National v WellingtonWellington v National

[2003] NSWSC 21

CITATION:	National v WellingtonWellington v National [2003] NSWSC 21
HEARING DATE(S):	09/12/02
JUDGMENT DATE:	12 February 2003
JURISDICTION:	Equity
JUDGMENT OF:	Master Macready at 1
DECISION:	Conclusions of Referee not accepted.
CATCHWORDS:	Sale of goods- conditions and warranties - contract for supply of forked castings for steel work - supply of defective castings - whether reliance by plaintiff on defendant's skill or judgment - Sale of Goods Act 1923 (NSW) s19(1). Whether the Referree's report under Supreme Court Rules Part 72 should be accepted.
PARTIES :	National Engineering Pty Ltd v Wellington Orana Foundry Pty Ltd & Anor Wellington Orana Foundry Pty Ltd v National Engineering Pty Ltd
FILE NUMBER(S):	SC 55020/00; 55036/00
COUNSEL:	Mr A. Diethelm for National Engineering Mr. S. Hill for Wellington Orana
SOLICITORS:	Philip Boyce & Associates for National Engineering Marsdens Law Group for Wellington Orana

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

Master Macready

Wednesday 12 February 2003

55020/2000 National Engineering Pty Ltd v Wellington Orana Foundry Pty Ltd
55036/2000 Wellington Orana Foundry Pty Ltd v National Engineering PtyLtd

JUDGMENT

1 MASTER: This is the hearing of a motion filed on 13 September 2002 in which National Engineering Pty Ltd ("National”) seeks an order that a referee's report pursuant to Part 72 of the Supreme Court Rules be rejected. Wellington Orana Foundry Pty Ltd (“Wellington”) submits that the report, which found that there should be judgment for Wellington against National in a sum of $122,350.00 should be adopted by the court. The matter came before me when I was an Acting Judge of the Court and I have continued to deal with the matter pursuant to s 37 (3A) of the Supreme Court Act.

2 There are two proceedings before the Court that concern the same factual matters. Originally Wellington commenced proceedings in the District Court against National claiming a sum of $129,420.20 for goods sold and delivered. In June 2000 National commenced proceedings in the Supreme Court against Wellington claiming damages for breach of contract in the sum of $1,145,756.00. There was also a claim by National against Nepean Engineering Pty Ltd. That claim was not referred out to the referee and does not concern me.

3 The District Court proceedings were transferred to the Supreme Court and on 26 October 2001, in each of the proceedings, the court referred the whole of the proceedings as between National and Wellington to Mr G. A. Markham as referee. Mr Markham is an experienced structural consulting engineer.

Background facts to the dispute

4 Most of these facts are not contentious as in general there is no challenge to most of the detailed findings of fact. The following account is taken from National’s submissions but has been amplified to clarify some matters referred to by Wellington.

5 In November 1996 National entered into a sub-contract with Multiplex Constructions (NSW) Pty Ltd for the fabrication and erection of structural steelwork for Stadium Australia. The roof steelwork included diagonal tube members with forked-end connections. National sought and obtained approval from Multiplex and its engineers to cast the forked-ends rather than fabricating them from plate steel. Drawings supplied by Multiplex stipulated the quality of steel required as “350G”.

6 “350G” is a grade of hot-rolled steel plate defined by AS 3678. That standard requires that grade 350 have a minimum yield strength of 350 megapascals (“MPa”) and sets out the required chemical composition for the grade. (Report para 11.)

7 Cast steel is the subject of a different Australian Standard, AS 2074. This standard does include steels which reach a yield strength of 340-350 MPa, but such steels are not referred to as “350G”. The same chemical composition as in 350G plate steel would not produce steel with a strength of 350 MPa in cast steel. (Report para 12.)

8 In November 1996 National requested from Wellington a quotation for castings “in 350G” which was responded to by Wellington quoting on “350G” (Report paras 67, 70) There was a factual issue between the parties as to the content of a telephone conversation, about which the Referee made a finding of fact (Report paras 71-76). That finding was that Wellington was offering cast steel of the same chemical composition as AS/NZS 3678 grade 350 plate and not cast steel with a minimum yield strength of 350 MPa. The referee made a finding that the contract included an express term that the casting would be in mild steel having this chemical composition.

9 In February 1997 National issued a purchase order to Wellington for 2,400 of the cast forked-ends, stipulating “350G”, with 800 to be supplied in each of April, May and June 1997 (Report paras 8, 87, 95).

10 Wellington produced and delivered certain castings (the “Mk1 castings”) made in accordance with the shape requested by National. Upon testing these were found to contain defects (Report paras 27, 94). The design of the Mk1 castings was “flawed and doomed to fail for a cast component of structural quality” (Report para 39).

11 At this stage Wellington had cast about 600 of the mark 1 clevises some of which had been delivered. They were then advised that they should produce according to addendum No 2 which applied a radiographic standard class 2 inspection. The referee found that this established for the first time that for the clevises to be fit for the purposes of being incorporated into the roof structure of Stadium Australia the acceptance criteria was radiographic standard cast 2 and that the mark 1 clevises were not to that standard.

12 After making certain enquiries Wellington proposed in June 1997 that the design be modified to provide for “tapered ears” on the castings (the “Mk2 castings”), and in August 1997 a revised price was agreed for these castings with anticipated production of 150 to 200 per week (Report paras 30,36). During September 1997 National made complaints as to the quality of Mk2 castings (Report para 101).

13 National declined to pay for castings delivered until the guarantee by Nepean was provided. In November 1997 Wellington ceased production and National commenced to fabricate the forked-ends still required out of plate steel.

14 Multiplex engaged consultants to investigate the suitability of the castings and radiographic and ultrasonic testing was carried out. Testing was required on all castings incorporated in the modules which had been lifted into the roof. Several castings in the roof needed to be replaced. (Report paras 45, 46.)

The legal principles applicable to the application

15 Part 72 rule 13 SCR governs proceedings in the Court after a Referee’s report is made. The rule provides:

“(1) Where a report is made, the Court may, of its own motion, after notice to the parties, or on application by any party, on a matter of fact or law or both:
(a) adopt, vary or reject the report in whole or in part;
(b) require an explanation by way of report from the referee;
(c) on any ground, remit for further consideration by the referee the whole or any part of the matter referred for a further report;
(d) decide any matter on the evidence taken before the referee, with or without additional evidence,
and shall give such judgment or make such order as the Court thinks fit.
(2) Evidence additional to the evidence taken before the referee may not be adduced before the Court except with the leave of the Court.”

16 National submitted that the approach to be adopted by the Court in exercising its powers under the rule is set out in Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549. In that case Gleeson CJ stated (at 563-4):

“What is involved in an application under Pt 72, r 13 is not an appeal, whether by way of a hearing de novo or a more limited re-hearing. … Rather, the judge, in reviewing the report and deciding whether to adopt, vary or reject it, has a judicial discretion to exercise in a manner that is consistent both with the object and purpose of the rules and with the wider setting in which they take their place. …
In so far as the subject matter of dissatisfaction with a referee’s report is a question of law, or the application of legal standards to established facts, then a proper exercise of discretion would require a judge to consider and determine that matter afresh. …
… The purpose of Part 72 is to provide, where the interests of justice so dictate, a form of partial resolution of disputes alternative to orthodox litigation, and it would frustrate that purpose to allow the reference to be treated as some kind of warm-up for the real contest. On the other hand, if the referee’s report reveals some error of principle, some absence or excess of jurisdiction, or some patent misapprehension of the evidence, that would ordinarily be a reason for rejecting it … . So also would perversity or manifest unreasonableness in fact-finding. …”

17 Wellington also referred to Foxman Holdings Pty Ltd v NMBE Pty Ltd (1994) 38 NSWLR 615 at 620 where Mr Justice Cole referred to the Chief Justice’s comments in these terms:

“By "patent misapprehension of the evidence", I understand the Chief Justice to be referring to a lack of understanding of the evidence as distinct from the according to particular aspects of the evidence different weights. The reference to "perversity or manifest unreasonableness in fact finding" I understand to relate to the exceptional case where it can be clearly demonstrated that no reasonable tribunal of fact could have reached the decision achieved. It is true that may involve a consideration of evidence. However, it is dealing with a state of evidence regarding material facts different to and more unreliable than a state of evidence said to be "unsafe and unsatisfactory" to support such findings of fact.

The challenge to the referee's report and conclusions

18 National’s case was based on alleged breaches of the condition implied into the contract between the parties by sub-section 19(1) of the Sale of Goods Act 1923. That sub-section (set out in the Report at para 108) implies a condition that goods supplied under a contract for the sale of goods will be reasonably fit for purpose, where certain requirements are satisfied.

19 One of those requirements is that the buyer makes known to the seller the particular purpose for which the goods are required “so as to show that the buyer relies on the seller’s skill or judgment”. At para 112 the referee correctly held that the issue of reliance was the “decisive issue” in the case. The referee found against National on the question.

Challenges to the factual findings

20 Amongst the grounds there were challenges to some specific factual findings of the referee. I will deal with those matters first and then move to the referee's treatment of the law and the application of the law to the facts in the case.

Paragraph 7

21 The referee referred to some evidence given by Mr Burns of National which indicated Mr Burns’s knowledge of relevant standards for castings and plate steel. He inferred that National was relying on its own skill or judgment to be able to achieve equivalent performance in a cast element compared to fabricated plate. I do not think that the inference flows from the quoted evidence but there is the knowledge of Mr Burns which was referred to by the referee. This fact is referred to in the later reasoning process.

Paragraphs 60 - 62

22 Paragraphs 60-62 are in the following form:

“60. Dr Southin, an expert metallurgist, was of the view that even the most casual examination of the drawing would indicate that two 'ears'. as they are so called, were shown in the drawing as flat plates of uniform thickness which would have been impossible to cast economically without them being full of shrinkage porosity."

The effect of his evidence was that a competent foundry would have informed National of this impossibility at the time of the 19 November 1996 enquiry, yet the QA-accredited Wallbank foundry provided a quotation (refer Paragraphs 15 to 17). He also said that the foundry should have consulted AS 2074 for an appropriate grade of cast steel, a matter later discussed.

61. I do not question the technical quality of Dr Southin's evidence, however, it seemed to me that his affidavit deposition was not totally objective in, for example, not referring to the clearly defined responsibilities of purchasers of castings as defined in AS 2074. Also, his rather personal attack on Mr Kortlucke's knowledge on QA was an unwarranted attempt at point scoring.
62. In relation to industry custom and practice in ordering castings, I prefer the mandatory requirements of the Australian Standard AS 2074 to Dr Southin's view. This Standard was prepared by a widely represented industry committee comprising:
'Australasian Institute of Metals
Australian Foundry Institute
Bureau of Steel Manufacturers of Australia
Confederation of Australian Industry
Department of Defence Department of Industry and Commerce
Institute of Steel Service Centres of Australia
Metal Trades Industry Association of Australia
Railways of Australia Committee
Society of Automotive Engineers ~ Australasia."

23 It was submitted that the comments in paragraph 62 create an entirely false opposition between the consultants’ evidence and the standard. Certainly the standard and the consultants’ evidence may stand together but it seems that there has been a rejection of Dr Southin’s opinion in favour of the standard and the expertise of the referee. As that rejection was in part based upon his assessment of Dr Southin as a witness the findings should not be set aside.

24 There also is a challenge to para 63 where the referee dealt with Dr Abel’s evidence. He said:-

“I think he answered these questions [ie on what a competent foundry would do] on the basis of a foundry competent to produce quality structural castings, that is, one experienced in this class of work.”

25 It was submitted that there was no evidence to support this assertion by the referee. Professor Abel was well aware of the circumstances of this case and his opinion was, it was said, not qualified in any way to allow it to be restricted to a particular category of foundry.

26 Apparently any such qualification was not put to the witness in cross-examination to allow him to deal with it and it would not have been proper for Wellington to put that submission without having done so. The referee should not have drawn such a conclusion without evidence and in the absence of the point having been put to the witness. However, for reasons to which I refer later this is not relevant.

The referee's consideration of the legal principles

27 In paragraphs 108-121 the referee referred to the legal principles that govern the matter. He referred to s 19 (1) of the Sale of Goods Act 1923 and identified the decisive issue in paragraph 112. He then went on to deal with the case law and in particular Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association [1969] 2 AC 31, Manchester Liners Limited v Rea Ltd [1922] 2 AC 74 and Cammell Laird & Co v Manganese Bronze and Brass Co (1934) AC 402.

28 He also referred to Professor Sutton's comments in Sales and Consumer Law (1995) at para 9.18 which made reference to the fact that section 19 (1) is not dependent upon failure by the seller to exercise proper skill and judgement, for once it has been established there has been reliance by the buyer, even though the parties never consciously thought about it, the seller's liability was strict. After referring to Manchester Liners Limited the referee commented:

“I think it follows that, where a manufacturer makes goods to a detailed specification provided by the buyer, one must examine what skill or judgment was left to the manufacturer and whether there was substantial effective reliance by the buyer on that skill and judgment.”

As a proposition of law this conclusion is correct. He referred to Cammell Laird & Co v The Manganese Bronze & Brass Co and a number of statements of the Law Lords and noted that the problem with the propellers in that case was not attributable to defective specifications or plans but to some other matter. He then concluded at the end of paragraph 120:

“I think it is reasonable to conclude, therefore, in the case of partial reliance on the skill or judgment of the manufacturer there must be some nexus between the exercise of skill or judgment of the manufacturer and any lack of fitness for purpose, even though it is not necessary to find any fault in such exercise.”

29 The referee then made reference to comments of Lord Ried in Hardwick Game Farm at p 82 that it can only be in unusual circumstances that a buyer does not rely in part at least on the skill or judgment of the manufacturer.

30 It is this conclusion at the end of paragraph 120 which National submitted was in error. They submitted that there is no legal principle which distinguishes, in the context of s 19 cases, between situations where specifications are provided and those where they are not. This is quite right and, in my view, the establishment of “some nexus” is not a part of the test. It is, however, appropriate and indeed important, in cases of partial reliance to address in what respect there was reliance on the seller’s skill and judgment.

The application of the law to the facts by the referee

31 The referee in paragraphs 122 to 130 proceeded to apply the law to the facts as he has found them. Notwithstanding that in paragraph 128 the referee refers to two bases there seemed to be three separate areas of consideration by the referee in this part of the report. The first is paragraphs 122 to 125, the second area is paragraph 126 and the last sentence of 127 and the third area is the first two sentences of paragraph 127.

Paragraphs 122 to 125

32 The relevant paragraphs in the report are as follows:

122. National provided Wellington with fully dimensioned sketch drawings of the M1 clevises and supplied the casting pattern. Pursuant to its contract with National, Wellington was obliged to produce the clevis castings conforming to the design and specification. National provided the design and there was no reliance (substantial or effective) on Wellington for the design.

123. The design of the M1 clevis castings was flawed and the purchase order (embodying the specification) was seriously defective. These failings are causative of the castings not being fit for the purpose of being incorporated into the roof of Stadium Australia.

124. It seems to me that National was entitled to rely on Wellington's skill or judgement in relation to casting techniques, however, there is no evidence of the remotest nexus between the exercise of that skill or judgement and the lack of fitness for purpose referred to above.
125. From what was said by their Lordships in Cammell Laird concerning the plans and specification, I think the circumstances here fall into the unusual category referred to by Lord Reid in Hardwick Game Farm and, from this initial line of reasoning, s19(1) is not implied into the contract.”

33 As I have said, it is not a question of a nexus as referred to by the referee. This diverts the referee from the real question which includes in what respect there was reliance on the seller’s skill and judgment. National points to the use by the referee of the word “design” in these paragraphs without elaboration. It is clear that National specified the shape to be cast and says that the referee did not consider whether National relied on Wellington’s skill and judgment to determine:-

(a) Whether the proposed shape could be cast and,
(b) if so how the desired mechanical properties (specified as 350 G) could be achieved.

34 The referee in paragraph 124 refers to National’s reliance on Wellington’s skill and judgment in relation to casting techniques but does not mention in what respect.

35 The pleadings do not elucidate the particular respects in this regard. The failures of the castings resulted from the matters accepted by the referee at paragraph 39 of his report. There he said:-

“On the issue of casting design, Mr Kortlucke had this to say:
“The casting has metal sections that are long and narrow. A good design guide is that the length to width ratio of thin sections should not exceed 6:1. The Mark 1 casting has a ratio of 17:1. Even after this deficiency was realised, the Mark 2 casting was forced by other issues to use a ratio of 9:1. This is the key factor that made the Mark 1 essentially impossible to cast, and the Mark 2 difficult to cast, without porosity.”
Neither Dr Southin nor Professor Abel took issue with this statement, and I accept it, noting that the large diameter hole for the connecting pin is a feature which adds to the complexity. It follows that the design of the Mk1 casting specified by National was flawed and doomed to fail for a cast component of structural quality. It was submitted by National that the original design was defective and unable to produce a satisfactory casting. This was really put on the basis that Wellington was somehow responsible for the design. I reject the last part of this submission as being contrary to paragraph 1 of the Summons and also the evidence.”

36 It is these problems which he identified which are the basis for the referee’s finding of a lack of nexus to which he refers. As I have said it is not a matter of nexus but in what respect there was reliance.

Paragraphs 126 and the last sentence of 127

37 Paragraph 126 is in the following terms.

“126. 1 think it is also important to broadly consider whether, in all the circumstances of this case, it would be reasonable for National to rely on Wellington's skill or judgement in manufacturing the clevis castings. In doing this, there is some factual overlap with what I have said above. Consideration of this question turns on the following facts.

(a) The relative size and experience of the parties. National had a staff of about 50 to 55 personnel, which included a qualified structural engineer, whereas Wellington was recently established, employed six personnel and only two of those had prior foundry experience.

(b) National had access to the designers SKM/Modus and to the design drawings and specification whereas Wellington did not. Without access to the SKM/Modus structural drawings of the stadium roof, Wellington could not have had any real concept as to how the clevises were to be used even though they knew they were to be welded onto struts to be incorporated into the roof of Stadium Australia.

(c) National was involved in the detailed design development of the steelwork. It proposed to Multiplex and SKM/Modus that the clevises be cast and then sent them sketches of the alternative design which they approved.

(d) In assessing Wellington's capability to produce structural castings, National failed to exercise reasonable care and disregarded the potential consequences of any difficulty in the manufacture, testing and acceptance of approximately 2,400 components for a significant long-span structure. National was dealing with a foundry with mostly experience in casting agricultural components and which was not QA certified (refer Paragraph 82). In addition, the provisions of QA and NDT were not terms of National's contract with Wellington.

(e) Wellington placed no caveat on its capability to undertake the casting of the clevises, as explained in Paragraph 64.

(f) Both Messrs Wilson and Burns of National were aware that, at the relevant time, there were different Australian Standards for rolled plate steel and cast steel.

(g) National, through its qualified structural engineer, exercised skill or judgment in expressing the belief that National would be able to achieve an equivalent performance in a cast element compared to a fabricated plate element (refer Paragraph 7).

(h) National failed to specify the casting in accordance with the mandatory requirements of the Australian Standard AS 2074, and the purchase order was seriously defective as a specification for the clevises (refer Paragraphs 90 and 91).

(i) The design of the Mkl clevises, as depicted in the sketch drawings provided by National, was flawed and doomed to fail for a cast component of structural quality (refer Paragraph 39).

The Mk2 clevises were difficult to cast without porosity as the taper on the projecting forks was 9:1 compared to design guide recommendations of 6:1 (refer Paragraph 39). Although Wellington suggested that a taper be tried on the forked ends, there is no evidence to support a finding that it defined the dimensions of the Mk2 castings, which were probably designed by Modus (refer Paragraph 30). The Mk2 clevis pattern was provided by National, and there was really no change in design responsibility between the Mkl and Mk2 clevises.

(k) National failed to reasonably test the prototypes of the Mkl castings and directed the production commence, when it knew that, pursuant to its contract with Multiplex, QA, quality control and load testing of the clevises were required prior to their incorporation into the structure (refer Paragraphs 23 and 50).”

38 In paragraph 127 the theme of unreasonableness by the buyer was repeated in the last sentence when the referee concluded:

“Accordingly, it seems to me that it would be unreasonable for National to rely on Wellington’s skill or judgment in any substantial or effective way.”

39 There does not seem to be any basis in law to imply a test of reasonableness on the part of the buyer in determining reliance. Reliance is simply a question of fact and is normally determined by inference from the relevant primary facts. Such facts may include conversations which make it plain that there is reliance in the relevant respect. More often they do not. In Hardwick Game Farm, Lord Reid indicated at 81, in reference to Lord Wright’s comment that reliance must be affirmatively shown:-

“But I do not think that he meant more than that in the whole circumstances a reasonable man in the shoes of the seller would have realised that he was being relied on.”

40 Lord Reid also pointed out at 84 that:

“…it is not necessary to show that the parties consciously applied their minds to the question. It is enough that a reasonable seller…would have realised that he was inviting Grimsdale (the buyer) to rely on his skill and judgment….”

41 It is the position of the seller which is important not that of the buyer.

42 Accordingly to the extent that the referee reached his conclusion on this ground he is in error.

The first two sentences of 127

43 The relevant part of paragraph 127 is as follows:

“All the circumstances discussed above are clearly unusual and could even be described as extraordinary. It seems to me that the aggregate of these unusual circumstances is such that they fall within the exception contemplated by Lord Reid in Hardwick Game Farm .”

44 The reference to the circumstances discussed above in paragraph 127 is a reference to matters in paragraph 126.

45 In contrast, in this ground the referee seems to be merely referring to facts he has stated in order to infer that there was no reliance. It is not simply a reference to the plans and specifications as suggested by National.

46 The question to be considered is whether the facts in 126 enable one to infer that there was reliance upon the seller as to whether the castings could be cast or whether they could be cast to the appropriate standard. I turn to each matter relied upon in turn:-

(a) Experience could be relevant if it was known to the other party or there was an obligation to enquire as to that experience. There is no evidence as to this obligation.
(b) I find it difficult to see how this has any relevance.
(c) I find it difficult to see how this has any relevance.
(d) Some of the items dealing with Wellington’s known experience may be relevant but the question of reasonable care depends upon whether there is an obligation to take such care. There seems to be no evidence of this obligation.
(e) This is relevant.
(f) This is relevant.
(g) This belief may arguably be relevant. Its expression was not.
(h) This is relevant.
(i) Neither party had this knowledge at the relevant time and it is therefore irrelevant to whether there was relevant reliance.
(j) The same comments in (i) apply to the first sentence.
(k) This is relevant.

47 It can be seen that the referee has relied on some matters which were inappropriate. In particular, the reliance on the existence of the fundamental fault was a serious error in his approach. Knowledge of the fault may have been relevant but there was no relevant knowledge. The failure of the referee to refer to Professor Abel’s evidence is not of significance as the evidence did not appear to go to knowledge by National of Wellington’s inexperience.

48 In the circumstances it seems to me that I should not accept the conclusions in paragraphs 122 to 130 of the report. The Court will hear submissions on what further steps should be taken following upon the rejection of that part of the report.

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Last Modified: 02/13/2003