Golden Sands Pty Ltd v Excel Quarries Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL LIST

No. 6875 of 2005

GOLDEN SANDS PTY LTD (ACN 096 491 913)	Plaintiff
v
EXCEL QUARRIES PTY LTD (ACN 010 056 407)	First Defendant
And
DARRA EXPLORATION PTY LTD (ACN 009 800 355)	Second Defendant

---

JUDGE:	WHELAN J
WHERE HELD:	Melbourne
DATE OF HEARING:	1, 2, 6, 8, 9, 13, 14, 15, 16 and 20 November 2006; 8, 11, 12, 13, 14, 15, 18, 19, 21, 25 and 26 February 2008
DATE OF JUDGMENT:	25 July 2008
CASE MAY BE CITED AS:	Golden Sands Pty Ltd v Excel Quarries Pty Ltd & Anor
MEDIUM NEUTRAL CITATION:	[2008] VSC 276

---

CONTRACT — Royalty agreement re sand extraction and treatment operations — Warranties — Warranty as to good standing under legislation and not liable to forfeiture or cancellation — Warranty as to no outstanding requisitions, orders or requirements — Whether breaches of warranties — Breaches not established

CONTRACT — Implied terms — Requirements for implication not met

TRADE PRACTICES — Trade Practices Act 1974 (Cth) — Misleading or deceptive conduct — Whether failure to disclose existence and contents of certain expert reports misleading or deceptive conduct — Misleading or deceptive conduct not established

NEGLIGENCE — Alleged negligent misstatement — No misstatement established on evidence

---

APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Ms K. McMillan SC with Mr D. Clough	Piper Alderman (November 2006)
Mr S. Wilson QC with Mr W. Lye	Maurice Blackburn Cashman (February 2008)
For the Defendants	Mr P. Bick QC with Mr M. Osborne	Cornwall Stoddart

TABLE OF CONTENTS

Introduction................................................................................................................................... 1
Sequence of Events....................................................................................................................... 2

Early involvement of Mr William Wilson and Mr Strickland with the Darra site.............. 2

Arrangements between Wilson, Strickland and Derham........................................................ 3

Pre-June 2001 operations on the Darra site............................................................................... 3

Discussions concerning combined operations......................................................................... 4

The Stewart reports in 1995 and 1998......................................................................................... 6

Consideration of the Stewart report in 1998.............................................................................. 8

Golden Sands takes over the Darra Site................................................................................... 12

Negotiations for the Royalty Agreement................................................................................ 13

Issues raised about the plant and equipment during the negotiations.............................. 13

The Royalty Agreement............................................................................................................. 14

Golden Sands’ concerns about corrosion prior to the Royalty Agreement........................ 15

Maintenance by Golden Sands on the Darra site................................................................... 17

The dispute with Mr Derham.................................................................................................... 18

Role of government inspectors................................................................................................. 20

Butler’s visits in March 2004...................................................................................................... 21

Failure to pay royalties.............................................................................................................. 21

Golden Sands first raises the corrosion issue and the 1998 Stewart report........................ 22

Mr Ricker returns........................................................................................................................ 23

The new plant on Davegale....................................................................................................... 23

Initial response of Excel to stacker complaint........................................................................ 25

Mr Butler follows up.................................................................................................................. 25

Stewart’s September 2004 report............................................................................................... 26

Further dealings between Excel and Golden Sands on the stacker and the engagement of David Bell........................................................................................................................................................ 28

Non-payment of royalties.......................................................................................................... 28

A replacement stacker is proposed.......................................................................................... 29

Further proceedings concerning non-payment of royalties................................................. 32

Dealings with Butler in late 2004 and early 2005................................................................... 32

The sand plant issues and the Knauer report......................................................................... 36

Golden Sands rejects the replacement stacker........................................................................ 37

Closure of the stacker................................................................................................................. 39

Production after stacker closure............................................................................................... 40

Continued problems with the sand plant and other compliance issues on the site......... 40

Institution and progress of this proceeding............................................................................ 42

The dozer hire.............................................................................................................................. 43

Reasons for the failure of the replacement stacker solution................................................ 44

Golden Sands’ Contractual Claims........................................................................................... 47

The pleaded case......................................................................................................................... 47

The existence of the alleged implied terms............................................................................ 49

The express warranties: clause 10.2......................................................................................... 51

The express warranties: clause 10.3........................................................................................ 61

Damages had breach of warranty been established.............................................................. 62

Golden Sands’ Section 52 Claims.............................................................................................. 62

The pleaded case......................................................................................................................... 62

Relevant legal principles........................................................................................................... 65

Was there misleading or deceptive conduct?......................................................................... 66

Misleading or deceptive conduct: other issues...................................................................... 69

Other Claims: Negligent misstatement and termination of the Royalty Agreement...... 71
Counterclaim............................................................................................................................... 71
Conclusions.................................................................................................................................. 72

HIS HONOUR:

Introduction

The plaintiff (“Golden Sands”) sues the first defendant (“Excel”) and the second defendant (“Darra Exploration”) in relation to an agreement concerning two quarries, one at 555 Sandy Creek Road, Lara (“the Darra site”) and one at 350–390 Sandy Creek Road, Lara (“the Davegale site”). The Davegale site and the Darra site are opposite each other on Sandy Creek Road.

Golden Sands is now under the control of Mr William Wilson and Mr Robbyn Strickland. They are the two directors. The business manager is Mr William Wilson’s son, Mr Peter Wilson.

The relevant agreement is a Royalty Agreement dated 21 December 2001 between Golden Sands, Excel, Darra Exploration, and a company named Davegale Pty Ltd. I will refer to this agreement as the “Royalty Agreement”. Under the Royalty Agreement, Golden Sands was given the right to extract sand from the Darra site and to use plant and equipment on the Darra site in the treatment and production of extracted sand. Golden Sands agreed to pay royalties. Darra Exploration and Excel gave certain warranties to Golden Sands in the Royalty Agreement.

The plant and equipment on the Darra site at the time the Royalty Agreement was executed included a sand washing plant and a large converted Favco crane with a belt conveyor which was used for depositing the washed sand on a concrete platform in large piles in which the sand drains and is stored. The converted crane with the conveyor is referred to as a “stacker”.

Commencing in early 2004, the stacker, the sand washing plant, and other aspects of the Darra site were the subject of various notices issued by a government inspector. Eventually, in early 2005 the stacker was closed down, and in early 2006 the sand washing plant was closed down.

In this proceeding Golden Sands claims that the condition of the plant and equipment at the date of the Royalty Agreement was such as to constitute breaches of the warranties given by Darra Exploration and Excel. Until a point late in the trial it made this claim in relation to the stacker and to a component of the sand washing plant called the dewatering assembly. During the trial Golden Sands abandoned reliance on alleged breaches of warranties in relation to the dewatering assembly and relied exclusively on its complaints in relation to the stacker.

In addition to relying on the express warranties in the Royalty Agreement, Golden Sands also alleges breaches of implied terms. Further, Golden Sands alleges that it was misled by Excel and Darra Exploration in relation to the condition of the stacker. This claim is principally founded upon Excel and Darra Exploration’s failure to bring to Golden Sands officers’ attention a report in relation to the stacker prepared by an engineer in July 1998.

The defendants deny Golden Sands’ allegations and counterclaim for outstanding royalties under the Royalty Agreement and a declaration of entitlement to terminate the Royalty Agreement. Golden Sands for its part claims that it validly terminated the Royalty Agreement in 2007. Excel and Darra Exploration deny that the agreement has been validly terminated.

The trial began in November 2006. When its allotted time had elapsed it was adjourned part heard. I made certain interlocutory orders which were the subject of an appeal and further applications.[1] The trial resumed in February 2008.
[1]Golden Sands Pty Ltd v Excel Quarries Pty Ltd [2006] VSC 454; Golden Sands Pty Ltd v Excel Quarries Pty Ltd (No 2) [2007] VSC 157.

Sequence of Events
Early involvement of Mr William Wilson and Mr Strickland with the Darra site

Mr William Wilson has over 35 years’ experience in the sand mining industry. During the mid 1980s, when managing director of a company named Oupan Resources Pty Ltd (“Oupan”), he was involved on a day to day basis in the design, construction and subsequent operation of the stacker and the sand washing plant on the Darra site. Production on the Darra site began in 1988.

In 1994 Oupan sold the site to Darra Exploration and sold the business conducted on the site to Excel. At that time both Darra Exploration and Excel were members of the Queensland Cement Ltd group of companies.

Mr Strickland was also involved in the construction of the plant on the Darra site between 1986 and 1988. At that time he was primarily a plant operator and trades assistant. The engineer on that project was Mr Helmut Ricker.

After the sale of the Darra site and the business in 1994, Mr Strickland remained on as manager until 1997. After that he was employed by Little River Pastoral Co Pty Ltd trading as Specified Sands on the Davegale site from March 1998.

Arrangements between Wilson, Strickland and Derham

In early 2001 Mr Strickland was manager of the Davegale site. He and Mr William Wilson, and one David John Derham, who conducted a trucking business through his company Derham Transport Pty Ltd, joined together to take over the conduct of the quarrying operations on the Davegale site.

The Davegale site was purchased by a company associated with Mr Derham named Davegale Pty Ltd. An agreement was entered into dated 23 April 2001 between Mr William Wilson, Mr Strickland and Mr Derham (or their nominees). To further this venture the three men incorporated Golden Sands, with the shareholding being 40 percent Wilson, 20 percent Strickland and 40 percent Derham. Clause 14 of the agreement between Messrs Wilson, Strickland and Derham dated 23 April 2001 reads as follows: “Derham will allow Golden Sands Pty Ltd to carry on the business until such time as Derham decides that the agreement should end.”

Pre-June 2001 operations on the Darra site

Prior to 1 June 2001 Excel was carrying out sand quarrying activities on the Darra site. Excel’s Victorian operations manager from May 1998 until June 2003 was Mr Terrence Williams. Between January 1998 and December 1999 the quarry manager on the Darra site was Mr David Ramage.

According to the evidence of Mr Williams, the high point of annual sand production on the Darra site prior to 2001 was approximately 350,000 tonnes per annum, which dropped to approximately 200,000 tonnes per annum in the period immediately prior to 2001 as a result of a decision made to stop producing concrete sand. Mr Ramage, who was not on the site after December 1999, said in his evidence that in his time production had been as high as 330,000 tonnes but that it then dropped back to 300,000 because of a lack of available water. Mr Williams said that when production was at its highest the sand washing plant was producing approximately 20,000 tonnes per month. Operations on the site produced both washed and unwashed sand.

In the period leading up to 2001 Excel’s operations on the Darra site were not profitable. Mr Williams said that losses were incurred and that there was pressure to reduce costs.

Both Mr Williams and Mr Ramage described the maintenance practices prior to 2001. Specialist contractors, particularly a company named Westmain Pty Ltd, were engaged to undertake most of this maintenance. According to Mr Ramage, Westmain had two fitters on site full time. Both Mr Williams and Mr Ramage said that maintenance costs on the Darra site were high and that there was pressure to keep them down.

During the period of Excel’s operations on the site quarry managers’ report books were maintained. These report books were kept on site. They constituted a daily record of relevant events in the form of a kind of diary.

Discussions concerning combined operations

There is some conflict in the evidence as to who approached who in relation to the arrangements which were eventually made whereby Golden Sands began operations on the Darra site as well as on the Davegale site, and there was also conflict in the evidence as to what the sequence of the relevant meetings was. It does not seem to me that it is necessary to resolve these conflicts. Whilst there is a claim for misleading or deceptive conduct, the alleged conduct is founded on what was not said, not on what was said. There is no dispute that meetings were held between Mr Williams and a Mr Ridout for Excel and Darra Explorations and Mr William Wilson and Mr Strickland for Golden Sands which resulted in arrangements being made whereby Golden Sands took over operations on both sites.

There were some obvious synergies which suggested to those involved at the time that combined operations on the two sites would be worthwhile.

The Darra site had considerable reserves of fine sand. It also had a substantial sand washing plant and a stacker of considerable capacity. As I indicated earlier, the stacker had been constructed from a converted Favco crane. It had substantial elevation and deposited the sand onto a large concrete pad which had been constructed in such a way that the water would drain in an effective manner. The Darra site had limited water reserves for use in washing sand and limited capacity for storing “slimes” which are an inevitable by-product of the sand washing process.

The Davegale site had considerable reserves of coarse sand. Whilst there was some plant on one portion of the Davegale site, referred to as the “390” portion, the Davegale site did not have plant of anything like the capacity of that on the Darra site. The Davegale site did have substantial water reserves and substantial capacity to store “slimes”.

One of the major products sought by customers is blended concrete sand. This is a washed sand product which requires a combination of coarse and fine sand. The two sites operating together were thought to be in a good position to produce this product.

According to Mr Derham, there was a further reason why Mr William Wilson was attracted to the idea that Golden Sands would take over operations on both sites and that was the benefit Golden Sands would realise by taking over Excel’s extensive list of customers. I accept Mr Derham’s evidence that this was a relevant additional factor.

The Stewart reports in 1995 and 1998

In 1995 an engineer with specific expertise in relation to Favco cranes, Mr Gordon Stewart, inspected the stacker on the Darra site. He sent a report to Excel dated 24 May 1995 which was marked to the attention of Mr Robbyn Strickland, the then manager of the quarry. The 1995 report relevantly reads as follows:

The specific reason for the inspection was to take advantage of my experience with Favco cranes in the matter of external corrosion.
For a proper investigation of this matter the boom, upper deck and towers would need to be cleaned, sandblasted and inspected at the weld joints by magnetic particle methods. Also thickness testing of the chords and other critical parts by ultrasonic means.
The corroded condition of the total structure is such that I would not accept it for crane usage irrespective of the results of any tests.
The unit is not now a crane or ever likely to be again hence the loads are all but static and a dead weight. …
…
Given the present use of the stacking conveyor assembly I do not consider the structure to require thickness testing or crack testing but think it should be cleaned, sandblasted and suitably painted at some appropriate time so that unnecessary corrosion does not continue to take place.
…
I would suggest that the present structure in the present condition could be expected to have a life of some 10 years from the above date.
In my opinion the conveyor is in suitable condition for continued work having regard to the OH&S Act 1985 as it effects [sic] this sand extraction operation.

In his oral evidence Mr Stewart explained that no structure can have an infinite life and that 10 years is the generally accepted minimum estimate for the projected life of mechanical equipment in the sense that “either it’s suitable for another ten years … or it is not suitable for use”.

At some time in 1998 one Paul Knauer prepared a report entitled “Processing Plant Rationalisation 1998”. One of the matters dealt with in that report was the condition of the dewatering screens in the wash plant. The report stated:

The 2 dewatering screens are in need of major repair both sub frames holding the screen mats together are in urgent disrepair both will require in a short period of time entire screen mats which is very costly.

Until abandoned during the trial, this observation was the basis for the claims made by Golden Sands concerning the dewatering assembly. These claims were similar in nature to the claims it makes concerning the stacker. These claims were abandoned after Mr Ramage gave detailed evidence of the repairs carried out at his instigation in response to this part of the report. Golden Sands’ counsel did not say that these claims were abandoned as a consequence of Mr Ramage’s evidence, a different explanation was given. If the claims had not been abandoned I would have rejected them as a consequence of Mr Ramage’s evidence on this issue.

Mr Stewart carried out another inspection of the stacker in 1998. He wrote a further report which is dated 8 July 1998. He forwarded it to Excel marked to the attention of David Ramage. Relevantly, the report reads as follows:

Since my last visit in May 1995 there appears to be significant deterioration to the structure and walkways. Much of the walkway area needs rapid attention as does some areas where sand constantly builds-up due to spillage or return belt droppings.
The revolving deck of the Favco crane, which now supports the tail pulley assembly, is very rusted. This area I do not see as imposing a collapse of structure problem. It is reasonable to point out that the more corrosive action, which can be minimised, the longer the structure will last.
Assess [sic] from the walkway of the feeder conveyor to the Favco decking needs urgent attention.
The Favco boom, which is now the conveyor belt support assembly, has recently been sandblasted at the rear section over a short length. There is very significant pitting corrosion to some of this area. The length which was sandblasted appears to have been controlled by access.
It is my opinion that an EWP should be used to access much further along the boom for sandblasting. There is major corrosion in the bottom chords in the unblasted area and it is not possible to assess the chord condition. The corrosion will shortly become a major safety issue if not attended to in the very near future.
Following sandblasting the critically corroded areas should be thickness tested by NDT methods [ie Ultratest ph.9789 5535] from the EWP before painting. This needs to be compared with a non-corroded area by an engineer. Some repair from the EWP may be required.
From my casual inspection I do not believe that the structure is unsound or unsafe but it is in some areas weakened and there may be a need to carry out some welding of patch plates.
As a matter of note only:—

The form of structural failure of this unit is most likely to be by local buckling in a panel section. ie. It will not simply fall apart as a total structure.
Your attention to these matters is important and I would wish to be kept informed so that at the end of the rework I can issue a certificate of competence for the structure.

Mr Ramage’s evidence was that in about mid 1998, following a routine inspection of the site, a Department of Energy and Minerals inspector had said to him that the stacker appeared to be corroded and that a corrosion report should be prepared by a qualified person. His evidence was that he asked Mr Stewart to prepare the report delivered in July 1998 as a consequence of this request. The inspector of the Department responsible for the Darra site at that time was Mr John Mitas.

The first thing that Mr Ramage did after receiving the 1998 Stewart report was to seal off access to the walkway along the boom with safety barrier mesh and safety tape. From that point onward whenever access was required to the boom an elevated work platform was used.

Mr Ramage had already carried out the sandblasting of parts of the stacker including a short section of the boom prior to Mr Stewart’s 1998 report, and Mr Stewart refers to that work in his report.

Consideration of the Stewart report in 1998

Mr Williams and Mr Ramage each gave evidence about steps taken in response to the 1998 Stewart report. Mr Mitas (the inspector at the time) also gave evidence and he too was asked about the report at trial.

Mr Ramage said he believes that he gave a copy of the 1998 Stewart report to both Mr Williams and Mr Mitas. Neither Mr Williams nor Mr Mitas recall having received the 1998 Stewart report. Mr Mitas has searched his files and he said in his evidence that there is no copy there.

Minutes of management meetings attended by Mr Williams and Mr Ramage in July 1998, August 1998, September 1998, October 1998 and November 1998 refer to the stacker issue. The minutes refer to “a corrosion report” having been received, which Mr Ramage says is a reference to the 1998 Stewart report. They refer to the fact that the report advised that what was required was “sandblasting and repainting of the whole structure”. They refer to quotes being obtained. The minutes of the meeting on 8 October 1998 relevantly read as follows: “The radial stacker is to be repaired at a cost of approx $30,000 and is likely to be carried out over the Christmas closure.” The same entry is repeated in the minutes of 5 November 1998, but the minutes of the 10 December 1998 meeting contain no entry in relation to the stacker.

Both Mr Williams and Mr Ramage said that in 1998, after the Stewart report, the stairway forming part of the stacker was completely replaced. They both also said that further repairs which were scheduled for the Christmas closure period were never done. They both said that Mr Ramage wished to completely replace the walkway but that Mr Williams would not agree to this. Mr Williams was of the view that blocking access to the walkway and using an elevated work platform for access was an acceptable and “a cheaper option”.

Whilst Mr Ramage expressed the belief that Mr Williams did have the Stewart report in 1998, Mr Williams’ belief is that he did not have it, and that he never read it, at that time. Their evidence also differed on a related issue. Whereas Mr Ramage said that all aspects of the report including corrosion generally were discussed between the two of them, Mr Williams said that their discussion only concerned the walkway and the stairs.

My assessment is that each of these men were honest witnesses doing their best to tell the truth. It is not surprising that they differ in relation to events which occurred almost 10 years ago. As to the differences between Mr Williams and Mr Ramage I make the following observations:

1.Whilst Mr Williams says that they only discussed the walkway and the stairs and Mr Ramage says that all of the report was discussed, it was nevertheless clear in Mr Ramage’s evidence that his principal concerns were the walkway and the stairs. He described the walkway as his “primary concern”. When asked to agree in cross-examination that the Stewart report raised safety issues his response was: “Definitely with the walkway. Definitely”. And when later asked again about safety and whether the underlying condition of the stacker boom remained a safety issue his response was: “The walkway. If you go back to the Stewart report, it wasn’t in danger of just falling down”.
2.Mr Williams says that the only repair he prevented Mr Ramage from carrying out was the replacement of the walkway and that that was because he considered that blocking access and using an elevated work platform was an equally safe and a cheaper alternative. Mr Ramage’s evidence was that more extensive repairs were scheduled to be carried out, and the minutes of the management meetings to which I have referred confirm that. But Mr Ramage also said that the reason those repairs were not done, was not because of a direction from Mr Williams but because he could not stop production over that Christmas period. Mr Ramage did not suggest that Mr Williams prevented any repairs being carried out other than the replacement of the walkway. This is consistent with Mr Williams’ evidence.
3.Mr Ramage’s evidence was that he gave a copy of the 1998 report not only to Mr Williams but to Mr Mitas as well. Like Mr Williams, Mr Mitas says he believes he did not get a copy of the report. There is no record of transmission of the report to either Mr Mitas or Mr Williams. There is no reason not to accept Mr Mitas’ evidence on this issue.
4.Mr Williams was very candid in conceding that, having read the 1998 Stewart report now, he appreciates now that he did not realise then “how bad the Stewart report paints the boom”. He also candidly said that, if he had read the report then, he would have placed more importance on it than he did.

It seems to me, on the balance of probabilities, that Mr Mitas and Mr Williams, who say they believe they did not see a copy of the report in 1998, are to be preferred to Mr Ramage, whose evidence is he believes that they did. In reaching this conclusion I do not in any sense reach any adverse finding on the credit of Mr Ramage. Indeed, my conclusion in relation to Mr Ramage’s credibility is quite the contrary. I found him to be a most credible witness and I accept all of his evidence other than on this particular point, where it seems to me that the probabilities are he is mistaken. That is not to say that Mr Ramage did not discuss all of the contents of the report with Mr Williams. In my view the probabilities are that he did so. The matters which have stuck in Mr Williams’ mind are the stairs, which were replaced, and the issue of the walkway, which was the matter with which Mr Ramage was primarily concerned.

Mr Mitas was also asked, having now read the 1998 Stewart report, what action he would have taken if he had read it then. His response was that the issue was the responsibility of the quarry manager. He would not say that he would have taken action himself. When asked whether he would have checked or followed up with the quarry manager he replied: “Only if I — if I was of the opinion there was some safety — serious safety issues with the structure, yes.” Golden Sands called Mr Mitas. This exchange took place in re-examination. Counsel for Golden Sands pursued the matter no further.

I was left with the clear impression that Mr Mitas would not have taken action consequent upon reading the Stewart report in 1998 unless he was of the opinion himself that there were serious safety issues with the structure. He was not asked whether the action taken to address the problem with the walkway (blockage and use of an elevated work platform) meant that the then current safety issues were resolved. He was not asked whether the replacement of the stairs resolved the safety issues in relation to that matter. He was not asked whether Stewart’s opinion that corrosion would “shortly become a major safety issue if not attended to in the very near future” would have prompted action by him at the time, or what that action would have been.

There is in evidence a document dated 1 June 2000 which is headed “Summary of Priorities — You Yangs Quarry”. You Yangs Quarry is a reference to the Darra site. The document catalogues the equipment and indicates in a table with a number of columns whether each particular item of equipment raises safety issues, whether it is expected to fail, whether major repairs are required, whether minor repairs are required, whether an upgrade is required, and the estimated cost. The stacker is referred to as “Conv 15”. The table indicates there were three safety concerns with the stacker and one item of major repair and one item of minor repair. Attached to the table are separate sheets for each item of equipment. The sheet in relation to the stacker reveals that the item of minor repair was the tail shoot and that that was done in January 2001. The item of major repair was sand blasting of the stacker tower and painting the lower section. The three items of safety concern were the stacker tower, the tail drum guard which was said to be very corroded, and the stacker walkway which was said to be “very corroded in some areas and needs replacing”.

Mr Williams did not recognise this document but he suggested that it was likely to be a list made up by the quarry manager at that time, a Mr Lester Hall.

This document indicates to me that as at June 2000 the stacker boom was not seen to be a safety concern but that the stacker walkway, which had been blocked off by Mr Ramage two years before because it was a safety concern, remained a concern. The walkway is the first item referred to on the sheet which deals with the stacker.

Golden Sands takes over the Darra Site

Golden Sands took over conduct of operations on the Darra site on 1 June 2001. Before taking over operations Mr Strickland and Mr Wilson had inspected the plant. Golden Sands operated the plant for over six months before the Royalty Agreement was executed on 21 December 2001.

Mr Williams’ evidence was that Excel left everything, including documents, at the site, handing it over to Golden Sands “as is”. I accept that.

Negotiations for the Royalty Agreement

The negotiations for the Royalty Agreement were protracted. The first draft of the agreement in evidence is dated 3 August 2001.

An interim agreement was made between the parties dated 20 September 2001 and signed on 24 September 2001. Under this interim agreement Golden Sands agreed “that liability rests with them for … maintain [sic] all mobile and fixed plant in safe condition.”

A further draft of the Royalty Agreement is in evidence. It is described as draft 4 and is dated 28 September 2001.

Yet a further draft of the Royalty Agreement dated 19 November 2001 is also in evidence.

Issues raised about the plant and equipment during the negotiations

In 2001 Golden Sands had three directors, Mr William Wilson, Mr Robbyn Strickland, and Mr David Derham. According to Mr Derham, at some point, perhaps shortly prior to taking possession of the Darra site or perhaps afterwards, he expressed concerns to Mr William Wilson and to Mr Strickland about the condition of the plant. In his witness statement he said he was concerned about the rust he had seen. He said he told Mr William Wilson and Mr Strickland that in his opinion Golden Sands should get an engineer who could introduce a metallurgist to assess the structural integrity of the plant.

Whilst I accept Mr Derham’s evidence that a conversation to this effect did occur, and that it did occur before the Royalty Agreement was executed in December 2001, I think it likely that the references to a metallurgist occurred later than Mr Derham now recollects. This is because the references to engagement of a metallurgist seem to be associated with a solicitor, Mr Harrison, who became involved later.

Golden Sands wrote a detailed letter to Excel dated 19 October 2001 addressing work which it was said Golden Sands had already carried out in overhauling and improving the equipment on the Darra site, and in supplementing that plant by equipment supplied by Davegale Pty Ltd. The assertion was that the total cost of all of this was $171,390. The letter also asserted that additional equipment was required costing a total of $55,000. The letter also addressed “substantial work yet to be done on the Excel plant”. A number of items were referred to, some of which related to corrosion problems. The estimated cost of work which the letter asserted was still to be carried out was $100–$120,000.

This letter was written in the course of the negotiation of the terms of the Royalty Agreement. The Royalty Agreement when executed provided for Excel to contribute $40,000 towards the cost of maintenance incurred by Golden Sands in the period June to October 2001. According to Mr Williams’ evidence, which I accept, Excel also paid to Golden Sands, or gave it credit for, $100,000 in response to the matters raised in the 19 October 2001 letter.

The Royalty Agreement

The Royalty Agreement was signed on 21 December 2001.

Under clause 4 of the Royalty Agreement, a royalty is payable per tonne of sand sold by Golden Sands whether sourced from the Darra site or the Davegale site in full or in part. The royalty is calculated in accordance with a formula and is payable on the twenty eighth day of each month. There is an obligation to pay a minimum royalty based on a yearly tonnage of not less than 300,000 tonnes. The royalty is adjusted each quarter.

Under clause 7.1 of the Royalty Agreement, Golden Sands is to have unfettered access to the Production Facilities (as defined), which includes the stacker. Clause 7.2 provides:

Golden Sands shall fully maintain the production facilities to the operational standard of the facilities as at the Commencement Date. Any and all improvements which Golden Sands makes to the Production Facilities shall become and remain the property of Excel.

The commencement date is defined as 1 June 2001.

Under clause 9.4 of the Royalty Agreement Golden Sands undertook to ensure all activities on the Darra Site complied with all applicable “Regulatory Requirements”, which was defined in broad terms.

Darra and Excel Exploration gave warranties in these terms:

10.2 Darra warrants in respect of the Darra Site that the Darra Site is in good standing under the Act and not liable to forfeiture or cancellation for any reason and is not the subject of any litigation.
10.3 Darra and Excel warrants in respect of the Darra Site that there are no outstanding requisitions by any duly empowered authority in respect of it. Darra and Excel also warrant that there are no outstanding orders or requirements on the Work Authority.

The “Act” is defined as meaning the “Extractive Industries Development Act 1985”.

Mr William Wilson gave evidence both in his witness statement and orally about the express warranties. He said that he was conscious of the risk of there being some unknown factor concerning the plant which would subsequently create problems and it was with that known risk in mind that he sought these warranties. Mr Williams in cross-examination was asked whether he recalled Mr William Wilson saying he wanted to ensure the site was in good standing under the relevant legislation and Mr Williams said he did. When asked whether he had said that that was the case Mr Williams responded by saying that there were certainly no orders by the relevant authority. Mr Williams then agreed that Mr Wilson had said he wanted a warranty to that effect, and Mr Williams added “… and that was subsequently written in”.

Golden Sands’ concerns about corrosion prior to the Royalty Agreement

Mr William Wilson wrote the letter dated 19 October 2001 to which I have already referred. Mr Derham, who was a director of Golden Sands at that time, was also concerned about the state of the plant. He raised these concerns with Mr William Wilson and with Mr Strickland.

On 6 November 2001 Mr Derham and his business manager, Mr Alan McKenzie, took a draft of the Royalty Agreement to a solicitor, Mr Richard Harrison, at Price Higgins. Price Higgins sent Mr Derham and Mr McKenzie a letter of advice dated 5 December 2001 on the draft agreement. Amongst other things the letter contained the following passage:

Golden Sands will be required to fully maintain the production facilities to the operational standard of facilities at the commencement of the lease. Perhaps it would be prudent to obtain an inspection report as to the condition of the facilities as at the commencement date.

Both Mr Derham and Mr McKenzie said in evidence that they raised this issue with Mr William Wilson and with Mr Strickland in December 2001 prior to the Royalty Agreement being signed. Mr McKenzie said that at that time he was the company accountant for Golden Sands and that he raised these issues in that capacity. Neither Mr Wilson nor Mr Strickland had attended the conference at Price Higgins. Mr Derham told me that the advice was paid for by Davegale Pty Ltd and not by Golden Sands.

There is no evidence that the advice of 5 December 2001 was given to any director of Golden Sands other than Mr Derham, but both Mr McKenzie and Mr Derham say they raised the issue of having the plant inspected, and the possibility of involving a metallurgist, with Mr William Wilson and Mr Strickland. Mr William Wilson and Mr Strickland in their evidence both said that a conversation about a metallurgist did occur, although they suggested that the conversation was with Mr Harrison, the solicitor, who visited the site in December 2001. Both Mr Derham and Mr McKenzie said that Mr William Wilson and Mr Strickland did not take any notice of their suggestion.

It may be that the suggestion a metallurgist be used was misconceived. Certainly both Mr Strickland and Mr William Wilson in their evidence made it clear to me that they thought so. When dealing with the issue Mr William Wilson conveyed to me the clear impression that in his view Mr McKenzie, Mr Derham and Mr Harrison did not know what they were talking about. I have no doubt Mr Derham and Mr McKenzie were given the same message at the time.

For present purposes it is sufficient to say that the issue of having the plant inspected by an expert or experts, and the possibility of there being problems with corrosion, were raised and considered by all three directors of Golden Sands prior to the Royalty Agreement being signed and that Mr William Wilson and Mr Strickland rejected Mr Derham’s suggestion that an expert inspection be undertaken.

In late 2001 Mr Derham was dissatisfied with his co-venturers, Mr William Wilson and Mr Strickland. His dissatisfaction was such that he took advice from Mr Harrison at Price Higgins about his position in early November 2001. He determined to take no action at that time. He then went ahead and executed the Royalty Agreement on behalf of Davegale Pty Ltd. He told me in his evidence that he did so believing he had no other option and hoping the relationship between him on the one hand and Mr William Wilson and Mr Strickland on the other could work.

Maintenance by Golden Sands on the Darra site

Evidence was given about maintenance of the plant by Golden Sands after the June 2001 handover by Mr William Wilson, by Mr Strickland, and by Mr Peter Wilson.

Mr William Wilson agreed Golden Sands did not do all of the maintenance referred to in his letter of 19 October 2001, for which Excel made allowance.

Golden Sands maintained no systematic maintenance records. Eventually that was one of the matters that Mr Butler, the government inspector principally involved in the events of 2004 to 2006, found unsatisfactory about Golden Sands.

The amounts Golden Sands spent on maintenance of the plant are recorded in the profit and loss statements of Golden Sands. Those amounts are very modest. Mr Peter Wilson, in his evidence in the trial, maintained that the amounts actually expended were in fact close to double what was recorded. He said this was because he included in his estimate of what was in fact spent, expenditure recorded as salaries and wages and consultancy fees in the profit and loss statements. Mr Dicks, Golden Sands’ expert on damages, worked very closely with Mr Peter Wilson in preparing his figures. He gave evidence on two occasions, once in each part of the trial. When he gave evidence in November 2006 he used the maintenance figures set out in the profit and loss statements. On the second occasion, in February 2008, he used the greater amounts estimated by Mr Peter Wilson.

When assessing the extent of Golden Sands’ maintenance the most reliable evidence in my view is that given by the government inspector, Mr Butler. In his evidence in chief, Mr Butler said that when he arrived in 2004 Golden Sands had “almost non‑existent systems of managing health and safety”. In cross-examination he said that there was no system of maintenance in 2004 and he agreed that the position was that in and between 2004 and 2006 there was “only a very minor level of effort” put in to compliance with the notices and directions which he issued.

Mr Stewart, the engineer who wrote the reports in 1995 and 1998, inspected the stacker again in 2004. He also gave what I consider to be evidence which is of assistance in relation to maintenance of the stacker. He said that in his opinion the standard of maintenance in relation to the stacker generally was “appalling.” His assessment of the position on the basis of what he saw in 2004 was that at that time there “probably wasn’t any.” He said that in 1998 there had been “some.” He said the stacker “… was much worse in 2004 than it was in 1998 …”.

The dispute with Mr Derham

A serious dispute between Mr William Wilson and Mr Strickland on the one hand, and Mr Derham on the other, came to a head in early 2002. On 7 March 2002 Mr Derham resigned as a director of Golden Sands. Mr Derham purported to terminate the agreement of 23 April 2001 by a letter dated 4 April 2002. He changed the locks on the Davegale site, demanded return of Davegale Pty Ltd’s plant and equipment, and withdrew cartage services. He cut or disconnected the water/slime pipe between the Davegale site and the Darra site. The operations on the Darra site were very considerably disrupted as a result.

When asked in his evidence before me why he took those steps, Mr Derham referred to the fact that he had received the agenda for a proposed directors’ meeting at the end of January 2002 which contained a proposal that Mr William Wilson’s son, Mr David Wilson, who was an employee of Golden Sands, was to get a new car and a pay rise. Mr Derham said he did not go to the meeting because he knew this would be approved as he would be outvoted. He said:

I had persevered up until the end of January of 2002 to try and make it work with Mr Wilson and Mr Strickland but it was very clear to me that it was a one way street, it was not going to work. I was putting in all the finances and all they wanted to do was spend them and take them out in whatever way they could.

He went on:
I really had no option but to cut ties. I couldn’t continue to work any longer with Mr Wilson and Mr Strickland. So it was really — I just hoped and believed that, yes, we could just get on and do our business and that they would continue on over the other side on the Darra site and that was really — I knew it wasn’t going to be easy but it would have been worse if I had have stayed involved in the business of Golden Sands.

Mr Derham denied that the breach between he and Messrs Wilson and Strickland had anything to do with the Royalty Agreement.

Eventually an interim arrangement was reached whereby the pumping of water and slimes between the two sites could resume, but the dispute was not resolved until a judgment of Byrne J in this Court was delivered on 21 November 2003,[2] and a consequent settlement was reached between the parties in March 2004.
[2]Golden Sands Pty Ltd v Davegale Pty Ltd [2003] VSC 458 (exhibit P4).

A great number of complaints were made by the respective parties about each other in what was generally referred to before me as the Davegale dispute. In the Court proceeding, Byrne J decided that Mr Derham could not unilaterally determine the April 2001 agreement. He reached this conclusion on the sole ground that the Royalty Agreement had transformed Golden Sands’ licence at will over the Davegale site into a licence for a term.

The March 2004 terms of settlement between Golden Sands and Davegale Pty Ltd are in evidence. Relevantly, under that settlement:

1.Golden Sands obtained a long term lease of the Davegale site at a rental which began at $10,000 per month and was to increase to $20,000 per month.
2.Davegale Pty Ltd agreed to pay Golden Sands $470,000.
3.Davegale Pty Ltd transferred to Golden Sands certain equipment. Golden Sands subsequently sold this equipment for $150,000.
4.Davegale Pty Ltd transferred to Golden Sands the wash plant equipment that was on the 390 portion of the Davegale site.
5.Mr Derham gave up his 40 percent shareholding interest in Golden Sands.

Role of government inspectors

In around 2000 the focus of the relevant government inspectors shifted from reliance on mining industry specific legislation to reliance on the general scheme of regulation provided for by the occupational health and safety legislation. I will return to this issue as it is significant in relation to Golden Sands’ claim concerning the alleged breach of the warranties, and in particular the claim that there was a breach of the warranty in clause 10.2 concerning good standing “under the Act”. I mention it now because when Mr Butler first visited the site in early 2004 he did so in a dual capacity. He was both an occupational health and safety inspector and a mines and quarries inspector. In 2004 he had responsibility for conducting inspections and audits at quarries and mines in the area which included the Darra site. In his evidence he explained that his role in relation to unsafe or dangerous plant and equipment was to “identify the unsafe plant and equipment and to take action to ensure it was made safe”.

Mr Butler’s dealings concerning the Darra site are set out in documents which are in evidence, being sequentially numbered file notes, field reports, a health and safety audit, and a number of improvement and prohibition notices. The relevant notices he issued were issued under the Occupational Health and Safety Act 1985.

Butler’s visits in March 2004

Mr Butler’s first visit to the Darra site was in March 2004. He produced a field report in relation to that visit. The report records, what he also said in his evidence, that what he found on his first visit was that there was no occupational health and safety management system. In his report he suggested that the implementation of such a system should be a “high priority”.

A follow up visit occurred on 24 March 2004 and a further field report was produced. Improvement and prohibition notices were issued on this occasion. Many further such notices were issued over the ensuing two years.

Two of the prohibition notices issued on 24 March 2004 concerned unguarded trapping, entanglement and nip points. I mention that because it was the absence of satisfactory progress on the issue of guarding over a long period which Mr Butler said caused him to stop the sand plant from being used in January 2006.

The issues of corrosion on the stacker and in the sand plant were not the subject of improvement notices or prohibition notices issued by Mr Butler in March 2004, but they were included on a list he compiled of issues to be followed up. Corrosion on the stacker was item 25 on that list and corrosion in the sand plant was item 24. In relation to each issue Mr Butler commented that a full engineering assessment of the structural integrity of the equipment was required. In his evidence Mr Butler said that these requirements were at that time simply advice that he was giving. They did not amount to a formal notice or direction at that stage.

Failure to pay royalties

Before any issue arose between the parties in relation to corrosion on the stacker, or elsewhere within the plant and equipment on the Darra site, there were significant defaults by Golden Sands in the payment of royalties and in the payment of other amounts due to Excel and Darra Exploration. These defaults resulted in Court proceedings in 2003 which were settled. In April 2004 royalty payments for October 2003, November 2003, December 2003 and January 2004 were outstanding and the solicitors for Excel threatened further Court proceedings. The royalty payments outstanding at that time were eventually paid, but royalties due in relation to the period from April 2004 to October 2006 were not paid and never have been paid. Some royalty payments were made after October 2006 as a consequence of interlocutory orders made by this Court at the conclusion of the November 2006 part of the trial. As at 28 February 2008 the total amount of royalties outstanding, subject to the claims made by Golden Sands in this proceeding, was $1,637,350.

Golden Sands first raises the corrosion issue and the 1998 Stewart report

In June 2003 Hanson Construction Materials Pty Ltd acquired all the shares in Excel and Hanson Quarries Victoria Pty Ltd and Minicon Pty Ltd acquired the Darra site from Darra Exploration. In substance, there was a joint venture between companies in the Hanson group and companies in the Readymix group, which was referred to by the name “M & H Quarries”. Attempts made to have the Royalty Agreement novated were not successful as Golden Sands was not prepared to agree. The persons who became responsible for dealings with Golden Sands on behalf of Excel and Darra Exploration from this point onwards were Mr Rodney Street from Readymix and Mr Peter Browne from Hanson.

By a letter dated 14 May 2004 from Mr William Wilson to “Excel Quarries/M & H Quarries” and marked for the attention of Peter Browne, Golden Sands raised a number of issues. In relation to the stacker the letter read as follows:

On another matter as you are aware the site has been recently subject to a partial audit by the Occupational Health and Safety inspector. There were two issues of a mechanical nature that the inspector raised concerns about namely the screen tower and its condition and the radial stacker. Whilst a condition of our occupation of the site was to fully maintain the production facilities to the operational standard of the facilities as at the Commencement Date (clause 7.2) we were not informed that the radial stacker had been inspected by Stewart and Associates Pty Ltd (consulting engineers) in July 1998 who pointed out there was “major corrosion in the structure and that the corrosion will shortly become a major safety issue if not attended to in the very near future”. The report states that attention to their recommendations is important and they wished to be kept informed so that at the end of the rework a certificate of competence for the structure could be issued. This work apparently was not done and we are unable to locate any such certificate. At no stage were we made aware of any such issue in respect of the stacker and its condition.
Could you please advise us as a matter of urgency when Excel will rectify this problem. Given that Excel was more than aware of the situation prior to June 1^st2001, we accept no responsibility for the condition of the structure and request that you attend to this immediately as it poses a significant health and safety hazard. In the event that this structure should collapse it will cause a serious interruption to our business and we will hold Excel responsible for any loss or damage incurred.

The evidence as to Golden Sands’ discovery of the Stewart reports was given by Mr Peter Wilson. He said that Mr Butler told him the stacker must have been inspected at some time and that he should see if he could find an engineer’s report. Mr Peter Wilson’s witness statement relevantly continues:

I searched the site office. … I then looked in the laboratory hut next to the workshop on the Darra Site. In the corner of this room in sealed boxes were a number of documents left by Excel. In the boxes there were the quarry manager’s diaries, which have been discovered in this proceeding, the dispatch schedules of loads being delivered to customers by Excel, advertising material, files about various parts of the plant and literature from suppliers of those items of plant about the plant.
In those files, I found the reports dated 24 May 1995 … and 8 July 1998 … from Gordon Stewart of Stewart & Associates Pty Ltd.

It is noteworthy that the Stewart reports were with the quarry manager’s diaries.

Mr Ricker returns

It will be recalled that Mr Helmut Ricker was the engineer who had worked with Mr Wilson and Mr Strickland in constructing the plant on the Darra site in the 1980s. In 2004 Mr Ricker suggested replacing the stacker boom to Mr William Wilson. His evidence was his estimate of the cost of replacement at the time was $250,000 and that there would have been one week’s disruption to production. Evidence was also given to this effect by Mr Peter Wilson, who said the directors’ decision was not to spend that money, and that he agreed with it. Mr William Wilson’s explanation for not proceeding in that way was because “it wasn’t just [the] boom”.

The new plant on Davegale

At some point it was decided that Golden Sands would proceed to build a new sand wash plant on the 350 portion of the Davegale site. This had always been, at the least, a possibility, and had been recognised as such in clause 9.10 of the Royalty Agreement itself.

Mr Peter Wilson in his oral evidence and in his witness statement said that the decision was made in 2005 at a time when Golden Sands considered that a point had been reached where there would be no satisfactory resolution of the stacker issue on the Darra site.

Mr Ricker, who is now an elderly man and who admitted to having problems with his memory after an accident in 2006, said in his evidence that he commenced work on the design of the new plant on the 350 portion of the Davegale site in the middle of 2004, that he was involved in that project for 12 months, and that his involvement was terminated in the middle of 2005 before the project was completed.

Mr Ricker’s account of the relevant timing is corroborated by a ledger account opened by Mr Peter Wilson in the books of Golden Sands which is entitled “New Wash Plant Davegale Site”. The first entry on this ledger is dated 30 July 2004.

It is true, as Mr Peter Wilson maintained when this ledger was put to him, that the entries throughout 2004 are generally related to cranage, suggesting that a lot of that work might have been moving equipment from the 390 portion of the site to the 350 portion. However, entries recording payments to Chemweld Pty Ltd, who did contracting work on the new plant, and to Ricker Engineering, are dated 15 February 2005, suggesting that physical work had commenced prior to February 2005.

My conclusion is that the decision to build the wash plant on the Davegale site was made in mid-2004 as Mr Ricker says and as the ledger account suggests.

I found the evidence of Mr Peter Wilson to be unsatisfactory on this issue. In my view he was concerned to attribute the decision to build the new plant to the problem with the stacker and his evidence as to timing reflected that concern. There are other aspects of his evidence which cause me to be cautious about accepting what he said in the absence of confirming material. I have already referred to one of them, being his evidence as to maintenance expenditure. It seemed to me that Mr Peter Wilson’s estimates of maintenance expenditure altered depending upon the purpose of the enquiry. When initially working with Mr Dicks on damages the figures in the financial statements were used. When the issue of the extent of maintenance became important different figures were said to be the correct ones.

Initial response of Excel to stacker complaint

By a letter of 28 June 2004, Excel advised that they were investigating the concerns raised in Golden Sands’ letter of 14 May 2004 and requested a copy of the Stewart & Associates report of July 1998. Neither Mr Street nor Mr Browne had heard of the 1998 Stewart report before receiving the 14 May 2004 letter.

Mr Butler follows up

On 26 August 2004 the government inspector, Mr Butler, visited the Darra site to follow up on the issues he had raised in March 2004. He prepared a field report in relation to that visit. The report indicated that a full review of the outstanding issues had not been conducted. Mr Butler reported that he was given the 1995 Stewart & Associates’ report and the Stewart & Associates’ report dated 8 July 1998.

One of the prohibition notices which had been issued in March 2004 (SB 040007) concerned the operation of the sand plant. In relation to that matter Mr Butler reported:

Mr Peter Wilson advised that he had undertaken hazard identification in relation to the use and operation of the sand plant. However, the implementation of all the required risk controls has not occurred. As a result, the Prohibition Notice remains in place.

On 27 August 2004 Mr Peter Wilson advised Mr Butler by telephone that he had engaged Stewart & Associates to conduct an inspection and assessment of the stacker. By this time Mr Mitas, who had been the inspector on the site in 1998, was Mr Butler’s manager. In the phone conversation with Mr Peter Wilson on 27 August 2004 Mr Butler told him that he had spoken to Mr Mitas and that Mr Mitas had directed that the hazard created by what was described as “the possible collapse of the conveyor” must be dealt with immediately. Mr Butler advised that Golden Sands must take steps to ensure no person had access under or around the boom.

On 1 September 2004 Mr Butler visited the site and prepared a detailed report. The report set out a number of matters which had not been attended to consequent upon Mr Butler’s earlier visits.

One of the issues inadequately addressed, according to Mr Butler, was item 22 concerning the unguarded condition of the sand plant. Item 24 dealt with “substantial corrosion” in the sand plant, and item 25 dealt with “signs of corrosion” on the radial stacker.

On this visit Mr Peter Wilson told Mr Butler that Stewart & Associates were attending the site on 6 September 2004 to assess the stacker and that if possible they would also be engaged to look at the sand plant.

Mr Butler’s concerns about the stacker led him to issue a prohibition notice (SB040014) requiring the company to ensure no person had access to the area under the stacker at any time and requiring a full engineering assessment of the structural integrity of the stacker.

Stewart’s September 2004 report

Mr Stewart conducted an inspection of the stacker and produced a report dated 14 September 2004. The report states:

The writer inspected and climbed around this structure yesterday and found it to be continuing in poor condition. At the least it is much more corroded than in July 98.

The report expressed Mr Stewart’s exasperation that his earlier recommendations had not been implemented. The report states: “It is my opinion that nothing has been done towards fulfillment [sic] of my advice either in 1995 or 1998.”

The report recommended that reinstatement work be carried out by Jatco Engineering Pty Ltd. The report stated that in Mr Stewart’s opinion “no assessment beyond general comment can be made until the unit is lowered to the ground.”

The report continues:

It is possible to reinstate this unit for a further 7–10 years of use by cut and shut and patch after having regard to the above mentioned Standards. Once on the ground and easy to get around enough of the structure can be sketched to allow basic structural calculations to be produced which will then lead on to the reinstatement procedure methods.

When he gave evidence before me Mr Stewart agreed with the proposition that in 2004 he did still consider the boom to be repairable, and he said that if repaired it would have had, in his view, another 10 years of life. I have earlier referred to what Mr Stewart said about the 10 year estimate period. Mr Stewart made it clear in his report, and he confirmed it in his evidence, that his opinion was that the stacker would not fall down. This was what had been Mr Mitas and Mr Butler’s principal concern, and is what had led them to issue the prohibition notice.

As a result of Mr Stewart’s advice, which was forwarded to Mr Butler, the prohibition notice was rescinded and Golden Sands was advised that they could “now use the stacker conveyor in the normal manner.” Mr Butler was told by Mr Peter Wilson in an email of 16 September 2004 that a representative of Jatco Engineering would attend to do a detailed analysis of the required repair work and Mr Butler replied by email confirming that the repair time frames would need to be reviewed after Jatco Engineering’s inspection.

Mr Peter Wilson’s evidence before me was that a person from Jatco Engineering “dropped in” after a few days, but that he did not see him again and he did not follow him up. Mr Peter Wilson’s email to Mr Butler to which I have referred, and a telephone conversation he had with Mr Butler the same day (16 September 2004), had given Mr Butler the clear indication that Jatco Engineering would be attending to the stacker.

Further dealings between Excel and Golden Sands on the stacker and the engagement of David Bell

By a letter dated 7 October 2004, Excel denied liability for the cost of repairs to the stacker and asserted that under the Royalty Agreement Golden Sands had the obligation to maintain the equipment. The letter, written by Mr Peter Browne, concluded by advising that he proposed to visit the site and inspect the stacker with an engineer in the next three weeks.

Mr William Wilson responded to this letter by a letter of 22 October 2004. In this letter Golden Sands put Excel “on notice” that it was holding Excel responsible for doing whatever was necessary to bring the stacker up to standard and to compensate Golden Sands for inconvenience caused as a result.

In mid-October 2004 Mr Browne engaged an engineer, Mr David Bell, to inspect the stacker and advise on the most cost effective solution.

Mr Bell attended the site on 26 October 2004. He prepared a report to Mr Browne, dated 27 October 2004. The report indicated, amongst other things: “The stacker integrity is questionable due to evidence of corrosion. … Failure of the conveyor due to corrosion is highly probable.”

He set out a number of options. His recommendation was as follows:

Carry out non destructive testing on tower and first 2 sections of boom. If steel work is suitable, fit new support tressles [sic] and new catwalk, remove last section of boom to result in a shorter conveyor. … If non destructive testing indicates steel is not adequate, install radial stacker to suit stockpile requirements.

Mr Bell also corresponded on the issue with Stewart & Associates. He received a fairly terse reply, in the course of which Mr Stewart advised that “I wipe my hands of the whole matter”. Mr Bell did not pass this reply on to Mr Browne.

Non-payment of royalties

Mr William Wilson’s letter of 22 October 2004 about the stacker (and other matters), to which I have referred above, concluded by saying that he would deal with the issue of royalty payments in a separate letter to follow shortly. At this point royalties were outstanding for the period from April 2004.

By a letter headed “Without Prejudice” dated 9 November 2004, Mr William Wilson set out complaints about Excel’s asserted failures in relation to the Davegale dispute, and asserted that “Golden Sands should not and will not pay Royalties on sand it did not sell as a direct result of the denial of access to the Davegale site”. For reasons set out in the letter, Mr William Wilson suggested that Excel bore the responsibility for the consequences of the dispute with Mr Derham and suggested Golden Sands was entitled to a credit of $198,244.32, which was almost the full amount of royalties then outstanding. No suggestion was made at that time that non-payment of the royalties related in any way to the stacker. No attempt was made before me to substantiate or rely upon the assertions made in this letter.

A replacement stacker is proposed

On 16 November 2004, Mr Butler conducted an unannounced visit to the Darra site to check on outstanding issues. He met with Mr Strickland, who advised him that “many of the outstanding issues had not been completed.” One of the issues not completed was the repair and verification of the stacker which Mr Strickland advised him was being held up while there were discussions about who would pay for it.

By a letter of 19 November 2004, Mr Browne of Excel advised Mr William Wilson that the position on liability remained the same but that the consultant had done an initial assessment and was proposing to do some further testing.

Mr Bell attended the site again on 26 November 2004.

Mr Bell reached the conclusion that the best alternative for dealing with the stacker problem was to replace it.

According to Mr Bell, he discussed replacement with Mr Peter Wilson on site and Mr Peter Wilson told him that “Golden Sands required a conveyor with the capacity to form stockpiles of 16,000 tonnes in two stockpiles”.

In Mr Bell’s first witness statement he said that Mr Peter Wilson told him this when he visited the site on either 26 October 2004 or “perhaps” on the visit he made on 26 November 2004. In his supplementary witness statement he indicated that after reading Mr William Wilson’s witness statement, which said that Mr Peter Wilson was not present on the site on 26 November 2004 when Mr Bell visited, Mr Bell agreed he did not see Mr Peter Wilson on 26 November 2004. In his oral evidence he said he believed his conversation with Mr Peter Wilson where he was told 16,000 tonnes capacity was what was required was on the first occasion, being 26 October 2004. Peter Wilson denied having ever told him this.

Mr Bell informed Mr Browne in late November 2004 that in his opinion the best option was to demolish the stacker and replace it. Mr Bell says that at some point between 17 November 2004 and 26 November 2004 a decision was made to replace the stacker with a new radial stacker and he was instructed to obtain quotes for a replacement.

Mr Bell wrote to Mr Browne about the stacker on 27 October 2004 and again on 17 November 2004. In neither letter did he refer to what he says Mr Peter Wilson had told him in relation to Golden Sands’ requirements for a replacement stacker. Indeed, in the letter of 17 November 2004 Mr Bell asked Mr Browne the following question: “Is M & H obliged to have a conveyor system capable of storing a given volume?”

On 19 November 2004 Mr Browne wrote to Mr William Wilson advising, amongst other things, that a consultant had been sent down to do an initial assessment on the radial stacker and that it was proposed to send him down again and then put a proposal to “M & H Quarries” and after that to discuss the matter further with Golden Sands. As indicated, Mr Bell did attend the site again on 26 November 2004. According to Mr Bell on this occasion he had a discussion with Mr William Wilson. Mr Bell’s evidence was that Mr William Wilson told him that Golden Sands considered the conveyor width should be 750 millimetres rather than the existing 600 millimetres. Mr William Wilson’s evidence was that he told Mr Bell, in the context of a discussion about his involvement in the construction of the stacker, that if he had his time again he would build the conveyor belt wider.

In early December 2004 Mr Bell sent out requests for quotations for a stacker with a conveyor length from 20 metres to 30 metres and a preferred conveyor width of 750 millimetres. Mr Bell in his evidence said that he specified the 20 to 30 metres length as a result of calculations he had done as to what length would be necessary to stack a total of 16,000 tonnes in two stockpiles in accordance with what he says Mr Peter Wilson had told him.

Mr Bell received a number of quotations which he compiled into a table and which he sent to Mr Peter Browne. The stackers set out on the table had the capacity to produce stockpile volumes which ranged from 10,034 tonnes to 33,887 tonnes. Prices ranged from $84,500 to $198,000. According to Mr Browne and Mr Street, a meeting was held at which it was decided to proceed with the stacker quotation from a company referred to as QME for a stacker of 25 metres conveyor length with a 750 millimetres belt width, having a capacity of 16,100 tonnes stockpile volume, with a quoted price of $88,000. The lowest quoted price for a stacker with a capacity above 33,000 tonnes was $121,000.

Mr Browne and Mr Street both said that the reason the stacker with a 16,100 tonne capacity was selected was because they believed that was in accordance with Golden Sands’ requirements, as communicated by Golden Sands to Mr Bell. Mr Bell’s evidence was that that stacker was in accordance with the requirements which had been communicated to him by Mr Peter Wilson, but he also said that his understanding was that M & H Quarries would have further discussions with Golden Sands as to which replacement stacker should be chosen.

My conclusion is that there was a misunderstanding between Mr Bell on the one hand and Mr Street and Mr Browne on the other as to who was responsible for finally clarifying with Golden Sands what capacity stacker it required. Mr Bell was a credible witness in my view. I accept that there was some discussion between Mr Peter Wilson and Mr Bell about 16,000 tonne capacity being required, but I do not accept that there was any kind of commitment by Golden Sands to accept a replacement of that capacity. Mr Bell himself expected that there would be further dealings with Golden Sands about the required capacity. That did not occur.

Further proceedings concerning non-payment of royalties

The defendants served a statutory demand on Golden Sands concerning the outstanding royalties on 30 November 2004. Application was made by Golden Sands to set aside that statutory demand. One of the grounds relied upon was the position in relation to the stacker.

By a letter of 15 December 2004 Excel’s solicitors, Cornwall Stoddart, responded to a letter from Golden Sands’ then solicitors, Piper Alderman Lawyers, in relation to the statutory demand proceeding and, in particular, in relation to allegations made about the stacker. Amongst other things, the letter stated that Excel was satisfied that “if repairs to the stacker were required they could be effected without any material interruption to the business”.

It was put to Mr Street and to Mr Browne in cross-examination that this response was disingenuous on two grounds. First, because a decision had already been made to replace the stacker, and, second, because it could not be seriously suggested that repairs or replacement could be effected without any material interruption.

There is some inconsistency between Mr Street and Mr Browne’s plans at that time and what the solicitors said. In my view this inconsistency does not reflect adversely on their credit in the way suggested. In the context, the assertions by the solicitors in the course of a contested statutory demand proceeding are explicable by the exigencies of contested litigation rather than disingenuousness on the part of Mr Browne and Mr Street.

Dealings with Butler in late 2004 and early 2005

Mr Butler attended the site on 17 December 2004 and prepared a further field report. Many of the items which were to have been attended to by Golden Sands had not been completed.

In relation to issue 22, the guarding on the sand plant, Mr Butler noted this as an item “not completed” and recorded advice by Mr Peter Wilson that the company had decided to use fencing to guard the whole plant and that access would be via captive keys. Under this proposed system the entire sand plant would be surrounded by a fence and access would be obtained by a key which would only operate when the plant was not in operation. No person could then gain access to any of the unguarded areas of the plant while it was in operation. In his evidence, Mr Butler told me that this was an acceptable method of guarding but that in order for it to work it must be constructed and maintained adequately, as one hole in the fence requires the plant to be shut down until it is fixed. In his evidence Mr Butler said that the issue of guarding was “pretty basic stuff, it’s not very complicated”. He said that when he first visited the site there was a “severe lack of guarding overall”. He said that Golden Sands chose the option of perimeter fencing instead of guarding individual components. He said that normally perimeter fencing needs to be permanently fixed in place but he said he allowed Golden Sands “flexible temporary fencing to give them an opportunity to decide where the fencing should be”. He said that on a number of visits he found holes in the fence that had been created and not fixed. He said that as time went on Golden Sands failed to bring the fencing up to required standards. He went on:

… if I find a repeated situation the guarding is not to standards I’ll — I’m obliged to prohibit that particular machinery that’s supposed to be protected from being used, and that’s what I did.

The prohibition to which he referred is a step he took in 2006, to which I will return.

In relation to issue 24, corrosion in the sand plant, Mr Peter Wilson advised that the engineering assessment had not been done and Mr Butler issued an improvement notice. Improvement notice SB040063 required a full engineering assessment of the structural integrity of the wash screen tower structure by 16 February 2005.

Mr Peter Wilson also advised that no action had been taken in relation to inspection and maintenance of the stacker (issue 25) and an improvement notice was issued for that as well. Improvement notice SB040062 required a full engineering assessment of the structural integrity of the radial stacker by 16 February 2005 but permitted continued use of the stacker in the short term.

On 10 January 2005 Mr Butler had a telephone conversation with Mr Peter Wilson concerning a different matter, but the stacker notice was also raised and Mr Wilson was advised that Mr Butler intended to contact M & H Quarries to determine what action they were taking.

Mr Butler had a conversation with Mr Street and Mr Browne on 2 February 2005. Mr Street told Mr Butler he had a copy of the improvement notice of 17 December 2004. He asked Mr Butler what would happen if there was non-compliance on 16 February 2005. Mr Butler said he would visit the site and investigate the reason. Mr Butler made a detailed file note of this conversation, and Mr Street in his cross-examination when asked whether he agreed that it accurately summarised the conversation said that he had no reason to doubt it. The note contains the following passage, after recording the fact that Mr Butler had said the reason would be investigated and if there was not a satisfactory reason prosecution may result:

If non-compliance occurred because of matters outside the control of Golden Sands, it may be that the notices will be withdrawn. Further investigations will then be conducted to determine if new notices should be issued, who they should be issued to and whether or not the plant should be shut down. The condition of the plant, at the time it was handed over to Golden Sands, may be an issue.

By a facsimile of 4 February 2005, Mr Bell advised Mr Browne of costings he had obtained to remove the existing stacker and replace it with a “new conventional 25 metre x 750mm radial stacker…”. The total cost was $126,940 plus GST.

In a telephone conversation of 7 February 2005 Mr Street advised Mr Butler amongst other things: “It is intended that the tower crane be replaced.” This advice was confirmed in a letter to Mr Butler written by Mr Browne dated 9 February 2005. The letter stated:

As owner of the relevant assets and holder of the Work Authority, we consider the issues raised by the Notice to be serious. In the circumstances, we intend to take immediate steps to replace the stacker with a new stacker.
…
In all the circumstances, we request that the Department stand the Notice over until the new stacker is erected on site.

On the same day, by a letter also dated 9 February 2005 from Cornwall Stoddart to Piper Alderman, the same advice as had been given to Mr Butler was given to the solicitors for Golden Sands. This letter also referred to the notice and to the fact that as owner Excel took the notice seriously and in the circumstances intended to replace the stacker. The letter concluded:

On the other hand, it is good standing “under the Act” which is provided for. It might be said that the site could not have a reputation “under the Act”, and that the issue must be the existence or otherwise of contravention determined objectively.

I will return to this issue.

The Royalty Agreement defines “the Act” as the “Extractive Industries Development Act 1985”. It is clear that the reference to 1985 is a typographical error and that the reference should be to 1995.

The Extractive Industries Development Act 1995 provides that the purposes of the Act include ensuring that extractive industry operations are carried out with safe operating standards and in a manner that ensures rehabilitation of quarried land. Under s 9 of the Act a person is prohibited from carrying out an extractive industry (which encompasses the extraction and treatment of sand) without a current work authority. Section 17 provides that a person proposing to apply for a work authority must lodge a work plan. Provision is made for applications for a work authority in s 19, and under s 20 it is provided that the relevant Minister can impose conditions. Under s 24, the Minister can cancel a work authority if he has given the holder 28 days’ notice and requested the holder to provide reasons why the authority should not be cancelled, and if at the end of the 28 days the Minister is satisfied that the holder has not substantially complied with the Act or the Regulations, or with any condition to which the work authority was subject, or where the Minister is satisfied that the holder has “endangered an employee or a member of the public on or near land to which the work authority applies”.

Provision is made for the appointment of inspectors in s 41 with the powers set out in s 43. Under s 45, an inspector can issue infringement notices.

The Extractive Industries Development Act 1995 repealed the Extractive Industries Act 1966 but the Extractive Industries Regulations 1989 which had been made under the 1996 Act remained in operation until August 2000.[19]
[19]See Subordinate Legislation (Extractive Industries Regulations 1989 — Extension of Operation) Regulations 1999 No 98, and the Subordinate Legislation Act 1994.

Mr Mitas in his evidence said that in 2000 inspectors under the Extractive Industries Development Act 1995 were also appointed inspectors under the Occupational Health and Safety Act 1985.

The Occupational Health and Safety Act 1985 is an Act covering workplaces in general and imposing duties on employers to provide a safe working environment for employees (s 21), and to ensure as far as practicable that persons other than employees are not exposed to risks to their health or safety from the conduct of the undertaking of the employer (s 22). Section 31 provides for the appointment of inspectors with the powers provided for in s 39. Under s 43 where an inspector is of the opinion a person is contravening the Act or the Regulations, the inspector may issue an improvement notice to remedy the contravention. Under s 44 where an inspector is of the opinion that an activity involves immediate risk to the health and safety of any person, the inspector may issue a prohibition notice.

Excel and Darra Exploration’s case in relation to the warranty in clause 10.2 was simple and direct. They firstly submitted that the warranty did not cover the “Production Facilities” because it was confined to the “Darra Site”. I reject that submission for the reasons I have given. Excel and Darra Exploration then submitted that “the Act” is the Extractive Industries Development Act 1995, and that there is no evidence that the Darra Site was otherwise than in good standing under the Act at all relevant times. They submitted that there was no evidence the site was liable to forfeiture or cancellation at any time, whether on 21 December 2001 when the Royalty Agreement was signed, or later.

Golden Sands’ submission on clause 10.2 was more complex. Golden Sands called in aid authorities concerning the need to resolve ambiguity by giving a business like meaning to the contract,[20] and relied upon the need to construe a contract in its context. Golden Sands submitted that clause 10.2 had two separate components, the first being that the site was in good standing under the Act, and the second being that the site was not liable to forfeiture or cancellation for any reason. It submitted that these two aspects of the warranty are to be read disjunctively.
[20]Australian Broadcasting Commission v Australian Performing Rights Association Limited (1973) 129 CLR 99.

Golden Sands relied upon the developments in 2000 whereby inspectors were given authority under both the Extractive Industries Development Act 1995 and the Occupational Health and Safety Act 1985. It referred to the fact that the various notices issued by Mr Butler here were issued under the Occupational Health and Safety Act. It relied upon the fact that the Occupational Health and Safety Act and the Regulations made under that Act applied to the site and in particular to the stacker.

Golden Sands submitted that the proper construction to be placed on the first limb of the warranty — good standing under the Act — was as follows. Whilst the right to conduct operations on the site was gained from a work authority granted in accordance with the provisions of the Extractive Industries Development Act 1995, as those who administered that Act did so under both the Extractive Industries Development Act 1995 and the Occupational Health and Safety Act 1985:

If adverse findings were made by an Inspector as a result of breaches of the Occupational Health and Safety Act or the Regulations made thereunder, the Inspector could thereby prohibit the use of a critical piece of equipment on the site which would immediately interfere with the sand extraction operations being conducted under the EIDA … In those circumstances then the site would not be in good standing under the EIDA.[21]

[21]Outline of Final Submissions of the Plaintiff, para 13(3) and (4).

The submission continued that the concept of “good standing” under the Extractive Industries Development Act 1995 “encompasses” anything that would affect the operator’s ability to carry out operations under the work authority including circumstances arising under the Occupational Health and Safety Act. Thus, it was said that the issue of whether there is “good standing” under the Extractive Industries Development Act 1995 must be determined by reference to broader obligations than matters arising specifically under that Act, including in particular obligations under the Occupational Health and Safety Act 1985. It was submitted that this construction avoided a “gap or hiatus” in the obligations of the parties given that Golden Sands was obliged to maintain the facilities and to comply with “Regulatory Requirements” as defined in the Royalty Agreement after the commencement date.

Golden Sands’ submission was in my view an argument as to why it would have been sensible, perhaps even desirable, in the circumstances existing in 2001 to have agreed upon a warranty that addressed issues arising under the Occupational Health and Safety Act 1985. The problem Golden Sands confronts is that the first part of the warranty in clause 10.2 does not do this. The relevant part of the warranty given is that the site is in good standing under the Act. The Act is defined as the Extractive Industries Development Act 1995 (misdescribed as 1985). To accept Golden Sands’ submission in relation to clause 10.2, is not to construe the clause that is there, it is to re-write the warranty so as to make it broader. It is not a question of resolving ambiguity or deciding between competing constructions. Acceptance of Golden Sands’ construction of “good standing under the Act” would involve, in my view, imposing on Darra a different warranty to the warranty which is contained in clause 10.2. Golden Sands’ submission amounts to an invitation to re-write the warranty in broader terms. That cannot be done.

In this respect Golden Sands’ reliance on its own obligation to comply with “Regulatory Requirements” (clause 9) is misplaced. In my view the width of the definition of “Regulatory Requirements” in the Royalty Agreement is a factor suggesting “under the Act” means what it says and is not to be interpreted as applying to regulatory requirements more broadly.

Once consideration is confined to good standing under the Extractive Industries Development Act 1995, then it does not matter whether one approaches the matter on the basis that what is in issue is the reputation of the site with those responsible for administering the Act or on the basis that the issue is the existence or otherwise of contravention determined objectively. It was not suggested that there was in existence as at 21 December 2001 any contravention of the Extractive Industries Development Act 1995. Further, the evidence did not establish the existence of any circumstance as at that date in relation to the perception of the relevant regulators concerning the site which would support a conclusion that the site was not then in good standing with them.

I do accept Golden Sands’ submission that clause 10.2 is to be read disjunctively. Thus, there is a further warranty to the effect that the Darra Site was not liable to forfeiture or cancellation for any reason. Here, in my view, Golden Sands is on firm ground in submitting that regard must be had to obligations under the Occupational Health and Safety Act 1985. If the evidence established that in some relevant sense the Darra Site was liable to forfeiture or cancellation as at 21 December 2001, it would not matter whether that liability arose under the Extractive Industries Development Act 1995, the Occupational Health and Safety Act 1985, or by reason of some other circumstance.

The most obvious circumstance which would constitute a liability to forfeiture or cancellation would be potential forfeiture or cancellation under s 24 of the Extractive Industries Development Act 1995. I have previously referred to the provisions of s 24. The section requires a contravention of the Act, a 28 day notice, an opportunity to be heard, and cancellation if the Minister is satisfied of specified matters. In my view it cannot be said that any such liability existed on 21 December 2001. There is no evidence of a contravention, and no notice had been given. There was no breach of warranty on that basis.

Golden Sands’ submission was that the warranty in clause 10.2 is breached if it can be shown that the stacker was in such a condition as at 21 December 2001 as would have “attracted the opprobrium of the relevant Inspector resulting in a Prohibition Notice such as was issued in September 2004”.[22] Thus, Golden Sands’ case in relation to this part of clause 10.2 is premised on the propositions that the stacker was relevantly in the same condition in 2001 as that in which it was found to be in 2004, and that by reason of that condition “opprobrium” sufficient to constitute a breach of warranty would have been attracted.
[22]Outline of Final Submissions of the Plaintiff, para 17.

In my view the evidence does not establish either of those propositions. The stacker’s condition was a result of continuous deterioration as a result of rust. Mr Stewart in his evidence said the stacker was much more corroded in 2004 than it had been in 1998. The evidence concerning Golden Sands’ maintenance, particularly the evidence of Mr Butler, gives no basis for a conclusion that deterioration between 2001 and 2004 would not have occurred.

Further, an examination of what occurred in 2004 reveals that even if the stacker’s condition is assumed to have been relevantly the same in 2001, that circumstance does not constitute something that can properly be described as the “Darra Site” being “liable to forfeiture or cancellation”.

When Mr Butler first visited the site in March 2004 he listed the stacker, amongst many other items, as an issue to be followed up, suggesting an engineering assessment of its structural integrity. He did not issue any improvement notice or prohibition notice in relation to the stacker then. When he returned in August and September 2004, again amongst many other items, he issued a prohibition notice in relation to the stacker which did not prevent or inhibit its use but which required the operator to ensure that no person had access to the area underneath it. After Mr Stewart’s report of 14 September 2004, the concern which had led to the issuing of that prohibition notice was resolved and the notice was rescinded. Golden Sands was then advised that it could use the stacker in the normal manner. After Mr Bell became involved in late 2004 an improvement notice was issued by Mr Butler requiring a full engineering assessment by 16 February 2005 but permitting continued use in the short term. It was thereafter envisaged that the problem would be resolved by a replacement stacker, which as matters transpired Golden Sands rejected. In February 2005 Mr Butler issued an improvement notice requiring replacement of the stacker by 29 April 2005. When the stacker was not replaced on 29 April 2005, Mr Butler issued a prohibition notice which prohibited its use. Operations on the site continued nevertheless until 2006. Operations then ceased for reasons unrelated to the problems with the stacker.

It is also significant in this context that Mr Mitas, the inspector responsible for the site at the time of the 1998 Stewart report, would not say he would have taken any particular action if he had had that report at that time.

In my view the “Darra Site” was never “liable to forfeiture or cancellation” for any reason related to the stacker. In any event, my conclusion is that the evidence does not establish that that was the position on 21 December 2001.

There is a further problem with Golden Sands’ case based on this part of clause 10.2. Resolution of the issues raised concerning the stacker was always a matter of expending money. Mr Ricker had advised the directors that the entire boom could be replaced at an estimated cost of $250,000 with one week’s disruption. A replacement stacker with a capacity of 33,000 tonnes could have been obtained for $121,000. Installation of a replacement stacker could have occurred over Easter in 2005. The stacker issue alone never exposed the “Darra Site” to liability for forfeiture or cancellation because it was always capable of resolution by what was, in this context, expenditure of a modest sum.

My conclusion is that Golden Sands has failed to establish that Darra Exploration breached the warranty in clause 10.2.

The express warranties: clause 10.3

Clause 10.3 has two components, one contained in the first sentence and one in the second. In the first sentence Excel and Darra Exploration warrant that there are no outstanding requisitions by any duly empowered authority in respect of the Darra Site. In the second sentence Darra Exploration and Excel warrant that there are no outstanding orders or requirements on the work authority.

In its submissions Golden Sands conceded “there were no requisitions by any duly empowered authority in respect of either the site or the sand operations”.[23]
[23]Outline of Final Submissions of the Plaintiff, para 19.

As to the second sentence of clause 10.3 Golden Sands submitted, relying on a similar argument to that advanced in relation to clause 10.2, that the reference to there being no outstanding orders or requirements on the work authority should encompass obligations on the holder of the work authority under the Occupational Health and Safety Act 1985 and its Regulations. It submitted that it could “certainly be argued”[24] that there was a requirement on the work authority, being the general obligation in s 21 of the Occupational Health and Safety Act 1985 to maintain a working environment that is safe and without risks to health. It was submitted that to the extent the stacker was not in a safe condition then there was a requirement on the work authority.
[24]Outline of Final Submissions of the Plaintiff, para 20.

I cannot accept the construction placed on the second sentence of clause 10.3 by Golden Sands. Accepting Golden Sands’ submission would be re-writing the warranty rather than construing it. In any event, for the reasons I have given the evidence does not establish that there was a contravention of s 21 in relation to the stacker as at 21 December 2001.

Golden Sands has failed to establish that Excel and Darra Exploration have breached the warranty in clause 10.3.

Damages had breach of warranty been established

Golden Sands’ claims damages on these claims of a very substantial sum for loss of profits, in excess of $5,000,000. If a breach of warranty had been established I would have assessed damages on the basis of an estimate of the cost of repair (Mr Ricker) or of the cost of replacement of the stacker with a stacker having the capacity to stockpile 33,000 tonnes, together with a modest allowance for disruption. I would not have accepted Golden Sands’ loss of profit claims. I would not have accepted that the asserted loss of profit was caused by the stacker problem. Further, I would not have accepted Golden Sands’ expert, Mr Dicks’, analysis because it was in significant respects founded upon information given to him by Mr Peter Wilson which I do not consider to be reliable.

Golden Sands’ Section 52 Claims
The pleaded case

Golden Sands also advances a claim for damages based upon contravention of s. 52 of the Trade Practices Act 1974 (Cth) (the “TPA”). Broadly, Golden Sands alleges that the failure by Excel and Darra Exploration to inform it of the existence of the 1995 Stewart report and the 1998 Stewart report and the contents of those reports, which I will term collectively the “failure to inform”, constituted misleading or deceptive conduct within the meaning of s. 52 of the TPA.

Golden Sands pleads its case on the basis that the failure to inform was misleading or deceptive conduct because the circumstances gave rise to a reasonable expectation that the reports and their contents would be disclosed,[25] and it is also said that by reason of the failure to inform in the circumstances representations were made to the effect that the stacker was in good order and that nothing adverse about it was known.[26]
[25]Revised further amended statement of claim, para 39.
[26]Revised further amended statement of claim, para 41.

The circumstances pleaded by Golden Sands which are relied upon in this respect may be summarised as the following:

1.The stacker had latent defects in the form of deterioration due to corrosion, which would become serious issues of concern in the then near future if not rectified in a timely manner, and Excel and Darra Exploration were well aware of these defects during the negotiation of the Royalty Agreement.[27]
2.By their very nature these defects were not capable of being identified through visual inspection, and Excel and Darra Exploration, as owner and operator of the Darra site, were in the best position to ascertain the existence of such defects.[28]
3.Excel and Darra Exploration were required to maintain the stacker to the standard prescribed by law and therefore should have known its condition.[29]
4.The plant was in continual operation so it was reasonable to assume it had the approval of the relevant regulatory authorities.[30]
5.The warranties in Clause 10 of the Royalty Agreement constituted a representation that the plant (including the stacker) complied with all regulatory requirements, and it was reasonable for Golden Sands to believe these warranties reflected the actual state of the plant.[31]
6.Excel and Darra Exploration knew at all relevant times that the stacker had to be in good working order and in compliance with all regulatory requirements to enable Golden Sands to meet the minimum royalty payments under the Royalty Agreement.[32]

7.The consequences of collapse or failure of the stacker were “extreme”.[33]

[27]Revised further amended statement of claim, particulars to para 37.

[28]Revised further amended statement of claim, particulars to para 39.

[29]Revised further amended statement of claim, particulars to para 39.

[30]Ibid.

[31]Ibid.

[32]Revised further amended statement of claim, para 38 and particulars to para 39.

[33]Revised further amended statement of claim, para 39.

In final submissions when asked to identify the erroneous assumption it is said that Mr William Wilson and Mr Strickland made as a result of the failure to inform, Golden Sands’ Senior Counsel said “they were erroneously assuming … that for a reasonable time, at least into the future, they would have the use of a significant piece of equipment [the stacker]”.[34]
[34]Transcript 943–4.

For these purposes, the critical point is the time when the Royalty Agreement was signed on 21 December 2001. It was not submitted that before then Golden Sands was irrevocably committed.

As at 21 December 2001 there were in existence the following further circumstances:

1.Mr William Wilson had been involved in the design, construction and early operation of the stacker, and Mr Strickland had also had early involvement with its operation.
2.Until 1997 Mr Strickland had been the manager of the operations conducted on the Darra site. The 1995 Stewart report was addressed to him.
3.In 1995 Mr Stewart had estimated that the then life of the stacker was 10 years. Notwithstanding what was, on any view, less than optimal maintenance, the stacker was operational for that 10 year period.
4.By 21 December 2001 Golden Sands had been operating the plant, including the stacker, for in excess of six months.
5.Both Mr William Wilson and Mr Strickland were, and were known to be, persons with extensive experience with equipment of this kind.
6.Prior to execution of the Royalty Agreement on 21 December 2001, one of Golden Sands’ then directors, Mr Derham, and a solicitor engaged by Mr Derham, had raised with Mr William Wilson and Mr Strickland the existence of corrosion in the plant generally and had suggested the engagement of an expert to assess the position. Mr Derham’s concerns were based upon his own observations.
7.Mr William Wilson was conscious of the risk of there being unknown factors concerning the plant which would subsequently create problems and it was with that known risk in mind that he sought the warranties in clause 10.
8.Issues of maintenance and allowances for pre-existing defects were addressed prior to execution of the Royalty Agreement in a context where Golden Sands sought, and obtained, concessions.

Whilst I accept that Golden Sands was ignorant of the contents of the 1998 Stewart report, I do not accept that Golden Sands erroneously believed, without qualification, that the stacker was free of corrosion which might impact on its operational life, and senior counsel for Golden Sands did not submit that. My conclusion is that Mr William Wilson and Mr Strickland were aware that corrosion existed in the plant generally and were aware corrosion could affect the operational life of particular pieces of equipment, including the stacker.

Relevant legal principles

There was no difference between the parties on the principles to be applied. They each cited well known authorities in the area including Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd,[35] Demagogue Pty Ltd Ramensky,[36] Winterton Constructions Pty Ltd v Hambross Australia Limited,[37] and CCP Australian Airships Limited v Primus Telecommunications Pty Ltd.[38]
[35](1988) 79 ALR 83.
[36](1992) 39 FCR 31.
[37](1992) 39 FCR 97.
[38][2004] VSCA 232.

The relevant issue is whether, on the particular facts of the case, the failure to inform constitutes misleading or deceptive conduct in that the circumstances are such that the person misled was entitled to believe, or had a reasonable expectation, that the relevant detrimental circumstance, if it existed, would be disclosed.

Was there misleading or deceptive conduct?

The 1998 Stewart report noted that there appeared to have been “significant deterioration to the structure and walkways” since the last inspection in May 1995. The walkway of the stacker was assessed as the part requiring the most urgent attention at the time. The report also noted that the revolving deck of the Favco crane was very rusted but did not pose a collapse of structure problem. In relation to the boom, Mr. Stewart reported a short length had been recently sandblasted at the rear section (limited by access issues) and that other sections had “very significant pitting corrosion”. Although he noted there was “major corrosion” in the bottom chords of the unblasted area of the boom, he determined that an exact assessment of the chord condition was not possible. He did note that the corrosion would shortly become a “major safety issue if not attended to in the very near future”. His recommended remedial work was to have the critically corroded areas sandblasted, and to have thickness testing undertaken, and then painting. The structure was not unsound or unsafe. The form of structural failure of the unit was most likely to be by local buckling in a panel section (i.e. it would not simply fall apart as a total structure).

The report records that all of this was based upon a “casual inspection”.

In June 2005, the then solicitors for Golden Sands wrote to Mr. Stewart seeking his retrospective opinion as to whether he thought, assuming no follow up action had been taken in the intervening years between the 1995 and 1998 reports and June 2001, the stacker was structurally sound or likely to be a danger to employees and members of the public as at June 2001. Mr. Stewart’s opinion was that “in the absence of any repair or reinstatement work being carried out and a further 3 years of deterioration having taken place it is unlikely the unit was structurally sound” primarily because “it was unsafe for any employee to climb upon the unit due to significant holes in the walkway grid and corroded access ladders”. This opinion was based on observations made by Mr Stewart on 14 September 2004 when he saw a rust hole in one of the boom’s chords and holes in the walkway, which led him to think it was not safe to walk along.

I referred earlier when setting out the sequence of events to the dealings between Mr Williams and Mr Ramage in relation to the 1998 Stewart report. Mr Williams in his evidence revealed that, reading the 1998 Stewart report now, he sees it as more significant than the way he saw the issues reported to him by Mr Ramage in 1998.

In truth, the misleading or deceptive conduct case only concerns the 1998 Stewart report. The 1995 report was addressed to Mr Strickland. It did not disclose problems of the same kind as those disclosed in the 1998 report. It was superseded by the 1998 report well before the critical date, being the signing of the Royalty Agreement.

My conclusion is that the circumstances here were not such as to produce a position where Golden Sands’ directors were entitled to believe and had a reasonable expectation that the existence of a report from 1998 setting out the matters the Stewart report did would, if it existed, be disclosed. In this respect I particularly rely on the contents of the 1998 report as I have described them above and on the further circumstances I have set out in para 284. In my view the critical matters are:

1.Both Mr William Wilson and Mr Strickland were men of considerable experience with equipment of this kind, and with this particular stacker.
2.Corrosion was the problem, and corrosion was something Mr William Wilson and Mr Strickland were aware existed throughout the plant. Its existence was apparent even to the untrained eye of Mr Derham.
3.Golden Sands operated the stacker for six months before signing the Royalty Agreement. It had had every opportunity to make its own assessment of its condition, and this was known to Excel and Darra Exploration.
4.Issues of maintenance and compliance with regulatory requirements were addressed by the parties, both in practical terms in relation to financial allowances being made, and in the express terms of the Royalty Agreement.
5.Whilst the stacker was a significant piece of equipment in the sand processing plant on the Darra Site, a corrosion problem in the stacker was capable of being addressed by expenditure of what was, in the context, modest sums.

Addressing the circumstances upon which Golden Sands particularly relies as set out in para 281 above, my analysis is as follows:

1.The stacker had corrosion. The existence of corrosion was not latent. It was apparent to Mr Stewart on a casual inspection. Mr Stewart’s assessment revealed the need for steps to be taken in relation to the walkway. Steps were taken in relation to that. Whilst his report also warned that corrosion would become a major safety issue if not attended to in the near future, he made it clear that he was not warning of collapse but of structural failure by local buckling.
2.The defects were capable of identification by visual inspection. Golden Sands, as operator of the stacker for the six months prior to 21 December 2001, was in a better position to assess the corrosion as at that date than Excel and Darra Exploration.
3.As at 21 December 2001 Golden Sands was the party required to maintain the stacker, and had been since at least the interim agreement in September 2001.
4.The plant was operational before and after 21 December 2001 and did not relevantly attract the attention of regulators until March 2004.
5.The warranties in clause 10 of the Royalty Agreement do not represent what Golden Sands suggests they do. In any event, they were not breached.
6.The evidence does not establish Excel and Darra Exploration knew that that particular stacker had to be in good working order to meet the minimum royalties. Repair or replacement of the stacker was in any event always practical at a cost which was modest in the context.
7.The collapse of the stacker was “extreme”, but that was not what Mr Stewart was warning about. Repair or replacement was always practical.

The contention made by Golden Sands that in the circumstances positive representations were made to the effect that the stacker was in good order and that nothing adverse was known about it is one which I reject.

Misleading or deceptive conduct: other issues

If I had found that there had been misleading or deceptive conduct, I would have found Golden Sands’ claim under the TPA failed for another reason.

In the claim as pleaded, both in the revised further amended statement of claim (para 48) and in the reply (para 2(f)), Golden Sands alleges that if had it not been misled it would not have entered into the Royalty Agreement and would have devoted its efforts to the Davegale site rather than both sites. Mr William Wilson and Mr Strickland gave evidence to the same effect. The same position was put on behalf of Golden Sands in the final address.

If I had found there had been misleading or deceptive conduct, the claim under the TPA as pleaded and argued would nevertheless have failed because if Golden Sands had not entered into the Royalty Agreement, my conclusion is that Mr Derham would have terminated the agreement made 23 April 2001 in a manner that was effective, and Golden Sands would have lost access to the Davegale site. I reach this conclusion based upon Mr Derham’s evidence about the nature of his relationship with Mr William Wilson and Mr Strickland and his intentions in that regard to which I have referred earlier, which I found to be both clear and credible.

This conclusion is entirely consistent with the judgment of Byrne J in Golden Sands Pty Ltd v Davegale Pty Ltd.[39] On my reading of the judgment, but for the fact that Golden Sands had entered into the Royalty Agreement Mr Derham’s purported termination of the agreement made 23 April 2001 would have been held to have been effective and Golden Sands’ access to the Davegale site would have been lost. I refer in particular to the judgment at paragraphs 10, 12 and 59, 28 and 33, 63 and 64–67.
[39][2003] VSC 458.

If I had found that the conduct of Excel and Darra Exploration had, in the circumstances, been misleading or deceptive, and if the problem concerning Mr Derham had been overcome, I would not have found that the misleading conduct caused the losses claimed by Golden Sands. Again, Golden Sands claims substantial damages for loss of profits, in excess of $2,000,000. The observations I made concerning damages on the contractual claims apply here also. I would not have accepted that the conduct caused the losses claimed.

Excel and Darra Exploration relied upon the fact that Excel had left everything behind when it handed over the site to Golden Sands on 1 June 2001, including copies of the 1995 and 1998 Stewart reports. The fact that the reports were left behind, and were left behind with documents which were important, such as the manager’s diaries, suggests to me that there was no conscious concealment of the reports. Having seen Mr Williams give evidence, if it were relevant I would conclude there was no conscious concealment of the reports. But this has no bearing upon the resolution of the s. 52 claim. In assessing whether or not conduct was misleading or deceptive, it does not matter that there was no intention to mislead. If the conduct is misleading, it does not matter that if the claimant had made proper inquiries (whether by itself or through its employees or agents) it would have been disabused of the error caused by the conduct.[40]
[40]Smith v State Bank of NSW Limited [2001] FCA 946, [61].

If Golden Sands proceeded upon an incorrect interpretation of the express warranties, no reasonable expectation of disclosure of the Stewart reports can arise from this in all the circumstances. The relevant authorities recognise that one party to an arm’s length commercial negotiation need not disclose to another negotiating party the correct interpretation of a contract to avoid liability under s. 52.[41]
[41]See, eg, Mander Forklift Pty Ltd v Dairy Farmers Co-operative (1990) APTR (Digest) 46-061; Halton Pty Ltd v Stewart Bros Drilling Contractors Pty Ltd (1992) ATPR 41-158.

For these reasons I find that Golden Sands’ claims under the TPA fail.

Other Claims: Negligent misstatement and termination of the Royalty Agreement

The cause of action in negligent misstatement fails because in the circumstances here, as I have set them out in dealing with the misleading or deceptive conduct claims, there was no relevant misrepresentation.

Golden Sands’ claim to have terminated the Royalty Agreement fails because the breaches relied upon have not been established.

Counterclaim

The counterclaim seeks recovery of outstanding royalties. The evidence is that the amount outstanding as at 28 February 2008 was $1,637,350.00. Golden Sands’ only defence is the claims it has itself made which have, with the exception of the claim concerning the bulldozer, failed. Golden Sands is entitled to a reduction in the amount due of the agreed allowance for the bulldozer. I will hear the parties further on the orders necessary to reflect this position, if agreement cannot be reached.

The defendants also seek declarations that the Royalty Agreement remains on foot but that they are entitled to terminate it. Again, Golden Sands’ only defence is the claims which have failed. I will hear the parties on the form of the appropriate declarations, if agreement cannot be reached.

Golden Sands did mount an argument that the amount due for royalties should be reduced by reason of what was said to be a failure to mitigate as the defendants could have recommenced mining on the Darra site themselves. I reject this submission. The claims made are contractual. The contract remains on foot. No issue of mitigation arises.

Conclusions

My conclusions are as follow:

(a)Golden Sands’ claims founded upon alleged breaches of the express contractual warranties fail because upon the proper construction of those warranties breach has not been established.
(b)Golden Sands’ claims founded upon alleged breaches of implied terms fail because the requirements for the implication of the alleged terms are not met.
(c)Golden Sands’ claim that misleading or deceptive conduct occurred fails as the evidence does not establish that such conduct did occur.
(d)Golden Sands’ claim that there was negligent misstatement fails as the evidence does not establish the misstatements relied upon.
(e)Golden Sands’ claim concerning the dozer succeeds in the sense that Golden Sands is entitled to a reduction in the royalties due of an agreed amount.
(f)Golden Sands’ claim to have validly terminated the Royalty Agreement fails as the breaches relied upon have not been established.
(g)The defendants’ counterclaim succeeds. Golden Sands’ defence is the claims it has made which have failed.

I will hear the parties further on the necessary orders and declarations, and on issues of interest and costs, unless agreement is reached.

[2008] VSC 276

25 July 2008