Tranquility Pools & Spas Pty Ltd v Huntsman Chemical Company Australia Pty Ltd

[2008] NSWSC 58

CITATION:	Tranquility Pools & Spas Pty Ltd v Huntsman Chemical Company Australia Pty Ltd [2008] NSWSC 58
HEARING DATE(S):	29/10/2007
JUDGMENT DATE :	20 February 2008
JURISDICTION:	EQUITY
JUDGMENT OF:	Bryson AJ
DECISION:	1. Upon the plaintiffs’ Notice of Motion of 27 September 2007 claim 1, order pursuant to UCPR 20.24 that the Report of Professor Robert Burford of 20 September 2007 be adopted in whole. 2. Direct that the plaintiffs approach the Registrar in Equity for an appointment for hearing the remaining claims in the Notice of Motion. 3. Dismiss the defendant’s Notice of Motion of 5 October 2007. 4. Order that the plaintiffs’ costs of Claim 1 in the plaintiffs’ Notice of Motion and the plaintiffs’ costs of the defendant’s Notice of Motion be plaintiffs’ costs in the proceedings.
CATCHWORDS:	PRACTICE and PROCEDURE - Reference and Report UCPR 20 Div.3 - report on causation of Pool Failures consisting of blistering and discoloration in swimming pools manufactured by spraying fibreglass on upturned mould - examination of detailed criticisms of Referee's Report - Report adopted.
LEGISLATION CITED:	s.52 of the Trade Practices Act
CASES CITED:	Chocolate Factory Apartments v West Point Finance Pty Ltd [2005] NSWSC 784
PARTIES:	Tranquility Pools & Spas Pty Ltd - First Plaintiff Tranquility Pools & Spas (Manufacturing) Pty Ltd - Second Plaintiff Huntsman Chemical Company Australia Pty Ltd - First Defendant
FILE NUMBER(S):	SC 50158/2006
COUNSEL:	J. Stevenson SC & V. Whittaker - Plaintiffs J. Simpkins SC & G. Sirtes - Defendant
SOLICITORS:	I E Duffield - Plaintiffs DLA Phillips Fox - Defendant

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

BRYSON AJ

20 FEBRUARY 2008

50158/06 TRANQUILITY POOLS & SPAS PTY LTD & ANOR v. HUNTSMAN CHEMICAL COMPANY AUSTRALIA P/L

JUDGMENT

1 BRYSON AJ: These reasons deal with Claim 1 in the plaintiffs’ Notice of Motion of 27 September 2007 and with the defendant’s Notice of Motion of 5 October 2007. These are interlocutory reasons and contain no findings of fact by whch the parties are bound when the ultimate issues come to be determined. The plaintiffs claim and the defendant resists adoption of the Report under UCPR 20 Div. 3 dated 20 September 2007 by Professor Robert Burford. The Court of Appeal and the Supreme Court have often considered the principles to be applied in exercising the discretion to adopt or reject the report of a Referee; the case law relates to proceedings under Pt 72 of the Supreme Court Rules, now continued in substance by UCPR 20 Div 3. In Chocolate Factory Apartments v West Point Finance Pty Ltd [2005] NSWSC 784 at paras 6-8 McDougall J stated 15 principles which his Honour deduced from the case law, and argument before me took place on the basis that those principles should be accepted, which I readily do.

2 The plaintiffs manufacture fibreglass swimming pools and claim damages and remedial orders against the defendant which manufactures chemical products and supplied the plaintiffs with Hetron 922, a vinyl ester resin which the plaintiffs used in the manufacture of 837 fibreglass swimming pools. A component of Hetron 922 is fumed silica, which is a thixotrope. A thixotrope alters the behaviour and viscosity of vinyl ester resin (and of many other materials) according as the material is, for example, under compression or not compressed, or as it is agitated or still. If a hydrophobic thixotrope is used the resin is resistant to permeation and retention of water: if a hydrophilic thixotrope is used the product is tolerant of permeation and retention of water. Unmodified fumed silica is a hydrophilic thixotrope, but fumed silica can be modified so as to be a hydrophobic thixotrope. It is the fact (or for present purposes can be assumed) that at different times the defendant used different kinds of fumed silica in the manufacture of Hetron 922, so that characteristics of the product were different from time to time according as the thixotrope was hydrophilic or hydrophobic.

3 The shell of a fibreglass pool is manufactured by using a spray gun to spray successive resin coats on an upturned mould. The first coat applied is a gelcoat layer and forms the inner surface of the swimming pool in direct contact with the pool water. This layer gives the pool its colour. Gelcoats are semi-permeable: it is possible for water to migrate through gelcoat. The second coat applied is called the mist layer, the third coat is the tie layer and the fourth is the structural layer, which comprises about 80 per cent of the thickness of the pool shell. The fifth and final layer is of gelcoat and enhances the appearance of the outer surface. The tie layer should prevent or resist migration of water into the structural layer. Hetron 922 was the vinyl ester resin used in the tie layer; a mixture of glass fibres and resin was sprayed over the first two layers. The glass fibres are surfaced with size. The glass fibres and resin are fed into the spray gun; the spray gun chops the glass fibres and mixes them with the resin, and the spray produces a thin coat of the mixture. The viscosity of the sprayed material is important: the material sprayed on must hold the position in which it is placed by the spray gun; it must not drip down the side of the mould. If the material is too viscous it cannot be used in the spray process; if it is not sufficiently viscous it will not hold position when sprayed on. Viscosities appropriate to different conditions are achieved by mixing thixotrope in the vinyl ester resin.

4 The plaintiffs’ claims relate to 83 fibreglass pools which were manufactured from April 2002 to April 2004, some by the first plaintiff and others by the second plaintiff after transfer of the business on 5 September 2003. During this period Hetron 922 resin supplied by the defendant contained an unmodified fumed silica named HDKN20 which the defendant had obtained from a supplier referred to as Wacker: this silica was hydrophilic. The plaintiffs allege to the effect that many of the pools - 194 when the Summons was filed on 19 October 2006, 261 when the Reference commenced and others since - have suffered from blistering and black spots, referred to as the Pool Failures, and that the plaintiffs have received numerous complaints and claims from retail customers and dealers. At other times the defendant supplied Hetron 922 containing modified fumed silica, which was hydrophobic. According to the plaintiffs’ case, vinyl ester resins which they used earlier and later containing hydrophobic thixotrope did not produce Pool Failures. Particulars in the Summons allege:

20. The Pool Failures have resulted from use of the Product.
Particulars
The Product contained, at material times, a hydrophilic thixotrope which is inappropriate for use in the manufacture of fibreglass swimming pools.

5 I give a brief (and from the point of view of a scientist perhaps inadequate) exposition of the processes which, according to the plaintiffs’ contentions, are involved. When a pool contains water, water can and does reach the tie layer through the gelcoat and mist layers, which are permeable in some way: perhaps by osmosis. Hydrolysis of water within the tie layer then takes place and reactions occur between products of hydrolysis and other substances within the tie layer. The size which coats the fibreglass can be involved in chemical reaction with products of hydrolysis, causing degradation of the size and producing acidic material. The views of Professor George, who participated in the reference on behalf of the plaintiffs, appear to have led the Referee to the view that the vinyl ester can also be affected by degradation and that products of its degradation can participate in production of acidic material. Blistering and black spots are caused by the presence of the acidic material. According to the plaintiffs’ case the presence of water in sufficient quantity to cause Pool Failures after hydrolysis is significantly affected by, and is caused by the use of a hydrophilic thixotrope in the vinyl ester resin: when a hydrophobic thixotrope was used Pool Failures did not occur.

6 The glass fibres which the plaintiffs used were not all obtained from the same supplier; there were obtained from several different glass manufacturers. So there were several different sources of fibreglass and the size applied to the fibreglass, making room for the possibility that varying characteristics in fibreglass and size played a part in causing pool failures. The material put before the Referee relating to glass fibre did not establish in any concrete way what variations there had been. There was no clear basis on which to say what impact variations of that kind may have had on the outcome.

7 The Order of Reference was dated 17 May 2007. The terms of the order including the questions referred were settled by agreement of the parties. The matter referred is stated in the Schedule of the order:

Please provide a report on the following questions. Where there are disputed questions of fact, please resolve the questions to the extent you can on the balance of probabilities. In all respects please explain your reasoning process. If you consider that further testing is required in order to answer the questions, please explain what further testing you recommend.
The questions employ the following definitions:

· “Pool Failures”: a problem with blistering and black spots identified in certain swimming pools manufactured by the Plaintiffs;

· “The Product”: a vinyl ester called Hetron 922 as supplied to the Plaintiffs by the Defendant.

The questions are as follows:
1. What has caused the Pool Failures?
2. What role, if any, has the Product played in relation to the Pool Failures?
3. What other factors (if any) have played a role in the Pool Failures.
4. If the Product has played a role, to the extent possible please state what proportion of the Pools are likely to suffer from the Pool Failures?

8 Directions accompanying the order included the following:

4. Direct that:
(a) subject to paras (b) and (c) hereof the provisions of Pt 20 r 20 shall apply to the conduct of proceedings under the reference;
(b) the reference will commence on 21 May, 2007 unless otherwise ordered by the Referee;
(c) after taking account of the submissions of the parties as to the manner in which the reference should be conducted, the Referee consider and implement such manner of conducting proceedings under the reference as will, without undue formality or delay, enable a just determination to be made including, if the referee thinks fit:
(i) the making of enquiries by telephone;
(ii) site inspection;
(iii) inspection of plan and equipment; and
(iv) communication with experts retained on behalf of the party;

(d) any evidence in chief before the referee shall, unless the referee otherwise permits, be by way of written statements signed by the maker of the statement;
(e) the referee submit the report to the Court in accordance with Pt 20 r 23 addressed to the Associate to the Commercial List Judge on or before 31 August 2007.

9 The concluding paragraph of the Report is as follows:

SUMMARY
104 I am in general agreement with the Plaintiffs’ submission. It is based on facts which are, in the main, agreed.
1) What has caused the Pool Failures?
My opinion based on the available evidence is that the Hetron 922, containing ethylene glycol and in particular hydrophilic thixotrope, that has been used in the tie layer in Tranquillity Pools, has caused failure. Pools which did not use this material as a tie layer, but made by Tranquillity, did not and do not fail. Pools made before April 2002 and after April 2004 have not failed because they do not have the same polymer mixture in the tie layer. No pools made by Tranquillity using identical manufacturing methods, except using other vinyl esters in the tie layer, between April 2002 and 2004 have failed.
2) What role, if any, has the product played in relation to the Pool Failures?
The Hetron 922 supplied to Tranquillity between April 2002 and April 2004 by Huntsman has caused blistering. Although a full scientific understanding of the reasons for this are not finalized, enough is now known to relate this product to Pool Failures. Testing by Huntsman has shown that blistering is associated with Hetron 922 containing hydrophilic thixotrope.
There is no evidence to show that other changes in manufacturing occurred at Tranquillity during the relevant period, nor is there any evidence to suggest that substandard manufacturing standards existed.
3) Is it probable that all of the Pools made by the Plaintiff using the Product will suffer from the Pool Failures?
It is probable that over a decade most if not all Pools will fail.
4) If the answer to question 3 is ’no’, to the extent possible please state what proportion of the Pools are likely to suffer from the Pool Failures?
N/A

10 In my understanding the Report is to be understood in whole so as to see what answer the Referee made to the questions referred to him. It will be seen that questions 3 and 4 in para 104 of the Report do not conform exactly with the questions in the Order of Reference. In my understanding, how the Referee dealt with question 4 can be understood by looking at questions 3 and 4 and the material stated by the Referee in answer to them together with all other material in the Report. The Referee's answer to question 3 is to be understood from the terms of the report as a whole.

11 Professor Graham George, Professor of Polymer Science of the Queensland University of Technology who is retained in consultation with the plaintiffs and Professor Robert Shanks, Professor of Polymer Science of Royal Melbourne Institute of Technology University, Melbourne, who is retained in consultation with the defendant, participated as experts in the Reference, on some occasions attending the Referee in the absence of legal advisers or other representatives. The Referee and the experts all have high expertise in Polymer Chemistry. The experts worked collaboratively to attempt to isolate the cause of the pool failures, commencing long before the Reference and the involvement of Professor Burford. They acted as collaborating scientists, not as advocates. They produced a document called “Assessment of causes of blistering of swimming pool laminates fabricated by Tranquility Pools & Spas, Taree, NSW” and made four joint reports before the Order of Reference was made; the first joint report is dated 22 June 2005, the second joint report 21 September 2005, the third joint report must have been made in January 2006 and the fourth joint report was signed on 24 and 28 March 2007.

12 The collaborative work of the experts, extending back to June 2005 if not earlier and well before the reference, was undertaken with method and rigour, directed to identifying the material which caused blistering and establishing the process or processes that had brought that material into existence. Their work included microscopic and spectroscopic examination of cross sections from laminates of blistered pools, examination with energy disbursive x-ray, GC-MS analysis of the fluid recovered from the blisters; and consideration and analysis of published literature relating to blister formation. Their consideration, and the knowledge and material which they had available for the Referee at the outset, were extensive.

13 The issues appear from the Summons and Defence, according to Commercial List practice. The plaintiffs' claim includes a claim that the product supplied was not of merchantable quality, based on a warranty stated in the delivery invoices. The plaintiffs also rely on contravention of s.52 of the Trade Practices Act with respect to four representations made to the first plaintiffs’ factory manager Mr Annakin by the defendant's sales representative Mr Rapson before the defendant entered on supply. The plaintiffs allege express representations by Mr Rapson to the effect that the product was a 20-year-old product and a proven product, that it was the same as the Derakane 411 that the first plaintiff was buying from another supplier, and that if anything did go wrong the defendant would stand behind the product. A fourth representation is also alleged to have been made by implication: that the product was of merchantable quality and fit for the purpose of use in manufacturing fibreglass swimming pools. The Defence disputes these allegations and raises numerous issues.

14 The four questions in the Order of Reference are obviously of high importance, but they are not either literally or in substance ultimate issues arising on the Summons and the Defence; the Report should be expected to have a very important part in the consideration and disposition of the litigation by the Trial Judge but its terms and answers to questions do not in my understanding establish without further consideration how any of the ultimate issues should be disposed of. If the defendant had obtained a favourable report on question one excluding causation by its product there could have been little more to debate. Except for this observation, the Report should be understood as undertaken to assist the Trial Judge to dispose of ultimate issues. This is a significant consideration when I address whether the answers are unsatisfactory in some way which might require their rejection.

15 It is important, in the light of some submissions I heard, to notice that the Referee was not asked to report on and did not report on whether the product supplied was of merchantable quality. Whether it was of merchantable quality is a question of mixed fact and law, involving the application of a legal standard to facts, and while the Trial Judge might well find the Referee's report useful or valuable, determination of the facts and the application of the legal standard would be the responsibility of the Trial Judge whose determination would not at any point be precluded from further consideration by the Report. Similar observations should be made about the issue of fitness for purpose.

16 For the plaintiffs’ case to succeed it would seem to be necessary for the plaintiffs to obtain findings to the effect that the use of unmodified fumed silica and the hydrophilic characteristics of unmodified fumed silica when used as a thixotrope caused the permeation of water into the layer in which hydrolysis and interaction of products of hydrolysis with size (and perhaps also with vinyl ester resin) occurred; and that if a hydrophobic thixotrope had been used the permeation would not have occurred. Unless these things were established it does not seem possible that the conclusion could be reached that the product was not of merchantable quality, or that it was not fit for the purpose for which it was required. To my mind it is not remarkable, but only to be expected that the questions referred to Professor Burford were phrased in ways which directed attention to the first part of these considerations, but not to the conclusion about merchantable quality or fitness for purpose.

17 The Referee did not conduct the reference in a way closely similar to the way in which a judge would have heard and determined issues in litigation. He was not required by law to do so; the Order of Reference expressly authorises proceeding in various ways which a judge would not usually adopt. The Court would be unlikely to adopt a report if the Referee had not proceeded in a fair way according to broad concepts indicated by the expressions "natural justice" and "due process," but what these require is not narrowly defined, and context and circumstances are important. There was a preliminary meeting between the Referee and counsel on 21 May 2007; there were one or more meetings between the Referee and Professors George and Shanks in the absence of legal representatives, and between the Referee and legal representatives in the absence of Professors George and Shanks. Documents referred to as a Draft Report or as a Summary of Points of Agreement of Experts were circulated among the experts and the Referee; in hindsight it seems a little inept that one of these documents was referred to as "Summary Points of Agreement of Experts" but Professor Shanks (who it seems did not participate in this document) later made another report of his own. There was no transcript or other complete record of most occasions when the Referee met and spoke to legal representatives or experts, but a record was made and transcribed on 17 August 2007 and on 23 August 2007. On 23 August 2007 the legal representatives of the parties each cross-examined their opponent's expert, and the proceedings were recorded and transcribed. Thereafter the parties made written submissions to the Referee, which he considered before making his Report. It is plain from later events that a Draft Report circulated by the Referee on 29 June 2007, which appears to have arisen from the meeting between the Referee and the legal representatives on 15 June 2007, remained well open to consideration; the Referee was presented with significant further material, contention and argument after this Draft Report.

18 The Referee set out the procedural history of the reference and the sources of information he had taken into account in paragraphs 1 to 14 of his Report. In the course of the reference there were meetings which I would describe as collaborative consultation among experts, followed by exchanges of an interim Draft Report and written material prepared by the parties’ experts. The Referee prepared an interim Draft Report dated 29 June 2007 of which he says "I noted some of the points of agreement and areas for further investigation." Thereafter there was a meeting on 27 July 2007 which the Referee described as "a technical meeting" and he says "this meeting took the form of a mainly collaborative scientific discourse, where a both I and the experts attempted to discuss and resolve issues from which agreement had not been possible." These, and the communications from the experts which followed, took a form which might be expected in a consultation among highly qualified and informed scientists. There were also events which more closely resembled court procedures - an initial joint meeting on 21 May 2007 at which parties presented folders of written material, a meeting with legal representatives on 29 June 2007, and a meeting and discussion with legal representatives on 17 August 2007 (which appears to have been inconclusive). A transcript of what took place then was made. Then or perhaps earlier the Referee was given four affidavits which (plainly) parties wished him to take into consideration. There was a final meeting on 23 August 2007, with cross examination; a transcript was made. After this meeting the Referee was given written submissions and reply submissions by the parties and some other further information. His Report followed on 20 September 2007.

19 The defendant’s Outline of Submissions before me included:

53. Huntsman submits that the report of Professor Burford ought be rejected in totality for following reasons:
(a) The Referee has in substance not answered the questions referred to him;
(b) The Referee has not provided any adequate or sufficient reason for attributing the cause of the pool failures to Hetron 922 and so has not revealed a thorough analytical and scientific approach to answering the questions referred to him;
(c) The opinions expressed by him are based upon obviously incomplete knowledge and are, accordingly, manifestly unreasonable;
(d) The Referee acted unreasonably and in denial of natural justice in rejecting evidence that other fibreglass pool manufacturers, who received the vast bulk of Hetron 922 during the same period, suffered no pool blistering and in refusing or neglecting to otherwise inquire into and/or consider the use of Hetron 922 to by other pool manufacturers;
(e) The report has no utility.

20 The contentions of the defendant against adoption of the Report can be collected into four groups. I am not directly quoting from any submission but in my understanding the groups are these:

1. Product from each of the batches of Hetron 922 which the defendant supplied was also supplied to other swimming pool manufacturers, and the defendants had not received complaints from other manufacturers, with the exception of one complaint which was not proceeded with. There were contentions to the effect that the Referee had not given appropriate weight or (it may be) any weight to this, and did not deal correctly or fairly with attempts by the defendant to bring these facts under his consideration; but refused in substance to consider them.

2. One result appearing from the absence of significant complaints from other swimming pool manufacturers was contended to be that the facts precluded any conclusion that Hetron 922 was unmerchantable; and it was contended that this conclusion was supported by the fact that only a proportion of the plaintiffs’ pools and not all of them have failed.

3. The Summons alleged in para 20 that the pools failed for the particular reason that the use of a hydrophilic thixotrope was inappropriate for manufacture of swimming pools. It was contended that the questions in the Order of Reference were cast in more general terms than issues which can technically be said to arise on the pleadings "… no doubt in anticipation that the Referee would address himself to answering the questions (to the extent that he could) in a way that would enable ready determination of whether Hetron 922 was merchantable or not." However it was submitted that as it has turned out, the Report would still leave the issue of merchantability to be fought out at the trial, and hence adoption of the report lacks any utility.

4. It was contended that the report was produced as a result of a flawed process and flawed reasoning and should not be adopted even if the Report is of some limited utility.

21 Before the Referee the plaintiffs contended that the following were objective background facts; and it appears to me that those facts were in substance accepted by the defendant.

(a) Tranquility had only experienced pool failures when the Hetron 922 was used in the formation of the tie layer in the pools;
(b) All other vinyl ester resin used by Tranquility prior to and subsequent to its use of Hetron 922 incorporated a hydrophobic (not hydrophilic) thixotrope;
(c) The pools that had to date suffered blistering were manufactured with the Hetron 922 as the barrier layer resin; and
(d) That Tranquility had not suffered pool failures in any pools manufactured using products other than Hetron 922.

22 As the defendant’s Senior Counsel pointed out, these background facts do not explain whether Hetron 922 or any characteristic of it caused the blistering. As Senior Counsel observed "If the objective facts established causation, the reference to it would have been otiose from its commencement. The questions posed for the Referee's response sought to establish by the application of scientific rigour whether there was any causal nexus between Hetron 922 and the … blistering." In a claim for a very large amount of money, said to be in the order of $50 million, and indeed in any civil claim it is appropriate to seek earnestly and carefully any insight which can be obtained into the facts and not place unconsidered or poorly considered reliance on superficial views of the probabilities; the balance-of-probabilities test is not a licence for superficiality or for less than complete consideration of the available evidence. It was for the Referee to establish by the application of scientific rigour whether there was any causal nexus between using Hetron 922 and the blistering if the application of scientific rigour could establish that matter; but it is not an appropriate criticism of the Referee or of the Report that an endeavour to establish the facts with scientific rigour was not successful; it was for the Referee to decide issues of fact on the balance of probabilities, as the Schedule to the Order correctly stated. It would have been an error of law and a failure of duty for the Referee to refuse to give an answer to a question for the reason that the facts could not be established with scientific rigour, if his consideration of the balance of probabilities produced an answer.

23 The use of a hydrophilic thixotrope was not the only characteristic of Hetron 922 which came under consideration during the reference as causative of the pool failures. The plaintiffs’ expert Professor George put forward and the plaintiffs in written submissions to the Referee relied upon a further matter relating to the presence of water-soluble material in the resin which had the effect that the resin was not sufficiently resistant to hydrolysis but itself suffered degradation. Professor George referred to the addition of water-soluble material such as ethylene glycol and diethylene glycol in the resin as defects in manufacture. These observations introduced the possibility that causes of blister formation, or of acceleration of blister formation included products of degradation of the resin or water-soluble material forming part of the resin, in addition to the products of hydrolysis of the size. It is notable that Professor George referred both to the use of hydrophilic thixotrope and also to the addition of water-soluble material in the resin as leading to accelerated blister formation; he did not speak of interaction of these elements as the cause of blister formation and he did not exclude the use of the hydrophilic thixotrope as a cause of blister formation in any contemplated circumstance. A defect in manufacture constituted by addition of water-soluble material in the resin is not part of the basis of the plaintiffs’ claim in para 20 of the Summons as now formulated. Nothing in the Report indicates that the Referee adopted or based any finding or conclusion on the view that the inclusion of water-soluble material in the resin was or could be the only cause of blistering, or was a defect in manufacture.

24 Plainly the points of agreement and areas for further investigation which the Referee says were noted in the interim Draft Report of 29 June 2007 were not final conclusions, were not treated by the parties as final conclusions and were open to further consideration, factual material and contention. Insofar as the heading “Summary Points of Agreement of Experts” of the document of 11 August 2007 was not correct, there was a very full opportunity to correct any wrong impression and to bring forward the views of Professor Shanks, the position of the defendant, and anything which was disputed about what Professor George said in the document. Professor Shanks in fact did submit further written material; there was opportunity for discussion orally at the meeting on 17 August 2007 and there was cross-examination at the meeting on 23 August 2007. All in all, the opportunities for putting matters of fact and opinion before the Referee, for discussion and for testing positions and removing misunderstandings were quite full and cannot be adversely compared with different procedures which a court would have followed.

25 In paras 21-46 of the Report the Referee deals with the subjects, obviously of central importance, of composition of blister fluid and possible mechanisms for blister formation. As narrated in these paragraphs, it was clear to the Referee and in his view it was agreed that the blister fluid included acetic acid which was derived from degradation (by hydrolysis) of the sizing present as interfacial coating on the glass fibres. The Referee set out, at some length, the considerations which had led him to move from an initial view, which he had noted on 29 June 2007, that vinyl ester resins were hydrolysis-resistant to the different view, which he concluded was correct (Report paragraph 24) that vinyl ester resin is itself able to degrade notwithstanding that vinyl ester resins were (and the Referee said that this was widely known) more resistant to degradation than cheaper unsaturated polyester resins. The Report shows that Professor George brought forward on 17 August 2007 a Swedish publication by authors Romhald and Bergman entitled “Blistering in constructions of fibreglass reinforced ester plastics - causes and countermeasures", said to be "one of the few documents which show that vinyl ester can indeed hydrolyse." On the basis of discussion set out in the report, the Referee departed from an earlier view, in which Professor George had at one time agreed, that vinyl ester resins were hydrolysis-resistant. The Referee said (Report para 32) "It is now emerging that in absolute terms this may no longer be a valid assumption, if the recently introduced literature is to be given credence". He also said (Report para 30): “… I believe there is adequate evidence for the possibility of vinyl ester hydrolysis being a potential contribution to blistering in the Tranquility Pools.” The end result of the Referee's consideration, in my understanding, is that while it was clearly established, and in his view agreed, that hydrolysis of the sizing on the glass fibres was a probable source of acetic acid producing blistering, hydrolitic degradation of the vinyl ester resin was also a possible source of the acetic acid found in the blisters.

26 I observe that there was no departure from the view that hydrolysis and degradation of the sizing was a source of the acetic acid present in the blister fluid, and the possibility of vinyl ester hydrolysis and degradation was spoken of as no more than a possible further source of acetic acid. (I further observe that hydrolysis and degradation of the vinyl ester resin could take place only if water had migrated into the layer in which the blistering occurred.)

27 The objectivity and rigour expected of expert witnesses required Professor George to bring forward the Swedish publication and the possibility of hydrolytic degradation of vinyl ester resin as a source of acetic acid when it became known to him. This is no more than a possible additional source of acetic acid and blistering, and there does not seem to be any ground for excluding hydrolytic degradation of the sizing as a source of acetic acid and blistering or any ground for suggesting its exclusion. Nor was there any suggestion of any further possible sources for the acetic acid which was undoubtedly present in the blistering. The introduction of consideration of vinyl ester resin as a possible source of acetic acid does not direct attention away from the characteristics of the thixotrope or to part taken by those characteristics in the presence of water in the layer in which blistering occurred.

28 The Referee also addressed matters raised by Professor Shanks relating to the contribution of glass fibres to there being too much hydrophilic character in the resin. Professor Shanks pointed out the possibility that the plaintiffs may have used a higher glass fibre content than other manufacturers and that this may have contributed to increasing hydrophilicity (Report para 37). The Referee discussed this possibility, and disposed of it on grounds which in my opinion were sound. One was (Report para 38) that there was no evidence that the plaintiffs had changed the glass fibre levels or glass fibre types at any point of time which would explain the occurrence of blistering when Hetron 922 was used. The Referee also (Report para 39 and following) discussed another mechanism referred to by Professor Shanks in which the glass fibres were clean, that is, not sized or not adequately sized, and acted as conduits for water to enter by capillary action. It was the Referee's view (Report para 39) that this was not either adequately proved nor disproved by the evidence. He referred (paras 41 and following) to the possible contribution of further high-resolution micrograph and associated microanalysis to an understanding of this matter, and commented (paras 42, 43 and 44) on the inadequacy of some micrographic material which had been given to him and on some discussion which had taken place about whether there should be further analysis. For reasons stated he adopted the view put to him by Professor George that further micrographic analysis, which would be expensive and would not necessarily be conclusive, was not justified on a cost benefit equation. In reaching this conclusion of the Referee did not adopt a different view put forward by Professor Shanks about the appropriateness of embarking on further micrographic examination.

29 Senior Counsel for the defendant contended to the effect that these conclusions and the basis for them were seriously to be criticised and that the appropriate course was not to come to a conclusion without embarking on the further micrographic investigations and ascertaining what information they produced and whether it was useful. I do not uphold this criticism. The Referee’s expertise put him in a good position to decide on the likely utility of further investigations. Furthermore it was not contended by Professor Shanks that further investigations were likely to be conclusive; he pointed to further investigations which might possibly assist. The opportunity had been before the defendant and indeed (I would respectfully say) before Professor Shanks for many months to decide whether or not to embark on such investigations and whether to bring results forward. I do not think that the utility of the Referee's conclusions is in any real way compromised by this criticism.

30 Senior Counsel for the defendant made many adverse observations and criticisms of the Referee's report. I will endeavour to deal with the substantial grounds put forward, but not with some observations which I regard as incidental to or illustrations of substantial grounds. The principal matter was expressed in the defendant's written outline of submissions in these terms:

45. In answering questions 1 and 2, the Referee's reasoning, in attributing the cause of pool failures to Hetron 922, appears to be that:
(a) Pools that did not use the Hetron 922 did not fail;
(b) Pools made by Tranquility using the Hetron 922, between April 2002 and 2004, did fail;
(c) Accordingly, the failures were caused by the use of Hetron 922.
46. Notably, what this analysis fails to come to terms with is the mechanism of failure and, pertinently, whether the mechanism was as alleged by Tranquility, namely, the inappropriate inclusion of the hydrophilic thixotrope rendering Hetron 922 unsuitable for use in pool manufacture.
47. Absent any such conclusion as to the mechanism, the analysis determines no more than Hetron 922 is capable of being used in pool manufacture in a way that may cause pools to ‘fail’.
48. Such an analysis is of no, or little, value, however, in determining whether Hetron 92 was unmerchantable.

31 I do not accept this principal submission.

32 The outline of the Referee's reasoning in Senior Counsel’s para 45 does not in my view do justice to the Referee's reasoning. The Referee's reasoning is not found only in the Summary, as the Summary must be understood with all previous passages of the Report, and in the context of expertise, both of the Referee and of the parties’ experts. The report should not be addressed by treating its summary as a syllogistic exposition of the grounds on which the conclusions are produced; the Referee's conclusion should be understood as the product of his judgement aided by his qualifications and experience, a process quite different to a chain of mathematical or other logical reasoning. I do not regard it as correct to contend that the Referee's analysis failed to come to terms with the mechanism of failure. To my reading, the Report makes an appraisal of and gives consideration to the available material bearing on the mechanism of failure, and the conclusions go as far as the Referee, with the advantages of expertise, found was justified by all the previous consideration; and did not go any further. On a fair understanding, the Referee did not make any findings about what in detail was the mechanism by which the inclusion of the hydrophilic thixotrope in Hetron 922 caused the pool failure; the Referee was fully informed of what was contended on behalf of the parties about relevant mechanism, and it should be understood that if he regarded it as established on the balance of probabilities that some particular mechanism could be identified, he would have stated that it was identified; he would have adopted that mechanism. The terms in which the Referee answered question 1 – what has caused the pool failures? – show that it was his conclusion that the causes and mechanism of failure could not be stated within a greater degree of rigour or particularity than the terms in which he stated them. He did not state that the cause could not be ascertained because the cause could not be understood or stated with scientific rigour or in an altogether satisfactory way involving exposition of the mechanism of failure. The Referee was told, correctly, in the Schedule to the Order that he was to act on the balance of probabilities, and he did so.

33 Paragraph 47 of this Submission understates the effect of the Referee's finding. The report goes further than stating that Hetron 922 is capable of being used in pool manufacture in a way which may cause pools to fail; it was clearly found in Report para 104(1) that the use of Hetron 922 with the hydrophilic thixotrope did cause the pools to fail. It was not correct to say that the conclusions are of no or little value; the conclusions are relevant to the issues, and should be understood as stated in the most precise terms that are available in the Referee's view. It is not an appropriate criticism to say that a fuller explanation or more precise terms might well have been more useful; a conclusion more closely conforming to the ideal was not, in the Referee's view, available. It was not, as paragraph 40 of the Submission appears to assume, the Referee's task to make a finding about whether Hetron 922 was of merchantable quality; the Referee's finding on causation leaves much for consideration by the Trial Judge on the question of merchantability, but in my opinion it was not correct to contend that the Referee's answers and the reasons given were of no value or of little value in determining that issue. The fact that causation can only be stated in the general terms in which it was stated, and not in more highly particular terms, may well be advantageous to the defendant on the issue of merchantability; I leave that consideration to the Trial Judge. Indeed, the terms of the questions which the parties agreed leave a great deal for consideration by the Trial Judge, no matter what degree of particularity the Referee was able to achieve in answering them.

34 Senior Counsel for the defendant observed in oral submissions (t.12/19-25) to the effect that the Report contains a no conclusion that the product was deficient because it included a hydrophilic thixotrope, something inappropriate in the manufacture of fibreglass swimming pools. Counsel said “To the extent that there is no opinion expressed about that essential issue, the Report lacks any utility whatsoever.” In my opinion these carefully crafted observations were unjustified when considered with the terms of the questions referred and the terms of the Report particularly the answers at para 104 to Questions 1 and 2. Whether or not the product was of merchantable quality, or was deficient to some relevant standard remains to be decided by the Trial Judge; having regard to the terms of the questions, and also I should add the nature of the Referee’s expertise, it was always likely that his answers to the questions referred would leave such questions to the Trial Judge. The submission, put in several forms and at different parts of the argument, that the Report lacks any utility whatsoever is rejected.

35 The Defence denies allegations made by the plaintiffs that the pool failures have resulted from use of Hetron 922 and that Hetron 922 is not of merchantable quality, and has given particulars of those denials in paras 20 and 27 of the Defence.

36 These particulars make a contention upon which the defendant places great reliance, to the effect that at or around the period when it supplied Hetron 922 to the plaintiffs, the defendant supplied the same product to a number of other purchasers some of whom used the product to manufacture swimming pools; and that the defendant has not received and is not aware of any complaints in relation to the product supplied to those purchasers. (Evidence shows that there was one complaint, which was not pursued). The Particulars are carefully crafted to say, and to say no more than that there had been no complaints; the Particulars do not say how such of the defendant’s purchasers as used Hetron 922 in swimming pools made use of the product, and do not say that there was in fact no blistering or other difficulty. One can, I suppose, put as much or as little detail into particulars of a denial in a pleading as one chooses, the object being to avoid prejudice by surprise, possible adjournment or other causes of delay in the course of a hearing. The particulars and what they disclose about the defendant’s position turn essentially on the absence of complaints and not on any underlying substantial matter about what took place, and embark only in the most minimal way on a demonstration of facts supporting the denials that Hetron 922 caused the blistering, and that Hetron 922 was not of merchantable quality. There were some references to these contentions of the defendant relating to supply to others and the absence of complaint in the course of the reference. Evidence on behalf of the defendant showed that the Hetron 922 supplied to the plaintiffs was only 11.14% (that is, about one ninth) of the total quantities of that product supplied to swimming pool manufacturers. It was made clear to the Referee during the reference that the facts in para 20 of the Defence were relied on. It must be said, from the terms of the Report and also from other material showing what took place during the reference, that the Referee took very little notice of them. I do not see this as inappropriate.

37 The fact if it is established that the defendant supplied Hetron 922 to a number of other manufacturers and received no substantial complaints enters hardly at all on the subject matters of the Reference. The swimming pool manufacturers were referred to only by a code in the material produced by the defendant; their names and other identifying particulars were not given. Unless material was brought forward showing who the purchasers were, which of them made swimming pools or any other products which are in any way relevant, how many they made, what their manufacturing techniques were, to what uses their products were put, and the contractual terms on which they dealt with the defendant and with purchasers from them, the subject of any inference to be drawn from the defendant’s experience in dealing with them, with respect to complaints or in any other respect, is not really opened for consideration. Considerations of those kinds could not begin because the defendant did not bring forward for the Referee’s consideration, or bring to the knowledge of the plaintiffs, any material beyond particulars of the quantities of product supplied, and did not identify the particular customers who purchased the product. The defendant declined to identify the purchasers, claiming that the information was commercial-in-confidence. In the absence of that information, there were no available lines of inquiry which could have led to any real understanding of what happened to the Hetron 922 in the hands of purchasers, or of whether the absence of complaints by purchasers had any real force or significance. The Referee referred to the incidence of pool failures for other manufacturers using Hetron 922 at paras 64 and 65 of his Report. He dealt with the matter briefly indeed. He said that (para 65): “In practical terms I am satisfied that an extension to other Pools might add unsustainable complexity, time and cost to this matter." This treated the defendant gently indeed. The complexity included overcoming the defendant's refusal to identify the other pool manufacturers, and embarking on comprehensive investigation into their business and affairs which the defendant had not undertaken, or offered to undertake, or contended was relevant; indeed the defendant had put a mask over the subject by referring only to the absence of complaints and not to the underlying facts.

38 Contentions which built upon this subject appeared in several forms at different places of the defendant’s case before me. The defendant’s complaints on this matter have the effect of complaints that its claim that the purchasers’ identities were commercial-in-confidence was accepted, was not overruled, and that no inquiries were pressed by the Referee, or for that matter by the plaintiffs, into what underlay this allegation relating complaints. I do not regard it as open to the defendant to make a complaint which has the effect that the Referee accepted its claim of confidence, and did not press on past it to make or insist on making investigations and inquiries about what in fact had happened to the product and what the experience of purchasers had been. The experience of others in using the product is no doubt relevant, but only if all relevant circumstances are known and are considered. The key to any such investigation was in the defendant’s hands, and the defendant did not produce the key.

39 The defendant could have brought forward information or evidence about what indeed happened to Hetron 922 in the hands of other manufacturers; but did not do so. The defendant did not formulate its contention about the relevance about the whole subject in any way which opened what the manufacturers did; the matter put forward was limited to the absence of complaints. It is not in my judgement a criticism of the Referee that he did not point out or bring the defendant around to the view that much more was necessary before its experience with other pool manufacturers was any basis for any useful conclusion.

40 In my interpretation the essence of the defendant's complaint is that there was a large avenue of investigation which conceivably could have been opened up, which the defendant did not contended was relevant in its pleadings, and did not open up, and that the Referee did not open it up either. These considerations give no substantial ground for rejecting his Report.

41 It was contended to the effect that the answer given by the Referee to Question 3 – “It is probable that over a decade most if not all Pools will fail" - is not supported by reasoning relating to the proportion of the pools manufactured by the plaintiffs which are likely to fail, and is not supported by any passage in evidence or other material submitted by experts. The experts do not seem to have adopted, in the material to which I was referred, any clear or particular proportion. The Referee also said (Report para 63): “On the basis of personally investigating failures in polymers, it is commonly observed that when defects are inherently present, deterioration inevitably occurs. I agree with Professor Shanks that the precise number may not be rigorously protecjed, but it is likely to be at least a majority of Pools.” Senior counsel contended that the Referee has not provided an explanation for what it is about the plaintiffs’ pools that have not failed which differentiates them from the pools which had failed, and that the expert opinion does not provide any available foundation whatever to the answer given to Question 3.

42 In my opinion it was not necessary that the answer given to Question 3 be supportable by some assessment of the proportion of likely failures in the material submitted to the Referee by experts. The Referee was in a position to make his own assessment, with the aid of his expertise as well as of the material submitted to him. So far as appears from any material which I was referred to, there was no exposition of differentiating factors which would tend to set the pools which have failed aside from the pools which have not yet failed, or to show that the processes, whatever they are which have already produced failures are not likely to produce more failures with the passage of time and exposure of pools to water. The answer to Question 3, which is not expressed in a highly prescriptive way, deals with probabilities and leaves open a wide range of possible outcomes, and this is a continuation of line of reasoning which produced the answers to Questions 1 and 2; assessment, made with a broad brush, of the probable outcome and cause. If this is the assessment which the Referee made, it was appropriate and it was his duty to report it; his expertise placed him in a position to make that assessment, and also to see whether his assessment should be based on that broad-brush approach, or could be based on some more detailed exposition.

43 In my opinion I should not uphold any of the grounds on which adoption of the Report was resisted. The Report when adopted will probably assist the Trial Judge to some degree, although it will leave a great deal open to the Trial Judge’s consideration. In my opinion the Report has sufficient utility to warrant its adoption.

44 There are other claims in the plaintiff's Notice of Motion with which I was not asked to deal.

45 My Orders are:

1. Upon the plaintiffs’ Notice of Motion of 27 September 2007 claim 1, order pursuant to UCPR 20.24 that the Report of Professor Robert Burford of 20 September 2007 be adopted in whole.

2. Direct that the plaintiffs approach the Registrar in Equity for an appointment for hearing the remaining claims in the Notice of Motion.

3. Dismiss the defendant’s Notice of Motion of 5 October 2007.

4. Order that the plaintiffs’ costs of Claim 1 in the plaintiffs’ Notice of Motion and the plaintiffs’ costs of the defendant’s Notice of Motion be plaintiffs’ costs in the proceedings.

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