Swick Nominees Pty Ltd t/as Swick Drilling Australia v Norncott Pty Ltd [No 3]
[2013] WASC 173
•9 MAY 2013
SWICK NOMINEES PTY LTD T/As SWICK DRILLING AUSTRALIA -v- NORNCOTT PTY LTD [No 3] [2013] WASC 173
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2013] WASC 173 | |
| Case No: | CIV:1252/2000 | 19-23, 26 & 27 NOVEMBER, 6, 17 DECEMBER 2012 | |
| Coram: | ALLANSON J | 9/05/13 | |
| 44 | Judgment Part: | 1 of 1 | |
| Result: | Claim against first defendant upheld subject to proof that first defendant is registered Claim against third defendant dismissed | ||
| B | |||
| PDF Version |
| Parties: | SWICK NOMINEES PTY LTD T/As SWICK DRILLING AUSTRALIA NORNCOTT PTY LTD DRESSER INDUSTRIES LEROI INTERNATIONAL INC |
Catchwords: | Negligence in design and manufacture Proof of negligence in design Need for expert evidence Turns on own facts Contract Pre-contractual representations Whether promissory Negligent misrepresentation Contract Terms implied under Sale of Goods Act 1895 (WA) Goods fit for purpose Merchantable quality |
Legislation: | Evidence Act 1906 (WA), s 79C Sale of Goods Act 1895 (WA), s 14 |
Case References: | Banque Commerciale SA, En Liquidation v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279 Burns v MAN Automotive (Aust) Pty Ltd [1986] HCA 81; (1986) 161 CLR 653 Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 Dovuro Pty Ltd v Wilkins (2003) 215 CLR 317 European Bank Limited v Robb Evans of Robb Evans & Associates [2010] HCA 6 FGT Custodians Pty Ltd v Fagenblat [2003] VSCA 33 Fink v Fink [1946] HCA 54; (1946) 74 CLR 127 Fitzpatrick v Job [2007] WASCA 63 Forrest v Australian Securities and Investments Commission [2012] HCA 39 Gould & Birkbeck & Bacon v Mount Oxide Mines Ltd (in liq) [1916] HCA 81; (1916) 22 CLR 490 Hadley v Baxendale [1854] EngR 296; (1854) 9 Ex 341 Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 JJ Savage & Sons Pty Ltd v Blakney [1970] HCA 6; (1970) 119 CLR 435 Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351 Malec v JC Hutton Pty Ltd [1990] HCA 20; (1990) 169 CLR 638 McRae v Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377 Nyoni v Patterson [2012] WASCA 171 Robinson v Harman [1848] EngR 135; (1848) 1 Ex 850 Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1996] UKHL 3; [1997] AC 254 Suosaari v Steinhardt [1989] 2 Qd R 477 Swick Nominees Pty Ltd v Norncott Pty Ltd [2008] WASC 24 Swick Nominees Pty Ltd v Norncott Pty Ltd [No 2] [2011] WASC 348 Sydney South West Area Health Service v Stamoulis [2009] NSWCA 153 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272 Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38; (1998) 192 CLR 603 Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16; (2004) 216 CLR 515 Zorom Enterprises Pty Ltd v Zabow [2007] NSWCA 106; (2007) 71 NSWLR 354 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
- Plaintiff
AND
NORNCOTT PTY LTD
First Defendant
DRESSER INDUSTRIES
Second Defendant
LEROI INTERNATIONAL INC
Third Defendant
Catchwords:
Negligence in design and manufacture - Proof of negligence in design - Need for expert evidence - Turns on own facts
Contract - Pre-contractual representations - Whether promissory - Negligent misrepresentation
(Page 2)
Contract - Terms implied under Sale of Goods Act 1895 (WA) - Goods fit for purpose - Merchantable quality
Legislation:
Evidence Act 1906 (WA), s 79C
Sale of Goods Act 1895 (WA), s 14
Result:
Claim against first defendant upheld subject to proof that first defendant is registered
Claim against third defendant dismissed
Category: B
Representation:
Counsel:
Plaintiff : Mr I A Morison & Mr C J Sweeney
First Defendant : No appearance
Second Defendant : No appearance
Third Defendant : Mr N D C Dillon
Solicitors:
Plaintiff : Eastwood Sweeney Law
First Defendant : No appearance
Second Defendant : No appearance
Third Defendant : Minter Ellison
Case(s) referred to in judgment(s):
Banque Commerciale SA, En Liquidation v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279
Burns v MAN Automotive (Aust) Pty Ltd [1986] HCA 81; (1986) 161 CLR 653
Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64
Dovuro Pty Ltd v Wilkins (2003) 215 CLR 317
(Page 3)
European Bank Limited v Robb Evans of Robb Evans & Associates [2010] HCA 6
FGT Custodians Pty Ltd v Fagenblat [2003] VSCA 33
Fink v Fink [1946] HCA 54; (1946) 74 CLR 127
Fitzpatrick v Job [2007] WASCA 63
Forrest v Australian Securities and Investments Commission [2012] HCA 39
Gould & Birkbeck & Bacon v Mount Oxide Mines Ltd (in liq) [1916] HCA 81; (1916) 22 CLR 490
Hadley v Baxendale [1854] EngR 296; (1854) 9 Ex 341
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41
JJ Savage & Sons Pty Ltd v Blakney [1970] HCA 6; (1970) 119 CLR 435
Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351
Malec v JC Hutton Pty Ltd [1990] HCA 20; (1990) 169 CLR 638
McRae v Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377
Nyoni v Patterson [2012] WASCA 171
Robinson v Harman [1848] EngR 135; (1848) 1 Ex 850
Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1996] UKHL 3; [1997] AC 254
Suosaari v Steinhardt [1989] 2 Qd R 477
Swick Nominees Pty Ltd v Norncott Pty Ltd [2008] WASC 24
Swick Nominees Pty Ltd v Norncott Pty Ltd [No 2] [2011] WASC 348
Sydney South West Area Health Service v Stamoulis [2009] NSWCA 153
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272
Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38; (1998) 192 CLR 603
Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16; (2004) 216 CLR 515
Zorom Enterprises Pty Ltd v Zabow [2007] NSWCA 106; (2007) 71 NSWLR 354
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1 ALLANSON J: Swick Nominees Pty Ltd carried on business in Western Australia as a drilling contractor under the name Swick Drilling. Norncott Pty Ltd carried on business as a supplier, distributor and repairer of drilling equipment under the name Air Drill. Air Drill distributed air compressors manufactured by LeRoi International Inc, a company incorporated in the United States of America.
2 In about June 1994, Swick Drilling and Air Drill agreed that Swick Drilling would purchase a piece of equipment from Air Drill, described as a LeRoi model TS24 1200 cfm/500 psi compressor (the TS24). The TS24 was then fitted to a diesel engine, an air receiver vessel and other components. The components when all fitted together made up an air compressor unit to provide a compressed air supply for a drilling rig. To avoid confusion, I will use the term 'compressor unit' to describe the assembled item which included the TS24.
3 The dealings between Swick Drilling and Air Drill were carried out between Randal Lloyd Swick, who was a director of Swick Nominees from 1998 to 2007 and who made all relevant decisions on behalf of the company, and Ian McKenzie Speer, who held the position of project manager at Air Drill.
4 Swick Drilling took delivery of the assembled air compressor unit in about January 1995. While it was being operated in July 1995 the compressor unit failed. The failure caused loss to Swick Drilling, which was aggravated because the compressor unit was then being used in a remote location. Swick Drilling says that there were further failures on 10 October 1995, 7 December 1995, 27 March 1996, 29 June 1996 and 24 October 1996. On each occasion the compressor unit could not be used until it had been repaired.
5 Swick Drilling seeks damages against Air Drill and LeRoi for the losses it suffered.
The pleaded case
6 There were originally three defendants to the action. In July 2011, I made orders discontinuing the action against the second defendant, Dresser Industries Inc.
The case against Norncott/Air Drill
7 Swick Drilling pleads its claim against Air Drill in contract, including for breach of conditions implied by s 14(1) and 14(2) of the Sale of Goods Act 1895 (WA), and for negligent misstatement.
(Page 5)
8 Swick Drilling claims that in or about March 1994, Mr Speer, on behalf of Air Drill, expressly represented to Mr Swick, on behalf of Swick Drilling, that:
7.1 the best and most suitable compressor for the plaintiff to purchase would be a LeRoi 500 psi compressor;
7.2 such a compressor had a bearing life of 30,000 hours whereas the bearing life of a Sullair compressor was only 10,000 hours;
7.3 the LeRoi compressor operated at pressures of 500 psi and that the high pressure which it developed in operation would significantly improve the plaintiff's performance in carrying out drilling; and
7.4 such compressors had been in operation over a period of some years prior to 1994.
9 On 24 June 1994, Air Drill made further representations by letter. The pleaded representations included that the compressor had extra large bearings and operated at a low rpm, thereby producing a long life.
10 On a date between 24 June and 30 June 1994, Swick Drilling and Air Drill agreed that Swick Drilling would purchase a LeRoi TS24. Pursuant to that contract, Swick Drilling provided a diesel engine and Air Drill fitted the engine to, and supplied to Swick Drilling, 'a LeRoi model TS24 air screw kit serial number 5228X35 together with an air receiver vessel 40922 and numerous component parts ("the compressor")'.
11 The contract incorporated express terms, including the representations in pars 7.2 and 7.3 (set out above), and oral terms that:
13.1 the set of bearings used in the compressor would enable the compressor to be used in normal operation, that being at operating pressures of 500 psi, for 30,000 hours without bearing failure occurring; and
13.2 the compressor was designed to operate, and was capable of operating, at air pressures of 500 psi and would perform well in operating at such pressures.
12 Swick Drilling further alleged that, by reason of the representations made in the letter of 24 June 1994, the contract incorporated express written terms that:
14.1 in operation, the compressor was capable of producing, and would produce, air pressures such as to produce a state-of-the-art air supply;
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- 14.2 the bearings used in the compressor were very large and the compressor would operate at a low number of revolutions per minute and the compressor would thereby last for a long time in operation;
14.3 the performance of the compressor in operation would be such as to enable the plaintiff to carry out drilling at greater operating pressures and for longer periods of time than it had been capable of doing in the past utilising its existing equipment, particularly the existing compressor; and
14.4 the performance of the compressor in operation would be such as to enable the plaintiff to do the things referred to in paragraph 14.3 above over a period well into the future.
13 Swick Drilling also pleads breach of each of the terms of the contract set out in pars 13 and 14. In particular:
1. that 'the set of bearings used in the compressor was not such as to enable the compressor to be used in normal operation for 30,000 hours without bearing failure occurring';
2. that on 20 July 1995 the compressor failed 'because of failure of the bearing pack of the second stage screw of the compressor';
3. that further 'bearing failures' occurred on five later occasions; and
4. that the compressor was not capable of operating reliably at air pressures of 500 psi and did not perform well when being operated at such pressures.
14 In the alternative, Swick Drilling pleads that there were implied representations to the effect that the TS24 'would be the most appropriate compressor for the plaintiff to purchase'; it would be capable of performing at pressures of 500 psi in a consistently reliable manner; and such compressors had been in operation carrying out mineral drilling work for some years prior to 1994 in a consistently reliable manner.
15 Swick Drilling also pleads an implied representation that the TS24 would produce air pressure so as to produce a state-of-the-art air supply in a consistently reliable manner.
16 Swick Drilling pleads that in reliance on the representations, and induced by them, it entered into the contract. The representations constituted statements of advice, information or opinion, and the representation that the compressor would enable the plaintiff to drill faster
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- and longer well into the future, was promissory. Air Drill further represented that it believed or had reason to believe the statements were in fact accurate; it had made enquiries to establish the statements were reliable and well-informed; it knew facts which justified the statements being made; and it made them in circumstances in which it was exercising all due care, skill and diligence.
17 Swick Drilling alleges that the representations were false as:
1. the compressor performed poorly and unreliably 'as a result of repeated bearing failure';
2. compressors such as that purchased by Swick Drilling had not been operating reliably in performing mineral drilling for some years prior to 1994;
3. it did not operate so as to provide any form of reliable air supply;
4. the purchase of the compressor was not beneficial to Swick Drilling as it failed to operate as reliably as its existing compressor; and
5. Air Drill never believed, or alternatively never had reason to believe, that the statements were in fact accurate, failed to make any adequate enquiries to establish they were reliable and well-informed, knew of no sufficient facts to justify the statements being made, and made them in circumstances in which it had failed to exercise all reasonable care, skill and diligence.
18 Swick Drilling pleads that the representations were negligent misstatements made in circumstances in which Air Drill possessed special skill or knowledge or was otherwise in a special relationship with Swick Drilling.
19 Swick Drilling also relies on the conditions implied under s 14(1) and (2) of the Sale of Goods Act, that the compressor was reasonably fit for the purpose for which it was required, and was of merchantable quality. Air Drill admits that each condition was implied into its contract with Swick Drilling, but denies breach.
20 Swick Drilling seeks damages from Air Drill under each of the various causes of action. Air Drill no longer trades and has not done so for some years. It filed a defence, in which it denied liability. Norncott Pty Ltd was deregistered some time after these proceedings began (I
(Page 8)
- assume after the amended defence in 2005). Swick Drilling had it re-registered in 2012 and continued their action against it to trial. Norncott did not take part in the trial. The practical benefit of continuing against Norncott was not apparent. I do not know whether it remains registered and will not enter judgment in the claim between Swick Drilling and Norncott until that is established.
21 The active defendant in the trial was LeRoi, which designed and manufactured the TS24. There is one cause of action pleaded against LeRoi in negligence.
The case against LeRoi
22 The case against LeRoi is that:
1. It designed, manufactured and supplied air compressors such as the TS24 which Swick Drilling agreed to purchase from Air Drill.
2. In the course of its business it designed, manufactured and supplied to Air Drill the 'manufactured compressor' (defined as the LeRoi Model TS24 Air Screw Kit, serial number 522X35) which Air Drill assembled with other component parts and a diesel engine for Swick Drilling.
3. LeRoi owed Swick Drilling a duty to take reasonable care in the design and manufacture of the manufactured compressor.
23 In par 62, Swick Drilling pleads that LeRoi failed to take reasonable care in the design and manufacture of the manufactured compressor. There are six particulars of negligence:
62.1 failing to design the manufactured compressor in such a way as to ensure that the manufactured compressor's air end second stage was adequate to enable the manufactured compressor to function reliably;
62.2 failing to manufacture the manufactured compressor in such a way as to ensure that the manufactured compressor's air end second stage was adequate to enable the manufactured compressor to function reliably;
62.3 the set of bearings used in the manufactured compressor was not such as to enable it to be used in normal operation without bearing failure occurring because of failure of the bearing pack of the second stage screw of the manufactured compressor; [the expression normal operation is used also in paragraph 13 as meaning 'operating at pressures of 500 psi'];
(Page 9)
- 62.4 the manufactured compressor was not capable of operating reliably at air pressures of 500 psi and did not perform well when being operated at such pressures in that the failures occurred at operating pressures of, or less than, 500 psi;
62.5 the manufactured compressor failed to produce good operating air pressures in operation with any reliability; and
62.6 [LeRoi] failed to take prompt steps to remedy the defects referred to above in circumstances where it knew, or ought to have been aware, of those defects by the date upon which the compressor was provided to the plaintiff by the first defendant.
24 Although it pleads the 'close relationship' between LeRoi and Air Drill in pleading circumstances giving rise to a duty of care, Swick Drilling did not put forward a claim that LeRoi is in some way liable, vicariously or otherwise, for the conduct of Air Drill. In opening, counsel for Swick Drilling confirmed that the sole basis of the claim for liability against LeRoi was that it failed to take reasonable care in the design and manufacture of a particular item of equipment. Swick Drilling sought to attribute liability for breach of contract, negligent statements, misrepresentations, and breach of the Sale of Goods Act, to Air Drill only.
25 In its defence, LeRoi admits that it designed and manufactured and supplied to Air Drill the LeRoi TS24 compressor. It also specifically admits that it designed, manufactured and supplied the 'manufactured compressor' to Air Drill. The defence is otherwise largely negative.
26 LeRoi did not in its defence admit that it owed a duty to Swick Drilling to take reasonable care in the design and manufacture of the compressor. In final submissions it accepted that it had a duty of care, but maintained the plea that it did take reasonable and prudent steps. It did not design or manufacture the bearings used in the compressor. The bearings were designed, manufactured and supplied to LeRoi by independent bearing manufactures: NTN Bearings and Timken Bearings. LeRoi pleads that it relied on independent manufacturers to supply suitable bearings, which were then incorporated into the manufacture of the compressor, and it was not reasonably possible for it to know or learn of any fault or deficiency that may be present in those bearings prior to their installation into the compressor during the manufacturing process.
27 LeRoi specifically pleads that Swick Drilling failed to take steps to adequately protect itself from the risk of business interruption and other losses in that it failed to obtain insurance, failed to negotiate adequate
(Page 10)
- warranty terms with Air Drill, and failed to purchase secure backup equipment.
28 LeRoi further pleads that air compressors can be used in different environments across different industries and for numerous applications other than mineral drilling, and that it had no direct knowledge of the persons or entities that may comprise the class of individuals or companies who purchased their compressors from Air Drill.
29 LeRoi pleads that the manufactured compressor was designed and manufactured for normal use at 350 psi, with occasional use at 500 psi, for use with specified oils, and for use with, and regular replacement of, air filters.
30 LeRoi denies the allegations of negligence.
31 LeRoi also alleges that Swick Drilling failed to take reasonable steps to mitigate its losses.
32 Both parties proceeded on the assumption that the common law of Australia was the substantive law to be applied, even though the plaintiff alleges acts or omissions in the design and manufacture of the compressor, and those acts all occurred in the United States of America. I will also proceed on that basis.
The plaintiff's case
33 Counsel for Swick Drilling provided extensive written opening submissions, but made only a brief opening orally. The written opening dealt with the case against Air Drill at length. It also canvassed the issues relating to whether LeRoi, as a manufacturer, had a duty of care to Swick Drilling as a subsequent purchaser. The breach of that duty was skated over, with the submission that the allegations were made out by reason of all the matters referred to previously in the submissions.
34 As the trial progressed, this cursory treatment of the particulars of breach of duty took on some significance. First, the parties did not agree whether the pleaded particulars of negligence, and the way in which it had conducted the trial, confined Swick Drilling to a case that the loss was caused by a failure in the bearings pack of the TS24 caused by faulty or inadequate bearings. They disagreed about whether Swick Drilling could rely on the doctrine of res ipsa loquitur in proof of breach of duty. Second, in final submissions, counsel for Swick Drilling submitted that the particulars in pars 62.1 and 62.2 did not confine its case. Its case was
(Page 11)
- that failure to take reasonable care in the design and manufacture of the compressor included a range of failures. Counsel suggested that its particulars were broad enough to include:
(a) putting the TS24 into the market in Australia without either specifying the oil that it required, or ascertaining whether that oil was available in that market; and
(b) inadequate testing before releasing the product into the market.
35 The only qualification to the breadth of the plea, as I understood counsel for the plaintiff, was whether the factors related to the TS24 failing to function reliably.
36 Pleadings ensure a basic requirement of procedural fairness, and, to do so, a statement of claim must state the case sufficiently clearly to allow the defendant a fair opportunity to meet it: Banque Commerciale SA, En Liquidation v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279, 286 287; Gould & Birkbeck & Bacon v Mount Oxide Mines Ltd (in liq) [1916] HCA 81; (1916) 22 CLR 490, 517; Forrest v Australian Securities and Investments Commission [2012] HCA 39 [26]. The need for the statement of claim to state the material facts to support the claim for relief, and for the pleadings to define with clarity and precision the issues or questions which are in dispute between the parties and fall to be determined by the court, was recently reaffirmed by the Court of Appeal in Nyoni v Patterson [2012] WASCA 171 [36].
37 The claim needs to be read as a whole, and not with any artificial or forced literalness, and regard may also be had to the way in which the parties conducted the trial. But the statement of claim pleaded by Swick Drilling says nothing about the availability of suitable oils in Australia. It says nothing about the testing of the product before release into the Australian market. They are not matters which, in my opinion, fall naturally within the plea of 'design and manufacture', taking each separately or as a composite expression, so that LeRoi ought to have been on notice and prepared to meet a case about choice or availability of lubricant, or testing of products as an element of negligence. It is true that in its defence LeRoi referred to the oils for which the TS24 was designed. To that extent, evidence about the availability of those oils was relevant. The defence did not, however, convert the plea of negligent design into a plea of failing to specify the required oil or ascertain its availability.
(Page 12)
The witnesses on liability
38 Swick Drilling called two primary witnesses:
1. Randal Lloyd Swick; and
2. Ian McKenzie Speer. It was difficult to properly understand Mr Speer's position at Air Drill. He was involved in sales of equipment, but appears also to have had a role in overseeing repairs, investigating problems and testing of equipment. He was the author of several letters to LeRoi that show he may have had a role in modifying the TS24 compressors that were distributed by Air Drill.
39 LeRoi called one witness, the former managing director of Air Drill, Ralph King.
40 Each party made submissions regarding the credibility of the witnesses of fact. I believed each of them was honest. But each was speaking primarily of things that happened between 1994 and 1997. Their evidence was not precise and was frequently a statement of impressions or conclusions, rather than the primary facts on which those conclusions were based.
41 In the evidence of Mr Swick, there were obvious errors. I am satisfied that none of them was deliberate or dishonest but there had been a lack of attention to detail in preparing his witness statement. I will give three examples. First, the claim was brought for six failures in the TS24. Mr Swick gave evidence of seven failures, and the documents show there was at least another. Second, Mr Swick said in his witness statement that the compressor unit was not used after the sixth failure in October 1996. The documents show that the TS24 was in use again in November 1996, when the compressor unit suffered an engine failure. And there was evidence of the compressor unit, including the TS24, being used up to at least July 1997. Third, it was only at trial that Mr Swick produced evidence, in a supplementary statement, that Swick Drilling had sold the TS24 and other components of the compressor unit in 2004.
42 Mr Swick was ready to concede and correct errors when they were shown. Readiness to concede error may show that the witness was doing his best to be truthful. But it does not take away from the fact that the witness was unreliable in his recollection. The difficulty in recalling accurately was not confined to Mr Swick, and each of the witnesses referred to the effect on his memory due to the time that had passed since
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- these events. Fortunately, in relation to most contested questions of fact, there were contemporaneous documents available and fallible human recollection was not critical.
43 Swick Drilling also called expert evidence from Robert Hearle Martin regarding the possible cause of the failures in the TS24. Mr King, Mr Speer and Mr Martin had all directly observed the TS24 and all of them were experienced in working with and maintaining mining equipment, including air compressors. None of them had formal qualifications. Although the case was about design and manufacture, neither party called evidence from an engineer. There was no evidence of comparison of the design of a TS24 with other compressors.
44 As a final general comment on the evidence, Swick Drilling relied to a significant extent upon letters that had been written by Mr Speer to LeRoi and sometimes to Swick Drilling. The letters contained a mix of statements of fact and technical information and opinion. The letters were received without objection and were admissible under s 79C of the Evidence Act 1906 (WA). There are two qualifications to their use. First, some of the letters included observations on the TS24 which were within Mr Speer's experience to give. But Mr Speer was not shown to be qualified as an expert on matters relating to design. Second, and in practical terms more importantly, the technical content of the letters was left largely unexplained.
The purchase of the compressor
45 Except where I set out the competing evidence, the following matters were not disputed.
46 Swick Drilling had dealt with Air Drill for some years before the purchase of the compressor. Mr Swick knew Mr Speer from his dealings with Air Drill, and from before Mr Speer joined Air Drill.
47 There is no evidence of any formal relationship between LeRoi and Air Drill before the first purchase of a TS24 by Air Drill in 1993 or 1994.
48 Mr Speer visited the United States in 1992 and 1993. In 1993 he visited the premises of a company called Schramm in Pennsylvania. Air Drill distributed Schramm products in Australia. A LeRoi TS24 was 'sitting in the corner of a particular factory area'. The representatives of Schramm told him that they had acquired the TS24 to investigate whether it could or should be fitted to a drilling rig that they were developing, but had decided it was too large and heavy for that rig.
(Page 14)
49 Mr Speer said he investigated the TS24 to ensure it was a good unit to sell in Australia and ('[we] satisfied ourselves at the time'). Mr Speer examined the compressor and arranged with Schramm for it to be sent to Air Drill in Australia so that Air Drill could have a good look at it. It is difficult to assess the extent of the investigation. Mr Speer's evidence was not challenged on this point.
50 Air Drill paid either Schramm or LeRoi for the TS24. It was sold to one of Air Drill's other customers, Western Deep Hole Drilling.
51 In about March 1994, Mr Swick and Mr Speer spoke about options for a larger and more powerful compressor unit for the Swick Drilling drill rig. Mr Speer told Mr Swick about the TS24 including:
1. it would be ideal for reverse circulation drilling as it had greater volume and pressure output than the largest compressors then available;
2. it had been in operation in the United States for some time.
52 Mr Speer also commented on the bearing life of the TS24. The evidence of Mr Speer and Mr Swick is not consistent on this point. Mr Swick's evidence was that Mr Speer said the TS24 had a 'T3 bearing life' of 30,000 hours, compared with 10,000 hours for a Sullair Compressor, although Mr Swick also says that he did not then, and still does not now, know what 'T3 bearing life' referred to. Mr Speer says he referred to B10 bearing life, a statistical measure of bearing life and that he told Mr Swick 'that I had been told that the TS24 had a "B10" bearing life of 30,000 hours'. Mr Swick says he drew the conclusion that he could expect three times as many hours use before the bearings would need to be overhauled. This seems to be the effect of what Mr Speer said, even though it may have been misheard or misremembered. To the extent of the discrepancy about bearing life, I prefer the evidence of Mr Speer, who is likely to have the technical detail correct.
53 At the time these comments were made, Air Drill and LeRoi had no agreement for Air Drill to supply LeRoi equipment in Australia. LeRoi contacted Mr Speer by fax on 28 February 1994, and provided some information regarding the operation of the TS24. Mr Speer responded the same day. He referred to Air Drill having used LeRoi products 'off and on over 18 years' but with a quiet period for the previous five to six years. Mr Speer concluded his letter with the following:
(Page 15)
- To finish off we are interested in learning all about the strengths and limitations of the TS24 + TS17 to ensure that all our installations work well and make our customers happy.
54 Mr Speer recommended to Mr Swick that Swick Drilling purchase the TS24. Mr Swick did not make an immediate decision, but from time to time requested further information and an update on the availability of the TS24.
55 On 24 June 1994, Air Drill wrote to Mr Swick, offering to provide a detailed quotation for supply of a compressor kit. The letter included:
Le Roi compressors have been around for many years and the recent total upgrade of their manufacturing and screw cutting plant has combined with their innovative designs brought them back to the forefront of high pressure rotary screw compressors.
The model TS24 subject of this quotation combines the following features to produce a state of the art air supply for Down Hole Hammer RC drilling.
- Unique loading/unloading system very simple
- Volume and Pressure control
- Significant power (fuel) savings at idle
- Extra large bearings low RPM - long life
- Conservative cooler designs for our extreme temperatures
- Many plumbing options for ease of hosing up
- Slim profile allows mounting low into rig chassis
- Range of power plants available Detroit, Cat, Cummins
- Integral safety shutdown system with multi point monitoring of vital signs
All of the points listed above are only details the single item that points the Le Roi out as an outstanding purchase is its ability to keep you drilling faster, longer with less gear on site by dialing up the pressure behind a suitable hammer rapid penetration rates can be maintained to much greater depths than with other low pressure 2 stage machines.
Recent years have seen hammer drilling pressure rise from 175-250-290-350-360 the Le Roi moves out to 500 psi where only boosters have been before. With modern hammer development moving toward smaller hammers and smaller rod lines the LeRoi will be the
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- perfect compressor to supply the new range of super boosters which will emerge in the next 3-5 years to operate the emerging very high pressure hammers.
56 The letter provided quotes for a range of options. Some of the listed components were described as 'necessary to ensure proper function and warranty coverage for the unit'.
57 Mr Swick says that he relied on the contents of the letter. He says he also relied on the statement by Mr Speer that the TS24 had been used in the United States for some years before 1994. With Norncott not participating in the trial, and the case against Le Roi being confined to negligence in manufacture and design, none of this evidence about the representations made, and Swick Drilling's reliance on them, was challenged.
58 On 29 June 1994, Swick Drilling placed an order with Air Drill for a TS24 'powered by 12V92TA Detroit mounted on jack-up skid base placed upon 2222 Mercedes truck or other subject to approval. All hydraulic and cooling equipment including hoses and fittings. All labour for assembly. Unit ready for use'.
59 On about 1 July 1994, Air Drill received a proposed distributorship agreement from LeRoi under which Air Drill was to act as an independent distributor of the 'TS 17 air end and component kit parts [and] TS24 air end and component kit parts [and] Spare parts'. LeRoi granted Air Drill non-exclusive rights to purchase the products for resale or use, and to service products in the territory of Australia and New Zealand. By cl 5 of the agreement, title to all products purchased by Air Drill and risk of loss passed to Air Drill upon delivery at the FOB point, subject to securities held by LeRoi until the full purchase price had been paid.
60 By cl 9:
The relationship between the Company [LeRoi] and the Distributor [Air Drill] is that of independent contractors; no partnership, joint venture, agency or employment is intended. The Distributor shall not pledge the credit of the Company nor bind it to any obligation, and the Distributor shall indemnify, defend and save the Company harmless from and against all claims, demands, costs and expenses arising out of the operations of the Distributor's business, except for product liability obligations of the Company.
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61 By cl 11:
Warranty (a) The company warrants that all Products sold to the Distributor for resale are merchantable and free of defects in material and workmanship when delivered FOB at the Company's plant in Sidney, Ohio. In the event of non-fulfillment of such express warranty, the Company will repair or replace the non-conforming or defect part or Product without charge to the Distributor. No claim for consequential or incidental damages based on warranty, for all breach of contract shall be asserted by the Distributor at any time with respect to a nonconforming or defective part or Product; and no claim for repair or replacement shall be made by the Distributor with respect to any part or Product after the expiration of the applicable time periods published in the Company's Standard Warranty (defined below). The foregoing express warranty is an accepted in lieu of all statutory warranties of fitness of purpose.
(b) From time to time the Company will adopt and publish standard terms of express warranties to be extend to all owner-users of the Products (the 'Standard Warranty'). The Distributor agrees that it will make the Standard Warranty a part of every resale or other use transaction of the Products by the Distributor and will indemnify and hold the Company harmless from all loss, cost and damage suffered or incurred by the Company, including reasonable attorneys' fees, by reason of the Distributor's failure to make the Standard Warranty a part of the terms of the Distributor's resale or use transactions.
62 Mr King accepted the agreement and signed on behalf of Air Drill on 7 July 1994.
63 Initially three TS24s were ordered. One of them was supplied to Swick Drilling. It was first displayed by Air Drill at a mining show in Kalgoorlie in about October 1994. A representative of LeRoi attended the mining show. The TS24 which had been displayed was then taken to Air Drill's workshop in Bayswater for construction of the compressor unit. The complete compressor unit including the TS24 was constructed between October 1994 and January 1995 and was commissioned in January 1995.
64 The assembled compressor unit was made up of:
1. a rebuilt Detroit 12V92TA diesel engine;
2. a frame on which the engine and the TS24 were mounted; and
3. other necessary items:
a. an engine and compressor radiator;
- b. cooling fan;
c. filtration system;
d. control system;
e. exhaust system;
f. control box with monitoring equipment.
65 None of the components was compatible only with the LeRoi TS24, and the LeRoi could have been replaced with another brand.
66 There was a question at trial whether Mr Swick supplied the Detroit engine, or whether it was provided by Air Drill. Mr Swick's initial evidence was that he supplied it. This is not consistent with the Air Drill records, which record as part of the components supplied a 'GM Engine' at $34,000, although subject of a separate invoice (there was no dispute that GM and Detroit referred to the same manufacturer).
67 On 13 January 1995, Mr Speer wrote to LeRoi regarding commission testing carried out by Air Drill. In his letter, he refers to the Swick Drilling unit 'after we changed gears in compressor'. Mr Speer wrote that he noted a vibration in the main hose feeding the oil pump that appeared to come from the pump, and inquired whether that was normal. There is no evidence of any response.
68 On 17 January, Mr Speer again wrote to LeRoi, referring on this occasion to a Swick Drilling report on field performance. He wrote that Swick Drilling had reported 'production up 30%', and a front seal leaking.
69 On 26 April 1995, LeRoi sent a fax to Air Drill advising them that they had experienced 'bearing problems with our vendor on the TS24 units … [and] now have problem resolved'. There is other evidence that LeRoi had problems in obtaining a particular brand of bearing (NTN), and the problem was resolved by switching to an alternative (the Timken bearing). The evidence does not show whether in April 1995 LeRoi was referring to that issue, or simply to a problem with the vendor of one or the other of those brands.
70 The compressor unit supplied by Air Drill to Swick Drilling underwent several changes. The TS24 identified in the pleading by its serial number was replaced with another after the first failure. Later, in 1997, the Detroit engine was replaced by a more powerful engine. Some time after the second failure, probably after the fifth failure, the gear set
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- was changed in the TS24, so as to increase the discharge volume of air to 1400 cfm, but with the pressure reduced to 350 psi. This also allowed Swick Drilling to run the engine at a lower speed and reduce fuel consumption. Mr Swick said that the change was to a different operating configuration of the compressor, but was within its design specifications.
The failures
71 Swick Drilling pleads, that on 20 July 1995, the compressor failed because of failure in the bearing pack in the second stage screw of the compressor. The failure occurred after the compressor unit had been in operation for a total cumulative period of approximately 950 hours since it was commissioned. Further bearing failures, each of which rendered the compressor incapable of being used until repair, occurred on 10 October 1995, 7 December 1995, 27 March 1996, 29 June 1996 and 24 October 1996. The plea is not admitted.
72 Mr Swick said in evidence that over 15 months from July 1995 the TS24 failed in operation six times. I am satisfied from his evidence, the job cards maintained by Air Drill in effecting repairs, the drilling record maintained by Swick Drilling, and the evidence of Mr Speer, that the compressor unit failed eight times between when it was commissioned and July 1997, although one of those was due to an engine failure.
Failure 1
73 On 20 July 1995, an employee of Swick Drilling told Mr Swick of the first failure. He instructed the employee to drive the unit to Perth. Mr Swick attended Air Drill on the following day, during the repair, and was shown the bearings.
74 There is a job card for this repair but the air end is not referred to in it, as it was replaced and not repaired. Mr Speer, however, saw the unit at the time of the repair. He testified that the compressor bearings (the male rotor bearings) had failed, and damage to the rolling elements and bearing raceways could be seen on inspection. Mr Speer sent a fax to LeRoi on 21 July 1995, in which he recorded observations on inspecting the unit: the oil was black and heavily contaminated and the cavity behind the bearings was full of destroyed bearing material. This failure had caused shards of metal to be distributed through parts of the compressor, causing considerable damage.
75 In a more detailed report, sent 25 July, Mr Speer identified the major failure as 'the two thrust bearings on the male rotor in the second (high
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- pressure) stage'. He described his observations as consistent with a failure of lubricant or a restricted supply of lubricant.
76 A new air end was fitted to the compressor unit and tested. Again Mr Speer noted vibration from the oil pump. Mr Speer suggested 'we need to increase the oil flow to and through the HP [high pressure] male rotor bearing assembly to control temperature and thus prevent lubrication breakdown along with resultant bearing failure'. He put forward a series of suggestions, including various modifications of the TS24. None of them was explained at trial and much of this fax was beyond my (unaided) understanding.
77 The report to LeRoi also dealt with a failure in a unit owned by another operator, Drill Torque. I will deal separately with the evidence of failures experienced by others.
Failure 2
78 The second failure occurred on 10 October 1995 at Murrin Murrin near Leonora. The daily drilling report simply reports 'inter stage pressure getting high'. After the experience of the first failure, the warning sign of an increase in inter-stage pressure was noticed and acted on before more serious damage was done. Again the TS24 was transported to Perth for repair.
79 The work card at Air Drill does not specify the cause of the failure, although Mr Speer said that a bearing failure had occurred. On 4 November 1995, Mr Speer reported to LeRoi regarding testing that Air Drill carried out on lubricant temperatures in an attempt to find the cause of the bearing failure after this occurrence. The testing showed high lubricant temperatures for the male bearing discharge lubricant. The cause of the high temperatures does not appear to have been obvious, in the sense that it was or could be readily ascertained. Mr Speer said in evidence that he was trying various testing to find the cause of the bearing failures. The correspondence between Mr Speer and LeRoi was largely technical, and again was not explained.
80 By 16 November 1995, the compressor unit had been returned to Swick Drilling with a modified oil injection system on the TS24. The evidence does not disclose whether the modification had been done by Air Drill, or by LeRoi.
81 Mr Speer wrote to Swick Drilling on 16 November. He wrote that LeRoi was very interested in any observations Swick Drilling may have
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- regarding the unit's performance with the modified system. He also told Swick Drilling that LeRoi would be despatching a replacement bearing oil cooler plus a fill of high pressure lubricant.
82 Mr Speer also told Swick Drilling that oil sample tests taken from the damaged unit had shown very high levels of aluminium and silicon. He advised:
Neither of these elements are part of the normal construction of your compressor particularly the Silicon and we must therefore ask you to check your intake filters very thoroughly as it would appear some damage must be present for such a high Silicon concentration to be present.
83 On 21 November, LeRoi reported that it was starting to make modifications to the TS24 'including seal on rotor shaft, alternate injection port for return line from discharge'. This is another instance when there is no explanation in the evidence about what the letter means. I cannot, on the evidence, say whether those modifications were made to any of the units supplied to Swick Drilling, what was their significance, or what, if any, effect they had.
84 Further correspondence passed between LeRoi and Air Drill on 30 November and 4 December 1995, in which LeRoi reported to Mr Speer on its research on using alternative oils.
Failure 3
85 The third failure occurred on 7 December 1995, again at Murrin Murrin. In the drilling report it is described as a failure in the high pressure end. Mr Speer said that it was, again, a bearing failure.
86 On 12 December 1995 LeRoi wrote to Mr Speer by fax with an update about the TS24. Much of the fax is technical and it was not explained.
87 Around this time Mr Speer sent a fax to LeRoi which referred to three identical failures where the 'high pressure female rotor thrust bearing fails'. Mr Speer reported that in each case the failure was detected by noting an increase in inter-stage pressure. I understand this document to refer to failures in units owned by Swick Drilling, and two other drilling operators (Drill Torque and Grimwood Davies). These three identical failures are again referred to in a fax from Air Drill to LeRoi on 14 December, where Mr Speer described measures adopted by Air Drill to prevent further problems. I note that, in the gender specific language used, the failures were described as in the 'female rotor thrust bearing'.
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- The first failure in the Swick Drilling unit had earlier been described as a failure in the male rotor.
88 Mr Speer also suggested reducing repair costs by repairing the damage as follows:
a. Grind rotor shaft to a smooth uniform diameter maybe 0.010" to 0.030" undersize.
b. Build up discharge housing bore with high velocity metal spray and reclaim diameter to provide correct clearance between rotor shaft and housing.
89 I do not know whether this was done. It is another example of a letter which needed to be explained, if it was to be used in evidence.
Failure 4
90 The TS24 failed again on 27 March 1996. The drilling report for that day simply notes 'compressor transported to Kal at end of shift for replacement and repairs'. Mr Speer said the failure was attributable to bearing failure. He did not state the facts on which he based that conclusion, but his evidence about the failure was not challenged.
Failure 5
91 The TS24 failed on 29 June 1996 at a site called Gidgee. The drilling report records 'high pressure element u/s'. Mr Speer attributed it to bearing failure. The Air Drill work card refers only to the air end being 'changed out' with serial number 5228X37 refitted.
92 On 1 July, Mr Speer wrote to Larry Noll, design engineer at LeRoi, with an idea to increase the life of the female rotor discharge bearing assembly on the TS24. It involved use of NTN bearings, I assume these differed from the bearings then being used. There is no evidence of a reply dealing directly with Mr Speer's suggestion.
93 On 6 September 1996, LeRoi wrote to Mr Speer at Air Drill. In its relevant parts, the letter reads:
I want to assure you that LeROI is committed to the resolution of the bearing problems with the current units. The first step is to provide the NTN bearings which have worked successfully….
The use of the originally specified NTN bearings will be the first and most important step in providing an air end to serve your market requirements. These NTN bearings continue to perform well with no known problems.
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- Concurrent with this effort, LeROI has begun a design upgrade project to select alternate bearings which will yield the maximum bearing life while still meeting the physical restraints of the existing components. The goal of this project is to be able to retrofit the larger bearings into existing designs.
LeROI has always been committed to providing specialized products into markets and applications where no other suppliers have successfully ventured. New and specialized uses for our products may sometimes not be the easy path for a supplier or end user to follow, but we believe that the TS24 has tremendous potential to meet your tough drilling applications. LeROI looks forward to putting the bearing problems behind and moving forward to supplying additional equipment.
94 This letter was sent to Mr Speer on 6 September, and forwarded by Mr Speer to Mr Swick on 9 September. Mr Swick wrote across the copy of the letter sent to him 'my unit is already fitted with these bearings'.
95 The plaintiff put this letter into evidence, through Mr Speer. Several things emerge immediately from it: first, LeRoi asserted that the problem was with the bearings; second, LeRoi asserted that there were no known problems when the specified NTN bearings were used; third, LeRoi identified the 'tough' drilling applications as 'new and specialized uses' for the TS24.
96 After the fifth failure, the compressor was reconfigured, and from then was used to produce higher volume (1,400 cpm) but lower pressure. In a letter dated 28 November 1996, providing a quote for drilling services, Mr Swick listed the equipment used by Swick Drilling as including 'one RC drilling rig with its own stand alone LE Roi 1200/500 compressor, recently modified to 1400/350. A booster is now used to supply pressures up to 900 psi'.
Failure 6
97 The daily drilling report for 24 October 1996 notes 'compression engine stalling with high inter stage pressure'. The TS24 was transported to Perth for repair.
98 In his witness statement, Mr Speer said that he understood that the further failure occurred and that it was attributable to bearing failure. A job card dated 28 October 1996 records the supply of two bearings, and the removal of 5228X37 and replacement with 5228X38. I accept that the failure was attributable to the TS24, requiring it to be replaced.
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Later events
99 A daily drilling report of 8 November 1996 records an engine failure, resulting in the compressor unit being replaced with a hired unit. The TS24 was not operating between November 1996 and February 1997 because of engine replacement on the compressor unit. The Detroit engine was replaced by a Cummins engine in February 1997.
100 Mr Swick said that the TS24 did a little over 600 hours with the Cummins engine on it before Swick Drilling stopped using it. In his evidence at trial, however, Mr Swick said there was a seventh failure in mid-1997. There was no precise evidence regarding the cause or circumstances of this failure, although on 27 October 1997, Air Drill invoiced Swick Drilling for repairs to both stages of LeRoi 5228X38. The plaintiff did not claim damages resulting from the seventh failure. Its case up to trial had been that, from about January 1997, Mr Swick decided to park the compressor unit in Air Drill's yard and Swick Drilling no longer used it.
101 On 3 December 1997, Air Drill wrote to Swick Drilling, offering an upgrade to the TS24 with 'a new bearing construction along with the high pressure rotors and discharge housing'. Representatives of LeRoi and Air Drill met with Mr Swick on 8 December 1997. LeRoi and Air Drill were offering a redesigned bearing pack for the second stage of the compressor. Mr Swick took the position, set out in a letter of 1 October 1998, that the TS24 was uneconomical to employ in the field until its reliability had been demonstrated. LeRoi, Air Drill and Swick Drilling reached no agreement over who was responsible for the expenses Swick Drilling said it had incurred. Nothing was resolved.
102 Swick Drilling began these proceedings in 2000. They have had a troubled history: see Swick Nominees Pty Ltd v Norncott Pty Ltd [2008] WASC 24; Swick Nominees Pty Ltd v Norncott Pty Ltd [No 2] [2011] WASC 348.
103 Swick Drilling sold the TS24 and the other components separately in 2004: the TS24 was sold to a third party for $5,000, and the other components to a company associated with Mr Swick's brother for $50,000. The evidence of these sales only emerged when Mr Swick provided a supplementary witness statement at the beginning of the trial. There was no evidence regarding the fate of the TS24 after it was sold.
104 There were some specific issues in the evidence which require short separate treatment.
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The upgrades
105 As set out above, there were two offers that were described as upgrades. The first was the replacement of Timken bearings with NTN bearings. I will consider the issue of bearings separately below. The second was the redesigned bearing pack offered by LeRoi in 1997 and not accepted by Swick Drilling. To the extent this upgrade is relevant to mitigation, there is no evidence about whether it had been effective in any air compressors in which it had been installed. For an operator like Swick Drilling, which had experienced repeated failures in the field, I am satisfied that the position expressed in its letter of 1 October 1998 was reasonable. Until the TS24, as modified by the upgrade, had been shown to be reliable, it was a reasonable business decision to not take any further chances with it. Swick Drilling did not fail to mitigate its losses.
The oil
106 During the period 1995 to 1997, attention was focused on whether the choice of oil was the solution to the problem.
107 In his report to LeRoi on 21 July 1995, Mr Speer commented that both units which had reported damage (the first Swick Drilling failure, and Drill Torque) were using mineral oils. In his more detailed report on 25 July, he said there appeared to be a failure of lubrication. He specified the oil being used: Mobil SHC626.
108 On 30 November 1995, LeRoi reported on its research concerning the use of Mobil 629 and Shell Tivela oils. It commented that the majority of the problems it had were due to burnt and varnished oils. Then on 12 December 1995, LeRoi reported that they had met that day with a Mobil representative. The 600 series Mobil oils were not recommended by the Mobil representative because of the tendency to form 'very hard carbon'. Other 'series' of oils were recommended. LeRoi warned ('per Mobil') that the Mobil 630 oil could cause significant problems.
109 While the oil choice was the subject of correspondence, neither party led evidence that would permit a finding that the failures in the TS24 were caused by incorrect oil choice, or that they could have been avoided by use of a different oil. It was one of the factors investigated by both LeRoi and Air Drill, but it has not been proved one way or the other.
110 Specifically, the evidence does not support the plea by LeRoi that the compressor was designed and manufactured for use with Mobil SHC1026,
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- or Mobil SHC630, or Mobil CP-4200-68 oil. The correspondence shows the recommendation for particular oils was made after problems had emerged and following a meeting with the Mobil representative on 12 December 1995.
The two brands of bearings
111 Swick Drilling pleads against Air Drill that it was an express oral term of the contract that the set of bearings used in the compressor would enable the compressor to be used in normal operation for 30,000 hours without bearing failure occurring, and that the first compressor failure was because of failure of the bearing pack, and each of the failures of the TS24 were bearing failures.
112 Against LeRoi, Swick Drilling pleads, as a particular of negligence, that the set of bearings used in the manufactured compressor was not such as to enable it to be used in normal operation without bearing failure. LeRoi responds that it relied on independent expert manufacturers to supply bearings suitable for the specific application which were then incorporated into the manufacture of the compressor.
113 There were two brands of bearings used in the TS24 at different times. It was designed for manufacture with NTN bearings. For a period, Timken bearings were used. There are differences between the NTN bearings and the Timken bearings but the evidence about those differences is scant.
114 Mr King, the former managing director of Air Drill, gave evidence for the defendant. Mr King said that at least a third of the machines in the field did not have problems. Air Drill could not identify why some units were presenting with problems and others were not, although he believed that the ones that were not a problem had NTN bearings in them. He could not recall failures in machines with NTN bearings.
115 Mr Speer said the Swick Drilling TS24 failed after it had been fitted with NTN bearings, although the period before the failure increased. More generally, he said that there were still failures with NTN bearings although, 'at a guess', the time between failures was about double. He continued:
The first lot had failed I think between three and six hundred hours and the NTNs ran probably anywhere between 600 and 12-1300 hours. I mean, a lot of this - bearing life is subjective. It depends on the load and the application …
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116 On 12 July 1996, Mr David Jorritsma of Air Drill sent a fax to Mr King, who was then in the United States of America. Mr Jorritsma wrote that he had been told by a NTN representative that the NTN bearings have a 'greater capacity for thrust' than the Timken. Whether the representative was qualified to express that opinion, and the facts upon which it was based, were not disclosed. The fax also referred to the NTN bearings having a steeper thrust angle, although the significance of this to either suitable applications or bearing life was not explained. Finally Mr Jorritsma commented 'we have not had a major failure with an NTN'.
117 On 22 August 1996, LeRoi wrote to Air Drill, suggesting the Timken bearings as the root of the unacceptable service life for the TS24.
The failures in other units
118 The problems with the TS24 were not confined to Swick Drilling. There are, however, difficulties in comparing the experience of Swick Drilling with other operators. The machine built for Swick Drilling was a stand alone air compressor built by Air Drill. The other TS24 air ends had been supplied by Air Drill as kits and built by the customer into a drill rig or compressor unit. No evidence was called from any of the other operators to enable any finding about whether operating conditions were similar. The evidence about the other operators was minimal.
119 At about the time of the first failure, Mr Speer reported a failure in a unit operated by Drill Torque after a similar number of hours operated at full pressure, although a different number of hours overall. In his report to LeRoi on 25 July 1995, Mr Speer also referred to a LeRoi operated by Grimwood Davies which, on checking, showed 'carbon in receiver' and oil that had become dark.
120 In a fax to LeRoi on 3 August 1995, Mr Speer set out some detail of the repairs made by Air Drill to both the Swick Drilling and Drill Torque units. Later, on 6 September 1995, Mr Speer sent a fax to LeRoi in which he listed five units containing TS24 compressors that were in service, three of which had failed.
121 On 4 December, Mr Speer reported to LeRoi on testing the Drill Torque unit in Kalgoorlie. He noted low cfm (which I took to mean output pressure) and low inter-stage pressure. High inter-stage pressure had been the precursor of the failures in the Swick Drilling unit. The relevance of low inter-stage pressure in the Drill Torque unit was not explained.
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122 Mr Speer testified that Ziggy Wolski, another driller who had experienced several failures with a TS24, was asked by Air Drill to change his operating procedures and switch the operating pressure to low mode prior to turning the air off. After doing this Mr Wolski reported no further failures. Mr Speer did not say whether the failures experienced by Mr Wolski were of the same kind as those suffered by Swick Drilling, Drill Torque and Grimwood Davies. There was no explanation of why the change in operating procedures should have been effective.
123 On 31 January 1997 Aqua Air (PVT) Ltd (operating in Zimbabwe) wrote to Mr Speer reporting 'HP upper rotor found bearing totally collapsed and extensive damage in the housing'. The bearings were reported as Timken.
124 There was also some evidence about an operator identified as Mr McKay, who suffered no failures in his compressor. Mr Speer, however, described Mr McKay's machine as modified 'way outside of any agreement with Le Roi'. There was no further detail.
125 Neither party called evidence regarding the performance in other markets in which the TS24 had been sold. I do not know whether there were similar complaints or problems.
The evidence about the design and manufacture
126 Although Swick Drilling pleaded its case against LeRoi for negligence in design and manufacture, the evidence it led on design was minimal.
127 Swick Drilling relied on the evidence of Mr Martin. He was a witness with no formal expert qualifications, but extensive experience as a mechanical fitter in the drilling industry on the maintenance side. He currently operates a business specialising in the repair and servicing of high pressure compressors used in the drilling industry. Mr Martin's experience with the TS24 was limited to installing three of them for Drillcorp, in around 1996. He said that while he tested the TS24 while investigating operational issues, he did not dismantle any TS24 and he had never worked on the internals.
128 Mr Martin saw, and reported to Air Drill, a problem with oil flow on the high pressure end of the TS24 when he 'ran the first one up'. He described how the compressors use large quantities of oil for cooling, lubrication and sealing. If the flow of oil is reduced it will lead to severe vibration and failure of the bearings. As I understood his evidence,
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- Mr Martin was not suggesting that the bearings were the cause of the problem, but that reduction in oil flow led the bearings to fail.
129 Mr Martin was asked his opinion as to the source of the problem in oil supply to the bearings. He said there were numerous things that could cause the problem, including dirty filters (a problem he saw regularly) and design of the machine. Mr Martin had not examined the filters on any of the LeRoi machines that he had worked on. He had not dismantled a TS24 and could say nothing more about design.
130 Mr Martin also said, from his experience, that a high pressure compressor does not normally require a major overhaul for the first 10,000 hours, and 10,000 hours was 'accepted' in the industry.
131 I accept Mr Martin's evidence that there was a lubrication problem and failing of the bearings in the second stage of the compressor. I cannot, from his evidence, determine whether the bearings were inadequate, or whether a lubrication problem caused otherwise suitable bearings to fail.
132 Mr Speer had long experience with mining equipment. Before Air Drill, he had worked for Atlas Copco, a manufacturer and distributor of compressors and mining equipment, and Sullair, a manufacturer of compressors. Mr Speer did not say in what capacity he worked in those companies. He had no formal qualifications. He may have been qualified by experience to give evidence of some aspects of compressors and mining equipment, but was not qualified to give expert opinion about design.
133 No witness explained how a compressor works, or what role the bearings had. No witness identified any aspect of the design of the TS24 that could in any way explain the failures. Neither party called evidence comparing the design of the TS24 with other compressors designed to perform the same function.
134 LeRoi called no evidence regarding design or manufacture.
135 The evidence does not show what happened to the original TS24 (serial number 5228X35) owned by Swick Drilling after Air Drill had replaced it in the compressor unit, after the first failure. Swick Drilling disposed of the TS24 (serial number 5228X38) that it then owned in around 2004. No TS24 was examined by an independent expert.
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Findings
136 First, there were multiple failures of the air compressor unit owned by Swick Drilling. The first occurred while it had TS24 serial number 5228X35 incorporated in the compressor unit. The TS24 was damaged in that failure. The compressor unit was repaired and the damaged TS24 was replaced with another. At some time around the fifth failure, the compressor was reconfigured to a 1400/350 - that is higher volume but lower pressure. This also enabled it to operate at lower engine speeds and reduced fuel consumption. The six failures occurred in less than two years.
137 Second, there were failures of the TS24 in compressor units owned and operated by other drilling contractors, including at least Grimwood Davies, Drillcorp and Drill Torque. At least some of those failures were similar in nature. Mr King estimated that two thirds of the TS24 compressors in the market failed, although the number of failures is not the subject of specific evidence. The plaintiff called no evidence from any other operators about the failures they experienced.
138 Third, the failures in the Swick Drilling machines were manifested in loss of oil pressure and failure of the bearings in the high pressure second stage of the compressor. I cannot find what the ultimate cause was. There is no evidence that anyone succeeded in identifying the cause. Mr Martin's evidence, which I found helpful, suggests that it is more likely that the bearings failed because of a reduction in oil flow in the compressor. That, however, just shifts the question back one stage, and I can make no finding on why there was a reduction in oil flow.
139 Fourth, the failures were probably universal in units with Timken bearings fitted, but not necessarily universal in units with the NTN bearings. The evidence on this issue is quite impressionistic. Mr Speer, in my opinion, had a more direct knowledge of what was happening. I prefer his evidence to that of Mr King on this question and find that it is likely that there were failures in units with NTN bearings, although the period between failures increased.
140 There was also evidence given about two other TS24 compressors which did not present with problems, or at least the same level of problems. The first compressor purchased by Air Drill was the one Mr Speer saw in the yard at Schramm. It was sold to Western Deep Hole Drilling. Mr Speer said this one did not fail prematurely. Mr Speer also referred to the unit owned by Mr Wolski which suffered no failures after the operating procedure was modified. The little evidence there is
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- suggests that operating practices may have made a difference to his being able to use his machine without problems.
141 Were I satisfied that the failures occurred only in units with the Timken bearings, then the problem would be more readily attributable to the bearing rather than other aspects of the TS24. Even then, the evidence of Mr Martin leaves open a finding that the Timken bearings failed earlier than the NTN bearings, but the cause of the failure lay in whatever reduced the oil flow to the bearings.
142 Fifth, there is no evidence before me of the performance of the TS24 in any other markets. The evidence of its performance in Western Australia is that a majority of machines used in the mining industry, up to two thirds, experienced failures.
143 Sixth, there is no evidence regarding the design or manufacture or reputation of the Timken bearings, and whether it would have been reasonably foreseeable that units incorporating those bearings would fail because they were either substandard or incompatible with application in the particular machine.
144 The evidence is quite unsatisfactory. Something resulted in the majority of the TS24 compressors sold in Western Australia failing. I infer, from the fact that different operators experienced problems, that the cause of the failure was not in every case poor practice by the operator (for example, by failing to clean oil filters). It is possible that the failure of the bearings was the cause, but it also may have been the result of the problem.
The case against LeRoi
145 Although the evidence is that the TS24 was damaged, at least on the first occasion of failure when metal shards were produced and contaminated the machine, Swick Drilling's case is properly considered overall as a claim for pure economic loss. The loss claimed by Swick Drilling is not for damage to property but for loss of value, lost productivity and, ultimately, the need to write-off the compressor unit as a piece of working equipment because it was seen as unreliable. The fact that some damage to the compressor itself was caused in the first failure does not alter that characterisation of the claim: see Woolcock Street Investments Pty Ltd v CDG Pty Ltd[2004] HCA 16; (2004) 216 CLR 515 [20].
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Duty of care
146 In its defence, LeRoi does not admit that it owed a duty of care to Swick Drilling. In final submissions, however, LeRoi accepted that a manufacturer owes to a consumer of the manufacturer's product the duty to exercise reasonable care to prevent the product causing foreseeable risk of injury or loss: Suosaari v Steinhardt [1989] 2 Qd R 477. There is no doubt this is so where there is a risk of injury. Following Dovuro Pty Ltd v Wilkins (2003) 215 CLR 317, 29 (McHugh J), (156 - 160) (Hayne and Callinan JJ), (177) (Heydon J), I believe that is also the case where the loss caused is confined to economic loss.
147 The question of the duty of care cannot be isolated from the scope or content of that duty. A manufacturer is not an insurer, and there is no absolute duty to design and manufacture a defect-free product: Fitzpatrick v Job[2007] WASCA 63 [38], [202].
148 The relevant occurrence here is the failure of the TS24 in operation, typically by a drop in the oil pressure. Swick Drilling bears the onus of persuading the court that it is more likely that the relevant occurrence was brought about by the negligence of LeRoi in designing and manufacturing the TS24. There are different ways in which this could have been proved.
149 First, Swick Drilling could have established the cause of the failure and facts justifying an inference that that cause was due to the negligence of LeRoi in designing or manufacturing the TS24. It has not proved negligence in this way, as it has not established the cause of the failure. I accept that Swick Drilling has proved that at least some of the failures were due either to a defect or the inadequacy of the TS24 for the particular task it was being used for, rather than due to operator error. The number of occurrences, and the failures of machines operated by others in mineral drilling applications, point to something to do with the machine rather than the circumstances of its use on each occasion. But Swick Drilling has not established what caused the TS24 to fail, either on any occasion when it failed, or on all occasions. If anything, the evidence shows that a man of Mr Speer's experience did not identify the cause of the failures over a period of many months.
150 Alternatively, Swick Drilling could have proved that the failure occurred in circumstances which justify an inference that the occurrence was due to negligence on the part of LeRoi, even though it is not possible to establish the precise cause. An inference of negligence may be drawn where, in the ordinary course of human affairs, such an occurrence is unlikely without want of care on the part of a person in the situation of the
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- defendant. The fact that Swick Drilling sought to establish the cause of the various failures does not preclude it from relying upon facts giving rise to an inference of negligence. The plaintiff's pleadings are sufficiently wide to permit this.
151 But in my opinion, it is not sufficient for Swick Drilling to establish that there were repeated failures of the TS24 and it was unreliable. The evidence disclosed nothing about the operation of air compressors. There was evidence that people who were experienced in the drilling industry in Western Australia would not expect bearings to need replacement before 10,000 hours of operation. More generally, it is reasonable to expect that equipment with a purchase price of over $100,000 should normally last more than six months at a time without breakdown. But I cannot say that, in the ordinary affairs of mankind, the TS24 would not have suffered loss of oil pressure or premature bearing failure, in the conditions in which it was being used, without negligence in its design and manufacture. I am not sure that I could draw that inference. But in any event I am not satisfied that I should draw it.
152 First, whether LeRoi was negligent has to be determined by reference to the facts at the time of the alleged tortious conduct. The TS24 was designed and first manufactured some time before 1993. There is simply no evidence of the uses for the TS24 that were then in contemplation. At a later time, LeRoi either knew, or ought to have known, that the compressor would be used in mineral drilling by the customers of Air Drill. But not before 1994.
153 Second, Swick Drilling's case required expert evidence to show that the multiple failures or unreliability of the TS24 when it was used in mineral drilling were caused by a fault in design or manufacture that is attributable to LeRoi's failure to take reasonable care. It is tempting to assume negligence because there is no explanation of why the TS24 repeatedly failed, but that would be substituting an assumption for evidence. Swick Drilling was, for about four years after it began these proceedings, in possession of the compressor unit. Its failure to adduce any expert evidence on the design of the machine and what caused it to fail is, in my opinion, fatal to the claim.
Testing
154 Swick Drilling attempted at trial to rely on inferences that the TS24 had not been tested adequately and that this is an element of design and manufacture. There are several reasons for rejecting this claim.
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155 First, there is no evidence about testing, other than the commission testing carried out by Air Drill. In particular, there is no evidence about whether the TS24 was or was not tested in the United States of America. Similarly, there is no evidence about the testing, or reputation of the bearings used.
156 Second, there is no evidence about what testing is required. This also is not a matter I am prepared to assume. For example, there is evidence that LeRoi had manufactured other compressors, but no evidence about their history and performance. I do not know whether the TS24 differed from them in ways that would lead to the conclusion that some (and if so what) testing regime was required.
157 Third, as I mentioned earlier in these reasons, there is an element of unfairness in asking the court to find liability on this basis. The issue of testing is not pleaded, nor could it be reasonably anticipated from the witness statements and agreed trial documents. Counsel for LeRoi, in final submissions, submitted that the plaintiff's case was based entirely on the adequacy of the bearings, particularly the Timken bearings. I do not accept the case was that limited. The evidence of Mr Martin, which was disclosed to the defence, was broader. But there was nothing to give notice of an issue based on adequacy of testing. Counsel for Swick Drilling did not apply to amend (probably a sound decision, given the history of this matter) but relied instead on the width of the particulars of negligence. I do not accept, however, that the particulars are as wide as was submitted.
Damages for negligent design
158 If LeRoi, by negligence in the design and manufacture of the TS24 caused economic loss, the measure of that loss is the loss of profits, loss of value in the machine, plus the expenses of mitigation (hire of replacement equipment, hire of compressor, and the discount to Goldfields Exploration NL). I discuss the measure of damages below.
The case against Air Drill
159 Air Drill did not appear at the trial, although Mr King appeared as a witness for LeRoi. There was, as I understand it, no prospect of Air Drill appearing. The company, Norncott, has not traded for some years, and was only re-registered by the plaintiff in 2012 to enable the trial to proceed against it. Air Drill had, however, filed a defence, so it is necessary to consider the claim against it on the evidence. There are several causes of action.
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Breach of contract
160 First, it is necessary to consider the allegations that the contract between Air Drill and Swick Drilling for the purchase of the TS24 contained the clauses set out in statement of claim, pars 13 and 14. The terms in par 13 are said incorporate oral representations made by Mr Speer on behalf of Air Drill in about March 2004; those in par 14, are said to incorporate written representations made in Mr Speer's letter dated 24 June 1994.
161 In its defence Air Drill admits it made all but one of the representations pleaded against it. The exception is that it denies that Mr Speer represented that the TS24 had a bearing life of 30,000 hours whereas the bearing life of a Sullair compressor was only 10,000 hours. Air Drill does not admit that the representations were incorporated as express terms of its contract with Swick Drilling.
162 The circumstances of the oral representations are set out in the witness statements of Mr Swick and Mr Speer. Mr Swick says he and Mr Speer had discussions about the available options for a larger compressor for the Swick Drilling business. The conversation took place one evening, when Mr Swick rang from the hotel where he was staying in Kalgoorlie. Mr Speer 'expressed enthusiasm' about the LeRoi compressor he had seen on his visit to the United States. Mr Swick say that it was then Mr Speer made the comment about the 'T3 bearing life' and the typical bearing life of a Sullair compressor. The comment was important enough for Mr Swick to remember it, but apparently not important enough for him to find out what Mr Speer was talking about.
163 Mr Swick says that, following this conversation, he decided to explore the suitability of the TS24 and wait for further information before making a decision as to what compressor to buy. He did not decide until June 1994.
164 Mr Speer agrees that, in the phone call, he told Mr Swick about the LeRoi TS24, and that Air Drill were importing the TS24 which Schramm had in its possession. Mr Speer says that he told Mr Swick that he had been told the TS24 had a 'B10' bearing life of 30,000 hours and this compared favourably to the typical bearing life of other compressors, being 10,000 hours. He agrees he recommended the purchase of the TS24. Mr Swick asked him to send some written material. I accept this evidence. It is consistent with what Mr Speer then did.
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165 On 24 June 1994, Mr Speer sent Swick Drilling a letter about the TS24. The order from Swick Drilling is dated 29 June 1994.
166 The first question is whether these representations, or any of them, are contractual. Whether a representation made in the course of negotiations gives rise to binding contractual obligations, either as a term of the agreement itself or a separate collateral contract, will depend upon the intention of the parties: Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41, 61. To be contractual, the representation must be promissory: JJ Savage & Sons Pty Ltd v Blakney[1970] HCA 6; (1970) 119 CLR 435, 442. Whether the parties intended to create a contractual liability as to the accuracy of the representation is to be ascertained objectively.
167 On the evidence, I am satisfied that the representation regarding bearing life of 30,000 hours was not promissory. I accept Mr Speer's evidence that he informed Mr Swick that he had been told about the 30,000 hours bearing life. That is not, objectively construed, a contractual promise as to the accuracy of what he had been told. It is also difficult, in the circumstances, to conclude that the other matters said in that conversation were intended to be contractual, having regard to the circumstances of the phone call, Mr Swick's request for more material, and the three months that passed before Swick Drilling decided to buy the compressor. The written agreement made later contained no reference to these representations.
168 For those reasons, I am not satisfied that the parties intended what was said in the conversation of March 1994 to be contractual. It follows that there was no breach of contract as alleged.
169 The letter of 24 June 1994 that is the basis of the contractual terms pleaded in par 14, is in evidence. The letter begins by offering a detailed quotation for the supply of a compressor kit. The particular matters on which Swick Drilling relies are described as features of the 'model TS24 subject of this quotation'. Again there is little doubt that the statements were about matters that were important to Mr Swick. I am also satisfied that Swick Drilling intended to act upon the representations in the letter, and did act upon them. Counsel for Swick Drilling submitted, in effect, that reliance on the significance of the representations 'elevates' them to the status of contractual terms. But those facts do not warrant the conclusion that the statements in the letter were themselves promissory or that the parties intended the representations made by Mr Speer to be terms of their agreement: see JJ Savage & Sons (443).
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170 The terms of the letter are not, in my opinion, promissory. Reference to 'state-of-the-art air supply' and 'keep you drilling faster, longer with less gear on site' are not of the kind that, objectively, are intended to create a contractual liability. They may be actionable as misleading or deceptive, but the plaintiff did not, presumably because of the limitation period then prescribed, seek remedies under the Trade Practices Act 1974 (Cth). They do not add to the essential, implied warranty, that the machine is fit for purpose and functional.
171 The plaintiff also relies on conditions implied by law. Swick Drilling pleads breach of the conditions implied under s 14 (2) and (3) of the Sale of Goods Act, that the compressor be reasonably fit for the purpose for which it was required, and be of merchantable quality. Although it does not admit all of the facts on which the pleas are based, Air Drill admits that the contract included the conditions implied by reason of s 14(2) and (3) of the Sale of Goods Act. Air Drill denies breach of those conditions.
172 The compressor unit was commissioned in January 1995 and the first failure was in July 1995. The failure on that occasion required return of the compressor unit for replacement of the TS24. Subsequent failures over the next 18 months required return of the compressor unit for either repair or replacement of the TS24 five more times. The compressor unit was not functional as a compressor to operate machinery used in mineral drilling. On the findings I have made regarding the repeated failures of the compressor unit over the 18 month period after its purchase, I am satisfied that Swick Drilling has shown breach of both conditions.
Assessment of damages
173 The measure of damages for a breach of a condition implied by the Sale of Goods Act is the contractual measure. The plaintiff is to be placed in the same situation with respect to damages, so far as money can do it, as if the contract had been performed: Robinson v Harman [1848] EngR 135; (1848) 1 Ex 850, 855; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272, 286 [13];Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64, 80. The general principle in Robinson v Harman is limited by the rule in Hadley v Baxendale [1854] EngR 296; (1854) 9 Ex 341, 354. That rule is concerned with the question of remoteness and marks out the limits of the heads of damage for which the plaintiff is entitled to receive compensation. It does not detract from the general rule: see European Bank Limited v Robb Evans of Robb Evans & Associates [2010] HCA 6
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- [11] - [12]. Swick Drilling bore the onus to prove the nature and extent of the damages they suffered as a result of the breach of condition by Air Drill: Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38; (1998) 192 CLR 603, 608, 612, 627, 628, 640; Commonwealth v Amann Aviation (80).
174 Where the breach complained of caused a direct or foreseeable loss of profits then, subject to doctrines of remoteness and mitigation, the damages should include an allowance for the profits lost, or for the opportunity of making them, after allowing for the expenses which would necessarily have been incurred in earning the profit. The crucial question is whether, at the time the contract was made, Air Drill should have had the loss of profits from drilling, including the time required to convey the compressor from a remote location for repair, in its contemplation, or whether those losses would have been in the contemplation of a reasonable person in Air Drill's position.
175 Air Drill was, on the evidence, aware of the nature of Swick Drilling's business, including that it operated at remote locations. It was, or should have been, also aware that the TS24 was a substantial investment that was replacing Swick Drilling's existing air compressor. I am satisfied that the proper measure of damages includes the profits lost from the period when Swick Drilling could not operate because its compressor was unserviceable. The cost of hire equipment, and transport and crane costs, to the extent they are proved, would also flow naturally from the breach and should have been in Air Drill's contemplation.
176 Swick Drilling persisted in the use of the TS24 for some months after the first failure. It was, of course, under a duty to take all reasonable steps to mitigate the loss caused by Air Drill's breach: see, for example, Burns v MAN Automotive (Aust) Pty Ltd[1986] HCA 81; (1986) 161 CLR 653. But on the facts, I am satisfied there was no failure to mitigate. The TS24 had been represented as a reliable long lasting unit. Swick Drilling had continuous work from existing contracts. Nothing was identified as a fault that would reasonably lead Swick Drilling to conclude that the TS24 was inherently unsuitable or unreliable and had to be replaced. I do not see what else it could or should have done.
177 The general rule is that damages are assessed at the date of breach: Johnson v Perez[1988] HCA 64; (1988) 166 CLR 351, 367. The rule is not universal, and 'must give way in particular cases to solutions best adapted to giving an injured plaintiff that amount of damages which will most fairly compensate him for the wrong he has suffered': Johnson v
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- Perez(355 - 356, 367, 371, 380); Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [26]; Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1996] UKHL 3; [1997] AC 254, 265. In the present case, the only way to properly assess the amount that can fairly compensate is to take into account the loss of productive use, and consequent loss of profit, in the period from when the compressor unit was commissioned to the last of the pleaded failures.
178 In some cases a party cannot adduce precise evidence of what has been lost. The assessment of the degree of probability that an event would have occurred, or might occur, and the consequent adjustment of the award of damages to reflect the degree of probability, involve matters not capable of precise proof: Malec v JC Hutton Pty Ltd [1990] HCA 20; (1990) 169 CLR 638, 643. In the present case, an assessment must be made of whether the air compressor would have remained in productive use throughout the relevant period, taking into account the continuity of Swick Drilling's contracts and the time required for mobilisation and demobilisation. The difficulty in estimating damages does not relieve the court from the responsibility of estimating them as best it can: Commonwealth v Amann Aviation (83); Fink v Fink [1946] HCA 54; (1946) 74 CLR 127, 143; McRae v Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377, 411 - 412. This may involve an element of guesswork, in the sense described in Zorom Enterprises Pty Ltd v Zabow [2007] NSWCA 106; (2007) 71 NSWLR 354 [84]. And see Commonwealth v Amann Aviation (143).
179 The method of assessment put forward by the plaintiff in the evidence of the accountant, Michael Bernard Fry, is, in my opinion, appropriate.
180 Counsel for LeRoi, both in cross-examination and submissions, challenged the evidence of Mr Fry as not independent because of his role in companies associated with the Swick family. It was not shown that Mr Fry had an interest in the outcome of the case. Even if he had, that interest would not disqualify him or make his evidence inadmissible: see FGT Custodians Pty Ltd v Fagenblat [2003] VSCA 33; Sydney South West Area Health Service v Stamoulis [2009] NSWCA 153 [213] - [219]. Mr Fry's connection with the plaintiff may properly bear on the weight the court gives to his opinions. After seeing him give evidence and deal with protracted cross-examination, I had no reason to doubt that he was attempting to assist the court in a relatively complicated task. I do not believe he was biased.
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181 The method proposed by Mr Fry was to estimate the average daily income generated by the compressor unit over the period during which the failures occurred. He chose a period bounded by the contracts on which Swick Drilling was working when the failures occurred. There were 25 days on which the compressor was not working because of the six failures: for each failure the periods were 7.5 days, 5 days, 3.5 days, 1 day, 7 days, and 1 day.
182 Mr Fry calculated a daily figure of $6,015.06 by dividing the total of the invoices attributed to the drilling rig which used the compressor unit by the total number of operational days. He then subtracted the amount that was not spent on consumables, again by calculating an average spending on consumables for each day in which the rig operated.
183 The method is not perfect. Counsel for LeRoi challenged it on a number of bases.
184 First, LeRoi challenged the assumption that the rig would have worked continuously as based on nothing more than Mr Swick's evidence that the relevant period was very busy, with inquiries for work that he just could not act on because he did not have equipment available. This evidence is subject to the same criticism as much of the other evidence - it is imprecise, and gives an overall conclusion about events that happened over 15 years ago. On the other hand, I believed Mr Swick to be an honest witness. I do not accept, as submitted on behalf of LeRoi, that his evidence should not be accepted where it is not corroborated by documentary evidence. Although the evidence suggests that the drilling business declined significantly in 1997, I accept from his evidence and the income generated that Swick Drilling was continuously employed, or nearly so, during the relevant period from July 1995 to October 1996.
185 Second, LeRoi submitted the calculation is flawed because it includes mobilisation days. Any averaging exercise is going to have some discrepancies and exercises in rounding. If mobilisation was excluded and only days when the rig was drilling were used, the number of days would reduce but the daily rate of earning would be higher. Ultimately it is an assessment that will lack the last degree of precision. I am satisfied, however, that it is fundamentally sound.
186 Third, there is a degree of inaccuracy in the calculation of daily expenses because they include an apportionment of costs to a rig used by Swick Drilling on a subcontract basis. LeRoi submits this 'renders the report defective and of no probative value'. That, in my opinion,
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- overstates the issue. In allowing for the expenses that would have been incurred in operating the rigs, I must recognise that they have been underestimated. The lawyers for Swick Drilling attempted a recalculation to enable a more accurate assessment. Although LeRoi argues this cannot be done, and the whole exercise must be thrown out, I cannot agree. There is no doubt that loss was incurred and I must do the best I can to calculate it on the available evidence. The calculation done by the plaintiff to correct the under-estimation of costs is not evidence, but it is based on the evidence and does help with the mathematics.
187 In conclusion, I am satisfied that a proper estimate of the amount of profit that Swick Drilling was likely to have earned on the days when its rig was unproductive due to the compressor unit being unserviceable is as follows: there were 25 days of lost production, during a period when the average amount earned on each day was about $6,000. The average spent on consumables for each day was about $1,500. Accordingly, the loss of income was $112,500.
188 Swick Drilling is also entitled to amounts reasonably expended in order to mitigate the effect of the breach. Mr Swick gave evidence (which I accept) that, as a result of the delay caused by the fifth failure, he negotiated a discount of $5,010 with the principal, Goldfields Exploration NL, which was deducted from the invoice. A loss of that kind results naturally, and in the ordinary course of events, from the breach and in my view should be allowed.
189 Swick Drilling also claimed for the hire of equipment to replace the compressor unit during repairs. Most of the invoices put forward were for the period after 8 November 1996. The compressor unit was not then being used because the engine was being replaced. The plaintiff accepted that it could not claim for replacement equipment for that period. There is one invoice for $4,512.80 for the period between 26 October 1996 and 2 November 1996 which is allowable.
190 There are invoices for the hire of a compressor and booster during July, August and September 1996. In his witness statement, Mr Swick says this was done when the TS24 was reconfigured to reduce the pressure to 350 psi, and ease the load on the bearings and increase their life. The amount of $24,488.36 was proved and should be allowed. There are also invoices for the period when the engine on the compressor unit was being replaced, and one paid invoice after that date. The plaintiff has not proved the connection of those amounts to its claim.
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191 Swick Drilling also claimed the cost of cranes used to lift the compressor, and transport from the various sites where breakdowns occurred, on each occasion of failure. There were only two occasions when it was proved that cranes were used, and commercial transport was used to carry the compressor unit to Perth. On neither occasion was the actual cost proved. There were no invoices. Rather, Swick Drilling called a participant from each industry (crane hire and road transport) to give his opinion on what the rates would have been for that work in 1995 and 1996. Neither witness proved the facts on which his opinion was based. I allowed the evidence to be given, but found it completely unhelpful. This aspect of the plaintiff's damages was not proved.
192 The other major component of Swick Drilling's claim is the total cost of acquisition of the compressor unit, the TS24 and all other components and labour, less the $55,000 recovered on the sale of the TS24 and other items in 2004. There was dispute at trial over whether there should also be a deduction for depreciation, and at what rate.
193 The plaintiff's case had an underlying premise that, had it been fit for purpose, the compressor unit would have a useful life of approximately 50,000 hours (or 15 years) if maintained with regular overhauls at 10,000 hour intervals. The premise was not proved. Nor can I assume that, to be fit for purpose or of merchantable quality, a compressor unit has, or is expected to have, an operating life of 50,000 hours or 15 years.
194 More fundamentally, the claim for the total cost of acquisition, in my opinion, goes beyond the amount required to put the plaintiff in the same situation as if the contract had been performed. The plaintiff is, in effect, asking for compensation as if the contract had been rescinded, with refund of the full purchase price. Yet it had the use of the compressor for over two years, and has been compensated for the loss of profit during this period caused by the breach of contract. Mr Swick reported 'production up by 30%' in using the compressor unit.
195 There was no evidence about the actual loss of value over time of equipment used in the mining industry. Depreciation scales used for accounting or tax deduction purposes do not necessarily help in calculating the actual value of a piece of machinery used in this environment.
196 The only evidence called as to value and loss of value was through Ron Wyndow, of Industrial Marketing Pty Ltd. Mr Wyndow gave, in effect, appraisals of value based on his experience in selling capital
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- equipment to drilling contractors. Mr Wyndow gave evidence that, during the period June 1995 to June 1997, there was a strong demand for compressors. Since 2002, the market had contracted to the extent that in the earlier period, his company had sold 44 compressors. In the period 2002 to 2004 (the date of his report) it had sold four, two of them second hand.
197 The result of this approach was to value the compressor unit at the time it was commissioned at $230,000. On the plaintiff's figures, the cost was approximately $223,000 including the Cummins diesel engine ($55,000) which was not fitted until February 1997. Mr Wyndow also estimated a difference in value of $130,000 in January 1997 between a reliable unit with a good reputation and a compressor unit with a TS24.
198 Mr Wyndow's evidence was affected by several assumptions that were shown to be incorrect. Most noticeably, he had been told the compressor unit was 'parked up' in January 1997, when it was still in operation until the second half of 1997. Mr Wyndow was not able to estimate what it would have sold for then and there is no evidence of its value or the relevant difference in value at that time. Mr Wyndow could only work with what he had. But his evidence was not a proper basis for establishing value.
199 I would have allowed the difference in value between the compressor unit, had it been fit for purpose, and the actual value at the time Swick Drilling stopped using it. On the evidence presented, I am not satisfied that Swick Drilling has proved those values and it has not proved this component of its claim.
Representations
200 Swick Drilling also put forward an alternative case: in reliance on the representations made orally and in writing by Mr Speer, and induced by them, it entered into the contract. Swick Drilling claims damages on the basis that the representations were false and were made negligently, in circumstances in which Air Drill possessed special skill or knowledge or was otherwise in a special relationship with Swick Drilling.
201 Air Drill admits it made the representations, except for the representation about bearing life. It denies that the representations were false, and that it made them negligently.
202 There is no doubt that some at least of the representations were false. The compressor did not have a long life, it fell far short of an outstanding
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- purchase. The plaintiff may have been entitled to rescind the contract for misrepresentation, had it discovered the falsity of the representations earlier.
203 There was scant evidence on whether the representations were made negligently. Mr Speer was a witness for the plaintiff. His evidence was that Air Drill investigated the TS24 and was satisfied at the time that it was a good unit. There was no detailed evidence as to the investigations made, or the source of the various comments he made, but his evidence was not challenged. Swick Drilling has the burden of proving negligence. Proving falsity, in this case, is not enough. I am not satisfied the representations were negligently made.
204 The measure of damages for negligent representations is different from the contractual measure. A person induced to enter a transaction by misrepresentations, generally speaking, must show that the losses claimed are related to the misrepresentation. It is not enough simply to show that the transaction was induced by the representation and the losses would not have occurred but for the transaction. The loss must flow directly from the inducement. Put another way, the damages are not designed to put the plaintiff into the position it would have been in if the representations had been true, but into the position it would have been in had the defendant not breached its duty of care.
205 Accordingly, if I am wrong, and Swick Drilling is entitled to relief for negligent misrepresentation, the measure of damages for breach of contract would, in this case, be the more favourable to the plaintiff. I would assess damages on that basis.
Conclusion
206 The claim against LeRoi has not been established and should be dismissed.
207 The claim against Air Drill for breach of the terms implied under the Sale of Goods Act has been proved. The utility of any judgment is questionable. I will not, in any event, enter judgment until I know whether Norncott Pty Ltd is registered.