Paper Australia Pty Ltd v Ansell Ltd

[2007] VSC 484

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

MAJOR TORTS LIST

No. 7964 of 2002Error! No sequence specified.

PAPER AUSTRALIA PTY LTD	Plaintiff
(ACN 061 583 533)
v
ANSELL LIMITED	Defendant
(ACN 004 085 330)

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JUDGE:	BONGIORNO J
WHERE HELD:	Melbourne
DATE OF HEARING:	24–26, 30, 31 October 2006; 1, 2, 8, 9, 13-16, 20-23, 27-30 November 2006; 4 December 2006
DATE OF JUDGMENT:	23 November 2007
CASE MAY BE CITED AS:	Paper Australia Pty Ltd v Ansell Ltd
MEDIUM NEUTRAL CITATION:	[2007] VSC 484	Revised 30 November 2007

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CONTRACT – Formation of contract – Notice of Terms and Conditions - Implied Terms – Limited Warranty – Exclusion clause – Applicability of exclusion clause – Breach – Damages – Mitigation – Assessment – Betterment.

TORT – Duty of Care – Breach – Damages – Mitigation – Assessment – Betterment.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M. Derham QC with Mr K.G. Howden and Mr R.H.M. Attiwill	Hunt & Hunt
For the Defendant	Mr G.G. McArthur SC with Mr R. Andrew	DLA Phillips Fox

TABLE OF CONTENTS

The Event and Its Cause

The Agreement to Service the Pressure Roller

The Effect of the “Warranty” clause

Plaintiff’s Claim in Negligence

The Damage

The Event of 7 April 2001

MG Cylinder before and after 7 April 2001

Was it reasonable to replace the MG cylinder?

Plaintiff’s Further Expert Evidence

Liability: The Defendant’s Case

The Kelleher Indication

Liability: Conclusions and Determination

Assessment of Damages

Material Damage

Sandusky Walmsley Payments

MG Interlock Project

Presser Roll

Bearings

Oil Lubrication System

Steam and Condensate System

Frames

Additional Installation Training and Commissioning Costs

Spare Parts: Sandusky Walmsley

Steam Pressure Loadings: Sandusky Walmsley

Final Payment to Sandusky Walmsley

Redundant Spares

Lurgi Constructions

Debtech

Simon Carves

Incode Pty Ltd

KRH Drafting Pty Ltd

RG and C Price

Beca Simons Pty Ltd

Beesley Consulting Pty Ltd

Marsh Pty Ltd

Primech Pty Ltd

Other Miscellaneous Items

Other Arguments of the Defendant

Material Damage: Conclusion and Determination

Consequential Loss

7 April 2001 to 31 March 2003

1 April 2003 to 30 June 2005

Mr J.A. Welsford

Consequential Losses:  the Defendant’s case

Tax benefit: depreciation of new MG cylinder

Consequential Losses: Conclusion and Assessment

Betterment

Conclusion

HIS HONOUR:

1. Paper Australia Pty Ltd (formerly known as Paperlinx and Australian Paper Pty Ltd) operates the largest pulp and paper making factory in Australia at Maryvale in Gippsland.  The factory covers a very large area.  It has three pulp mills and five paper making machines as well as a waste processing plant.  It operates 24 hours a day, seven days a week and produces a wide range of papers from sack papers to security papers and envelope papers in a variety of colours.  Some paper is bleached, some is not.  The properties of the paper produced vary according to the use to which the paper is to be put.  Different production processes are applied to produce these different types of paper. 

1. The five paper making machines at Maryvale are designated M1 to M5.  This case concerns M2, a machine which produces both machine glazed (MG) and machine finished (MF) paper.  It is a very large machine which processes wet paper pulp through many stages by pressing and drying it until it becomes one continuous long roll of dry paper.  In simple terms, MG paper is produced by pressing the still very wet paper at a late stage in the production process against a highly polished, heated, cast iron cylinder, using a pressure roller covered with rubber.  The cylinder is called an MG cylinder or a Yankee dryer.  It is a cast iron pressure vessel which weighs about 80 or 90 tonne.  It is heated by steam under pressure.

1. It is the MG cylinder on the M2 machine with which this case is concerned. It was 200 inches long and 14 feet in diameter.  The pressure roller, which holds the wet paper against the rotating cylinder, was slightly longer than the cylinder and had a diameter of 29½ inches.  It weighed about 9.5 tonne and was made of steel with a rubber covering.  There were two such rollers used on the M2 machine designated as #2.130 and #2.132.  These rollers were used in rotation, one being kept as a spare whilst the other was on the machine.  They are sometimes called service rollers.  The inner steel core is referred to as the “shell”. 

1. In the process of glazing paper the pressure roller holds the paper against the MG cylinder using pneumatic pressure.  The force applied was in the order of 400lb/linear foot.  In metric measurement this is equivalent to 70kN/metre.  The MG cylinder was heated from within using steam under pressure so that after the paper has passed over it, its water content is considerably reduced (to about 20%) and it exhibits a glossy or glazed surface.  During this process the paper passed through the M2 machine at speeds of between about 150 and 410 metres per minute, depending upon the grade of paper being made. 

1. This litigation concerns an event which occurred on 7 April 2001 when, as the plaintiff alleges, the rubber coating on pressure roller #2.132, which was being used on the M2 machine, separated from its steel shell.  That is to say the rubber coating, which was designed to contact the wet paper and press it against the MG cylinder, came away from the steel core of the roller.  The event was described as a delamination of the rubber cover of the pressure or service roller. 

1. The plaintiff alleges that in the course of this event considerable damage was done to the MG cylinder on the M2 machine, as a result of which it had to be replaced.  The machine was, at the time, producing MG papers for a variety of applications from fast food wrappers to building insulation.  Paper Australia alleges that it suffered substantial losses as a result of this incident, not only directly, but also consequentially, to its business.  It claims damages for those losses against Ansell Limited (formerly called Dunlop Duratray, a business owned by Pacific Dunlop Ltd) which, shortly before the incident on 7 April 2001, had serviced the pressure roller by replacing its rubber covering – the covering which delaminated. 

1. The plaintiff’s claim is framed both in contract and in tort.  It alleges that Dunlop[1] was in breach of terms of its contract to service the pressure roller and/or it was negligent.  In either case, says the plaintiff, the defendant is liable in damages to compensate it for the losses which it has suffered both directly and indirectly. 

   [1]In this judgment the defendant will normally be referred to as “Dunlop” notwithstanding its subsequent change of name.  That is how it was generally referred to in evidence and documents before the Court.

1. The defendant’s defence to the proceeding raises a number of legal and factual issues which must be resolved.  It is convenient that they be dealt with serially.  They raise not only questions of Dunlop’s liability but also, if it is liable, the extent of that liability and, in particular, the extent of its liability (if any) for the costs, both direct and indirect, of the plaintiff having replaced the MG cylinder on the No. 2 paper making machine. 

The Event and Its Cause

1. Mark Anthony Walker, a professional engineer, has worked at the Maryvale mill since 1990.  He had tertiary qualifications in engineering and, in April 2001, was the Engineer Support Manager – Packaging Papers.  He had held this position since June 2000 and as such he had responsibility for the M2 paper making machine. 

1. Mr Walker told the Court that at about 6.00am on Saturday, 7 April 2001 he was telephoned at his home by a mill employee who told him that the cover had come off the pressure roller on the M2 machine and that the machine was no longer operating. 

1. Mr Walker went immediately to the mill and inspected the M2 machine.  That inspection verified what he had been told.  The rubber cover on #2.132 service roller had completely come off its shell.  He was concerned that this event may have damaged the MG cylinder.  Accordingly, he ensured that the MG cylinder, which normally operated under a steam pressure of 47psi or 330kPa, was de‑pressurised for safety reasons.  He then inspected the cylinder and the scene generally.

1. Mr Walker’s inspection of the pressure roller revealed that its rubber covering had completely come away from its metal shell and had broken into pieces.  He found no sign of the rubber cover itself having hardened or become brittle with stress cracks.  It had simply come away from the shell leaving the metal exposed.  He had seen hardening and cracking of the rubber on rollers on a number of earlier occasions, but on this occasion there had been a complete separation between the cover and the shell, not a disintegration of the cover itself. 

1. Mr Walker and other employees of the plaintiff then removed all the broken cover pieces from the M2 machine and placed them on the floor.  He made a visual inspection of the M2 machine itself but found no obvious signs of damage at that time. 

1. The plaintiff’s case is that the rubber cover of the service roll on the M2 machine delaminated on 7 April 2001 because Dunlop had not properly cured or vulcanised the rubber in the course of re-covering the service roll when it was contracted to do so by the plaintiff in August 2000.  Failure to adequately cure or vulcanise the rubber had resulted in the base layer of the rubber cover being too soft, alleged the plaintiff, causing the rubber cover to delaminate when exposed to the massive forces in the nip between the MG cylinder and the service roll in the course of the operation of the M2 machine. 

1. In his evidence Mr Walker said that shortly after he inspected the M2 machine he telephoned a Mr Jason Dwyer of Dunlop.  He described Mr Dwyer as the “Maryvale mill contact person at Dunlop for sales”.  He described what he had seen at the M2 machine to Mr Dwyer who agreed with him that the likely cause of the problem was delamination due to a bonding failure between the cover and the shell of the service roller.  

1. Mr Walker also gave evidence of a subsequent meeting with a Mr Val Faoro, who he described as the general manager of Dunlop, on 9 April 2001 at the mill.  He told the Court that, after inspecting the failed service roller, Mr Faoro said that in his opinion there had been no “cross-linking between the base cover material and the roll metal shell”.  Mr Walker explained that cross‑linking refers to “the creation of chemical bonds that stick the rubber cover to the metal roll shell of the service roll”.  He said that Mr Faoro told him that he, Faoro, would check what chemical solutions had been used to prepare the shell before the rubber was applied.

1. The plaintiff called Mr Harry Wyllie Mowbray, a paper industry consultant with experience in examining the causes of roll cover failure.  Mr Mowbray analysed the failed pressure roll cover and performed a range of tests to determine the hardness of the layers of the cover.  From these and other observations he concluded that the base layer of the cover was too soft and was therefore bound to fail in service. 

1. In 2006 Mr Mowbray performed a further test on a small piece of the failed cover, measuring the hardness of the inner layer, vulcanising the piece of rubber and then measuring the hardness again.  From the results he obtained he concluded that the rubber was formulated correctly but had not been heated long enough or to a high enough temperature or both during the re‑covering of the roll.  This meant that the roll did not have the ability to handle the shear loads in the nip between it and the cylinder under operating conditions. 

1. Dr Graeme Ewing Russell was also engaged by the plaintiff to provide an opinion on the possible causes of the failure of the rubber cover.  He concluded that:

Negligible or no bond was achieved between the base of the rubber cover and the steel shell of the compression roller.  This was most likely due to the rubber cover not being properly cured during the process of re-covering the pressure roller.

1. Finally, Mr Walker gave evidence that on 18 December 2001 a Professor Robert Burford attended at the Maryvale mill on behalf of Dunlop.  He took four samples of the cover which had failed.  Mr Walker said that Professor Burford had with him a Shore A hardness meter, which is a hand held measuring device which can be used to evaluate the hardness of a substance such as rubber.  Mr Walker said that Professor Burford took a number of measurements using the hardness meter. 

1. Although the defendant never conceded that the cause of the rubber cover delaminating, and thus the cause of the event which occurred on machine M2 on 7 April 2001, was a defect in the way the rubber cover was fixed to the pressure roller in August 2000 when it was serviced by Dunlop, it hardly contested the issue.  Mr Walker was not cross‑examined as to the evidence he gave on this question and Professor Burford was not called as a witness. 

1. Mr Walker’s evidence stands unchallenged.  It being entirely cogent and inherently reasonable having regard to the expert evidence which was, likewise, unchallenged, the Court is entitled, if not bound, to act upon it: Paric v John Holland Constructions;[2] Hardy v Gillette;[3] and Fensford Pty Ltd v Nour Pty Ltd.[4]  Further, the failure of the defendant to call Professor Burford enables an inference to be drawn to the effect that his evidence would not have assisted its case:  Jones v Dunkel;[5] O’Donnell v Reichard.[6] 

   [2](1984) 2 NSWLR 505.

   [3](1976) VR 392.

   [4][2006] VSCA 118.

   [5](1959) 101 CLR 298.

   [6][1975] VR 916.

1. Whether the roller cover on the pressure roller delaminated, as Mr Faoro suggested, because of a lack of a proper bond between it and the metal shell of the roller or whether it delaminated because of a failure to cure the rubber properly as Dr Russell suggested is of little moment.  The probable cause of the delamination of the cover of the pressure roller on the MG cylinder of machine M2 on 7 April 2001 was faulty workmanship on the part of Dunlop in fixing a new cover to the roller some eight months previously. 

The Agreement to Service the Pressure Roller

1. The plaintiff alleges that the agreement between it and Ansell to service pressure roller #2.132 was evidenced by a purchase order dated 6 September 2000 by which it said it requested Dunlop to replace the cover on the roller.  This purchase order incorporated, by reference, the plaintiff’s standard conditions of purchase which, it maintains, were well known to Dunlop from previous occasions on which Dunlop had performed work for it. 

1. In fact, there are arguably three documents relevant to the agreement between the plaintiff and Dunlop concerning the covering of the pressure roller.  First, there is a quotation No. JD2K081, dated 15 August 2000 under Dunlop’s letterhead, signed by Jason Dwyer, to perform specified work for a fixed price on a roller described as “PM 2 MG SERVICE ROLL”.  There is no dispute that this quotation refers to the relevant pressure roller.  After setting out details of the job and its cost, the following appears on this document:

Warranty

Because of so many conditions existing beyond the control of Dunlop Duratray in the use of roll coverings, no warranty as to life or length of service is made.  All roll coverings are warranted to be free of defects in material and workmanship.  No claim will be honoured or adjustment made on any roll covering after one year from date of invoice or shipment.

Our liability for breach of warranty is limited to the replacement of the roll covering.  Consequential damages are not allowed. 

The second document is the plaintiff’s purchase order dated 6 September 2000 addressed to the defendant, marked for the attention of Jason Dwyer.  It purports to accept quotation No. JD2K081 and contains a statement as follows:

AUSTRALIAN PAPER TERMS & CONDITIONS WILL APPLY TO THIS ORDER – A COPY WILL BE SUPPLIED ON REQUEST

The third document is a copy of those terms and conditions signed by its Maryvale Mill contract manager, Neil Donoghue.  The first paragraph of this document is in the following terms:

1.ACCEPTANCE

The order may be accepted in accordance with the terms and conditions hereby stated along with any and all special conditions set forth on the face of the purchase order.  Shipment of any part of the goods or the furnishings [sic] of any part of the services shall constitute an acceptance of the order upon the terms herein, notwithstanding any different or additional terms contained in any acknowledgement, acceptance or other communication from Vendor not signed by Purchaser.

1. Mr Donoghue provided detailed evidence to the Court as to the plaintiff’s purchasing system for goods and services.  He said that the plaintiff’s terms and conditions upon which his signature appeared had not changed since 1990.  He said that they were originally printed on the back of purchase orders but after the plaintiff moved to a computerised system there was merely a reference to them on purchase orders, as in this case.  He said that although he did not know whether the defendant had ever asked for a copy of the terms and conditions it had been a supplier to the plaintiff since before the plaintiff changed from a manual to a computerised ordering system, the inference being that it must have known of them. 

1. The plaintiff also contended that there were implied terms of its agreement with the defendant which imposed the following obligations on the defendant with respect to the work to be carried out:

(a)(To) carry out all necessary work recovering the #2.132 service roll with reasonable skill and care;

(b)(To) ensure that any materials which it applied comprising the rubber cover were reasonably fit for the purpose;

(c)(To) ensure that the rubber cover was adequately cured and vulcanised.

The defendant admitted that each of these terms was implied in its contract with the plaintiff. 

1. In its pleading the plaintiff also alleged that there were terms of its contract with the defendant implied by virtue of the provisions of the Trade Practices Act 1974 (C’th).  The defendant denied the implication of these statutory terms and the plaintiff did not press its case on this basis at trial. 

1. Mr Derham QC, for the plaintiff, contended that the defendant had sufficient notice of the plaintiff’s terms and conditions for those terms and conditions to be incorporated into the contract between them for the re‑covering of the service roll.  He referred to Thompson v London Midland and Scottish Railway Company;[7] Smith v South Wales Switchgear Co Limited;[8] and Metal Roofing and Cladding Pty Ltd v Amcor Trading Pty Ltd.[9]  Accordingly, the plaintiff’s case was that the contract between it and Dunlop was subject to the plaintiff’s standard conditions and incorporated the implied terms which Dunlop conceded were part of its contract. 

   [7][1930] 1 KB 41.

   [8][1978] 1 WLR 165.

   [9][1999] QCA 472 (McPherson JA).

1. The defendant’s case was that, although the implied terms pleaded were incorporated into the contract for the re-covering of the service roller, those terms must be applied subject to the limitations imposed by the warranty expressed in its original quotation.  This warranty which, it argued, effectively precluded any liability in tort, would limit its exposure in this case to the cost of supplying and fitting a replacement roller cover – $31,990, the amount it had charged the plaintiff for the work it performed in August 2000.  

1. Accordingly, the first question to be addressed on this part of the case is whether the warranty contained in the defendant’s quotation forms part of the contract between the parties. 

1. In his final address, counsel for the defendant, Mr McArthur SC, contended that the contract was effected by the plaintiff’s acceptance of its written quotation, such acceptance being constituted by its sending the roll to be re-covered to the defendant’s premises on 17 August after receiving that quotation but well before it sent its purchase order dated 6 September 2000.  The plaintiff’s answer to this argument was that any action by it in dispatching the roller was an action consistent with both parties’ intention that, the price of the work to be performed having been established, the terms of their contract would be finalised when the plaintiff sent a purchase order, which it later did.  The plaintiff contended that the course of dealing between the parties meant that no contract was contemplated as existing until a purchase order was received by Dunlop.

1. In opening the defendant’s case on this point Mr McArthur had outlined it as being that Mr Burgess, an employee of the plaintiff, had orally accepted the defendant’s quotation on 16 August in a phone call with Jason Dwyer of Dunlop, the originator of the quotation. Mr McArthur said that “ … that was the end of the matter contractually”. 

1. Jason Dwyer was not called as a witness by the defendant and Mr Burgess, under cross‑examination, said he did not recall phoning Dwyer and orally accepting the quote.  He said it was not necessarily his normal practice to phone Dunlop to say whether a quote had been accepted.  He recognised the “Warranty” clause in the Dunlop quotation of 15 August and acknowledged having seen another Dunlop quote from an earlier date containing the same clause. 

1. The plaintiff’s submission was that there was no evidence of any oral acceptance of Dunlop’s quotation.  Having regard to the evidence this submission must be accepted, but the matter does not end there.  The question remains as to whether that quotation was accepted by the plaintiff’s delivery to Dunlop of the roller to be re-covered. This undoubtedly occurred on 17 August.  It was this act, argued the defendant, which caused the contract to come into existence well before the plaintiff sent its purchase order. The purchase order, with its incorporated terms and conditions, was, thus, irrelevant. 

1. Mr Derham submitted that the defendant’s failure to call Mr Dwyer in the circumstances created a Jones v Dunkel[10] situation which would enable an adverse inference to be drawn against Dunlop as to the creation of the contract and its terms.  But such an inference would go no further than the evidence already referred to, that is to say that Dunlop had not established that there was any oral acceptance of its quotation.  But Dunlop no longer said that there was. In its final address it relied upon the act of the plaintiff in delivering the roll to it for re-covering as necessitating the inference that its quote had been unconditionally accepted. 

   [10](1959) 101 CLR 298.

1. The defendant’s failure to call Mr Dwyer can only affect the issue of the creation of the contract and its terms if the uncontradicted evidence of Neil Donoghue, called by the plaintiff, was capable of supporting an inference that Dunlop must have known of and accepted the practice of the plaintiff in imposing its standard terms and conditions on every contract for goods and services which it entered, thus subordinating Dunlop’s terms (including the “Warranty” clause) to those of the plaintiff. 

1. Mr Donoghue’s evidence established that Dunlop had dealt with the plaintiff before the plaintiff changed its ordering system from a manual system, where its terms and conditions were printed on the reverse of its purchase order form, to a computerised system where full details of its terms and conditions were omitted from its purchase order form which merely informed the supplier of the existence of those terms and conditions and how they could be ascertained.  The plaintiff argued that because of Mr Donoghue’s evidence and the lack of any contradictory evidence from Mr Dwyer (or anyone else from Dunlop) the Court should infer that, notwithstanding that the plaintiff did not forward its purchase order to Dunlop until about 6 September, the fact that Dunlop knew of the plaintiff’s terms and conditions from its earlier dealings with the plaintiff is enough to support a conclusion that the terms and conditions were incorporated into the contract between it and the plaintiff.

1. But the sequence of events here is such that even if an inference is open from Mr Donoghue’s evidence that Dunlop knew of the plaintiff’s terms and conditions, that inference cannot go as far as establishing that Dunlop accepted those terms and conditions as applicable to its contract in this instance.  It submitted its quotation to the plaintiff on 15 August containing a specific clause which sought to limit its liability in certain circumstances – a clause inconsistent with the plaintiff’s standard terms and conditions.  The plaintiff forwarded the roll to Dunlop on 17 August for work to be done on it without any query as to the limited warranty or its proposed application and without any reference to any other contractual terms.  Dunlop’s offer to perform work on the roller constituted by its quotation was accepted by the plaintiff, unconditionally, by its sending the roller to Dunlop for the work to be performed on 17 August.  The attempted inclusion by the plaintiff of its standard terms and conditions by the forwarding of a purchase order three weeks later was, in this case, ineffective. The purchase order was not a contractual document. The contract between the parties was constituted by the Dunlop quotation, including the “Warranty” clause (for whatever effect it has), subject to the implied terms which Dunlop has admitted. 

The Effect of the “Warranty” clause

1. The plaintiff contended that even if the “Warranty” clause in Dunlop’s quotation is incorporated into the contract to re-cover the pressure roll, it has no application to its case against Dunlop.  It argued that, as the plaintiff did not make its case on a breach by Dunlop of that express warranty but on a breach by Dunlop of one or other of the terms the defendant admits are implied into the contract, the limitation on Dunlop’s liability which the quotation purported to impose has no application.  The ordinary and natural meaning of the limitation, being expressed, as it was, immediately after the description of the warranty offered, is that it limits Dunlop’s liability only in respect of a claim for breach of that warranty and not otherwise, argued the plaintiff.

1. Clauses limiting liability in a contract are to be construed according to their natural and ordinary meaning in the context of the whole of the contract in which they are found.  Any ambiguity should be construed contra proferentem: Darlington Futures Limited v Delco Australia Pty Ltd.[11]  The defendant argued that the limitation of liability expressed in the “Warranty” clause (or immediately after it) in the quotation applied to all claims against it, whether for breach of the express warranty itself or for a breach of one or other of the conceded implied terms, or in negligence. 

   [11](1986) 161 CLR 500, 510 (Mason, Wilson, Brennan, Deane and Dawson JJ).

1. A number of things may be said about the defendant’s quotation.  First, it is a quotation to supply particular designated and specified materials, namely a roll cover.  Those materials are described by reference to brand and characteristics:-

Face Length:	5130.00mm
Core Diameter:	749.00mm
Finish Diameter:	812.00mm
Base Type:	Stowe Woodward Irga
Cover Type:	Dunlop/Stowe Woodward “Superwear”
Cover Hardness:	25 + 4 p & j
Surface Finish:	Proof Parallel (with specified ND wash)

Secondly, it is a quotation for work to be performed, namely:

Stripping and disposal of cover, removal of corrosion, preparing shell surface, covering and grinding.

1. Thirdly, the “Warranty” clause, read in its ordinary meaning, applies not to the work to be performed by Dunlop, but rather to the roll covering which is to be supplied.  The clause opens by explaining the need to limit any warranty as to the life or length of service of “roll coverings”.  It warrants “roll coverings” as being free from defects in material and workmanship (scil. workmanship in respect of manufacture of the cover itself) and limits claims “on any roll covering” to one year.  Its limitation on liability refers to “replacement of the roll covering”. 

1. Fourthly, the limitation on liability is not expressed to be a general limitation but rather one which applies to a claim for breach of the “Warranty” set out above it.  Fifthly, viewed overall, in its natural and ordinary meaning and in the context of the whole contract, the “Warranty” clause and its limitation would entitle Dunlop to limit its liability to the cost of replacement of a roll cover only in those cases in which a claim is made because of a failure of the roll cover attributable to a breach of the express warranty; that is to say, a claim made because of defects in the material of which the roll cover is manufactured or defects in the workmanship used in making it.  The limitation does not purport to limit liability in respect of defective workmanship in applying an otherwise satisfactory roll cover to the shell which is designed to take it. 

1. The plaintiff’s expert witnesses who provided opinions as to the failure of the roll cover, Harry Mowbray and Dr Graeme Russell, each concluded that the failure of the roll cover occurred because of defects, not in the roll cover itself, but in the process of applying it to the roller.  Mr Mowbray specifically referred to the rubber in the cover having been formulated correctly and attributed its subsequent failure to inadequate vulcanisation, the process by which rubber is cured and made hard by the application of heat.  Mr Mowbray considered that the cover was not heated to a high enough temperature and/or for long enough to create inter‑molecular bonding between the raw rubber molecules so as to cause it to achieve appropriate hardness and to bond onto the roller shell.  Dr Russell expressed a similar opinion.  Each of them attributed fault to the process by which the cover was applied to the shell, not to the manufacture of the cover itself.  Their conclusions in this regard were never challenged and no evidence was called by the defendant on the question.  Accordingly, the limitation on liability expressed in Dunlop’s quotation has no effect on its liability to the plaintiff in this case.  Such liability must be judged by reference to its obligations in contract and tort without limit. 

1. The plaintiff claimed a breach of three implied terms of its contract with Dunlop.  It has successfully proved a breach of two of those terms, that which required the defendant to use reasonable skill and care in carrying out the work of re‑covering the pressure roller and that which required the defendant to ensure that the cover was adequately cured and vulcanised.  The plaintiff is accordingly entitled to succeed in its claim for damages for breach of contract.

Plaintiff’s Claim in Negligence

1. As well as its claim in contract against Dunlop the plaintiff put forward a case in common law negligence, alleging a duty of care arising out of the relationship between the parties, the course of dealing between them over many years, the nature of the work undertaken in re‑covering the roller, the defendant’s knowledge of the important function carried out by the roller in the plaintiff’s manufacturing process and the massive forces imposed on the roller in that process.  The plaintiff contended that the content of that duty of care was, in essence, the same as that of the duty imposed upon the defendant by the implied terms which it had conceded bound it in its performance of its contractual obligations. 

1. The defendant denied the existence of this duty of care in its pleading but confined itself, at trial, to repeating that denial on the ground that:

There is no warrant for imposing a concurrent duty of care which could produce a different outcome to the application of the contractual terms.

1. By this submission the defendant was referring to the possibility that if the limitation on its liability which it contended was effected by the limited warranty clause in its quotation succeeded in limiting its liability for breach of contract, the imposition of a duty of care outside the contract might deprive that clause of its intended effect.  No authority was cited by the defendant for the proposition that negligence could not co‑exist with breach of contract in a case such as this and the matter was not argued further. 

1. The two issues which could be affected by a finding of negligence against the defendant as well as a finding that it was in breach of contract are those which go to the issue identified by the defendant – namely the efficacy of the limitation of liability clause – and the issue as to whether damages might be differently assessed in negligence.  However, having regard to the conclusion reached above as to the effect of the contractual term purporting to limit the defendant’s liability in contract and the fact that neither party suggested that damages in this case would be assessed differently were there to be a finding of negligence, little turns on whether the defendant is in fact liable in negligence.

1. In light of the above it is sufficient to indicate that there would appear to be no reason why the defendant would not have imposed upon it a duty of care arising out of the relationship between the parties and the other matters relied upon by the plaintiff to which reference has been made.  The content of that duty would not differ from the obligation imposed by the terms implied in the parties’ contract, two of which were, as has already been held, breached by the defendant.  The limitation of liability clause would have no application to a finding of negligence so that in the circumstances of this case the plaintiff would be entitled to damages for negligence, assessed on the same principles as it is entitled to damages for breach of contract. The tort produced the same damage as the defendant’s failure to honour its contract. There is, accordingly, no need to pursue this matter further. 

The Damage

1. The MG cylinder central to this case was made in 1949 in the U.K. by engineers Bentley and Jackson.  It was made of grey cast iron, a very brittle substance with a very low tolerance to deformation.  It was installed at Maryvale in 1955 and operated there until it was replaced following the event of 7 April 2001 with which this litigation is concerned.  It was certified to operate at a steam pressure of 50psi (344kPa).  At all relevant times it was part of the M2 paper making machine.

1. According to the evidence of Mr Walker, since 1990 there had been a number of instances in which the cover on a service roll on this MG cylinder failed, but in none of them did the whole cover come off the roll.  He dated these events as having occurred in April 1995, November 1995, April 1999, July 1999, May 2000 and August 2000. 

1. The first cover failure in April 1995 occurred in what he described as a “trial” cover called “Tempwear”, supplied by the defendant as a premium cover to prevent the edges of the service rolls on the M2 machine from becoming hard and brittle, resulting in cracking.  This cover failed after being in service for only 24 hours.  The defendant subsequently admitted that it was defective. 

1. Each of the other cover failures involved the cover cracking and becoming brittle so that small pieces of rubber fell out.  None of the failures before 7 April 2001 involved the whole cover coming off the shell.  Mr Walker said that when he inspected the delaminated cover after the event it had none of the defects described as having accompanied earlier failures. 

1. In late March 2001 the MG cylinder was inspected by two technicians, a Mr Elsässer of Prüf-Werkstofftechnik GmbH and a Mr Frech of Voith Paper Rolls GmbH and Co, German companies involved in the paper industry.  Mr Elsässer’s company was a sub-contractor to Voith. He established that the MG cylinder had an even shell surface within .02mm, except for one small area which was within .03mm. 

1. Mr Frech attended at Maryvale with a Mr Keller at about the same time as Mr Elsässer.  He measured the surface of the MG cylinder, ground it and performed minor repairs to it.

1. The work the German technicians carried out involved ultrasonic stud integrity inspections of the head/shell studs, the head/journal studs and the shell of the MG cylinder.  There was external and internal inspection for corrosion, a head tilt test, an internal spigot fit gap inspection of the head to shell fit of the cylinder and a run-out check of the shell.  Mr Walker explained that an internal spigot fit gap inspection was an examination of the fit between the shell of the MG cylinder and the front head and the fit between the MG cylinder and the back head.  Voith found the MG cylinder to be fit for service, it passed all of Voith’s evaluation criteria and Voith made no recommendations for repair or further maintenance. 

1. The effect of the evidence of Mr Elsässer and Mr Frech, which was not challenged by cross‑examination, was that a week prior to the delamination of the roll cover on the pressure roller of the MG cylinder on the M2 machine that cylinder was neither dented nor displaced. 

The Event of 7 April 2001

1. The most direct evidence as to the event of 7 April 2001 came from Jamie Hamilton, who was a dryer‑man at Maryvale.  On the morning of that day he was in Crew 4 at the M2 machine.  He was responsible for the “dry” end of the machine, that is to say the end nearest the MG cylinder.  He said he was in the control room adjacent to the MG cylinder when he heard a “massive bang”.  There was then a lot of “noise, thuds and vibration”.  He saw pieces of rubber going up into the hood above the MG cylinder and there were some small pieces going into the after‑dryer.  He said he thought the MG cylinder was going to “blow up”.  He took steps to shut it down.  It took about 30 seconds for it to stop. 

1. Mr Hamilton also gave evidence that before the event he described nothing untoward had happened.  There was nothing out of the ordinary.  In his evidence Mark Walker said that records kept for the M2 machine showed no abnormal operation in the period immediately before the event.  Those records showed that the event itself occurred at 5.59am on 7 April, a Saturday morning. 

1. Richard Burgess, the maintenance superintendent for the M2 machine, said that he got to the mill within about half an hour of the incident happening.  He said that he saw large portions of the rubber cover of the pressure roller scattered about the M2 machine.  He described the event as a “catastrophic failure” of the service roll cover. 

1. There was little challenge by the defendant to any of this evidence although it maintained at trial that the only actual damage to the MG cylinder which could be linked to the incident of 7 April was a small indentation which could easily have been ground out.  It maintained that the technicians from Voith who ground the cylinder in the days immediately before 7 April were still present in Australia and could easily have ground the indentation out without affecting future performance of the MG cylinder or causing the MG cylinder to be “de-rated,” that is to say, operate at a lower pressure, such that it would be less productive.  It submitted that there was sufficient thickness in the shell to permit a small indentation to be ground out without causing the cylinder to be de‑rated. This would only occur if considerably more than was necessary was ground off. After the Voith re-grind at the end of March there would still be a thickness margin if the amount required to eliminate what, it contended, was the only damage to the cylinder was ground off.  The plaintiff vigorously contested these submissions.  Its case was that the event of 7 April 2001 effectively rendered the MG cylinder irreparably damaged so that it had to be replaced. 

MG Cylinder before and after 7 April 2001

1. In 1999 Mr Walker had suspected that an incorrect camber of the MG cylinder might be a possible cause of the partial roller failures which had been experienced. An incorrect camber could lead to excessive loads being applied to the outer edge of the pressure roller.  He measured the MG cylinder to establish whether it had the correct camber.  He found that the outer edges of it were higher than they should have been and determined that the cylinder should be re-ground.  Before this exercise was carried out, however, a fitness‑for‑service inspection was commissioned from Beloit, one of the then prominent manufacturers of papermaking equipment.  The inspection was carried out, in October 1999, by Dennis Alan White, a non‑destructive examination inspector whose company, Inspection Systems and Services Inc consulted in this area.  Mr White has had long experience in the non‑destructive testing of boilers and pressure vessels, particularly in the paper industry.  His CV, which was before the Court, was impressive, especially with respect to his experience with pressure vessels, and Yankee dryers or MG cylinders in particular.  It was not challenged.  Indeed, an expert called by the defendant, Professor Andrew Samuel, conceded that Mr White enjoyed an international reputation in the field of testing Yankee Dryers.

1. Mr White examined the MG cylinder at the plaintiff’s mill at Maryvale in October 1999.  He carried out a number of different technical tests on it.  They were an acoustic emission test (AE test) of the shell of the cylinder, a magnetic particle inspection (MPI) of the heads of the cylinder, an ultrasonic testing (UT) examination of the bolts on each end of the MG cylinder and a UT examination of the thickness of the shell of the MG cylinder in three different positions.  All of Mr White’s tests were carried out in accordance with a number of different international codes and standards applicable to the test being performed.  These codes and standards, which are highly technical in nature, dictate the procedures to be applied when carrying out the various tests referred to in the examination of pressure vessels such as MG cylinders.  In particular, Mr White applied the directions contained in two publications of the Technical Association of Pulp and Paper Industries (TAPPI):  “Guidelines for the Inspection and Non-Destructive Examination of Paper Machine Dryers” and “Yankee Dryers: Guidelines for Safety and Condition Assessment”. 

1. In his evidence Mr White described the purpose of non‑destructive examination of steam heated pressure vessels such as the MG cylinder as being to locate “indications”.  An indication is a linear fault in the material being examined.  According to the American Society of Mechanical Engineers a “rejectable indication” is any linear fault in the shell of a pressure vessel which is at least three times as long as it is wide.  “Indications” were sometimes, in the evidence in this case, referred to as “cracks”: a description vehemently disputed by the defendant. They could, perhaps, be better understood as defects or irregularities, not all of which have particular structural significance.

1. Mr White described acoustic emission testing (AE testing) as seeking to identify indications in a body such as a pressure vessel by measuring the emission of “elastic energy” from the vessel.  It does this by measuring electrical impulses transmitted between sensors placed at various points on the surface of the vessel.  The characteristics of such impulses are able to be analysed by a computer, using proprietary software, to enable deductions to be made as to what is happening within the material tested.  Such testing is a well‑recognised non‑destructive testing method.

1. Magnetic particle inspection (MPI) is a form of crack‑testing of ferrous metals.  When a magnetic field spans a crack in a steel or iron surface, one side of the crack will be charged “north” and the other “south”.  MPI takes advantage of this phenomenon to examine articles capable of being magnetised.  There were two variations of MPI referred to by Mr White in his evidence.  Contrast background magnetic particle inspection (CBMI) involves the application of a thin background (or contrast) layer of paint on the object being examined which is then spread with a medium of magnetic particles whilst electrical current is applied.  Fluorescent wet magnetic particle inspection (WMPI) involves spreading the surface of the article being examined with a fluorescent liquid medium in which magnetic particles are suspended and then examining the surface under ultraviolet light during and/or after part‑magnetisation of the object.  Mr White considered this testing method to be the most sensitive available. 

1. Mr White described ultrasonic testing as being a method of testing an object using piezo‑electric transducers placed on the surface of the object to pass sound into it and then measuring the sound reflected from it.  The thickness of the material being examined can thus be calculated by deduction from those reflections.  This method can detect any interface or discontinuity within the material being examined. 

1. The result of Mr White’s testing of the MG cylinder in October 1999 was summarised by him as follows:

(a)The AE test revealed some AE activity from the drive side head of the vessel.  The data was characteristic of attached metal (bolting) strain caused by differing thermal expansion coefficients around a bolting discontinuity.  In my opinion, the activity noted was caused by, one or more, very small head/shell bolting flaws;

(b)the MP examination revealed no rejectable indications;

(c)the UT examination of the head/shell bolts revealed no rejectable indications;

(d)the shell was 2.057” thick at the centre, 2.003” thick at the tending side and 2.023” thick at the drive side.

Mr White considered that these test results, together with other examination data which he collected, indicated that the MG cylinder was fit for service when he inspected it in October 1999.  Mr Walker received a report of Mr White’s fitness‑for‑service test from Beloit.  It noted that “no rejectable indication was noted during the magnetic particle inspection”.

1. Shortly after the incident of 7 April 2001 Mr Walker contacted Roy Tyrer at Sandusky Walmsley, the successor company to Beloit, to determine what tests should be performed prior to putting the MG cylinder back into service.  Mr Tyrer recommended a run-out test, wet fluorescent magnetic particle inspection and an acoustic emission test as had been done previously. 

1. On 10 April Mr Walker and two fitters performed the run‑out test suggested by Mr Tyrer.  They took extensive measurements, with dial gauges, of the surface of the shell of the MG cylinder.  They recorded these measurements and repeated them in an area where they found a significant indentation. They found and recorded a maximum deviation of 1.35mm on the point of the shell of the cylinder which they described as being “at Voith bolt #24” – a particular point described by reference to one of the features on the outside of the end of the cylinder, namely a “Voith bolt”.  By “deviation” Mr Walker explained that he was referring to the difference between the highest and lowest points in a particular quadrant of the cylinder – thus measuring an indentation.  The quadrant in which Voith bolt #24 is found is that quadrant between Voith bolts 15 and 30.[12]  Mr Walker repeated these measurements with the same result on 12 April. 

   [12]The MG cylinder had cast iron plates sealing each of its ends.  Those plates were held to the cylinder by bolts at their circumference.  There were 60 such bolts sometimes called “Voith bolts”.  Thus each quadrant of the cylinder sliced lengthwise represented a segment in which there were 15 bolts.  These bolts and the segments of each group of 15 of them are commonly used to describe points on the surface of an MG cylinder. 

1. Overall, Mr Walker’s measurements, charted on an exhibit before the Court, showed that the MG cylinder was significantly displaced and had many indentations in it after the incident of 7 April.  In particular they demonstrated an external depression in the cast iron MG shell. 

1. Mr White returned to Maryvale on 18 April 2001 and between then and 21 April tested the MG cylinder again, having been requested to do so by Roy Tyrer of Sandusky Walmsley.  He summarised the conclusions which he reached on that occasion in his evidence as follows:

(a)The MG produced an  alarming amount of AE data, at an alarming rate, with a quarter of the operating steam pressure.  The most active source of acoustic emission was the area of the external depression in the cast iron MG shell.  The results were characteristic of existing and new damage to the cast iron shell in that area.  The results were the worst I have ever experienced;

(b)Following the MG test I performed an MPI test which revealed indications in the outer surface of the shell in the area of the depression.  I note in this regard that the reference in my report of 19 April 2001 to the indications being 10mm apart is incorrect.  They were approximately 10”apart;

(c)My examination of x-rays of the area of the depression provided to me by Peter Miller of Intico Pty Ltd showed the existence of acceptable levels (grade 2 and 3) of casting shrinkage (also known as casting porosity);

(d)An internal examination of the cylinder in the area of the depression using a straight edge and light source did not show a bulge corresponding with the external depression.

The “depression” referred to by Mr White  was that found by Mr Walker when he performed the run‑out tests already described.

1. Mr White said that whilst he was conducting these tests he became very concerned at the results he was obtaining.  Although he had intended to pressurise the MG cylinder up to 340kPa he aborted the test when the steam pressure reached 80kPa because it became apparent to him that damage to the MG cylinder was worsening during the test.  He considered it unsafe to continue.  He explained his concern as being that the cylinder might explode.  In answer to a question from the Court as to why pressurising the cylinder was dangerous, he said that if a Yankee dryer fails in its shell “ … it destroys a city block”.  Mr White was not cross‑examined on this statement. 

1. Mr White undertook further inspections and performed further tests in March/April 2004 on the MG cylinder in relation to this litigation.  By then, of course, the cylinder was out of service and had been so for three years.  It had been removed from the paper factory and was stored in an open area at the Maryvale mill.

1. On 29 March 2004, Mr White carried out an MPI examination of the cylinder in the area of the original depression and found five further linear indications.  On 1 April he carried out a further AE test and found that there was significant AE activity during the test, both during pressurisation and when the pressure was kept static.  Because he considered that the AE activity level of 19 April 2001 (when he tested the MG cylinder shortly after the event of 7 April) was a warning of impending failure of the cylinder, all work activity within 200 yards of the cylinder was stopped for the duration of the AE test. 

1. On the same day Mr White carried out a further MPI test on two of the indications in the area of the original depression which he had identified in April 2001.  One of those indications had grown from 5mm to 10mm and another had grown from 12mm to 20mm during pressurisation on the AE test.  A UT examination of the depression found three ultrasonic indications. 

1. The document relied upon as Mr White’s final report following his examination and testing of the MG cylinder in April 2004 was dated 2 April 2004, although it appears to have been actually produced somewhat later.  He expressed his conclusions/recommendations in that report in the following terms:

The #2MG Cylinder cannot be recommended for steam pressure service because:

·     The appearance of new WFMPI indications each time cast iron cylinders is examined demonstrates that the #2MG is/was unsafe for continual service.

·     All WFMPI and AE indications would need to be absent from the cylinder before it could be recommended for service.

Acoustic emission examination is recommended prior to any future steam service of this cylinder.

1. In the body of his report Mr White described the damage suffered by the MG cylinder in the incident of 7 April 2001 thus:

The #2 MG Yankee shell suffered an enormous inward force, creating a depressed area when the delaminated pressure roll cover passed through the nip between the Yankee and service roll.  The force of the impact is attested to by the fact that the 90 Tonne Yankee was lifted, along with its bearing housing, stretching the housing “hold‑down” bolts.  The observable damage is a depressed area of the Yankee shell, most notably about 1mm deep around an area 1425mm from the shell front edge in line with bolt 23 (or bolt 46 depending on the numbering system).  The #2 MG Yankee cast iron shell was sufficiently stressed to cause permanent material strain (deformation).  

The cast iron in the depressed area of the #2 MG Yankee shell is permanently deformed.  In order to remain in this state, it must have significant residual stress.  The depressed area continuously exhibits new linear indications on the shell surface due to the high residual stress(s).  This can be thought of as similar to the way safety glass continues to crack once its material strain limit is exceeded. 

1. Mr White was cross‑examined with respect to his report by reference to another version of it in which his conclusions/recommendations were expressed in different terms:

The #2 MG cylinder cannot be recommended for steam pressure services until all AE and WFMPI indications are removed from the shell area. 

Acoustic emission examination is recommended prior to any future steam services of this cylinder.

1. Counsel for the defendant tendered two emails which, read together with their attachments, made it clear that Mr White had told Messrs Tyrer, Ryder and Butler of Sandusky Walmsley that his conclusions/recommendations in his “first” report had been “rephrased” at the suggestion of a solicitor of the firm of Hunt and Hunt, the solicitors for the plaintiff. 

1. Consequent upon the revelation of this alteration to Mr White’s report, and the way it appears to have come about, it became necessary for the Court to consider carefully whether this matter affected the reliance which could be placed on his evidence generally, and in particular whether his opinion should be accepted concerning the damage which was done to the MG cylinder and the effect of that damage.  That is the central issue upon which his opinion is relied on by the plaintiff. 

1. Having considered this matter I have decided that, notwithstanding the alteration to his report which he conceded and other concessions which he made in cross‑examination to the effect that he may have discussed his conclusions generally, before writing his report, with other people who had an interest in the effect of his tests, I should generally accept his evidence.  I reach this conclusion, principally for two reasons.  First, the description of the damage to the MG cylinder in the first version of Mr White’s final report set out above is identical to that in the version with the altered conclusion.  That conclusion is generally in line with the opinion of other experts concerned with the MG cylinder since the event of 7 April 2001, including experts who were not challenged by the defendant.  This is important because it is that damage and its extent which is of central importance to the ultimate question in this case.

1. Secondly, neither of the two versions of Mr White’s final report proffer an opinion as to whether it might be possible to remove the indications found in the MG cylinder by WFMPI and AE testing in April 2004 (as well as in April 2001).  The differences in the two conclusions are of emphasis rather than of substance.  Under cross‑examination he adhered to his conclusions expressed in the rephrased report.  He said he was intending to give the impression that the MG cylinder might not be repairable.  He described it as “toast”.  I am satisfied that Mr White is generally a witness of truth whose evidence ought to be accepted.

Was it reasonable to replace the MG cylinder?

1. One of the principal issues in this case was whether the plaintiff’s decision to replace the MG cylinder on the M2 paper making machine after the event of 7 April 2001 was reasonable.  Much of the defendant’s case was concerned with criticising that decision with a view to demonstrating that the plaintiff’s actions in replacing the MG cylinder were unreasonable, thus leading to a conclusion that its claim for damages should be limited to the reasonable costs of necessary repairs to the cylinder rather than the cost of replacement. 

1. After Mr White completed his tests in April 2001 he expressed the opinion that those tests had shown that the cast iron of the MG cylinder was damaged and, indeed, was damaged further during the tests themselves even though the steam pressure in the cylinder was raised to only 80kPa: well below a rated working pressure of 344kPa.  He gave evidence that following the tests he discussed carrying out further tests with Mr Walker.  He told Mr Walker that further AE testing would be required, but that he thought it was risky to pressurise the vessel with steam as there was a distinct possibility it would explode and that a possible alternative was to pressurise it by filling it with water, called hydrostatic pressurisation.  However, having regard to the size and weight of the MG cylinder, its position inside the Maryvale plant and the weight of the water which would be required to pressurise it, any such testing would require extensive strengthening of structural components of the M2 machine and significant engineering work to the building in which it was housed.  Such work would be extremely time consuming and costly.  Mr Walker told the Court that about 65 tonne of water would have to be put into the MG cylinder which would need to be independently supported (other than on its own bearings or journals) to be able to carry out this exercise safely. 

1. Clive Robert Butler was, in 2001, product line engineer-Yankee, MG and paper dryers with Sandusky Walmsley in the U.K.  His CV, which was before the Court, attested to extensive qualifications and work experience in the paper industry and in particular with respect to MG cylinder operation.  He was on each of two sub‑committees of the Technical Association of the Pulp and Paper Industries (TAPPI) which were concerned with the operation of MG cylinders, namely the “Yankee Dryer Safety Sub‑committee” and the “Steam Heater Paper Dryer Sub‑committee”.  He had been a member of both those committees for many years.  Their charter was, he said, to inform dryer owners and operators of the safety aspects of MG dryers. 

1. Mr Butler gave evidence that following the incident of 7 April 2001 he was informed of the results of the run‑out, AE and MPI tests performed by Mr Walker and Mr White and asked to provide a written recommendation regarding the options available to the plaintiff.  His evidence was that he formed the view that:

… The cylinder could not be returned to service without removal of all indications found on its surface, to be followed by further hydrostatic and acoustic emission testing.  Particularly in light of my understanding of Dennis White’s tests, I considered it extremely unlikely that the cylinder would pass such tests, even if repairs were carried out.

1. Mr Butler said that he had formed his opinion on information given to him by Roy Tyrer of Sandusky Walmsley and Dennis White to the effect that measurements of the external surface of the cylinder had found a depression in it extending over an area of the circumference and up to about 1mm deep, that the cylinder had failed on all three of the acceptance criteria on AE testing, that the number of acoustic hits, their magnitude and the low pressures at which they were recorded were unprecedented and that a subsequent magnetic particle inspection had found indications within the depressed area.

1. Mr Butler wrote a letter of advice to Mr Walker of the plaintiff.  The letter was dated 20 April 2001 although it was probably not received by Mr Walker, as an attachment to an email to him from Roy Tyrer, also of Sandusky Walmsley, until the following day.  Mr Butler’s conclusion in that letter was expressed in the following terms:

   ·     The shell was sound before the incident.

   ·     The shell has cracks/indications.

   ·     The AE results are at a level higher than any known dryer currently in service.

   ·     The dryer should not be operated in it’s (sic) present condition.

   We can only recommend two options:

   1.Remove the dryer from service and find a replacement/new dryer.

   2.Remove all visible indications/cracks by grinding, hydrotest the dryer in the presence of your local Authorised Inspector, an AE examination to be included in the test.  Only if the results of the AE examination are acceptable can the operation of the dryer be considered. 

   We would also advise that option 2 is a “long shot” and unlikely to be acceptable to your insurance carriers or the Authorised Inspector.  We do not recommend this course of action, as it is very costly with little hope of success.

   Despite having travelled from the United Kingdom, Mr Butler was not cross‑examined, either on the opinion expressed in this letter or otherwise.

1. Mr Walker told the Court that he took part in a video conference on 20 April 2001 with a number of executives of the plaintiff including Ian Wightwick, the CEO.  Mr Wightwick, who chaired the conference, asked Mr Walker what had been found out to that time concerning the MG cylinder.  Mr Walker told the meeting that dial gauge tests, fluorescent MPI tests, acoustic emission tests and an x-ray of the MG cylinder had been carried out.  All of the data collected, he said, suggested that the MG cylinder was damaged in the area of an indentation which had been found.  He said he described the indentation to the meeting and told the meeting that it had not been present on previous surveys of the cylinder.  He said that he described the properties of cast iron and, in particular, the fact that it does not give or yield significantly as compared with mild steel.  He said he told the meeting that it was his opinion that the failure of the cover of the #2.132 service roll had caused a localised force which had caused the indentation in the MG cylinder as that was the only event which had occurred between the end of the March 2001 shut down (when Voith carried out its testing and grinding) and the incident on 7 April which could have produced such damage.  He said that he told the meeting that to move a 2” thick MG cylinder shell 1mm in a localised area permanently could only mean that the cast iron structure had been damaged and fractured.  He said that he described the acoustic emission tests in detail and told the meeting that in pressuring the MG cylinder during those tests further damage was being done. 

1. Mr Walker said that he told the meeting what he thought the Company’s options were.  It could remove the source of the acoustic emissions by removing all the linear cracks found in the indentation at Voith bolt #24 which would involve repetitive wet fluorescent magnetic particle inspections and the grinding out of all the linear cracks.  Further AE tests would then be required to confirm that all live cracks had been removed following which the cylinder would have to be sprayed with metal spray and re‑ground by removing a minimum of 1mm off the shell.  But he also said that  he was not prepared to do any further AE testing using steam, given the risks which had already been taken in the course of Mr White’s tests.  He said that the only other option was to do AE testing by pressurising the MG cylinder using water in place of steam.  He told the meeting that this was the safer means of pressurising the MG cylinder because if the MG cylinder failed under pressure the amount of energy released would be minimal and there would be less risk to personnel doing the AE testing.  He said that he told the meeting that this procedure would take a considerable amount of time and effort and involve further downtime of the M2 paper machine with little chance of success.  He said that he pointed out to the meeting the problem of the weight of the water to be added to the MG cylinder to undertake hydrostatic AE testing and that this additional weight would require alternative supports to be built to prevent the MG cylinder failing under its own weight.  He said that he told the meeting that there was still a risk that, even with appropriate supports, further damage could occur due to additional forces generated by the water load. 

1. Mr Walker said that Mr Wightwick said that there was no further point in proceeding as he had outlined as the Company would have no customers left by the time the testing referred to was completed.  He said Mr Wightwick was keen to commence the manufacture of MF[13] papers for the Company’s MG customers as quickly as possible.  He said that Wightwick said that the sales and marketing group of the Company had a considerable job ahead to launch MF papers in place of MG papers.  Mr Walker said that he told the meeting that another option was to get a new MG cylinder which would take about 12 months. Wightwick then said to the meeting that the Company should proceed to try to first find an available second hand MG cylinder as there would be no MG paper customers left if it took 12 months to get a new MG cylinder. 

   [13]MF (machine finished) papers could be produced on the M2 machine by, in effect, by-passing the MG cylinder. MF papers lack the glaze of MG papers and are inferior for the uses for which MG papers are generally used.

1. Mr Walker said that he estimated that the work required to undertake AE testing by pressurising the MG cylinder using water instead of steam would have caused the M2 machine to be closed completely for four or five weeks.  The extensive engineering and building works required to be undertaken to the building in which the M2 was housed would have cost in the order of $700,000. 

1. Mr Walker said that after the meeting of 20 April 2001 he telephoned Roy Tyrer of Sandusky Walmsley and advised him that he agreed with Dennis White that the source of the acoustic emissions found on AE testing were linear indications and crazed cracking in the area where the run-out test earlier performed had found an indentation.  He told Tyrer that it would be risky to do AE testing using steam and that the alternative, using water, was impractical having regard to the machine downtime which would be involved.  Mr Walker said that after further discussion Mr Tyer expressed the opinion that “ … we were flogging a dead horse”. 

1. Mr Walker gave evidence that he eventually received an email from Roy Tyrer attaching the letter from Clive Butler dated 20 April 2001 expressing the opinion that the MG cylinder should be replaced and enclosing a quotation from Sandusky Walmsley for a new MG cylinder.  He also received a letter on 2 May 2001 from Roy Tyrer expressing the opinion that Sandusky Walmsley regarded the damaged MG cylinder as having had an unlimited life expectancy prior to the incident of 7 April 2001. 

1. Mr Walker’s evidence reveals that notwithstanding the advice which the plaintiff had received, further testing and investigation was continued to be carried out.  Mr Walker said that he took advice from Peter Thorpe of PH Thorpe & Associates who were consulting engineers which advice confirmed Dennis White’s opinion that the MG cylinder had to be taken out of service. 

1. A company called Intico was subsequently engaged to perform a wet fluorescent magnetic particle inspection of the MG cylinder.  Mr Walker said that he wanted this test done because he had not been present when Dennis White had performed his test on 20 April.  Peter Thomas Miller, a non‑destructive technician employed by Intico, performed that test on 11 May 2001.  It was performed in the deformed area in from the tender side of the cylinder.  It was carried out in accordance with the requirements of Australian Standard 1171 and reported upon by Mr Miller.  He found seven indications in the area between Voith bolts 21 and 24 at varying distances from the tender side.  This was in the area of the indentation found by Mr Walker.  The indications were between 3mm and 6mm.  Mr Walker told the Court that this testing confirmed what Dennis White had found on 20 April.  Mr Miller was not cross‑examined. 

1. In addition to the test which he performed on the composition of the failed roller cover, Harry Mowbray re‑assembled the pieces of the failed cover and expressed an opinion as to the mechanism by which the cover came away from the shell.  In his report, which was before the Court, Mr Mowbray described the sequence in which parts of the cover came away.  From indications of severe crushing on parts of the roll cover he concluded that pieces had passed back through the nip between the roller and the MG cylinder.  He said:

There is little doubt in my mind that there was sufficient energy in terms of static loads and momentum to cause a displacement of the MG surface that has occurred there is also evidence showing the main energy absorption in the cover during the catastrophic failure aligns with the damage on the MG cylinder.  (sic)

1. Mr Mowbray is an agent for the supply of various components and services to the paper industry.  He was cross‑examined extensively as to his motive in preparing his report for the plaintiff.  He admitted in cross‑examination that he did so in the expectation that he would become the preferred supplier of roll covers to it.  He also acknowledged an emotional email he wrote to Mr Walker expressing his disappointment upon being informed that he would not have the opportunity to become the new supplier, despite having expressed an opinion favourable to the plaintiff’s case.  Notwithstanding this cross‑examination and the frank admissions made by Mr Mowbray, which were heavily relied upon by counsel for the defendant in criticism of his evidence, I am satisfied that his principal interest in the investigations he undertook was to determine how the cover had delaminated and what the effect of that event was.  I am also satisfied that the fact that he had a commercial motive for supporting the plaintiff’s case does not diminish the overall effect of his evidence.  Having observed him give his evidence and having considered the concessions which he made I am satisfied that his evidence is cogent and reliable notwithstanding.  It is supported by much of the other expert evidence.  I accept it. 

1. Before leaving Mr Mowbray it should be noted that in cross‑examination by Mr McArthur he said that it was known in 2001 in the paper making industry that there was a risk that rubber from a delaminated pressure roller could cause damage to an MG cylinder.  He also said that he did not know of any way an MG cylinder could be protected from damage in the event that a pressure roller did delaminate.  In other words, the event which the plaintiff alleges occurred in this case, namely damage to an MG cylinder caused by a delaminating pressure roll cover represented, in Mr Mowbray’s opinion, a recognised risk in the paper making industry in 2001. 

1. The decision to condemn the MG cylinder was effectively taken by the plaintiff at the teleconference of 20 April 2001, although I accept the plaintiff’s submission that even then that decision was not irreversible had some reason emerged which rendered it inappropriate.  As it happened, justification of the decision was significantly strengthened by the letter from Mr Butler from Sandusky Walmsley dated the same day but received some time after the meeting.  Mr Walker told the Court that the plaintiff’s CEO had made the decision to try to obtain a secondhand MG cylinder as “ … the market place wouldn’t wait”. 

1. Mr Walker tried to locate a secondhand MG cylinder through the only three worldwide manufacturers of such cylinders, Voith, Metso and Sandusky Walmsley.  He told the Court that he made enquiries of his contacts in the tissue paper manufacturing industry and of secondhand dealers in MG cylinders.  He was unable to locate a suitable secondhand cylinder.  None of Mr Walker’s evidence on this topic was challenged. 

Plaintiff’s Further Expert Evidence

1. Further expert evidence was tendered by the plaintiff on the issue as to whether the MG cylinder was repairable.  This evidence was from two experts, one a world authority on MG cylinders and their safe operation, the other a former industrial safety regulator.  

1. William Grant Corboy was retained by the plaintiff as an expert to provide an opinion as to whether the MG cylinder could have been returned to successful operation after 7 April 2001.  He is a professional engineer with particular expertise in relation to dryers in the paper making industry.  He has tertiary qualifications in engineering and long experience in the United States paper industry.  He has published papers on Yankee dryers including the TAPPI guidelines on their safe operation.  He operates a consultancy called Yankee Consulting Inc. in New Jersey, USA.

1. Mr Corboy wrote three reports which were before the Court.  They were dated 29 May 2004, 31 March 2005 and 31 July 2006. 

1. In his first report Mr Corboy said he accepted, as the basis of it, Mr Harry Mowbray’s opinion as to the cause of the event of 7 April 2001.  He concluded that the MG cylinder was not capable of being returned to service after that event.  He gave a number of reasons for this opinion, including that it would be necessary, in attempting to repair the cylinder, to grind more than 1mm from its surface to eliminate the high residual stresses within the cast iron structure caused by the  assault  to it by the delaminating roll cover. He explained residual stress in his oral evidence as being produced when cast iron is stressed beyond its elastic range so that some of the energy put into it at the time it was deformed still resides within it.  He concluded that the MG cylinder had been subject to “plastic deformation”.  He said that the internal surface of the MG cylinder shell, as measured by the defendant’s experts, Professor Samuel and Mr Bell, confirmed the original run-out measurements of the outside of the shell taken by Mr Walker shortly after 7 April 2001. 

1. Mr Corboy was of the opinion that any attempted repair of the cylinder by grinding would result in its being de-rated – that is to say being required to be operated at a decreased pressure – thus preventing its return to successful operation. 

1. In his report of 31 July 2006 Mr Corboy referred again to the residual stresses in the MG cylinder and said that such stresses were only remediable through stress relief heat treatment which he considered impractical either in situ or at an external workshop.  He said that even if such treatment was possible, which he maintained it was not, “ …  it is extremely unlikely that subsequent machining to return the vessel to papermaking standards could be performed without reducing shell thickness below the Derating Thickness, rendering the vessel inoperable.” 

1. In his reports of May 2005 and July 2006 and in his evidence before the Court Mr Corboy expressed serious disagreement on a large number of matters with the expert witnesses relied upon by the defendant, Professor Samuel and Dr Martin.  He not only disagreed completely with their ultimate opinions but also identified what he considered to be a number of errors in their methodology. Although he was cross-examined, that cross‑examination related mainly to matters going to his credit.  His conclusions and his criticism of the defendant’s case were not challenged.  For example, Mr Corboy expressed the following opinion with respect to Professor Samuel’s suggestion that one method of repairing the MG cylinder was to use “metallocking”:  

No professional, with sufficient knowledge of the industry would venture to submit metallocking as a credible, permanent MG shell repair recommendation.

This definitive opinion was never challenged in cross‑examination.  There were many other opinions of Mr Corboy’s left similarly unchallenged.  No effective inroads were made into Mr Corboy’s evidence in the course of cross‑examination, leaving it as an appropriate basis upon which to reach conclusions in this case. 

1. In 2005 the plaintiff engaged yet another engineer to provide expert evidence as to the MG cylinder.  He is Mr Donald Robinson, who was, for 18 years, Victoria’s Chief Inspector of Boilers and Pressure Vessels.  Not surprisingly, having regard to his background and experience, Mr Robinson emphasised occupational health and safety considerations in the opinion which he expressed in a report dated 14 June 2006 which was before the Court. 

1. In his report Mr Robinson referred to the statutory responsibility imposed upon the plaintiff by s 21(1) of the Occupational Health and Safety Act 1985 to provide and maintain, as far as practicable, a working environment for its employees which is safe and without risks to health.[14]  He also referred to the statutory duties imposed upon employers by the Occupational Health and Safety (Plant) Regulations 1995 to undertake hazard identification and risk assessment and control in respect of the operation of plant equipment such as the MG cylinder.  In particular he referred to the absolute duty imposed by Regulation 708(1)(a)(i) to maintain the MG cylinder so as to eliminate any risk associated with its use, at least unless it was impracticable to do so.

   [14]This legislation was in force at all times relevant to this litigation.  It has since been replaced by the Occupational Health and Safety Act 2004. 

1. Mr Robinson examined a number of the numerous other reports tendered by the plaintiff in this case including the reports of Mr White’s tests on the MG cylinder conducted shortly after the incident of 7 April 2001 and again in 2004, and Mr Corboy’s report of 29 May 2004.  He also read reports from the defendant’s expert witness, Professor Andrew Samuel, of 30 October 2003 and 7 October 2004 with two folders of documents, referred to as the Dunlop-Duratray documents,  which he described as being relevant to the replacement of the cylinder and a report from Dr Gary Martin, also procured by the defendant. 

1. Mr Robinson offered a number of opinions concerning the condition of the MG cylinder after 7 April 2001.  In particular he concluded that if the cylinder had been returned to operation after the incident complete failure would have occurred.  He considered that no competent boiler and pressure vessel inspector would have certified it as safe to operate.  He considered that the fact that it was not practical to monitor any deterioration in the cylinder whilst it was in service should, of itself, have been sufficient to render the risk of using it unacceptable from an occupational health and safety point of view.  In his written statement he said that, having reviewed material generated by the parties’ experts, he was of the view that if returned to service the cylinder would, at some point, have exploded, even if the repairs suggested by the defendant had been performed satisfactorily.

1. Mr Robinson concluded his report with the opinion that, having regard to Mr White’s findings in 2004 as compared with those of 2001 there was “…indisputable evidence that further use of the MG cylinder would constitute  a grave danger to life and property…”

1. Mr Robinson was cross-examined by counsel for Dunlop on a number of matters but not on his conclusions as to the dangers inherent in putting this MG cylinder back into service even if it had been repaired in the way the defendant’s experts suggested.  These conclusions were nothing if not dramatic but were not challenged.  Mr Robinson rejected emphatically any suggestion that he had been influenced in his opinion by other expert reports which the plaintiff had obtained and which he had read or by statements in his letter of instructions from the plaintiff’s solicitors as to the eminence of the experts who had written those reports. 

Consequential Losses: Conclusion and Assessment

1. Dr Manning’s evidence was cogent and convincing.  Whilst he readily conceded the complexity of the calculations he had undertaken, I am satisfied that he took into account all those factors which he considered were relevant to those calculations.  He was not shown, either by cross‑examination or by reference to any convincing criticism by Mr Williams, the defendant’s forensic accountant, that he had made any error of principle or, for that matter, any error of calculation. 

1. I have considered Mr Williams’ evidence carefully.  It consisted only of criticisms of Dr Manning’s opinions; no affirmative case was put.  Indeed, Mr Williams conceded that his role was only to discredit those opinions.  He did not succeed in that endeavour.  Nor do I regard counsel for the defendant’s criticisms of Dr Manning as having diminished the value of his evidence in any way.

1. It follows that the plaintiff’s claim for consequential losses should be assessed in conformity with Dr Manning’s calculations.  I accept his opinion that those calculations are conservative.  It is not insignificant, in this regard, that Mr Welsford assessed the plaintiff’s loss at a considerably higher amount.  It is also indicative of the conservative nature of Dr Manning’s calculations that he regarded the factors which caused the plaintiff’s ongoing losses to have exhausted themselves by the end of the 2004‑2005 financial year.  By that time he thought that any ongoing loss was insignificant. 

1. In respect of two matters which affected Dr Manning’s calculations the plaintiff voluntarily incurred extra costs.  Those costs were incurred in providing rebates to some of its customers and in importing MG paper to satisfy some of its customers who had previously used its MG paper as a base for insulation.  I am satisfied that those costs were incurred in a reasonable attempt to preserve the plaintiff’s business against further loss for which the defendant would have been liable.  They are, accordingly, recoverable. 

1. Dr Manning’s evidence provided calculations of loss, not an assessment of damages.  In some cases the difference may be significant, particularly where future losses or contingent events have to be taken into account.  That is not this case.  Here, all the plaintiff’s losses are past losses and can be the subject of calculation.  Nor are vicissitudes or possibilities relevant.  However, having regard to the fact that an assessment can never be as precise as a calculation it is appropriate to round off Dr Manning’s figures to reach a sum for damages.  His reports themselves acknowledge rounding errors so that the precision with which his results are reported are, as in any such calculation, subject to limits of error.

1. Dr Manning calculated the plaintiff’s losses for the period from 8 April 2001 to 31 March 2003 in the sum of $5,096,737 and for the period 1 April 2003 to 30 June 2005 in the sum of $3,129,232.  From the latter figure $31,990 must be deducted as not being recoverable.  Accordingly that sum should be reduced to $3,097,242.  The total of these sums is $8,193,979.  The plaintiff’s damages for consequential losses should be assessed at M$8.2. 

Betterment

1. When the plaintiff replaced the MG cylinder on the M2 paper making machine following the event of 7 April 2001 it did so with a new MG cylinder which was a more modern version of the MG cylinder which it replaced.  Its maximum operating steam pressure is 6.2bar against the old MG cylinder’s 3.45bar.  It also operates at a higher speed and with a higher nip load.  The defendant argues that if the plaintiff is entitled to damages assessed by reference to the replacement of the MG cylinder it must bring into account against those damages a “betterment” factor because the new machine is more profitable than the old. 

1. When the decision was taken, on 20 April 2001, by the plaintiff that the old MG cylinder was not able to be repaired Mr Walker was instructed to seek a secondhand cylinder to replace it.  He could not do so.  There are very few such pieces of equipment in existence around the world and there were none that he could find which were for sale despite a worldwide enquiry.[22]  Thus, the only option available to the plaintiff to replace the cylinder was to acquire a new one.  Speed was of the essence as the plaintiff was of the belief, as expressed by its executives in the teleconference of 20 April 2001, that its market for MG paper was in danger of being lost if production was not resumed as quickly as possible. 

   [22]See [104].

1. The defendant’s primary submission in this case, assuming its liability to the plaintiff, was that the decision by the plaintiff to condemn the MG cylinder was taken too quickly and was, in any event, wrong.  The plaintiff should not recover the cost of a new MG cylinder – only the reasonable cost of repairing the old cylinder.  Alternatively it took the position that if the plaintiff is awarded damages based on the cost of a new MG cylinder it should be required to account for the increased profit derived from the employment of this new piece of equipment.

1. There is no doubt here that the plaintiff has obtained a new MG cylinder installed on its M2 paper making machine as a replacement for an old MG cylinder and that this new cylinder is better and, other things being equal, capable of improving the M2 machine’s production capacity with consequences for the profit derived by the plaintiff from its business.  But the matter does not end there.

1. The general rule as to the measure of damages, both in contract and in tort had its origin in the judgment of Lord Blackburn in Livingstone v Rawyards Coal Co.[23]  He defined the measure of damages as:

That sum of money which will put the party who has been injured, or who has suffered, in the same position that he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation.

[23](1880) 5 App Cas 25, 39.

1. The application of this principle in this case means that the plaintiff must be put in the same position it would have been in had the incident of 7 April 2001 not occurred: that is to say operating its M2 paper making machine with a 50 year old MG cylinder having an unlimited, or at least a very long, life expectancy.  Instead, it has a new MG cylinder, with more modern specifications which, the defendant argues, has already demonstrated a capacity for being able to increase production on the M2 paper making machine.  As the plaintiff will receive damages to cover the cost of the purchase, installation and commissioning of the new MG cylinder it has, as a matter of fact, received a benefit over and above the replacement of that which it lost as a consequence of the defendant’s default.

1. In the course of this case the MG cylinder has, for convenience, generally been treated as an independent chattel although it is, of course, only part of the M2 machine.  It is but one part of a very large machine which processes paper pulp into paper over a very long process.  It  produces nothing of itself.  The plaintiff’s claim in this case could just as easily have been framed as a claim for damage to the M2 machine which required the replacement of its MG cylinder.  It is useful to consider these aspects of this case to expose the real question as to whether the plaintiff has, in fact, gained a benefit for which its damages must be reduced and, if so, how that reduction should be calculated. 

1. The ordinary measure of damages for the loss or destruction of a chattel ( apart from consequential losses properly claimable) is its value.[24]  Where there is a market for the lost or destroyed chattel that market will, theoretically at least, determine the chattel’s value and thus the quantum of the plaintiff’s damages.  Here, the plaintiff says there was no market for second hand MG cylinders.  If there had been it would have bought one, if only to resume making MG paper as quickly as possible.  Its case on this question must be accepted; it was hardly contested.  So must its contention that it had to act quickly, not only in abandoning the old MG cylinder but in ordering a new one.  In the circumstances the plaintiff acted reasonably in replacing the old MG cylinder with a new one. Viewed as a repair of the M2 machine it would be equally justified in effecting the repair using a new MG cylinder.[25] It was the only practical solution to the problem it found itself in because of the defendant’s default.

   [24]The Clyde (1856) Swab. 23, 24 (Dr. Lushington), Liesbosch  Dredger v S.S. Edison [1933] AC 449.

   [25]Darbishire v Warran [1963] 3 All ER 310.

1. In Harbutt’s Plasticine Limited v Wayne Tank and Pump Co Limited[26] the UK Court of Appeal was dealing with the question as to whether the owners of a plasticine factory which was destroyed by the defendant’s default and who built a new modern factory to continue operating their business should have their claim for damages reduced because they acquired a new factory for one which was old.  In his judgment Widgery LJ commenced from Lord Blackburn’s position as to the restitutio in integrum principle of compensation for actionable loss and then examined the reasonableness of the plaintiffs’ conduct in having done what they did.  He upheld the plaintiff’s contention that no credit had to be given for the “betterment” they obtained at the defendant’s expense.  It is clear from what his Lordship said that if he had considered that the plaintiffs were obliged to give such a credit its measure would have been assessed by comparing the value of the old factory as against that of the new.

   [26][1970] 1 QB 447.

1. In the same case Cross LJ was more specific.  He considered that in a case where it was obviously right for the plaintiffs to re‑build and re‑equip its factory and start business again as soon as possible, the defendant was not entitled to claim any reduction in the damages it had to pay simply because the plaintiff got new for old.  Dealing with the quantification of any betterment had it been allowed his Lordship said:

I can well understand that if the plaintiffs in re-building the factory with a different and more convenient lay out had spent more money than they would have spent had they re-built it according to the old plan, the defendants would have been entitled to claim that the excess should be deducted in calculating the damages.  But the defendants did not call any evidence to make out a case of betterment on these lines and we were told that in fact the planning authorities would not have allowed the factory to be re‑built on the old lines.

Lord Denning MR agreed in the result on similar reasoning although, like Cross LJ, excepted the case where the plaintiff “ …  added extra accommodation or made extra improvements … “. 

1. In Bacon v Cooper (Metals) Limited[27] Cantley J applied Harbutt to deny a defendant a reduction in damages for the destruction of a machine part caused by its default where the plaintiff bought a new part because a secondhand part was not available.  He held that an injured party was not disentitled to recover the costs of reasonable remedial measures merely because the person in breach could suggest other measures less burdensome or because the injured party incidentally derived some greater benefit over and above mere indemnification.  Like the Court of Appeal in Harbutt, Cantley J considered that the inquiry to be embarked upon in determining whether a plaintiff must give credit for receiving a betterment is whether the plaintiff behaved reasonably in doing what it did.  He quoted MacMillan LJ in Banco de Portugal v Waterlow and Sons Limited[28] where he said:

Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty.  It is often easy after an emergency has passed to criticise the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency.  The law is satisfied if the party placed in a difficult situation by reason of a breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest other measures less burdensome to him might have been taken.

[27][1982] 1 All ER 397.

[28](1932) AC 452 at 506.

1. The plaintiff has maintained in this case that the new MG cylinder was simply a modern version of the old.  Whilst its specifications are undeniably better than the old cylinder it has not been suggested in argument by the defendant that the plaintiff should have ordered a new MG cylinder having the same specifications as the old cylinder.  Much less has the defendant demonstrated that the plaintiff acted unreasonably in not doing so. There is no evidence either that an MG cylinder identical to the old one would have been able to be obtained, nor was there any evidence as to whether, if it could, it would cost less (or for that matter more) than the new MG cylinder.

1. The defendant relied upon the House of Lords decision in British Westinghouse Electric and Manufacturing Company Limited v Underground Electric Railways Company of London Limited[29] and  the NSW Court of Appeal decision in Hoad v Scone Motor Pty Ltd.[30]   But each of these cases is distinguishable on their facts.  In the first, the breach of contract which gave rise to the plaintiff’s action was not, as here, one in which a chattel was destroyed but rather one in which the defendant failed to supply a chattel which complied with its obligation to do so.  Further, the facts surrounding the alleged betterment were quite different to those which obtain in this case. 

   [29][1912] AC 673.

   [30][1977] 1 NSWLR 88.

1. In the second of the cases relied upon by the defendant the plaintiff intended to sell the chattel with which he had replaced that which was destroyed by the defendant’s default, by which sale he would make a substantial profit because the replacement chattel was considerably more valuable than that which it replaced.  That is not this case.  Hoad and British Westinghouse are each illustrations of Widgery LJ’s assertion in Harbutt that cases of alleged betterment are always dependent upon their own peculiar facts. 

1. The reasonableness of the plaintiff’s action in replacing the old MG cylinder with a modern equivalent must be accepted.  In the circumstances of this case, the plaintiff, having acted reasonably in doing what it did, is not obliged to give credit to the defendant for the better MG cylinder with which it replaced that which the defendant effectively destroyed.  This is so, even if, as the defendant contends, the new MG cylinder is capable of enhancing the performance of the M2 machine and has achieved that result.

1. Even if it was decided that the plaintiff did have to account for some betterment arising from its replacement of the old MG cylinder the defendant faces another problem in demonstrating the quantum of that betterment.  There is no evidence before the Court as to the difference in value between the new MG cylinder and the old so as to form some basis for a rational assessment of the deduction to be made to the plaintiff’s damages.  That the onus of proving the quantum of any betterment is on the defendant is clear not only from Harbutt[31] but also from the judgment of Handley JA in Tyco Australia Pty Ltd v Optus Networks Pty Ltd.[32] In that case his Honour acknowledged the principle in the law of damages derived from cases such as Fink v Fink[33] and Chaplin v Hicks,[34] that the common law does not permit difficulties of estimating a plaintiff’s loss to defeat his remedy. But he went on to distinguish the position of a defendant who seeks to have damages reduced because of a chance that the plaintiff derived a benefit from the wrong which the defendant committed.  He said a defendant does not have the plaintiff’s advantage. He is not in this “favoured position.” A defendant must prove the quantum of the reduction he seeks. See also Roberts v Rodier and ors,[35]J & B Caldwell Ltd v Logan House Retirement Home Ltd,[36]and Monroe Schneider Associates (Inc) v No 1. Raberem Pty Ltd.[37]

   [31][1970] 1 QB 447, 476 (Cross LJ).

   [32]Unreported NSWCA 40422/02.

   [33](1946) 74 CLR 127.

   [34][1911] 2 KB 786.

   [35][2006] NSWSC 282 (per Campbell J).

   [36][1999] 2 NZLR 99, 110.

   [37](1991) 33 FCR 1, 29.

1. The defendant put its case on the quantum of betterment issue, not in terms of the respective values of the two MG cylinders, but on the profit which it asserted the plaintiff made as a result of having a more efficient MG cylinder.  It called Mr Wayne White of Omni Continental, a process consulting company specialising in the pulp and paper industry in Canada.  Mr White wrote two reports and gave oral evidence.  His evidence was relied upon by the defendant as demonstrating that the plaintiff had achieved considerable increases in its production following the installation of the new MG cylinder.  It also relied upon the opinion of Mr Trevor Williams the forensic accountant, as to the monetary quantification of Mr Wayne White’s production assessment.  Together they suggested that the benefit to the plaintiff was somewhere between M$4.6 and M$12.4.

1. The plaintiff responded to this evidence with evidence from Mr Welsford to whom reference has already been made and, of course, it relied upon the opinion of Dr Manning who was adamant that there was no financial advantage to the plaintiff which accrued as a result of the new equipment.  In any event, on Dr Manning’s evidence, any benefit which the plaintiff did obtain, at least up until 30 June 2005, was already accounted for in Dr Manning’s opinion on the plaintiff’s losses which the Court has accepted. 

1. But all of this evidence is beside the point.  In the circumstances of this case any claim for betterment would have to be assessed by reference to values, not the resulting profit experienced by the plaintiff.  The plaintiff’s profit is derived from the operation of the whole M2 paper making machine and its business generally not just the MG cylinder.  There is much evidence before the Court as to the limitations which are imposed upon the operation of that machine by various “bottlenecks” in it.  The paper making process on the M2 machine is a long one.  It involves a large number of linked individual processes which the paper passes through in a continuous strip from one such process to the next.  Essentially, all of these processes are concerned with extracting water from the paper pulp.  Many of them are called “dryers”.  The MG cylinder is but one of those towards the end of the process which is used in the manufacture of MG paper.  Thus, assessments of the plaintiff’s profitability as a result of the new MG cylinder would need to take into account, in some considerable detail, the effect on that profitability of the operation of various parts of the MG paper making machine.  The term “dryer limited” was used frequently in this case to describe problems such as those adverted to above.

1. Further, the plaintiff’s profitability is always going to be affected by a large number of business factors quite unrelated to the M2 paper-making machine and its efficiency.  As cross‑examination demonstrated throughout this case, the Australian exchange rate, markets for paper in South East Asia, the United States, New Zealand and Australia, the world spot market for the price of paper, the presence or absence of local and overseas competitors etc etc all affect the plaintiff’s profitability.  To these can be added the plaintiff’s business activities in marketing, advertising and otherwise promoting its products.

1. If, contrary to the Court’s conclusion, an amount for betterment should be deducted from the plaintiff’s damages there has been no reason demonstrated for a departure from the ordinary method of calculating the benefit to the plaintiff of its having acquired a new MG cylinder at the defendant’s expense. That method would be to calculate the difference in value of the two MG cylinders and use that sum as the betterment factor. But there is no evidence in this case that that exercise would lead to a finding that there had been a relevant benefit. In any event there is no evidence upon which that calculation could be made.

1. The plaintiff’s damages should not be reduced for betterment. Even if a case could be made that they should be so reduced, the defendant has failed to discharge its burden of proving the quantum of any such reduction.

Conclusion

1. The plaintiff is entitled to judgment against the defendant in the sum of $ 4,645, 053.32 for its material damage and $ 8,200,000.00  in respect of its consequential losses, a total of $12, 845, 053.32.

1. Subject to hearing counsel as to any inaccuracies in the figures or calculations in this judgment and on the question of interest and costs, there will be judgment as I have stated above.

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