Telstra Corporation Limited v Gramac Excavations Pty Ltd
[2022] VCC 944
•1 July 2022
| IN THE COUNTY COURT OF VICTORIA AT Melbourne COMMON LAW DIVISION | Revised Not Restricted Suitable for Publication |
General List
Case No. CI-20-03475
| TELSTRA CORPORATION LIMITED | Plaintiff |
| v | |
| GRAMAC EXCAVATIONS PTY LTD | Defendant |
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JUDGE: | HIS HONOUR JUDGE LAURITSEN | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 3 and 4 March 2022 | |
DATE OF JUDGMENT: | 1 July 2022 | |
CASE MAY BE CITED AS: | Telstra Corporation Limited v Gramac Excavations Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2022] VCC 944 | |
REASONS FOR JUDGMENT
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Subject:DAMAGES
Catchwords: Claim by plaintiff against the defendant for cost of the repair of damaged fibre optic cable – liability admitted – dispute regarding the appropriate method to calculate damages
Cases Cited:Thomas v Powercor Australia Ltd [2011] VSC 586; Powercor Australia Ltd v Thomas [2012] VSCA 87; Commonwealth Railways Commissioner v Hodsdon (1970) 16 FLR 437; Mediana, Owners of the Steamship v Owners, Master and Crew of the Lightship Comet [1900] AC 113; Price v Commissioner of Highways [1968] SASR 329; Telstra Corporation Ltd v Adept Drainage Pty Ltd [2011] VCC 1172; Dart Industries Inc v The Décor Corporation Pty Ltd (1993) 179 CLR 101; Levin Bros v Davis Manufacturing Co (1934) 72 F 2d 163
Judgment: Damages awarded to the Plaintiff in the sum of $96,619.07
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr I McDonald with Ms J Clark | Moray & Agnew Lawyers |
| For the Defendant | Mr J Castelan | Gigliotti Lawyers as agents for Jensen McConaghy Lawyers |
HIS HONOUR:
Introduction
1On 7 December 2016, while excavating, Gramac Excavations Pty Ltd (Gramac) damaged an underground fibre optic cable owned by the plaintiff, Telstra Corporation Limited (Telstra). Using its own employees and contractors, Telstra repaired the damage and originally sought damages of $121,736.31. There were three components to its claim:
(a) labour costs of $55,410.40;
(b) material costs of $7,160; and
(c) external hire costs of $59,165.91.
2Two days before the trial, Gramac amended its defence. It no longer disputed its liability for the damage and two aspects of Telstra’s damages set out in (b) and (c) above, leaving the amount of the damages in (a) disputed. At the start of the hearing, Telstra amended the figure in (a) to $52,454.40.
3Why is there a dispute over that amount? It is because Telstra almost invariably uses its workforce to repair its damaged infrastructure. It does so because it has an enormous amount of infrastructure spread around Australia and employs a workforce to maintain it. For damage to its infrastructure, it employs a workforce, highly skilled in the performance of these repairs and immediately available to perform them. With this workforce, Telstra can expect the repair work reaches a satisfactory standard.
4As this case shows, the damage was located quickly and the most important of the repairs carried out quickly. The repairs were carried out so well that there was little interruption to the services provided to their customers and Telstra avoided loss of goodwill and, possibly, profit. The figure of $52,454.40 represents Telstra’s claim for the cost of its employees, which is an amount far greater than the amount it paid to the employees directly involved in the repairs. The claim includes many other items. One of Telstra’s witnesses described this claim:[1]
“If companies did not have a manner to recover their support costs, you’d only ever be charging out based on the direct cost which would always be understated.”
[1]Transcript (“T”) at p 89.
5Counsel described the dispute as to whether the appropriate basis was a “full cost recovery model” or an “incremental” method of costing. In the above quote, the witness spoke of the “full cost recovery model”. The “incremental method” looks at the additional costs incurred by Telstra due to the need to repair.
6I will discuss the legal principles later. Suffice to say at present, if the normal measure of damages is the reasonable cost of repairing the cable, then is the claim of Telstra reasonable? Generally, what is a reasonable cost is answered by evidence of what is the commercial cost of repair. Here, apart from what Telstra claims, there is no evidence from any provider, external to Telstra, as to what the reasonable commercial cost of these repairs would have been. In effect, Telstra says what it charges is the reasonable commercial cost. As will emerge, Telstra calculates the figure of $52,454.40 using a combination of direct and indirect costs. Gramac disputes this figure, saying it does more than place Telstra in the same position as if the damage had not occurred.
7For the cost of its employees, Telstra’s claim comprises:
(a) 198.5 hours of normal hours at $155.00 per hour and totalling $30,767.50; and
(b) 135 hours of overtime hours at $166.08 per hour, totalling $24,642.90.
8As will be seen, both hourly figures for normal and overtime hours far exceed the amounts Telstra paid its employees who were directly involved in the repairs.
9Instead of receiving evidence of an external third party provider, I heard from three chartered accountants: an employee of Telstra; and an expert each engaged by Telstra and Gramac for this proceeding.
Circumstances
10Owing to Gramac’s amended pleading, it is no longer necessary for me to describe the incident. What is important is Telstra’s response.
11Riccardo De Blasio (De Blasio) is a customer access network programme co‑ordinator or manager employed by Telstra since 1985. In November 2016, he had a staff of ten and was responsible for the Melbourne metropolitan area. If there was a fault which concerned his section, De Blasio was contacted by Telstra’s global communications centre.
12On 2 November 2016 at about 5pm, he received a phone call from this centre and was told:[2]
“... there were multiple systems affected on a quite large cable, the exact location was unknown at that stage, but we were told to mobilise immediately.”
[2]T24.
13He contacted a co-worker, Jason Fraser (Fraser), and together they went to the Sunshine Exchange to investigate. Knowing there were multiple systems affected, De Blasio and Fraser tested some fibres with specialised equipment. They obtained measurements which enabled them to determine the general area where the fault occurred. These investigations did not pinpoint the exact location.
14From their calculations, they went to the nearest access point to the cable at the corner of Coronation Street. Noticing evidence of a fresh excavation and based on long experience, they decided this could be where the fault was located.
15They checked to see how many services were affected. By testing multiple fibres, they concluded 80% were affected. They organised a contractor to excavate the road. The contractor arrived just after midnight. Excavation revealed there were numerous torn or broken fibres. They restored some of the services through taking the kink out of the cable. They then transferred major links in the cable to undamaged fibres. There were insufficient undamaged fibres available to restore about twenty services so they needed to use new cable. Attempting to repair the damaged cable is inappropriate through the need to work in a clean environment.
16De Blasio and Fraser worked until 5.00am and were replaced by a fresh crew. Contractors laid about 1.8 kilometres of cable between access points.
17Telstra engaged a contractor, Drilco Australia Pty Ltd, to perform certain works which appear in its invoice, including excavation and the cable wall. Telstra does not have the machinery to perform these excavations.
18I have already briefly mentioned the expertise of the Telstra employees undertaking this work. Telstra provides an optic fibre training course. Other than that, these employees gain experience through doing the work. Although there are contractors who can do “splicing” work, they are very rarely used by Telstra. Why? De Blasio explained:[3]
“We’re a dedicated fibre team, we’re good at what we do, so we’re experts in what we do, it’s done to the correct standard, ... I know that contractors do all sorts of different work, parts of the business, and there’s many a time that we go out and fix what they’ve done, I think they prefer to keep it in house because we’re good at what we do.”
[3]T44.
19The members of De Blasio’s team have many years of experience in doing that sort of work. He cited the example of a fellow employee, Eric, who had 38 years working with fibre optic cable.
20It is Telstra’s policy this kind of work is performed between midnight and 6am to cause the least disturbance to its customers – “... during the day everybody’s doing their thing and needs the service.”[4] Its employees are paid overtime for night work.
[4]T28.
21The repairs were carried out on five days: 4, 7, 9, 14 and 16 November. 5 and 6 November were Saturday and Sunday. No work was performed on those days. The work resumed at 10pm on 7 November. The work on 4 November had partly restored services so that there was no work on the weekend.
22If the damage had completely disrupted the service, De Blasio’s team would have worked continuously to restore service. However, it did not in this case and after performing some work the urgency disappeared, so much so his team could attend to more urgent other work. The details of the work are contained in a document with the quaint title – HP Service Manager Copper Ticket.
Thomson
23Matthew Thomson (Thomson) is a chartered accountant, of many years’ experience. He is now employed by Telstra. He calculated the labour rate for this claim. It has three components:
(a) the direct labour costs of the persons doing the repair work and associated costs of these persons (eg long service leave);
(b) the cost of support for these persons to complete their work (eg motor vehicles and IT equipment); and
(c) the corporate support that is required.[5]
[5]T51.
24Telstra uses those three components when quoting for new contracts, such as maintenance and remediation work for the NBN.[6] Describing this method as a “full costs recovery model”, he said:[7]
“... this is commonly applied, it’s industry standard, a common accounting procedure whereby in order to understand the full end to end cost of an activity across the organisation you look at the labour and materials, which are probably more your direct type costs, as well as the broader costs performed around the organisation.”
[6]T51.
[7]T55.
25To Mr Thomson:[8]
“... the whole premise of the labour rate calculation is the costs of Telstra doing this type of work. The cost to Telstra of performing recoverable damages activity.”
[8]T89.
26The alternative method of incremental or marginal costing excludes costs which exist because of the activity.[9] This form of costing is used in “manufacturing type industries”. The full costs recovery model is used in Australia Post, where he worked previously, because it better reflects the true cost of the activity incurred by Telstra as a result of the work.[10] In calculating these costs, no profit margin is included.
[9]T56.
[10]T57.
27If this work was done for a third party, like Optus, Telstra would take the $159 per hour and add a margin to it.[11] The same methodology is used to cost activities elsewhere in the Telstra organisation.[12]
[11]T92-93.
[12]T93.
28After an extensive cross-examination, Mr Thomson said:[13]
“Applying it [the full costs recovery model] to an individual instant, of course there’s going to be some anomalies and overs and unders, but these are certainly in a manner that enables Telstra to the recover the costs of performing its recoverable damages work.”
[13]T92.
29The costs do not include all of the costs incurred by Telstra across all of its activities.[14]
[14]T62-63.
30There is included a component for the finance team because it determines the labour rates.[15] Absent this accident, the employees in the team would have been employed. Longer term they would not.[16]
[15]T64.
[16]T64-65.
31Originally, Telstra claims the labour rate at $159.13 per hour and $187.99 per hour for overtime. The support and overhead costs are the same whether it is normal time or overtime rates. He adopted the wage of a CFW4[17] – this is the most common technician carrying out these types of repairs. He does not know whether CFW4s were used in this case or not.[18] The payroll tax rate is a nationwide average: it is not the Victorian rate. But applying the Victorian average would not make a material or large change.[19]
[17]T70.
[18]T70.
[19]T70.
32As to motor vehicle running costs, this item, like others, is not specific to an incident. It is included as part of the model even though no such costs were incurred on this job.[20] The amount included is $9.05.
[20]T71.
33There is one team leader for every sixteen members of staff. The model includes the figure of $4.47 for a team leader. There is no evidence the actual team leader had any involvement in these repairs.
34As to the component of the model called “Support Staff costs”, Mr Thomson defined it as:[21]
“The cost to provide business support/administrative support for operational staff performing recoverable damages work.”
[21]Joint Court Book (“JCB”) 121, Appendix A: Telstra Corporation Limited Hourly Labour Rate Calculations (Effective 1 July 2016), paragraph 6.4(a).
35Although not certain, he believed these staff helped with scheduling activities, including organising employees to attend particular jobs. He did not know whether any support staff were directly involved in this incident.[22] He was uncertain where they work.[23] It is $7.14 in the hourly rate.
[22]T73
[23]T74
36There is another item called “total support staff costs”. Although uncertain, Mr Thomson believed it involved communications and, specifically, included in the main the leasing of mobile phones, Blackberries and laptops. It did not involve the cost of staff. The employees who performed the repairs had these type of devices. This item carried a figure of $7.14.
37The broader item “Front of house & Back of house support costs” relates to the costs of running a call centre or centres. There is a single phone number. The centre or centres receive the phone calls which report the damage to Telstra’s infrastructure. Interestingly, the customer field workforce of 2,626 employees nationally wide at the time devoted a mere 1.87% of its overall time to recoverable damages work. The number of phone calls concerning this incident have been as low as one although there is no evidence on the point.
38Within the time “Front of house and back of house support costs” is an item called “bad debts”. They form a large part of the figure of $40.31 for that item. These are costs incurred for this activity due to actions of others and are not recovered from them: hence, the description “bad debts”. To Mr Thomson:[24]
Q:“
You’re saying it’s standard accounting procedure to have a bad debt against X and seek to charge an amount against person Y for that?
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A:It would be standard accounting procedure to acknowledge that if we perform a service or activity or any company performs a service or activity that has or carries a risk of bad debts, that that would be factored into the rate we would charge for all future business to shield us from that risk.”
[24]T83.
39An item, “network evaluators” is a specific function performed by the customer field workforce. Mr Thomson could not say whether the cost of this item was included in the direct labour costs.
40There is an item called “training costs”. A figure of $0.38 is assigned to it. It represents the training costs of the entire customer field workforce in all areas of their work. The item is included even though only 1.87% of its activities concern this kind of work. The training would have occurred whether this incident occurred or not. However, Mr Thomson sought to justify the item:[25]
“A:Not a direct cost, however, if the field technicians were not continuously trained they would be unable, or there's a risk they would be unable to fulfil the work that's required here, so this is a justified cost in that if we did not continue to train our technicians we would be unable to complete this type of activity.”
[25]T84.
41The tools and equipment of the customer field workforce is needed for all of the work performed by its members, of which this type of work represents 1.87% of their overall work. The figure is $0.93.
42Since 2016, Telstra has changed its structure from a state-based to a national-based organisation. In 2016, it was still a state-based organisation with a head office in each state. For “regional head office staff costs”, the figure is $9.88. They did not bear a direct relationship with the incident. Again, it is a cost which enables Telstra to fulfil the activity of the customer field workforce.
43The indirect overhead costs represent the cost of various services needed for the running of the Telstra business day to day. Recoverable damages is part of Telstra’s day-to-day business. These costs are allocated across its business on a staff or per hour basis.
44Within the category of indirect overhead costs are various items: infrastructure services; Telstra Services national support; corporate, human resources, finance and legal; and property and rental expenses.
Gwynne
45Matthew Gwynne is a chartered accountant. He is a principal in PKF(NS) Forensic Accountants Pty Ltd, specialising in forensic accounting. He has extensive experience in forensic accounting and commercial insurance claims. For this proceeding, he prepared three reports and an email.[26]
[26]Reports dated 10 February 2016, 13 December 2021, and 2 March 2022, the email was sent on 2 March 2022.
46In his first report, Mr Gwynne considered the way Telstra calculated the 2014 labour rate was in concurrence with market practice and was not materially overstated. He explained what he meant by “concurrence with market practice”:[27]
“It’s consistent with my understanding of the basis on which entities such as Telstra, or even utilities or government departments, seek to recover for services that they provide, and so it’s a process of costing where you allocate direct costs and indirect costs based on the activity and other metrics to come up with an appropriate way of determining a price to charge a third party, as opposed to an internal party.”
[27]T98.
47In his second report, Mr Gwynne commented on a report prepared by David Gibson. He described Mr Gibson’s approach as “incremental costs” or those amounts which Telstra would charge above what it actually paid its employees involved in the actual job of repair. From Mr Gwynne’s perspective, Telstra charged as it did because it had a skilled field workforce quickly able to repair damage to its infrastructure. He compared the Telstra costs with the three different labour rates adopted by Mr Gibson.
48In his third report, he examined the Telstra 2016 labour rate. He reached the same views expressed in his first report. He differed slightly from the hourly rates adopted by Telstra: $155.67, his rate for ordinary time against Telstra’s $159.13; and $184.88, his rate for overtime as against $187.99. To Mr Gwynne, the Telstra figures are not materially overstated.
49By an email, sent on 2 March 2022, Mr Gwynne reduced the overall overtime rate to $166.08.
50Mr Gwynne says Telstra’s methodology is in keeping with those adopted by other organisations.[28]
[28]T98.
Gibson
51David Gibson is a forensic accountant. He is a partner at the Sydney office of the forensic accounting division of Sedgwick. For over 15 years, he has specialised in the review and quantification of economic loss and business interruption insurance claims. Gramac’s solicitor asked him to review the amount of the labour costs claimed against it.[29]
[29]Reports dated 5 November 2021 and 25 February 2022.
52Mr Gibson is a proponent of the “incremental costs” model. In his first report, he explained:[30]
“In determining the financial position that Telstra would have been in if the Incident has not occurred, in my opinion the following accounting principles apply:
(a) Telstra’s financial position but for the incident can be determined based on its actual financial position following the incident, less any additional costs incurred or loss of revenue due to the incident.
(b) The additional costs incurred must be incremental as a result the Incident, i.e., the costs would not have been incurred had the Incident not occurred. The costs should be direct and variable in nature (e.g., overtime labour costs or fuel for motor vehicles). Fixed overhead costs, such as rent and head office costs are very unlikely to have increased due to the incident.
(c) The costs should also represent the cost to the business, without any additional profit margin. For example, costs paid to employees should represent the actual wages paid to the employee, plus direct labour on-costs (e.g., superannuation), rather than a charge out rate which includes a profit margin or allowance for fixed overhead costs.”
[30]At [6.10.1].
53In a table attached to paragraph 3.10 of his second report, Mr Gibson set out the figures used by Mr Gwynne in his second report. Beside those figures, Mr Gibson created three scenarios, described as “My Low Rate”, “My Mid Rate” and “My High Rate”. For convenience, I attach the table:
54As can be seen, his low rate does not include any normal time wages of the employees directly repairing the damaged cable while the mid and high rates do. Many of the direct labour support costs are missing from his scenarios while none includes indirect overhead costs. He excluded those costs as being fixed overhead costs, unaffected by the repairs.
55In a table attached to paragraph 4.02, Mr Gibson summarised his calculations for each scenario, including and excluding stand down hours:
56In re-examination, Mr Gibson acknowledged he did not know what an external organisation would charge for these repairs but added:[31]
“... but I guess from my experience generally it would be cheaper to do it internally. So to me the reasonable commercial cost would be in the range of the rates that I’ve calculated.”
[31]T124.
57In reaching those categories, Mr Gibson’s report contains a detailed analysis of the individual items comprising them and his explanation of why he disagrees with Mr Gwynne. He does so in three areas with the most important summarised in this paragraph:[32]
“The Gwynne Report includes a number of fixed costs which are unlikely to have been impacted by the repair works in calculating the labour rate, as outlined in my review at paragraphs 5.04.14 to 5.04.22 above. For example, it includes costs such as Rent, Finance and Human Resources. In my opinion, the labour rate should be calculated based solely on the directly variable costs which would have increased due to the repair works.”
[32]At [6.02(a)].
58In relation to “direct labour costs”, they are the salaries and labour on-costs paid to Telstra’s employees directly involved in the repairs. Without knowing the basis upon which these employees were engaged by Telstra (permanent or casual for the occasion), Mr Gibson analysed the five items. Two of the items he excluded from the scenarios as unlikely to be incurred: functional and other allowances; and meal allowance. Two of the remaining three items he modified.
59Absent the incident, these employees would have been paid their normal hours. They would have been involved in other activities. However, the fact they were involved in repairing the damage means they were not engaged in other activities as part of their duties. I consider the claim for normal hours is legitimate.
60The same reasoning applies to the stand down hours. Even with those hours, the employee worked no more than their normal weekly number of hours does not matter for again they are not doing other work during the stand down hours.
61In relation to “direct labour support costs”, being overhead costs relating to the employees directly involved in the repairs, Mr Gibson analysed them under eight headings. Mainly, their inclusion in his scenarios depended upon whether they increased due to the incident. Among the items he excluded is bad debts. It appears he misunderstood the reason for the item. However, on the correct basis, I agree with the conclusion that it is unreasonable to include it in Telstra’s claim.
62In each of his categories, Mr Gibson did not allow any amount for “indirect overhead costs” because they are unlikely to have been impacted by the repair works. Although lacking sufficient detail, Mr Gibson believed these costs included finance and legal costs, human resources costs, rental costs, other corporate or administrative expenses.
63Using his categories, and including “stand down hours”, Mr Gibson arrives at $10,376.37, $21,108.21 and $28,293.16 respectively. These amounts rely upon different figures for normal and overtime hours. For Mr Gibson’s high rate, those figures are $80.46 and $91.27 respectively. They are higher than the low and mid rate figures because he includes nine items in his normal time and eight items in his overtime.
Legal considerations
64Gramac’s counsel referred to the ruling of J Forrest J in Thomas v Powercor Australia Ltd[33] and to the appeal in Powercor Australia Ltd v Thomas.[34] In the appeal, Osborn JA gave the leading judgment. His Honour said:[35]
“... the underlying principle as being that when goods are damaged by the negligence of a tortfeasor, the owner of the goods suffers immediate loss represented by the diminution in the value of the goods. The principle that the measure of this damage is ordinarily the reasonable cost of repair, will ordinarily apply to fixtures unless reinstatement is not practicable or sensible.”
[33][2011] VSC 586.
[34][2012] VSCA 87.
[35]At [27].
65As to the appropriate method of assessing such damages, Osborn JA agreed with the trial judge in holding the appropriate method of assessing damages with respect to items used in the farming enterprise and damaged or destroyed by fire was the reasonable commercial cost of repairing or reinstating such items.[36]
[36]At [73].
66This way of measuring damages occurs daily in our courts in actions for the recovery of damages where motor vehicles are damaged in accidents. The damages are those due to the cost of repairing the damaged vehicle by a motor vehicle repairer. The commercial cost of the repair of motor vehicles usually includes the cost of labour, the cost of materials and a margin for profit. In those cases, as in this, the dispute is about the adjective “reasonable” in the expression “reasonable commercial cost”.
67Telstra’s counsel relied on Commonwealth Railways Commissioner v Hodsdon.[37] At p 438, Blackburn J said:
“It seems to me that in principle a plaintiff who himself repairs a damaged chattel, being engaged in a business of that kind, is entitled to such damages as fairly represent the expense which his entire undertaking has sustained by reason of the damage, including the proper proportion of his overhead expenses.”
[37](1970) 16 FLR 437.
68Gramac pointed to the underlying principle of restitutio in integrum – placing Telstra in the same position as if the damage had not occurred. Its application relied on the accounting approach of Mr Gibson that the additional costs incurred must be incremental as a result of the incident – the costs would not have been incurred had the incident not occurred. The costs should be direct and variable in nature (eg, overtime labour costs or fuel for motor vehicles). Fixed overhead costs, such as rent and head office costs, are very unlikely to have increased due to the incident.
69In the Commonwealth Railways Commissioner’s case, Blackburn J referred to the cases of The Mediana[38] and Price v Commissioner of Highways.[39] In the former, the plaintiff, a harbour authority, owned a lightship which was damaged by the defendant’s negligence. Through the use of lightships the plaintiff lit the approaches to the Mersey River. It replaced the damaged lightship with another which it kept for emergencies. By using the replacement lightship, it lost nothing and did not incur any additional expenses. But it recovered as damages out-of-pocket expenses and damages for loss of use of the damaged vessel while it was repaired.
[38]Mediana, Owners of the Steamship v Owners, Master and Crew of the Lightship Comet [1900] AC 113.
[39][1968] SASR 329.
70The latter case involved the repair of a damaged vehicle by its owner. In the course of his reasons for judgment, Bray CJ quoted a passage from the speech of Lord Halsbury in The Mediana[40], which explained the task of a tribunal of fact in arriving at a figure for general damages. In this case, unlike in The Mediana and Price’s case, Telstra’s claim for the labour costs is a claim in special, not general, damages.
[40]At pp 117-118.
71Telstra relied upon passages in Telstra Corporation Ltd v Adept Drainage Pty Ltd.[41] This is a decision of a judge of this Court. The circumstances of the tortious act were similar to those in this case as was the issue decided. After referring to Commonwealth Railways Commissioner v Hodsdon[42] and Dart Industries Inc v The Décor Corporation Pty Ltd,[43] Judge Parrish concluded:[44]
“After a consideration of all the evidence and bearing in mind the state of the authorities, I have formed the view that it is open to Telstra as a matter of law, to claim labour costs rates based on the average costing method described by Giles. The evidence of Giles is that the elements relied on all have a cost impact in placing a team in the field to perform work such as that undertaken on 14 September 2007. Furthermore, as I have stated, such exercise by Giles has been undertaken consistent with relevant accounting principles.” (my underlining)
[41][2011] VCC 1172.
[42](1970) 16 FLR 437.
[43](1993) 179 CLR 101.
[44]At [95].
72Craig Giles was an accountant and a finance manager employed by Telstra. He gave evidence of direct labour costs, direct labour support costs and indirect overhead costs.[45] Although described somewhat differently, the items are broadly similar to those in this case. In that case, the expression used to describe Telstra’s methodology was “average costing” and “marginal costing” to describe the specific extra cost incurred due to a particular activity.
[45]The figures are set out in [53] to [56] of the judgment.
73Dart’s case involved the infringement of a patent and a claim for account of profits as opposed to damages. The purpose of an account of profits is to avoid unjust enrichment of the infringer with no element of punishment involved. The trial judge ruled no part of general overhead costs was allowable as a deduction in arriving at the infringer’s profit. This ruling was rejected by the Full Federal Court and the High Court. Amending the statement of principle of the Full Federal Court, the justices in the joint judgment said the correct position was the plaintiff should be at liberty to show that various categories of overheads are attributable to the obtaining of the relevant profit and to show how and in what proportion they should be allocated in the taking of the account of profits.
74Earlier in the joint judgment, the justices cited, with approval, from an American case, Levin Bros v Davis Manufacturing Co,[46] including this passage:[47]
“It often happens that overhead expenses are applicable to and should be spread over the entire business but where a business is established and in operation and another line is taken on without increase of overhead expenses it is just to the patentee that the actual situation be applied and none of such overhead be charged as an expense of the added line except as it participated in manufacture or sale of the infringing article.”
[46](1934) 72 F 2d 163.
[47]Dart Industries Inc v The Décor Corporation Pty Ltd (1993) 179 CLR 101 at 117.
75Judge Parrish quoted a further passage from Dart’s case at paragraph 93 of his judgment. It deals with the factors one considers in arriving at which overheads are attributable. I will not repeat the passage here.[48]
[48]Supra at p 119.
76In a separate judgment, McHugh J identified two different accounting methods of costs: incremental cost and absorption cost. The former is the change in aggregate cost that accompanies the addition or subtraction of a unit of output. The latter allocates all fixed costs between the products of the business. After an examination of various matters, accounting, economic and case law, McHugh J concluded:[49]
“... the absorption method of cost accounting is the appropriate method of accounting for general overheads in a case of infringement. The test to be applied was concisely stated in Alfred Bell and Co v Catalda Fine Arts where the Court said:
‘The test is not whether such an overhead item had been increased by the handling of the infringements but whether this overhead item actually assisted in the production of the infringing profits.’
Whether the overhead did actually assist in the production or sale, etc. of the infringing product will be a question of fact in all the circumstances of the case.”
[49]Supra at p 133.
77McHugh J also amended the way the Full Federal Court described the principle and instead of “contributed” or “attributable”, the words “assisted in” should be substituted.
Submissions
Telstra
78Telstra submitted its hourly labour rate model is a measure of the total cost to it of the damage sustained due to Gramac’s tortious act. This model does not include any profit or cost of capital. It relies on a passage from the Commonwealth Railways Commissioner’s case and on [87]−[91] of the Adept case. It is a model which may not be appropriate to all cases but is appropriate in this case.
79Telstra’s bad debts are apportioned to the field work division and divided by their productive hours.
80As for payments for stand down hours, Telstra has a legal obligation to pay them under an Enterprise Bargain Agreement. These are a direct cost to Telstra due to Gramac’s tortious act.
81Telstra submits its model represents a prima facie case and there is an evidentiary onus on Gramac to prove what a third party would have charged for these repairs.
82If I did not accept Telstra’s model then it submitted I should accept Mr Gibson’s scenario 3 as fair and reasonable.
Gramac
83Gramac disputes that Telstra’s model represents the reasonable commercial cost to it to repair its assets. It also disputes its model represents a fair and reasonable representation of the damages suffered by Telstra.
84Gramac relies on the principle contained in the maxim “restitutio in integrum”. It submits the incremental costing is the appropriate method to calculate economic loss in this case. In terms of this discrete issue, it is $47 or $48 per hour for cable joiners. It is not the reasonable cost of supplying a particular workforce, which devotes 1.87% of its time to “recoverable damages work”.
85Where there is property damage and the plaintiff effects its own repairs, the applicable principle is set out by the Court of Appeal in Powercor Australia Ltd v Thomas: the reasonable commercial costs of repairing the asset. As to the Commonwealth Railways Commissioner’s case, it seizes upon the expression “being engaged in a business of that kind” to submit Telstra’s business is far broader than the repairing of damaged cables.
86Gramac submits:
(a) under “Labour”, Telstra seeks 127 hours where its employees were “stood down” because they worked the previous night. This item should not be allowed.
(b) Telstra’s model is not based on the cost to repair the damaged assets but on costs asserted to exist because “of this activity”.
(c) specific items constituting the model had no relevance to the incident, the specialised workforce or Telstra’s claim.
(d) the calculation of hourly rate under Telstra’s model includes fixed costs which it would have incurred whether or not the incident occurred.
87As to (a), it was Telstra’s decision to work overnight. The work could have been done in daylight hours. There would be no overtime and those workers would have worked during the day.
88As to (b), Gramac submits many of the costs which make up the model are costs of Telstra in performing the recoverable damages activity, which is part of the duties of the customer field force. If the incident had not occurred, those costs would have been incurred anyway.
89Gramac criticises Telstra’s calculation of certain items:
(a) there were no motor vehicle running costs actually incurred over the repairs. However, the figure of $9.05 is sought;
(b) the figure of $4.47 for team leader is challenged on the basis the actual team leader, John Deveson, was not called as a witness and the inference should be drawn his evidence would not have helped Telstra’s claim;
(c) there is uncertainty on what is encompassed by the item “support staff costs” and placed at $7.14 and it should not be allowed for that reason;
(d) for the broader item “front of house and back of house support costs”, there was uncertainly as to what the item included beyond the cost of call centres. An item, “network evaluators”, is a function performed by the customer field workforce. “Bad debts” are debts incurred under this model but are not recovered.
(e) for “training” at $0.38, this means employee training, which would have occurred anyway;
(f) for “tools and equipment” at $0.93, these were required for the repairs anyway;
(g) for “regional head office staff costs” at $9.88, they bore no relevance to the incident;
(h) all of the indirect overhead costs bore no relationship with the incident and were not caused by the incident.
90Gramac submitted I should reject Telstra’s model and accept Mr Gibson’s scenario 2, being $56.56 per hour for normal time and $67.98 per hour for overtime.
Discussion
91On one view, the reasonable commercial cost of labour to repair the damaged cable is what Telstra seeks to recover. If one were to establish the reasonable commercial cost, then ordinarily the evidence of a relevant organisation would be called. Given the peculiar circumstances of Telstra and the way it repairs its infrastructure, I doubt there was a viable alternative to it in the commercial field to repair this particular damage to Telstra’s exacting requirements.
92Telstra’s infrastructure is nationwide and extensive. It has a dedicated team of employees, the customer field workforce, to deal with problems with its infrastructure including the type of damage caused by the defendant. The team is spread across the nation. Its members are highly skilled and are immediately available. Those attributes mean Telstra can effect repairs with the minimum of interruption to its services. With De Blasio’s team, there were ten highly skilled experts in repairing optic fibre cable, immediately available to effect repairs even though the repair of damaged optical fibre cable represented a small portion of the work of De Blasio’s team. Accordingly, on one view, the reasonable commercial cost of labour is what Telstra is charging here.
93In performing the repairs to the damaged infrastructure, De Blasio’s team were not performing their other duties. However, the workforce which effected the repairs were diverted from their other activities while undertaking them. To exclude the normal hours of De Blasio’s team, as Mr Gibson proposes in his low rate, would effectively penalise Telstra, for whatever other work they would have done would at best be delayed.
94In this case, there were the earnings of Telstra’s employees engaged directly in the repairs. There was also overtime and “stand down” amounts. The overtime and stand down amounts arose because Telstra worked at night. It did so to minimise disruption to its customers’ use of the services. They mitigated their loss by this means. The “stand down” time comes from the Enterprise Bargain Agreement between Telstra and its employees. I do not know whether it is unique in the sphere of industrial agreements. It is an unusual aspect. Since I doubt there is an entity external to Telstra which could perform the repairs as Telstra required, it is speculative to wonder whether such an entity could work at night, work continuously and without a similar or any stand down arrangement.
95Telstra’s claim has two main components. First, there are the actual cost of its employees involved in the repairs. This involves normal, overtime and stand down hours and the incidental expenses incurred because they are employees. Second, there are the various indirect support costs incurred because recovery damages work is an activity within the Telstra business.
96It is reasonable for Telstra to have repaired the damage in the way it did. Its employees worked at night to minimise the disruption of services to its customers. It sought to mitigate its loss. By doing that, it was legally obliged to give effect to the stand down provision of the EBA. Each of the normal, overtime and stand down claims are plainly commercially reasonable, as are the proportional claims arising out of the employment of the team.
97The positions of the parties is essentially a contest between incremental costs and absorption costs. This represents contrasting accounting principles: Telstra espousing absorption costs while Gramac espousing costs. Notwithstanding the difference between a claim in damages and one for the accounting of profits, Telstra urges me to adopt absorption costs as the proper basis of assessment of damages while Gramac urges the other.
98In effect, Telstra urges me to adopt the approach of Judge Parrish in the Adept case. His Honour clearly adopted the absorption cost approach and applied it to the facts of that case. When dealing with principles of law stated by another judge of the same inferior court, I should follow the statement unless convinced it is wrong. This is the nature of judicial comity. Far from being convinced Judge Parrish is wrong, His Honour’s use of the test in the Dart Industries[50] case us a most useful means of resolving the issue presented in this proceeding.
[50] (1993) 179 CLR 101
99Although Dart’s case dealt with the infringement of a patent, a product rather than a service and an account of profits and not damages, I will adopt the statement in the joint judgment of the nature of the costs properly brought to bear in this case: Telstra should be at liberty to show that various categories of overheads are attributable to the determining of the labour cost and to show how and in what proportion they should be allocated.
100Adopting that test, the indirect overhead costs are not attributable to, or even assisted in, the repair of the damaged cable. These overheads were not increased by the damage caused to the cable and would have been incurred in any event. I agree with Mr Gibson on that point.
101In relation to “direct labour costs”, Mr Gibson excluded two items: functional and other allowances; and meal allowances. In his first report, Mr Gibson excluded “functional and other allowances” because “Based upon my review of the Enterprise Agreement, I am unable to identify why these allowances would have been paid in relation to the work performed in relation to this Incident”. These allowances involved higher duties, temporary shirt, height allowance and first aid. I agree with their exclusion. If any had been actually incurred over this repair, I would have no hesitation in including them.
102Also in his first report, from the Enterprise Agreement, Mr Gibson noted the limited circumstances in which a meal allowance was payable and could not find evidence in the hours worked to support the item. Again, I agree for the same reason.
103In relation to “direct labour support costs”, Mr Gibson excluded three items: support staff costs; regional head office staff costs; and communications, PC leasing and others. Each of these he excluded because he would not expect them to increase due to the incident. The fact of “no increase” does not necessarily exclude those costs on an absorption cost basis. Are they attributable? I do not think so. They are too remote to the fact of repair.
104Telstra submitted there was an evidentiary onus on Gramac to rebut the prima facie case raised by it. In this case, there is no such evidentiary onus. Even if there were, seeking evidence of such cost from someone in the field and external to Telstra could well prove hopeless, for no such entity is likely to exist which could provide the skilled and immediately available service Telstra requires. Any delay or inadequacy in the repairs could cause damage to its customers and then to Telstra itself.
105As to the actual wages paid to Telstra’s employees directly involved in the repairs, there were:
(a) 198.5 hours of normal hours at 55.82 per hour. The figure of 198.5 hours includes 127 “stand down hours”. These total $11,092.27; and
(b) 135 hours of overtime hours at $85.03 per hour, totalling $11,479.05.
106As to the actual figures, there is some difference between Mr Gwynne and Mr Gibson but sometimes it is difficult to discern where the difference lies. For salary, they agree on the normal time rate. They disagree on the overtime rate. Mr Gibson arrives at an overtime rate of $62.65 per hour while Mr Gwynne uses $80.48 in his second report. However, Mr Gwynne changed his position to $62.65 in an email sent 2 March 2022.
107As to front of house and back of house costs, the difference relates to the inclusion or exclusion of bad debts. Since I agree with Mr Gibson as to their exclusion, then I accept his figure.
108The differences between the experts over the items of costs which I accept are marginal.
109From the perspective of what is fair and reasonable, Telstra should recover the actual expenses of its employees, including the stand down hours and certain indirect expenses referable to those employees. Although what is fair and reasonable can, and often does, encompass a range of figures, the figures set out in Mr Gibson’s high rate are fair and reasonable and I will adopt them. Accordingly, under this head of damage, I would award Telstra the sum of $28,293.16.
Other matter
110The defendant noted the absence of John Deveson, a team leader, as a witness for Telstra. I would not expect Telstra to call him as a witness, given the calling of De Blasio as a witness. I will not draw any adverse inference.
Conclusion
111I will award Telstra the following amounts:
(a) labour costs of $28,293.16;
(b) material costs of $7,160; and
(c) external hire costs of $59,165.91.
112In total, I will award the sum of $96,619.07 and will hear the parties on the question of interest and costs.
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