chains were installed. Using the exit sprocket shaft as a reference point, the upper entry shaft was out of alignment by 31 mm, that is, one sprocket was 31 mm closer to the entry shaft than the other sprocket, so that the misalignment was ± 15.5 mm. The difference for the lower entry shaft was 41 mm so that the misalignment here was ± 20.5 mm. It will be recalled that the lower chains failed first. The sprockets on each shaft were about three metres apart and the entry shaft was some 30 m from the exit shaft.
Mr Better expressed the opinion that on a chain assembly such as that in the D1 oven where, in each case, the two chains were joined by rigidly fixed flights, the surveyed misalignment would cause the pitches to twist as they went around the entry sprockets. This would induce a bending moment which caused the wear and consequent failure.
Mr Better’s opinion on this point enjoyed, to some extent, the support of the plaintiffs’ witness, Graham Barry Ash. Mr Ash is a consultant engineer with Laminex with 46 years’ experience as engineer of which 25 years were spent in the fibreglass industry. He was involved in the design and construction of the Dandenong plant some 26 years ago and has worked on the D1 oven since its construction. He was of opinion that it was most unlikely that the failure of the Ace chains was due to the fact that they were used in a misaligned assembly. He based this conclusion on the fact that the chains had operated for over 20 years in this oven without adjustment to the alignment and without mishap. Furthermore, after their replacement with the new Morgan chains in 2004, they continued to operate in the same environment. Nevertheless, in cross-examination he agreed that when installing a new chain it is good practice to ensure that the shafts are parallel. His attention was drawn to the survey of 9 June 2003. He said that the misalignment there reported was excessive and that if the chain were operated in that environment, it would draw a high current and that the motor would automatically shut down. In many respects this witness appeared to be easily confused and I am a little concerned that in giving this evidence he may have misunderstood the extent of the suggested misalignment, because he then said that the misalignment was virtually half a link. A link is 152.4 mm (six inches). In any event, when asked whether this would be sufficient to put the chain under undue stress, he replied that he could not say this without having done calculations.
No witness gave evidence of having undertaken any such calculations. Mr Ash, it seems, made some preliminary calculations but no party pursued the results of these. Certainly Mr Better did not do so; he appeared to be content to act simply upon an unspecified misalignment.
I return now to Mr Better. I regret that I found his evidence was little more than assertion. He made no calculations; his inspection of the failed links was limited; he pointed to no wear patterns consistent with his hypothesis; he appeared to be content to embrace his instructions with little if any attempt to test them critically. In the circumstances, I place little weight upon his conclusion that misalignment was the principal cause of the failure of the chains.
This, however, is not the end of things. It is for the plaintiffs, which bear the burden of proof, to show that the failure which caused their loss was caused by a breach of the implied term as to fitness or the term as to merchantability. I turn, therefore, to the question, what was the cause of the chain failure. This question must be determined on the balance of probabilities. In the circumstances, and notwithstanding my criticisms of the evidence of Mr Better, I will include his hypothesis of misalignment among the other possible causes thrown up by the observations of those who have inspected the chains.
It is convenient that I list briefly what are these significant observations.
(1)Fatigue cracking of the side plates was initiated at the notch in the outer and inner K1 side plates. Mr May observed that the dimension of this notch is not shown on the contractual drawings. The notch provided by Renold was of a more severe profile than that in the first Morgan chains: its diameter was 4.6 mm compared with 11 mm in its predecessor. The location of the two notches in each of the K1 side plates was adjacent to the lug, which is the stiffest part of the side plate and the part most resistant to tensile and lateral bending stresses. This meant that these lateral stresses were concentrated at the notch whose more severe profile concentrated these stresses over a smaller part of the side plate than had previously been the case in the first Morgan chains. This made the K1 side plates particularly sensitive to fatigue failure under lateral stress. This was consistent with the cracking which was observed to commence at the notches in these plates.
(2)The rate of wear observed on the Ace chain was significantly different from that of the first Morgan chains. Mr May observed that the side plates in the first Morgan chains exhibited a maximum wear of 1 mm after 10 years of operation, that is, 0.1 mm per annum; the measurement for the Ace chain was 2.8 mm after 1.25 years, that is, 2.3 mm per annum. There is evidence, which I accept, that the two chains operated in a similar environment.
(3)The pattern of wear of the inner side plates showed that it was caused by contact with the hub of the roller and, where this wear exceeded 2.8 mm, by contact with the outer perimeter of the roller itself. This had the consequence of weakening the side plate, where the wear was sufficient to cause a reduction in the thickness of the side plate sufficient to weaken its capacity to resist tension and flexion.
(4)Wear was observed on the inner face of some of the K1 side plates and of the plain side plates, which appeared to have been caused by sprocket teeth. The number of pitches affected was a maximum of 10%, with some more observed among the discarded pitches.
(5)The wear on these and other parts of the chains was exacerbated by the presence of abrasive debris from the manufacturing process. This debris was also present during the period of operation of the first Morgan chains.
(6)The outer and inner side plates were attached to the pin and bush respectively by an interference fit, that is, the fit of the side plate and the shaft which penetrates it was so tight that they were fixed rigidly together. Put another way, the shaft could not move independently of the plate. Mr May observed, upon inspection of the discarded Ace chain pitches, a loss of fit to 50% of the pin joints examined, most of which had suffered a complete loss of fit. In the case of the bush joints, the loss of fit affected no less than 80% of the joints examined. These failures occurred particularly in the case of the K1 side plates, that is, more of these side plates failed and their deterioration was more severe than was observed in the case of the plain side plates. He observed, too, that the deterioration to the bush joints appeared to start in the K1 side plate and then to progress to the same bush in the plain side plate which then lost fit as well.
(7)Mr May’s measurement of the dimension of the holes in the failed side plates did not disclose any deformation.
(8)One of the cracked K1 side plates was analysed by Mr May for chemical composition. This showed 0.032% carbon and 0.22% manganese. He said that this analysis showed that the material was a basic low carbon steel, but which fell within the general specification for mild steel. The low carbon content, however, meant that the steel was easier to work but this was at the cost of hardness and tensile strength.
(9)Mr May then had the side plates measured for Brinell hardness. This showed that the K1 side plates had a hardness ranging from 110-120 HB which was significantly lower than that of the plain side plates, which was in the range of 140-170 HB. This variation in hardness was consistent with the wear which was observed particularly to affect the K1 side plates. This measure of hardness was then converted to MPa. As a matter of conversion, 105 HB is the equivalent of 365 MPa, and 118 HB the approximate equivalent of 410 MPa, which is the minimum tensile strength for a grade 250 steel provided in AS3768-1996. It appears to be somewhat less than that specified for grade 350 material in this same standard.
The significance of this for the plaintiff’s purposes is that the material specification for the side plates provided on 28 August 2001 is “mild steel (AS250-AS350) as rolled”. I should make two comments about this. First, Mr Better said that the conversion from HB to MPa is not reliable because, within a single piece of steel, there will be a scatter of hardness readings. I accept this to be the case. Second, it is not pleaded that the material for the side plates, or the K1 side plates, of the Ace chains did not conform to the contractual specification. The significance of the tensile strength and hardness ratings for the side plates lies in the fact that they provide a theoretical explanation for the observed distortions and wearing. They were also relied upon to underpin Mr May’s conclusions.
Mr May’s Hypothesis
As I have mentioned, the first Morgan chain and its predecessor had operated in the D1 oven, each for about a decade. The drawing for the first Morgan chain was provided to Renold at the time of tender and Renold had access to sample pitches of that chain. The Ace chain was said by Renold to be an improvement on its predecessor. These improvements which were set out in its quotation, concerned the bush.[18] In addition, there was a change in the profile of the two notches in the K1 side plate.
[18]They are set out in paragraph [14] above.
Mr May attributed the failure of the chains to these modifications. He described the process of failure as follows:
(1)The strength and hardness of the mild steel in the K1 side plate was less than that in the plain side plate. Under the normal tensile stresses imposed on the chain by the motor which turned the sprocket shaft, the holes in the K1 side plates suffered a micro-deformation relative to those in the plain side plates. This deformation led to a deterioration in and a loss of the interference fit between the bush and pin and those side plates. This process, which Mr May described as like stretching, was within the elastic limit of the mild steel so that it returned to shape when the stresses were removed. Nevertheless the loss of fit remained. This led to a loss of stability and rigidity in the pitches and exposed the pitch to distortion and its component parts to wear.
(2)The alloys of the roller and bush and the pin were very much harder than the mild steel of the side plates, particularly the softer steel of the K1 side plates.
(3)The increase in the diameter of the bush and the changed profile of the roller meant that the contact area between the hub and the side plate on either side of the roller was reduced by 33%. This had the consequence of increasing the interface pressure between these components.
(4)This increased interface pressure exacerbated the wearing effect of the roller against the relatively softer material of the side plates, especially the K1 side plates. This wearing reduced the thickness of the K1 side plates which in turn reduced their ability to resist lateral stresses and the fatigue consequent upon their bending under those stresses.
(5)At this point, the chain was doubly vulnerable. The loss of rigidity meant that lateral stresses were imposed on the pitches and, in particular those side plates as the chain passed over the misaligned sprockets and in its ordinary operation. Second, the effects of wear and the presence of the severe notches in the K1 side plates meant that they were less able to resist these stresses than might otherwise be the case and less able than the plain plates. It was at this point that fatigue fracture was observed to occur.
(6)The presence of abrasive debris from the product meant that the wear was always a difficulty with the D1 chain assemblies. In the case of the Ace chain, the introduction of lubrication apertures in the bush, which was a feature of the Renold special chain design, permitted this debris to enter more easily into the pin interface and from there into the bush interface. Mr May described this as another wear process, but not one which was critical to the deterioration of the chain.
In order to identify points of agreement and points of difference between the opinions of Mr Better and Mr May and to point up their different reasonings, the two witnesses were jointly examined by counsel. Both were sworn and counsel put the same questions to each witness in turn. This very satisfactory procedure produced the result that both witnesses agreed that, under ordinary longitudinal load, the elongation of a new K1 side plate and plain side plate would differ. Mr May said, however, that he was not prepared to say which would enlarge more. Mr Better, for his part, said that the extent of this elongation would be miniscule – not sufficient alone to affect the interference fit between the plate and the bush or pin.
It will be seen from this analysis of the evidence of the two expert witnesses that the contest between them was as to whether the misalignment was the true cause of the failure or whether it was merely a factor which came into a play after the chain had deteriorated due to other causes. Put in terms of Mr Better’s analysis[19], the contest was as to whether the lateral forces which led to the fatigue failure occurred when the chain was operating under the abnormal condition brought about by the sprocket misalignment, or whether these abnormal conditions were the loss of rigidity and excessive wear of the pitches which were caused by the defects in those components.
[19]See para [44] above.
Notwithstanding this, Renold by paragraph 22 of its defence raised a number of other matters which were not its responsibility and which, it said, caused the plaintiffs’ loss and damage. There are no less than 20 particulars provided of the failure of the plaintiffs or one of them properly to install the Ace chains, to maintain them and to operate them. Most of these were either not supported by the Renold witnesses or were shown to be without substance. At the conclusion of their final address, when asked about these, counsel for Renold abandoned five, leaving 15 suggested causes of failure. It is to these that I now turn. Having given some lengthy consideration to the principal engineering contentions in this case I can express my conclusions about these matters relatively briefly.
Misalignment
Particulars (i), (ii) and, it would seem (iii) are concerned with the misalignment of the sprocket shafts which was, of course, the hypothesis espoused by Mr Better.
Mr Ash who has had a long involvement with the D1 oven was asked about this. He was critical of the misalignment, but he did not agree that this was a cause of the failure of the chains. There is, to my mind, considerable force in his practical observation that, if the chain assembly worked satisfactorily for over 20 years before the Ace chains were introduced and again after they were replaced, attention should be directed to the Ace chains rather than to the environment in which they operated. I accept the evidence of Mr Boyne and Mr Chandnani that the settings of the sprocket shafts were unchanged when the Ace chains were installed and that an alignment differential of ± 20.5 mm or ± 15.5 mm was not a matter of concern and, indeed, might be required in order to avoid the problem of the chain snaking.
Mr May, too, rejected misalignment as the cause of the observed failures. He said that if misalignment were a problem, he would have expected to have seen a different sort of wear in the links and wear in the side rails. He said that his extensive examination of the damaged links disclosed no pattern of wear which was suggestive of misalignment as the cause. He explained this by reference to photographs of the wear and by reference to damaged links which were in evidence.
As I have mentioned, Mr Better’s evidence on this matter, I found unconvincing. He did not advance any detailed reasoning to support his conclusion that the observed failure and the observed misalignment were causally related. He did not address the empirical arguments offered by Mr May which I have summarised.
I reject misalignment as a significant cause of the chain failure.
Want of Inspection and Maintenance
Particulars (v), (vii), (ix), (x), (xiv), (xvi), (xvii) (xviii) and (xix) are concerned with inspection and maintenance matters.
There was no evidence of a want of routine inspection; indeed such evidence as was before me, showed that there is no substance in this criticism. I reject particulars (v), (vii) and (xvi).
As to a failure to lubricate the chain, I was provided with a document setting out a list of pages from the plaintiffs’ production log book, presumably with an invitation that I look at these and draw my own conclusions. I have. The evidence does not support the allegation. Lubrication was always a problem with the D1 oven chain assemblies. Indeed, the Renold design for a special chain was directed to eliminating or reducing this problem. The evidence of the plaintiffs’ operational witnesses was that they applied lubrication appropriately. I reject particular (ix).
Another perennial difficulty with all the D1 oven chains was that caused by the build-up of abrasive fibreglass product. This is said to be the cause of the failure in particulars (x), (xiv) and (xix). I reject it as a cause. The presence of this material was part of the environment and known to Renold in which its chains were required to operate. There is no evidence which leads me to conclude that this was any more severe when the Ace chains were operating.
Lack of preventative maintenance is alleged in particulars (xvii) and (xviii). It was not established.
Undue stress on the pitches
Particulars (viii) and (xi) are concerned with the imposition of excessive stress on the chains. The cause of this is given in particular (xi) as being that the motor driving the chains was too powerful. In particular (viii) I was invited to look at a number of entries in the production logs although these were not put to the plaintiffs’ operational witnesses. I have done so. There is nothing of substance to be found upon my reading. The basis for the contention that the motor was too powerful appears to be the preliminary calculation of Mr Ash which he largely disavowed. Mr Ash, in his witness statement and orally before me, explained how the motor was not overpowered. He explained the various levels of protective devices in place to protect the plant from inappropriate power surges. He said that he carried out a physical check from the computer output and discovered that the systems were operating properly. His evidence on this was not challenged. I accept it.
Next, it was put in particular (xiii) that the plaintiffs allowed the chain to operate with broken and contaminated flights. Again, I was invited to look at entries in the production logs. I have done so and found nothing to encourage me to conclude that this was a cause of the chain failure.
Broken Tension Rod
The final matter, that in particular (xii), concerns the broken tension rod. There was in the chain assembly provision to maintain an appropriate tension in the chains. This was required because the length of the chain will vary in operation as they pass through the oven. The evidence showed that the tension rod was detected as broken on 28 March 2003.
Mr Better fastened upon this breakage as a cause of the chain failure. First he said that the misalignment which was the cause of the chain failure was itself the product of the break in the tension rod. Next, he contended that the force from the motor driving the chains which was required to break the rod was such that it would have been sufficient to break the chains or at least to have set in train the deterioration which led to their failure. Then, finally, he contended that it was a combination of the misalignment and possibly the broken rod which could have contributed to the chain failure.
As with his other conclusions, these were not argued from a firm factual basis. It does not appear that he inspected the broken rod. The evidence of the operational witnesses was that the break was of recent occurrence prior to 28 March 2003. The deterioration of the chains commenced well before that, as the evidence shows. The force required to break the rod was accepted to be a little less than one million newtons. The chain assembly was not capable of generating such a force. The evidence showed, in any event, that the fracture was due to fatigue rather than to the application of such a force. The tension rod operated on the upper chain assembly; the failure occurred first on the lower chain. Mr May said that a broken rod could not therefore have an effect on the lower chain. The effect of the break would be to cause a loss of tension on one side with a consequent increase of tension on the other. Mr Boyne said this would have caused the amps to go up, but he said he recalled no indication of this. I reject this as a cause of the chain failure.
I return now to Mr May’s hypothesis. On the balance of probabilities, I accept it as describing the effective cause of the failure. His conclusion was arrived at after an extensive analysis of the available evidence and as the product of reasoning which he exposed to criticism. Moreover, he considered and provided cogent reasons for rejecting the competing hypotheses, notably that which focussed upon misalignment of the sprocket shaft at the entry end of the chain assembly.
A Breach of the Supply Agreement
It is clear enough from what I have written that the Ace chains were not reasonably fit for the purpose of use in the Insulation Products manufacturing process. Furthermore, the contributions to the chain design for which Renold was responsible were the cause of this unfitness. I refer to the materials which were used, including its own decision to use a mild steel for the K1 side plates which, although it was within the contract specification, had different characteristics from the mild steel used in the plain side plates. The features of the Ace special chain also contributed to the adverse impact of these materials.
Negligence Issues
Given my conclusions upon the contract claims, it is not necessary that I consider the alternative claims in negligence. Nevertheless, in deference to the submissions advanced and in case the proceeding may go further, I shall briefly venture my views on these issues.
Renold’s duty of care to Fletcher
In the statement of claim[20] it is alleged that Renold was in breach of a duty of care owed to Laminex and to any subsequent owner of the chains, including Fletcher. Since, it is only Fletcher which is said to have suffered loss and which seeks damages, I shall content myself with the duty owed to that party. Fletcher’s loss is economic loss.[21] What is put is that Renold owed a duty of care to Laminex when it supplied the Ace chain and that this duty inured for the benefit of subsequent purchases of the chain. Such an argument depends upon a reasoning analogous to that in Bryan v Maloney[22].
[20]Statement of Claim paras 19, 20.
[21]Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515 at 529 [20].
[22](1995) 182 CLR 609.
The assignment of the Insulation Solutions assets to Fletcher was part of an internal restructure of the company group. Accordingly, it was put that the relationship between the assignee and Renold should be equated with that of the assignor. Furthermore, since the expected life of the chains was about 10 years, it was reasonably to be expected by Renold that their ownership would change within their lifetime.
I am not persuaded that these are significant considerations. The fact that a business enterprise chooses to adopt a series of corporations as vehicles for its commercial advantage is doubtless a matter for its commercial judgment. This advantage must be weighed against the disadvantages which attend such a structure, including those that arise when it chooses to reorganise that structure.
In any event, where this is done, the assignee has the capacity to protect itself from losses such as the present. It is not vulnerable in the sense that this concept is used in this area of the law.
I conclude from this that no duty of care is owed by Renold to a subsequent purchaser of the chains. The Fletcher claim in tort must therefore fail.
Breach of duty
If a duty is owed, I would have concluded that Renold was in breach of that duty by manufacturing the side plates out of steel of differing strengths.
Contributory Negligence
In paragraph 26 of the defence Renold alleges that Fletcher is guilty of contributory negligence in as much as it failed to maintain the Ace chains and to operate the D1 oven properly. This plea depends upon the particulars (iv) to (xx) in paragraph 22. Such of these particulars as remained in contention at the end of the trial, I have dealt with already.[23] I have rejected them. The contributory negligence contention fails.
[23]See paras [65]-[74] above.
Proportionate liability
Next, it was put that Laminex was a concurrent wrongdoer with Fletcher within the meaning of Wrongs Act 1958 s 24AH, so that I must apportion damages between them pursuant to Part IVAA of that statute[24]. The basis for this contention must be that Laminex is in breach of a duty to Fletcher to exercise due care. The breaches alleged are, again, those contained in paragraphs 22 and 23 of the defence.
[24]Defence para 24.
The allegations in paragraph 22, that Laminex failed properly to install, maintain and operate the Ace chains, I have rejected.
The allegations in paragraph 23 are to the effect that Laminex failed to take reasonable care in the design of the chain and that it accepted a design from Renold which it knew to be defective. I do not conclude that these allegations have been made out for reasons already stated. In any event, I am not persuaded that, in its conduct prior to the manufacture of the chains, Laminex owed to Fletcher a duty of care so as to lead to a conclusion that it was guilty of any relevant wrongdoing.
Contribution from Laminex
This contention appears to raise against Laminex a right of contribution under the Wrongs Act 1958 s 23B. The factual basis for this is found in paragraph 23 of the defence. I put to one side any procedural difficulties in the way of a defendant in its defence seeking such relief against a plaintiff. The claim here depends upon a finding that Laminex is liable to Fletcher for the loss which it has suffered. This liability depends upon its conduct prior to the manufacture of the chains. This claim must fail for the reasons already mentioned.[25]
[25]See para [87] above.
Loss and Damage
I turn now to the loss and damage alleged to have been suffered by Fletcher as a consequence of the breaches of contract by Renold.
Has Fletcher suffered any loss?
The claim for damages is that of Fletcher which was, of course, not a party to the supply agreement. Since the deficiencies in the Ace chain came to light after it had acquired the Insulation Solutions Assets as at 1 July 2002, the cost of their replacement and the consequential losses were all suffered, not by Laminex, but by Fletcher. Its right to recover these damages therefore depended upon the effect of the assignment.
There were in fact two agreements between Laminex and Fletcher which bear on this issue. The first is a sale of business agreement which is undated, but which is said to be effective on 1 July 2002. This is Exhibit A to the supplementary witness statement of Paul Robert Pickup. This document is in fact expressed as an offer by Laminex to sell assets and I assume that it was accepted in accordance with its terms. The operative provision is cl 1.1 which is in these terms:
“1.1 Offer to Sell
The Offeror offers to sell to the Offeree, with effect from the Effective Time, its entire right, title and interest in and to each of the Insulation Solutions Assets for the Consideration in accordance with the terms and conditions of this Offer.”
The conditional agreement to sell the Insulation Solutions Assets is in cl 2.1. The consideration is said to be the book value of the assets which are said to be approximately $17.8M. The Insulation Assets are defined in cl 15.1. The relevant definitions contained in this clause are the following:
“Insulation Solutions Assets means the following assets:
(a)Insulation Solutions Moveable Assets;
(b)Insulation Solution Records;
(c)the Domain Name; and
(d)the Website Contents.
but does not, for the avoidance of doubt, include any goodwill.
Insulation Solutions Moveable Assets means the Insulation Solutions Plant and Equipment and the Insulation Solutions Inventory.
Insulation Solutions Plant and Equipment means all moveable plant, equipment, motor vehicles, machinery, furniture, fittings owned and used by Offeror in carrying on the Insulation Solutions Business as at Completion.”
The effect of this is to transfer to Fletcher the Ace chains as at 1 July 2002. At this date no deficiencies had become apparent.
Clause 5.1 provides for the transfer or assignment to Fletcher of an “asset which forms part of the Insulation Solutions Assets (or is an asset relating to the Insulation Solutions Business which should reasonably be transferred to [Fletcher]) [but which] was not transferred or assigned“ upon completion of the sale of business agreement.
The second agreement is an assignment deed between the same parties dated 31 December 2003. This deed is specifically directed to the assignment to Fletcher of the rights of Laminex to bring this proceeding. The operative provisions of the deed are the following:
“2. Assignment
With effect as of the Effective Date, the Assignor assigns to the Assignee the Assignor’s right, title and interest in all Claims arising out of or in connection with the Supply Agreement or in connection with the design, manufacture and supply of two chains by Renold to Insulation Solutions in or about December 2001 which assignment is accepted by the Assignee.
1.1 Definitions
‘Claims’ means any allegation, debt, causes of action, liability, claim, proceeding, suit, judgment or demand of any nature howsoever arising and whether past, present or future, fixed or unascertained, actual or contingent whether at law, in equity, under statute, based on contract or otherwise.
‘Effective Date’ means 1 January 2004.”
The point taken on behalf of Renold was this. The sale of business agreement effectively transferred the Ace chains from Laminex to Fletcher, presumably for full value. At the time of the assignment deed, Laminex had therefore not suffered any loss: it had nothing valuable to assign. It was accepted, however, that Fletcher, as assignee of the Laminex cause of action against Renold, might bring an action against Renold for breach of its contract with Laminex, but that it had only the right to enforce the cause of action which was assigned to it. Since, at the time of the assignment on 1 January 2004, Laminex had suffered no loss, the cause of action was worthless. Counsel accepted that, if the defects were apparent before the sale of the asset, the position would have been otherwise. Likewise, if the defects became apparent after the assignment of the cause of action. I was referred to no authority in support of this proposition; it was said to depend upon principles relating to assignments of choses in action.
To my mind, there is no substance in this contention. The Ace chain, when delivered by Renold was defective in terms of the sale agreement. At that moment, although it was not aware of the deficiencies, Laminex had a right of action in contract against Renold. If this right did not pass under the sale of business agreement, it certainly passed to Fletcher under the deed of assignment. The consequence is that Fletcher might sue for its losses suffered as a consequence of the Renold breaches of contract. It matters not that Laminex is not suing for its losses, as plainly was its entitlement had there been no assignment. It is not suggested that the losses in the hands of Fletcher were greater than would have been those in the hands of Laminex.[26]
[26]See Tolhurst v Associated Portland Cement Manufacturers (1900) Limited [1903] AC 414 at 423 per Lord Lindley.
The point presented by counsel for Renold was a little more artful. It was that, since Laminex sold to Fletcher a defective item, it should be assumed that the consideration reflected its true and reduced value. But the evidence is to the contrary. And this is not surprising, because at the time of the sale, the defect was undetected. The deed of assignment made some 17 months later was effective to overcome the argument that the right to sue did not pass with the defective chains.
I conclude that Fletcher is entitled to recover the loss which it suffered flowing from the breach of contract by Renold.
Cost of replacement of the chains
In its statement of claim Fletcher seeks the following items of loss arising from its replacement of the defective Ace chains.
“(i) cost of the replacement chains - $79,044.00, comprising:
A.bottom flights - $13,500.00
B.bottom chain - $26,772.00
C.top flights - $12,000.00 and
D.top chain - $26,772.00;
(ii)costs of installation of the replacement chains - $287,128.48, comprising:
A.cleaning for analysis - $1,620.00
B.CMET Report - $4,350.00
C.bottom jig – material - $6,999.28
D.bottom jig – labour - $18,049.50
E.top jig – material - $3,999.20
F.top jig – labour - $8,053.50
G.engineering pre work – bottom - $25,672.00
H.engineering pre work – top - $15,264.00
I.installation bottom - $102,354.00
J.installation top - $78,526.00;
K.maintenance prior to replacement - $22,241.00.
_________
Total$356,172.48.”
Items (i) and (ii)A and B were accepted by Renold in the sum of $83,864. As to the remaining items, no challenge was directed to the evidence of Mr Chandnani that they were properly incurred. I accept his evidence and will allow all of these items. The total cost of replacement of the chains, items (i) and (ii), is therefore $355,022.48.
Consequential losses
This is the area where the real contest as to quantum was conducted. Fletcher seeks $545,569.00 which is made up as follows:
“(iii)consequential loss of production and sales - $545,569.00 comprising:
A.reduced output prior to replacement - $15,993.00
B.lost production prior to replacement - $95,958.00
C.lost sales margin from lost production and output - $111,592.00
D.lost production during installation of top chain - $145,152.00
E.lost sales margin during installation of top chain - $176,874.00.”
The losses of production under the Ace chains totalled 63 hours. This is made up of 54 hours down time as recorded in the production logs for six days in March and June 2003 when the bottom chain failed and nine hours of reduced production. The lost production due to these lost hours was 96.2 tonnes.
Russell William Heath, an accountant employed by Fletcher, calculated that in the year 2002-2003 the total labour costs incurred, including on-costs, for the Dandenong factory were $4,006,556. Overhead costs for the factory were $2,290,200 (variable) and $12,338,867 (fixed), a total of $14,629,067. The total factory costs for labour and fixed overheads were therefore $16,345,423. The standard machine hours required for the year for production through the D1 and D2 ovens was 9,193.2 hours. This meant that, in order to break even, each oven was required to process product to a value of $1,777.99 per hour.
The equivalent for the year 2003-2004 was $1,680 per hour.
Mr Pickup, Fletcher’s Logistics Executor, said that in the years 2002-2003, the demand for fibreglass product was such that the Dandenong factory was required to operate at full capacity and that all the product might have been sold at a net profit of $1,160 per tonne, that is, after deduction of production and overhead costs.
The loss for the year 2002-2003, therefore, was 63 hours production at $1,777 per hour cost, $111,951, plus a loss of profit of $111,592 representing 96.2 tonnes at $1,160 per tonne. The total loss for this year was $223,543.
In the year 2003-2004 the lost production time was 86.4 hours and the production loss was 143.8 tonnes. The equivalent production cost for the year was $1,680 per hour and the profit loss $1,230 per tonne. Again, demand exceeded capacity so that the total loss for that year was $322,026.
These calculations were criticised by Bruce Flint of Flint Forensics Pty Ltd, the consultants engaged by Renold. Mr Flint said that the Fletcher calculations were at best theoretical. He pointed out that, in fact, during the periods of suggested loss, the production hours were greater than budgeted. Counsel for Renold also took Mr Heath to task because the witness was unable to point to any lost sale.
I reject these criticisms. If, as I accept to be the case, Fletcher could sell whatever the Dandenong factory was capable of producing in each year, its loss is represented by the value of lost production capacity, notwithstanding that this exceeded the budget set at the commencement of the year. For the same reason, it is not necessary to present for present purposes for Fletcher to identify any customer who was turned away.
I therefore accept that the consequential losses due to the Renold breaches of contract totalled $545,569.
The total loss and damage suffered by Fletcher is, therefore, $900,591.48. It follows from this that there should be judgment for the first named plaintiff in the sum of $900,591.48 I will hear counsel further as to the precise terms of the judgment including interest and as to costs.
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