Renold Australia Pty Ltd v Fletcher Insulation (Vic) Pty Ltd

[2007] VSCA 294

SUPREME COURT OF VICTORIA
COURT OF APPEAL

No 4172 of 2004

RENOLD AUSTRALIA PTY LTD	Appellant
v.
FLETCHER INSULATION (VIC) PTY LTD	First Respondent
	and
LAMINEX GROUP LTD	Second Respondent

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JUDGES:	CHERNOV and ASHLEY JJA and WHELAN AJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	2 August 2007
DATE OF JUDGMENT:	13 December 2007
MEDIUM NEUTRAL CITATION:	[2007] VSCA 294

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SALE OF GOODS – Supply agreement for provision of assembly line – Assignment of business to associate company – Assignment of potential claims under agreement to assignee company – Damages from failure of assembly line manifested after assignment – Loss suffered by assignee of the agreement – No loss suffered by assignor – Dispute as to cause of failure – Assembly line not reasonably fit for purpose for which ordered – Damages – Entitlement of assignee to claim damages for breach of agreement where loss occurred after assignment – Consequential loss – Whether sufficient evidence of consequential loss notwithstanding no evidence of loss of specific of sales or customers’ inability to obtain stock – Whether holding of stock demonstrates no consequential loss.

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APPEARANCES:	Counsel	Solicitors
For the Appellant	Mr R L Berglund QC with	Norris Coates
Ms B H M Lim
For the Respondents	Mr L Glick SC with	Clayton Utz
Mr J P Slattery

CHERNOV JA:

1. The appellant, Renold Australia Pty Ltd (‘Renold’), appeals against the orders of a judge of the Trial Division made on 8 August 2006.  His Honour ordered, first, that Renold pay the first respondent, Fletcher Insulation (Vic) Pty Ltd (‘Fletcher’), $900,591.48 together with damages in the nature of interest in the sum of $262,978.99 for breach of contract by Renold to supply oven chains for use in the business conducted by Fletcher.  Secondly, his Honour ordered that Renold pay Fletcher’s costs of the proceeding, including reserved costs, to be taxed as follows:

(a)       costs up to and including 29 November 2004, on a party party basis;
(b)      thereafter, on an indemnity basis.

1. The circumstances giving rise to the proceeding were the following.  At all relevant times prior to 1 July 2002, the second respondent, Laminex Group Ltd (‘Laminex’), manufactured fibreglass insulation products that involved passing them through two large ovens – called D1 and D2 – on chain conveyors.  There were two sets of chain assemblies for each oven, an upper and lower assembly and the chains were connected by flights (sometimes called ‘pitches’) at every link.  The chains provided support for, and moved, a conveyor belt on which the product passed through the oven.  The case was essentially concerned with the failure, in early 2003, of the chain assembly for the D1 oven that was purchased by Laminex[1] from Renold in August 2001 and installed at or about the end of that year. 

   [1]The purchase was in fact made by Amatek Ltd which subsequently became known as Laminex. 

1. In concept, said his Honour, the chains were similar to a bicycle chain with a series of links held together by pins.  The significant difference between the chains in question and a prototype bicycle chain was the presence of a wheel or roller at each pin.  As the judge explained, the chain assembly at each of the two levels that related to the D1 oven comprised a pair of chains, each 115 metres long, running in parallel around the same sprocket wheel shaft.  The turning of the driven sprocket wheel meant that the pitches, as they approached it, were in tension.  Each pitch had two side-plates: an inside side-plate and an outside side-plate.  The jointing on the pitches was such that, at that point, each of the two side-plates overlapped.  Thus, at the point of overlap, there were two side-plates – respectively, an inner and an outer inside side-plate and an inner and outer outside side-plate.  The two chains were connected horizontally by a series of metal plates or flights.  As I understand it, in order to provide for a base on which the conveyor belt was to sit, part of the vertical inside side-plates, both inner and outer, were bent to a right angle so that, on top of each of the pitches, there was a horizontal area upon which the end of each flight was supported and to which it was bolted.  The inside side-plates (both inner and outer) with their lugs were referred to as the ‘K1 side-plates’ as distinct from the outside side-plates (both inner and outer) which were referred to as ‘plain side-plates’.

1. The chains for the D1 oven were first installed in 1980 by a firm named Rexnord.  The Rexnord chains were operated, without relevant problems, for some ten years, which was their life expectancy.  Thus, in 1990 they were replaced by chains manufactured by L K Morgan Conveyor Co Pty Ltd (‘Morgan’) (‘the first Morgan chains’).  The first Morgan chains also operated without relevant problems and were to be replaced at the end of their anticipated life of approximately ten years.  Thus, in the early part of 2001 Laminex made the decision to replace the first Morgan chains and to that end sought quotations for the required chains.  In the result, on or about 29 August 2001 Laminex entered into a contract with Renold for the supply by the latter of chain assemblies for the D1 oven (‘the Supply Agreement’).  Renold supplied and installed the chains during the Christmas 2001 shutdown of the factory, but in about February 2003 they were found to be defective.  In the result, the Renold chains were progressively replaced in July and November 2003.  The replacement chains were supplied by Morgan at a cost of approximately $355,000.

1. In the interim, on 1 July 2002, Laminex sold its assets relating to the fibreglass manufacturing business to its associated company, Fletcher.[2]  As I have said, the defect in the Renold chains was first discovered in February 2003 – after the sale of the business to Fletcher – so that no loss was suffered by Laminex by reason of the defect in the Renold chains.  No doubt in order to enable Fletcher to claim any loss arising from the faulty Renold chains, by a Deed of Assignment dated 31 December 2003, Laminex assigned to Fletcher, on 1 January 2004, its ‘right, title and interest in all Claims arising out of or in connection with the Supply Agreement or in connection with the design, manufacture and supply of the [Renold] chains …’.

   [2]Fletcher was then known as Insulation Solutions Pty Ltd.

1. The circumstances in which the Supply Agreement was entered were not controversial.  Tenders were called by Laminex by way of its facsimile of 25 July 2001 to prospective tenderers.  One of the items of information that was sought by Laminex was the materials which the tenderers proposed to use in the production of the chain assembly, including the pins, rollers, bushes and plates.  Laminex said that link plates and attachments might be made of mild steel.  One of the tenderers was Renold, which submitted a quotation on 30 July 2001.  There were further communications between the parties concerning the specifications for the chain assemblies and about the technical aspects in relation to them.  In the course of these negotiations, Laminex received advice from its US parent on Renold’s various proposals.  On 15 August 2001, Laminex placed its order with Renold for the supply of the chain assemblies for the D1 oven and delivery and installation took place at the end of 2001.  It was also uncontroversial that the chains supplied by Renold failed prematurely and needed to be replaced. 

1. The proceeding was commenced by Fletcher as plaintiff.   Laminex was joined as a second plaintiff because the appellant, as defendant, contended that Fletcher could not recover any damages in any event because the relevant contracting party was Laminex.  The essential question before his Honour was whether Renold should bear the cost of this as well as the consequential losses claimed by Fletcher.  For the purpose of analysing the nature and extent of these failures and of identifying their cause or causes, each party adduced evidence from an expert metallurgist engineer retained by it.   Fletcher’s expert was Robin May of CMET Pty Ltd and the engineer engaged by Renold was Harry Better of HRL Technology Pty Ltd.  As his Honour noted, the experts were not in disagreement as to the nature and extent of the failures.  I will deal with the relevant aspects of their reports later but it is convenient to mention at this point that, in his only written report that was tendered in evidence and dated April 2005, Mr Better accepted, without adverse comment, that there existed areas of fault in the chain assembly that were identified by Mr May in his reports of 16 May and 4 July 2003.  They included the following:

(a)Side-plate fracture on the lower chains.  This was said to have resulted from metal fatigue which was initiated at the notch of the K1 side-plate.[3]

(b)Severe degeneration of the side-plates that was caused by considerable wear at various locations that included, respectively, the adjacent roller, bush, pin and sprocket tooth.

[3]It seems that, in order to facilitate the bending of the K1 plates to provide the flight support lugs and to relieve stresses in the metal during the bending process, Renold had cut a notch on the vertical plate adjacent to the lug.

1. Fletcher claimed that the principal cause of the failure of the chains was their inadequate design, for which Renold was responsible.  Renold, on the other hand, contended that it was essentially the misalignment of the chains, for which Fletcher was responsible, that caused them to fail.  The misalignment, it was said, produced premature wear on the side-plates caused by the rollers wearing away at them.  It was also said for Renold that the cause of the premature wear was due to the tension shaft breaking and misaligning the chain.  Furthermore, it was claimed, a lack of maintenance contributed to the premature failure. 

1. It seems not to have been in dispute that the chain failure was the result of fatigue and ductile rupture.  Mr Better’s opinion, as stated in his report, was that the misalignment of the chains was the most likely cause of the lateral forces that produced the excessive wear of the side-plates and other component parts.  His Honour, however, considered that Mr Better’s evidence was little more than assertion.  The judge pointed out that he made no calculations, his inspection of the failed links was limited, he pointed to no wear patterns consistent with his hypothesis and he appeared to be content to embrace his instructions with little if any attempt to test them critically.  In the circumstances, his Honour said, he placed little weight upon his conclusions that misalignment was the principal cause of the failure of the chains.

1. Nevertheless, his Honour said, it was for Fletcher to establish by evidence the failure which caused the loss due to a breach of the implied term as to fitness or the term as to merchantability.  The learned trial judge then set about examining the evidence to determine the cause of the chain failure and, in that context, took into account Mr Better’s hypothesis that misalignment was the root cause of the problem.  In this context, the learned judge observed that the rate of wear observed on the Renold chain was significantly different from that of the first Morgan chains:  the side-plates on the first Morgan chains exhibited a maximum wear of 1mm after ten years of operation, in other words, 0.1mm per annum, whereas the measurement for the Renold chains was 2.8mm after 1.25 years, namely, 2.3mm per annum.  His Honour accepted that the two chains operated in a similar environment. 

1. It seems that the drawings for the first Morgan chains were provided to Renold at the time of tender and Renold had access to sample pitches of the chains.  Renold modified the design, claiming that it would be an improvement on its predecessor.  Mr May attributed the failure of the chains to those modifications.  He said that if misalignment were a problem he would have expected to have seen a different sort of wear in the links and wear in the side rails.  He said that his extensive examination of the damaged links disclosed no pattern of wear which was suggestive of misalignment as the cause. 

1. Following a close examination of the evidence his Honour rejected the claim that misalignment was a significant cause of the chain failure.  The judge also did not accept Renold’s claim that excessive stress on the pitches and want of inspection and maintenance of the chains materially contributed to their failure.

1. His Honour concluded that on the evidence the Renold chains were not reasonably fit for the purpose for which they were ordered and that the contributions to the chain design, for which Renold was responsible, were the cause of this unfitness.  In that context his Honour referred to the materials which were used, including Renold’s own decision to use mild steel for the K1 side-plates which, although that was within the contract specification, had different characteristics from the mild steel used in the plain side-plates. 

1. Thus, his Honour concluded that Renold was in breach of the Supply Agreement.

1. Fletcher’s claim was also based on alleged negligence on the part of Renold in the design and production of the chains.  Given his Honour’s conclusion that Renold had breached the Supply Agreement it was strictly unnecessary for him to consider the alternative claim in negligence.  Nevertheless, his Honour proceeded to do so and concluded that no duty of care was owed by Renold to the subsequent purchaser of the chains, namely, Fletcher.  Hence, his Honour said Fletcher’s claim in negligence had to fail.  But if a duty was owed, the judge said, he would have concluded that Renold was in breach of it by manufacturing the side-plates out of steel of different strengths. 

1. His Honour then turned to consider whether Fletcher was entitled to recover damages as a consequence of the breach of the Supply Agreement by Renold.  The judge recognised that its right in that regard was dependent upon the effect of the assignment. 

1. His Honour noted that Renold argued that, at the time of the Deed of Assignment, Laminex had suffered no loss and, thus, had nothing valuable to assign and that the cause of action it had assigned to Fletcher was worthless.  It seems that this contention was pressed on the basis that the defects in the chains were not apparent before the sale of the assets.

1. The learned trial judge rejected Renold’s argument in this regard.  He noted that when the chains were delivered by Renold they were defective in terms of the Supply Agreement.  The judge concluded that the right of action in contract against Renold passed to Fletcher under the Deed of Assignment.  Thus, his Honour said, Fletcher could sue for its losses suffered as a consequence of the Renold breach of contract.  Importantly, his Honour noted that it was not suggested that the losses in the hands of Fletcher were greater than would have been those in the hands of Laminex.  In that context, his Honour referred to Tolhurst v Associated Portland Cement Manufacturers (1900 Ltd.[4]  Thus, his Honour concluded that Fletcher was entitled to recover the loss which it suffered flowing from the breach of contract by Renold, more particularly, the cost of the replacement chains ($355,022.48) and consequential losses ($545,569), a total of $900,591.48.

   [4][1903] AC 414, 423 (Lord Lindley).

1. His Honour’s determination of the costs question as summarised in the opening paragraph of these reasons was made in the following context.  Fletcher served two offers of compromise on Renold, respectively, on 4 June and 15 November 2004.  Each offer was sent under cover of a letter headed ‘Without prejudice except as to costs’.  So far as is relevant the offer of 4 June 2004 was that Renold pay Fletcher $550,000 in full and final satisfaction of the claim.  It was also stated that the terms of the offer of compromise, if accepted, be essentially confidential.  The terms of the offer of 15 November 2004 were identical, save that the sum sought was reduced to $400,000.  Neither offer was accepted, or even responded to.  In the result, as has been noted, the amount recovered by Fletcher was, in dollar terms, much less favourable to Renold than either of the sums offered.  Renold, however, contended that Fletcher was nevertheless not entitled to indemnity costs because:

(a)the offer did not comply with O 26 of the Rules of the Supreme Court;

(b)the decision of Renold not to accept either offer was not unreasonable.

1. But his Honour concluded that the offer could be treated as a Calderbank offer[5] and in that context the principal test for determining whether indemnity costs should be ordered was whether rejection of the offer was unreasonable.[6]  His Honour considered that it was not unreasonable for Renold to reject the first offer, essentially because it was then not in a position to assess meaningfully the quantum of Fletcher’s claim.  The judge concluded, however, that this was not the position as at 15 November 2004 given particularly that the second offer was significantly less than the first and included such statutory interest as might be awarded and the costs which Fletcher might have incurred.  His Honour concluded, ‘… looking at the picture as a whole, the rejection of the [second] offer must, in the light of the result, be seen as unreasonable.’  Hence, his Honour awarded costs to Fletcher on an indemnity basis from 29 November 2004.

   [5]Mideco Manufacturing Pty Ltd v Tait [1989] VR 50, 57 (Gobbo J).

   [6]Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No. 2) (2005) 13 VR 435.

Fletcher’s entitlement to claim damages for breach of contract

1. The appellant first argued that his Honour erred in concluding that Fletcher was entitled to claim damages for breach of the Supply Agreement.  It was contended that since Fletcher was not a party to the agreement, and since it was not made for its benefit, it had no standing to sue for breach of it.  In support of the claim that a stranger to an agreement cannot sue for its breach, counsel cited a number of well known authorities,[7] the correctness of which is not in doubt.  The judge erred, it was said, because the effect of his order was that Fletcher could claim damages for breach of the Supply Agreement as if it were a party to it.  More particularly, claimed counsel, his Honour’s conclusion that Fletcher could sue because the right of action in respect of the Supply Agreement was passed to it by Laminex under the Deed of Assignment was wrong.  At best, it was argued, the assignment entitled Fletcher to sue only for the losses, if any, suffered by Laminex.  But since no loss was suffered by Laminex by reason of the fact that it had disposed of the chains (at market value without reduction in the price by reason of defect) Fletcher had no right to claim damages. 

   [7]Dunlop Pheumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847, 853; Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460, 478; Trident General Insurance Co Ltd v McNeice Bros Pty Ltd (1988) 165 CLR 107.

1. In support of that claim counsel cited three cases,[8] but in my view they do not support the appellant’s contention.  All three cases were concerned with the proper assessment of the measure of damages in circumstances where the plaintiff was a contracting party.  Thus, in Slater v Hoyle & & Smith Ltd[9] and Auspac Trade International Pty Ltd v Victorian Dairy Industry Authority,[10] it was held that a party supplying defective goods to a purchaser in breach of contract is not entitled to rely on the purchaser’s re-sale of those goods to diminish the damages that it otherwise would be liable to pay.  Bence Graphics Ltd v Fasson UK Pty Ltd evinces some modification to that position in circumstances where, at the time of making the agreement, it was in the contemplation of the parties that the (defective) goods would be used in the making of a product that would be on-sold.[11]  In such a case, the extent to which the purchaser’s loss is mitigated by on-sale may be a relevant factor in assessing the measure of damages.[12]    In my opinion, the cases say nothing about the effect of the assignment in the present case.

   [8]Slater v Hoyle & Smith Ltd [1920] 2 KB 11; Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87; Auspac Trade International Pty Ltd v Victorian Dairy Industry Authority (Unreported, Supreme Court of Victoria, Southwell, Nathan and O’Bryan JJ, 22 February 1994).

   [9][1920] 2 KB 11.

   [10]Unreported, Supreme Court of Victoria, Southwell, Nathan and O’Bryan JJ, 22 February 1994.

   [11][1998] QB 87, 99 (Otton LJ distinguishing Slater v Hoyle & & Smith Ltd [1920] 2 KB 11), 105 (Auld LJ disagreeing with the principle in Slater v Hoyle & & Smith Ltd [1920] 2 KB 11).

   [12]A point also recognised in Auspac Trade International Pty Ltd v Victorian Dairy Industry Authority (Unreported, Supreme Court of Victoria, Southwell, Nathan and O’Bryan JJ, 22 February 1994).

1. Another reason put forward as to why Fletcher was not entitled to recover damages for breach of contract as assignee was that the assignment took place after the date on which Fletcher first incurred a loss.  It was said that, on a proper construction of the deed, what was assigned to Fletcher was Laminex’s interest in all ‘claims’ it had against the appellant as at 1 January 2004 and at that stage that right had no value.  Counsel further argued that the loss suffered by Fletcher was not the same as the loss suffered by Laminex and it could not be assumed that the losses by Fletcher were no greater than those that would have been suffered by Laminex from the breakdown of the machinery.

1. In my view, none of these arguments has any merit.  They are based on a misunderstanding of what are the rights that were vested in Fletcher as a legal assignee of a chose in action.  It is plain enough that, on his Honour’s findings, the cause of action for breach of the Supply Agreement was complete upon the occurrence of the breach,[13] namely, in December 2001 when the defective chains were supplied to Laminex.  Thus, at that point Laminex acquired a right to claim damages from the appellant for loss arising from the breach irrespective of when the loss manifested itself – here, after the breach.  And, so far as is relevant, it was that right to damages that Laminex assigned at common law to Fletcher.  As was explained by Windeyer J in Norman v Federal Commissioner of Taxation[14] the assignment had the effect of immediately transferring that right to Fletcher which thereby effectively replaced Laminex as the contracting party to the Supply Agreement. 

   [13]Commonwealth v Cornwell (2007) 81 ALJR 933, 936.

   [14](1963) 109 CLR 9, 26.

1. And it is not the law, as the appellant would have it, that such an assignee can only recover by way of damages an amount that is no greater than that which reflects the assignor’s financial loss at the date of the assignment.  If the appellant’s contention in that regard was correct, it would mean that, in the present case, notwithstanding the plain breach of contract by the appellant, it could not be successfully sued at all for damages arising from that breach because Laminex did not suffer a loss and, on the appellant’s argument, Fletcher was not entitled to recover its damages.  To state that position makes it apparent that it is unlikely that the law in this regard is as the appellant claims, as was pointed out with some clarity in Chitty on Contracts:[15] 

Assignee cannot recover more than assignor.  A further aspect of the idea that an assignee takes an assignment ‘subject to equities’ is the principle that an assignee cannot recover more from the debtor than the assignor could have done had there been no assignment.  For example, in Dawson v Great Northern and City Railway Co the assignment of a statutory claim for compensation for damage to land did not entitle the assignee to recover extra loss suffered by reason of a trade carried on by him, but not the assignor, that the assignor would not have suffered.

The application of this principle has given rise to particular difficulty in relation to building contracts or tort claims for damage to buildings.  Say, for example, a building is sold at full value along with an assignment to the purchaser of claims in contract or tort in relation to the building.  The building turns out to need repairs as a result of a breach of the builder’s contract with the assignor (whether that breach is prior, or subsequent, to the sale to the assignee) or of a tort (damaging the building prior to the sale).  The assignee pays for the repairs.  It might be argued that the assignor in that situation has suffered no loss so that, applying the governing principle that the assignee cannot recover more than the assignor, the assignee has no substantial claim.  If correct, ‘… the claim to damages would disappear … into some legal black hole, so that the wrongdoer escaped scot-free’.  Acceptance of the argument would also nullify the purpose of the governing principle which is to avoid prejudice to the debtor and not to allow the debtor to escape liability.

Perhaps not surprisingly, therefore, that argument was rejected by the House of Lords in a Scottish delict case.  And the problem has been circumvented in England by the courts’ recognition that, where a third party is, or will become, owner of the defective or damaged property, there is an exception to the general rule that a contracting party can recover damages only for its own loss and not the loss of the third party.  Where the exception applies, the contracting party (the assignor) is entitled to substantial damages for the loss suffered by the third party (the assignee): by the same token, an award of substantial damages to the assignee does not infringe the principle that the assignee cannot recover more than the assignor.

[15]29^th ed, [19-073]-[19-075] (citations omitted).

1. It seems to me that, as a matter of principle, an assignee in the position of Fletcher is entitled to recover damages for breach of contract that are of the same kind as those that the assignor could have claimed had there been no transfer of the business, even if the assignor has not suffered substantial damages by reason of the breach.  The essential rationale of the law relating to the assignment of choses in action is that it recognises that the assignee steps into the shoes of the assignor for the very purpose of pursuing or continuing to pursue the right which was vested in the assignor before the assignment, and it is irrelevant that at the point of assignment the assignor had suffered no substantial damages.  And here, the assignee is not burdened by problems that might have arisen if it had materially changed the business operations that were conducted by the assignor at the date of breach.  The business conducted by Fletcher was essentially the same as that which had been carried on by Laminex.  Hence, I think, there is no basis in principle why Fletcher could not recover damages flowing from the breach of contract that was assigned to it.

1. That an assignee in the position of Fletcher is entitled to recover damages for breach of contract to which the assignor was a party, notwithstanding that the damages occurred before the assignment, was made plain by the Court of Appeal in Offer-Hoar v Larkstore Ltd[16] where, as here, the relevant issues were temporal in origin.  In that case, the assignor Starglade Ltd (‘Starglade’) was the owner of a building site which was on a slope.  In December 1998 it received a report from an engineering services company (‘Technotrade’) which said that the site was suitable for a proposed development of two-storey houses.  Starglade sold the site in June 1999 with the benefit of planning and building control consents, including all soil investigations, to Larkstore Ltd (‘Larkstore’).  Relying on the report Larkstore engaged a builder to carry out the works.  In the course of there so doing a landslip occurred in October 2001 causing damage to properties up hill from the site.  In March 2003 the owners of the properties began legal proceedings against Larkstore and the builder for damages for loss suffered by them.  In February 2004 Starglade assigned by deed to Larkstore Technotrade’s soil inspection report and its rights under it.  Larkstore commenced proceedings in October 2004, relying on the assignment, for damages for breach of contract against Technotrade.

   [16][2006] 1 WLR 2926.

1. Thus at the time of the breach of contract Starglade was the owner of the site but at the time of the landslip, in October 2001, Larkstore was the owner of the site and suffered substantial damage.  Starglade, although entitled to the chose in action at that point, was not entitled to recover substantial (as distinct from possibly nominal) damages because it had ceased to own the site.  And Larkstore was also not entitled to recover damages from Technotrade for breach of contract because it had no contract with Technotrade and, at that point in time, had no assignment from Starglade of the benefit of its contract, rights of action and remedies for breach of it.  It was claimed in that case, as I have said, that Starglade could not assign to Larkstore more than it had.  It was said it did not have a claim for substantial damages against Technotrade in contract because it had ceased to own the site before the assignment and before the landslip. 

1. The Court of Appeal upheld the decision of the trial judge that Larkstore, as assignee, was entitled to recover damages for breach of contract notwithstanding that the assignor did not suffer loss and that the assignment was made after the damages had occurred.  Mummery LJ rejected Technotrade’s arguments on the basis of ‘legal principle and good sense’.[17]   He said that the assignee could not recover from the contract breaker damages which the assignor could not have recovered had the assignment not taken place.[18]   But the law does not entitle the contract breaker to escape all liability for breach of contract.  His Lordship essentially adopted [19] an explanation of the relevant principle by Staughton LJ in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd,[20] namely, that in a case such as the present the general proposition that an assignee cannot recover greater damages than the assignor could have obtained must be ‘elucidated’ slightly such that the damages that the assignor could have recovered must be viewed or assessed on the assumption that there had been no assignment or sale of the business and that the assignor continued to conduct it. 

   [17]Ibid 2937.

   [18]Ibid 2936.

   [19]Ibid 2938.

   [20](1992) 57 BLR 57, 80-1.

1. As Mummery LJ explained:[21]

   [21]Offer-Hoar v Larkstore Ltd [2006] 1 WLR 2926, 2934.

The answer to the perceived problem of a limit on the damages which Larkstore, as assignee, is entitled to recover from Technotrade is to be found, in my judgment, in an analysis of the cause of action itself.  In this case the cause of action was the right to sue Technotrade for breach of contract in respect of the preparation of the soil inspection report on the site.  The cause of action was complete in December 1998 when Technotrade produced the soil report for Starglade.

…[If] Starglade … had remained the owner of the site, [it] would have been entitled to … recover substantial damages for the landslip which occurred in October 2001.

The remedy in damages for breach of contract is not limited to the loss that could have been proved at the date when the breach occurred and the cause of action first arose.  Subject to factual and legal issues of causation, remoteness, quantum and limitation of actions, there is a remedy in damages against the contract-breaker for loss which occurs after the cause of action has accrued.  A cause of action may arise years before any substantial damage occurs, as, for example, in the case of negligent advice on title.  There is no legal principle which protects the contract-breaker by excluding his liability for substantial damage that occurs after the initial breach of contract.

Later in his reasons, Mummery LJ pointed out:

What was assigned by Starglade to Larkstore was a cause of action for breach of contract against Technotrade and the legal remedies for it.  It was not an assignment of ‘a loss’ …  The assignment included the remedy in damages for the cause of action.  The remedy in damages for breach of contract is not, in principle, limited to the loss suffered as at the date of the accrual of the cause of action or as at any particular point of time thereafter.[22]

[22]Ibid 2936.

1. I note for completeness that in some of the earlier cases courts allowed recovery by rationalising that, at the date of the assignment, the relevant damages had been suffered by the assignor by reason of the breach.  Thus, in one case, although the assignor did not suffer financial loss by reason of the breach, it was considered that it must have suffered damage because of the diminution in the value of the asset in question, albeit unknown at the time of the assignment.[23]   In other cases, recovery was allowed on the basis that the assignor, who was a party to the proceeding, could recover damages for the assignee by way of an ‘exception to the general rule that a plaintiff can only recover damages for his own loss’.[24]  These decisions, however, do not detract from the analysis of the present issue that was undertaken by Mummery LJ in Offer-Hoar v Larkstore Ltd as I have briefly described. 

   [23]GUS Property Management Ltd v Littlewoods Mail Order Stores Ltd (1982) SC (HL) 157.  

   [24]See, eg, Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1992) 57 BLR 57, 114-15 (Lord Browne-Wilkinson).

1. Rix LJ, who agreed with Mummery LJ,[25] said, after reviewing relevant authorities:

   [25]As did the third member of the court, Peter Smith J.

[The cases] illustrate the possibilities that, in order to prevent the loss caused by a defendant’s breach disappearing into the proverbial black hole, the courts are nowadays willing to go far to create a working, and developing, analysis which will accommodate a claim for substantial damages … .

Underlying all these cases can be heard the drumbeat of a constant theme, which could possibly be described as ubi ius ibi remedium, the maxim that where there is a right there is a remedy; but it could also be said that the courts are anxious to see, if possible, that where a real loss has been caused by a real breach of contract, then there should if at all possible be a real remedy which directs recovery from the defendant towards the party which has suffered the loss.  In the case of property development, where it is readily contemplated that a party which prepares the development will transfer the fruits of his work to one or more partners or successors, there is a particular need for some such solution.

The courts have to work with the analytical tools which are to hand.  But the essence of the matter is that the general principles which have been developed to ensure that claims are confined to victims (the rule that a party may only claim in respect of his own loss; the rule in favour of privity of contract) and that a wrongdoer should not be made to pay compensation which goes beyond his breach (the rule that an assignee may not recover more than his assignor could have recovered), rules which as far as they go are necessary and fundamental to good order and fairness in the litigation of claims, are not, if at all possible, to be allowed to become instruments of maladjustment and injustice.  Thus the exception developed long ago in the carriage of goods context to allow a contracting party to recover damages against a carrier on behalf of another party to whom the goods in question are subsequently transferred has been brought into use in a modern situation where there is an equal need to find a solution which matches the commercial situation, and where no other solution had been found to be at hand.[26]

His Lordship concluded:

[I]n principle the assignee is seeking to recover no more than the loss which the assignor would have suffered and been entitled to recover if he had not transferred the development.  The rule in Dawson [1905] 1 KB 260 is not designed to allow a defendant to escape liability for his breach, but to ensure that he does not have to meet a bigger liability than he would have been under to the assignor. In other words, the assignee cannot bring to his claim losses which do not follow from the original breach, but which he has separately introduced. Similarly, the rule that a party may only recover in respect of his own loss does not seem to me to create any difficulty in a case where cause of action and loss are, at this point, united in the same party. The cause of action for Technotrade’s breach always brought with it potential or inchoate liability for all the losses which would ultimately, subject to matters of causation and remoteness, flow from it.[27]

[26]Ibid 2945 -6.

[27]Ibid 2946-7.

1. In the present case, as I have said, Fletcher did not seek to recover any more than the loss that Laminex would have been entitled to recover if there had been no transfer of its business to Fletcher.  In the circumstances, his Honour was plainly correct in concluding that Fletcher was entitled to recover the loss which it suffered flowing from the appellant’s breach of the Supply Agreement.

Cause of failure

1. I now turn to consider the appellant’s claim that his Honour erred in a number of respects in concluding that the cause of the failure in the chains should be attributed to the appellant. 

Mr May’s hypothesis

1. First, it was said, his Honour erred in accepting Mr May’s hypothesis as to the cause of the failure.  It was claimed that the hypothesis was a description of the process of failure and did not deal with the cause of the failure.  In considering this contention it is necessary to bear in mind that it was the appellant’s case at trial that the reason for the failure was overloading and misalignment of the chains.  In seeking to establish this claim, the appellant relied essentially on the evidence of Mr Better.  But as I have explained, after a thorough analysis of the relevant evidence, his Honour preferred that of Mr May to that of Mr Better and the judge explained why he did so.  As his Honour said:

On the balance of probabilities I accept [Mr May’s hypothesis] as describing the effective cause of the failure.  His conclusion was arrived at after an extensive analysis of the available evidence and as the product of reasoning which he exposed to criticism.  Moreover, he considered and provided cogent reasons for rejecting the competing hypotheses, notably that which focused upon misalignment of the sprocket shaft at the entry of the chain assembly.

In my view, no error has been shown in this aspect of his Honour’s decision.

1. In particular, contrary to the appellant’s claim, on a proper construction of Mr May’s hypotheses as summarised by his Honour, and which need not be repeated here, and having regard to his evidence, it is plain enough that he considered that the cause of the failure was the redesign of the chain by the appellant, more particularly, in respect of the bush diameter, the low strength of the K1 side-plates and the notches on the K1 side-plates and at the end of the bush.  That he described in his hypotheses not only those defects but also their consequences that led to the failure of the chains does not detract from his conclusion as to the cause of the failure. 

Root cause

1. It was next claimed that Mr May considered that the ‘root cause’ of the failure of the chains was the differential strength between the K1 side-plates and the plain side-plates and that this hypothesis was speculative.  But as the respondent correctly pointed out, Mr May did not say that the ‘root cause’ of the failure was the differential strength between the two plates.  He agreed in cross-examination that the ‘root cause’ (as put to him by the appellant’s counsel) was that there was a wear in the K1 side-plates that were softer than the plain side-plates.  As I have noted, the differential strength between the K1 and the plain side-plates was only one aspect of Mr May’s hypothesis as to why the chains failed.  There is no substance, I think, in the appellant’s claim that this was speculative – it was apparent on the evidence that there was the differential strength between the two plates and that there was greater wear on the K1 side-plates.  In any event, the witness was entitled to express his expert opinion on these matters and, in the circumstances, it was plainly open to his Honour to prefer his evidence to that of Mr Better.

Claimed failure by his Honour to have regard to evidence

1. It was also claimed by counsel for the appellant that his Honour failed to have proper regard to the evidence as to the misalignment and the working load of the chains and that his Honour should have found that the cause of the failure was their misalignment at the time when they were installed and the fact that they operated at twice the recommended working load.  That complaint is also without merit.  Causation is essentially a question of fact to be resolved as a matter of commonsense.[28]  His Honour saw samples of the chains and heard witnesses and their explanations for the defects.  As has been noted, in his reasons, his Honour thoroughly reviewed the evidence and the competing hypotheses as to the cause of the failure of the chains.  In that context, he plainly had regard to the evidence, such as it was, about the misalignment of the chains and their working load and there is nothing in his Honour’s reasons to show that he failed to have proper regard to these matters as is claimed by the appellant.  And I consider that his conclusion on these issues is supported by the preponderance of the evidence.  Moreover, it is incorrect to say, as the appellant’s counsel did, that Mr May gave no serious consideration to whether misalignment of the shafts could have been the cause of the chain failure.  Mr May’s evidence was that his investigations, involving both inspection of the wear on the chains and inspection of the chains in operation before they were replaced, did not show evidence that the failure of the chains was caused by misalignment. 

   [28]Chappel v Hart (1998) 195 CLR 232, 268-9 (Kirby J).

1. I note for completeness that his Honour made it clear why he accepted the evidence of Mr May in preference to that of Mr Better and I have already noted what his Honour said in relation to his evidence.  As to the evidence of Mr Better, his Honour said:

I regret that I found his evidence was little more than assertion.  He made no calculations; his inspection of failed links was limited; he pointed to no wear patterns consistent with his hypothesis; he appeared to be content to embrace his instructions with little if any attempt to test them critically.  In the circumstances, I place little weight upon his conclusion that the misalignment was the principal cause of the failure of the chains.

As has been mentioned, his Honour nevertheless proceeded to examine the whole of the evidence to determine what was the cause of the failure, concluding, as has been noted, that it was due to the fault in the design of the chains by the appellant.

Evidence of Mr Ash

1. The appellant further claimed that his Honour failed to have regard to the evidence Mr Ash, a consulting engineer with Fletcher, who had been involved in the design and construction of the factory built by the predecessor to Laminex and of the D1 oven.  His evidence, it was said, supported the appellant’s case on misalignment and excessive working loads.  More particularly, it was claimed that Mr Ash gave evidence that the chains had been working at twice their working load limit and should not have been run on the sprocket alignments revealed in the survey conducted by Precision Engineering Surveys on 9 June 2003. 

1. But in my view, on the whole of Mr Ash’s testimony, it is apparent that the essence of his evidence on the alleged overloading issue was that the chains were constantly protected by an overload protection system that switched off the motor if it exceeded the preset current or torque settings and that the highest individual chain tension was well below the appellant’s recommended working load and its  minimum chain breaking strength.  Moreover, he said that over a three month period of observation between April and June 2003 the maximum chain tension recorded for the Renold chain was well below the recommended capacity.  Moreover, he said that he did not consider that the side-plate wear and cracking that he observed in the chains was consistent with an increased working load on the chains.  His opinion was that the failure of the chains was not due to the chains operating at a capacity that was too large for the conveyor.

1. As to alignments, Mr Ash answered the cross-examiner’s questions on the assumption that what was conveyed in the survey was correct.  But he said in answer to his Honour’s question that if the alignment was excessive the overload protection system would shut down the motor.  In any event Mr Ash’s evidence was only part of the evidence on those issues, and in relation to the question of alignment it was plainly relevant, as his Honour noted, that the two sets of chains that were installed before the Renold chains had, in effect, operated for a total of 20 years without any problem arising due to misalignment.  In all the circumstances, the appellant’s claim that his Honour failed to have proper regard to the evidence of Mr Ash is baseless. 

Claimed error in finding consequential loss

1. The next grounds that were pressed by the appellant alleged that his Honour erred in concluding that Fletcher suffered consequential losses by reason of the defects in the chains and their need to replace them.  It was said that because there was evidence that at all relevant times Fletcher maintained inventory of stock and there was no evidence of unmet demand for stock produced through the D1 oven or of lost sales to predominant distribution channels used by Fletcher his Honour should have concluded that Fletcher had not established that it suffered any consequential loss as a result of the closure of the D1 oven to enable replacement of the Renold chain.  Again, I consider that these claims are without merit.  In my view, there was sufficient evidence before his Honour to justify the impugned finding.  For example, as the respondent pointed out, there was evidence that during 2003, when the chains failed, the local demand for insulation products exceeded Fletcher’s ability to produce them.  Mr Pickup, the Logistics Executive at the respondent who was responsible for purchasing, production planning, warehousing and distribution said in evidence that during the first half of 2003 orders for products received from Fletcher’s state warehouses consistently exceeded production capacity.  Mr Pickup also said that for the whole of 2002 and the first six months of 2003 demand was such that the D1 and D2 ovens were working continuously to meet demand and that Fletcher would have run out of stock of some product lines.

1. Furthermore, Mr Heath, the Manufacturing Accountant for Fletcher, gave evidence that there was constant demand over and above what the factory could produce during the relevant period.  It was also said that the sales managers were continuously losing sales because they could not access the required products.  According to his evidence, the market for fibreglass insulation products was such that there was only a very small window of opportunity to supply customers, often only a day or two, and if that could not be done the customer would go to a competitor.  It is plain enough that merely because there was no evidence that specific sales had been lost by reason of lost production does not mean that sales were not lost.  As for the claim that stock on hand that was held by Fletcher contradicted its claim of loss, Mr Heath said that although Fletcher had around $2.5 million of finished goods in stock this would have been made up of many hundreds of different products.  Thus, the mere fact that stock was held did not demonstrate that sales (of particular products) were not lost and consequential damages were not suffered by Fletcher.

1. In the circumstances, it was open to his Honour to conclude that in 2003 Fletcher could have sold all the products that its factory was capable of producing and thus award damages for consequential loss on the basis of lost sales. 

1. The absence of evidence from Fletcher’s actual or potential customers that they could not obtain Fletcher stock during the relevant period does not lessen or detract from the other evidence to which I have referred that went to establish that sales were lost as a result of the shutdowns. 

Claimed error as to award of indemnity costs

1. The appellant also argued that, although his Honour correctly refused to award indemnity costs notwithstanding the appellant’s non-acceptance of the offer of compromise of June 2004, he erred in his conclusion that the appellant acted unreasonably in rejecting the November offer and in exercising his discretion to award the respondent indemnity costs as from that date.  It was said that his Honour accepted that in June 2004 the appellant did not have sufficient information to make a meaningful assessment of the quantum of the claim and, thus, determine whether to accept the first offer.  And his Honour said that the position of the appellant was no different in November 2004.  It was argued that his Honour thereby accepted that in November 2004 the appellant was also in the position where he could not meaningfully assess the quantum of the claim.  It follows, so it was said, that his Honour should have concluded that it was not unreasonable for the appellant not to have accepted the second offer.  In coming to the conclusion, the appellant claimed, his Honour must have had regard to irrelevant matters and, therefore, his discretion in that regard miscarried.

1. In my view, however, his Honour made no error of principle and did not plainly err such as to vitiate the impugned decision.  When his Honour said that ‘the position of [the appellant] on 15 November 2004 was no different [from that in June]’ his Honour may have been referring to the fact that the appellant had not been provided with the material it sought to enable it to substantiate the quantum of the respondent’s claim.  But it is clear enough from the remainder of the judge’s reasons that he considered that in November the appellant was in a materially different position for the purpose of determining whether to accept the second offer.  First, his Honour noted the amount that Fletcher was prepared to accept was reduced to $400,000, which was only approximately $57,000 greater than the cost of replacing the chains.  Secondly, his Honour noted, as I have said, that the second offer was inclusive of statutory interest and costs.  Thirdly, there must have been a prospect that Fletcher might recover some damages for its consequential loss claimed.  In all the circumstances, his Honour said, he considered that the rejection of the second offer was unreasonable.  As the respondent pointed out, by November 2004 the appellant was in a position to make an informed assessment of its prospects of success in the proceeding.  The statement of claim dated 30 April 2004 contained detailed particulars as to the defects in the chains, and representatives of the appellant attended the premises of Fletcher and inspected the defective chains on several occasions.

1. In my view, in concluding that the rejection of the second offer was unreasonable such as to warrant the exercise of discretion to award indemnity costs, his Honour made no error of principle and his conclusion is not plainly wrong.[29]  On the contrary, I consider that it was well open for his Honour to have come to that conclusion.  Unsurprisingly, the amount of the compromise offered was plainly a relevant consideration,[30] more particularly, that the second offer was, as I have said, significantly less than the June offer (and, as it turned out, considerably less than the judgment sum).

   [29]Semco Developments Pty Ltd v Graham [2005] VSCA 268 [12].

   [30]Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No. 2) (2005) 13 VR 435,

1. In the circumstances, the appellant’s claim that his Honour’s exercise of discretion to award costs on an indemnity basis miscarried is unsustainable.

Conclusion on the breach of contract claim

1. For the reasons I have given I would dismiss the appeal against his Honour’s decision to award Fletcher damages for breach of the Supply Agreement. 

Notice of contention

1. Given the above conclusion it is not necessary to deal with Fletcher’s Notice of

Contention under cover of which it is claimed that his Honour erred in finding that the appellant was liable to Fletcher in negligence.

ASHLEY JA:

1. I agree with Chernov JA, for the reasons which his Honour gives, that this appeal should be dismissed.

WHELAN AJA:

1. For the reasons given by Chernov JA, I agree that the appeal should be dismissed.