Kewside Pty Ltd v Warman International Ltd

[1990] FCA 219

JUDGMENT No.

IN THE FEDERAL COURT OF AUSTRALIA	)
WESTERN AUSTRALIA DISTRICT REGISTRY)	1
)
GENERAL DIVISION	)

BETWEEN:  KEWSIDE PTY LTD
Applicant

AND:  WARMAN INTERNATIONAL LIMITED
Respondent

CORAM: NORTHROP, WILCOX AND HILL JJ.
PLACE: PERTH

DATED: 4 MAY 1990

EX TEMPORE REASONS FOR JUDGMENT

The appellant, Kewside Pty Ltd, which was the applicant in the proceedings below, appeals against the assessment of damages made by the learned trlal judge, French J, in an application based upon s.52 of the Trade Practices Act, 1974. The learned trial judge found liability to have been established and the respondent does not challenge the findlngs on this issue.

Briefly, his Honour held that the respondent had made certaln representations to the appellant concerning a compressor which was intended for use by the appellant in drilling operations to be conducted by it in country areas which representations went to the number of hours of use which the	alia, in Malaysia. The relevance of the latter representations	compressor had had and whether it had been used overseas, inter
was that use in Malaysia indicated not only a higher number of hours worked by the machine but also that it may have been misused. The representations were false.
Based upon the representations the appellant purchased the compressor and had it installed upon a drilling rlg by the respondent which also performed some upgrading work. The respondent's charges for performing this work were $49,365.42 and were never paid by the appellant. The respondent cross-claimed successfully for the recovery of this amount and the appellant (the respondent to the cross-claim) appeals also against the decision on the cross-claim.
At the heart of the major issue is the approach taken by his Honour to the appellant's claim for damages which were based relevantly on three clalms llsted in schedules. The first (Schedule 1) was a claim for items said to have been purchased by the appellant and when its business failed disposed of by the appellant or rendered useless. Many of the items formed part of a security held by a flnance company and were disposed of by that
company pursuant to its security. The second (Schedule 4) involved a claim for the loss of opportunity to earn a profit in
the period 14 May 1986 to 15 December 1987. The Schedule calculated that loss at $315,631. The third claim (Schedule 3) involved a claim for the loss in fact suffered by the appellant in its period of trading from 14 May 1986 to 18 August 1986. That loss was claimed as $24,715.03.
It is convenient to deal first with the most substantial claim, being that for the loss of opportunity to make a profit
(Schedule 4) .
His Honour was of the view that the lost opportunity was compensable. The facts which his Honour regarded as relevant in the assessment of damages and the way in which he approached the task can be seen from the following passages in his Honour's judgment:

"Kewsidets decision t o acquire the Sullair compressor from Warman was taken after it had decided to acquire the rig and embark upon the new venture of providing essential plant for exploratory drilling as well as the skills and labour of its principal, Koosney. It did so in a financial condition that can only be described as fragile dependent entirely upon income earned from contracts to enable it to meet the substantial financial commitments which it had undertaken.

In the event, it suffered a number of setbacks all of which played a role in the failure of its business. These included the problem with the reverse circulation drill rods which gave rise to a delay of about 14 days on the Black Flag job. Leaking seals, defective hydraulic motors, blown hydraulic hoses and a leaking control panel as well as contamination of the hydraulic oil, all contributed to the difficulties experienced with

the rig at Black Flag. Slow starting of the

compressor accounted for some delay which on Koosney's evidence amounts to about 20% of the time for which the rig was actually working. As only 8 days was spent drilling out of a total of some 38 at Black Flag, this suggests a compressor caused delay equivalent to 1.6 shifts.

Despite Rodney Koosney's evidence that the compressor was taking up to 4 hours to get started at Mertondale, I am not satisfied that the percentage of lost time overall was any greater than that at Black Flag. It appears from the drilling records that some 20 days were occupied actually drilling at Mertondale and on that basis 4 day shifts could be said to have been lost by reason of slow starting on the part of the compressor. This represents a total of 5 or 6

shifts over the entire period of 77 days that Kewside was attempting to carry out these contracts. Other problems experienced at Mertondale included delays arising out of the bogging of the rig, the need to obtain a replacement hammer and to strip and clear it and damage to a welder. Koosneyfs incapacity must also have had some effect on the operation of the business. It may be said that the stripping of the blower shaft on 8 August was the last straw, but by this time it was Kewside's financial fragility that was dominating its difficulties. As early as March or April 1986 Koosney had borrowed $5,000 from his brother because, as he told him, he was desperate and needed the money just to keep going. He had borrowed also from Davies International, he had not paid Vickers Keogh and he owed Warman $105,581. It is my opinion that right from the outset Kewside had very little margin for mishap. The difficulties with the compressor contributed to its demise, but other factors played a much larger role.

I consider that the contribution made to Kewside's

difficulties by the compressor can be taken as one among a number of factors which conspired to deprive it of the chance of a profit and caused it to sustain an operating loss. The loss of chance is, in my opinion, compensible (sic). In assessing its value I take as the starting point the profit projection suggested by Stevens, namely $242,500 for the 18 month period of high demand to December

1987. The loss of chance attributable to the compressor is in my opinion a small proportion of that amount when appropriate discounts are applied for the financial vulnerability of Kewside and other problems that it faced and which I think fell outside at least the quantitative if not the

qualitative framework of the range of difficulties	taken into account by Stevens in his assessment.
The assessment of the value of the lost chance attributable to the compressor is necessarily a somewhat arbitrary exercise. In my opinion however, 15% of that sum recognises the effect of the compressor defects as significant but not dominant in determining the inability of Kewside to earn any profit. The loss of chance of profit attributable t o the compressor i S therefore $36,375. "

It is not in dispute that the assessment of damages
involves a process of estimation rather than calculation,

particularly in a case where there is involved an attempt to estimate what might have happened had the false representations made by the respondent not been made. The measure of damages in a case such as the present is designed to put the appellant in a position that he would have been in but for the misrepresentation. See Gates v. City Mutual Life Assurance Society Ltd (1985-86) 160 CLR 1 at 13.

His Honour had before him a report of a Mr Stevens who also gave oral evidence as to the likely drilling revenue and outgoings of a driller in the period 14 May 1986 to 15 December 1987 unaffected by any difficulty with compressors. That report showed estimated drilling revenue based on 415 shifts of an average of 100 metres drilled per shift, calculated at the rate of $25 per metre drilled totalling $1,037,500, outgoings of $784,350 and a profit estimate after taking into account ongoing costs of $242,450. These figures were unaffected by any abnormal difficulties.

The appellant however clearly suffered a number of disabilities that contributed to its achieving a lower than	average drilling rate and losses rather than profits in the brief
period it traded. In addition to the compressor and depending upon the period which is chosen, these were said to have included:

(a) The appellant's financial fragility.

(b) The back problems of its proprietor, Mr C Koosney, which amounted, for example, to four days absence during the drilling period at Mertondale for back tcaction.

(C) Problems with the drill's hydraulic system. These problems were relevant to the period of work on the appellant's first contract at Black Flag when this contract was finally aborted and before the commencement of the Mertondale job.

(d)	Problems with the appellant's truck being bogged. It should however be noted that the appellant was, pursuant to its drilling contract, entitled to be remunerated for the time lost, although it would seem at a lesser rate than could be obtained for drilling.
(e)	There were the normal vicissitudes of drilling such as the breakdown of a hammer leading to delays.

His Honour, as can be seen, accepted M Stevens' evidence and commenced his assessment by reference to it. However it would seem that at first instance his Honour was not given the considerable assistance given us by counsel for both sides in examining the available evidence as to what might be expected to have happened financially to the appellant if the representations had not been made. Rather it would seem, his

Honour was largely concerned to resolve the various issues then alive between the parties as to liability.

The appellant criticised the judgment below on a number of bases. It was said that his Honour attached undue weight to the question of financial vulnerability of the appellant, borrowings made by the appellant and perhaps other matters that caused difficulties for the operations of the appellant including the back problem of Mr Koosney. It was also submitted that in looking at the actual outcome of the operations his Honour should have concentrated on the period of the second contract at Mertondale.

In this connection a number of matters should be noted:

1.   The difficulties at Black Flag caused by hydraulic problems were in reality start-up problems. By the time the rig moved to Mertondale they had been resolved. Hence the time at Black Flag was unrepresentative of the future profit that but for the representations would have been earned by the appellant.

2.    At the start of the Mertondale project the appellant had been able to refinance its operation on 16 June 1986. It had an overdraft and owed moneys to both a repairer, Vickers Keogh for the repair of the rig and to the respondent. On the evidence, however, neither the repairer nor the respondent was pressing for payment. Had the appellant been able to operate with a rellable compressor it is likely that it could have made some

payments to its creditors and perhaps a small proflt instead of the loss which it actually incurred.

3.   Although the appellant borrowed a small sum of money from Mr Rodney Koosney (the proprietor's brother) the evidence does not suggest that Mr Koosney was pressing for payment.

4.   The appellant still had, at the commencement of the Mertondale job, work available to it in the form of contracts. The evidence suggested that provided drilling contracts were on hand, finance was available if required. It would still have been able to trade its way out of difficulties but for the faulty compressor.

5 .    However, when the respondent repossessed the compressor unit, then in pieces for repair, and the appellant no longer had any contracts available to it, it then could no longer refinance and its financial dissolution was inevitable.

On the evidence it seems quite clear that the compressor was a significant factor in the change in the appellant's situation between the beginning of the Mertondale project and the date the compressor was repossessed. One has only to reallse that during the period of the Hertondale contract, 34 days, the appellant lost for every day of drilling 20 per cent of the day for slow starting. It lost an average of 1 . 4 5 hours per day for other compressor problems, i.e. something like 3 . 5 hours a day for the 20 days it in fact drilled. It lost the whole of 7 further days as a result of problems related to the compressor. Effectively one in 5 five days was lost to drilling as a result

of the compressor and 3 . 5 hours a day of drilling was lost as a	result of the compressor. On these facts it seems clear that to
attribute only 1 5 per cent of the appellant's difficulties to the compressor is incorrect.
Various mathematical calculations were propounded by the appellant based upon various assumptions to persuade us that the appellant's lack of opportunity resulted in a loss of or about that figure projected by Mr Stevens. These calculations were in turn criticised by the respondent. One matter is clear. For whatever reason, it does not seem that the appellant in the period of the Mertondale contract ever achieved an average of 100 metres a shift, even if an attempt be made to extrapolate what drilling results might in that period have been achieved had the compressor not been faulty.
One calculation, for example, suggested an appropriate average drilling rate of 90 metres per shift, another 78 metres per shift. Yet another calculation showed an average of approximately 55 metres a shift if regard were had to time lost for the normal exigencies of drilling and time lost on account of the compressor.
None of the calculations could, of their very nature, be scientifically accurate. However doing the best we can we are of the view that an appropriate discount to be applied to Mr Stevensf calculations is to allow 55 per cent. In making this discount we seek to make allowance for the other difficulties which contributed to the appellant's failure, that is to say in particular, Mr Koosneyfs back problem and the undercapitalisation
of the company. Mr Stevens' calculations made allowance for the ordinary vicissitudes of drilling.
Accordingly we would increase the damages awarded by his Honour under this head to $133,347.50.

We turn now to deal with the claim for damages made in

Schedule 3.

His Honour dealt with the appellant's actual operating loss quite shortly. He said:

"Similarly, the operating loss over the relevant period may be treated as a measure of lost opportunity to at least cover costs. Taking the schedule 3 figures of $24,715 as a rough guide, the amount I would assess as the loss of chance to avoid loss is $3,707."

It was submitted for the appellant that if we were of the opinion that a higher percentage of Hr Stevens' calculation should be accepted in the claim under Schedule 4 then the same percentage should be applied to the loss of profit particularised in Schedule 3.

However this is not so. The actual loss which was suffered arose in part out of factors not present in the Mertondale job and in particular out of the hydraulic and other start up difficulties. In these circumstances to allow the appellant 55 per cent of the loss would be to compensate the appellant for difficulties unassociated with the compressor. Again it is difficult to make any precise estimate but we are not

persuaded that his Honour erred in discounting the actual loss	suffered to 15 per cent. We would accordingly not disturb his
Honour's assessment.

We turn now to deal with the claim in Schedule 1.

As his Honour points out in the judgment, Schedule 1 in general comprised a list of every item of plant or equipment purchased by the appellant between May and August 1986 for which

an invoice could be found irrespective of whether the items had been consumed or damaged in the course of operations. In one respect, the schedule was shown to be overstated by $1,500. His Honour gave no damages to the appellant under this heading, which received only minor attention in the judgment and, it would seem, in the argument below. His Honour said:

"The losses claimed, flowing from the collapse of Kewsidels business and in particular the amounts sought in schedules 1 and 2 do not display any sufficient causal connection with the conduct complained of to justify their recovery."

With respect to his Honour, it is not clear why this should be so. Once it is accepted that the representations made by the respondent contributed to the appellant's losses, the items in Schedule 1 are further losses suffered by the appellant in the period, albeit capital rather than revenue losses.

Accordingly it seems appropriate in our view to allow to

the appellant 15 per cent of the items in Schedule 1 as part of

practical sense any depreciation of the assets from tradlng.	the loss, noting that this figure takes into account in a
The trial judge allowed interest at 14 per cent per annum from 1 January 1988 until the date of his order, 18 January 1990, upon the amounts awarded by him in both the action and the cross-claim. The commencing date was selected as immediately following the date to which Mr Stevens' proflt calculation was made. However, the damage was sustained by the appellant progressively over the period May 1986 to December 1987. Under these circumstances, it appears to us more appropriate to calculate interest from an earlier date. We have selected 1 April 1987, being a date at about the midpoint of the period of damage. We will retain the rate of 14 per cent used by his Honour.
As will appear, we think that the order made by the trial judge in respect of the cross-claim was correct. ~t would be unfair to take the interest awarded to the appellant back to
1 April 1987 but to allow the respondent interest only from 1
January 1988. But there is no appeal by the respondent against the order made in connection with the cross-claim. Accordingly, we will adjust the position between the parties by deducting from the sum which we would otherwise have granted the appellant, an amount equal to nine months interest on $49,365.42 at 14 per cent, namely $5,183.36.
The total amount to be allowed to the appellant in respect of its claim will be $191,738.03. This amount is made up
as follows:

55% of profit projected by

Mr Stevens ($242,450)

15% of operating and capital
losses ($54,868)
Interest on $141,427.70 for
2 years & 293 days at 14% pa

Less interest on $49,365.42
for 9 months at 14% pa

The appellant's complaints about the cross-clalm are without substance. The amount allowed by his Honour relates only to costs incurred by the appellant in fitting out the rig and installing the compressor. These were costs which the appellant would have had to incur if it was to carry out drilling activities. Mr Stevens' calculation assumes a driller with an effective rig with compressor installed. The appellant's claim that his Honour should have made an order under 5.87 of the Trade Practices Act overlooks at least two matters: the relevant

transaction did not stem from a breach of the Act and it is now

impossible to restore the parties to their original position.

The trial judge allowed the appellant three quarters of its costs on the action. He made no order in relation to the costs of the cross-action. The disallowance of one quarter of the appellant's costs of trial was apparently intended to reflect both the fact that the respondent had succeeded on its cross-action and the overall result in money terms. 1n our judgment the respondent correctly succeeded in its cross-action but the result of the case, in the llght of these reasons, is that the appellant has enjoyed substantial success in money terms. Counsel estimate that the cross-action involved not more than one eighth of the hearing time at trial. Accordingly we will amend his Honour's order so as to give to the appellant seven eighths of its costs at first instance. The respondent must pay the costs of the appeal.

The formal orders of the Court will be as follows:

1.    That the appeal be allowed in part.

2.    That order 1 made by French J on 18 January 1990 be amended so as to substitute for the figure "$51,545" the figure "$191,738".

3.    That order 1 made by French J on 7 February 1990 be amended so as to substitute for the words "three quarters" the words "seven eighths".

4.    That the respondent pay to the appellant its costs of the appeal.

I certify that this and the

preceding thirteen (13)
pages are a true copy of the
Reasons for Judgment herein of

the Court.

Associate a 4 . a;,& .

Dated: 4 Nay 1990

Counsel and Solicitors	Mr P P McCann
for Appellant:	instructed by Messrs Malteles &
Salmon
Counsel and Solicitors	Mr P G McGowan
for Respondent:	instructed by Messrs Phillips FOX
Dates of hearing:	2 and 3 May 1990
Date Judgment Delivered:	4 May 1990