Sural SpA v Downer EDI Rail Pty Limited

[2007] NSWSC 1234

CITATION:	Sural SpA & Anor v Downer EDI Rail Pty Limited [2007] NSWSC 1234
HEARING DATE(S):	8/10/07, 9/10/07, 11/10/07, 12/10/07, 15/10/07 - 19/10/07, 22/10/07 - 24/10/07
JUDGMENT DATE :	7 November 2007
JURISDICTION:	Equity Division Technology and Construction List
JUDGMENT OF:	Einstein J
DECISION:	Defendant/cross-claimant succeeds in its claims for breach of contract - Verdict to be entered for the defendant/cross claimant.
CATCHWORDS:	Contract - Novation - Variation - Formal contract for the manufacture and supply by Italian company of conductor to be used by Australian company in construction of electricity power lines in Western Australia - Terms of informal arrangements between contracting parties for the variation/novation of contractual obligations - Inferences from evidence of conversations, communications and subsequent conduct - Contractual construction - Causation - Damages for breach of contract - Duty to mitigate - Expert evidence - Jones v Dunkel
LEGISLATION CITED:	Evidence Act 1995 (NSW)
CASES CITED:	ABB Engineering Construction Pty Ltd v Abigroup Contractors Pty Ltd [2003] NSWSC 665 Abigroup Contractors Pty Ltd v ABB Service Pty Ltd [2004] NSWCA 181 Adler v Australian Securities and Investments Commission [2003] NSWCA 131 Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 Allen v Carbone (1975) 132 CLR 528 Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452 Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 Bellingham v Dhillon [1973] 1 All ER 20 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 Brunninghausen v Glavanics (1999) 46 NSWLR 538 B Seppelt & Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147 Cardwell Shire Council v Calabrese (1975) 49 ALJR 164 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Dunkirk Colliery Company v Lever [1878] 9 Ch D 20 FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343 Fightvision Pty Ltd v Onisforou & Ors (1999) 47 NSWLR 473 Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 Garnac Grain Co Inc v HMF Faure & Fairclough Ltd & Bunge Corp [1968] AC 1130 Geebung Investments Pty Ltd v Varga Group Investments (No.8) Pty Ltd (1995) 7 BPR 14,551 Godecke v Kirwan (1973) 129 CLR 629 Graham Evans Pty Ltd v Stencraft Pty Ltd (2000) 16 BCL 335 G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 Harpers Trading (Singapore) Pte Ltd v RFL International Ltd (unreported, Supreme Court of New South Wales, Carruthers J, 12 December 1994, BC9403441) Hasell v Bagot Shakes and Lewis Ltd (1911) 13 CLR 374 Heysham Properties Pty Limited v Action Motor Group Pty Limited & Ors (1996) 14 BCL 145 Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 Hoad v Scone Motors Pty Limited [1977] 1 NSWLR 88 Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 Inland Revenue Commissioners v Raphael [1935] AC 96 Integrated Computer Services Pty Limited v Digital Equipment Corporation (Australia) Pty Limited (unreported, Court of Appeal of New South Wales, McHugh, Mahoney and Hope JJA, 23 December 1988, BC8801158) James Findlay & Company Limited v NV Kwik Hoo Tong Handel Maatschappij [1929] 1 KB 400 John R Keith Ltd v Multiplex Constructions (NSW) Pty Ltd & Anor [2002] NSWSC 43 Jones v Dunkel (1959) 101 CLR 298 London & South of England Building Society v Stone [1983] 3 All ER 105 Love & Stewart Ltd v S Instone & Co Ltd (1917) 33 TLR 475 Masters v Cameron (1954) 91 CLR 353 Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507 Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1 Munce v Vinidex Tubemarkers Pty Ltd [1974] 2 NSWLR 235 Narni Pty Ltd v National Australia Bank Limited [2001] VSCA 31 NRMA Ltd v Morgan (1999) 31 ACSR 435 Payzu Ltd v Saunders [1919] 2 KB 581 Pobjie Agencies Pty Ltd v Vinidex Tubemakers Pty Ltd [2000] NSWCA 105 Raguz v Sullivan (2000) 50 NSWLR 236 Reardon-Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 Roper v Johnson (1873) LR8CP 167 Ryan (Receiver & Manager of Homfray Carpets Australia Pty Ltd) v Textile Clothing & Footwear Union Australia [1996] 2 VR 235 Sacher Investments Pty Limited v Forma Stereo Consultants Pty Limited [1976] 1 NSWLR 5 Schellenberg v Tunnel Holdings Pty Ltd (2000) 170 ALR 594 Segenhoe Limited v Akins (1990) 29 NSWLR 569 Simonius Vischer & Co Ltd v Holt & Thompson [1979] 2 NSWLR 322 Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310 Smailes & Son v Hans Dessen & Co (1906) 95 LT 809 Sotiros Shipping Inc & Anor v Sameiet Solholt (The “Solholt”) [1983] 1 Lloyd’s Rep 605 TCN Channel Nine v Hayden Enterprises Pty Limited (1989) 16 NSWLR 130 Telstra Corporation Limited v Australis Media Holdings (1997) 24 ACSR 55 Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486 Tomko v Palasty [2007] NSWCA 258 Wenkart v Pitman (1998) 46 NSWLR 502
PARTIES:	Sural SpA (First Plaintiff) Sural CA (Second Plaintiff) Downer EDI Rail Pty Limited (Defendant)
FILE NUMBER(S):	SC 55058/04
COUNSEL:	Mr Lally QC, Mr J Slattery (Plaintiffs) Mr M Leeming SC, Mr M Jones (Defendant)
SOLICITORS:	Clayton Utz (Plaintiffs) Corrs Chambers Westgarth (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
TECHNOLOGY AND CONSTRUCTION LIST

Einstein J

Wednesday 7 November 2007

55058/04 Sural SpA & Anor v Downer EDI Rail Pty Ltd

JUDGMENT

The proceedings

1 These proceedings concern obligations arising under a contract for the supply and construction of electricity power lines in an area of Western Australia to the north of Perth [“the Project”].

2 The first plaintiff Sural SpA ["SpA"] is incorporated in Italy. The second plaintiff Sural CA ["CA"] is incorporated in Venezuela. In the circumstances detailed in these reasons, both companies were at times involved in the supply of conductor to be used in the subject Project known as "G" 54/7/3.00 ACSR/AC conductor.

3 An issue involves the novation or variation of the only formal contract ever entered into between the parties [entitled "Formal Instrument of Agreement"]. That contract had been entered into on 16 August 2002 between CA and the defendant, Downer EDI Rail Pty Ltd (formerly Evans Deakin Pty Ltd t/as Downer PTR) ["Downer"] which is an Australian engineering corporation. It provided amongst other things that:

i. Sural CA would manufacture and supply Downer with a certain quantity of conductor packed onto non-returnable steel drums;

ii. the steel drums on which the conductor was to be supplied were to be in accordance with Australian Standard C365.11;

iii. the conductor was to be delivered by Sural CA to Fremantle [CFR (Incoterms 2000)] in four “batches” by certain specified dates;

iv. Downer was entitled to liquidated damages for delay in delivery calculated at a rate of 0.25% per day of the value of the conductor which had not been delivered up to a maximum of 10% of the value of the conductor of which delivery had been delayed; and

v. Sural CA was to provide security in the amount of 10% of the contract sum in the form of a bank guarantee.

4 Serious civil unrest took place in Venezuela in late November 2002 up to January 2003 leading to Sural CA proposing to Downer that the contract be carried out by the Sural group facility in Italy, Sural SpA. The material communications were both oral and in writing. It is common ground that the proposal was ultimately put into place and that either by variation or novation, SpA became a contractual party:

i. The Sural parties contending that the altered contractual position involved SpA being substituted for CA as the sole contractual party;

ii. Downer having pleaded that the altered contractual position involved CA and SpA being jointly substituted as the Sural contractual parties, but during final address conceding the correctness of the Sural analysis.

The structure of the pleaded cases

5 The structure of the pleaded cases is as follows:

Summons

i. By the Summons SpA seeks:


a) a finding that there was a novation or variation of the contract in or about May 2003 such that the conductor was to be supplied and delivered by SpA instead of CA and that Downer would pay SpA for the conductor;

b) the recovery of a debt it claims it is owed, in an amount of US$321,209.47.

Defence

ii. Downer has defended that claim, on the basis that it claimed a set-off for liquidated damages based upon late delivery of conductor. It has quantified the liquidated damages claim at US$316,627.22 which, when added with an interest component of US$4,582.25, relevantly totalled US$321,209.47.

Reply

iii. In reply, SpA claims that the liquidated damages amount has already been taken up by the application of security held by Downer, and therefore there is no separate right to hold back this amount. Downer claims that it is entitled to keep the whole security for the defects liability period, and is therefore entitled to hold back the further sum. In substance the dispute comes down to whether Downer was entitled to keep the whole security for the defects liability period.

Amended cross-claim

iv. By way of the amended cross-claim, Downer claims that the product that was supplied, in particular the drums upon which the conductor was wound, did not accord with the terms of the contract and, that as a consequence of that breach, it has suffered substantial losses.

v. The four principal alleged breaches of contract are said to have arisen because the conductor supplied was:


a) wound onto drums in a manner that did not comply with industry standards and did not allow roll-out of the conductor at speeds that accorded with ordinary industry standards (“winding breach”); and

b) on poorly designed wooden drums and not on non-returnable steel drums (“steel drum breach ” ); and

c) on drums which failed to comply with the latest edition of Australian Standard C365II – Drums for bare stranded conductors, Part II; Metal Drums (being Australian Standard AS 3983-1991) (“standards breach”); or

d) on wooden drums which failed to comply with the ANIE (the Italian Association of Electrotechnical and Electric Companies Standard) (“wooden drum breach”).


Defences to amended cross-claim

vi. There are various defences raised to Downer’s cross-claim. Without being exhaustive it suffices for present purposes to note that they fall into two broad categories:


a) The Sural parties claim that there was a variation of the terms of the contract which had the effect that the drums did not need to be steel, but wood, and that it otherwise complied with the Agreement.

b) The Sural parties contend that the cause of loss occasioned to Downer was its own acts and omissions, not any default on the part of the Sural parties.

Overview of the issues in dispute

6 Again but without being exhaustive, the principal issues in dispute appear to be as follows:

i. When was the contract novated/varied and what was the effect of that novation/variation upon sundry rights and obligations of the parties including:


a) the rights and obligations of the parties with respect to security?

b) the requirement to supply the conductor packed onto non-returnable steel drums?

ii. Has Sural SpA committed the winding breach, the steel drum breach, the standards breach or the wooden drum breach?

[As will be seen in the reasons which follow, the ultimate findings of breaches of contract do not depend upon non-compliance with particular standards for the reason in particular, that the experts agreed that failure to comply with the code limits was neither sufficient proof of inadequacy nor a satisfactory explanation of the problems which occurred.]


iii. If so, did that breach cause any loss and damage suffered by Downer?

iv. If so, how much loss and damage was suffered by Downer by reason of that breach?

The somewhat unusual issues which arise

7 A feature of the litigation involves the seeming lack of formality in the manner in which the parties:

i. failed to ensure that any formal document was brought into existence setting out the terms of the altered contractual position;

ii. engaged over a reasonably extended period of time in a mix and match of telephone conversations and emails on a number of contractual topics [with the resultant need for the Court to pay very close attention to the detail of these inter partes communications] in order to reach findings as to:


a) the date when any novation or variation to the contract occurred;

b) the terms of any novation or variation.

8 An extensive volume of evidence [both documentary and through the very many witnesses called] treated with the four alleged breaches.

The principles

9 There are a number of principles which require to be kept in mind, including principles concerning contract [novation/variation], mitigation and assessment of quantification of damages.

Determining when parties have first entered into a binding contract or have later agreed to a variation or novation of a pre-existing contract

10 Where the issue before the Court concerns identification of the occasion when parties have first entered into a binding contract or have later agreed to a variation or novation of a pre-existing contract, a number of matters require close consideration.

11 There are a number of authorities which treat with the proper approach to be taken in such cases. Naturally each case must be determined upon its particular facts. On more than one occasion I have had an opportunity to endeavour to summarise a number of the principles which obtain. For present purposes it seems convenient to simply repeat the statements of principle to be found in John R Keith Ltd v Multiplex Constructions(NSW) Pty Ltd & Anor [2002] NSWSC 43 [which statements were in turn repeated in ABB Engineering Construction Pty Ltd v Abigroup Contractors Pty Ltd [2003] NSWSC 665 and later affirmed by the Court of Appeal: Abigroup Contractors Pty Ltd v ABB Service Pty Ltd [2004] NSWCA 181 without adverse comment as to the expression of principle].

12 The following passages are taken from John R Keith at [217]-[238].

“[In relation to the Masters v Cameron issue] it is necessary to recall the three classes for which the decision of the High Court is authority. The passage in question [in Masters v Cameron (1954) 91 CLR 353] at 360 is in the following terms:

"Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.
In each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution…
Cases of the third class are fundamentally different. They are cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own…"

… the seeds of what has now been called the "fourth class" were sown in the earlier case of Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310:

“One in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon while expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms.”
(Per the majority consisting of Knox CJ, Rich and Dixon JJ at 317.)

In Love & Stewart Ltd v S Instone & Co Ltd (1917) 33 TLR 475, His Lordship Lord Loreburn stated at 476:

“It was quite lawful to make a bargain containing certain terms with which one was content, dealing with what one regarded as essentials, and at the same time to say that one would have a formal document drawn up with the full expectation that one would by consent insert in it a number of further terms. If that were the intention of the parties, then a bargain had been made, nonetheless that both parties felt quite sure that the formal document could comprise more than was contained in the preliminary bargain.”


In Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 McClelland J. by reference to Sinclair Scott and Co Ltd v Naughton (1929) 43 CLR 310 referred to a fourth class in terms of Masters v Cameron , namely the situation where the parties were content to be bound immediately and exclusively by the terms which they had agreed upon, whilst expecting to make a further contract in substitution for the first contract containing, by consent, additional terms.

On the issue which arose in Baulkham Hills of whether or not there was a binding contract, McClelland J at 627 put the matter as follows:

"There was a binding contract, if and only if, by the exchange of letters the parties mutually communicated their respective assents to being legally bound by terms capable of having contractual effect: see the discussions in Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 at 9254ff and Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309. In the last mentioned case Mahoney J A (at 326) identified three questions which it is often useful to consider in such a context as the present, namely "….did the parties arrive at a consensus?; (if they did) was it such a consensus as was capable of forming a binding contract?; and (if it was) did the parties intend that the consensus at which they arrived should constitute a binding contract?"

On appeal to the Court of Appeal, McClelland J’s decision was affirmed on the basis of the principle quoted above in Sinclair, Scott . In G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631, the Court of Appeal held that,

“…the decisive issue is always the intention of the parties which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances: Godecke v Kirwan (1973) 129 CLR 629 at [63]; Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 332-4, 337. If the terms of a document indicate that the parties intended to be bound immediately , effect must be given to that intention irrespective of the subject matter, magnitude or complexity of the transaction.”

(Per McHugh JA (as his Honour then was) at 634E-F, with whom Kirby P and Glass JA agreed.) [Emphasis added.]


…the fourth class has now passed into common parlance insofar as the courts are concerned and is referred to regularly as an accepted classification: see Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486; Heysham Properties Pty Limited v Action Motor Group Pty Limited & Ors (1996) 14 BCL 145; Telstra Corporation Limited v Australis Media Holdings (1997) 24 ACSR 55; Brunninghausen v Glavanics (1999) 46 NSWLR 538.

I accept that regardless of classification, the principle that is now recognised is that there can be an informal contract with the expectation that other terms will be negotiated and by consent included in the formal document. That is, to say that such further negotiations and activity regarding other terms is still to take place does not mean the existing informal contract is not binding: Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 [per Ipp J (as he then was) at 110-111].

…the fourth class was considered in Graham Evans Pty Ltd v Stencraft Pty Ltd (2000) 16 BCL 335 [Full Federal Court (French, Whitlam and Dowsett JJ) and see also transcript of special leave application which was refused]. Evans brought an action against Stencraft claiming damages for breach of contract. The claim was dismissed at first instance. Evans appealed to the Full Federal Court. The Full Federal Court, in reversing Spender J at first instance, considered Masters v Cameron and applied Baulkham Hills and in so doing upheld the appeal unanimously. The Full Court held that parties may be bound immediately by the terms which they agree upon, whilst expecting to negotiate the terms of, and make a further contract in substitution for, the first contract.

Brambles Holdings Ltd v Bathurst City Council (Unreported, 2001, NSWCA, Mason P, Heydon JA and Ipp AJA) was a case in which the “difficulties” of pressing too far the classical theory of contract formation based upon offer and acceptance (see also Pobjie Agencies Pty Ltd v Vinidex Tubemakers Pty Ltd [2000] NSWCA 105 per Mason P at [1]). Heydon JA said in that case, whilst considering the principles of the law of contract that:

“Offer and acceptance analysis does not work well in various circumstances.” [at paragraph 71]

In that case, Heydon JA set out succinctly the conventional and accepted principles of the law of contract:


“The first relevant principle of law is that pre-contractual conduct is only admissible on questions of construction if the contract is ambiguous and if the pre-contractual conduct casts light on the genesis of the contract, its objective aim, or the meaning of any descriptive term: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347-352.

The second relevant principle is that post-contractual conduct is admissible on the question of whether a contract was formed: Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 at 77; Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 at 668, 669 and 672; B Seppelt & Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147 at 9149 and 9154-9156; Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR [97023] at 9255.

The third relevant principle is that post-contractual conduct is not admissible on the question of what a contract means as distinct from the question of whether it was formed. As explained by Priestley JA (Meagher JA agreeing) in Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 326-330, the status of the relevant High Court authorities is unclear: hence unless it is demonstrated that the later decisions of the Victorian Full Court and Court of Appeal against admissibility, Ryan v Textile Clothing & Footwear Union of Australia [1996] 2 VR 235 and FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343, are clearly wrong or they are overruled, they should be followed in New South Wales. No attempt was made to demonstrate that they are clearly wrong.

The fourth relevant principle is that the construction of a contract is an objective question for the Court, and the subjective beliefs of the parties are generally irrelevant in the absence of any argument that a decree of rectification should be ordered or an estoppel by convention found.”

Hence in determining the circumstances surrounding the formation of the agreement, the matrix of facts, it is the objective intent that is paramount. Whether any relevant individual representative thought that an agreement existed or that it did not exist, is irrelevant to the exercise unless there exists an argument concerning estoppel. As Lord Wilberforce has said in Reardon-Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989:

“When one speaks of the intention of the parties to the contract one speaks objectively - the parties cannot themselves give direct evidence of what their intention was - and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties.”



Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1907) 5 CLR 647; Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68; Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548-549; Geebung Investments Pty Ltd v Varga Group Investments (No.8) Pty Ltd (1995) 7 BPR 14,551 (supra); Anaconda Nickel (supra) are also authorities supporting the proposition that in ascertaining the relevant intention, that is the intention to contract, relevant circumstances may include prior negotiation and subsequent conduct.

A fundamental question falling for consideration is whether the conduct of the parties viewed in the light of surrounding circumstances shows or is indicative of an agreement having come into existence.

“In an ongoing relationship, it is not always easy to point to the precise moment when the legal criteria of a contract have been fulfilled. Agreements concerning terms and conditions which might be too uncertain or too illusory to enforce at any particular time in the relationship may by reason of the parties’ subsequent conduct become sufficiently specific to give rise to legal rights and duties. In a dynamic commercial relationship new terms will be added or will supersede older terms. It is necessary therefore to look at the whole relationship and not only at what was said and done when the relationship was first formed.”
[Per McHugh JA (as he then was) in Integrated Computer Services Pty Limited v Digital Equipment Corporation (Australia) Pty Limited (unreported, NSWCA, McHugh, Mahoney and Hope JJA, 23 December 1988); see also Raguz v Sullivan (2000) 50 NSWLR 236 at 251.]


Questions of the relevance and probative value of evidence in circumstances in which the issue concerned whether or not an enforceable contract had been entered into were also before the Court in Film Bars Pty Ltd v Pacific Film Laboratories (1979) BPR 97023. As McClelland J put it, such questions cannot properly be considered independently of a consideration of the relevant issue namely what it is in point of fact that constitutes the making of a contract in circumstances such as here obtained. As his Honour points out, such a contract is made " by the mutual communication between the parties of their respective assents to being bound by identifiable terms otherwise capable of having contractual force, the mutual communication typically taking the form of offer and acceptance ". As his Honour (citing Williston on Contract, 3rd ed, Vol 1 paragraph 21) points out, one is not concerned with the subjective thing known as meeting of the minds, but the objective thing, the manifestation of mutual assents which is essential to the making of a contract [at page 9254].

Film Bars [at page 9255] is also authority for the proposition that:

“in determining whether the communications between the parties constitute a contract the Court is not confined to a consideration of the terms or manner in which the communications were made: they must be interpreted by reference to the subject matter and the surrounding circumstances including, inter alia, the nature of, and the relationship between, the parties, and previous communications between them, as well as to standards of reasonable conduct in the known circumstances."


…subsequent communications may have probative value depending upon the light they throw on the proper interpretation of earlier communications alleged to constitute the contract. Post-contractual conduct is not admissible on the question of what a contract means as distinct from the question of whether it was formed [cf Brambles Holdings supra; cf the recent decision of the Court of Appeal in Tomko v Palasty [2007] NSWCA 258 where this principle was affirmed [Einstein J, Mason P concurring].

Subsequent communications can also legitimately be used against a party as an admission by conduct of the existence or non-existence, as the case may be, of a subsisting contract...

Considerable assistance in terms of following the relevant principles…is to be obtained from the decision of the New South Wales Court of Appeal in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540. …

The matter was put in the following terms by the Chief Justice (at 550 and following) with whose reasons for judgment Hope and Mahoney JJA agreed:

"…The case involves the objective determination of the intention of the parties from a consideration of a series of communications exchanged by them in the context of their dealings over a period of time. In those circumstances it is both appropriate and necessary to have regard to the commercial circumstances surrounding the exchange of communications and, in particular to the subject matter of those communications: Allen v Carbone (1975) 132 CLR 528 at 531-532. Furthermore, as was noted earlier, it is proper to have regard to communications between the parties subsequent to the date of the alleged contract to the extent to which those communications throw light upon the meaning of the language which is being considered for the purpose of determining whether it expresses an intention one way or the other upon the critical matter. At the least, such subsequent communications will often form part of the context in which the particular exchanges in question are to be evaluated.
The position is by no means so clear, however, in connection with internal memoranda… or statements as to subjective intention made by individuals in the course of giving evidence. As it happens, although the learned judge had a good deal of material of this kind put before him at the hearing, it was not particularly helpful even if admissible. In the first place, a great deal of it was equivocal and individual pieces of evidence were contradictory in effect. Some of the persons who participated in the negotiations in question were called to the witness box and vigorously examined as to what was going on inside their minds at particular times. This process in the end principally served to demonstrate what might have been expected to be the case, that is to say, that the witnesses, not being lawyers themselves, were in a state of considerable confusion about the issue that ultimately emerged as determinative of the rights of the parties…
In so far as acts or statements of the kind referred to, not involving communications between the parties, are claimed to be relevant in a case such as the present upon the ground that they constitute an admission, it seems to me that it will often be necessary to identify with some care the fact which is said to have been admitted. As was noted, there may be cases in which the issue is such that the fact of the subjective state of mind of one or other of the parties is relevant. Normally, however, what is in issue is not their subjective state of mind but their “intention as expressed” (cf Inland Revenue Commissioners v Raphael [1935] AC 96 at 142 per Lord Wright) and caution may need to be exercised in relating the fact which is said to be admitted to the fact which is legally relevant.”
[emphasis added]

Novation

13 Novation is a transaction by which, with the consent of all parties concerned, a new contract is substituted for one that has already been made. Intention is crucial to show a novation. A novation may be express or implied from the circumstances. However, when searching for such an intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements. Novation may be inferred from evidence of informal conversations and the subsequent consistent pattern of conduct of the parties: Fightvision Pty Ltd v Onisforou & Ors (1999) 47 NSWLR 473 at 491-493.

Variation

14 Variation by contract (as opposed to waiver or estoppel) involves two contracts, the existing one and the contract of variation: Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 at [19]-[31]. The existence of a contract of variation must be clearly demonstrated by reference to the ordinary rules of contract formation [Cheshire and Fifoot’s, “Law of Contract”, Eighth Australian Edition at [22.4]].

Principles concerning mitigation

15 Downer’s submissions accurately summarised these principles.

16 The general principle is that a plaintiff must take all reasonable steps to mitigate the loss to it consequent upon the defendants’ wrong and cannot recover damages for any such loss which it could have avoided, but has failed, through unreasonable action or inaction to avoid. In British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 at 689 Viscount Haldane LC described the principle in terms of a “duty”. Although not strictly relevant for current purposes, it should be noted that the “duty” to mitigate is something of a misnomer for the reasons identified by Sir John Donaldson MR (as he then was) in The Solholt [1983] 1 Lloyd’s Rep 605 at 608:

“A plaintiff is under no duty to mitigate his loss, despite the habitual use by the lawyers of the phrase ‘duty to mitigate’. He is completely free to act as he judges to be in his best interests. On the other hand, a defendant is not liable for all loss suffered by the plaintiff in consequence of his so acting. A defendant is only liable for such part of the plaintiff’s loss as is properly to be regarded as caused by the defendants’ breach of duty. As Viscount Haldane LC put it [in British Westinghouse Electric and Manufacturing ] at 689: The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps. And later: “Whether a loss is avoidable by reasonable action on the part of the plaintiff is a question of fact not law. This was decided in Payzu Ltd v Saunders [1919] 2 KB 581.”

See also Wenkart v Pitman (1998) 46 NSWLR 502 at 524.

17 In Payzu Ltd v Saunders [1919] 2 KB 581 at 586 McCardie J posed the following question in relation to mitigation:

“The question, therefore, is what a prudent person ought reasonably to do in order to mitigate his loss arising from a breach of contract. … the plaintiffs … were fully entitled to consider the terms in which the offer was made, its bona fides or otherwise, its relation to their own business methods and financial position, and all the circumstances of the case…”

18 As can be seen from these well-established principles, the defendant assumes an onus to establish that the plaintiff has acted unreasonably in respect of the minimisation of loss occasioned by the defendant’s breach. If the defendant is unable to discharge that onus, the normal measure of damages will apply [Roper v Johnson (1873) LR 8 CP 167; Hasell v Bagot Shakes and Lewis Ltd (1911) 13 CLR 374 at 388; British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London [1912] AC 673 at 689; Garnac Grain Co Inc v Faure & Fairclough [1968] AC 1130 at 1140; Munce v Vinidex Tubemarkers Pty Ltd [1974] 2 NSWLR 235 at 240; TCN Channel 9 v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 158; Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1 at 17 and 29; Wenkart v Pitman (1998) 46 NSWLR 502 at 504, 520-523 and 535; Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507 at 509 and 513].

19 As Downer has contended, the Court does not weigh the conduct of the plaintiff in fine scales for the benefit of the defendant, [see Banco de Portugal v Waterlow& Sons [1932] AC 452 at 506: “Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticize the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of duty owed to him has acted reasonably in the adoption of remedial measures and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken” [cited in Simonius Vischer & Co Ltd v Holt& Thompson [1979] 2 NSWLR 322 at 355]. Nor will the Court impose a high standard on the plaintiff [Sacher Investments Pty Limited v Forma Stereo Consultants Pty Limited [1976] 1 NSWLR 5 at 9; Harpers Trading (Singapore) Pte Ltd v RFL International Ltd (unreported, Supreme Court of New South Wales, Carruthers J, 12 December 1994)], or judge the actions of the plaintiff with the critical eye of hindsight [Banco de Portugal v Waterlow [1932] AC 452 at 506]. After all, in this situation it has already been accepted that the defendant is the wrongdoer [Banco de Portugal v Waterlow [1932] AC 452 at 506; Sacher Investments Pty Limited v Forma Stereo Consultants Pty Limited [1976] 1 NSWLR 5 at 9; Harpers Trading (Singapore) Pte Ltd v RFL International Ltd; Segenhoe Limited v Akins (1990) 29 NSWLR 569 at 582].

20 The pragmatic approach to the assessment of the plaintiff’s actions is governed by the following principles:

i. it is a matter of fact in all the circumstances. [For example, in Sotiros Shipping Inc & Anor v Sameiet Solholt (The “Solholt”) [1983] 1 Lloyd’s Rep 605 at 609: “If they could have found a different but identical ship, clearly it would have been reasonable that they should have bought it and the price of that purchase would have established the measure of their loss. However there is no suggestion that any such vessel was available. This left them with the alternative of buying Solholt”];

ii. the Court does not expect the plaintiff to undertake “any obligation to do anything other than in the ordinary course of business” [ Dunkirk Colliery Co v Lever [1878] 9 Ch D 20 at 25 per James LJ, cited by Viscount Haldane LC in British Westinghouse at 689; see also Bellingham v Dhillon [1973] 1 All ER 20 at 23-24; London & South of England Building Society v Stone [1983] 3 All ER 105 at 120-122];

iii. the mitigation principle does not require a plaintiff to act in a way it perceives to be commercially unwise for it. [In James Findlay & Co Ltd v NV Kwik Hoo Tong Maatschappij [1929] 1 KB 400 at 410, 415 and 418 the plaintiff’s loss could have been offset had they insisted upon their legal rights under a pre-existing contract with a third party. However that pre-existing contract was based upon a premise that the plaintiff had subsequently found out was incorrect, so that whilst enforcement was strictly available, to do so would have tarnished the plaintiff’s commercial reputation. Greer LJ at 415 said: “I see nothing immoral or unconscionable in an endeavour to hold to their bargain the Indian sub-purchasers who had bought goods on different terms from those on which the respondents bought them - namely, as goods which were certified by the bill of lading as having been shipped in September. The respondents would have been perfectly entitled, as a matter of business morals, to hold the sub-purchasers to their bargain and make them pay damages if they did not take the goods. But it is wholly unreasonable to say that that would be the ordinary course of business which they ought to pursue to diminish the damages. People have not to consider what is right in a strict court of conscience; they have to consider the effect of their conduct upon their business relations with other people, and I have little doubt that it would not have suited the respondent’s business, nor would it be reasonable as a matter of business to require them, to do what is suggested in order to diminish the damages, if prima facie they are entitled to recover damages from the defendants.” In Harpers Trading (Singapore) Pte Ltd v RFL International Ltd (unreported, SCNSW, Carruthers J, 12 December 1994) the Court found that the requirement to mitigate did not require the plaintiff to “fire sell” its product in circumstances where it was perceived it would be commercially unwise to do so. See also Smailes & Son v Hans Dessen & Co (1906) 95 LT 809 at 814; and the dissenting judgment of Samuels JA in Hoad v Scone Motors Pty Limited [1977] 1 NSWLR 88 at 100].

Assessing quantification of damages

21 The Sural parties’ summary of the well-established general principles in assessing the quantification of damages is accepted as correct:

i. Only loss which is caused by the breach in question is compensable [ Cardwell Shire Council v Calabrese (1975) 49 ALJR 164 at 165]. A claimant bears the onus of establishing the extent of its loss on the balance of probabilities. To satisfy the requirements of that rule, a claimant must, if it is to recover more than a nominal amount, affirmatively establish loss capable of being measured in monetary terms. In many cases, proof of the full extent of the loss will involve establishing an evidentiary foundation for positive and detailed ultimate findings by the Court on the balance of probabilities. There are, however, cases where considerations of justice or the limitations of curial method render ultimate findings, about what would have been or will be, impracticable or inappropriate [ Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 118 per Deane J]. Ultimately, as much certainty and particularity must be insisted upon in proof of damage as is reasonable having regard to the circumstances and to the nature of the acts themselves by which the damage is done [ Amann at 138 per Toohey J].

ii. Nevertheless, damages will not be awarded if the evidence does not comply with a minimum standard: Cheshire and Fifoot’s, “Law of Contract”, Eighth Australian Edition at [23.23]. This minimum standard will not be satisfied if the evidence of loss is essentially speculative, unreliable, inaccurate, incomplete and/or ill-founded as a matter of fact [ Narni Pty Ltd v National Australia Bank Limited [2001] VSCA 31 at [31] per Tadgell JA].

iii. In a claim based on wasted expenditure, the claimant is only entitled to damages for additional expenditure incurred as a result of the breach. The claimant is not entitled to damages for expenditure it would have incurred in any event.

Jones v Dunkel

22 It is important to recall the principles laid down in Jones v Dunkel (1959) 101 CLR 298. The following extracts clarify the position in this regard:

"[The] unexplained failure by a party to give evidence, to call witnesses, or tender documents…may, not must, in appropriate circumstances lead to an inference that the uncalled evidence would not have assisted that party's case… The appropriate circumstances exist where it was within the power of the party to tender the evidence which was not tendered..." (JD Heydon, Cross on Evidence , 7th ed, Butterworths, Sydney, 2004 at [1215].)

"This instance of a Jones v Dunkel inference, also available where there is unexplained failure by the party to call a witness or tender documentary evidence, can entitle the judge or jury more readily to accept the evidence of the opposite party which might have been contradicted, or more readily to draw any inference fairly available from the evidence called by the other party. A Jones v Dunkel inference cannot fill gaps in the evidence, or convert conjecture and suspicion into inference, but unless it is to be empty of content the inference if drawn may weigh the scales, however slightly, in favour of the opposing party." [ Adler v Australian Securities and Investments Commission [2003] NSWCA 131 at [649] per Giles JA, Mason P and Beazley JA agreeing.]

"[T]he rule [in Jones v Dunkel ] only applies where a party is "required to explain or contradict" something. What a party is required to explain or contradict depends on the issues in the case as thrown up in the pleadings and by the course of evidence in the case. No inference can be drawn unless evidence is given of facts "requiring an answer". (JD Heydon, Cross on Evidence , 7th ed, Butterworths, Sydney, 2004 at [1215].)
[Passage quoted with approval in the joint judgment of Gleeson CJ and McHugh J in Schellenberg v Tunnel Holdings Pty Ltd (2000) 170 ALR 594 at 608- 609.]

The contractual position

23 It seems convenient first to treat with the contractual position.

The 16 August 2002 formal contract

24 Without being exhaustive, particularly significant provisions of the original contract were as follows:

i. Sural CA is described as “Supplier” and Evans Deakin Pty Ltd (trading as Downer PTR) is described as “Purchaser”.

ii. The “Scope of Work” (Part D) is described as:


The Works to be carried out require the Supplier to provide all labour, plant, machinery, equipment, supervision, engineering and materials necessary for the quality assurance, supply, manufacture, testing, packing onto non returnable steel drums and into containers, transporting to the wharf at the port of departure, loading on board the vessel at the port of departure and delivery CIF (Inco terms 2000) Fremantle Western Australia of 54/7/3.00 ACSR/AC conductor code name “Golf” in accordance with Western Power Corporation’s Specification for Contract No TD6.9.1 (relevant extracts of this Specification are included in Annexure Part F of the Contract), and the Contract.

The requirements for delivery purposes are detailed in Annexure Part G.

iii. The applicable “Standards” (Part H) are described as:


Unless otherwise agreed in writing by the Purchaser all design, material and workmanship shall comply with the latest editions of the Australian Standards.

The following Australian Standards will be applied:

AS 3607 Conductors – Bare overhead, aluminium and aluminium alloy-steel reinforced
C 36511 Drums for bare stranded conductors, Part II; Metal Drums
(It should be noted that the “latest edition” of the Australian Standard (being AS 3983-1991) was attached to a facsimile dated 25 June 2002 from Les Waldron of Downer to Mr Riviere and Ms Holzhaker.)

iv. Clause SC-7.3 included:

Unless otherwise agreed in writing by the Purchaser conductor drums shall be non returnable steel type in accordance with Australian Standard C365.11 so as to enable smooth running out in lengths as long as can be conveniently handled and erected . The drums are to be constructed so as to withstand rough handling in transit and be of a type, size and construction which will ensure that during and after winding of the conductor onto the drums and during transport and storage, the conductor will not be damaged in any way … [Emphasis added.]

v. Clause SC-8 provided:


All materials used under this contract shall be new and of the best quality and of the class most suitable for working under the conditions specified and shall withstand the variations of temperature and atmospheric conditions arising under working conditions without distortion or deterioration or the setting up of undue stresses in any part , and also without affecting the strength and suitability of the various parts of the works which they have to perform. No repair of defective parts will be permitted without the sanction in writing of the Purchaser.

All work shall be carried out and completed in a neat and workmanlike manner to the approval of the Purchaser.

vi. The procedure for Variations is described in clause GC16.


The “Delivery Schedule” (clause SC-15; Part G) recorded:

1. batch 1 to be delivered on 30 June 2003;
2. batch 2 to be delivered on 30 July 2003;
3. batch 3 5to be delivered on 30 August 2003;
4. batch 4 to be delivered on 30 September 2003;

vii. Clause GC17.1 provided for the payment of Liquidated Damages for every day in which the delivery was late, such amount being 0.25 per cent per day of the value of the conductor, calculated in accordance with SC-2.2 which had not been delivered at the Place for Delivery by the Date for Delivery for that conductor, limited to a maximum liability of 10% of the value of the conductor of which delivery had been delayed (Clause SC-11).

viii. Interest was payable on all moneys due to either party at a rate of 5 per cent per annum, compounded at six monthly intervals (GC-23).

ix. Payments and set-offs were dealt with in GC22.2 to GC22.4. Limitation of liability was dealt with in GC-27.

x. Security was dealt with in clause SC-3 and GC5.2 – GC5.7.

25 The particular parameters laid down by the contract which require to be steadfastly kept in mind may be summarised as follows:

i. Sural CA agreed to supply the conductor to Downer:


a) in four batches on 30 June, 30 July, 30 August and 30 September 2003;

b) in lengths of 3500m per drum weighing 4844 kg (Sural CA's quotation dated 16 August 2001 signed by Mr Riviere and Ms Holzhaker, incorporated by Annexure I);

c) on “non returnable steel type” drums in accordance with Australian Standard C365.II; and

d) drums were “to be constructed so as to withstand rough handling in transit”.

ii. The obligation upon Sural CA to supply was capable of being varied by the parties in writing and only in writing. See SC 7.3 (“Unless otherwise agreed in writing”) and also GC 16.1).

26 As the reasons and the evidence make plain, there were two variations in writing which occurred, at two separate times:

i. first, a variation [herein termed the novation] whereby the supply was to be made by Sural SpA;

ii. secondly, a variation whereby in lieu of the security by way of bank guarantee, Downer would retain from the payment for the first batch of conductor, an amount of 10% of the total contract price.

The ultimate holding concerning the claimed steel to wooden drums variation

27 As the evidence and the reasons make plain there was no oral agreement to vary the obligations under the contract to supply the conductor on wooden drums. It is common ground that there was no agreement in writing to that effect.

The approach taken to setting out the evidence

28 It is inappropriate to endeavour to chronicle all of the evidence. This is particularly the case where there were so many emails passing between the parties at material times, not to mention the number of conversations which occurred. The approach taken in this judgment is to attempt to deal only with those communications which seem to have particular significance for the issues arising for determination. Even so it has been necessary to deal with many emails and with some correspondence. All of the communications have of course been taken into account in order to make the factual findings.

29 It is pertinent to also note that in relation to the factual issues as to the alleged breaches of contract, many witnesses were called to give evidence as to what they had seen and in some cases [as where the first-hand hearsay rule applied], as to what others had told them had occurred. At the same time the volumes of written material inter alia comprising the actual site records were before the Court. Mercifully there were some useful summaries of the site records. Here a deal of the evidence has had to be referred to in order to make material factual findings.

30 Although it was the case that one or other of the witnesses called by either party disagreed in a number of instances with the version of conversations said to have taken place with the other, in some instances the inconsistencies in their different versions played no part in being determinative of any finding in these reasons. Of course other instances involve vital questions of whose version is accepted.

The reliability of witnesses

Ms Holzhaker

31 Ms Holzhaker [a product manager with the Sural group of companies at the relevant time] appears to have carried out her level best to accurately recall the events in respect of which she gave evidence. [She was based in Venezuela until approximately 10 June 2003 at which time she relocated to Italy.] In the nature of things that evidence was often that she acted at the dictate or direction of Mr Riviere, yet curiously, when he gave evidence, he did not seem to always agree that this had happened with the regularity she had expressed.

32 It has been difficult to determine some of the reliability issues on the balance of probabilities. The Court has in many instances, [including that of having to assess the reliability of Ms Holzhaker], required to closely study the contemporaneous written documents. But in several instances a close examination of the contemporaneous documents seen in the light of contradictory evidence given by other witnesses, particularly Mr Riviere, has ultimately led to the Court accepting the evidence of certain of the Downer witnesses as the more reliable: and in particular accepting the evidence of Mr Antoniazzi as being more reliable than that given by Ms Holzhaker. This is not to say that Ms Holzhaker did not earnestly believe that the content of the conversations said by her to have occurred was otherwise than as she stated in her affidavits and in the witness box. However in other instances, Ms Holzhaker’s evidence as to the content of conversations is held to be the more reliable.

33 Ms Holzhaker was clearly confused from time to time in her recollection of events and conceded that her recollection was less than perfect. In particular at one stage she gave evidence under cross-examination that Mr Riviere was at a particular time, negotiating with Mr Antoniazzi concerning the supply of wooden drums as one of the technical issues under discussion on 28 April 2003. She then moved away from that answer, later accepting that she did not know [if wooden reels had been the subject of the discussion]. Neither Mr Riviere nor Mr Antoniazzi gave evidence of any such discussion at this time and no contemporaneous documents recorded such discussions. Hence the difficulties encountered in accepting some of her evidence.

Mr Riviere

34 The evidence given by Mr Riviere requires to be very carefully treated with for the reason that he was obviously very partisan to the Sural interests: his evidence was that his parents were ultimately the beneficial owners of SpA as well as CA [T 199-200]. The answers given by Mr Riviere were in a number of instances, inconsistent with the contemporaneous materials. In some instances his evidence clearly requires to be rejected.

35 Mr Riviere verified a creditor’s statutory demand for payment of debt issued by SpA to Downer and dated 9 June 2004. That affidavit included Mr Riviere deposing that SpA was a creditor of Downer in respect of a debt totalling US $321,209.47 that was owing pursuant to the Formal Instrument of Agreement dated 16 August 2002 (as varied). He deposed that as part of his duties with SpA, he was responsible for the implementation of the agreement and had inspected the business records of SpA in relation to its client Downer. He deposed that the debt was due and payable by Downer.

36 Critically for present purposes, he deposed that he believed that there was no genuine dispute about the existence or amount of the debt.

37 He was closely cross-examined on this last mentioned sentence in his affidavit. That cross-examination extended over many pages [commencing at T 320]. It is quite plain that he must have known that there was indeed a genuine dispute about the existence and amount of the debt. This was patently clear from the terms of the detailed 9-page letter from Downer addressed to the Sural companies and dated 10 May 2004 [PX 1804] which gave chapter and verse in the most graphic terms to the contention by Downer of its rights at law. This matter reflects adversely on Mr Riviere’s credit.

38 Another indicator of Mr Riviere's evidence being sometimes unreliable concerns the following:

i. the numerous occasions, when Mr Antoniazzi sought the issue of the bank guarantee stipulated in the contract without success;

ii. the clear inference from the evidence that SpA at all material times had the greatest difficulty in procuring such a bank guarantee but without acknowledging any such difficulty, continued to fob off the requests for that guarantee with various excuses;

iii. the fact that notwithstanding the obligation to provide the bank guarantee, Mr Riviere was still writing in late March 2003 indicating that SpA proposed to open the bank guarantee once the parties moved closer to the date of shipment, where the inference from all of the evidence is that there was no proper basis for putting that proposal forward;

iv. Mr Riviere's refusal under cross-examination to concede that notwithstanding Mr Antoniazzi's request of 27 March 2003 that the bank guarantee be urgently established, Mr Riviere had to have had the gravest doubts that SpA could achieve any such thing;

v. that this was in fact the then state of affairs becomes tolerably clear from in particular, the later correspondence sent to Mr Antoniazzi by Ms Holzhaker, which, with respect to the security issue, made the observation that Sural's guarantee credit line "is quite full" because of the amount of different deliveries around Europe;

vi. the appropriate inference is that this had been the state of affairs throughout, which inference is supported by the end result where no guarantee was ever furnished.

39 Another indicator of the unreliability of the evidence given by Mr Riviere is exemplified by his reluctance to agree with propositions put to him that he thought would advance Downer’s case. Examples include what in the main would seem to be uncontroversial facts:

· that conductor is a long-lead item;

· that by May 2003 Downer realistically had little choice but to accept Sural's conductor;

· that Type 22 wooden drums [in accordance with the Italian ANIE standards] were a relatively unusual drum for the Taranto factory to make;

· that Downer was making it absolutely clear that it regarded wooden drums as a breach of contract;

· that it was cheaper for Sural SpA to obtain wooden drums than steel drums.

40 Additionally there are the circumstances concerning Sural's dealings with the supplier Construzione Legno Sud [“CLS”] and in particular Mr Riviere's familiarity with those dealings:

i. he initially claimed to be unaware of the identity of any individual with whom he had dealt with at CLS;

ii. he initially claimed that Sural SpA still bought wooden drums from CLS, then said that it had last bought drums from CLS in 2005 or 2006;

[I accept that this ignorance was certainly curious given the centrality of the wooden drums to these proceedings.]

41 Then there is the fact that notwithstanding the repeated requests for documents relating to the wooden drums, not one of which was discovered prior to the hearing, Mr Riviere was able to supply invoices on short notice after cross-examination commenced. Yet it was he who gave instructions to Sural's solicitors, and he who verified Sural's discovery.

Mr Todaro

42 Mr Todaro was a mechanical engineer employed by SpA. He was at all relevant times based in Italy. On one occasion he visited the Downer work site in Western Australia to implement a program involving the insertion of inflatable bladders into the wooden reels supplied by Sural to Downer in response to alleged problems experienced by Downer in the unwinding of the wooden drums. His evidence was given through an interpreter and I was unable to discern any area in respect of which his evidence could be seen to be unreliable.

Mr Fanelli

43 Evidence [both in affidavit form as well by video-link] was given by Mr Fanelli. He had visited Australia in late November and early December 2003 to undertake work involved in rewinding electrical conductor from the full to the empty wooden reels supplied by SpA, the reels being located at the Ridolfo premises. His evidence was that the rewinding was successful, although the conductor on only 7 of the 30 drums were not damaged by the rewinding process [which was stopped for that reason]. This evidence is inconsistent with that given by Mr Chigioni [Downer’s logistic manager] that the trial was equivocal: [Mr Chigioni not having been required for cross-examination].

44 In my view Mr Fanelli’s evidence requires very careful assessment. It is inconsistent with the evidence given by Mr Barona that the rewinding process was abandoned following excessive tail extrusion and layers of the conductor biting on themselves and jamming. It is plain that Mr Fanelli took a number of photographs whilst in Australia but only the three photographs the subject of cross-examination had been produced. He appears to have first denied that Mr Guazzelli had discussed with him the nails found in the layers of conductor and to then have proceeded to give evidence of what he claimed to say to Mr Guazzelli in response. In the result the evidence by Mr Fanelli can be given little weight.

Additional plant costs

271 Sural speculated as to the possibility that the additional plant costs were fixed costs that would have been incurred in any event despite the run out delays. Moreover, Sural pointed to the evidence of Mr Antoniazzi that the actual job costs calculated by Downer included equipment that was owned by Downer [T 733.25-28]. Sural did not adduce any evidence to challenge the evidence of Mr Barona as to his revised tender estimate in relation to plant costs during the stringing process. There was no evidence challenging the rates given for each of the pieces of machinery. The tender estimate and project cost report are business records and the Court is entitled to proceed on the basis that they are prima facie accurate unless proven otherwise. I accept that the tender estimate and project cost report detailing the plant costs fairly represent Downer’s plant costs. The inference to be drawn is that they were real costs that were taken into account in the tender estimate created before the commencement of any litigation [T 845.37].

Additional materials and miscellaneous costs

272 The remaining costs in dispute are discussed below.

Replacement Olex conductor

273 There was no dispute between the parties that 7 drums of Olex conductor was purchased for $115.901.10 [that is, at $16,557.30 per drum] as evidenced by the Olex invoice [Exhibit MM1 tab 5].

274 Further, there is no dispute between the parties that 3 of these drums were used in the Project. This is evidenced in the document prepared by Mr Antoniazzi headed “Summary of OLEX Drum Run-out” at Tab 2F of Exhibit MM1 and was assumed by Mr Masters to be correct [T 701:21-35]. However Downer contends that Sural has ignored Mr Rantucci’s uncontradicted evidence that a total of 6 drums of Olex conductor were used on 15, 17 and 19 July 2004 (Mr Rantucci’s affidavit of 1 July 2005 at [54]). I accept Mr Rantucci’s evidence in this respect. Downer is entitled to recover the costs of 6 of the steel drums purchased from Olex.

275 Downer also contends that the Court should infer that the seventh drum was used to satisfy (in part) its agreement to supply Western Power with an additional two drums of conductor on steel drums [some reference to which is seen at PX 937 and PX 978]. The limited evidence before the Court on this matter does not permit this inference to be drawn.

Downer head office staff costs and travel costs

276 The parties are in agreement as to the amount owing to Downer in respect of travel costs. The travel costs total $24,631.82. It was conceded by Downer that its head office staff costs were not recoverable because they constituted the internal labour costs of Downer personnel who would have been paid by Downer whether or not the Project was undertaken.

Forgone planned revenue from the resale of steel drums (item 15)

277 Downer claims $357,000 in respect of foregone planned revenue from the sale of empty steel drums. Mr Antoniazzi (19 October 2007 affidavit at [46] and in cross-examination at T 739:9-54) gave evidence that there exists a market for second-hand steel drums; that he received a real offer at $1,000 per drum [the cost price of new steel reels being apparently around $3,000]. Mr Antoniazzi gave evidence that the usual practice, based on his involvement in other projects, was for the second-hand purchaser to come to the site and collect the used drums.

278 Mr Masters similarly gave evidence of his experience in the sale of steel drums in his affidavit. His experience had been that a company similar to Downer would purchase the conductor supplied on steel returnable drums and once the conductor had been used, the empty drums were returned to the conductor manufacturer for re-use (rather than sold second-hand in the open market). Mr Masters evidence was qualified by the fact that he has never had to sell steel drums on the open market [T 703:20].

279 In the situation of Downer, the return of any drums to Sural (for value) in Italy was not possible since the contract had stipulated “non-returnable steel drums”.

280 The evidence of Mr Masters and Mr Antoniazzi in regards to the market re-sale value of any steel drums left a deal to be desired. They did not purport to be experienced in selling second-hand steel drums in the market. The oral quote that Mr Antoniazzi obtained for the steel drums is insufficient to prove their re-sale value or that there was a ready market for the second-hand drums. The fact that the planned revenue from the re-sale of steel drums may have been factored into Mr Barona’s tender estimate for the Project [suggesting that their anticipated re-sale value was realistic] does not overcome the defect in the necessary proof of the re-sale value in a second-hand market.

281 Furthermore, although neither party appears to have drawn the Court’s attention to the relevant portion of the faxed letter dated 14 October 2003 from Downer to Sural [PX 1171], Mr Antoniazzi said “Lastly, Downer has foregone the benefit of the substantial re-sale value of the steel reels, which in this instance would amount in the order of USD 400 to USD 700 each.” Hence this would seem to have been an altogether other answer to the claim for foregone planned revenue from the re-sale of steel drums.

Additional traffic control on Brand Highway (WA) due to extended duration in July 2004

282 Sural contended that the traffic control costs represented internal labour costs. However Mr Antoniazzi, whose evidence on this matter is accepted as reliable, gave evidence that the traffic control was undertaken by a third party contractor, Altus Traffic (see Mr Antoniazzi’s 19 October 2007 affidavit at [48]). Sural is liable to pay Downer’s additional traffic control costs due to the extended duration of the Project in July 2004.

Sural’s alternative calculations

283 Sural advanced the proposition that Mr Barona’s affidavit actually demonstrated that the time required for running out the conductor was not longer than expected under what was estimated for the stringing process.

284 As Downer submitted this analysis requires to be rejected for the following reasons:

i. The analysis is not supported by any evidence from any witness called by Sural, nor was it put to any Downer witness.

ii. In truth the job cost report showed an overrun of millions of dollars and the project took months longer than anticipated (152 days instead of 79 days). Sural's analysis does not explain how the proposition for which it contends is consistent with the reality of the situation.

iii. Sural's analysis fails to recognise basic realities about daily activity: for example, it fails to recognise that during the allocated 10-hour working day, there is not only change over of drums, but also travel time (which can be more than 100km from camp to stringing site), lunch and crib breaks, tool box meetings etc.

iv. Sural’s analysis results in a number that is far removed from the usual run-out speeds that were identified in the evidence of Messrs Hendrick [1 July 2005 affidavit at [18]], Chigioni [23 June 2005 at [38], [52]] and Rantucci [1 July 2005 at [23]].

v. Sural’s approach involves calculating a notional run-out rate from Mr Barona's original and revised tender estimates. It is then asserted that “it is plain that the estimates of Mr Barona are broadly in line with the run out rates achieved”. That is wrong in the following ways: Mr Barona did not estimate run out rates – he estimated times. Indeed Mr Barona cautioned against precisely the extrapolation of run out rates that Sural's lawyers have undertaken: T 452.30. Also, Sural's submission asserts comparability of run out rates, but does not state what Downer's run out rates were or factor in the delays from stoppages due to tangling, conductor damage, tail feed, etc). Finally most importantly, it takes no mathematical analysis at all to see that if the comparison is between Mr Barona's estimate and reality, Mr Barona estimated the stringing process to take 79 days, while it took 152 days in fact. This was due in large part to the problems with the Sural drums during run out.

Allowance for Exigencies / vicissitudes

285 In the letter of instruction addressed to Mr Masters dated 14 June 2006 [Schedule 2 to Mr Masters report of 26 July 2006], Downer stated that its amended cross-claim was quantified at an updated amount of $3,473,572. In the proceedings before the Court, the amount of the claim had been reduced to approximately $2.7 million, which is said to reflect directly upon what further amount of discount, if any, should be given by the Court for exigencies [T 837:50].

286 The task of determining damages is ultimately no more than a decision of fact. The numerous stages involved in the obtaining, shipping, transporting and deploying of the drums of conductor should not be underestimated. At a number of the disparate stages involved, there may have been certain variables that were not explored in the evidence presented. The determination of the appropriate damages award is not a matter of scientific accuracy. My impression from all of the evidence is that it is appropriate to reduce the overall amount advanced by Downer [after making adjustments for the heads of damage which have been disallowed] by 5%, even taking into account Downer’s proposition that its claim before this Court had already been discounted for exigencies.

Short minutes of order

287 The parties are to bring in short minutes of order to reflect the up to date calculations necessary to give effect to these reasons. On the same occasion, costs may be argued.

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