GEC Alsthom Australia Ltd v City of Sunshine and Ors City of Sunshine v GEC Alsthom Australia Ltd and Ors

[1997] FCA 813

FEDERAL COURT OF AUSTRALIA

IN THE FEDERAL COURT OF AUSTRALIA	)
)
VICTORIA  DISTRICT REGISTRY	)  VG 91 of 1993
)
GENERAL DIVISION	)

BETWEEN:             

GEC ALSTHOM AUSTRALIA LIMITED
Applicant

  AND:             

CITY OF SUNSHINE
First Respondent

MAUNSELL PROPRIETARY LIMITED
Second Respondent

CITY OF SUNSHINE
Cross Applicant

GEC ALSTHOM AUSTRALIA LIMITED
First Cross Respondent

MAUNSELL PROPRIETARY LIMITED
Second Cross Respondent

JUDGE:	RYAN J
PLACE:	MELBOURNE
DATE:	18 AUGUST 1997

MINUTES OF ORDER

THE COURT ORDERS:

1. THAT Brimbank City Council (“Brimbank”) be substituted for the City of Sunshine as the first respondent and cross-applicant herein.

1. THAT IT BE DECLARED that Brimbank is obliged to indemnify GEC against any direct loss attributable to Brimbank’s failure to supply a gas energy flow of 95 gigajoules per hour Lower Calorific Value for a period of 10 years from 1 March 1992.

(In this declaration “net loss of income” includes the amount calculated after deducting:

(a)from the power which it is assumed would have been generated but for the said failure to supply a gas energy flow at the stipulated rate

(i)15% attributable to engine and other plant downtime

(ii)11% attributable to parasitic loss;

(b)from the income which would have been received from time to time from the sale of the net power which it is assumed would have been so generated

(i)any savings achieved by GEC in consequence of the supply of gas to it being reduced from time to time to below 95 gigajoules per hour;

(ii)royalties calculated in accordance with cl. 3 of the Gas Supply Agreement on the basis that the first instalment other than the Initial Royalty fell to be calculated on 24 December 1992)

1. THAT Brimbank pay to GEC an amount calculated in accordance with the declaration in paragraph 2 of this Order  after allowing for the savings referred to in sub-paragraph (b)(ii) thereof achieved to 31 January 1996 which have been agreed in the sum of $875,996 and for calculation errors in respect of the same period in the sum of $41,564.

1. THAT Brimbank pay to GEC interest on the amounts calculated in accordance with paragraphs 2 and 3 of this Order as due to GEC from month to month from April 1992 to the date of payment at the rate of 11% per annum.

1. THAT Brimbank pay to GEC from month to month after the payment referred to in paragraph 4 of this Order until 1 March 2002, or further order, an amount calculated in accordance with the declaration in paragraph 2 of this Order.

1. THAT Maunsell pay to Brimbank the amounts paid by Brimbank to GEC in accordance with paragraphs 3, 4 and 5 of this Order and an amount representing the expenses incurred by Brimbank as a result of the gas energy flow from the Hulett Street site having been less than 95 gigajoules per hour Lower Calorific Value.

1. THAT GEC’s application against Maunsell be dismissed with no order as to costs.

1. THAT Brimbank’s cross-application against GEC be dismissed.

1. THAT Maunsell’s cross-claim against GEC be dismissed.

1. THAT Brimbank pay to GEC 85% of its costs of and incidental to the application herein and Brimbank’s cross-claim against GEC, including any reserved costs, such costs to be taxed in default of agreement.

1. THAT Maunsell pay to Brimbank 85% of Brimbank’s costs of its cross-claim against Maunsell, including any reserved costs, such costs to be taxed in default of agreement.

1. THAT Maunsell pay GEC’s costs of Maunsell’s cross-claim against GEC, including any reserved costs, such costs to be taxed in default of agreement.

1. THAT Maunsell pay to Brimbank 85% of the costs paid by Brimbank to GEC pursuant to paragraph 10 of this Order.

1. THAT liberty be reserved to any party to apply on not less than 72 hours notice in writing to the other parties.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA	)
)
VICTORIA  DISTRICT REGISTRY	)   VG 91 of 1993
)
GENERAL DIVISION	)

BETWEEN:             

GEC ALSTHOM AUSTRALIA LIMITED
Applicant

  AND:             

CITY OF SUNSHINE
First Respondent

MAUNSELL PROPRIETARY LIMITED
Second Respondent

CITY OF SUNSHINE
Cross Applicant

GEC ALSTHOM AUSTRALIA LIMITED
First Cross Respondent

MAUNSELL PROPRIETARY LIMITED
Second Cross Respondent

JUDGE:

RYAN J

PLACE:

MELBOURNE

DATE:

18 AUGUST 1997

REASONS FOR JUDGMENT ON DAMAGES
AND FURTHER ORDERS

On 20 February 1996 reasons for judgment were published indicating the Court’s provisional views as to the orders which should be made in consequence of findings of fact made and conclusions reached on the various issues raised by this litigation.  Those reasons for judgment were extensive and to avoid unnecessary repetition I shall refer in these supplementary reasons to passages from those reasons without setting them out.  I shall also use in these reasons the same abbreviations and nomenclature for the parties and other participants in the relevant events as have been adopted in the earlier reasons.

1. THE MEASURE OF THE INDEMNITY TO WHICH GEC IS ENTITLED

At pp 77-78 of the earlier reasons it was indicated that Sunshine is obliged by force of its agreement with GEC to indemnify GEC against any direct loss, including lost revenue, sustained as a result of there being insufficient gas to run five generators at the times and with the yields contemplated by the agreement.  It was further indicated that there should be credited to Sunshine any savings which GEC has achieved as a result of not operating the plant at full capacity.

In the course of the further hearings which have occurred since the original reasons for judgment were published, it has been agreed between the parties that the savings achieved by GEC to 31 January 1996 as a result of not operating the plant at full capacity should be quantified in the sum of $875,996.  However, there has been no agreement as to certain allowances which, it is claimed, should be made in calculating the income which GEC would have derived had the gas flow been as warranted.  The first of those allowances was in respect of time during which one or more generators would have been non-productive for repairs and maintenance or other reasons not referable to any deficiency in the quantity or quality of gas drawn from the field.  Those periods of inactivity have collectively been called “downtime” and it is convenient to continue the use of that expression in discussing this issue.  The second matter in respect of which it has been accepted that some allowance should be made in calculating the income which GEC should have derived from operating the plant has been referred to as “parasitic loss”.  Other matters relevant to quantifying the indemnity to which GEC is entitled are the date from which GEC was obliged to supplement royalties received by Sunshine, so-called “calculation errors” and interest.

(a)       Downtime

It was accepted by GEC that downtime was a necessary incident of operating the power station even at full load.  Operational experience indicated that what were called “trip shut-downs” occurred when the Viking electric governor caused the whole plant to cease operating possibly as the result of a fault in the SECV grid.  On the other hand, the need for repair and maintenance of compressors, field blowers and chillers was increased by temperature variations and moisture content directly referable to the poor quality of gas derived from the field.

Mr Zacherl, the finance manager of GEC’s power plant engineering division, acknowledged, when recalled and further cross-examined, that more plant problems had been experienced in the practical operation of the power plant than had been anticipated when initial projections were made that the operating capacity would be 90% of the theoretically available peak hours.  However, he also indicated (transcript 13 May 1996 p 119) that, when imputing a figure for downtime in calculating its hypothetically achievable production had the gas supply been as warranted, GEC had assumed that one of the five generators would always be out of commission during off-peak hours.  Mr Zacherl went on to testify in the same passage:

In total we’ve left out 30 per cent of off peak and in peak time we’ve done the normal servicing and our plan would not have been to have serviced in peak time, that was never the object, but because there was no gas there was no reason to work in off peak to do that sort of service work.  We’ve also had some problems that could have been fixed very quickly but because there was no gas or there’s no - I think the push is to fix them quickly so, for example, an alternator failure and dealing with insurance companies and a number of things slowed us down but if we would have had gas we would have got it fixed in less than a month but we let it go six months and in total we’ve had about 15 per cent of our peak time as we’ve claimed as down time to our own account and 30 per cent in off peak and that is greater than what was allowed for in the models for routine servicing.

When cross-examined, Mr Zacherl indicated that, in calculating the hypothetical revenue which would have been derived had gas been delivered from the field at 95 GJ-hr, GEC had assumed engine downtime of 30% during off peak hours and 10% during peak hours.  In fact, downtime was greater during peak hours partly because of problems referable to deficiencies in the quality or quantity of gas.  It seems that GEC took advantage of that forced inactivity of the plant to have as much maintenance and servicing as possible carried out during peak hours when it was more economical for the work to be done.

Upon re-examination, Mr Zacherl indicated that an overall allowance of 15% for downtime had been validated by operating experience between April 1992 and January 1996 which revealed a “loss due to plant problems” expressed in kilowatt hours of 15.2% after taking account of time lost through causes other than the need for ordinary repairs and maintenance.  Mr Ryan, a chartered accountant who gave evidence at Maunsell’s request, was unable to express an opinion about the correctness or otherwise of Mr Zacherl’s approach. However, he appeared to accept that 15% was an appropriate overall or average figure to allow for downtime across both peak and non-peak hours.  In the absence of any evidence suggesting a more precise method of allowing for this factor, I shall order that GEC’s hypothetical net operating revenues from a gas flow of 95 GJ-hr be calculated on that basis.

(b)      Parasitic Loss

This concept denotes the power drawn from the generators before it was transmitted to the distribution grid operated by the State Electricity Commission of Victoria (“SECV”) thereby entitling GEC to a payment by SECV, at least during one period, at the rate of 10.67 cents per kilowatt hour so made available during peak hours.  The current drawn off in that way was used for power and lighting within the power station itself.

For the purpose of determining lost revenue, GEC has calculated its hypothetical peak levels of generation by making an allowance for parasitic loss of 10%.  Mr West, GEC’s Plant Manager at the Sunshine Power Station, gave evidence that the assumption that parasitic loss would have averaged 10% throughout the period from April 1992 to 31 January 1996 had been based on some eighty meter readings taken at various intervals while the power station was achieving full load and which indicated that the “works power” drawn off had been of the order of 9%.

As might be expected, parasitic loss, expressed as a percentage, increased as quantities of power generated diminished.  However, parasitic loss is not in direct inverse proportion to the amount of power generated, partly because, as Mr West explained, starting and stopping of generators as a result of deficiencies of gas from the field creates a need for more ancillary power than if the generators have been run more or less continuously as they would have been on the assumptions on which GEC has calculated its peak levels of generation.  At times of very low, or no, generation it was necessary for the power station to “buy in” ancillary power from the SECV grid thereby further increasing the average parasitic loss expressed as a percentage of total production.

Mr Ryan, the chartered accountant referred to in Part 1(a) above, indicated that his calculation of parasitic loss as actually incurred during the operation of the power plant between 1 August 1992 and 31 January 1996 revealed an average of 11.7% during peak periods and 15.1% during off-peak periods, yielding an overall average of approximately 12.36%.  Mr Ryan also claimed that his examination of a budget prepared by GEC before it had commenced power generation at the Sunshine site disclosed an allowance of 11.4% for parasitic loss.

Because of the hypothetical nature of the exercise involved in imputing to GEC a level of production which would have been achieved had the supply of gas been as warranted by Sunshine, actual experience at much lower levels of production can provide only a rough and ready guide to the appropriate allowance for parasitic loss.  On a broad view of all the evidence, including that of early forecasts of parasitic loss, I consider that the appropriate allowance to be made in calculating GEC’s hypothetical net achievable production is 11%.

(c)Royalties

It will be recalled from the earlier reasons for judgment that the Gas Supply Agreement between Sunshine as vendor and GEC as purchaser provided, by cl 3, for the payment by GEC to Sunshine of royalties by an initial amount of $3,824,075 and a residual amount equal to 3.75% of the amount received by GEC for the supply of electricity to the SECV.  The residual royalties were subject to an annual minimum of $108,000 to be adjusted by reference to the Consumer Price Index.  Clause 3 of the Gas Supply Agreement was in these terms:

In consideration of the Vendor supplying the Gas to the Purchaser in accordance with this Agreement, the Purchaser shall pay to the Vendor:

(a)on the date of this Agreement an amount by way of royalty of A$3,824,075 (the “Initial Royalty”); and

(b)within 7 days of the Purchaser receiving payment for the sale of electricity which has been generated from the conversion of the Gas supplied under this Agreement 3.75% of such receipts

(c)on each anniversary of this Agreement (other than the first anniversary) an amount equal to the Minimum Amount for the 12 month period ending on that date less the aggregate of all amounts paid under paragraph (b) in that 12 month period.  For the purposes of this paragraph the Minimum Amount for any twelve month period shall be such amount calculated by adjusting a base amount of $108,000 effective as at 1 August 1989 by movements in the proportion of the Consumer Price Index as applied by the State Electricity Commission of Victoria to the incentive tariff for firm availability of supply of electricity; and

(d)from the date the Return on the Initial Royalty [as defined] exceeds 25% p.a. an amount equal to 50% of the Project Surplus Revenue [as defined] after that date.

It has been contended on behalf of GEC that the obligation imposed by paragraph (c) of that clause to make up to the Minimum Amount the aggregate of royalties at the rate of 3.75% of receipts in the preceding 12 months did not arise in the first year of operation of the power plant ie from 6 April 1992 to 5 April 1993.  I reject that interpretation of the clause.  In my view, the phrase “each anniversary of this Agreement” refers to each occasion on which 12 calendar months expired from the date of making the Gas Supply Agreement i.e. 24 December 1990.  The first anniversary of the Agreement thus occurred on 24 December 1991 but that anniversary was excluded by the phrase in parenthesis “(other than the first anniversary)” as an occasion on which GEC was obliged to make good the shortfall, if any, between residual royalties paid in the preceding 12 months and the Minimum Amount.  The first occasion on which GEC became subject to the contingent liability to make a payment by way of supplementing the residual royalty was the second anniversary of the Gas Supply Agreement i.e. 24 December 1992.

This construction is consistent with the expectation, to be gleaned from other contractual documents contemporaneous with the Gas Supply Agreement, that generation of electricity should commence on 1 March 1992.  I find no ambiguity inherent in the language of cl 3(c) of the Gas Supply Agreement but, if any such ambiguity could be demonstrated, I would resolve it in favour of Sunshine by resort, first, to the context provided by the contemporaneous agreements to which I have just referred.  That aid to construction is reinforced by the extrinsic evidence afforded by the file note (Exhibit 81) to the effect that the words in parenthesis had been inserted in acknowledgement of the fact that construction of the project would occupy the first year from the making of the Gas Supply Agreement.

GEC must therefore credit Sunshine with the amounts necessary to bring the residual royalties up to the Minimum Amount in respect of the year ended 24 December 1992 and each year thereafter.

(d)Calculation Errors

Mr O’Brien, a chartered accountant retained by GEC, gave evidence in the course of the substantive trial of the application that he had, in effect, audited GEC’s claims for lost revenue which had been submitted to Sunshine in respect of the period from 1992 to 1994 by examining them against the source documents.  Mr O’Brien claimed, a result of that process, to have identified calculation errors which required those claims to be reduced by $113,698.

Mr O’Brien’s “audit” was, in turn, reviewed by Mr Moffat, the chief executive officer of GEC’s power plant engineering division and Mr Bhatia, a planning engineer employed by GEC.  Those witnesses were responsible for preparing detailed “variance summaries” for each month from August 1992 to March 1994.  Those summaries collectively became Exhibit GEC-26.  Mr Moffat and Mr Bhatia were extensively cross-examined by Counsel for both Sunshine and Maunsell but it was not demonstrated that their corrections to Mr O’Brien’s audit were inaccurate or misconceived.

In the course of the further hearing on 29 April 1996, Counsel for Maunsell did not seek to adduce further evidence tending to invalidate the “corrections” which Mr Moffat and Mr Bhatia had contended should be made to Mr O’Brien’s calculations.  Rather, they contented themselves with submitting that Mr Moffat and Mr Bhatia had made certain “subjective” assessments as to where the records relied on by Mr O’Brien required adjustment and that their “corrections” should not be accepted by the Court.

Mr Zacherl, in his evidence in the course of the further hearing on 13 May 1996, adopted $41,564 as the appropriate amount by which GEC’s claim should be reduced for calculation errors.  Although he was cross-examined about how the conceded reduction should be apportioned over claims spanning a period of about 18 months, he was not challenged about the propriety of the “corrections” made to Mr O’Brien’s treatment of this issue.  Those corrections, as I understood them, arose principally from the acceptance by Mr Moffat and Mr Bhatia that identified periods of “downtime” appearing in the primary source records were attributable not to plant failure or maintenance but to deficiencies in the quantity or quality of gas.  In those circumstances, I accept the validity of the corrections and consider that the appropriate reduction to be made to GEC’s claim for calculation errors in respect of the earlier period is $41,564.

(e)       Interest

Section 51A(1) of the Federal Court of Australia Act 1976 provides:

In any proceedings for the recovery of any money (including any debt or damages or the value of any goods) in respect of a cause of action that arises after the commencement of this section, the Court or a Judge shall, upon application, unless good cause is shown to the contrary, either-

(a)order that there be included in the sum for which judgment is given interest at such rate as the Court or the Judge, as the case may be, thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date as of which judgment is entered; or

(b)without proceeding to calculate interest in accordance with paragraph (a), order that there be included in the sum for which judgment is given a lump sum in lieu of any such interest.

It is not disputed that GEC should be awarded interest on the amounts found to be due to it from Sunshine by way of indemnity as those amounts have been quantified from month to month. The matter in issue between the parties on this question is the rate at which the Court should order, pursuant to s 51A(1), that interest should be added to the amounts recoverable by GEC. It was submitted on behalf of GEC that the Court should adopt the rate of 13.2% per annum which was fixed by the Attorney-General of Victoria pursuant to s 2(1) of the Penalty Interest Rates Act 1983 and which has been in force from 30 October 1991 to date.

Support for that course was said to be derived from the judgment of Davies J in Namol Pty Ltd v A W Baulderstone Pty Ltd (1993) 119 ALR 187 where his Honour observed, at 188:

Interest should be added in accordance with s 51A of the Federal Court of Australia Act 1976 (Cth). It is the usual practice of the court when sitting in New South Wales to adopt the rates set out in Sch J to the Rules of the Supreme Court of New South Wales. This is because those rates reflect commercial rates of interest, which is not the case for the rates prescribed in O 35, r 8 of the Federal Court Rules. The practice has the policy advantage of ensuring that damages are awarded on the same basis whether a matter be instituted in this court or in the Supreme Court of New South Wales.

That statement was endorsed by a Full Court of this Court in Woodco Pty Ltd v Hollybank Pty Ltd (unreported Lockhart, Lee and Whitlam JJ 7 February 1995) where it was noted that no challenge had been made to the approach taken by Davies J.  Heerey J had earlier noted in Karmot Auto Spares Pty Ltd v Dominelli Ford (Hurstville) Pty Ltd (1992) ATPR 41-175 at 40,395:

Where an interest rate was not agreed but an award of interest is appropriate, a rate related to the market place should ordinarily be fixed: Ruby v Marsh (1975) 132 CLR 642 at 653; Cullen v Trappell 80 ATC 4185 at 4195; (1980) 146 CLR 1 at 21. In the absence of any direct evidence, the Practice Notes issued under s. 94(1) of the Supreme Court Act 1970 (NSW) would seem to be an appropriate guide. Awarding a rate of 10 per cent, which as a matter of notoriety has been well below prevailing interest rates in recent years, would seriously under-compensate a successful applicant. There would also be a disincentive against respondents making reasonable settlement offers since even a respondent ordered to pay the full amount of an applicant’s claim would have enjoyed the benefit of higher interest rates in the meantime.

However, the same learned Judge in Henderson v Amadio(No 2) (1996) 62 FCR 221 observed at 239:

As to the rate, I think rates fixed under the Penalty Interest Rates Act 1983 (Vic) are not appropriate since that legislation is directed to the courts of Victoria. The alternatives are overdraft rates, as suggested by the applicants, and one month term deposit rates, as suggested by Hudson Conway. Naturally the former are substantially higher. For example, as at 30 June 1990 the overdraft rate (National Australia Bank) was 21.75 per cent whereas the term deposit rate (WBC Deposits and Investments) was 13.25 per cent.

The evidence does not disclose whether the applicants have been in credit or overdraft since June 1990.  To award interest at overdraft rates to an applicant who was not in fact in overdraft would be to overcompensate.  Some applicants borrowed to make their investments and others had funds available, but that only indicates their position as at June 1990.  In the absence of evidence I think the fairest course is to apply the term deposit rates.  Between June 1990 and December 1995 these varied between 13.25 per cent and 4.35 per cent.  Rather than make separate calculations for each change of rate in respect of all amounts found due in this case, it seems fair and more convenient if a mean were to be applied.  Counsel for Huntley McArdle & Glass said that on his calculations the mean was 6.7 per cent.  There was no contrary submission.  Accordingly all amounts payable under this judgment will carry interest at 6.7 per cent simple from date of accrual until date of judgment.

Counsel for Maunsell opposed the application of a rate of 13.2% contending that interest rates which a State Supreme Court was directed to apply should not automatically be adopted by this Court in exercise of the discretion conferred by s 51A(1).

In my view, the correct approach is to fix interest rates which broadly reflect those prevailing in the commercial money market from time to time.  It may be that the rates appended to the Rules of the Supreme Court of New South Wales generally answer that description, at least to the extent that they provide a useful test of the appropriateness of a rate which the Court might be minded to adopt in the light of more direct evidence of market rates.  Moreover, an appreciable difference can be expected to be disclosed between market rates offered by commercial borrowers such as banks to depositors or other lenders and the rates charged by the same institutions to borrowers from them.  With respect to the views expressed by Heerey J in Henderson v Amadio (No 2) (supra), I do not consider that rates fixed by the Court in this context should vary according to the Court’s perception of what the recipient of the interest would have done with the principal had he or she received it when it fell due.

It is clear from the lack of movement in the rates fixed pursuant to the Penalty Interest RatesAct 1983 (Vic) during the last six years when interest rates have notoriously fallen to historically very low levels, that those rates do not mirror the market but, as the title to the Act suggests, and s 2(b) contemplates, contain a significant, and apparently increasing, penal component.

Moreover, s 60(1) of the Supreme Court Act 1986 (Vic) makes it clear that the rates fixed by the Attorney-General are maxima and that it is within the discretion of the Victorian Supreme Court to adopt, in any given case, rates below those fixed. That sub-section provides:

The court, on application in any proceeding for the recovery of debt or damages, must, unless good cause is shown to the contrary, give damages in the nature of interest at such rate not exceeding the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 as it thinks fit from the commencement of the proceeding to the date of the judgment over and above the debt or damages awarded (emphasis added).

In the light of the authorities, it seems a proper exercise of the discretion to adopt what appears on a broad view, without minute calculation, to be an average of commercial rates over the relevant period.  On that approach, I have decided to adopt a rate of 11% per annum which seems generally in line with the mean of rates prescribed during the same period by Schedule J under the Rules of the Supreme Court of New South Wales.

1. CLAIM BY SUNSHINE AGAINST MAUNSELL

(a)       Damages

At p 79 of the earlier reasons for judgment I concluded:

However, Sunshine was induced by Maunsell’s representations, or by what I have found to be Maunsell’s negligent advice, to bind itself to furnish GEC with the indemnity under the Gas Supply Agreement on which I have fixed Sunshine with liability.  Maunsell is accordingly liable to Sunshine in damages represented by the amount payable by Sunshine to GEC pursuant to the indemnity which was provided.

Sunshine has contended that it is entitled, upon an application of the measure of damages appropriate in tort, to be placed in the same position as it would have occupied had Maunsell not been negligent or made representations which were misleading or deceptive.  That required, so it was submitted, an order for payment by Maunsell to Sunshine, in addition to the amount necessary to indemnify Sunshine in respect of the amounts payable by it to GEC discussed in Part 1 of these reasons, of a:

sum representing the amount expended by Sunshine

(i)in investigating and in an endeavour to remedy the insufficient gas supply;

(ii)in construction of the well field, power station building and other infra-structure items provided by it; and

(iii)in the failed hydroponics venture, including the amount payable under the lease agreement for the hydroponics building.

It is accepted that the costs of investigating and endeavouring to rectify the deficiencies in the quantity and quality of gas derived from the field are properly recoverable by Sunshine from Maunsell.  However, Maunsell disputed its liability to reimburse Sunshine for costs incurred by it in constructing the well-field and power station building, including fees for professional services paid to Maunsell itself and what have been called “transaction costs” incurred in entering into the Gas Supply Agreement and related transactions.

In Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1, the High Court concluded that the proper measure of damages under s 82 of the Trade Practices Act for contravention of ss 52 and 53 of that Act is that in tort where “damages are awarded with the objective of placing the plaintiff in the position in which he would have been had the tort not been committed (similar to reliance loss).”  However, the same Judges went on to observe at 14:

The question then is whether it is appropriate to apply the contract measure of damages to the contraventions found to have taken place.  The courts are not bound to make a definitive choice between the two measures of damages so that one applies to all contraventions to the exclusion of the other.  However, there is much to be said for the view that the measure of damages in tort is appropriate in most, if not all, Pt V cases, especially those involving misleading or deceptive conduct and the making of false statements.  Such conduct is similar both in character and effect to tortious conduct, particularly fraudulent misrepresentation and negligent misstatement.

Counsel for Sunshine sought to draw an analogy between the present cases and cases where mortgagees have recovered damages for negligent valuations; see eg Trade Credits v Baillieu Knight Frank (NSW) Pty Ltd (1988) 12 NSWLR 670, Baxter v Gapp [1939] 2 KB 271 and London and South of England Building Society v Stone [1983] 1 WLR 1243.

There is no suggestion that the lenders in those cases were not obliged to bring in to account benefits received under the transactions which they were wrongfully induced to enter; e.g. interest on the higher principal which they had been induced to lend.  Indeed, in London Building Society v Stone Stephenson LJ observed at 1261:

But if an advance secured by the borrower’s reliance on a false valuation of a property becomes in fact an advance which needs no security, but is repaid without recourse to the property, then in my judgment the valuer may be fortunate enough to be able to rely on the borrower’s repayment in diminution of the lender’s loss and of the compensation he is legally liable to pay for it.

Similarly, because of the impossibility of quantifying in money terms the benefits which Sunshine has correspondingly received, I consider this case is within the area recognized in Gates in which the Court is not bound to make a definitive choice between the tortious and contractual measures of damages.  See also State of South Australia v Johnson (1982) 42 ALR 161 where the High Court concluded, at 170:

In the present case, Mr Johnson was induced by the negligent misrepresentation to become an applicant for allotment of the property under the scheme.  The property was allotted to him, and he spent some 13 years farming the property.  In such a case, it is not possible to restore Mr Johnson to the position in which he would have been if the negligent misrepresentation had never been made.  The learned trial judge expressly rejected such an approach, an approach which would have included an assessment of what the plaintiff’s position would have been had he remained in the Air Force.  No attempt was made at the trial to establish a claim for a sum to compensate the plaintiff for what he would have earned had he not been seduced by the misrepresentation.

I do not consider that Sunshine is entitled to recover its “transaction costs” which are presumably reflected in the physical assets which it has acquired and the benefits, such as they are, of the various contractual obligations to it which have been assumed by GEC.  This reasoning applies to the professional fees paid to Maunsell for the advice which contained the representations that induced Sunshine to enter into the subject transaction.  Those fees were the consideration for which Sunshine acquired the right of recourse against Maunsell to which it has been held to be entitled.

However, I accept the submission made on behalf of Sunshine that it is entitled to recover from Maunsell any extra expenses, including the cost of time and effort expended by Council officers, consultants and contractors which would not have been incurred had the quality and quantity of gas available from the field been as represented by Maunsell.  The order which I propose to make will provide for payment by Maunsell of those expenses as well as for reimbursement to Sunshine of moneys paid by it pursuant to the contractual indemnity which it gave to GEC.

(b)      Future Losses

It is highly likely that GEC will continue to lose revenue from the operation of the power plant at an increasing rate from the present day until the date on which the Gas Supply Agreement is fixed to expire, ie 1 March 2002.  It is true that, in its letter of 20 June 1990, Maunsell adverted to the risk that the gas flow available from the Hulett Street field might not exceed 75 GJ in the second five year period of operation of the power plant.  However, for reasons explained at p 75 of the earlier reasons, that qualification of Maunsell’s advice was not, in terms, calculated to deter Sunshine from entering into the Gas Supply Agreement or to induce it to limit its obligation to supply gas thereunder to 75 GJ per hour in the latter five years of the currency of the agreement.  Accordingly, Maunsell cannot confine, in the way suggested, its liability to make good the whole of Sunshine’s loss caused by the negligent advice or misrepresentation.

That is not to say that Maunsell should not obtain the benefit of any steps which may become available to Sunshine during the remaining life of the agreement to mitigate or offset the loss for which Maunsell has ultimately to assume liability.  Those steps may be available to be taken by Sunshine directly or may present themselves as economies which Sunshine, through a right of subrogation, can reasonably require GEC to effect.  However, the onus of proving that any such steps have become available and ought reasonably to be taken will remain on Maunsell (Garnac Grain Co v Faure & Fairclough [1968] AC 1130 at 1140). Accordingly, my declaration as to the obligation of Sunshine to indemnify GEC in the future and Sunshine’s right to recoup from Maunsell the cost of doing so, should be read subject to that caveat which may be invoked, if circumstances warrant, by exercising the liberty to apply which I shall reserve.

1. COSTS

GEC has succeeded in its claim to enforce its contractual right to an indemnity from Sunshine.  However, it was reasonable, in circumstances in which Sunshine had disputed its obligation to provide such an indemnity, for GEC to have joined Maunsell as a defendant.  In the ordinary course, therefore, GEC would be entitled to an order than Sunshine indemnify GEC for any costs which GEC might be ordered to pay to Maunsell;  see e.g. Johnsons Tyne Foundry Pty Ltd v Maffra Corporation (1948) 77 CLR 544 per Dixon J at 566.

However, in this case, Sunshine has, on its cross-claim, established that it is entitled to be indemnified in turn by Maunsell for the costs incurred, and to be incurred, in providing the contractual indemnity to GEC.  Sunshine has also succeeded in making out its cross-claim for further damages against Maunsell represented by the other expenses directly incurred by Sunshine in endeavouring to make the gas field more productive and otherwise as a result of Maunsell’s negligent advice or misrepresentations. The issues raised by the joinder of Maunsell as a respondent to GEC’s action did not travel significantly beyond those raised by Sunshine’s cross-claim and Maunsell’s cross-claim against GEC.  Nor is it possible to identify substantial periods of time spent in the course of the hearing which were confined to issues arising from GEC’s joinder of Maunsell.

Similar considerations apply to the cross-claim by Sunshine against GEC.  As well, it has to be borne in mind that costs were thrown away at various early stages of the original hearing as a result of deficiencies in the discovery of one party or another and of amendments to pleadings and a consequential need for supplementary discovery.  A similar observation can be made about the costs of the further hearing after publication of the original reasons for judgment.  In the event, much of the evidence taken in those hearings did not have to be evaluated by the Court because agreement was reached between the parties on the quantum of the “savings” which should be allowed by GEC in calculating its losses of revenue up to 31 January 1996.  Time was also spent on other issues such as the interpretation of cl. 3 of the Gas Supply Agreement governing accrual of Sunshine’s entitlement to royalty payments and the appropriate rate of interest as a component of GEC’s damages.  On those issues, GEC’s arguments have not prevailed entirely or, in some respects, at all.  Minute apportionment of responsibility for those costs thrown away, or, arguably, unnecessarily incurred, would involve more costs and the expenditure of more time than it would be worth.  It is sufficient to note my clear impression that it would be unfair to lay the whole burden of those costs at the door of Maunsell.

In the light of all these matters, I consider it a legitimate exercise of the discretion adumbrated by Gibbs CJ in Gould v Vaggelas (1985) 157 CLR 215 at 230 to impose “some liability” on the unsuccessful respondent for the costs of the successful respondent. Taking a broad view of the course taken by the litigation and applying the principles indicated as applicable to the discretion by Toohey J in Hughes v Western Australian Cricket Association (Inc) [1986] ATPR 40-748, I regard it as appropriate to make no order as to the costs of the claim by GEC against Maunsell and to order that Sunshine pay 85% of GEC’s costs of its claim against Sunshine and of Sunshine’s cross-claim against GEC. Maunsell, in turn, should indemnify Sunshine to the extent of 85% of the costs which Sunshine is required to pay to GEC and should pay 85% of Sunshine’s costs of its cross-claim against Maunsell. Maunsell must also pay GEC’s costs of Maunsell’s cross-claim against GEC.

1. FORM OF ORDERS

(a)It is accepted that Brimbank City Council, as the successor to Sunshine, pursuant to certain legislative changes of local government areas and the designation of the entities responsible for them, should be substituted as the first respondent and first cross-applicant.  I shall order accordingly and, in succeeding paragraphs of the orders, shall refer to that respondent as “Brimbank”.

(b)In the orders tentatively proposed at the conclusion of the earlier reasons for judgment, I suggested a form of declaration in respect of Sunshine’s obligation to indemnify GEC against losses occasioned by the failure of the field to yield a gas energy flow at the stipulated rate of 95 GJ-hr.  I propose to preserve a declaration in substantially those terms but referring specifically to the matters of downtime, parasitic loss and royalties considered in Part 1 of these reasons.

(c)It has not been possible to quantify precisely, as at 31 January 1996 or any other date, the amount to which GEC has become entitled pursuant to the indemnity referred to in (b) above.  I shall therefore confine an order for payment pursuant to that indemnity to one requiring payment by Sunshine to GEC of an amount calculated in accordance with the declaration after allowing for “savings” accruing up to 31 January 1996 in the agreed sum of $875,996.  I shall also provide for an adjustment in respect of the same period for the calculation errors referred to in Part 1(d) of these reasons.

(d)The amounts calculated to be payable to GEC as indicated in (b) and (c) above as accruing due from month to month from April 1992 to date of payment should bear interest at the rate of 11% per annum.

(e)Payments in discharge of the indemnity to which effect is to be given by the declaration referred to in para (b) above should continue to be made as the obligation accrues from month to month until the expiration of the Gas Supply Agreement on 1 March 2002.  The requirement to make those payments will be qualified in the order by expressing it to be subject to further order so as to accommodate the possibility of future adjustment adverted to in Part 2(b) of these reasons.  Payments in discharge of liabilities accruing in the future, if made in time, will not carry interest.

(f)An order must be made on Sunshine’s cross-claim against Maunsell to the effect that Maunsell should indemnify Sunshine for payments made in accordance with the declaration referred to in para (b) above.  As well, Maunsell must indemnify Sunshine in respect of any expenses which Sunshine has incurred as a result of the gas energy flow having been less than that represented by Maunsell.

(g)Sunshine’s cross-application against GEC and Maunsell’s cross-claim against GEC must be dismissed.  GEC’s application against Maunsell will also be dismissed with, for the reasons explained in Part 3 above, no order as to costs.

(h)For the reasons explained in Part 3 above, orders for costs will be made in the form there indicated.

(j)Liberty to apply will be reserved to all parties, partly to accommodate the possible need for an adjustment of rights and liabilities in respect of losses accruing in the future which is adverted to in Part 2(b) above.  However, the liberty to be reserved will not be confined to that matter and may be invoked if further difficulties are encountered in quantifying amounts to be taken into account in making calculations required by the orders, such as amounts of “savings” to be imputed to GEC after 31 January 1996 or expenses incurred by Sunshine as a result of Maunsell’s misrepresentation.

I certify that this and the preceding thirteen (13) pages are a true copy of the Reasons for Judgment of the Honourable Justice Ryan

Associate:

Dated:            18 August 1997

Counsel for the Applicant and First Cross Respondent:	Mr E W Gillard, QC and Mr M Garner
Solicitors for the Applicant and First Cross Respondent:	Colin Biggers & Paisley
Counsel for the First Respondent and Cross Applicant:	Mr J G Larkins, QC and Mr T North
Solicitors for the First Respondent and Cross Applicant:	Price Brent
Counsel for the Second Respondent and Second Cross Respondent:	Mr D Habensberger, QC with Mr T J Ginnane
Solicitors for the Second Respondent and Second Cross Respondent:	Hall & Wilcox
Dates of Hearing:	3 and 29 April 1996 13 May 1996 14 and 18 June 1996
Date of Judgment:	18 August 1997