North East Equity Pty Ltd v Proud Nominees Pty Ltd (No 2) - [2008] FCA 1189

FEDERAL COURT OF AUSTRALIA
North East Equity Pty Ltd v Proud Nominees Pty Ltd (No 2)
[2008] FCA 1189
CONTRACTS – classification of contract for supply and installation of plant and equipment to improve carrot processing plant – whether properly classified as contract for sale of goods, or contract to do work and supply materials – ascertainment of proper law of contract
CONTRACTS – implied condition that what was to be supplied would be reasonably fit for purposes required and indicated by buyer, who was relying on seller’s skill or judgment – identification of contractual terms and representations – consideration of pre-contractual negotiations – identification of oral and written contractual terms made in course of negotiations and correspondence
CONTRACT – assignment - master lease agreement entered into between buyer and bank – buyer assigned all its contractual rights to bank “in relation to” plant, when supplied and installed by seller – whether right to sue seller for breach of contract between buyer and seller was right assigned to bank – whether assignment was of bare right to damages or of legal chose in action
TRADE AND COMMERCE – Trade Practices Act 1974 (Cth) – consumer protection – misleading or deceptive conduct or false representations – whether representations made during pre-contractual negotiations or in contract – whether representations continued to time of contract formation – whether representations false
TORTS – implied promise that seller would exercise reasonable care and skill in performance of its services – implied promise was concurrent with co-extensive duty in tort on seller’s part to exercise reasonable care and skill
DAMAGES – reliance damages – whether, even if claims for misrepresentations and/or negligence had succeeded, buyer proved causation of loss or damage
WORDS AND PHRASES – “in relation to”
Property Law Act 1969 (WA), s 20
Sale of Goods Act1895 (WA), s 14(i)
Beaton v Moore Acceptance Corporation Pty Ltd (1959) 104 CLR 107 referred to
Bellgrove v Eldridge (1954) 90 CLR 613 cited
BHP Coal Pty Ltd v O & K Orenstein & Koppel AG [2008] QSC 141 cited
Bonython v The Commonwealth (1950) 81 CLR 486 applied
Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 236 ALR 720 cited
Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (2008) 166 FCR 494 cited
British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways of London Co Ltd [1912] AC 673 applied
Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 applied
Butcher v Lachlan Elder Realty Pty Limited (2004) 218 CLR 592 cited
Campomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45 cited
CEPU v ACCC (2007) 162 FCR 466 cited
Codelfa Construction Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337 referred to
Fountain v Alexander (1982) 150 CLR 615 cited
Gull v Saunders & Stuart (1913) 17 CLR 82 applied
Helicopter Sales (Australia) Pty Limited v Rotor-Work Pty Limited (1974) 132 CLR 1 applied
Hellyer Drilling Co v MacDonald Hamilton & Co Pty Ltd (1983) 51 ALR 177 cited
Hewett v Court (1983) 149 CLR 639 cited
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 cited
International Air Transport Association v Ansett Australia Holdings Limited (2008) 242 ALR 47 cited
Loxton v Moir (1914) 18 CLR 360 cited
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 applied
Poulton v The Commonwealth (1953) 89 CLR 540 cited
TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd (1963) 180 CLR 130 cited
Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 cited
Torkington v Magee [1902] 2 KB 427 followed
Watson v Foxman (1995) 49 NSWLR 315 followed
Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454 cited
Zhu v Treasurer of NSW (2004) 218 CLR 530 cited
NORTH EAST EQUITY PTY LTD (ACN 009 248 819) v PROUD NOMINEES PTY LTD (ACN 074 270 938)
WAD 58 OF 2006
RARES J
12 AUGUST 2008
PERTH

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY

WAD 58 OF 2006

BETWEEN:

NORTH EAST EQUITY PTY LTD (ACN 009 248 819)
Applicant

AND:

PROUD NOMINEES PTY LTD (ACN 074 270 938)
Respondent

JUDGE:

RARES J

DATE OF ORDER:

12 AUGUST 2008

WHERE MADE:

PERTH

THE COURT ORDERS THAT:
1.On or before 15 August 2008 the parties bring in proposed orders giving effect to these reasons and, in default of agreement, each party then bring in such orders as it or he seeks and file and serve any written submissions and affidavits in support.
2.On or before 26 August 2008 the parties file and serve any written submissions and affidavits in reply.
3.The proceedings stand over to 28 August 2008 at 4.15pm EST.

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

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY

WAD 58 OF 2006

BETWEEN:

NORTH EAST EQUITY PTY LTD (ACN 009 248 819)
Applicant

AND:

PROUD NOMINEES PTY LTD (ACN 074 270 938)
Respondent

JUDGE:

RARES J

DATE:

12 AUGUST 2008

PLACE:

PERTH

TABLE OF CONTENTS
1......... CONTRACTUAL NEGOTIATIONS........ ........ ........ ........ ........ ........ ........ ........ ........ ... [6]
2......... MR TANA’S JULY 2002 NOTES........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [12]
3......... PROUD MACHINERY’S LETTER OF 29 JULY 2002........ ........ ........ ........ ........ ...... [14]
4......... MR WEBSTER’S MEMORANDUM OF 1 AUGUST 2002........ ........ ........ ........ ....... [31]
5......... MR TANA VISITS BELGUIM TO ASSESS BRUYNOOGHE........ ........ ........ ........ .. [39]
6......... PROUD MACHINERY’S LETTER OF 30 SEPTEMBER 2002........ ........ ........ ........ . [45]
7......... PROUD MACHINERY’S LETTER OF 8 OCTOBER 2002 & THE AMENDMENTS OF 14 & 18 OCTOBER 2002........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [49]
8......... CONTRACT FOR THE SUPPLY OF THE NEW LINE........ ........ ........ ........ ........ .... [59]
9......... IDENTIFICATION OF CONTRACTUAL TERMS........ ........ ........ ........ ........ ........ ... [70]
9.1...... Principles........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [70]
9.2...... What was the term or representation concerning a production level of 18.75 tonnes per hour at final pack out (sub-pars (a) and (g))?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [73]
9.3...... Could Proud Machinery and Mr Proud rely on a ‘split shift’ argument?........ ...... [88]
9.4...... What was the term or representation concerning the requirement that the core temperature of packed carrots not exceed 5°C? (sub-pars (c) and (h))........ ........ ........ ........ ........ ........ ........ .... [92]
9.5...... Was there a term or representation concerning intermixing? (sub-par (f))........ .... [96]

10....... IDENTIFICATION OF REPRESENTATIONS........ ........ ........ ........ ........ ........ ........ [100]
10.1.... Principles........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [104]
10.2.... Consideration of alleged written representations........ ........ ........ ........ ........ ....... [110]
(i)....... Was a representation made that the new line would fulfil North East Equity’s desire to pack 150 tonnes of carrots over an 8 hour working day?........ ........ ........ [110]
(ii)...... Was a representation made that nine hydro-cooling tanks would allow one of those tanks for each length or size grade and provide the opportunity to have a spare tank? [112]
(iii)..... Was a representation made that the hydro-cooling tanks would be capable of producing constant product output?........ ........ ........ ........ ........ ........ ........ ........ .. [114]
(iv)..... Was a representation made that the new line would provide quality length sizing for three separate lengths?........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [116]
(v)...... Was a representation made that the new line would be capable of controlling the temperature of the carrots?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [117]
(vi)..... Was a representation made that the new line would greatly reduce damage to the carrots and wastage?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [118]
(vii).... Was a representation made that the new line would increase production while reducing the man hours required to achieve that production, compared to the existing Sumich line?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [119]

10.3.... Were representations made based on the contractual terms in sub-pars (c) and (h)? [120]
10.4.... Consideration of alleged oral representations........ ........ ........ ........ ........ ........ ... [123]
(viii)... Did Mr Proud repeat orally the various written representations alleged? [124]
(ix)..... Was an oral representation made that Proud Machinery and Mr Proud possessed sufficient knowledge, skill and experience to design, procure and install the new plant? [125]
(x)...... Was an oral representation made that the new plant would utilise electric power more efficiently than the existing Sumich line?........ ........ ........ ........ ........ . [130]
(xi)..... Was an oral representation made that the new plant would comfortably handle a capacity of 150 tonnes per day packed out in cartons, and in doing so it would be operating as ‘idle’?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [137]

11....... DELETION OF THE HANDLINE........ ........ ........ ........ ........ ........ ........ ........ ........ .... [142]
12....... THE DESIGN OF THE REFRIGERATION SYSTEM........ ........ ........ ........ ........ ..... [143]
13....... THE EFFECT OF THE REPRESENTATIONS........ ........ ........ ........ ........ ........ ........ [146]
14....... THE NEW PLANT IS INSTALLED........ ........ ........ ........ ........ ........ ........ ........ ........ . [149]
14.1.... Key components of the new line........ ........ ........ ........ ........ ........ ........ ........ ...... [150]
14.2.... The touch screen........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [151]
14.3.... Ms Mirosevich’s role in operating the new line........ ........ ........ ........ ........ ........ . [156]
14.4.... Mr Correia’s role in operating the new line........ ........ ........ ........ ........ ........ ...... [168]

15....... THE WEIGHT OF CARROTS IN THE BINS........ ........ ........ ........ ........ ........ ........ .. [176]
16....... MR TANA’S ROLE IN PLANNING CARROT PRODUCTION........ ........ ........ .... [182]
17....... CARROT FARM PRODUCTION PROBLEMS........ ........ ........ ........ ........ ........ ...... [187]
17.1.... Carrot quality in 2003........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [194]
17.2.... Carrot blight at Lancelin........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [203]
17.3.... The market for carrots........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [210]
17.4.... The 2002 decision to buy the new line, the 2003 change in the carrot market and North East Equity’s claim for economic loss........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [222]

18....... THE PROBLEMS CONTINUE........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [233]
19....... MR WEBSTER’S 20 AUGUST 2003 MEMORANDUM TO MR TANA........ ........ [238]
20....... MR TANA’S LETTER OF 12 SEPTEMBER 2003 TO MR PROUD........ ........ ....... [241]
21....... THE TEST IN MID-NOVEMBER 2003........ ........ ........ ........ ........ ........ ........ ........ ... [257]
21.1.... Production on 17 and 18 November 2003........ ........ ........ ........ ........ ........ ...... [259]
21.2.... The meeting on 17 or 18 November 2003........ ........ ........ ........ ........ ........ ....... [283]
21.3.... The aftermath of the 17 or 18 November meeting........ ........ ........ ........ ........ .... [297]

22....... THE EXPERT EVIDENCE ON THE OPERATION OF THE PLANT........ ........ ..... [304]
22.1.... Defining ‘working day’, ‘operating hour’ and removal of 18% rejects........ ....... [306]
22.2.... The 5°C requirement and the chilling tanks........ ........ ........ ........ ........ ........ ...... [318]

23....... LENGTH GRADERS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [325]
24....... CAPACITY........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [331]
25....... APPROACH TO REPRESENTATION CLAIMS GENERALLY........ ........ ........ ..... [343]
26....... SUMMARY OF FINDINGS ON CONTRACTUAL TERMS PLEADED AND REPRESENTATIONS UNDER ss 52 AND 53(c) OF THE TRADE PRACTICES ACT........ ........ ........ ...... [345]
27....... DID NORTH EAST EQUITY HAVE TITLE TO SUE FOR DAMAGES FOR BREACH OF CONTRACT?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [347]
28....... THE CLAIM IN NEGLIGENCE........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [366]
29....... DAMAGES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [372]
29.1.... General conclusions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [372]
29.2.... The flume elevators........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [373]
29.3.... Damages for disruption........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [378]
29.4.... The 5°C requirement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [381]
29.5.... Damages on a ‘no transaction’ basis........ ........ ........ ........ ........ ........ ........ ........ [385]

30....... CONCLUSION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [396]

REASONS FOR JUDGMENT

Nicola Tana has had a number of successes in various business enterprises with which he has been associated. He is the managing director of North East Equity Pty Limited, and he has effectively controlled the company since he established it. In September 1998 North East Equity purchased a carrot processing plant at Mandogalup Road, Wattleup, which is south of Fremantle in Western Australia. The plant had previously been operated by the Sumich group, but that group had gone into receivership. However, after the purchase, North East Equity continued to sell some carrots and other produce under the Sumich brand name.
In 2002 Mr Tana negotiated with his then friend, David Proud, to replace some of the less sophisticated Sumich plant with a more modern processing plant. Mr Proud was the principal of a business called Proud Machinery, which operated under the trading name of Proud Nominees Pty Limited. I will refer sometimes to both Proud Machinery and Mr Proud simply as ‘Proud’. The negotiations took many months.
In October 2002 North East Equity agreed with Proud Machinery to pay it $3 million to purchase and install new equipment for the carrots processing plant. The new equipment was installed in March 2003. Since then Mr Tana and Mr Proud have disagreed about whether the new plant and equipment were satisfactory.
North East Equity claimed many millions of dollars in damages and economic loss based on loss of carrots sales, breach of contract, contraventions of s 52 of the Trade Practices Act 1974 (Cth) and negligent misstatement, although in final address an alternative claim was also made in the order of $1 million. North East Equity also claimed that Proud Machinery and Mr Proud had represented that the plant and equipment would perform at the standards set in the contract, which was the basis of its claims of contraventions of s 52 of the Trade Practices Act and in negligence. There were many disputes as to whether the new plant, as finally installed by Proud Machinery, operated either to the contractual or represented standards, and how any loss of North East Equity should be assessed.
A further complicating factor is that, after entry into the contract with Proud Machinery, North East Equity financed the acquisition of plant and equipment by entering into a master lease with the Bank of Western Australia Limited, under which the bank took an assignment of all of North East Equity’s rights under the contract with Proud Machinery. That raised an issue whether North East Equity could sue Proud Machinery for breach of contract.
1. CONTRACTUAL NEGOTIATIONS
As Mr Tana said, his discussions with Mr Proud ‘… were very informal’. Mr Tana asked for a plant that could process and pack 150 tonnes in an 8 hour working day. Mr Tana explained that the purpose of the 8 hour day was to condense his packing operations into a one-day shift, and thus avoid paying his workers penalty rates. Mr Tana said that he told Mr Proud that he needed to achieve a minimum temperature of 5°C for the cores of the carrots when they were packed.
Mr Tana also asked that the plant have the ability to grade, automatically or mechanically, the carrots into various sizes, in order to replace the then-present process where this grading was done manually. Carrots can be graded by sorting them according to their width (or girth) and their length. Ultimately, as part of the contract, North East Equity’s staff specified to Proud Nominees five widths and three lengths into which the carrots should be able to be graded by the new plant.
Mr Tana and Mr Proud agreed that the new plant would result in an increase in the efficiency of North East Equity’s labour usage, compared with the existing Sumich plant.
In the course of their discussions, Mr Tana told Mr Proud that the principal source of carrots for the Wattleup plant would be an existing farm at Guilderton. Guilderton was about one hour’s drive north of Perth. Mr Tana explained that it was his intention to establish a larger farm, to replace the majority of the suppliers of the Wattleup plant. This new farm was to be at Lancelin, about 180 km north of Wattleup, and further up the Western Australian coast from Guilderton. Mr Tana’s long-term plan was to have both his growing and packing operation on the premises at Lancelin. But, he needed an interim plant at Wattleup until he brought the Lancelin operation into production. A new processing and packing plant would be built at Lancelin.
Mr Proud told Mr Tana that he had recently been involved in supplying a Queensland carrot producer, Kalfresh, with a new automated carrot processing line. Mr Tana sent North East Equity’s maintenance manager, John Webster, to Queensland to inspect Kalfresh’s plant prior to deciding to purchase the new plant from Proud Machinery. Mr Tana also travelled to Belgium to speak with the manufacturer of some of the proposed new plant and inspected three factories there to observe similar equipment in operation. North East Equity claimed that Proud represented that there would be savings on power costs based on Kalfresh’s experience.
The new plant was installed in early March 2003. After that, the parties became engaged in disputes about its performance, which I will come to later in these reasons.
2. MR TANA’S JULY 2002 NOTES

In July 2002 Mr Tana prepared a document headed ‘DAVID [PROUD] INITIAL NOTES’. During the pre-contractual negotiations in July 2002 Mr Tana handed Mr Proud a copy of that note. Mr Tana could not recall doing this, but I am satisfied that he did. Relevantly, he wrote (and I have inserted the items in square brackets):
‘PRODUCTION EXPECTATION
1.FINISHED PACKED PRODUCT 150 TONNES/DAY INCLUDING PREPACK (AVE 10T/DAY) ALL CLASSES
2. CARROTS TO HAVE MAX 18% REJECT
3. 150T/DAY IN 8 HOUR WORKING SHIFT
4.SUBJECT TO 182 GROSS TONNE (22.75T/hr) FEED
5.UTILIZING OUR PACKAGING, STRAPPING, TAPING AND PALLETIZING
6.PACKED CORE TEMPERATURE OF CARROTS MAX 5°C
7.MUST MAKE CHANGES TO ACHIEVE ABOVE AT PM [PROUD MACHINERY] UNLESS CAUSED BY NEE [NORTH EAST EQUITY].
PAYMENT TERMS
1.NEE ENTERS INTO AN AGREEMENT WHEREBY P[ROUD] MACH[INERY] CHARGES $233K FOR THE PROJECT COORD[INATION], MANAGEMENT AND SUPERVISION OF MANUFACTURE AND INSTALLATION OF EQUIP[MENT]. BRUNOGH [sic] AND GILLENKIRSCH [sic] CHARGES $3m FOR SUPPLY & INSTALLATION OF P/[RODUCTION]LINE PLUS ONION CLIPPER
…
INSTALLATION
1.COMMENCE MANUFACTURE ON SITE JANUARY
…
3.COMMISSION DATE FRIDAY 28^TH FEBRUARY
4.FULL PRODUCTION ON 3^RD MARCH
5.$5,000/DAY PENALTY ON CONTRACT IF NOT OPERATIONAL 3^RD MARCH
GENERAL
1.MIRA [MIROSOVICH, THE PRODUCTION/SHED MANAGER AT WATTLEUP] AND/OR JOHN [WEBSTER, THE MAINTENANCE MANAGER AT WATTLEUP] TO ADELAIDE OR BELGIUM FOR TRAINING ON SYSTEM
2.JOHN [WEBSTER] AVAILABLE FOR GENERAL ASSISTANCE BUT NO EXPECTED
…
4.MATERIAL TO BE SPECIFIED e.g. SIZES, THICKNESS, MOTOR RATINGS etc (ALL MOTORS TO BE 25% OVER SPECIFIED).
…’
Mr Proud said that Mr Tana’s note formed the basis for the preparation of the agreement to supply the new plant and equipment. The references in the note to ‘Brunogh [sic] and Gillenkirsch [sic]’ were intended to refer to manufacturers of equipment intended to be used in the new production line. These were a Belgium company, Bruynooghe, which manufactured the grading and associated equipment which sorted carrots into various sizes by width (or girth) and length, and Gillenkirch, a German manufacturer of packing equipment.
3. PROUD MACHINERY’S LETTER OF 29 JULY 2002
By the time Mr Tana provided the handwritten note to Mr Proud, much discussion had already taken place between them. Shortly after Mr Tana’s note was provided, Mr Proud wrote to Mr Tana on 29 July 2002. The letter commenced by saying:
‘The following is an outline of the system which I believe will fulfil your desire to pack 150 tonnes of carrots over an eight hour working day.’
Mr Proud then described 22 items which were to be included in the proposed system. First, the existing plant’s equipment for receiving and polishing the carrots was to be retained.
That existing equipment operated in the following way. When carrots were brought to the plant, they were contained in large wooden crates. There is a significant issue as to the weight of carrots contained in those crates, which, depending on which account is correct, varied between 400, 410 and 450 kg. A forklift truck would pick up two of these crates at a time and move them to the tipping station. The forklift would raise the crates up to a level where they sat on a platform on the tipping station. After the forklift tines were withdrawn, the crates would be held in place on the platform. The platform would then tip, so that the carrots contained in the crates would spill into hoppers or large bins. From there, they were conveyed mechanically, on conveyor lines, to inspection or grading tables. At this point the carrots were visually assessed as they moved along a conveyor belt. Carrots that looked damaged or unsuitable would then be removed. Thus, sometimes when the carrots were tipped into the receiving hopper, they might have become broken or chipped by contact with some sharp edge or other carrots. Such carrots are not attractive to consumers, who prefer produce which appears to be in good condition. The rejected carrots, however, are able to be used commercially, for example, in commercial production of composite foods or in juice.
Obviously, the greater the accuracy at which unsuitable carrots are removed at this point, the more efficient the further processing will be. The subsequent stages of the processing plant will not have to deal with carrots that, ultimately, will not be packed at the end of the processing.
After the carrots passed along the conveyor belt across the inspection or grading stations, they then proceeded into brush washers. These machines used water and brushes which rotated and washed the carrots. Dirt and other residue, including root hair, were scrubbed off, so that the skin of the carrot appeared to be clean and fresh-looking.
Mr Proud’s letter then proposed that a new stainless steel wet receiving hopper would be installed after the old brush polishers. This would spread the carrots more evenly. They would then be conveyed onto one of two flume elevators. These would carry the carrots upwards on their way to automatic grading. As the carrots passed upward on the flumes, they would be sprayed with water to rinse them. At the top of the elevator, two infeed vibrators would be positioned to spread the carrots evenly across the conveying belt, which was two metres wide. The vibrators were intended to be positioned to minimise the chance that any carrots might fall off the elevated platforms to which they had been carried.
Next, the diameter (or girth) sizers or graders would grade the carrots into five separate diameters. The diameters could be set by the operator of the equipment adjusting a hand wheel which was equipped with a gauge. As the carrots passed over the diameter graders, they would fall through holes in the conveying belt that were wider than the width of the carrots. After the carrots fell through such holes, they were received onto other conveyor belts. The smallest carrots would fall through first, followed by progressively larger ones. The lower conveyor belts ran horizontally away from the diameter grader. Mr Proud said that the diameter graders would be accessible from a suitable platform and stairway, and would be serviced by a centralised lubrication unit. He said that there would be automatic lubrication systems as well. He said that the output for Mr Tana’s expected production would allow for the graders to operate at the lower end of their available speed ‘… which will reflect in the quality and service of each of these units’.
The five lower or ‘exit’ conveyors would carry, respectively, five streams of graded carrots ranging from smallest to largest. The smallest and the extra large carrots would be taken by their two conveyors directly to a receiving water tank. The small/medium, medium and large carrots would be transferred to three stainless length graders. These would run horizontally to the exit conveyors. The letter of 29 July 2002 said that the length graders ‘… have the ability to split these diameters into two selections which will then transfer into the desired chiller tank’. The letter said that, in order to control the transfer of selected sizes to the correct water tanks, 24 pneumatic gates would be positioned at appropriate locations. The gates would be activated from the main control panel for the whole system.
In the letter, Mr Proud recommended that nine receiving water or chiller tanks be installed. The receiving tanks would each hold up to 10 tonnes of a particular grade of carrots. Mr Proud wrote that those ‘… will give you one tank for each of the selected diameter and length grade and one extra tank for the purpose of receiving any grade which exceeds the ten tonne capacity allowed. This will also give you an opportunity to have a spare tank in the case of a pump malfunctioning or for cleaning purposes as it is possible to drain any tank without interfering with the others’. For example, the smallest diameter carrots would have been conveyed from the initial exit conveyor underneath the commencement of the diameter grader directly to a receiving tank. That tank would be full of chilled water intended to cool the carrots’ core temperature to the 5°C referred to in Mr Tana’s note.
The receiving tanks could be emptied by the plant operator causing air to agitate the carrots from below, and water to flow out of the tank into an intra-lock exit conveyor. The exit conveyor would allow the chilled carrots, which had been carried out of the receiving tank, to be conveyed to the packing stations. And, the exit conveyor also drained the water propelling the chilled carrots out of the receiving tanks into the return water tank. A water compensation tank would also be installed to hold any water that could not be used immediately. Next, water which had been recycled through the return water tank was pumped through a drum filter to remove debris. Then the chiller tank would receive the filtered water. Chilling coils were placed inside that tank which would lower the water to the desired temperature. Mr Proud wrote that he was proposing to make further enquiries with Mr Webster about North East Equity’s refrigeration requirements. Mr Proud said he would then be able to evaluate the existing refrigeration plant and what changes might be proposed.
Mr Proud said that the exit conveyors and gate system proposed would enable the operator to select any size and diameter of carrot to be sent to a particular packing site. He said that he had allowed for a one-bin filling station which would have the ability to receive any size selected. Delivery belts would control the flow of the chilled carrots to the intended packing station.
The letter gave the following description of the automatic control system which it proposed would be used by the plant operator:
‘Item 16 Automatic Control System
One central PLC [Programmable Logic Control] will control the whole system using a 12.1 touch screen for full access of all perimeters of the line. A graphical operator interface results in a user friendly operation.
This system is a stand alone unit which can be connected to your main office. A modem is installed to assist in program changes or troubleshooting.
Brief description of the control system
During the filling of the water tank the system activates the water pumps and the blowers to spread the product evenly. The water being pumped escapes into the Return Tank at a rate which is controlled through a PT100 Temperature Sensor.
The temperature of the tank is controlled through this PT100 sensor which ensures that we efficiently chill the received produce to its desired packing temperature.
When we select a desired grade to a packing position the pumps and blower are activated in an appropriate manner to obtain a constant product output. A PID Control Loop calculates the speed of the pump and the blower motor to ensure this controlled feed.
It is also possible to bypass the program and in this way the operator can take over the machine in a manual mode and this has a password protection to ensure security.’
The Wattleup plant used three carton filling stations, consisting of a combination of the Newtec weighing and Gillenkirch packing machines. Mr Proud proposed that there be two additional Newtec/Gillenkirch carton filling stations, to make a total of five. The way these carton filling stations worked was that the weighing machine would be set to measure either 10 or 20 kg quantities of carrots. The desired quantity would then be packed into an appropriate 10 or 20 kg carton by the Gillenkirch packing machine. Before the carrots went to the weighing machine, they would be conveyed over a final grading table. At that point, they would be inspected for quality. The persons at the grading table would pick up and throw into designated tubes, first, Class 2 carrots and, secondly, any damaged carrots which had not been removed at the initial grading. Class 2 carrots were ones that either had escaped notice in the initial grading, or subsequently had become damaged as they passed along the various parts of the processing. Thus, carrots may have chipped or been damaged when they fell as they passed through the diameter or length grader holes or as they were mixed about in the process of being received into or taken out of the chilling tanks. The persons performing visual inspections at the final grading tables would remove these imperfect carrots from those destined for the carton filling stations. Mr Proud suggested that the existing tanks in the old system be repositioned to receive, by conveyor belts, the carrots that were rejected at the final inspection tables.
The 29 July 2002 letter also noted that the weighing and packaging equipment used in the existing prepack line could be included in the new design. Mr Proud suggested that he might be able to increase the productivity of the prepack line with new equipment. The prepack line was used to weigh automatically and then pack very small carrots into plastic bags of, say 0.5, 1 or 2 kg, each for display for sale in supermarkets. Small and small/medium carrots would be conveyed for prepacking from a chilling tank to a conveyor with a grading table. From there, the sorted carrots would be conveyed to where they were weighed and packed into plastic bags, and then to cartons whence they would be carried along the final conveyor.
In addition, Mr Proud had incorporated Mr Tana’s proposal that the existing hand-packing line be retained and incorporated into the new plant. This line conveyed particular classes of carrots which were hand-packed in smaller quantities. For example, the handline could process carrots that required closer than usual inspection, and those of which a small volume had been received.
Next, all of the packed cartons were conveyed to two robots located at the end of the various lines, which automatically removed the cartons from the lines and stacked them onto pallets ready to be moved into the cool room by a forklift.
At the conclusion of the letter, before noting that he was still trying to calculate the cost, Mr Proud wrote:
‘Please consider this proposal as I believe that thru [sic] its implementation your company will profit from the following:
Quality of sizing length & diameter
Controlled temperature for packing
Greatly reduced amount of crop being damaged and wasted
Reduction of fork lifts required to run the existing operation
Ability to pack out over an 8 hour day
Only require bins for the infeed of the line
Maintenance and down time will be minimised
Increase of production whilst reducing the man hours required.’
4. MR WEBSTER’S MEMORANDUM OF 1 AUGUST 2002
Mr Tana sought Mr Webster’s input on the proposal and the then drawings of the suggested plant layout. On 1 August 2002 Mr Webster provided Mr Tana with a list of matters for consideration. He pointed out that an 8 hour shift was, in reality, only 7 hours of work, after taking account of the employees’ rest breaks and an amount of inefficiency in an ordinary working day. He then gave a worked example to show that, in 7 hours, the five packing machines could process 7,350 cartons of 20 kg each, equivalent to 147 tonnes. He had based this on each of the Gillenkirch packing machines being able to process three and a half 20 kg boxes per minute consistently over the whole of the seven effective working hours of an 8 hour shift.
Mr Webster wrote that this level of output would occur as long as the brush washers could keep up with the present 14-15 tonnes per hour to produce what he called ‘a good polished carrot’. Importantly, he said that, at 15 tonnes per hour for such a quality, the brush washers could only produce 105 tonnes over 7 hours, and continued:
‘This means prior to shift start we would need 3 hrs at 15TPH to fill all tanks ready to get a total of 150 tonnes (9 tanks can hold 90 tonnes), so in effect becomes a 10 hour day. ? hrs.’
Mr Webster observed that the 150 tonne target should be achievable because the prepack line’s production was not included in the above figures. He noted that one of the drawings then being considered showed five inspection tables, one at each box filler, and observed that probably only three were required. He suggested that one inspection table could be used for two box fillers, so that only three inspection tables would be required between the five box fillers. He commented that, because sizing should not be a problem for both girth and length, it would be possible to grade for Class 2 medium and large carrots at the inspection tables located prior to the box fillers. He said that the Class 2 carrots could then be able to be stored in the two old surplus Wyma (brand) wet tanks until they were packed later in the day.
Mr Webster wrote that he had had discussions with Ms Mirosevich and they had estimated that no more than 32 people would be needed to operate the new automated plant (leaving out the handline and prepack line). He gave an example of a 10 hour day in which the forklift and grading (at the inspection tables located immediately after the wet hopper) would start at 6.00am so that 45-50 tonnes could be accumulated in tanks by about 9.00am. The shift of workers operating at that section of the plant could finish at 2.00pm and a new team could arrive to do 3 hours more work until 5.00pm and then clean up for an hour. Thus, the second shift would do 4 hours per day. Mr Webster continued by observing that the pack out lines would be able to operate from 9.00am to 5.00pm for shifts of between seven and six effective working hours, or a 38 hour working week.
These observations to Mr Tana by his two principal employees responsible for the operation of the existing plant are of considerable significance. Mr Webster was commenting on both the quality of carrot and the capacity of the existing brush washing machines which were to be used as the initial feed for the new plant and equipment. Those machines could not supply 150 tonnes worth of good polished carrots in 8 hours. If they were worked continuously for 8 hours and produced the maximum that Mr Webster suggested of 15 tonnes per hour, they could only produce 120 tonnes in an 8 hour shift.
Both Mr Tana and Mr Proud understood that the brush washers could operate to process about 22.75 tonnes per hour, but that this would affect the quality of the carrots. I accept Mr Proud’s evidence that, in 2002, he discussed with Mr Tana that, at that speed of processing, the carrots would be insufficiently polished and would retain some hairs and green matter. As Mr Tana said:
‘The amount of polishing required is a quality issue that was not part of the brief to Proud anyway.’
However, Mr Proud would have been conscious of the efficient operation and capacity of the brush washers and the need to operate them in a way to maintain the quality of his customer’s (i.e. North East Equity’s) product. Mr Tana was aware of the consequence of increasing the speed of the brush washers beyond Mr Webster’s suggested 15 tonnes per hour. Mr Tana said in re-examination:
‘… the function of the brush washer, it is to polish the carrots and that is a choice that we make in terms of the quantum of polishing that happens. We can accelerate the process and in so doing brush off less of the epidermal layer or we can slow the process down.’
Thus, it was clear to Mr Tana that, to achieve his objective of 150 tonnes in an 8 hour shift, he would have to have his work force operating on split shifts as Mr Webster’s memorandum had discussed. In that way, it would be possible for the work force, efficiently managed, to have the individual workers paid only for 8 hour or shorter shifts, but they would not all work during the same 8 hours in any one day. Indeed, as the expert evidence made clear, split shifts in the food packaging and processing industry are common. I am satisfied that Mr Tana was, at all times, fully cognisant of this fact. Moreover, I find that Mr Tana was aware, and believed that Mr Proud was aware, that the workforce at Wattleup took lunch breaks and two ‘smoko’ or rest breaks during the course of their 8 hour shifts, so that an 8 hour shift did not translate into 8 hours of work, but rather into 7 hours, as Mr Webster’s memorandum illustrated.
5. MR TANA VISITS BELGUIM TO ASSESS BRUYNOOGHE

Around July or August 2002 Mr Tana went to Belgium and was met by Bruynooghe’s export manager, Marc Seldeslachts and taken by him to its head office and factory. Mr Proud had arranged for Mr Tana to make the visit. Before the visit, Mr Tana had an understanding of what Bruynooghe’s processing system involved through his discussions with Mr Proud, his understanding of the drawings that Mr Proud had supplied showing possible configurations of the new processing line, and a video of the new Kalfresh plant operating which Mr Proud had shown him. Mr Tana understood that Bruynooghe’s system of processing involved tank systems with water movement of the carrots, and that this feature would be an integral part of the upgrade which Mr Proud was proposing. By then, he was aware that the likely cost involved was between $2-3 million. Mr Tana understood that Bruynooghe’s system involved initial grading of both the girth and length of the carrots together with a hydro-cooling system using chilled water to cool the carrots. While he was at Bruynooghe’s head office, he met its managing director or owner, Stefan Parrein. He was given a presentation of the various parts of the system and was impressed by both what was presented and the presenters.
Messrs Parrein and Seldeslachts showed Mr Tana a DVD demonstrating the tank system and carrot movement. They explained to him what the DVD was demonstrating. He was then taken to observe three Bruynooghe plants in operation at various factories, one of which he considered to be similar to that which Mr Proud was proposing. Mr Tana enquired of the Bruynooghe personnel about a number of matters, including the tonnage which the graders could process per hour. He formed the view that Bruynooghe were capable of manufacturing the components, and he was comfortable with both their responses and his observations of the equipment in operation.
Prior to organising this visit, Mr Proud had shown Mr Tana a DVD of the Kalfresh plant with the Bruynooghe system in operation. While he was at Bruynooghe’s offices he was shown drawings of the then current version of the design for the Wattleup plant. He said that he discussed the drawings in general terms with Messrs Parrein and Seldeslachts. They told him that they represented the system that was going to be provided for Mr Tana’s job in Australia.
However, Mr Tana said in his evidence that he had not gone to Belgium to understand technical specific matters about the Bruynooghe line. He said that he did not ask them about the drawings or any aspect of them because he recognised the items and ‘… [s]o there was nothing for me to ask them in that’. He said that he had no concerns and was comfortable with what he had seen in Belgium and therefore did not raise any matters with Mr Proud. He noticed that, in Belgium, carrots were not graded after they had gone through the hydro-cooler tanks, apart from removing rejects. He said that he had not noticed any length grading occurring in the Belgium operations that he had been shown.
In his written evidence, Mr Tana went as far as claiming that he had no prior knowledge of the Bruynooghe tank system and ‘[a]ll of my knowledge came from [Mr] Proud’s representations to me’. He said this in responding to Mr Webster’s evidence that Mr Tana had rung him from Belgium sounding very excited and had said: ‘It looks like this could be the way to go’. In cross-examination Mr Tana accepted the accuracy of Mr Webster’s account. He sought to explain his written response to it as relating to his initial discussions with Mr Proud. I reject Mr Tana’s evidence seeking to minimise his investigations, knowledge and understanding of the Bruynooghe system. As he said in cross-examination:
‘… I had availed myself of knowledge by going to see the system itself, by having sent John Webster by [sic] Queensland to view the system.’
Mr Tana said that he was taken to a plant in Belgium with a similar operation to that he was contemplating for Wattleup. He claimed not to recall whether he saw a length grader at a plant in Belgium. I infer that, in Belgium, Mr Tana ensured for himself by his discussions with Bruynooghe and his inspections, how each important part of the equipment described in Proud Machinery’s letter of 29 July would operate. That is why he was so enthusiastic when speaking from Belgium with Mr Webster. I also find that Mr Tana observed in operation Bruynooghe length graders of the kind later installed in his new line.
6. PROUD MACHINERY’S LETTER OF 30 SEPTEMBER 2002
The negotiations culminated in late September 2002. On 30 September 2002, Mr Proud sent a letter to Mr Tana which began by referring to ‘the following responses to your list of requests’. Mr Proud indicated that he would like to discuss them promptly. The only document in evidence that could amount to such a list appears to be the initial handwritten notes of Mr Tana, to which I have referred. It is likely (and I find) that Mr Proud’s letter was addressing these. The letter stated:
‘Production expectations
Proud Machinery agrees that the line will have the capacity to process 22.8 gross tonnes of carrots per operating hour with a maximum of 18% rejects. This calculates to 18.75 tonnes/hr final packout on the pallet.
Utilizing all of the packaging and palletizing equipment which is shown in the final layout. I have used the following as a basis of our calculations.
Pre pack Line
Pre pack consists of a 2012/2G45 and 2009/G45 which have the ability to pack a conservative 50 units / min or 3000 packs/hr.
50% @ 500 gms         =        750 kg per hour
           25% @ 1000 gms       =        750 kg per hour
           25% @ 1250 gms       =        937 kg per hour
Total production per hour 2.437 tonnes per hour.
           Maximum allowance for daily production 12.5 tonne.
Five Gillenkirch CBF3000 carton fillers will achieve the following:
150 Cartons/hr each   =   750 Cartons @ 20kg        = 15 tonnes/hr
180 Cartons/hr each   =   900 Cartons @ 20kg        = 18 tonnes/hr
240 Cartons/hr each   =   1200 Cartons @ 20 kg     = 24 tonnes/hr
Hand Line
The relocated hand line will also allow you to pack any low volume sizes or carrots which require closer inspection.
Min 20 Cartons/hr each packer   = 60 Cartons @ 20kg   = 1.2 tonnes/hr
Conclusion
By using these calculations and several combinations of the same we are able to achieve the desired pack out of 18.75 tonnes per hour.
Temperature of pack out
After discussions with Gary North, I am able to advise you that he would be comfortable in working with your refrigeration technicians in the supply and installation of the required equipment.
Gary North has advised me that he will guarantee a maximum 5 degree celcius core temperature for your carrots and will be contacting John Webster for further technical discussions.’
The letter then referred to commencing assembly on the site early in January and required that North East Equity would make the site available for commencement of the installation on 2 February 2003. Proud Machinery agreed to a penalty of $5,000 per day if the line were not operational by 7 March 2003, up to a maximum limit of $50,000. Mr Proud wrote that he would be in contact with Amaroo, a company in South Australia, which was building another processing plant at Renmark using equipment supplied by Proud Machinery to arrange training for Mr Webster and Ms Mirosevich when the new system was commissioned at Renmark. The letter continued by stating that Proud Machinery was responsible for all contractors on the installation, excluding power supply to the line, plumbing work and water supply. North East Equity would be responsible for the sea freight for up to 10 x 40 foot containers. Proud Machinery agreed to accept letters of credit for Newtec and Gillenkirch equipment and was negotiating with Bruynooghe for similar conditions. The irrevocable letter of credit would be claused to provide for a payment of 50% on shipping, 40% on delivery and 10% on commissioning. The letter continued:
‘The refrigeration is supplied require a 20% deposit and will discuss with you directly the balance of payment but have indicated that no furthur would be required prior to delivery.
Proud Machinery will also be invoicing North East Equity for the project management and co ordination of the equipment an amount of $233,000.00 over 5 equal monthly payments of $46,600.00 commencing October 2002.’ [sic]
On 1 October 2002 North East Equity issued a purchase order signed by Mr Webster to Proud Machinery in the following terms:
‘This Purchase Order is in a response from a letter from Proud Machinery dated 30/9/02 that N.E.E./Sumich and PROUD MACHINERY are at an agreed position to start production of new machinery from Newtek, Gillenkirch and Broonoogh [sic] (Handline & pre-pack to still be agreed)’
On the same day, one of Mr Proud’s companies, Steventon Lodge Holdings Pty Ltd, invoiced North East Equity $46,600 plus $4,660 GST (a total of $51,260) for ‘Sourcing, project management, coordination and supervision for new carrot packing and distribution line installed by Bruynooghe of Belgium and Gillenkirch of Germany’.
7. PROUD MACHINERY’S LETTER OF 8 OCTOBER 2002 & THE AMENDMENTS OF 14 & 18 OCTOBER 2002
Next, on 8 October 2002, Mr Proud wrote to Mr Tana referring to ‘Revision S’ of the drawings. The letter commenced by stating:
‘Proud Machinery would like to confirm the terms and conditions of your contract to purchase the items listed in the attached schedule and included in drawing No SUM-000-Revision S.’
The attached schedule listed 45 items of equipment and services. It identified the supplier in each case, except for refrigeration which was to be advised. The letter said:
‘All ancillary equipment will be controlled through the main control board for easy start up and shut down of the line. The clients must supply a modem connection to the Bruynooghe control board which will allow for fast and efficient factory back up.’
The letter reiterated the terms of the penalty clause and that Proud Machinery would be responsible for ensuring that all contractors and employees of Proud Machinery performing duties for it on site were covered by appropriate Workcover and Public Liability Insurance. Proud Machinery also had the right to make minor alterations to the layout of the line, so that the produce could be handled more gently and efficiently. It continued:
‘Production expectations
Proud Machinery agrees that the line will have the capacity to process 22.8 gross tonnes of carrots per operating hour with a maximum of 18% rejects. This calculates to 18.75 tonnes/hr final packout.
Total Investment Value $3,000,000.00 plus GST’
The letter specified a similar payment schedule to the earlier letters, except that all payments were now to be by transferable and irrevocable letter of credit in favour of Proud Machinery. The letter stipulated that all equipment would remain the property of Proud Machinery until final payment was made. It was signed by both Mr Tana and Mr Proud on behalf of their respective companies. In addition to the schedule of equipment and services, there was a schedule which identified different lengths and girths of carrots to be graded by the equipment and the tank to which they were to be sent, once graded, by the conveying equipment.
On 14 October 2002 an amendment was made to that schedule by North East Equity, and the amended schedule was faxed to Proud Machinery. The final requirements for the production line were then set out as follows:

DROP #

SIZE

GIRTH

LENGTH

TANK #

ADDITIONAL COMMENTS

A1

WASTE

ALL

UP TO 100MM

WASTE

A2

SMALL

24-28MM

100-140MM

140+MM

1

2

500GM PREPACK

1KG PREPACK

A3

SMALL/

MEDIUM

29-35MM

100-140MM

141-170MM

170+MM

1

3

5

TANK 1 & 2

INTERCHANGEABLE

PREMIUM SMALL/

MEDIUM

A4

MEDIUM

36-43MM

100-150MM

151-180MM

180+MM

1 or 3

4

5

PREMIUM MEDIUM

A5

LARGE

44-54MM

100-170MM

171-220MM

220+MM

6

7

8

PREMIUM LARGE

A6

EXTRA

LARGE

54+MM

8

SPARE

9

SPARE AS BACK UP TO ABOVE

On 18 October 2002 Mr Proud wrote a further letter to Mr Tana which they both signed. The letter noted that, among other things, any alterations made by Proud Machinery to the layout of the line must not impact on its efficiency. It said that the contract price was fixed. Proud Machinery also transmitted some drawings at the same time as this letter. The drawings depicted an alternative configuration adding a sixth box filler, if that were required. They showed the dimensions of the grading tables located immediately before the carrots were conveyed to the box fillers. These depicted three persons standing at the grading tables, which were 3 metres in length, and showed chutes for the graders to throw Class 2 and reject carrots.
In a number of respects, I found Mr Tana to be an unsatisfactory witness. One instance of this was his evidence concerning his visit to the Bruynooghe factory in Belgium. In March 2001 Mr Tana wrote to Mr Proud complaining about the operation of the Gillenkirch packing units installed at Wattleup, and stating that he placed a large emphasis on manufacturer advice, ‘… as we expect that their equipment will do what it is meant to do’. He admitted in evidence that he did place a large emphasis on manufacturer advice. He took the trouble to visit Bruynooghe and to go on a tour of three different plants showing Bruynooghe’s equipment in operation. Bruynooghe was the manufacturer of an integral part of the system that he was considering purchasing. It had the proposed drawings of the new plant available for discussion with Mr Tana when he visited. Yet, in his evidence, Mr Tana sought to convey that his dealings with Bruynooghe in Belgium were unimportant, notwithstanding that he was, at that time, contemplating a substantial investment of over $2 million in new plant. Originally, in his witness statement he said:
‘I did not go back to David Proud with any concerns because I assumed that he had taken all of my requirements and the changes that would be necessary because of those requirements into account when the Sumich [Wattleup] system was designed.’
In cross-examination Mr Tana agreed that this statement could be read as suggesting that he did have concerns, but had not mentioned them to Mr Proud. He claimed that he had no concerns about how Bruynooghe’s systems applied to what was proposed at Wattleup. In addition, because of his perception of shortcomings in equipment that had been supplied by Mr Proud in the past, Mr Tana asserted that he had reservations during the course of negotiations for the new Wattleup plant about Mr Proud’s business dealings. This was notwithstanding that he and Mr Proud were friends at that time, socialised together and would have dinner with their respective wives when visiting one another. Indeed, they had gone on an overseas trip together with their wives. He claimed that he regarded Mr Proud as a salesman. He asserted in his witness statement:
‘Given the problems experienced in the past, the size of the financial commitment and the central importance of the packing lines to the Sumich [Wattleup] business, I was cautious about Proud’s ability to meet NEE’s requirements. That is why the requirements were specifically documented…’ (emphasis added)
Mr Tana admitted that, except for the handwritten notes that he gave Mr Proud in July 2002, he had not documented his requirements and instead had simply relied on Mr Proud’s documents. When he was taken to his handwritten notes during the course of cross-examination, Mr Tana had no recollection of sending them, or the circumstances in which he gave them to Mr Proud. He said that those notes represented his requirements ‘[a]s at that day’, but that the discussions continued ‘… and the requirements were confirmed and finalised [in] a letter from David [Proud]’. Mr Tana accepted that the notes may have been given to Mr Proud during the course of their meeting during 2002, and that they did not represent his overall requirements. He then gave this evidence:
‘Do you say that at some point after this document was created your requirements changed? --- My requirements never changed. My requirements were still these but there was still a requirement for my operational personnel to fill in and that was a subsequent meeting or a meeting prior and that will have to come out with evidence from Mira [Mirosevich]. She sat in the office and they started to talk about sizing, about streams of carrots. That formed part of the contract as well.’ (emphasis added)
The requirement for the operational personnel to which Mr Tana referred was specified in the two schedules, the first attached to Proud Machinery’s letter of 8 October 2002, and the second in the facsimile with the amended requirements sent by North East Equity on 14 October 2002.
Ms Mirosevich had been involved in the specification to Proud Machinery of how the carrots were to be graded and the tanks to which they were to be sent. This was a task she undertook with Mr Webster and Frank Chew, then the sales manager of North East Equity’s carrot business. These specifications were originally supplied to Proud Machinery and included in Mr Proud’s letter of 8 October 2002. Subsequently, the amendment made on 14 October 2002 was sent by North East Equity to Proud Machinery. In cross-examination Ms Mirosevich sought to assert, instead, that Mr Proud decided which tanks were to be used for what produce. Ultimately, she conceded that she had agreed to provide Proud Machinery and Mr Proud with the final specification of 14 October 2002. She sought also to distance herself from her involvement in considering the proposed designs of the plant before it was made, but I think this was because she was given tasks by Mr Tana which were beyond her abilities. I do not accept her evidence that suggested she had little involvement in those matters. It was important for her, as the production manager, to be substantively involved in this design and specification work, and I find that she was.
8. CONTRACT FOR THE SUPPLY OF THE NEW LINE
It was common ground that a contract was made in writing on 18 October 2002 between North East Equity and Proud Machinery, comprised of the letter from Proud Machinery dated 30 September 2002, North East Equity’s purchase order dated 1 October 2002, Proud Machinery’s letter of 8 October 2002, and that this was varied by Proud Machinery’s letter of 18 October 2002, together with the sheet specifying the tanks to which graded carrots were to be sent, faxed by North East Equity on 14 October 2002.
North East Equity alleged that the contract was a contract for the sale of goods within the meaning of one of the Sale of Goods Act 1895 of Western Australia or South Australia, but it did not identify which Act applied. Both Acts were written on the template devised by Sir Mackenzie Chalmers in 1893. The proper law of the contract for the supply of the new plant is the system of law by reference to which the contract was made, or that with which the transaction has its closest and most real connection: Bonython v The Commonwealth (1950) 81 CLR 486 at 498 per Lord Simonds. Their Lordships stated there that (Bonython 81 CLR at 498):
‘[W]hat is the proper law of the contract, and therefore what is the substance of the obligation created by it, it is a factor and sometimes a decisive one that a particular place is chosen for performance.’
Here, the contract for the supply and installation of the new plant and equipment had to be substantially performed in Western Australia. The only connection with the law of South Australia was the location of Proud Machinery’s head office there. A condition of the letters of credit was payment of 40% of the purchase price for the particular goods upon delivery to Perth. Effectively, performance of the contract had to occur either in Western Australia, or overseas in the various parts of the world from which Proud Machinery was sourcing supplies of items of plant and equipment to be installed.

The substantial obligation created by the contract was for Proud Machinery to supply and install, at Wattleup in Western Australia, the plant and equipment for which it was charging $3 million. That obligation, together with a consideration of the whole of the circumstances, leads to the conclusion that the proper law of the contract was the law of Western Australia. The transaction had its closest and most real connection with that State. Accordingly, I find that the Sale of Goods Act1895 (WA) applied to contract.
North East Equity pleaded that the contract contained conditions implied by s 14(i) of the Sale of Goods Act based on representations said to have been made by Mr Proud to Mr Tana during the pre-contractual negotiations. Relevantly, s 14(i) provides:
‘14. Implied conditions as to quality or fitness
Subject to the provisions of this Act, and of any statute in that behalf, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale, except as follows:
(i)Where the buyer, expressly or by implication, 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, and the goods are of a description which it is in the course of the seller's business to supply (whether he be the manufacturer or not), there is an implied condition that the goods shall be reasonably fit for such purpose: Provided that in the case of a contract for the sale of a specified article under its patent or other trade name, there is no implied condition as to its fitness for any particular purpose.’
I am of opinion that nothing turns on whether the contract for the supply of the new line was, on its true characterisation, a contract for the sale of goods or a contract for work and materials. In the former case, s 14(i) of the Sale of Goods Act ordinarily would operate to imply a condition that the goods be reasonably fit for the purpose for which they were required, as made known by the purchaser. In the absence of special circumstances, a contract to do work and supply materials will carry with it two implied warranties: first, that the materials are of good quality and free from latent defects; and secondly, that the materials are reasonably fit for their intended purpose: Helicopter Sales (Australia) Pty Limited v Rotor-Work Pty Limited (1974) 132 CLR 1 at 6 per Menzies J, at 8 per Stephen J, Barwick CJ agreeing with their Honours at 4 and Mason J agreed with Stephen J at 15; Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454. I am of opinion that because, not only was Proud Machinery to supply the goods, it was also to erect and install them, the contract was not merely a contract for the sale of goods, but was in substance a contract for the provision of work and materials: cf Hewett v Court (1983) 149 CLR 639 at 646-647 per Gibbs CJ, 650 per Murphy J, 655 per Wilson and Dawson JJ, 662 per Deane J. As Gibbs CJ noted, the distinction between a contract for the sale of goods and one for the provision of work and materials is frequently a fine one and the tests for distinguishing them are unsatisfactory and imprecise: Hewett 149 CLR at 646; see too Sutton KCT, Sales and Consumer Law (4^th ed, Lawbook Co, 1995) at [2.42]-[2.43]; Benjamin’s Sale of Goods (7^th ed, Sweet & Maxwell, 2006) at [1-041]-[1-043].
It follows that, whether the contract is properly characterised as a contract for the sale of goods or for the supply of work and materials, there was an implied condition that what was to be supplied (goods or work and materials) would be reasonably fit for the purposes for which the buyer (North East Equity) indicated they were required and that it relied on the seller’s (Proud Machinery’s) skill or judgment.
North East Equity alleged that the new plant and equipment were goods of a description that was in the course of Proud Machinery’s business to supply. There is no question that that is correct. North East Equity also alleged that it relied on Proud Machinery’s skill or judgment because it had made known, through Mr Tana’s discussions with Mr Proud, expressly or by implication, the purposes for which the new production line was required. Those purposes for which the new line was to be reasonably fit were in the same terms as some of the representations pleaded independently by North East Equity in aid of its case under s 52 of the Trade Practices Act (with which I will deal with later), namely:
(a)       The capacity to process and pack in excess of 150 tonnes of carrots in an 8 hour working day (being equivalent to 18.75 tonnes per hour).
(b)       The ability to process farm fresh carrots at field temperatures.
(c)       The core temperature of packed carrots to be not more than 5°C.
(d)The ability to sort and grade carrots into eight distinct streams of size and length grades.
(e)An increase in efficiency of labour usage compared to the existing Sumich line.
(f)        The ability to process and pack carrots from more than one source without intermixing carrots from other different sources.
North East Equity also alleged that the contract contained the following express terms, and that Proud Nominees had made identical representations arising from the correspondence and conversations between the parties. Those additional terms and representations were, namely, that the new production line would:
(g) have the capacity to process 22.8 gross tonnes of carrots per operating hour with a maximum of 18% rejects, equal to 18.75 tonnes per hour final pack out on the pallet;
(h)achieve a guaranteed maximum of 5°C core temperature for North East Equity’s carrots.
Mr Proud readily acknowledged that, in the discussions leading up to the formation of the contract, Mr Tana had asked him, or he understood North East Equity wanted him, to provide a system that could achieve each of the terms and purposes in sub-pars (a)-(e). I am satisfied that Proud Machinery was aware of each of those five terms or factors as a purpose for which the new line was required by North East Equity. Additionally, the circumstances in which Mr Tana and Mr Proud were discussing these matters would have conveyed to a reasonable person in Mr Proud’s position that Mr Tana and North East Equity were relying on Proud Machinery’s and Mr Proud’s skill or judgment in the selection of appropriate plant and machinery to achieve those purposes. Mr Tana had told Mr Proud to evaluate the existing line by visiting it at the time of preparing a quotation for what was required. I am satisfied that Mr Proud (and hence Proud Machinery) appreciated, and a reasonable person in his position would have appreciated, that North East Equity (through Mr Tana) was relying on Proud’s skill or judgment in recommending plant and equipment, and on those who might install it, to achieve each of the five purposes in sub-pars (a)-(e) that Mr Tana and Mr Proud had discussed.
However, the purpose specified in sub-par (a) changed, as the discussions evolved, from 150 tonnes in an 8 hour working day to 18.75 tonnes per operating hour, as will appear below. And, there is a dispute about whether there were terms or representations to the effect in sub-pars (f), (g) and (h) above. Consequently, there are also issues of how sub-pars (a) and (c) are to be understood.
9. IDENTIFICATION OF CONTRACTUAL TERMS
9.1 Principles
No contract is made in a vacuum. In order to construe the terms of the contract, the Court seeks to place itself in the matrix of mutually known facts forming the background in which the parties contracted. Additionally, where terms are alleged to have been made orally, it is necessary to identify what, if any, oral terms were agreed. In Watson v Foxman (1995) 49 NSWLR 315 at 318-319 McLelland CJ in Eq explained that, where a party alleged in civil proceedings that conduct of another was misleading or deceptive, or likely to mislead or deceive, ordinarily it was necessary for that party to prove to the reasonable satisfaction of the Court first, what the alleged conduct was, and secondly, the circumstances which rendered it misleading. He continued, in terms, which in my opinion are apposite to the identification of oral terms of a contract agreed to have been made in the course of negotiations, as follows:
‘Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.’
McLelland CJ in Eq said that each element of the cause of action had to be proved to the reasonable satisfaction of the Court: Watson 49 NSWLR at 319; see also s 140 of the Evidence Act 1995 (Cth) and CEPU v ACCC (2007) 162 FCR 466 at 479-482 [29]-[39] per Weinberg, Bennett JJ and myself.
The process of construction of a contract is undertaken objectively. In Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at 179 [40], Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ said:
‘It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.’ (citations omitted)
And in CEPU 162 FCR at 510 [164]-[165] Weinberg, Bennett and I said:
‘ In the construction of a contract, the court places itself in the commercial matrix in which the parties were at the time that the contract was made. This is so that the court can construe correctly both the express terms used by the parties and those which are included by implication in order to give effect to their presumed intention. In Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 76 ALJR 436; 186 ALR 289 at [10], Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ said that it was appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question in a contract were used and, from those circumstances, to discern the objective which the parties had in view. They applied what Lord Wilberforce had said, namely that an appreciation of the commercial purpose of the contract “... presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating” (Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 at 995-996).
And, in Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at [11] approving Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1) [1998] 1 WLR 896 at 912, Gleeson CJ, Gummow and Hayne JJ said that interpretation of a written contract involved
... the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.’
See also International Air Transport Association v Ansett Australia Holdings Limited (2008) 242 ALR 47 at 51-52 [8] per Gleeson CJ, at 63 [53] per Gummow, Hayne, Heydon, Crennan and Kiefel JJ.
9.2 What was the term or representation concerning a production level of 18.75 tonnes per hour at final pack out (sub-pars (a) and (g))?
In the letter of 30 September 2002 the parties expressly adverted to the capacity of the line to process 22.8 gross tonnes of carrots per operating hour, with a maximum of 18% rejects. The letter expressly said that this equated to 18.75 tonnes per hour at final pack out on the pallet (i.e. after the robots located at the end of the last conveyor). Moreover, that letter also referred to the packing capacities per hour of various components of the proposed new production line, namely the prepack line, the five Gillenkirch carton fillers and the handline. The letter expressed the conclusion that, by using those calculations and several combinations of them, the desired pack out of 18.75 tonnes per hour would be achieved.
While the parties had discussed, in their earlier negotiations, 150 tonnes being produced in an 8 hour working shift on one day, I find that the letter of 30 September 2002 made clear that the particular performance Proud Machinery and Mr Proud were warranting would be achieved by the proposed configuration of the new line (which would include the handline and the prepack line production). And, in the subsequent letter of 8 October 2002, signed by both Mr Tana and Mr Proud, the same warranty was given using the figure of 18.75 tonnes per hour at final pack out.
Mathematically, 18.75 tonnes per hour multiplies to 150 tonnes for 8 hours. However, the parties had identified specifically that the capacity of the plant was to be measured by a pack out rate of 18.75 tonnes per hour. How North East Equity proposed to run the plant, and how many continuous hours it proposed to have, were matters for it to determine. The production expert evidence, which I accept and discuss later in these reasons, demonstrated that the existing brush washers could process 22.8 tonnes per hour. The experts did not address the issue of the resulting quality of carrot processed at that speed. However, it was unlikely that the brush washers would process 22.8 tonnes per hour in any event, because most of the 18% rejects should have been removed at the grading tables located immediately before them. Mr Webster’s memorandum of 1 August 2002 showed that because the existing brush washers, which were to be incorporated into the new line, could not process more than 14-15 tonnes per hour if a good quality were to be maintained, he and Mr Tana were aware that it was impossible, even if the whole plant operated continuously for an 8 hour day, to process more than 120 tonnes of good quality carrots. And, as that memorandum also showed, the plant did not operate for 8 hours continuously. Rather, in an 8 hour day, it operated for about 7 hours after allowing for lunch, smoking or tea breaks and other usual inefficiencies. I do not accept Mr Tana’s evidence to the extent that it differed from Mr Webster’s account of how the plant operated in practice. Mr Webster worked there full-time when he wrote the memorandum, whereas Mr Tana visited the plant often, but was not there continuously throughout the day.
I am satisfied that a reasonable person in the position of the parties would have understood the term ‘per operating hour’ in the contractual letters as referring to the actual time in which the plant was operating. I find that Mr Tana also had that understanding. Thus, in an 8 hour shift, Mr Tana understood that there were about 7 operating hours which would result in about 131.25 tonnes of packed product based on the rate of 18.75 tonnes per operating hour. And, after he deleted the handline, the stipulated result of an 8 hour day’s production (with 7 operating hours) would be 122.85 tonnes (at 17.55 tonnes per hour).
I am satisfied that Mr Tana was fully aware of this limitation in his work force’s operating hours when he decided that North East Equity would contract with Proud Nominees for the new line. I am also satisfied that a reasonable person in the position of the parties would have appreciated that Proud Nominees was representing and warranting that the packing machines could operate, initially, at the 18.75 tonnes per hour (and, after deletion of the handline, at 17.55 tonnes per hour), but that for good quality carrots, this output level could only be achieved by building up a store of carrots which had been processed through the brush washer operating at a slower speed. And, they would have appreciated that, when the letters of 30 September and 8 October 2002 referred to the capacity of the line to process 22.8 gross tonnes of carrots per operating hour, they must have had in mind the overall operation of the plant in a commercially efficient manner that would result, at the time of pack out, in a net output of 18.75 tonnes of good quality carrots. Both knew the quality limitations on the brush washers which prevented them feeding more than 15 tonnes per hour into the grading and chilling tank system, as Mr Webster’s memorandum to Mr Tana of 1 August 2002 demonstrated. Equally, both knew that the existing brush washers had the capacity to process carrots at 22.8 tonnes per hour if North East Equity wished to use them at that speed, and so sacrifice quality.
Both parties knew that the existing brush washer equipment was to be employed in the new plant. They knew that the supply of carrots to a packing machine and packing lines out of the proposed tank system could come at a greater rate than 15 tonnes per hour. Thus, in the letter of 30 September 2002, Mr Proud identified maximum production capacities of 2.437 tonnes per hour for the prepack line, 24 tonnes per hour for the five Gillenkirch machines using 20 kg cartons, and 1.2 tonnes per hour for the handline, again using 20 kg cartons. The total of that production capacity was 27.637 tonnes per hour, far greater than the 18.75 tonnes per hour at final pack out, or 22.8 gross tonnes per operating hour.
Mr Tana and Mr Proud were experienced in how production plants in the food processing industry operated. Split shifts were common in that industry, as David Harris, an expert witness called by North East Equity, made clear. The parties also understood that the grading of the carrots was likely to lead to a faster build up of larger numbers of particular sizes of some carrots, principally the small/medium and medium ones, than other proposed gradings would produce. Those carrots, once they had been processed through the brush washers, and across the flumes and various graders would take some time to cool to a core temperature of 5°C in the chilling tanks. From there, they would have to be moved to pack them out in the last stages of the new line. The parties’ common knowledge was that the initial input of carrots from the farm could not pass through the brush washers at more than 15 tonnes per hour, if quality was to be maintained. And they knew that, if the packing machines worked to their maximum capacities of up to 27.6 tonnes per hour, before the packing operation could commence on any given day, it would be necessary for a considerable volume of carrots to be processed through the brush washers and the graders, to then be stored and chilled in the tanks.

In addition, s 20 of the Property Law Act 1969 (WA) provided:
‘20.     Assignment of debts and choses in action
(1)Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee, or other person from whom the assignor would have been entitled to receive or claim that debt or chose in action, is effectual in law (subject to equities having priority over the right of the assignee), to pass and transfer from the date of the notice —
(a)       the legal right to that debt or chose in action;
  (b)       all legal and other remedies for the debt or chose in   action; and
(c)the power to give a good discharge for the debt or chose in action, without the concurrence of the           assignor.
(2)       Where the debtor, trustee, or other person liable in respect of         the debt or chose in action referred to in subsection (1) has      notice —
(a)that the assignment so referred to is disputed by the assignor, or any person claiming under him; or
(b)of any other opposing or conflicting claims, to the debt or chose in action,
he may, if he thinks fit, either call upon the persons making claim thereto to interplead concerning the debt or chose in action, or pay the debt or other chose in action into court, under the provisions of the Trustees Act 1962.
(3) For the purposes of this section “any debt or other legal chose in action” includes a part of any debt or other legal chose in action.’
That section is derived from s 25(6) of the Judicature Act 1873 (UK): see Meagher Gummow and Lehane’s Equity: Doctrines & Remedies (4^th ed, Butterworths, 2002) [6-030], where at [6-480] the learned authors referred to the decision of Lord Alverstone CJ, Darling and Channell JJ in Torkington v Magee [1902] 2 KB 427 as an instance of a valid assignment of a chose in action. In Torkington [1902] 2 KB at 431-432 the Divisional Court held that an assignment of the benefit of an executory contract, of which there was no breach at the time, was validly made under the analogue of s 20. Their Lordships held that the right to sue for damages for a later breach by the obligor could be exercised directly by the assignee without suing in the assignor’s name: Torkington [1902] 2 KB at 432.
As a matter of ordinary English, the assignment by North East Equity of ‘all of its rights in relation to’ the new line was plenary. The expression ‘in relation to’ is of wide and general import (cp its width when used in a statute: Fountain v Alexander (1982) 150 CLR 615 at 629 per Mason J). And, in Loxton v Moir (1914) 18 CLR 360 at 379 Rich J said:
‘The phrase "chose in action" is used in different senses, but its primary sense is that of a right enforceable by an action. It may also be used to describe the right of action itself, when considered as part of the property of the person entitled to sue. A right to sue for a sum of money is a chose in action, and it is a proprietary right.’
I am of opinion that the chose in action, being the entitlement to sue the vendor of the new line for breach of contract, was intended to be assigned by the language of the notice of 3 December 2002, to which North East Equity, Proud Nominees and the bank were parties.
Next, North East Equity relied on cl 1.15(g) of the construction purchase and lease agreement it entered into with the bank on 16 December 2002. That provided that North East Equity, at its own expense, would take any action required by the bank ‘… in order to enforce performance of the contract by the supplier or to protect our interest in the goods’. North East Equity argued that this contemplated that it would retain its rights under the contract including the right to sue for breach. I reject that argument.
First, the assignment occurred and Proud Machinery became party to the notice some 13 days before the construction purchase and lease agreement was made. The latter agreement cannot affect the construction of the earlier notice which had an additional party, Proud Machinery.
Secondly, in any event cl 1.15(g) was consistent with the plenary construction of the earlier assignment. It provided for North East Equity, as assignor, to make its name available, were that necessary, to enforce performance of the contract. That would only be where rights had not been passed to the bank by the earlier assignment. Since the bank was paying for the purchase and installation of the new line, it is not apparent, as a matter of commercial commonsense why it would leave causes of action for breach of contract by the vendor in the hands of the bank’s customer. The bank would be conscious of the risk to it of its customer (North East Equity) becoming insolvent. If that occurred, the bank would have purchased, and would own the new line, but could only prove in its customer’s insolvency for the damages needed to bring the new line into conformity with the contract. That would work commercial inconvenience and is not a commercially sensible construction in absence of clear words: Zhu v Treasurer of NSW (2004) 218 CLR 530 at 559 [82] per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ.
Thirdly, cl 1.15(g) protected the interests of the bank where, for some legal or other reason, it could not sue (e.g. in respect of a claim for unliquidated damages which accrued before the assignment). Fourthly, the protection of the bank’s interest in the goods referred to in cl 1.15(g) is not a right of North East Equity ‘in relation to’ the new line as contemplated in the notice; it is a distinct right of the bank.
North East Equity also argued that the assignment was of a bare right to damages. It was not; the assignment was of a legal chose in action for the reasons I have given.
In Beaton v Moore Acceptance Corporation Pty Ltd (1959) 104 CLR 107, Dixon CJ, Taylor and Windeyer JJ considered a case involving a purchaser who had entered into a contract with a vendor for the sale of goods, being a bulldozer. Before that contract was completed, the purchaser entered into a hire purchase contract with a financier, and the financier in turn entered into a contract with the original vendor to acquire the bulldozer from it so as to make it available to the purchaser. The bulldozer was defective when delivered to the purchaser. Dixon CJ, Taylor and Windeyer JJ said that the purchaser’s claim against the original vendor was for breach of a contract ‘… which, by common consent, was superseded by the hire purchase agreement in question and which, therefore, was never carried into effect’: Beaton 104 CLR at 118; see too Hellyer Drilling Co v MacDonald Hamilton & Co Pty Ltd (1983) 51 ALR 177 at 181 per Fitzgerald J.
North East Equity relied on TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd (1963) 180 CLR 130 where a purchaser under a hire purchase agreement was held to be entitled to recover damages for breach of contract against both the vendor of the equipment and the financier who let it on hire purchase. However, the reason for this was that such a right was expressly created by s 7A(1) of the Hire-purchase Agreement Acts 1933-1946 (Qld): see TC Industrial 180 CLR at 136 where the relevant section is set out.
Rights to sue for the tort of negligent misrepresentation (Poulton v The Commonwealth (1953) 89 CLR 540 at 602 per Williams, Webb and Kitto JJ) and for loss or damage under s 82 of the Trade Practices Act in respect of a contravention of s 52 are not assignable: Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 236 ALR 720 at 732-734 [51]-[57] per myself; BHP Coal Pty Ltd v O & K Orenstein & Koppel AG [2008] QSC 141 at [76] per McMurdo J. Those rights remained with North East Equity.
The assignment was made as a contract. Each of North East Equity and Proud Machinery agreed with the bank in December 2002 that all North East Equity’s rights in relation to the new line would be either assigned by it to, or taken as being enforceable directly by, the bank. Under that agreement, North East Equity’s contractual rights against Proud Machinery passed to the bank in accordance with, or were superseded by, the terms of the notice executed by Proud Machinery on 3 December 2002: Beaton 104 CLR at 118. Accordingly, I am of opinion that North East Equity had no title to sue Proud Machinery for breach of contract.
28. THE CLAIM IN NEGLIGENCE
North East Equity pleaded that Proud Machinery and Mr Proud owed it a duty ‘… in designing, procuring and installing the [n]ew [l]ine to exercise reasonable care and skill so as to avoid [North East Equity] suffering loss and damage by any act or omission on the part of [Mr] Proud or Proud Machinery’. I have found that Proud Machinery and Mr Proud did not design the new line.
Nonetheless the contract contained an implied promise that Proud Machinery would exercise reasonable care and skill in the performance of its services, including the selection of goods or work and materials that were reasonably fit for the purposes for which North East Equity had (expressly or by implication) indicated they were required: Astley v Austrust Ltd (1999) 197 CLR 1 at 21-22 [46]-[47] per Gleeson CJ, McHugh, Gummow and Hayne JJ; Helicopter Sales 132 CLR 1.
In the relationship between North East Equity and Proud Machinery, that implied promise was parallel and concurrent with a co-extensive duty in tort on the part of Proud Machinery and Mr Proud to exercise the same reasonable skill and care: Astley 197 CLR at 23 [46]-[48] per Gleeson CJ, McHugh, Gummow and Hayne JJ.
The pleading of Proud Machinery’s and Mr Proud’s alleged negligence and the way in which North East Equity argued this claim reflected, in substance, its complaints of failures in the design, procurement and installation of the new line, which gave rise to the shortcomings in its operation as installed. The duty of care in this matter arose because and in the context of the contractual relationship. Proud Machinery had parallel and concurrent obligations in tort and contract to exercise reasonable care and skill in performing professional tasks owed to North East Equity under the contract. Mr Proud had a parallel and congruent obligation in tort: Astley 197 CLR at 23 [48]. There is no circumstance pleaded in the present case which would justify extending those obligations in tort beyond a parallel and concurrent liability of Proud Machinery and Mr Proud, co-extensive with the contractual obligations of Proud Machinery to exercise reasonable skill and care.
The contract was negotiated at arms length between two experienced and capable business people, Mr Tana and Mr Proud. Its express and implied terms reflected the commercial relationship agreed on by the parties for the procurement and installation of the new line. That relationship is a commonplace in commerce; a vendor who is the distributor of plant and equipment and a purchaser who, after negotiating with the vendor, agrees on terms for the purchase and installation of the equipment. The common law and statutory obligations (such as in Part V of the Trade Practices Act and the Sales of Goods Act) which govern such a relationship do not need extension or modification on the facts of this matter or merely because one party was unhappy, after the event, with the result arrived at by the performance of the contract.
On the basis of my findings in respect of the contractual terms and representations, the claim in negligence, must also fail.
29. DAMAGES
29.1 General conclusions
I have rejected the claims for damages for economic loss and loss of a chance to earn further profits as being without foundation. I have also found that, in substance, North East Equity has not established that the new line failed to operate in accordance with the pleaded contractual terms and representations, or that Proud Machinery and Mr Proud breached the duties of care they owed. There are still some subsidiary matters which I will address below.
29.2 The flume elevators
The agreement reached in the meeting on 18 November 2003 recognised that the flume elevators were not operating to the standard which they ought to have achieved. I am of opinion that, as Mr Proud admitted, the problem with the flumes was never remedied. Bruynooghe quoted €51,000 plus freight to replace them with a system that Mr Tana would have accepted, if he had not had to pay for this, as he explained in his letter to Mr Proud of 8 January 2004. This price provides a reliable measure of the quantum of damages required to put North East Equity in the position that it would have been in, had the flume elevators not been defective. True it is that the original flume elevators worked, albeit not as well as they should have, and were retained. Mr Tana gave evidence that North East Equity’s packaging operations were to be conducted from the Lancelin farm pack house from late October 2007, with the exception of the prepack line of 10 kg cartons for small/medium carrots.
The problems with the flume elevators caused them to stop sometimes, which held up production for brief periods. On other occasions, carrots fell off the flume elevators, particularly in the first few months. These occasions caused disruption and irritation to North East Equity. There was no precise evidence of how long or how often these delays occurred, but I am satisfied that they were more than trivial. North East Equity, however, did not prove that it had to pay staff overtime or otherwise suffered financial loss on any particular occasion because of delays caused by the flume elevators. There is no evidence that, even though production was interrupted, it was not completed during ordinary working hours.
Moreover, while Mr Tana no doubt was annoyed by being asked to pay for the replacement flumes, had he done so by early 2004, when it was clear that Proud Machinery and Bruynooghe would not, this problem would have been resolved. I am not persuaded that it was reasonable for North East Equity not to have replaced them by June 2004 if there were production difficulties of any substance caused by the flume elevators: Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 at 658 per Gibbs CJ, at 668 per Wilson, Deane and Dawson JJ, at 673-674 per Brennan J. Accordingly, I am of opinion that the general damages for this problem should be awarded only for the period to June 2004 when the new flumes should have been installed, had a decision to replace them been made within a reasonable time.
It was not reasonably foreseeable, at the time the contract was entered into, that North East Equity would continue to operate a defective flume system which disrupted its business by affecting the orderly and efficient operation of the new line. Any damage it suffered beyond the time when what needed to be done became clear and that Proud Machinery would not replace the flume elevators, was not within the reasonable contemplation of the parties as flowing from the breach: Burns 161 CLR at 668 per Wilson, Deane and Dawson JJ.
I am of opinion that the cost of replacing the flume elevators was €51,000. There is no evidence of the freight or installation costs but, doing the best I can from reviewing the general costs of installing the new line I consider that an allowance of €9,000 should be made, making a total of €60,000.
29.3 Damages for disruption
It is difficult to dissect particular losses of time or costs as having been occasioned by one or more of the deficiencies in the new line which I have found. These were the defective flume elevators and the original location of the touch screen in the office, rather than above the tanks where it was moved later in 2003 at no cost to North East Equity. The task of making an assessment of any loss is more difficult because of the deficiencies I have found in North East Equity’s management, or lack of it, of the new line.
Doing the best I can, it is likely that, on occasion, some extra labour and operating expenses were incurred due to the deficiencies of the flume elevators and the initial location of the touch screen in the office. No attempt to quantify such losses by evidence was made. I am of opinion that it is appropriate to find that $10,000 would compensate North East Equity for any unnecessary increase in its operating costs during the periods in which the touch screen remained in its original location and up to June 2004 when the new flumes should have been installed. I am not satisfied that any substantial or greater loss was incurred.
However, North East Equity did not appear to make any separate claim for damages based on the deficiencies in, and disruption caused by, the flume elevators. The expert production evidence did not suggest that these machines caused any delay or inefficiency which related to the pleaded misrepresentations and negligence. I consider that this sum of €60,000 can be some evidence of the amount by which the new line as installed was worth less than its cost, but I will need to hear the parties as to whether I can allow North East Equity to recover damages in this sum on its pleaded case and in light of my overall findings.
29.4 The 5°C requirement
As I have found, I am not satisfied that North East Equity has established that, if the new line were competently operated, it could not achieve an outcome of 17.55 tonnes per operating hour at final pack out, with a maximum of 18% rejects, and with carrots at no more than 5°C.
There was no evidence of any loss of sales or other economic loss suffered by North East Equity, including any claim relating to carrots being packed at a core temperature greater than 5°C. If I were wrong in my finding that no breach has been established of the contractual terms and representations that the core temperature of carrots would not exceed 5°C, then the question of quantification of North East Equity’s damages for this breach would arise.
The situation has some similarity to assessing damages where building work is defective. Recently, Finkelstein and Gordon JJ said that, speaking generally in cases of work done or not done, or damage caused to property in breach of contract, there are two bases for assessing damages: first, the cost of reinstatement, or secondly, the diminution of the value of the property due to the breach. They held that the correct measure is ‘… whatever is reasonable for the wronged party to recover’: Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (2008) 166 FCR 494 at 503 [29]. I examined the authorities and concluded that the principle applicable based on Bellgrove v Eldridge (1954) 90 CLR 613 was (Bowen Investments 166 FCR at 524 [98]):
‘… that the building owner was entitled to recover the cost of rectification provided that the rectification proposed was both necessary, to bring about conformity with the contract, and a reasonable course to adopt. "Reasonableness", in that context, can be seen to be what the owner could require having regard to the terms of the contract and the nature of the departure from them in the performance proffered by the other party. That is, of course, a factual enquiry.’
The new line was a working asset used by North East Equity in its business from March 2003 to at least October 2007. On the hypothesis that I ought to have found that the new line was defective because it did not always pack out carrots with a core temperature of 5°C or less, such an event had no pecuniary consequence. And, the carrots were still packed chilled but perhaps not as low as exactly 5°C or less. The performance offered by the new line as installed was not productive of any relevant determent to North East Equity. It saw no need to reinstate, supplement or replace the refrigeration system. And it suffered no commercial detriment as a result. I am of opinion that North East Equity has not established that the cost of bringing the new line into conformity with the contractual term or representation relating to the 5°C requirement would be reasonable to award as damages: see Bowen Investments 166 FCR at 503 [29], 522 [93].
29.5 Damages on a ‘no transaction’ basis

In final address, counsel for North East Equity suggested that its reliance damages should be calculated on the basis set out below. It argued that it would not have entered into the contract and subsequent lease agreement with the bank, had it not acted in reliance on Proud Machinery’s and Mr Proud’s misleading representations, or if they had not been negligent. North East Equity’s methodology used a number of approximations in claiming that it had suffered a loss of $1,300,000. In the calculations below, I have attempted to remove those approximations so that the result, using North East Equity’s methodology, can be compared with other calculations, which I explain below.

(Negative values are in parenthesis)

Exact calculation

North East Equity’s approximation in its submissions

(a)

Total cost to North East Equity of new line

(Based on North East Equity making all lease payments to the bank for 5 years to 30 May 2008. This figure was agreed by the parties.)

$ (4,328,230)

$ (4,328,230)

(b)

Add the current value of the new line

(Based on Mr Gregson’s evidence that at May 2007 the new line had an auction value of between $640,000 to $960,000.)

$     960,000

$   1,000,000

(c)

Add North East Equity’s savings on labour costs:

·    based on a period of 4 years;

·    assuming savings per carton reduced by 30¢ to 90¢ per carton for 1,955,000 cartons p.a. (based on Mr Langridge’s analysis that 23,000,000 kg p.a. were produced);

·    0.30 x 1,955,000 = $586,500 p.a. labour savings;

·    subtract from this figure additional power costs of $89,700 p.a. that North East Equity claimed were incurred;

·    net saving of $586,500 - $89,700 = $496,800 p.a. (approximated by North East Equity to a net saving of $500,000 p.a.), or a total net saving of $1,987,200 (approximately $2 million) over 4 years.

$   1,987,200

$ 2,000,000

(e)

Net expenditure by North East Equity

$ (1,381,030)

$ (1,328,230)

approx $1.3 million

The above calculation mixed the costs in (a) for a 5 year lease, with only 4 years worth of savings in (c). The new line had been retained beyond the 4 year period and there was no evidence that North East Equity intended to bring the lease to an end before the expiry of the 5 year term. In that situation, I consider that credit should be given for the savings over the whole 5 year term of the lease not for only 4 years. I have rejected the claim that any representation was made to the effect that North East Equity’s power costs would be less if the new line were acquired.
Accordingly, that amount should be excluded from the calculation leaving, on North East Equity’s basis for its claim a net saving of $586,500 p.a. or $2,932,500 for 5 (not 4) years resulting in a net loss, on this hypothesis of $435,500. However, I find that the saving was not less than 34¢ per carton (that is the labour costs per carton of the new line were at the lower end of Mr Tana’s range, namely 86¢ each). Using the same packing rate, that produces a saving of $664,700 p.a. or $3,323,500 for the 5 years. This would result in a loss of $44,730 on the above assumptions, as set out in the table below.

(a)

Total cost to North East Equity of new line

$ (4,328,230)

(b)

Add the current value of the new line

$     960,000

(c)

Add back savings on labour costs

·    based on a period of 5 years;

·    assuming savings per carton reduced by 34¢ to 86¢ per carton, using same packing rate as above;

·    0.34 x 1,955,000 = $664,700 p.a. resulting savings, or a total net savings of $3,323,500 for 5 years

·    Not accepting that additional power costs were incurred

$   3,323,500

(d)

Net expenditure by North East Equity

$     (44,730)

If such a small loss were incurred, it would not accord with commonsense for North East Equity not to have gone ahead with acquiring the new line. In assessing what Mr Tana (as the controlling mind of North East Equity) would have done, it is important to exclude from consideration the subsequent impacts of the fall in the market and the production problems with the farms. Mr Tana was optimistic in 2002 that demand for carrots would increase, so that the labour savings he expected would have been greater, the more carrots were processed. A reasonable business person in the position of Mr Tana and, I infer he too, would have replaced the inefficient old plant with the more efficient new line which gave the actual savings referred to above with the prospect of even greater ones in light of the expectation of greater demand and the significant reduction in future labour costs: Gull v Saunders & Stuart (1913) 17 CLR 82 at 89 per Barton ACJ, Gavan Duffy and Rich JJ approving British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways of London Co Ltd [1912] AC 673: cf at 689-691 per Viscount Haldane LC esp at 691 where the Lord Chancellor referred to replacing obsolete machines with up to date ones.
There is a further difficulty with North East Equity’s analysis because it relied, as the value of the new line, on the figure of $960,000 given by Jonathan Gregson. Mr Gregson had no formal qualifications as a valuer, but was a very experienced auctioneer. He had no experience in selling equipment of the kind in new line, other than selling other equipment belonging to North East Equity. First, Mr Gregson gave that figure in respect of the new line as at May 2007, not at the time of its acquisition or installation four years earlier. The figure affords no proper basis on which to compare the amount paid in early 2003 with the true value at that time of what was acquired: HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 at 656-659 [34]-[40] per Gleeson CJ, McHugh, Gummow, Kirby and Heydon JJ. Secondly, Mr Gregson was not able to offer an opinion in his expert report on the new line’s value when it was acquired, saying only that this assessment was ‘difficult’. He had tried to enquire of Mr Proud and Bruynooghe about a value which he could consider for his report, but desisted after he learned of their involvement in the proceedings. Nor did another equipment dealer of whom he enquired give him any assistance in placing a value on the new line.
Here, the subsequent fall in the carrot market may have been an independent or extrinsic cause affecting Mr Gregson’s perception in 2007 of what the new line might then realise at auction based on his experience with selling North East Equity’s equipment subsequent to early 2003: HTW Valuers 217 CLR at 659 [40]. If the market for carrots were higher, rather than lower, a processing plant offering substantial savings in labour costs would be likely to be more attractive to potential purchasers. Instead, by 2007 the market falls had driven some of North East Equity’s competitors out of business.
This analysis shows that, even if North East Equity had proved that Proud Machinery and/or Mr Proud had contravened ss 52 and or 53(c) of the Trade Practices Act and/or been negligent in one, or even all, of the respects it had alleged, it would not have established that the contravention(s) or breach(es) of duty had caused it to suffer any loss or damage. This is because, first, there is no evidence that the new line, as installed, was worth less than was paid for it (except, perhaps the €60,000 I have found it would have cost to replace the flume elevators and $10,000 for the disruption caused) and, secondly, even if it were, that difference was greater than the savings North East Equity achieved by operating the new line.
I do not accept that Mr Gregson’s appraisal of the auction price realisable for the new line in May 2007 provides any reasonable basis on which to arrive at its value in March 2003 when it was brand new. A willing but not anxious purchaser, and a willing but not anxious vendor, would agree on a different and substantially higher price for brand new plant and equipment than for plant and equipment which had been used to process about four years worth of production at the levels shown on the evidence. The wear and tear of four years’ use would create a substantial difference between the value when new (even if it were less than the price paid to Proud Machinery) and the value of the plant and equipment as seen by Mr Gregson.
If the new line, in March 2003, were worth even half of the price payable to Proud Machinery of $3,000,000 (excluding the sum due to Steventon Lodge) then, using North East Equity’s methodology for assessing its damages, it would not have suffered any loss:

(a)

Total cost to North East Equity of new line

$ (4,328,230)

(b)

Add the current value of the new line

(Assuming equal to half of price payable to Proud Machinery.)

$ 1,500,000

(c)

Add back North East Equity’s savings on labour costs:

·    based on a period of 5 years;

·    assuming savings per carton reduced by 34¢ to 86¢ per carton, resulting in labour savings of $664,700 p.a. as shown above;

·    subtract from this figure additional power costs of $89,700 p.a. that North East Equity claimed were incurred;

·    net saving of $664,700 - $89,700 = $575,000 p.a. or a total of $2,875,000 over 5 years

$ 2,875,000

(d)

Net gain by North East Equity

$       46,770

In my opinion, the value of the new line at March 2003 was likely to be substantially more than $1,500,000. So, this last calculation understates the net benefit which North East Equity would have obtained, notwithstanding the assumption that it had proved all of its claims of misrepresentations and breaches of duty under the Trade Practices Act and in tort. The fact that North East Equity chose to move most of its packing operations in October 2007 from Wattleup is not relevant to the application of the methodology suggested by it, since it has claimed the cost of leasing up until May 2008. Had it continued to use the new line, it would not have been worse off. Its decision to change its operations should be viewed in the same way that the decision to buy new turbines in British Westinghouse [1912] AC at 691 was viewed; namely, that the decision to centre operations at Lancelin was commercially sensible and would enable North East Equity to eliminate unnecessary road transport costs, including for transport of rejects and waste.
I am not satisfied that North East Equity has established what the new line was, in fact, worth in the condition in which it was installed. Thus, I am not satisfied that it has suffered any loss in receiving something worth less than what it agreed to pay, or what the bank actually paid, for it, other than in the limited respects that I have found (for the flume elevators and disruption). As I have understood the pleadings, these aspects were not the subject of any claim.
30. CONCLUSION
In conclusion, I find that, in substance, North East Equity’s claims for damages for about $4.2 million in wasted expenditure and $4.85 million in economic loss have not been established. I will allow the parties to consider these reasons and address the question of the final orders which ought to be made.

I certify that the preceding three hundred and ninety-six (396) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.
Associate:
Dated: 12 August 2008

Counsel for the Applicant: MH Zilko SC and MD Cuerden

Solicitor for the Applicant: Ilberys Lawyers

Counsel for the Respondent: PG McGowan

Solicitor for the Respondent: David Deakin Davies & Co

Date of Hearing: 17-20, 24-28 September 2007
8-12 October 2007

Date of Judgment: 12 August 2008

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	WAD 58 OF 2006

JUDGE:	RARES J
DATE OF ORDER:	12 AUGUST 2008
WHERE MADE:	PERTH

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	WAD 58 OF 2006

JUDGE:	RARES J
DATE:	12 AUGUST 2008
PLACE:	PERTH

DROP #	SIZE	GIRTH	LENGTH	TANK #	ADDITIONAL COMMENTS
A1	WASTE	ALL	UP TO 100MM	WASTE
A2	SMALL	24-28MM	100-140MM 140+MM	1 2	500GM PREPACK 1KG PREPACK
A3	SMALL/ MEDIUM	29-35MM	100-140MM 141-170MM 170+MM	1 3 5	TANK 1 & 2 INTERCHANGEABLE PREMIUM SMALL/ MEDIUM
A4	MEDIUM	36-43MM	100-150MM 151-180MM 180+MM	1 or 3 4 5	PREMIUM MEDIUM
A5	LARGE	44-54MM	100-170MM 171-220MM 220+MM	6 7 8	PREMIUM LARGE
A6	EXTRA LARGE	54+MM	8
SPARE	9	SPARE AS BACK UP TO ABOVE

(Negative values are in parenthesis)	Exact calculation	North East Equity’s approximation in its submissions
(a)	Total cost to North East Equity of new line (Based on North East Equity making all lease payments to the bank for 5 years to 30 May 2008. This figure was agreed by the parties.)	$ (4,328,230)	$ (4,328,230)
(b)	Add the current value of the new line (Based on Mr Gregson’s evidence that at May 2007 the new line had an auction value of between $640,000 to $960,000.)	$ 960,000	$ 1,000,000
(c)	Add North East Equity’s savings on labour costs: · based on a period of 4 years; · assuming savings per carton reduced by 30¢ to 90¢ per carton for 1,955,000 cartons p.a. (based on Mr Langridge’s analysis that 23,000,000 kg p.a. were produced); · 0.30 x 1,955,000 = $586,500 p.a. labour savings; · subtract from this figure additional power costs of $89,700 p.a. that North East Equity claimed were incurred; · net saving of $586,500 - $89,700 = $496,800 p.a. (approximated by North East Equity to a net saving of $500,000 p.a.), or a total net saving of $1,987,200 (approximately $2 million) over 4 years.	$ 1,987,200	$ 2,000,000
(e)	Net expenditure by North East Equity	$ (1,381,030)	$ (1,328,230) approx $1.3 million

(a)	Total cost to North East Equity of new line	$ (4,328,230)
(b)	Add the current value of the new line	$ 960,000
(c)	Add back savings on labour costs · based on a period of 5 years; · assuming savings per carton reduced by 34¢ to 86¢ per carton, using same packing rate as above; · 0.34 x 1,955,000 = $664,700 p.a. resulting savings, or a total net savings of $3,323,500 for 5 years · Not accepting that additional power costs were incurred	$ 3,323,500
(d)	Net expenditure by North East Equity	$ (44,730)

Counsel for the Applicant:	MH Zilko SC and MD Cuerden
Solicitor for the Applicant:	Ilberys Lawyers
Counsel for the Respondent:	PG McGowan
Solicitor for the Respondent:	David Deakin Davies & Co
Date of Hearing:	17-20, 24-28 September 2007 8-12 October 2007
Date of Judgment:	12 August 2008