Seeley International Pty Ltd v Newtronics Pty Ltd - [2001] FCA 1862

FEDERAL COURT OF AUSTRALIA
Seeley International Pty Ltd v Newtronics Pty Ltd [2001] FCA 1862
CONTRACT- Formation of Contract – exchange of correspondence, meetings and purchase orders with Terms and Conditions – assessment of actual terms of contracts –– where respondents did not object to printed terms or put forward their own terms over a prolonged period the applicant’s terms held to be incorporated into the contract
CONTRACT – whether breach of implied term that goods reasonably fit for purpose where respondent well aware of that purpose – whether implied warranty goods existed that were of merchantable quality – whether respondents breached implied term to use reasonable care and skill
TORTS – Duty of Care – whether respondents breached duties to exercise reasonable care and skill in designing and manufacturing product – whether the applicant relied upon respondents’ expertise
DAMAGES – liability of both respondents in tort and contract – business sold by first respondent to second respondent without applicant’s knowledge – second respondent continued to deal with applicant as before – both respondents in breach of express and implied terms of contract – held jointly and severally liable
DAMAGES – applicant sought damages for loss of reputation – respondent led evidence of lack of reliability in product – evidence disclosed general lack of brand awareness in product area – unable to find applicant enjoyed a high reputation for reliability
DAMAGES – past economic loss – calculation of direct losses as a result of product recall – losses due to negative publicity and required re-direction of monies away from research and development into marketing – assessment of impact on lost sales and market share taking into account other external factors and commercial contingencies
Trade Practices Act 1974 (Cth) ss 51A, 52, 82, 74
Sale of Goods Act 1895 (SA) s 14
Acts Interpretation Act 1901 (Cth) s 22(1)(a)
Fair Trading Act 1987 (SA) s 54
Limitations of Action Act 1936 (SA) s 48(3)(b)(i)
Evidence Act 1995 (Cth) s 69
McGregor on Damages (16^th Ed)
Macquarie Dictionary (3^rd Edition)
The Australian Oxford Dictionary
Cullinane v British ‘Rema’ Manufacturing Co Ltd [1954] 1 QB 292 referred to
Canvas Graphics Pty Ltd v Kodak (Australasia) Pty Ltd [1995] FCA 470 referred to
March v E & MH Stamare Pty Ltd (1991) 171 CLR 506 applied
Astley v Austrust Ltd (1999) 197 CLR 1 applied
Crawford v Mayne Nickless Ltd (1992) 59 SASR 490 discussed
Bryan v Maloney (1995) 182 CLR 609 applied
Perre v Apand Pty Ltd (1999) 198 CLR 180 applied
Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 followed
Amann Aviation Pty Ltd v Commonwealth (1990) 22 FCR 527 referred to
Gibbs Holdings Pty Ltd v MMI [2000] QCA 524 referred to
Hall v Meyrick [1957] 2 QB 455 referred to
Marra Developments Ltd and the Companies Act [1979] 2 NSWLR 193 cited
Valoutin Pty Ltd v Furst (1998) 154 ALR 119 applied
TPC v TNT Management Pty Ltd (1984) 56 ALR 647 cited
Jones v Dunkel (1959) 101 CLR 298 applied
SEELEY INTERNATIONAL PTY LTD v CINTRO PTY LTD AND NEWTRONICS PTY LTD
NO SG 21 OF 1998
O’LOUGHLIN J
21 DECEMBER 2001
ADELAIDE

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY

SG 21 OF 1998

BETWEEN:

SEELEY INTERNATIONAL PTY LTD
APPLICANT

AND:

CINTRO PTY LTD
FIRST RESPONDENT

AND:

NEWTRONICS PTY LTD
SECOND RESPONDENT

JUDGE:

O’LOUGHLIN J

DATE:

21 DECEMBER 2001

PLACE:

ADELAIDE

FINDINGS AND REASONS
THE PARTIES TO THE PROCEEDINGS

The applicant in these proceedings is Seeley International Pty Ltd (“Seeley”). On 12 February 1998, it filed an application and a statement of claim in this Court naming Newtronics Pty Ltd as the respondent to the proceedings. It pleaded (inter alia) that it had entered into certain agreements with that company; it alleged that those agreements related to the design, manufacture and supply by the respondent to Seeley of certain electronic components which were to be installed in Seeley’s domestic rooftop evaporative airconditioners. Those components, which will be described in detail in due course, can, at this stage, be referred to as a hand held remote control package. The agreements, or the negotiations leading up to the making of those agreements, were said by Seeley to date back to 1992.
In February 1995, fires had broken out in three houses. In each case, the source of the fire was somewhere within a Seeley domestic rooftop evaporative airconditioner which had been installed on the roof of each house. It was Seeley’s case that the cause of each fire was the faulty componentry that the respondent had supplied to Seeley. It has claimed that the fires caused substantial losses to its business and its reputation; it has sought damages to compensate it for those losses, alleging that the respondent had breached its obligations under the agreements, that it had breached a duty of care that it owed to Seeley and that it had been guilty of misleading and deceptive conduct in the negotiations that preceded the making of the agreements.
A defence was filed denying liability; there was also a cross-claim for the price of goods sold and delivered. Seeley must have realised that something was wrong because, in its defence, the respondent claimed that it was only incorporated in 1993, a year after the commencement of the negotiations. The consequential inquiries that Seeley made enabled it to place material before the Court which has satisfied me that the following findings can be made:
·a company by the name of Newtronics Pty Ltd was incorporated on 24 February 1981;
·however, that company changed its name to Cintro Pty Ltd (“Cintro”) on 27 October 1993;
·a company was incorporated as Biddop Pty Ltd on 3 September 1993;
·Biddop Pty Ltd changed its name to Newtronics Pty Ltd (“Newtronics”) on 27 October 1993;
·Cintro has, from 27 October 1993, owned approximately 49 per cent of the shares in Newtronics.
·By a Deed of Sale dated 15 day of October 1993 (“the Deed of Sale”) the business that had previously been conducted by the old Newtronics Pty Ltd (ie Cintro) was sold to the new Newtronics Pty Ltd. The Deed of Sale was tendered in evidence. By clause 2.1 (in conjunction with Clauses 1.1.5 and 1.1.9) Cintro transferred, with effect from 30 September 1993, all the relevant assets and liabilities of its business to Newtronics.)
·Neither the vendor nor the purchaser of that business caused notice of the sale to be given to Seeley and Seeley was unaware of the sale of the business and the change in the corporate identity of the party with whom it was dealing until a date subsequent to the institution of these proceedings.
Henceforth in these reasons I will use the name “Cintro” to identify the body corporate with which Seeley first dealt. Any reference to “Newtronics” will, unless I indicate to the contrary, be a reference to the company that was incorporated under the name of Biddop Pty Ltd and with whom Seeley dealt after the sale of the business by Cintro.
When Newtronics purchased the business from Cintro, employees of Cintro, including Messrs Tescher, Casey, Au and others, were then working on the Seeley project that has become the focal point of these proceedings. Newtronics took over the employment of those men so that they were thereby able to continue the work on the project that they had previously attended to as employees of Cintro. That work, as counsel for Newtronics acknowledged in his written submissions, “included the design of electronics for the Applicant so as to enable RF Units to be installed in the Applicant’s coolers”. The letters “RF” stand for “radio frequency” and the reference to “coolers” was a reference to Seeley’s domestic rooftop evaporative airconditioners.
As I have already said, neither Cintro nor Newtronics disclosed to Seeley the change that had occurred in the ownership of the business. Seeley continued to deal with the same personnel; its employees continued to visit the same premises and they telephoned and sent facsimile transmissions to the same numbers as they had prior to the Deed of Sale. The fact that the same personnel held themselves out as employees and representatives of Newtronics, combined with the fact that none of them made any attempt to inform Seeley of the sale of the business, led, so Seeley claimed, to the conclusion that, by its conduct, the new company took over and bound itself to deal with Seeley in accordance with the terms and conditions of the contractual arrangements that were in force at the time of the changeover. During the course of his closing submissions, counsel for Newtronics stated that, whilst putting Seeley to proof, his client did not seek to take any advantage of the fact that there had been a change of ownership of the business in 1993. As I understand this concession, it could mean that this case might be decided against Newtronics – should the evidence warrant such a result – by having regard to the acts or omissions that occurred from the time of the first contact between Seeley and Cintro as if there had been no change in the corporate ownership of the business.
The revelation about the existence of the two companies and the change of names, necessitated the filing of an amended application and an amended statement of claim; they were filed on 30 October 1998, naming Cintro as the first respondent to this action whilst Newtronics was identified as the second respondent. On 11 February 1999, Cintro filed its defence to Seeley’s amended statement of claim. Newtronics, as the second respondent, had earlier filed its defence and a cross-claim against Seeley on 26 November 1998.
On 17 December 1998 Seeley filed its reply to Newtronics’ defence and its defence to Newtronics’ cross-claim. Pursuant to leave granted by a judge of this court, Seeley filed a further amended statement of claim (“the third statement of claim”) on 22 February 1999 and a fourth amended statement of claim (called “the substituted statement of claim”) on 27 May 1999. Newtronics filed a further amended defence to the third statement of claim and an amended cross-claim against Seeley and it later it filed its amended defence to the substituted statement of claim. Cintro did not, however, file an amended defence to the third statement of claim or to the substituted statement of claim.
Newtronics’ cross-claim against Seeley was resolved on the last day of the trial on the following terms. The parties agreed that the quantum of Newtronics’ cross-claim for goods sold and delivered to Seeley was $217,718.98 plus interest that was to accrue from 1 March 1995 to date at 10.5 per cent per annum simple interest. They further agreed that if Seeley succeeded on its claim, that amount, together with accrued interest, was to be set off so that the amount for which judgment would be entered in Seeley’s favour would be accordingly reduced. If, on the other hand, Seeley were to wholly fail in this action, Newtronics would be entitled to judgment on its cross-claim in that sum plus accrued interest.
In addition to reaching that agreement, the parties also reached an agreement, first, in respect of Newtronics’ cross-claim for lost profits, secondly, for the value of its lost work in progress and finally for the value of goods completed but not delivered. The agreed sum for all three subject matters totalled $25,000 plus interest that was to accrue from 1 March 1995 to date at 10.5 per cent per annum simple interest. However, if Seeley succeeded in its claim, the parties have agreed that Seeley will not have any liability to Newtronics in respect of any of these last mentioned matters. If, on the other hand, Seeley were to wholly fail in this action, Newtronics would be entitled to judgment on its cross-claim in that further sum plus accrued interest. Finally, the parties agreed that all questions of costs on the claim and cross-claim should be deferred pending the final determination of these proceedings.
On 14 December 1998, Newtronics filed a second cross-claim; it named Cintro as the cross-respondent and it sought either indemnification or contribution with respect to the claims that Seeley had made against it. On 4 March 1999 Cintro filed a mirror cross-claim against Newtronics seeking indemnification or contribution from it. Defences to those cross-claims were duly filed. During the course of his closing submissions, counsel for Newtronics announced that his client was no longer pursuing its cross-claim against Cintro: nor was it pursuing an allegation of contributory negligence that it had made against Seeley. Newtronics had initially alleged that Seeley had failed to afford an appropriate measure of protection against fires in the design and manufacture of the motors that were installed in its rooftop evaporative airconditioners and had, as a result, been guilty of contributory negligence. Counsel for Seeley sought to use this abandonment to argue that Newtronics’ defence could now only succeed if it were able to show that Seeley’s acts or omissions were, as a matter of law, the only cause of the fires and the only cause of the loss and damage that flowed from the fires. However, such a submission overlooks Seeley’s primary onus of establishing, on the balance of probabilities, that Newtronics’ acts or omissions were responsible for the fires and the consequential losses. Seeley is only relieved, by the abandonment of the allegation of contributory negligence, of having to justify its conduct; it must still prove that one or other or both the respondents are liable to compensate it for its losses.
Newtronics also filed another cross-claim, naming its insurer, Cigna Insurance Australia Limited (“Cigna”) as a cross-respondent. In that cross-claim, Newtronics alleged that if (which was denied) Newtronics were found to be liable to Seeley, then Newtronics was entitled to indemnity under its insurance policy from Cigna in respect of Seeley’s claim. Cigna denied liability under the policy. It alleged that its liability to indemnify Newtronics was limited to certain events and that the subject matters of Seeley’s claims were not within the class of events that were covered by the relevant policy. During the course of the trial Newtronics and Cigna settled their differences on undisclosed terms. By consent, Newtronics cross-claim against Cigna was dismissed: no order was made as to costs.
Although Cintro filed a defence and was represented by counsel when this matter was called on for hearing, it would be fair to say that it had not played an active role in any of the pre-trial procedures. Mr Hevey, counsel for Cintro, informed the Court, when the matter was called on, that his client did not wish to take part in the trial; he said that his client would adopt Newtronics’ “defence and attitude” to Seeley’s claim; he also said that, whilst Cintro was not withdrawing its cross-claim against Newtronics, his instructions were to call no evidence on that claim. In those circumstances, leave was granted to Mr Hevey to withdraw. Cintro thereafter took no part in the trial although it did file some written submissions on 5 July 2001, a short time after judgment had been reserved in the matter. As Cintro has failed to lead any evidence in support of its cross-claim against Newtronics, its cross-claim must be dismissed. As I have already noted, Newtronics, for its part, elected not to proceed on its cross-claim against Cintro and accordingly there will also be an order dismissing Newtronics’ cross-claim. The net result of these many forensic manoeuvres was that the case settled down to a dispute between Seeley on the one hand and Cintro and Newtronics on the other, with Cintro taking no part in the proceedings.
THE PLEADINGS
In paragraph 1 of the substituted statement of claim Seeley pleaded that it had, at all material times, carried on business as a manufacturer and wholesaler of evaporative air coolers. Newtronics admitted that claim but added, correctly in my opinion, that Seeley’s business also included the design and manufacture of electric motors and associated electronic circuitry and controls. Seeley next alleged that Cintro had carried on business as a manufacturer and a seller of electronic components; I have earlier noted, Cintro did not file an amended defence to the substituted statement of claim. As will become apparent, the evidence established that Seeley’s allegation was correct and I so find.
In par 3 of the substituted statement of claim, Seeley alleged that Newtronics carried on business as a designer, manufacturer and seller of electronic products. In its defence Newtronics admitted that it carried on business as a manufacturer of electrical (not electronic) components (not products) but it denied the allegation that it was a designer or a seller of any products. That denial was inaccurate. The undisputed evidence established that first Cintro, and then Newtronics following in the footsteps of Cintro, designed and manufactured electronic objects. Those objects to the untutored eye could be called components or they could be called products.
In par 4 of the substituted statement of claim and in its further and better particulars, Seeley alleged that on various dates in 1992 meetings took place between representatives of Seeley and Cintro. The evidence established that some of those meetings took place at Seeley’s premises at St Marys, South Australia; other meetings were held at Cintro’s premises in North Melbourne, Victoria. Seeley has claimed that, at those meetings, there were discussions between representatives of the two companies “with a view to the parties entering into the contractual arrangements for the design and subsequent manufacture of certain electronic components”. The discussions at those meetings, which were augmented by telephone conversations, were described in the substituted statement of claim as “the Cintro negotiation process”.
The next stage in the development of the relationship between the companies was called “the Cintro development process” in the substituted statement of claim. That was said to have occurred as a result of personal meetings and telephone discussions in the period commencing in November 1992 and continuing until September 1993.As to the Cintro development process, Seeley has alleged that the discussions took place “in connection with the design, development and manufacture of the prototype and completed electronic components by Cintro”.
Seeley then claimed in par 5 of the substituted statement of claim that in 1992 it entered into an agreement with Cintro (“the design agreement”). It alleged that the purpose of the design agreement was for Cintro to design, manufacture and sell to Seeley a prototype radio frequency remote control package for use in Seeley’s domestic rooftop evaporative airconditioners (“the prototype”).
The second statement of claim, to which Cintro had pleaded, referred to the parties entering into the design agreement but it did not include the details of the Cintro negotiation process nor did it refer to the Cintro development process. Cintro’s answer in its defence was to admit that it and Seeley entered into an agreement whereby:
“Cintro agreed to design and sell to Seeley a pre-production prototype remote control (‘the prototype’) for an evaporative airconditioner.”
Save for this admission however, it did not admit the remaining allegations that were contained in par 3 of the second statement of claim. This meant that it did not admit that the agreement called for Cintro to manufacture the prototype; it also challenged Seeley’s description of the device. Seeley had called it:
“A prototype radio frequency remote control package for use in Seeley’s airconditioning units.”
Cintro described it as:
“A pre-production prototype remote control … for an evaporative airconditioner.”
Newtronics did not plead to any of the allegations in pars 4 and 5 of the substituted statement of claim save to say that if any allegation was made against it in either of those paragraphs (which dealt with the Cintro negotiation process, the Cintro development process and the design agreement) the allegation was not admitted.

In par 6 of the substituted statement of claim, Seeley alleged that the prototype comprised goods of a description which it was in the course of Cintro’s business to supply and deal in; that allegation had also appeared in the second statement of claim and Cintro – but not Newtronics – had admitted it. In both the second statement of claim and the substituted statement of claim, Seeley had then pleaded that it had expressly made known to Cintro the particular purpose for which the prototype was required and that it would be relying on Cintro’s skill and judgment. Cintro and Newtronics both denied those allegations, pleading instead that Seeley had relied upon its own experts and its own skill and judgment and that it had not relied on Cintro’s skill and judgment.
According to Seeley, the continuing business dealings between it and Cintro (and, unknown to Seeley, later dealings with Newtronics) led to a second contract which Seeley described as “the supply agreement”. In par 39 of the substituted statement of claim, Seeley alleged that:
“On or about 7 or 8 September 1994 Seeley entered into an agreement (“the Supply Agreement”) whereby Seeley agreed to purchase and Newtronics agreed to manufacture and supply to Seeley approximately 3,000 units of the devices.”
Newtronics responded in its defence by pleading, inter alia, that:
“In or about September 1994 the Second Respondent entered into an agreement (“the Agreement”) with the Applicant whereby the Second Respondent agreed to supply and deliver equipment including hand held remote control units and circuit electronic control boards (“the electronic parts”) for use in the Applicant’s evaporative air-cooler.”
Newtronics otherwise denied the allegations in par 39 of the substituted statement of claim. Cintro addressed the making of the supply agreement in par 11 of its defence (when pleading to the second statement of claim). With qualifications that are not relevant for present purposes, it agreed that Newtronics entered into an agreement with Seeley whereby Newtronics was to manufacture and deliver “hand held remote control units and circuit electronic control boards and electronic parts for use” in Seeley’s evaporative rooftop airconditioners.
This then is an outline of the broad allegations that ultimately led to this litigation. I leave the pleadings at this stage to discuss in further detail the nature of the businesses that were conducted by Seeley and the respondents.
SEELEY’S BUSINESS
Seeley is now, and has at all material times been, a South Australian based manufacturer and distributor of cooling and heating systems. It is said to be one of Australia’s largest manufacturers of fixed and portable evaporative airconditioners. Its principal products during the period with which these proceedings are concerned have been:
·electric domestic heaters;
·portable evaporative airconditioners that are marketed under the brand name “Convair”;
·industrial and commercial evaporative airconditioners that are marketed under the brand name “Breezair”; and
·domestic rooftop evaporative airconditioners that are also marketed under the brand name “Breezair”.
Thus it can be said that Seeley manufactures two types of domestic airconditioning units. The first of them is the “Convair” standard portable unit (“the portable unit”); it is free-standing and can be moved from place to place. It is powered by connecting it to an ordinary electric power socket; it carries its own water reservoir and, when it is operational, it pumps cool air into a room. Seeley has manufactured that type of cooler for many years. These proceedings are not concerned with the portable unit, although it will be necessary to refer to it from time to time when discussing the history of Seeley. The second unit is the “Breezair”. The domestic rooftop version of this brand is the unit with which these proceedings are concerned. Hence, any reference hereafter to “Breezair” will refer only to a Seeley’s domestic rooftop evaporative airconditioner. It is much larger than the portable unit and, when used for a conventional house property, it is installed on the roof of the house.
The Breezair operates on the principle of water cooled air. Inside the external cabinet (or housing structure) there is an evaporative media that is affixed to the four vertical sides of the cabinet. Initially, this media was “woodwool” but later a cellulose based medium that is called “CELdek” was used. A water distribution system is used to pump water from a holding tank in the bottom of the unit to a water spreader at the top of the unit. At the top of the unit the water spreader evenly distributes the water so that it is able to flow by gravity feed down the CELdek, thereby wetting the evaporative media. The water distribution system includes both inlet and outlet valves that are used to dump and replace old water in the tank. These valves were initially operated by electrically controlled devices called actuators. Mr Frank Seeley, the chairman of directors of the applicant, during the course of his evidence, described an actuator as something akin to a cylinder with a piston. He likened it to a bicycle pump. In a particular operation it would be as though the handle of the pump was extended and in the next phase the handle was driven, as if a piston, into the cylinder. There are two actuators in the system. One of them activates the opening of the dump valve and the other operates “to activate the closing of the water in that valve”. A large plastic centrifugal fan is located inside the cabinet and is used to draw air from outside the cabinet through the wet evaporative media (the CELdek) thereby cooling the incoming air. The fan then drives the cool air through an outlet at the bottom of the cabinet into the duct work and, from there the cool air is pushed into the internal rooms of the house. The unit operates by means of an electric motor which drives the centrifugal fan; a belt and pulleys are attached to the motor and the fan axle.
The Seeley business commenced in 1967 as a partnership between Mr Frank Seeley and his brother, Cedric. Initially, its activities were limited to the retailing of “Coolair” portable evaporative airconditioners. In the first year of operations, the business was that of an assembly operation. The components that were used in the cooler were manufactured by other business houses and Messrs Seeley and their workforce merely assembled and sold them. Mr Cedric Seeley died in 1969. For a short time, Mr Frank Seeley continued the business with his brother’s widow, but then in 1972 Mrs Cedric Seeley sold her interest in the business to Mr Frank Seeley and his wife, Mrs Kathy Seeley. Subsequently, corporate changes have occurred and now the business is owned and operated by the applicant, a corporation, the shares in which are beneficially owned by members of the Frank and Kathy Seeley family.
It was in about 1972 that the business switched from mere retailing to the manufacture of portable units. Mr Seeley, during the course of his evidence, explained that he developed a prototype portable cooler that was based on existing coolers save that he changed it, wherever possible, from a metal based product to one which, apart from its electrical components, was made almost entirely from plastics. Existing brands had been metal-based products and the use of water in the evaporative system meant that they were liable to corrode; his use of plastic was a substantial innovation. He sold about 1,000 units in his first year but in 1981, after ten years, the business had manufactured and sold about 150,000 portable evaporative air coolers. By 1976, the business was employing about 100 employees and in 1978 it started to supply Email Ltd with portable units that Email marketed under the badged name “Email Air”.
In 1980, the business obtained an export order to supply Iraq with 40,000 portable units. According to Mr Seeley, the business sold a total of 70,000 portable units or thereabouts in Australia and Iraq that year with a turnover of approximately $10 million. It was also in 1980 that the business expended about $1 million in plant and equipment so that it might thereby be able to manufacture its own electric motors for its portable coolers. During 1980, further improvements were made and, as a result, more “air delivery” was achieved from the cooler. Noise level was reduced by 50 per cent and power consumption was cut by about 10 per cent. In 1981, the business obtained a further order from Iraq for 100,000 portable units. As the cost to the business of manufacturing its own motors had achieved a saving of about $10 per unit, the business recouped its capital investment in the new plant and equipment within a year or so. It also redesigned and reworked its product, reducing it from 389 components to 56 components. This was achieved, in the main, by the use of plastics and, in particular, plastic clips which were designed to replace metal screws and fastenings.
Mr Seeley also said that in 1981 his company’s engineers had begun working on the idea of expanding the business so that it could manufacture rooftop evaporative airconditioners in addition to the portable units. In 1982, the business was further expanded; it purchased the plant and equipment that was necessary to enable it to undertake its own plastic injection moulding; it was now able to make its own plastic components.
In 1983, Seeley entered the rooftop evaporative airconditioning market with its EA model. At that time, the market in Australia for such rooftop airconditioners was about 10,000 to 15,000 units per annum, although it grew to 25,000 units by 1989. The geographic market for evaporative coolers was and is limited to areas of dry heat; they are not particularly suitable for humid conditions. As a result, the market is centred on Perth, Adelaide, Melbourne and areas of rural Australia to the west of the Great Dividing Range.
Seeley’s EA model had a plastic polymer cabinet, a plastic fan housing and a plastic centrifugal fan. Mr Seeley said that it had the advantages of a superior appearance, durability and resistance to corrosion because of its use of plastics and it was promoted as having these advantages. He said that it also had a significantly lower cost price and that its patented centrifugal fan was superior to the conventional propeller-type fan that was used in its competitors’ models. Initially when the EA model was introduced, it was sold under Seeley’s existing brand name, Convair. However, the General Electric group, which had initially been a purchaser of the EA model, decided to quit the field and Seeley took over that group’s brand name, “Breezair”. Seeley continued thereafter to use “Breezair” as the name for its EA model.
In 1983, when the Breezair EA model was introduced, the motors that were used by Seeley to drive the evaporative airconditioners were fixed speed motors that operated at mains voltage. Some could operate at two different speed levels whilst others could operate at a three speed function. In either case, it meant that the level of cooling could only be set in limited steps such as “high”, “medium” or “low”. The controller that was used to operate the unit was wall mounted and was connected by conventional electrical wiring to the airconditioner on the roof. The basic task of such a controller was to switch the unit “on” and “off”. The controllers that were used by Seeley at that time were acquired by it from the manufacturer, a company that carried on its business under the name of “Clipsal”.
In 1983, immediately before the introduction of the Breezair EA model, Seeley faced four major competitors in the rooftop market. Bonaire and Braemar each controlled about 40 per cent of the market, whilst Coolair and Celair each accounted for 10 per cent or thereabouts. According to the unchallenged evidence of Mr Seeley, Bonaire was based in Adelaide, as was Coolair, and those businesses sold throughout the Australia wide market. He said that the Braemar brand, which was based in Albury, sold mainly in New South Wales and South Australia, while the Celair brand, which was based in Leeton, sold mainly in New South Wales and Queensland. There were, in addition to these four major competitors, several other minor competitors throughout Australia. Despite this opposition, Breezair managed, nevertheless, to make a successful entry into the rooftop market as did another brand, Brivis, in 1986. Breezair’s success may be gauged from the fact that by the end of 1989 its sales of domestic rooftop evaporative airconditioners had risen from nil in 1983 to about 12,000 units. As at 1990, it was claimed by Mr Arnold, Seeley’s managing director, that Breezair enjoyed market leadership when regard was had to its market share of 43.4 per cent, to its innovative features and to the number of dealers who sold Breezair units.
Between 1983 and 1989, Seeley introduced further innovations to its EA domestic rooftop evaporative airconditioner. For example, in 1986 Seeley introduced variable speed motors which, as their name suggests, permitted the units to operate at a multiple range of speeds. They required variable speed controllers which Seeley also introduced in 1986. The primary function of a controller is, as I have already noted, to activate the airconditioner by turning it “on” and “off”. It can, however, operate other functions of the airconditioner, including regulating the speed of the main motor and the fan; it can also be used to turn the pump motor “on” and “off” and to turn the inlet and outlet valves “on” and “off”. The controller is a vital part of any evaporative airconditioner. It is important that it responds correctly to any setting that may be made by the operator. Thus, it is important that the controller not energise the motor when it has been switched “off” by the operator. It is particularly important that the controller not energise the run winding only because such energisation could cause the motor to overheat without turning and that could lead to ignition and fire. The variable speed controller was also a wall mounted switch, similar to the fixed speed controller, but with the addition of a rotary knob which selected the variable speed. Variable speed motors had the advantage of offering consumers a greater range of comfort levels. This new type of controller was then connected to a control box within the airconditioner which incorporated a triac. A triac was used to control the variable speed of the motor by regulating the voltage that was supplied to the motor (and hence its speed). This high voltage, variable speed controller was manufactured for Seeley by Tekelek Pty Ltd (“Tekelek”).
Between 1990 and 1992, Seeley’s share of the market receded. This was partly because of the activities of Seeley’s competitors, including Coolbreeze, which had entered the market in 1990, and partly because of the financial difficulties that Seeley suffered as a result of the default of an international customer. In 1989, Seeley suffered acute financial embarrassment when an international purchaser defaulted in payment of about $5m. Seeley acknowledged that, for the next several years, it was in strained financial circumstances and was unable to devote significant resources to product development and innovation. Ultimately, Seeley was successful in achieving the return of its goods from the defaulting purchaser but that did not occur until mid 1992.
In about July or August 1992, Seeley, having overcome its financial crisis, resolved to pursue the development of a radio frequency [RF] remote control for its Breezair rooftop evaporative airconditioners. It had, in the preceding October, introduced a thermostatic electronic control with a liquid display known as “the Sensortouch” for the summer of 1991-1992. As I have already noted, Seeley’s rooftop airconditioners were then controlled by a wall-mounted “hard-wired device”. In the early 1990’s, those devices were still only available with one of two options: a customer could have a Clipsal “on/off” switch with two speeds or he or she could have the variable speed switch that was made by Tekelek. It was said, on Seeley’s behalf, that its decision to introduce the RF remote control was one of a series of innovations that had been planned by the company to regain Seeley’s market share. The evidence satisfies me, and I find that in August 1992 Seeley engaged Cintro to design and manufacture an RF remote control which was designated “the RF Sensortouch”. I also find that the RF Sensortouch remote control was to have similar functions to the Sensortouch that had early been designed and manufactured by Tekelek but that it was to be a moveable hand control that operated by means of radio waves.
The initial task that Cintro, and later Newtronics, was to perform, was the design and manufacture of a radio frequency (RF) Sensortouch remote control prototype that would control the operation of Seeley’s rooftop evaporative airconditioners. That operation was to include the method by which the motor in the airconditioning unit would be energised. The prototype was to comprise three modules:
·    a hand held remote control transmitter unit; (this was known by several names such as “a radio frequency module” or “the remote control” or “the remote controller”); its technical name is an “electronic transmitting module” or an “ETM”. It is a conventional handset that is now a familiar object in most homes – the type of handset that is used to control a television set or a video recorder.
·    a printed circuit electronic control board with copper conducting tracks which was also called a “printed control board” or a “PCB”. It was to be installed inside the rooftop evaporative airconditioner; (this item is sometimes referred to as the evaporative cooler control module or “the ECCM”; it is also known as “the power board”); and
·    a receiver located in the roof space of the premises and fitted as part of the airconditioner; (“the receiver”).
The system that Cintro was to design for Seeley was to have a variable speed control that could be used through the remote control system; it was intended that it would replace the wall-mounted hard-wired variable speed control system.
A plastic box was to be mounted on the fan scroll which was inside the housing of the rooftop unit; it was to be connected by a lead to the radio receiver. The box was manufactured in two halves which fitted together. The top section, sometimes called “the lid”, was to hold the evaporative cooler control module (“the ECCM” or “the power board”). The purpose of the ECCM was to receive and interpret transmissions from the ETM and to provide control and power for all functions of the cooler. The receiver was to be mounted in the roof to receive the radio signals from the handset, that is the ETM.
Seeley was to receive deliveries of the separate components from Newtronics – those components being the handset or the ETM, the ECCM and the radio receiver. Seeley would then incorporate those components in its assembly of the end product. This involved the installation of the ECCM in the lid together with various other components such as the heat sink and mylar insulating sheets for which Seeley was responsible.
By facsimile transmission dated 11 October 1993, shortly after the date when Newtronics took over the business Cintro, Mr Ray Cox submitted to Seeley details of the price per unit for the supply and delivery of the ECCMs and the ETMs.
By 1993, Seeley was in a position to launch a new rooftop model – the EM model. It was intended that it would have the RF Sensortouch remote control feature that Cintro had been retained in 1992 to develop, but Cintro had not been able to meet Seeley’s deadline. I am satisfied that the EM model can properly be described as innovative: it had a rounded lower profile together with a new special feature called “the no seasonal maintenance”; that involved the inclusion in the rooftop system of an automatic weather seal. Until then, all rooftop airconditioning units suffered the drawback that, as they were designed to admit air in the summer, they were prone to admitting cold air into the ducting system in the winter. The only solution was to climb on to the roof and cover the unit at the end of summer and uncover it at the end of winter. Seeley’s automatic weather seal avoided that; Seeley had designed an internal seal that could be locked in place by the use of an electronic device. The EM model, which came in various sizes and capacities was fitted with a variable speed motor which was controlled by the variable speed controller. The unit consisted of a plastic housing with vented sides to admit air into the housing; in fact, the unit was almost exclusively made of plastic injected moulding apart from the electrical componentry and a few other items, such as a steel axle. The large cylindrical centrifugal fan was also made by means of injection moulded plastic. Seeley claimed that its centrifugal fan had three advantages over a metal axial fan; first it could move the same volume of air as a much larger axial fan; secondly it was quieter in its operation than an axial fan and thirdly, it was much cheaper to produce. I accept that these features were well ahead of Breezair’s competitors.

The new EM model was released in October 1993 in time for the 1993-1994 summer season, but it was September 1994 before Seeley was able to release the RF Sensortouch remote control for use with the EM Model.
As from September 1994, a Seeley EM model could be purchased with one of three controlling devices. The first option was a hard-wired wall-mounted, variable speed controller that had been designed and manufactured by Tekelek. The second choice was a hard-wired, wall mounted Sensortouch electronic controller which included both an automatic temperature regulating function and a variable speed control function. That had also been designed and manufactured by Tekelek and it employed a triac to regulate voltage and, consequentially, power to the motor. In September 1994, however, Seeley was able to offer the third alternative – a radio frequency (RF) Sensortouch remote control. Its design had been commenced by Cintro and concluded by Newtronics. Newtronics was its manufacturer. Basically, it had the same functions as the wall-mounted Sensortouch controller, save that it had the huge advantage of being a hand held unit that was capable of being carried from place to place. It was an immediate success and Seeley achieved very substantial sales in the summer to January 1995. But then, in the space of four days in February 1995, the three fires occurred in three EM rooftop units. Each of them had been installed with a system that had been designed and supplied by Newtronics.
The Seeley motor which was used in the EM model was described by one of Seeley’s expert witnesses, Professor Bonwick, as a “single phase induction motor connected through circuitry to mains supply electricity”. Elsewhere in a report that he produced, he said of the motor that it was a “Permanent Split-Phase Capacitor” motor, the word “Permanent” referring to the fact that the start motor always remains connected. It comprised a stator and a rotor. In the finished product, the rotor was installed inside the stator and rotated with a very small clearance. The stator was manufactured with a series of slots that were arranged around it in a diameter. Those slots contained turns of copper conducting wire. The Seeley motor had two windings – the start winding and the run (or main) winding. The start winding was arranged so that it traversed the ends of the stator that were closest to the outer perimeter of the stator, whilst the run (or main) winding was arranged so that it traversed the ends of the stator that were closest to the inner perimeter. In each case, the windings were turned in four symmetrical sections known as poles. The principal purpose of the start winding was to create a rotating magnetic field through the space that was occupied by the rotor. It thereby subjected the rotor to a rotating force of sufficient power to cause it to turn from a stationary position. When a passage of alternating current was passed through the run winding and the stator, it created a pulsating magnetic field. As the rotor sat in the path of that magnetic field, it became magnetised and so induced an electric current in the rotor.
The start winding was to be connected by Seeley personnel to the mains supply through a mechanical relay or switch. The relay was to remain open and non-conducting until it received a signal that was initiated by pressing the “on” button on the remote control handset. That action would send a signal to the micro-processor which activated a low voltage circuit that passed through the winding coil; that, in turn, caused the switching arm to be drawn across to the connecting contact, thereby closing the start winding circuit and so activating the AC supply and connecting the start winding.
Two of the principal components in the run winding circuit were the opto-coupled triac and the main (or power) triac. The circuit employed the opto-coupled triac to control the speed of the air-conditioning fan; it was also intended that it would block or isolate the mains supply from the run winding when the motor was not energised – that is, when it was intended that the motor be turned “off”.
The motors for the rooftop airconditioners came in a variety of sizes, the smallest of which was 370W. The largest of the motors was 1500W but the evidence in these proceedings only referred to the 750W, the 1100W and the 1500W motors. The axle for the motor was made out of a section of rectangular stainless steel; it passed through a connecting section in the middle of the fan, enabling the axle to grip and turn the rotating fan. The unit had a plastic pulley that was so constructed that it was possible to adjust the diameter of its surface and the tension on the pulley belt. Using an instrument known as a tong meter, an installer could measure the current that was drawn by the motor under normal operating conditions and then adjust the pulley to achieve the optimum current, and hence, the optimum output of the motor. This ensured that the motor was not overloaded to the point of overheating under normal operating conditions.
The design, manufacture and operation of the RF Sensortouch remote controllers is at the heart of this case. Seeley’s case includes the allegation that the controllers that had been used and installed in each of the units that were involved in the house fires had been designed by Cintro and Newtronics and manufactured by Newtronics. Seeley has alleged that they caused the fires and that Cintro and Newtronics were negligent in the design and that Newtronics was negligent in the manufacture of the controllers.
As a result of the fires Seeley had to institute a nationwide recall (“the recall”) of all its RF Sensortouch controllers; it started this on 17 February 1995 by contacting its dealers and known purchasers. Emergency action was taken to isolate all units so that they were no longer attached to the mains power. At a later stage, owners were provided with an alternative, safe, control mechanism so that they could operate their units. Later again, owners were given the option of having better control units installed or keeping their existing control units and waiting until the remote control system was redesigned and available for use.
The business that had been commenced by Mr Seeley and his brother in 1967, and which is now conducted by the applicant, has grown from a modest annual turnover of $100,000 to its present turnover of many, many millions of dollars. The applicant has claimed that this substantial increase in the size of the business has been the result of its corporate energy and its commitment to innovation; it has also claimed that it has always been a market leader and an innovator. However, Seeley has further claimed that, because of the three fires in February 1995 and the recall, its reputation has been seriously damaged; it had to wind down its research and development; its capacity to innovate was, so it has claimed, substantially impaired and it lost a large part of the market share. According to Dr Beaton, Seeley’s market share was materially reduced. Dr Beaton, an expert in marketing, gave evidence about the impact that the three fires and the recall had on Seeley’s business and its reputation.
SEELEY’S WITNESSES
The first witness was Mr Frank Seeley who, together with members of his family, enjoy the indirect ownership of the whole of the issued shares in the capital of the applicant. His evidence about the history and progress of his company was supported by that of the applicant’s managing director, Mr Roy Arnold and its company secretary and finance manager, Mr Michael Steele. That evidence was not substantially challenged and I accept what Mr Seeley said in his evidence.
Mr Seeley is presently the chairman of Seeley’s Board of Directors. Mr Arnold retired from the position of managing director on the last day on which he gave evidence in these proceedings. Mr Seeley’s evidence about the history of his company and its business was, for the most part, uncontentious. He said that in July 1992, Seeley resolved to pursue the development of a radio frequency (RF) remote control for its rooftop evaporative airconditioners. That project came to be known, as I have said, as the RF Sensortouch project. At that time, and until December 1992, Mr Ian Forte was the officer in Seeley who was in charge of product design and development for the project. When Mr Forte resigned in December 1992, Mr Bob James assumed responsibility in the company for product design and development generally but Mr Andrew Friebe took on the specific responsibility for the RF Sensortouch project. Thereafter, and until August 1994, he was the Seeley employee with the day to day responsibility for that project. In September 1994, Mr Paul Zuodar took over from the Mr Friebe and remained responsible for the RF Sensortouch project until February 1995.
The remaining employees of Seeley who gave evidence, and who can be mentioned at this stage, are Mr Graeme Johnston: he was the production engineering manager until 1996 with responsibility for general production and quality control. Next was Mr Andrew Machin who was Seeley’s purchasing/supply officer and the person responsible for the procurement of the products that were used in the manufacture of Seeley’s products. Finally there was Mr Murray Morton. He was the manager in charge of overseas markets. However, his evidence was not concerned with overseas markets; he was one of Seeley’s officers who had made preliminary investigations into one of the fires.
Three witnesses were called by Seeley in rebuttal without objection. They were Messrs Broadbent, McBratney and O’Hara. As Mr Broadbent was not required for cross-examination, his statement was received into evidence as Ex A288. His evidence concerned his testing in 2001 of ten Seeley motors that had been manufactured according to 1995 specifications. Mr McBratney’s evidence concerned the inquiries that he made of Texas Instruments, the manufacturer of the Klixon 9700k thermal protector; Mr McBratney is a consulting engineer. The remaining rebuttal witness, Mr O’Hara is an employee of Seeley who, at the time of giving his evidence, was Seeley’s national sales manager.
In addition to these witnesses, Seeley called several expert witnesses with specialties in various disciplines. The first of them was Dr Pedder. At the time of giving his evidence, Dr Pedder was the senior Technical Consultant for ERA Technology Ltd and the Visiting Professor in Design Automation at the University of Southhampton (UK). His area of expertise is power electronics, modelling and simulation and he holds Master’s and Doctoral degrees in those and associated disciplines. He is a very highly qualified professional and academic engineer. In submitting his report of May 2000, Exhibit A63, Dr Pedder stated that he had been requested to examine the design of the power electronics that had been used to control the speed of the fan drive by studying the circuit diagram of the speed controller, of a sample wiring card and the component data. His primary task was to provide an opinion as to the competency of the design and the level of safety of Newtronics’ power board for its intended application.
Mr Andrew H Baghurst also gave evidence on behalf of Seeley. Mr Baghurst is a Director of The Australian Electrical Testing Centre which is a Division of Techsearch Business Services at the University of South Australia. He holds Bachelor’s and Masters’ Degrees in engineering as well as a Diploma of Education. He was awarded a Churchill Fellowship in 1974 and in 1991 he received an Engineering Excellence Award in the Manufacturing Facilities Category from the Institution of Engineers. He is the author of numerous publications and seminar papers.
The next of the applicant’s experts was Professor WJ Bonwick. He holds Bachelor’s and Doctoral degrees in Engineering, specialising in Electrical Engineering. He is now retired but had earlier held the position of Sir John Monash Professor of Electrical Power Engineering at Monash University and was later the Director of the Centre for Electrical Power Engineering at that University. His curriculum vitae is most extensive and most impressive. In his report of March 1999, Professor Bonwick said that he had been requested to express his opinion “as to the design of the Newtronics’ Circuit Board”. He was also asked to comment upon the suitability and the outcome of various tests that had been devised and carried out by Mr Baghurst and to comment on the conclusions that had been reached by Mr Baghurst, including those relating to the Newtronics’ circuit board design.
The last of the technical and scientific experts was Mr Russell F Lee. Mr Lee practises as a Forensic Electrical Engineer. He had inspected the damage to one of the three homes on instructions from the home-owners’ insurer. He has developed extensive expertise in the investigation, reporting and the determination of the causes of electrical and other ignition source fires. He is highly qualified both academically and professionally. Mr Lee did not, however, undertake a detailed study of the electronic systems nor did he identify the manufacturers of the various components.
Dr Beaton, who gave evidence on behalf of Seeley, holds Bachelor’s and Doctoral degrees in Medicine and Medical Sciences. He also holds a Master’s degree in Business Administration. His academic qualifications were all obtained at the University of Witwatersrand, Johannesburg, South Africa. He said that as part of his studies for his Master’s degree in Business Administration, he studied the subject of Organisational Behaviour, that being a subject that is based on an understanding on how human beings behave in various settings. These settings include, for example, the underpinning of marketing, including an analysis of how consumers behave in response to the marketing stimuli of marketers and their competitors. As part of his studies, he also investigated the nature and effects of innovation in relation to the introduction of new products into health care organisations. Initially, Dr Beaton pursued an academic career in medicine, being a Professor in the Faculty of Medicine at the University of Witwatersrand in the field of Medical Education. In 1980 however, he turned to advertising when he was appointed managing director of a major advertising agency. Later again, he went into market research. Since coming to Australia, Dr Beaton has followed a career in advertising, marketing and the investigation and analysis of quantitative survey findings. In addition to giving oral evidence in the proceedings, his report of 23 May 2000 was also received into evidence.
The last of Seeley’s witnesses was Hugh Lachlan McPharlin, a chartered accountant, who prepared reports and gave evidence about the extent of the losses that Seeley was said to have suffered as a result o the fires and the recalls. Mr McPharlin is presently a partner in Edwards, Marshall and Co, having joined that firm in 1977 as a student. He obtained his degree of a Bachelor of Arts in Accountancy in 1983.
CINTRO’S AND NEWTRONICS’ BUSINESS
The original company, now called Cintro, carried on business between 1981 and 1993. Its shares were then owned by Garry Tescher, his brother, Otto Tescher and Odero Conci. Garry Tescher was the managing director and principal executive officer of Cintro at the time when its business was acquired in 1993 by Newtronics. Newtronics was thereafter owned, as to 51 per cent, by Atco Controls Pty Ltd, a company that was associated with Georgio Gjergja. The remaining 49 per cent was held by Cintro. Thereafter, and until February 1995, the directors of Newtronics were Garry Tescher and Georgio Gjergja. Following upon the sale of the business to Newtronics, Garry Tescher assumed the role of managing director and principal executive officer of Newtronics.
Newtronics did not call any of its present or former officers or employees as witnesses in the trial. Therefore, its management structure and the nature and the extent of its business has to be inferred, in part, from the documents that were tendered as exhibits during the course of the trial and, in part, from what was said by those Seeley employees who gave evidence. Those documents reveal that sometime in 1995 David Bruce took over as managing director from Garry Tescher. Allan Charak was succeeded in August 1993 by Ray Cox as the marketing manager. The senior electronics engineer was Eric Au and the chief research and development engineer was Odero Conci. As senior electronics engineer, Eric Au was in charge of the development project for the RF Sensortouch remote control for Seeley throughout the period from August 1992 to August 1994. Engineers who worked under his supervision included Sengdy Manikhot and, from August 1993, Simon Casey. Following upon the acquisition by Newtronics of Cintro’s former business, Mr Casey was assigned the day-to-day responsibility for Seeley’s RF Sensortouch project. Mr Conci was Cintro’s particular employee who was in charge of a related development project for Electrolux Vacuum Cleaners in the United States of America, a factor that will achieve a measure of importance at a later stage in these reasons.
In his opening submissions, counsel for Newtronics acknowledged that Newtronics had purchased Cintro’s business and that Newtronics had carried on that business, employing certain of the former employees of Cintro to continue the work that they had been doing when in the employ of Cintro. That work included the work of designing the electronics for Seeley so as to enable radio frequency (RF) units to be installed in Seeley’s EM model domestic rooftop evaporative airconditioners. This meant that Newtronics was to complete the design (which had been commenced by Cintro) of the electronic features that would enable a hand-held remote control device to operate the rooftop airconditioner. Newtronics also conceded that, once it took over the business from Cintro, it took over all of Cintro’s responsibilities.
Between October 1993 and into 1994, numerous meetings were held between the parties and several prototypes of the electronic transmitting module (“the ETM”) and the evaporative cooler control module (“the ECCM”) were submitted by Newtronics to Seeley for Seeley’s consideration. It was Seeley’s case that Cintro – and later Newtronics – were contractually bound to design and supply a package or a kit that was to comprise the handset (that is, the remote control), the receiver which was connected to the power board, and the power board. The handset was to be turned “on” and “off” by the use of a button.
These proceedings have arisen because Seeley has claimed that the Newtronics’ package failed and that the failure caused the three fires; when the controls were switched to the “off” position, the airconditioning units did not shut down. They remained energised or live; electricity continued to run through the motors of the airconditioners but the fans were not turning. Because the fans were not turning, the units were not cooling, nor were they blowing air through the ducting system. The three home owners were unaware of this fault as the fault manifested itself in each case in the airconditioning unit which was installed on the roof of their respective homes. In each case, a fire broke out, causing damage, allegedly through the units overheating. Seeley has alleged, and Cintro and Newtronics have denied, that the fires occurred because of faults in the components that had been designed by Cintro and Newtronics and supplied by Newtronics.
The commercial relationship between the parties to this litigation commenced in about March 1990 when Mr Charak, Cintro’s marketing manager, called at the offices of Seeley and met with Messrs Machin and Forte. The purpose of his visit was to promote Cintro’s motor controllers. The case for Seeley was that Mr Charak said that Cintro had the capability to develop a radio frequency (RF) control for the Breezair model and that Cintro could duplicate the Tekelek variable speed controller for a cheaper price. Newtronics had the opportunity, during the course of the trial, to refute this assertion; but it did not call Mr Charak and it has offered no reason for his absence. In those circumstances, I have no reason to doubt the veracity or the memories of Mr Machin and Mr Forte and I accordingly make findings in terms consistent with the evidence that they gave on this subject.

In his final submissions, counsel for Newtronics submitted that the Court had heard that a dispute had arisen between the former directors of Cintro and the present directors of Newtronics. That dispute was said to be unrelated to this litigation but, submitted counsel, it explained why no former staff had been called to give evidence. I reject that submission. No details of any such dispute were given and no attempt whatsoever was made to explain why any such dispute might have inhibited Newtronics from calling members or former members of its technical and administrative staff to give evidence on its behalf.
Following upon Mr Charak’s approach, Seeley provided Cintro with a Tekelek variable speed controller so that Cintro could consider its operation when making its quotation. Tekelek’s variable speed controller utilised an opto-coupled triac and a power triac to control the run winding; it also utilised a common relay to isolate both the run and the start winding. Cintro therefore knew that Tekelek had considered it desirable to use a common start-run winding relay. It will be necessary, in due course, to return to the subject of the presence of a relay in the circuitry.
Following this first meeting, Mr Charak provided two alternative quotations to Seeley to design and manufacture a variable speed controller. One was dated 26 March 1990 and the second one was a month later on 26 April. Negotiations between Seeley and Newtronics broke down however, and Seeley continued to engage Tekelek to develop and manufacture its controls.
In January 1992, Mr Charak approached Mr Forte again, once more seeking to take Seeley’s business from Tekelek by supplying electronic controllers to Seeley. Mr Charak’s visit was followed by a visit by Mr Gary Tescher who spoke with Mr Forte on 5 February 1992. Relying on the entries in his diary, Mr Friebe recalled that he also met with Mr Tescher on 5 February at Seeley’s premises. On that date it was agreed that Cintro would provide Seeley with a quotation to design and manufacture a replacement for the existing Sensortouch control.
Mr Forte visited Cintro’s premises in Melbourne on 17 February 1992. On that occasion, Mr Tescher showed him Cintro’s production line and examples of some of Cintro’s work. It included controllers for Vulcan/Chef appliances, a variable speed controller for vacuum cleaners, a climate control for Holden Calais airconditioners and an RF remote control for B & D roller doors. It was during this tour that Mr Tescher informed Mr Forte that Cintro was an expert in the field of RF links and was very experienced in appliance controllers, including controls for motors. Mr Tescher also said that Cintro had overcome communication reliability problems for appliances such as the proposed RF Sensortouch remote control.
Other statements that were attributed by Mr Forte to Mr Tescher included the assertion that Cintro’s Mr Au was a highly competent engineer, that Cintro was much better than its competitors and that Seeley would not have any problems because Cintro knew what they were doing. Mr Tescher also showed the Vulcan circuit board to Mr Forte telling him that it was typical of what Cintro made. I have no reason to doubt the integrity of Mr Forte and, in the absence of Mr Tescher, (his absence not having been satisfactorily explained) I find that statements, as summarised in these reasons, amounting to representations about the skill and expertise of Cintro were made by Mr Tescher to Mr Forte on the occasion of Mr Forte’s visit to the premises of Cintro in Melbourne on 17 February 1992. I further find that the representations that were made by Mr Tescher reasonably and understandably led Mr Forte, and therefore, his employer, Seeley, to believe that Cintro had the expertise and ability to design, develop and manufacture remote controllers with RF links for use in Seeley’s evaporative airconditioners. Mr Forte also said, and I accept, that he told both Mr Tescher and Mr Charak that Seeley wanted all the features that it then enjoyed in the hard-wired Sensortouch but with a number of additional features, such as the option of adding a heater to it and another control known as “the water miser control”.
At about this time, Cintro supplied Seeley with copies of its brochures, some of which were tendered in evidence. The first was entitled “Touching the Future” whilst the second was called “Excellence in Electronics”.
The brochure “Touching the Future” said that:
·Cintro had played a part in the rapid and continuing development of electronic devices to serve applications “undreamed of in the near past”;
·Cintro designs and markets electronic products that replace entire electro-mechanical control systems;
·the Cintro design team has produced advanced electronic solutions to product design problems in almost every area of manufacture, including major appliances such as ovens, microwaves, dryers, washers, vacuums, heating and airconditioning;
·Cintro offers a complete custom design service, from product evaluation and design through prototype testing and development to final manufacturing;
·electronics can reduce product cost and increase reliability and marketability; and
·Cintro’s long experience and the highest standards have brought it a record of economical manufacture and excellent quality control procedures.
The brochure, “Excellence in Electronics”, outlined Cintro’s fully integrated design and manufacturing service. It also outlined Cintro’s claimed experience, expertise and high standards of design, manufacture and quality control asserting:
“In fact, we believe that [Cintro] has designed more custom microprocessors for appliances than any other company, in the world.”
The brochure further said that:
·Cintro is Australia’s largest manufacturer of microprocessor based electronic products;
·Cintro has a 75 per cent share of the domestic appliance electronic control market;
·Cintro is acknowledged as a world class appliance control design and manufacturing company;
·Cintro is one of the few companies in the world whose expertise covered all applications from small to major appliances;
·great care is taken in design to ensure that the design was technically reliable;
·Cintro’s integrated research and development department covers all areas of electronics technology, from mass volume microprocessor applications through to radio frequency transmission and power electronics;
·Cintro achieves a consistently high level of quality of products and services.
The case for the applicant was that Cintro (and therefore Newtronics) offered, in these written materials, a complete service from product evaluation and design through to prototype testing and development to final manufacture. That, in my opinion, was a justifiable submission and I accept it.
In an undated document entitled “Fact Sheet”, Cintro claimed that in “the eight years since the company’s establishment, [Cintro] has captured 75% share of the domestic appliance electronic controls market …”. As Cintro was incorporated in 1981, it would seem that this statement was published sometime in 1989 or shortly thereafter. There was no evidence that the Fact Sheet was ever seen by or relied upon by Seeley but it is an indicator of how Cintro regarded itself and its expertise. It is an aid that can be enlisted when considering the extent to which Seeley has claimed that Cintro and (later) Newtronics presented themselves to Seeley as experts in their field and as experts upon whom Seeley could rely.
Seeley has submitted that the design and manufacture of the RF Sensortouch remote control for its rooftop domestic evaporative airconditioners fell squarely within the claimed expertise of Cintro and Newtronics. In the absence of evidence to the contrary from the respondents, I accept that submission.
Mr Forte returned to Cintro’s factory in Melbourne on 27 April 1992, accompanied by Mr Friebe. They met with Messrs Tescher, Charak and Au. During the course of this visit both Mr Tescher and Mr Charak demonstrated Cintro’s capabilities in various areas and, once again, emphasised the expertise that Cintro possessed. Mr Friebe said of this visit that they discussed the Sensortouch project and some other projects in which Cintro was involved on Seeley’s behalf. Mr Friebe said, echoing the evidence of Mr Forte on an earlier occasion, that Mr Tescher had said that Cintro was then making RF Controls for garage roller doors and that his company had experience in controlling motors and developing RF links with motors. During this visit on 27 April, Mr Friebe recalled that Cintro had, in its boardroom, one of the existing Tekelek hard-wired Sensortouch controls. According to Mr Friebe, Mr Casey of Cintro subsequently told Mr Friebe that Cintro had gone over the Tekelek controller and had identified areas which they thought were poorly designed. Mr Friebe said that Mr Casey told him that Cintro had improved on those areas in the controller that it was making for Seeley. Mr Friebe said that he and Mr Forte asked Cintro to give Seeley a quotation, first, for the cost of duplicating the existing Sensortouch control and, secondly, for the cost of duplicating the existing Sensortouch but with a radio frequency (RF) link. Thus, in April 1992, began the negotiations in earnest between Seeley and Cintro which culminated in Newtronics supplying to Seeley the radio frequency (RF) remote control package that was to be used by Seeley with its rooftop evaporative airconditioners.
On 22 May 1992, Mr Charak sent a facsimile transmission to Seeley quoting $65.13 per controller. That price was accepted by Seeley. On 22 June 1992, Mr Charak sent another facsimile transmission to Mr Machin of Seeley. The facsimile stated inter alia:
“[Cintro] stands behind all its products with its reputation for quality and expertise as the largest manufacturer of electronic controls in Australia.”
Both Mr Machin and Mr Forte said that they relied upon this statement in believing that Cintro was an expert in the field of electronics. In the absence of Mr Charak and, relying upon Mr Forte and Mr Machin as witnesses of truth, I accept that they relied upon Mr Charak’s statement in the manner in which they described.
The emerging pattern continued at Mr Tescher’s meeting in Adelaide on 24 July 1992 with Messrs Arnold and Forte. Mr Arnold and Mr Forte, in their respective witness statements, alluded to the nature of the representations that Mr Tescher made to them about Cintro’s expertise and ability. Those representations were in terms similar to, and consistent with, those that had earlier been made and which have already been summarised in these reasons. I accept the evidence of Mr Arnold and Mr Forte that Mr Tescher represented to them at that meeting that Cintro had the degree of expertise to warrant Seeley engaging it for the design and manufacture of the radio frequency remote controls. Following on the meeting with Mr Tescher on 24 July 1992, Mr Forte recommended to Mr Arnold that Seeley proceed with the RF Sensortouch control, using Cintro as the designer and manufacturer. Mr Arnold accepted the recommendation and decided that Cintro should be engaged to design and manufacture the controller; he had previously obtained the authority of his Board of Directors to incur the necessary expenditure.
It was on the occasion of the meeting on 24 July 1992 that the scope of the design work that was to be carried out by Cintro was agreed. Cintro was to:
·design and develop two printed circuit boards, one to be fitted in the hand held unit and one to be fitted in the electrical control box that would be installed in the rooftop unit;
·design and develop software for both printed circuit boards; and
·design the tooling for both printed circuit boards.
In return, Cintro was to be paid the sum of $31,000 as the price for the design and development of the RF Sensortouch remote control.
Mr Forte visited Cintro’s premises in Melbourne on 25 August 1992. He said in his witness statement that the purpose of his visit was “to expand on the specification given to us by (Cintro) on 21 July 1992”. During that visit, Mr Tescher introduced him to Mr Au as the engineer who was responsible for the RF Sensortouch design. Mr Tescher also showed Mr Forte a control board that Cintro had used for a Vulcan appliance, telling Mr Forte that it was an example of how Cintro could get a lot of information into a very small chip. Mr Tescher, once again, gave assurances about Cintro’s capabilities. It was during this visit that Mr Au, in his discussions with Mr Forte, exhibited a wide knowledge of electrical componentry and circuitry. He also told Mr Forte that he had undertaken the design work that had resulted in the power boards that Mr Forte had been shown.
Mr Arnold visited Newtronics’ premises in Melbourne on 11 September 1992 where he spoke with Mr Tescher. According to Mr Arnold, Mr Tescher said words to the effect that “we know more about design and production of electronic controls than anyone else in Australia” and “[Cintro] is expert in the field of radio frequency electronics”. Mr Arnold also said that Mr Tescher claimed that Newtronics had “the best designers and engineers and we know what we are doing”. Mr Arnold said, and I accept, that Mr Tescher’s representations reassured Mr Arnold that Cintro would be able to handle Seeley’s requirements. The ease with which that finding can be made has been based upon my acceptance of Mr Arnold as a witness of truth and the absence of Mr Tescher as a potential witness to refute Mr Arnold’s evidence.
Mr James attended at Cintro’s premises from October 1992 onwards on several occasions. He met with Mr Tescher and other representatives of Cintro and in his witness statement he has recorded the many representations that Mr Tescher made about Cintro and its abilities. These representations were in the same pattern as those that had been made by Mr Tescher to Mr Arnold. I accept Mr James’ evidence that Mr Tescher also said to him that Cintro was capable in all matters of design and production of electronic components, that it was the leading manufacturer of appliance controls and that he held Cintro out as a party that was competent to design and manufacture to Seeley’s requirements.
The uncontradicted evidence of Messrs Forte, Machin, Friebe, Arnold and James justifies a finding, which I make, that Seeley relied upon the many representations that had been made to its senior officers by Mr Tescher and the other representatives of Cintro to whom reference has been made. Based upon the representations that had been made in the name of Cintro, Seeley was entitled to believe, and did believe, that Cintro had a high standard of quality, that it would use appropriate and high quality components, that its product would be both safe and reliable, that it would be of merchantable quality and that it would be fit for the purpose for which it was required; namely for use in rooftop evaporative airconditioners.
NEWTRONICS’ WITNESSES
The witnesses for Newtronics can conveniently be divided into three groups. First, there were those who can be described as technical or scientific witnesses. They were Dr Holmes and Mr Collins, both of whom were called to repudiate the allegation that the three fires were caused by Newtronics faulty power boards. Mr Gartner, a metallurgist examined some thermal protectors and Mr Herzog, another metallurgist was retained to examine the method that was used by Seeley in fixing cooling fans to the electric motors that were used in its evaporative airconditioners. Mr Jansen, the last of the technical witnesses, was a Dutchman who was employed by the company that manufactured Klixon thermal protectors.
In his written submissions, counsel for Newtronics did not attempt to rely on the evidence of Mr Collins as to the causes of the three fires. Significantly, he wrote:
“It would be our submission that the most significant aspect that Collins addressed related to the despoliation of the debris.”
It is true that the evidence revealed that appropriate clinical and forensic procedures were not carried out in some respects when inspections of the debris from the three fires were conducted. However, those omissions or failures were not, in any sense, damaging to Seeley’s case. The matter of greater interest was that Mr Collins was advanced, initially, along with Dr Holmes, as an expert who would contradict the opinions of Seeley’s expert witnesses. Mr Collins failed in that exercise and, understandably, counsel for Newtronics has not relied on his opinions. The evidence of Mr Collins was contradictory and confusing. I do not consider that it is necessary to examine his evidence in detail.
The next group comprised accounting, marketing and actuarial witnesses. Mr Lockwood was presented as an expert in accounting; Mr Solomon is an actuary and Messrs Fulton, Hildebrand, Ramage and Wegman gave evidence on aspects of marketing.
The final group consisted of seven men who, for convenience, can be referred to as the lay witnesses. Messrs De Meo, Dullard and Mannix were former dealers or distributors of Seeley’s products. Messrs Doherty, Marshall, Ramsay and Reigel-Huth were former employees of Seeley.
THE THREE FIRES
The first of the fires occurred at about 10.30 am on 14 February 1995 at the home of Mr and Mrs Douglas Gunning at 9 Grevillea Avenue Roleystone, Western Australia (“the Roleystone fire”). They had an EM model Breezair domestic rooftop evaporative airconditioner installed in their home just over two weeks earlier on 27 January. Mr Gunning said that he noticed a “funny” noise which occurred only when the unit was switched “off”. When the unit was running there was no problem with noise but when it was switched “off” it would make a sound like “err err” every five minutes of so. Mrs Gunning also noticed a noise and, like her husband, she said that it only occurred when the unit was switched “off”. She said the noise “came and went. It was not continuous”. Mrs Gunning was quite certain that the unit had not been in operation during the night preceding the fire and she was also certain that she had checked the unit and ascertained that it was “off” before leaving for work at about 6.30 am on the morning of the fire. (Her husband had left about fifteen minutes earlier). Each of them was separately telephoned at their work at about 10.30 am and were informed that their house was on fire. Fortunately, a neighbour had bravely climbed the roof of the house with a fire extinguisher and had succeeded in containing the fire. The evidence of Mr and Mrs Gunning was not challenged. I accept what they have said and I find that, at the time of the fire, their remote control was in the “off” position.
The second fire, which happened two days later at about 10.40 pm on 16 February, occurred in the home of Mr and Mrs John Langfield at 252 Summerlakes Parade, Ballajura, Western Australia (“the Ballajura fire”). They had a Breezair domestic rooftop evaporative airconditioner installed in late November or early December 1994. It was also an EM Model. However, at the time of installation, they were not able to obtain an RF Sensortouch remote control. Mr Langfield said that he had been told that Seeley had been unable to keep up with the demand. He also said that he was told that an RF Sensortouch remote control would be installed as soon as it became available. As a result, Mr and Mrs Langfield accepted a manual control which, so Mr Langfield said, worked “well” with the airconditioner. On 15 February 1995, a serviceman disconnected the manual control and installed the RF Sensortouch remote control system.
Mrs Langfield recollected that the airconditioner was operating on that day, 15 February, but only for a short period of time. Mrs Langfield said that she recalled using the remote control to switch the airconditioner “on” whilst she was at home on 16 February. However, she also recalled that she switched the power switch on the remote control to “off” at approximately 3.40 pm when she left for work. She said that she returned home at about 10.20 pm. Mr Langfield said that he arrived home from work on 16 February at about 4.10 pm; his wife had already left for her work. He said that the airconditioner was switched “off” when he got home and that he did not, at any later stage, turn it “on”. They each said that at about 10.45 pm, their neighbour alerted them to a fire in the airconditioner housing on the roof. Mr Langfield removed the fuse for the airconditioner from the fuse box and climbed the roof, using the garden hose in an unsuccessful attempt to contain the fire. Their house and its contents were extensively damaged before the Fire Brigade was able to control the fire. As was the case with Mr and Mrs Gunning, the evidence of Mr and Mrs Langfield was not challenged. I accept what they have said and I find that, at the time of the fire, their remote control was in the “off” position.

Seeley included in its claim for damages, the wages that it paid to its staff where their work was attributable to the fires or the recall. Those expenses included the costs to Seeley for its research and development staff investigating the cause or causes of the fire and involving themselves in modifications to the design of the RF Sensortouch controllers. It also included the cost to Seeley for its research and development staff working on the recall as well as the cost to Seeley for its general staff working of matters attributable to the fires or the recall. Because of the fires and because of the work that was generated within Seeley as a result of the fires and the recall, I am satisfied and I find that it was necessary for Seeley to redirect the focus of its research and development to an investigation into the cause or causes of the fires. Work in the area of research and development was deferred or postponed so that Seeley’s personnel could devote the necessary amount of time and attention to the redesign of the controller and its modifications thereby ensuring safety in the future operations of the unit.
In my opinion, these claims are reasonable and relevant and I allow the figure of $378,397, as claimed, for the cost to Seeley of wages paid to its employees.
Seeley engaged a power electronics designer and manufacturer, Technical Components Pty Ltd, to design and implement modifications to the Newtronics RF Sensortouch controllers to make them safe. Design took place between March and July 1995 and the manufacture of the modifications lasted until December of that year. Initially, the price per unit was $29.48 but this was later increased to $36.73. It was necessary for Seeley to distribute the modified controllers and to engage electricians, at Seeley’s cost, to install them. Seeley paid an amount of $112,218 to Technical Components Pty Ltd for the work that it did in redesigning and producing the necessary modifications to the RF Sensortouch controller. That figure was not questioned by Newtronics and I allow it.
The final item of direct expense that was incurred by Seeley and claimed as part of its damages was $9894 for telephone charges. Numerous telephone calls were made by Seeley’s staff and agents to dealers, electricians and consumers. Mr Steele made a series of calculations to justify this claim and Newtronics has not challenged the figure. I therefore allow this sum. As a result, Seeley’s direct expenses can be quantified as follows:

·          Recall expenses account $1,754,477

·          Staff time $   378,397

·          Technical Components Pty Ltd $   112,218

·          Telephone costs $      9,894
$2,254,986

I turn now to consider the nature and extent of Seeley’s indirect losses.
WARRANTY EXTENSION
In an attempt to mitigate the losses that it suffered as a result of the fires and the recall, Seeley extended, by twelve months, its manufacturer’s guarantee to those consumers who were affected by the recall. The reasonability of the extension of the guarantee was not challenged by Newtronics. Its marketing expert, Mr Fulton, for example, accepted that the extension would have assisted in customer relations. Seeley has claimed against Newtronics an amount of $204,459, the costs incurred by Seeley in gratuitously offering its recall customers an extra twelve months on its manufacturer’s warranty. A total of 4,119 Breezair consumers were directly affected by the recall of whom 3,575 had already had installed RF Sensortouch controllers. The remaining 554 had purchased and accepted delivery of Breezair airconditioners but were awaiting the installation of the remote controllers.
DEALER LOYALTY SCHEME
In July 1995, Mr Arnold decided to implement a dealer loyalty scheme. The object was to encourage dealers to remain with Seeley and to maintain sales. Experts from both sides recognised that it was important for Seeley to maintain a good relationship with each member in its dealer network and to keep their confidence and trust. Mr Arnold said, and I accept, that the feedback that he got from the dealers was that the company could not permit a similar problem to occur again. He said that his senior management had made an assessment that the company had come close to losing many of its dealers and that it was necessary to expend time and energy in building up the confidence of the dealers. In my opinion, such an assessment sounds quite reasonable and understandable and I accept it.
The dealer loyalty scheme was only available to those dealers who met designated sales targets. A dealer would accumulate points in order to reach certain agreed levels of sales; a sufficient number of points could gain for a dealer an expense free attendance at an overseas conference that had been sponsored by Seeley. Not all the witnesses in the field of marketing supported Seeley’s decision. Its expert Dr Beaton did, as did Newtronics’ witness Mr Fulton. Another of Newtronics’ witnesses, Mr Hillebrand expressed reservations but, on balance, it seems that it was a reasonable and necessary strategy for Seeley to adopt. The question remains, however, whether the extent of Seeley’s claim for recompense is too expensive.
Seeley has claimed the costs associated with three dealer conferences that it organised and paid for. They were held in the Maldives in 1996, Mauritius in 1997 and Fraser Island in 1998. Prior to the recall, it had not been Seeley’s practice to have annual conferences involving its dealers at a common venue. Rather, Seeley’s practice was to hold a low cost meeting in each State (or part of a State) at which the product range and other matters relating to the forthcoming season’s programs were explained to the dealers. The costs associated with such meetings usually only included the cost of a conference venue, a dinner and the travel cost of Seeley’s personnel. The average cost of those meetings was $61,059 per year. In quantifying its claim under this heading at $574,602, Seeley took the actual costs that were incurred by it for the three conferences in 1996, 1997 and 1998 and then deducted three times $61,059. Mr Doherty asserted in his evidence that he was the person who was responsible for the organisation of the Maldives conference, which, so he said, was planned long before the fires and the recall. In the head on collision between Mr Doherty and Mr Steele, Mr Arnold and others on this subject, I prefer the evidence of the Seeley witnesses.
There is, of course, no doubt that Seeley organised and paid for the three conferences: nor do I doubt Seeley’s bona fides in holding those conferences. My concern is whether these costs should be brought home to Newtronics. Seeley was in a most difficult position. It had to make sure that it maintained its dealer loyalty. I can well accept that the idea of a “paid holiday” for the dealers would be a practical and reasonable stratagem. I do not believe, however, that three such “holidays” with two of them held at overseas destinations were necessary. I would have thought that one rather splendid affair followed by a second, but less spectacular conference, both held in Australia, would have been sufficient. I have no exact figures to quantify those hypotheses but using a broad axe I would allow Seeley an amount of $180,000 under this particular heading of its claim.
ADDITIONAL MARKETING COSTS
Seeley increased its advertising and marketing expenditure after the fires and the recall. Newtronics, for its part, submitted that Seeley that failed to prove that it suffered any loss of sales as a consequence of the fires and the recall; it also submitted that there was no proof that there had been any loss of market share as a consequence of the recall. Mr Arnold said, and I accept, that he decided to increase advertising and marketing expenditure as a result of his discussions with his company’s dealers. They had said that this additional expenditure was necessary so that Seeley could do its best to maintain its market share. The dealers were of the opinion that the fires, the recall and the attendant publicity would make it difficult for the dealers and Seeley to maintain the rate of growth of sales and market share that Seeley had previously enjoyed. Mr Arnold was also of the opinion that the increased expenditure would help reassure the dealers. That, so it seems to me, is a reasonable hypothesis and I accept it. Seeley claimed that this increased marketing expenditure amounted to $1,715,338. However, those increased costs were incurred in the period commencing October 1995 and continued through to September 1999, a period that encapsulated four summers. I find it surprising that the fires and the recalls would have had such long term effects but Dr Beaton supported Seeley’s claim. He said in his report, Ex A97 at par 16.2:
“Expenditure between October 1995 and September 1999 on marketing the Breezair brand of $6,096,101 instead of $4,356,293, being what I would have regarded as normal for such a brand given its expenditure history prior to the events of early 1995. In my opinion, this additional marketing expenditure (in the order of $1,739,808 [sic] in excess of “normal”) was necessary in order to defend and restore the reputation of the Breezair brand in the market following the impact of the events of early 1995.”
Mr Fulton, who gave marketing evidence on behalf of Newtronics agreed, in principle, to the need for an “increased marketing campaign to assuage the dealers”. He agreed that it would be “a reasonable thing to undertake and that it would certainly help to “instil confidence in the dealer network”. Newtronics called four witnesses to give evidence on the subject of marketing and the effects of the fires and the recall on Seeley’s market share. They were Messrs Fulton, Hillebrand, Wegman and Ramage. Counsel for Seeley said in his written submissions:
“In almost all respects, the witnesses called by Newtronics came to agree with the analysis of Dr Beaton.”
I do not think that I could accept that statement without qualification, but it does remain the fact that I found Dr Beaton to be a most impressive witness and, for the most part, I am prepared to rely, substantially, on his opinions where they are at variance with the opinions of Newtronics’ witnesses. Having regard to the evidence from the complaints files and the SRRs, (which had not been made available to Dr Beaton) I cannot, however, accept that all increased expenditure on marketing was attributable solely or predominantly to the fires and the recall.
Mr Steele used Seeley’s contemporaneous business records to calculate the company’s expenditure on marketing Breezair domestic airconditioners throughout the years 1996 to 1999. Those figures, after making some necessary adjustments, show a clear increase in the amount spent on marketing but they also suggest that there was an earlier history of increased expenditure prior to the fires. The figures, as prepared by Mr Steele are as follows:

1993 1994 1995 1996 1997 1998 1999

Actual
Expenditure
719,470

825,806

1,115,445

1,814,467

1,843,035

1,923,370

1,788,873

Less Dealer Conference
-100,226

-66,381

-54,844

-344,130

-265,494

-148,155

-504,734

619,244 759,425 1,060,601 1,470,337 1,577,541 1,775,215 1,284,139

Normalised
Expenditure
567,884

773,218

1,098,168

998,164

1,084,726

1,180,120

1,128,884

Extra Expenditure 472,173
492,815

595,095

155,255

1,715,338

I do not think that it would be fair to place all this increased expenditure on Newtronics. Once again, it is necessary to use a broad axe. I put to one side the increase in expenditure in 1995 for that was the year of the fires. But expenditure in marketing increased from $567,884 in 1993 to $773,218 in 1994, an increase of about 36 percent. If I factor in an increase of this size as a normal incremental cost in the advertising and market expenditure it would suggest that the size of Seeley’s claim should be commensurately reduced to a figure of $1,097,816. Allowing for other reasons for increased marketing expenditure, I will discount that figure and allow Seeley $700,000.
The costs that Seeley incurred in its attempts to mitigate its losses which should be allowed to it by way of damages, are therefore:

·          $   204,459 Warranty extension

·          $   180,000 Dealer loyalty scheme

·          $   700,000

·          $1,084,459
Additional marketing costs

ECONOMIC LOSSES

Seeley’s claims in respect of its economic losses that have and will result from the fires and the recall are based, in the first place, on its past economic losses in respect of losses of sales for the period March 1995 to September 2000. Additionally, it seeks to be compensated for its future economic losses for the period commencing in September 2000 and, continuing, so it would seem, indefinitely. At its highest, Seeley seeks as much as $35.7m for its past losses and $89.5m for its future losses. Both these figures are predicated on the premise that Seeley would have, but for the fires and the recall, achieved and held, in perpetuity, a market share of 50 per cent – a proposition that I soundly reject.
Following the fires and the recall, Seeley’s market share for fixed evaporative airconditioners suffered a steady decline. Its market share fell from 38.6 per cent in February 1995 to 29.9 per cent in December 1998 and has remained at about that level ever since. The fixed evaporative airconditioning market is a small market that is made up of only a few manufacturers. Several witnesses from both sides acknowledged that it is a market that is characterised by reasonably rapid rates of technological innovation and change and that it is a market in which there are strong competitors who are continuously pursuing product development and product innovation as a means of gaining market share. The marketing experts for both parties agreed that the capacity to innovate and to be first in the market with a new product is of vital importance in maintaining or enhancing market share.
Dr Beaton identified three consequences of the fires and the recall, each of which, in his opinion, materially contributed to Seeley’s loss of market share. In the first place, negative publicity would have had an adverse effect on intending purchasers. That publicity would have been exacerbated by the comments and conduct of rival dealers. In the second place, the fires and the recall would have affected Seeley’s ability to attract new Breezair dealers. Finally, there was a long-term effect due to the diversion of Seeley’s resources away from research and development for a period of two years or so. This diversion allowed rival manufacturers to overtake Seeley in important areas of product development. Thus Mr Arnold said, and I accept, that had it not been necessary to divert the company’s resources, he was of the opinion that Seeley would have been able to release its new domestic rooftop airconditioner model (the EV model) some two years earlier than its actual release. There are, however, other factors, adverse to Seeley’s interests, that must be taken into consideration.
Seeley had, prior to the fires, engaged from time to time in market research but it did not cause any such research to be undertaken after the fires. I find that, on the balance of probabilities, such research could have been quite material to Seeley’s claims in these proceedings. After all, Seeley has asserted a loss of business reputation as well as a loss of market share as a result of the fires and the recall. In my view, the applicant’s claim for damages has been impeded by the absence of a market survey just as it has been impeded by its failure to call any of its distributors. They would have been a meaningful source of information about the effect of the fires and the recall on the sales of Seeley’s domestic rooftop evaporative airconditioners. There is, in my opinion, another matter of importance that must be taken into account when considering a quantification of Seeley’s future losses. Mr Arnold conceded that the gap in the costs between evaporative and refrigerated airconditioning was closing. This, of course, means that the former advantage of cheaper evaporative airconditioners was diminishing in importance.
Using Seeley’s market share in February 1995 as a base, it can be accepted that Seeley was then at risk, because of the fires and the recall, of suffering a loss of market share and a consequential loss of sales commencing in February 1995. The difficulty is to determine how long those losses continued as a result of the fires and the recall. I can readily accept that the fires and recall would have had a deleterious effect, but in reaching that conclusion, I have to factor in a discount factor and make some allowance for the evidence of the lay witnesses who gave evidence on behalf of Newtronics. For example, Mr Dullard said that he continued to sell units to customers who had not raised the issue of the recall. Mr Doherty claimed that the recall had had no effect on the consumer market; he went so far as to say that there was no concern within Seeley’s management that the recall had effected the Breezair market share. That, of course, is at odds with the consistent evidence of the Seeley witnesses whose evidence I prefer. Mr Riegel-Huth said that Seeley was always struggling to meet demand, suggesting therefore, that there had been no loss of sales at all.
Although the consequences of the fires and the recall may not have been the sole contributing cause to changes in Seeleys’ business results, nevertheless they did, in my opinion, have adverse effects on Seeley’s market share; they also generated some negative publicity and they directed resources away from the applicants research and development division. I am also of the opinion that the fires and the recall would have created a measure of difficulty for Seeley in its attempts to attract new dealers. These are all matters for which Seeley is entitled to be compensated.
Seeley has claimed that at the time of the fires, its market share was on the rise and Mr Hillebrand, one of Newtronics marketing experts, agreed with that claim. Seeley said that it expected its share of the market to increase to 50 per cent. That may have been its hope and even its expectation, but I cannot accept it as a probability for the purposes of calculating its damages. In fact, I am not even prepared to accept that Seeley would have held on to its 38.6 per cent share of the market if the fires had not occurred. Seeley entered the rooftop market in 1983. In the twelve years before the fires its share of the market rose and fell because of the vagaries of commercial life. There is no reason to suppose that there would have been a material beneficial change in circumstances if the fires had not occurred. The most that Seeley can hope for would be a calculation of losses based on its market share as at February 1995 and then reasonably discounted to allow for contingencies.
It has been inherent in Seeley’s submissions that the consequence of the fires and the recall is that its losses will continue in perpetuity. This is a paradoxical submission for it suggests that, no matter the quality of Seeley’s product, it will never regain its rightful place in the market. I cannot accept such a gloomy forecast. Over six years have already past since the fires occurred. If Seeley’s product is as good as it claims, it would have by now, in my opinion, clawed its way back to its rightful position. I consider that more than enough time has elapsed to allow the consumers to forget the tragic events of February 1995 and to allow Seeley to prove to its dealers and the community that it has a safe and viable product.

A calculation of past loss (ie a calculation based on a market share of 38.6 per cent and not the predicted share of 50 per cent) was prepared by Mr McPharlin. He calculated the loss of sales from February 1995 to September 2000 by subtracting the figures for actual sales of Breezair units in that period from the predicted figure for the sales that would have occurred but for the fires. The number of sales that were said to have been lost in that period has then been multiplied by the contribution per unit lost and the results have been aggregated to give the following figures:

Year Lost Sales Contribution Rate Loss

1995/1996 122 $680 $82,960

1996/1997 818 $721 $589,778

1997/1998 3,569 $842 $3,005,098

1998/1999 4,317 $738 $3,185,946

1999/2000 4,223 $717 $3,027,891

Mar-Sep 2000 3,182 $717 $2,281,494

Total $12,173,167

I have already noted that these figures should incur a reasonable discount to accommodate various commercial contingencies. There are a host of such matters: strong competitors, consumer reaction to differing brands and the closing gap between the cost of refrigerated and evaporative airconditioning are three of the more obvious.
It must be recognised that discounting for “commercial” contingencies has not achieved universal support. Davies J in Amann Aviation Pty Ltd v Commonwealth (1990) 22 FCR 527 at 537 said:
“See also TCN Channel Nine Pty Ltd v Hayden Enterprises (1989) 16 NSWLR 130, in which a submission was rejected that, in the assessment of damages for breach of contract, there should be imported a discount for vicissitudes such as is commonly allowed in the assessment of economic loss in personal injury cases.
Nevertheless, as the circumstances of commercial life are complex and varied, issues of chance and contingency may play a part.”
On the other hand Sheppard J in the same case said at 548:
“It remains to say that the difference in the approach which I have adopted from that adopted by my brothers lies in my conclusion that is appropriate to discount the amount which the contractor might otherwise have been awarded because of a number of contingencies.”
In Canvas Graphics Pty Ltd v Kodak (Australasia) Pty Ltd [1995] FCA 470 the Full Court did not disturb the trial Judge’s use of “commercial contingencies”, whilst in Gibbs Holdings Pty Ltd v MMI [2000] QCA 524 at [115-6] an award was reduced for various commercial contingencies. In the English case of Hall v Meyrick [1957] 2 QB 455 Ashworth J concluded that “the more the contingencies, the lower the value of the chance…of which the plaintiff was deprived”, whilst in Cullinane v British “Rema” Manufacturing Co Ltd [1954] 1 QB 292 Evershed MR at 304 (with whom Jenkins LJ agreed) upheld that part of an assessment of damages that allowed a deduction for “due allowance to commercial contingencies” (see generally McGregor on Damages 16^th Edition at par 382). On balance, I remain convinced that this is an appropriate case to make an appropriate allowance for “commercial contingencies”.
However, additionally, I think that the base of $12,173,167 should be reduced. I would have thought that a manufacturer, such as Seeley, would have completely recovered from the aftermath of the events of February 1995 within a period of three to four years. Naturally there will be those with long memories, particularly competitors and opposition dealers: some small allowance can be made for them. With that qualification however, I would reduce Mr McPharlin’s base of $12,173,167 to (say) $6.8m (which would roughly equate to a loss for four years) and then further discount that figure by 15 per cent. On this basis I would allow $5,780,000 for past economic loss and nothing further for future economic loss.
Subject to calculations on questions of interest, which could exceed $6.2M, and subject to hearing the parties on costs, I have calculated Seeley’s losses as follows:

·            $2,254,968.00 Being the costs of the recall and associated expenses

·            $1,084,459.00 Being indirect costs

·            $5,780,000.00

$9,119,427.00

Being Seeley’s economic loss

·          - $   217,718.98

$8,801,708.02
Being the agreed set-off

I will defer entering judgment to allow counsel to check my calculations and to do their calculations of interest so that, if possible, an agreed final figure can be reached.

I certify that the preceding three hundred and fifty-five (355) numbered paragraphs are a true copy of the Findings and Reasons herein of the Honourable Justice O’Loughlin.
Associate:
Dated: 21 December 2001

Counsel for the Applicant: Mr RJ Whitington QC
with Mr MF Blue QC

Solicitor for the Applicant: Thomson Playford

Counsel for the First Respondent: Mr G Hevey

Solicitor for the First Respondent: Cornwall Stoddart

Counsel for the Second Respondent: Mr T Graham QC
with Mr P Marzella and Mr S Le Grand

Solicitor for the Second Respondent: Russell Kennedy

Counsel for the Cross-Respondent (Cigna Insurance):
Mr B Bongiorno QC with Mr D Masel

Solicitor for the Cross-Respondent (Cigna Insurance):
Norris Coates

Dates of Hearing: 17-26 July 2000, 1-10 August 2000, 14 August 2000, 18 August 2000, 21-23 August 2000, 29 August 2001, 1 September 2000, 5 September 2000, 4-6 December 2000, 8-12 December 2000, 19-22 December 2000, 8-19 January 2001, 29 January – 21 February 2001, 23-28 February 2001, 30 May – 1 June 2001

Date of Findings and Reasons: 21 December 2001

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SG 21 OF 1998

BETWEEN:	SEELEY INTERNATIONAL PTY LTD APPLICANT
AND:	CINTRO PTY LTD FIRST RESPONDENT
AND:	NEWTRONICS PTY LTD SECOND RESPONDENT

JUDGE:	O’LOUGHLIN J
DATE:	21 DECEMBER 2001
PLACE:	ADELAIDE

· Recall expenses account	$1,754,477
· Staff time	$ 378,397
· Technical Components Pty Ltd	$ 112,218
· Telephone costs	$ 9,894 $2,254,986

1993	1994	1995	1996	1997	1998	1999
Actual Expenditure	719,470	825,806	1,115,445	1,814,467	1,843,035	1,923,370	1,788,873
Less Dealer Conference	-100,226	-66,381	-54,844	-344,130	-265,494	-148,155	-504,734
619,244	759,425	1,060,601	1,470,337	1,577,541	1,775,215	1,284,139
Normalised Expenditure	567,884	773,218	1,098,168	998,164	1,084,726	1,180,120	1,128,884
Extra Expenditure	472,173	492,815	595,095	155,255	1,715,338

Year	Lost Sales		Contribution Rate	Loss
1995/1996	122	$680			$82,960
1996/1997	818	$721			$589,778
1997/1998	3,569	$842			$3,005,098
1998/1999	4,317	$738			$3,185,946
1999/2000	4,223	$717			$3,027,891
Mar-Sep 2000	3,182	$717			$2,281,494
Total	$12,173,167

· $2,254,968.00	Being the costs of the recall and associated expenses
· $1,084,459.00	Being indirect costs
· $5,780,000.00 $9,119,427.00	Being Seeley’s economic loss
· - $ 217,718.98 $8,801,708.02	Being the agreed set-off

Counsel for the Applicant:	Mr RJ Whitington QC with Mr MF Blue QC
Solicitor for the Applicant:	Thomson Playford
Counsel for the First Respondent:	Mr G Hevey
Solicitor for the First Respondent:	Cornwall Stoddart
Counsel for the Second Respondent:	Mr T Graham QC with Mr P Marzella and Mr S Le Grand
Solicitor for the Second Respondent:	Russell Kennedy
Counsel for the Cross-Respondent (Cigna Insurance):	Mr B Bongiorno QC with Mr D Masel
Solicitor for the Cross-Respondent (Cigna Insurance):	Norris Coates
Dates of Hearing:	17-26 July 2000, 1-10 August 2000, 14 August 2000, 18 August 2000, 21-23 August 2000, 29 August 2001, 1 September 2000, 5 September 2000, 4-6 December 2000, 8-12 December 2000, 19-22 December 2000, 8-19 January 2001, 29 January – 21 February 2001, 23-28 February 2001, 30 May – 1 June 2001
Date of Findings and Reasons:	21 December 2001