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Federal Court of Australia |
COURT
IN THE FEDERAL COURT OF AUSTRALIACATCHWORDS
Trade Practices - misleading or deceptive conduct - representations as to operating hours and service history of a compressor - duty of disclosure by vendor of goods - purchase air compressor by drilling contractor - financial failure of drilling contractor - compressor contributing factor - other factors dominate - measure of damages - loss of chance of prof loss of chance to avoid loss - small chance of success with suitable compressor - chance lost - evaluation of lost chance cross-claim - whether agreement to sell hire purchase agreemen whether contract rescinded.Trade Practices Act 1974 s.52, s.53A, s.82, sub-s.87(1A)
Hire Purchase Act 1959 s. 2(1), s.5(3)
Abundant Earth Pty Ltd v R. & C. Products Pty Ltd (1985) 59 ALR 211
Hutchence v South Seas Bubble Co. Pty Ltd (1986) 64 ALR 330
Clark Equipment Australia Ltd v Covcat Pty Ltd (1987) 71 ALR 367
Yorkshire Dale Steam Ship Co. Ltd v Minister of War Transport (1942) AC 691
Munchies Management Pty Ltd v Belperio (1988) 84 ALR 700
Elna Australia Pty Ltd v International Computers (Australia) Pty Ltd [1987] FCA 230; (1987) 16 FCR 410
Pavich v Bobra Nominees Pty Ltd (1988) ATPR (Digest) 46-039
HEARING
PERTHCounsel for the Applicant: Mr P.P. McCann
Solicitors for the Applicant: McLeod & del Piano
Counsel for the Respondent: Mr P.G. McGowan
Solicitors for the Respondent: Phillips Fox
ORDER
There be judgment for the applicant on the claim in the sum of $51,545.There be judgment for the respondent on the cross-claim in the sum of $49,365.42.
There be liberty to apply within fourteen days on the question of costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
DECISION
Introduction2. For the past twenty years, Colin Douglas Koosney has worked as a contract driller in the mining exploration industry. Lacking any significant capital equipment for much of that time he was limited to the provision of his skills and labour. In 1984 he formed Kewside in Queensland and continued to provide his services through that company. In January 1986 he decided to acquire a drilling rig of his own. At that time an auction was pending in Perth of secondhand plant previously owned by a business known as Interair Drill. Koosney, who was in Brisbane, telephoned Leigh Davies the principal of Davies International, a dealer in secondhand drilling equipment. He asked him to purchase at the auction a secondhand truck mounted Schramm 985 heavy duty percussion drilling rig. Davies agreed and did so on the basis that there would be no obligation on Kewside to acquire the rig from Davies as he had intended to purchase it for resale in any event. He bought the rig at auction and a day or so later Koosney flew to Perth. At Davies yard at Belmont he inspected the rig, started it up and in his words "played around with it for a day or two". He decided that the price, which was about $75,000, was reasonable but that it would be necessary to upgrade the equipment with a replacement air compressor and drive unit. Koosney paid Davies a deposit of $7,517 on 20 January. The balance of the purchase price was raised from Esanda Limited ("Esanda") who acquired the rig and leased it back to Kewside. Koosney also engaged Davies in what appears to have been a rather loose arrangement to act as a consultant to help him arrange contracts and get the rig operating to his satisfaction. According to Davies he was acting as Kewside's administration manager, a position from which he later resigned because he was not consulted about some of the equipment being fitted to the rig.
3. Koosney proposed to offer his services and those of the rig for reverse circulation drilling, a technique involving the use of an air driven hammer to pulverize rock at the bottom of a drill hole and compressed air to force dust and chips up the drill pipe to the head of the rig and from there to a sample collector. Compressed air was also used to operate an hydraulic system to force drill pipes into the drill hole.
4. There were two small six cylinder Schramm piston compressors already fitted to the rig. They were of a type known coloquially as "double trouble" because of their obsolete design and tendency to break down as they became older. Koosney decided to fit a larger compressor of the Sullair brand in lieu of the smaller units. Warman at that time had the franchise for the sale of these compressors. Davies, who had managed the drilling division of Warman for about two years, recommended that Koosney speak to Ian Speer then Manager of the Sullair Division. They had several meetings of which Davies recalled three. The first of these took place at Davies' office at Belmont in February 1986. Koosney had had unrelated dealings with Speer over the phone on previous occasions but had not met him in person. He and Davies told Speer that he wanted to fit out a Schramm rig for percussion drilling and that a serviceable compressor was needed to replace the existing compressors for that purpose. Koosney specified a compressor which could deliver 900 cubic feet per minute (cfm) and generate a pressure of 350 pounds per square inch (psi). Davies thought this a little large but Koosney said he wanted to be able to drill deep holes. Speer mentioned the price range for new units but at $135,000 to $140,000 they were too expensive and discussion quickly turned to secondhand compressors.
5. Koosney told Speer that he wanted a unit with "low hours". He intended to use the rig in exploration drilling for minerals and because of the isolated locations in which it would be operated the compressor had to be reliable. The evidence does not allow the sequence of conversations that followed and the number of meetings over which they occurred to be set out with any precision. It is apparent however that at the first meeting or a short time later Speer told him that Warman had a secondhand Sullair 900 cfm/350 psi portable rotary screw air compressor. It had, he said, been imported new into Australia, done pipeline pressurization testing work, been out on hire and was presently on hire in Victoria. He said that it was a type of compressor that was eminently suitable for the proposed application. The price would be between $63,000 and $70,000. At some point in their conversations Speer told Koosney and Davies that he thought the machine had had about 1,050 hours of operation.
6. Early on in their discussions Davies made mention to Speer of rumours that
some Sullair compressors used in Indonesia or Malaysia
and brought back into
Australia had been badly treated while overseas. He told Speer not to sell
Koosney "one of those brumbies
from Indonesia or Malaysia". Speer laughed
and said "No". Davies could not recall the precise words he had used but said
the
conversation had been to that effect. And later at Warman's yard, on the
steps up to the office of Warman's engineer Kevin Lawson,
when Koosney was
about to commit himself to the purchase, Davies renewed his query. He said
to Speer:
"I wouldn't let Col sign the papers if it was one ofSpeer replied:
those overseas compressors."
"No, it is definitely not one of those, it comesRe-examined on these conversations Davies said:
from Melbourne."
"I cannot recall whether I said Indonesia orAs Speer was aware, the compressor had been used in Malaysia. Indeed, that was a factor he took into account in arriving at his estimate of the number of hours that it had been operated. When asked whether there had been any discussion with Koosney and Davies about overseas use, he said at first that he did not think there was a specific discussion although he remembered a question being raised whether the machine was "one of those Malaysian machines". Davies, he agreed, had asked him the question at his yard in Belmont and "once memorably on the stairs going up to Kevin's (Lawson's) office". He had replied:
Malaysia right. But it would be somewhere in the
terms of - I know I said 'definitely' because that
was one of the major points which stuck in my mind
and has done ever since, it was 'Ian, its
definitely not one of those engines that's been to
Indonesia - Malaysia' and he said, 'No it
definitely comes from Melbourne'. And I think he
must have thought so."
"No they are not the Malaysian machines."But this answer, he said, had to be understood in the context that the rumours to which Davies had referred concerned machines belonging to the Singapore division of the Sullair Corporation of the United States. They had been used in Singapore and later brought into Australia with suspect engines. They had been offered for sale by Warman with notice of their possible mechanical difficulties and had been priced down accordingly. Davies had himself offered to purchase the machines which were selling for about $34,000. But he was outbid by another party. Against that background Speer explained:
"So, when I answered him, I said 'No, these were notThe unit he had in mind to sell to Kewside had come to Australia, gone to the Burrup Peninsula then to Malaysia and back to Australia. The substance of his evidence was that he had told Davies that it was not one of those which had been the subject of the rumours to which Davies was referring.
the Malaysian machines' in that they were not the
machines which were based in Singapore which were
property of Sullair Corporation United States
Singapore Division."
7. Cross-examination of Davies did not precisely address the point made by Speer. He was asked whether one of the rumours he had heard related to machines imported direct from Sullair U.S.A. into Malaysia. He recalled someone from Sullair having said something to him on this issue but could not remember precisely what. The only time Speer told him definitely where the machine had come from was on the stairs to Lawson's office when he said it had come from Melbourne. He did not ask and was not told anything more about its history beyond the fact that it had "low hours".
8. In his closing submissions counsel for Kewside expressly disclaimed any suggestion that Speer had acted dishonestly although it was contended that his answers on the question of the compressor's overseas service were misleading and negligent.
9. According to Davies, had he known that the compressor in question had been
to Malaysia, he would have advised Koosney very strongly
not to buy it. He
had heard he said "...so many adverse remarks about the overseas motors and
compressors...". Koosney had not
heard these rumours himself. He heard of
them for the first time when Davies raised the issue with Speer at Belmont.
Asked in cross-examination
whether Davies did not say words to the effect
"This is not one of those compressors that was imported into Malayia is it?"
he agreed
that that was the substance of what was said. The question was
repeated:
"Did Mr Davies say to Speer words to the effect:Koosney replied:
'This is not one of those compressors that was
imported into Malaysia is it?'."
"Basically the substance is - yes, it could have10. It was put to Koosney and he agreed that his concern was not about whether the machine had been to Malaysia but whether it had been badly serviced and maintained. And further in cross-examination:
been yes. It was what - was - whether the machine
had been to Malaysia or overseas."
"Q. ...are you now telling us that it is not so11. Before making a final commitment Koosney told Speer that he was interested in purchasing the compressor and would like to think about it. He asked him to consider what additional work would be necessary to bring the rig up to a satisfactory standard. He then left Perth and went to Cue where he was engaged under a contract with Kelly Drilling.
much whether it had operated in Malaysia or
Indonesia that mattered but the service
history and the way it had been looked after:
is that what mattered?
A. Yes, that is what matters yes."
12. Speer inspected the rig in company with Geoff Sebo another Warman's
employee and prepared a written quotation to cover acquisition
and fitting of
the compressor and upgrading of the rig generally. The quote was sent to
Koosney at Cue on or about 5 March 1986.
It was misdated 5 March 1985. The
cost of the compressor was quoted at $55,000. A six month warranty "against
wear or loss of
capacity" was offered covering the "air end only". A further
$25,030 was quoted for upgrading the rig and fitting the compressor
to it.
There was no quote for any work on the engine beyond shifting the radiator
from the front to the side. The warranty offered
was "limited to that offered
by manufacturers of new parts and standard Warman Warranty on workmanship".
The "standard Warman International
Terms and Conditions" a copy of which was
attached to the quotation were said to apply to the sale. Terms of payment
under the standard
conditions were "nett cash on delivery except when the
PURCHASER possesses a current credit account with WARMAN in which case the
terms of payment shall be nett cash free of exchange by the twenty-eighth day
of the month following that month during which the
goods are delivered or are
ready for delivery". Clause 14 of the standard conditions dealt with
warranties and included in sub-cl.14.7
a limitation provision in the following
terms:
"LIMIT OF LIABILITYBy cl.20 title to the products remained in Warman until all payments had been made. The clause concluded:
Except as otherwise provided by State or Federal
law WARMAN gives no warranty other than that
contained herein in connection with the sale or use
of its products or services. WARMAN'S liability on
its warranty shall in no event exceed the cost of
correcting defects in the product sold or the
services supplied and shall not include:
(a) Expenses incurred by the PURCHASER in an
attempt to repair or rework any allegedly
defective product or service.
(b) Losses, costs, expenses, liabilities and
damages (including loss of profits, all
liabilities of the PURCHASER to its customers
or third persons, and all other consequential
damages) whether direct or indirect, and
whether or not resulting from or contributed,
to by the default or negligence of WARMAN, its
agents, employees and sub-contractors, which
might be claimed as the result of the use or
failure of the product sold or the services
supplied."
"Warman shall have the right to repossess theKoosney, who was still working at Cue, telephoned Speer and Davies and also checked that his brother, Rodney Koosney, would be available to help him work on the rig. He then travelled to Perth, met Speer with Davies in Warman's office and gave him a Kewside purchase order dated 11 March 1986 for the supply of a Sullair compressor and the upgrade of the rig in accordance with the quotation with the addition that:
products in the event of non-payment hereunder."
"We require delivery ex your works by 24/5/86 as weThe order concluded with the following:
are a penalty rate 1% on our contract which is
$2,500 per week. Acceptance of our order by you
brings the same penalty which will apply to you for
late delivery after 24/5/86 $2,500."
"Item 3 A weekly progress report is expected."So far as the penalty provision was concerned, Speer said that the rate proposed was unacceptable to Warman and the order was amended. The amended order was not in the evidence but nothing turns on that as no penalty is claimed.
13. At the time that the order was placed there was a discussion between
Koosney, Davies and Speer in the office of Kevin Lawson,
Warman's engineer.
The discussion covered the requirement that Warman should give Davies a weekly
report on progress. He was authorised
to approve any additional work that
might be necessary if any faults were found in the machine in the course of
the work.
Installation of Compressor and Upgrading of Rig
14. Having placed the order, Koosney returned to Cue to continue his work for Kelly Drilling. Neither he nor Davies received the promised weekly reports. He kept in contact with Davies however trying to monitor Warman's progress. Some weeks passed and it does not appear to be in dispute that there was an initial delay in commencing work on the rig. Koosney decided to go to Perth to see for himself what was happening. The date upon which he went was not in evidence although I infer from the date on which the fitting work was completed that it was no later than the second half of April. Koosney found that the rig had been stripped down and work started on the mast. He complained to Speer about hydraulic hoses on the rig being left open to the air. Normally, he said, when such hoses are disconnected the ends are plugged with screws to prevent contamination. He decided to stay in Perth until the rig was ready and arranged for his brother Rodney to take over Kewside's work for Kelly Drilling at Cue.
15. By 8 May the work had been completed and the rig was started up. According to Koosney start up was achieved "with great difficulty" in the presence of himself, Davies, Sebo and the men who had actually carried out the work. The Warman representatives attributed the difficulty in starting to the cold weather and the fact that the rig had been idle for some time. When Koosney tried to raise the mast, hydraulic hoses leading from the control panel to the rotation head on the mast were stretched. The hoses were steel braided and the stretching caused pinhole leaks, resulting in a fine spray of hydraulic oil during operation. It also weakened couplings on the hoses to such an extent that they tended to come away from their fittings under any sudden surge of pressure.
16. David Youngson, who was then employed by Warman as a field service representative, was a qualified fitter turner and machinist who had had considerable experience in working with hydraulic cranes and their engines. At the time of trial he was a director and operations manager for a drilling contractor called Alcor Holdings Pty Ltd. He had been involved in the latter part of the work on Kewside's rig connecting up hoses and other components which had been shifted from their original configuration on the Sullair compressor. In the course of the work he had started it up without any problems. He also started it in Koosney's presence on 8 May without difficulty. Youngson made no reference to the alleged stretching of the hydraulic hoses and was not cross-examined on it. Koosney expressed no dissatisfaction with what Warman had done. He seemed, according to Youngson, to be fairly happy with the result. Koosney however claimed that he was "totally pissed off with Warman" for delaying him on his contract. He spent some three days, he said, trying to sort out the hydraulic hose problems. On 11 May he took possession of the rig with a view to taking it to Vickers Keogh Pty Ltd ("Vickers Keogh") in Kalgoorlie, a company which he regarded as qualified to deal with hydraulics. Asked why he did not leave it at Warmans to resolve the hydraulic problem he said that at that stage he had "no confidence in the Warman personnel. They were incompetent to do it." Indeed, on Koosney's evidence, when he left the yard on 11 May he was not on speaking terms with the Warman management. In spite of this claimed dissatisfaction it is common ground that he and various of the Warman personnel went out to dinner together at a Chinese restaurant on the same night and later to a Perth nightclub. Koosney described it as "a big party" and conceded in cross-examination that they were in good spirits hopefully having finished the job.
17. At the time, Kewside had been engaged by a company called Hunter
Resources to carry out drilling work at Black Flag near Kalgoorlie
and
Leonora. But the work could not begin until the rig was ready. Koosney took
it to Vickers Keogh early on the evening of 12
May. On 14 May he instructed
that company to repair leaking control valves and replace the damaged hoses.
The valves had been leaking
from the outset and the hoses were those damaged
when he tried to raise the mast in Warman's yard.
The Black Flag Job
18. On 17 May the work had been completed at a cost of $1,645 and Koosney took the rig out to Black Flag which was about 45 minutes drive from Kalgoorlie. There he raised the rig mast and attempted to drill a hole. The attempt failed because of a problem with the reverse circulation drill rods unrelated to the work done by Warman. This gave rise to a delay of about 14 shifts while he argued with the suppliers and arranged to borrow replacement rods from Western Mining Corporation. Davies came up to Kalgoorlie for a day at this time to assist with modification of the drill system. Koosney then recommenced drilling with the borrowed rods. However, he experienced further difficulties and called out Vickers Keogh to repair a leaking seal on the top rotation motor and to supply a new motor to replace one which had broken down. The defective motor was taken to Kalgoorlie and the new and repaired motor brought back to site and fitted. For these services Kewside was charged $1,679, including the cost of materials. Subsequently, an hydraulic hose burst and the control panel began leaking again. Vickers Keogh replaced the hose and carried out repairs to feed circuit hydraulics on site. The charge for these services was $722.35. The continuing difficulty with hydraulic hoses was attributed by Koosney to contamination and to excessively high settings for pressure relief values regulating the maximum levels of fluid pressure in the hydraulics system. He blamed Warman for both of these problems, saying that the setting of the pressure valve was integral to the fitting of the compressor to the rig. He also alleged that the contamination of the hydraulic system by sand arose when the rig was sandblasted in Warman's yard with hoses open to the air.
19. Counsel for Kewside sought leave at trial to amend the statement of claim to raise the new allegation that Warman had breached implied terms of the contract in failing to carry out the upgrade with reasonable skill and workmanship. Specifically this related to the stretching of the hoses, the adjustment of the pressure relief valve, the use of incorrect hoses and contamination of the hydraulic oil with sand. When it became clear that if the amendment were allowed an adjournment would be sought by and granted to Warman, it was decided not to proceed with the amendment. So far as Kewside relied upon contract therefore, it relied upon terms and conditions relevant to the sale of the compressor only.
20. Throughout the Black Flag operation Koosney experienced difficulties getting the compressor started. According to how cold the morning was, it took him an hour to an hour and a half. Once up and running it performed reasonably well. When an hydraulic hose failed however repair or recoupling would take between 10 minutes and an hour. If the compressor engine were still warm when repairs were completed it would take only 5 or 10 minutes to restart. If it had been off long enough to cool down completely it took as long to start as in the morning.
21. While the rig was still at Black Flag, Youngson from Warman visited the site at Speer's instruction. He discussed the slow starting with Koosney and observed that there was a problem. However he was unable to determine its cause. He checked the crank speed of the engine and the fuel system, but could not find any explanation in these areas. He also had some discussion about the drill rod difficulties that Koosney was experiencing and took some measurements for him relating to the operation of the underhead air swivel which transferred air from the compressor to the drill line.
22. On 24 June 1986 Koosney decided that his continuing difficulties with the
rig were preventing him from making any substantial
progress with the Black
Flag work and he informed Hunter Resources that he would not be able to finish
the job for them in the time
required. Another rig from another company
became available and he took his to Vickers Keogh "to get the hydraulics
sorted out".
The main delay on the job was due to the defective rods which
cost him fourteen 10 hour shifts. Hydraulic problems were responsible
for "a
fair bit of it" and starting problems for "a small percent, about twenty
percent or something". At this stage Kewside had
received no payment from
Hunter Resources although eventually it was paid $5,743 for the drilling that
was done. All told there
were 8 days in the period from 18 May to 24 June in
which drilling took place.
Repairs by Vickers Keogh
23. The work carried out by Vickers Keogh went beyond repair. On Koosney's instructions modifications were carried out to the rod loading boom, the breakout table and Cease spanners. The rod loading boom situated at the top of the rig mast is operated by hydraulics and used for holding and placing drill rods in the rotation head. The breakout table located near the bottom of the rig is a component whose function was not described with precision but it is evidently at or just above that table that drill rods are disconnected from the rotation head. A Cease spanner is applied to rods as they are disconnected to prevent continued rotation and escape into the drill hole.
24. Other work done included overhauling and replacing the upper rotation
motors on the mast head (referred to in the invoice as
hydraulic motors). A
Pahl filtration system was installed which was designed to keep the hydraulic
system free of contaminants.
When the rig originally came out of Warman's
yard it had been fitted with a standard Schramm filtration system, described
by Koosney
as "fairly outdated and fairly obsolete". Repairs were also carried
out to leaking valve banks in the control panel. These leaks,
according to
Koosney, were causing loss of pressure in the hydraulics and consequent loss
of power. The cost of the work carried
out by Vickers Keogh on this occasion
came to $15,403 and was completed by the end of June or early July.
Refinancing with UCL Finance
25. In the meantime, on or about 16 June, the rig which was originally leased
from Esanda, was refinanced under a new lease agreement
with UCL Finance
Limited (later known as Advance Commercial Finance Limited). This step was
taken as part of a restructuring of
Kewside's finances to discharge collateral
security over land in favour of Esanda and enable Kewside to raise additional
operating
capital by way of bank overdraft. UCL Finance paid out Esanda and
entered into a new lease agreement with Kewside supported by a
bill of sale
over other items of plant. The plant so encumbered comprised:
(a) 1980 International truck with water tank and26. UCL Finance was supplied with a valuation of the rig prepared by Davies at Koosney's request. It was set out in a short typed memorandum of less than half a page which, after describing the rig by its various identifying numbers went on:
hydraulic crane.
(b) 3.8 metre tandem fuel trailer.
(c) Mobile Twin Sample Cyclone
(d) 24 x 6 m x 4 inch reverse circulation rod line
(e) Dresser D50 Percussion Hammer and Bits
(f) 2 x 450 cfm x 250 psi Air Compressors
"This unit has been re-built and fitted with a newThe patently incorrect assertion that the compressor was "new" and the rather generous proportions of the valuation offered, suggest that Davies was at the time firmly in Koosney's camp. His approach to factual accuracy in that respect suggests that his evidence should be treated with some caution.
Sullair 900 CFM x 350 PSI air compressor powered by
12V71GM Hydraulic pumps fitted to 12V71 driving the
rig hydraulics. The rig has been supplied with
brand new 4 1/2 inch 6 m reverse circle (sic)
drilling rods. The true valuation of the equipment
on todays market complete with equipment would be
$270,000"
27. In spite of Warman's continuing title to the compressor unit, the lease
was expressed to be of:
"1 x 1978 Schramm T985 HB Air Drilling Rig fittedThe careless disregard for both UCL's and Warman's rights in relation to the compressor unit evidenced by its inclusion in the lease does not reflect particularly well on Koosney. Nor does the false description of the compressor as "new". The refinancing arrangement allowed Kewside to use the land which was previously charged in favour of Esanda to raise overdraft funds of $16,000 with its bank. This money, he said, was applied to meet lease payments under the UCL Finance lease, to pay wages and other "bits and pieces".
with a new Sullair 900 CFM x 350 PSI air compressor
powered by G.M. 12V71. Hydraulic pumps fitted to
GM12V71 driving the rig hydraulics. Mounted on
Hendrickson Bogey drive 'Crane Carrier' with 6V53
GM series Diesel engine and RP Fuller Road Ranger
Gear Box.
Reg No. XPX 011 Serial Number 17270004 Chassis No.
600DOH13340"
28. On 9 July Koosney took the rig to a site at Mertondale about an hour's drive from Leonora where he had a further contract to drill for Hunter Resources. There was a two day delay when the truck carrying the rig became bogged but on 11 July he commenced drilling. He remained working at Mertondale until 22 July 1986. Because he was suffering from back problems he arranged for his brother Rodney to take over the work for a time while he sought medical attention.
29. Between 11 and 22 July the compressor operated satisfactorily except for difficulty in starting. It took between one and a half and two hours to get it running in the morning. Because of the continual winding over of the engine the batteries were becoming depleted and had to be recharged using a welder generator, a process which could take 20 or 30 minutes to complete. Aerostart, an ether based compound sprayed into the engine's air breathing system, was used to facilitate ignition. During the time at Mertondale the starter motor was replaced twice. In addition to these problems the engine leaked oil and a separator designed to remove oil vapour from the compressed air output did not work properly resulting in some contamination of mineral samples. The level of contamination was not unacceptable to the client but in the end Warman made available a replacement separator which Koosney fitted himself. The impact of these various problems was that he did not achieve at Mertondale the drilling rates that he considered he ought to have.
30. Koosney telephoned Speer while the rig was still at Mertondale. Speer decided to go up to the site with Youngson and have a look at the machine for himself. He recalls that when they first saw it, it was early in the morning and "bitterly cold". Koosney pointed to oil leaks and Speer remarked that they were merely cosmetic and would not damage his engine. Koosney left the site shortly after Speer and Youngson arrived. They remained there for three days. They commenced a tune up of the engine in accordance with the manufacturer's instructions. As they thought there might have been a problem with the injectors these were removed and taken to Kalgoorlie for examination by a firm called Scott Engineering, which specialised in the repair and maintenance of heavy plant and machinery. Speer and Youngson there saw Colin Hocking the service manager, explained that the injectors had come out of a 12V71 engine which was having difficulty with cold starts and asked him to test them. Although he did not have any test facilities, Hocking partially stripped two of the injectors and upon inspection of various internal parts could see no signs of obvious damage. He made the comment in his evidence-in-chief that there are a lot of things that can cause difficulty with starting other than injectors.
31. Speer and Youngson then returned to Mertondale, refitted the injectors and completed the engine tune up. Again there was a problem in starting. It took, according to Youngson, 15 to 20 minutes. They tried using an extra set of two 12 volt batteries in parallel with the two batteries already in place on the rig, but the start time did not improve. Speer's evidence differs from Youngson on this. His evidence was that with the additional batteries it only took 30 to 45 seconds to start the compressor. As to that, I am satisfied that there was a significant starting time problem extending well beyond a mere half minute.
32. Youngson took the side covers off the engine and inspected the cylinders. There he observed glazing on the liner of the cylinder walls. This he described as "a very hard surface that develops on the liner itself", caused by the engine not being used under full power. He agreed in evidence-in-chief with a view expressed in a report later prepared by Colin Hocking, that glazing is a contributing factor to low compression and was usually caused by extended periods of running under light engine load. He also agreed it was a condition that could arise in either a new or very old engine. He did not however accept a suggestion that an engine driving a compressor could only ever be running under load. The load would depend upon the pressure being generated by the compressor and this was a variable that could be controlled by its operator. Youngson said that glazing on the cylinder walls would cause difficulty in starting the engine. To get rid of it, it would be necessary to pull the engine down and deglaze the liners or replace them.
33. During this time Speer had one or more telephone conversations with Koosney. At one point he suggested that the problem had arisen because the hydraulic system was putting too great a load on the motor, a suggestion Koosney rejected because, as he said, unless something was engaged on the hydraulic system it was static. There were some exchanges between Speer and Koosney about the age of the machine, Koosney saying that it was "clapped out" and had done "a hell of a lot more than a 1000 hours". Koosney said he was at that stage just trying to keep it going long enough to get some of his money back. Speer said that when he and Youngson had finished at Mertondale he thinks he contacted Koosney and said "We have done all we can for the machine and it started satisfactorily for us". This was clearly inconsistent with Youngson's observations. In my opinion Speer had no basis upon which he could have said that the compressor was starting satisfactorily.
34. Koosney returned to Mertondale and found the double battery system hooked up. This saved time in recharging the principal batteries, but did not improve the starting time for the engine. He stayed on site for a few days then travelled to the Eastern States to be treated for a back problem, leaving his brother Rodney in charge of the contract.
35. Rodney Koosney started on site on 30 July 1986. He and his brother had
discussed his remuneration and although no precise agreement
was reached,
there seems to have been an understanding that Rodney's company Sanare Pty Ltd
would receive either a percentage of
income earned by the rig after deduction
of expenses or some fixed rate per metre drilled. The question of
remuneration was never
finalised. It was, in any event, somewhat academic as
Rodney knew at the time that Kewside was not making its way financially.
In
March or April his company had lent Kewside $5,000 evidenced by an invoice
recording the loan in which it was described as:
"...being for $5,000 as a loan to help you survive."Colin had told Rodney when asking for this financial assistance that he was desperate and needed the money just to keep going.
36. Rodney experienced difficulties with the rig from the outset. He claimed that it took him between two and a half and four hours to get the compressor started each day. On 31 July he had a problem with the drill hammer and had to travel to Kalgoorlie for a replacement. On 2 August he stopped drilling for 2 hours to strip down and clean the replacement hammer. On 3 August there was a 3 hour stand down because of damage to a welder said to have been caused by Hunter Resources. A further 2 1/2 hours was lost on 4 August while he travelled to Kalgoorlie in connection with the welder. On 7 August drilling was slowed down because of hard ground.
37. On 8 August the blower shaft on the compressor engine stripped. Rodney Koosney went into Scott Engineering in Kalgoorlie and obtained a replacement which he installed on site. But on 11 August the shaft stripped again and the rig ceased operation after 3 hours of drilling. At or about that time arrangements were made for Scott Engineering to inspect the compressor engine on site. Representatives of that firm working in Leonora at the time went out to Mertondale on Hocking's instructions and confirmed that the blower drive shaft had been stripped. Hocking sent them to site as the result of a call from Speer. Acting on instructions from Colin Koosney, Rodney then took the rig into Scott Engineering on 16 August. He subsequently left Kalgoorlie and returned to Broken Hill on 18 August. Between 30 July and 11 August he had drilled some 622 metres. Total revenue from the Mertondale job came to $24,694.
38. In the meantime, Speer had become increasingly concerned about Kewside's
ability to pay Warman for the compressor and the work
done on the rig. An
invoice had been sent to Kewside on 18 July for $56,216 being $55,000 for the
compressor and $1,216 for an oil
pump. A second invoice was sent on 8 August
for $49,365.42 being $25,030 for the upgrade of the drill rig and $24,335.42
for "...additional
activities associated with Schramm drill rig upgrade".
According to Speer, Warman had entered the transaction with Kewside knowing
that it was dependent on achieving a good cash flow but no payment had been
forthcoming and Koosney had given no indication of any
intention to pay the
accounts.
Examination by Scott Engineering
39. Speer formed the view that Warman could not repossess the compressor
while it was part and parcel of the rig. He devised a plan
which would give
Warman access to what was still its property by virtue of cl.20 of the
standard Warman International Terms and Conditions.
He said to Koosney that
if there were to be a dispute about the engine they should find some
independent arbitrator and that the
best person in this regard would be the
Kalgoorlie agent for Detroit Engines. He suggested that Koosney take the rig
to Scott Engineering
and have the relevant parts dismantled so that the true
source of the difficulties could be identified. Koosney agreed to this course
and Speer then instructed Scott Engineering to dismantle the unit and quote
for rebuilding it to new condition. His purpose however
was not to embark
upon a rebuilding of the compressor but to get it into a condition which would
enable Warman to repossess:
"For purposes of getting the thing dismantled so weAccepting this plan was made in pursuit of what Speer honestly regarded as a legitimate end, it was devious.
could repossess it, I had asked Scotts to quote on
a total rebuild of the engine to new
specifications. To do that they had to pull the
engine right out of the machine. To give us a
quote on just a partial rebuild or to ascertain the
damage, they would have done that with the unit in
frame which would not have left us with an option
of repossession."
40. Acting on the request from Warman, Scott Engineering stripped the engine
and quoted about $20,000 for repairs. Hocking made
certain observations
concerning the state of the engine in a report tendered at trial:
1. The cylinder liners appeared to be glazed, a factorThe kind of wear outlined in paragraphs 2, 3 and 4 is, according to Hocking's report, normally found in engines with operating hours ranging from between 3,000 to 4,000 upwards and/or engines which have been subject to poor servicing in the following respects:
contributing to low compression and usually caused
by extended periods of running under light engine
load. It could occur in a brand new engine or a
very old one.
2. Both camshafts were scored and required regrinding.
3. 23 of 36 cam follower rollers were scored and
required replacement.
4. The hardened faces on several gears in the engine
were pitted and required replacing. These included
the water pump drive, oil pump driver, oil pump
driver, rear idler and two internal oil pump gears.
1. Extended oil and oil filter change periods.He discounted the possibility that poor servicing by Kewside could have been responsible for these problems and observed:
2. Use of incorrect oil.
3. Extended fuel filter change periods.
4. Lack of basic maintenance.
"Assuming the engine had not been poorly servicedThe starting problems Hocking attributed to the glazing which he described as a hard polished surface on the inside of the liner formed out of unburnt fuel and other combustion products. When glazing occurs the piston rings are unable to seal effectively against the liner.
before Kewside acquired it, then even had Kewside
poorly serviced the engine during its less than 150
hours of operation it is unlikely that Kewside's
poor servicing would have caused the kind of wear
and tear referred to in items 2, 3 and 4 above."
41. It was put to him in cross-examination that he could not say whether it was long operating hours or poor servicing or some combination of both that was responsible for the condition of the engine. He maintained, notwithstanding the language of his report, that the wear he had observed was normally seen in engines with high operating hours which have also suffered poor servicing. He would not expect to see the sort of effect he did on an engine with a history of poor servicing but low hours. This observation did not extend to the cylinder glazing which he agreed was something that could occur irrespective of the age of the engine.
42. While the engine was still stripped down at Scott Engineering, Davies was
authorised by UCL Finance to examine and report on
the state of the rig and
the compressor. He took photographs and a video film of the equipment in the
yard. The video film was
later erased from its tape and the photographs
showed no detail of the engine or its parts. Davies is a qualified motor
mechanic
and has had experience in overhauling motors, although he has only
been involved in stripping down about 5 Detroit engines. He observed
that the
Detroit engine forming part of compressor 71948 had badly scored timing gears.
There was no damage however to the crankshaft
or "bottom end" of the engine.
The non-uniform distribution of damage to the engine led him to three
possibilities:
1. That the engine had been rebuilt.He did not say which was the most probable of those hypotheses, but his observations support those of Hocking.
2. That incorrect oil had been used which had caused
the top head wear.
3. The engine had done between 4,000 and 5,000 hours.
43. Youngson also inspected the engine at Scotts. He noticed, as at
Mertondale, that there was glazing on the liners but said that
there was an
absence of wear in the liner itself. Normally, he said, when the liner is worn
a lip forms around the top where the
upper piston ring stops its upward
travel. He also noted the presence of machined cross hatching in the
cylinders. Ordinarily cross
hatching would not be found in an engine with say
5,000 hours of operation. He had come across cross hatching at high hours
before
but only in a different type of engine. He was unable to observe
scoring on the cam shafts because they had been ground by the cam
followers.
He did see evidence of wear on the followers. It was marking of a kind
consistent with the passage of dirt. He could
not recall the pitting observed
by Hocking on the hardened gear faces although he did not deny its presence.
Pitting would suggest
corrosion. He disagreed with Hocking's estimate of
3,000 to 4,000 hours of operating life. In his opinion the engine had less
than
2,000 hours work. He was persuaded to that view by the absence of wear
on the liners. The scoring and pitting observed by Hocking
must have been due
to the presence of foreign matter or corrosion. That in turn could be
explained on Hocking's hypothesis of poor
servicing. Failure to maintain
regular oil changes could give rise to such problems. He agreed that glazing
of the liners could
be caused by the engine running on light load but
disagreed with the suggestion that the engine coupled to a compressor would
only
ever run on full load. If the compressor were delivering less than its
rated pressure the engine would not be required to deliver
its full power.
Repossession and Surrender
44. At the time that the rig was being stripped down by Scott Engineering Koosney was in touch with that firm by telephone from Noosa, Queensland, where he was undergoing traction treatment for his back. Kewside's financial condition was parlous. It could not pay its creditors and Koosney was unable to raise funds to have Scott Engineering carry out the work for which it quoted. Speer was demanding payment of Warman's account. On 22 August 1986 Warman repossessed the compressor and engine. By arrangement with Scott Engineering the unit was put in a Seatainer and transported to Perth by Brambles. After cleaning it up and removing leaking battery acid from some parts, Warman sold the compressor to a firm called Airdrill for $56,500 in January 1987. Costs associated with the repossession amounted to $4,631.05.
45. On 26 October 1986 Kewside executed a voluntary surrender of the rig
(less the compressor) to UCL Finance which sold it to Davies
International in
January 1987. Davies also purchased the goods secured under the bill of sale
except, it seems, for the drill rods
and the percussion hammer and bits. For
these items and the rig he paid $85,625. The payout figure on the lease was
then $77,781.53
and a sum of $7,843.47 was refunded to Kewside. Davies had
some work done on the hydraulic hoses linked to the power steering of
the rig
carrier. He sold the rig some 4 or 5 months later for about $135,000 in cash
plus a small truck mounted drilling rig known
as a Warman Investigator and a
small Sullair air compressor. He later resold the Warman Investigator for
$110,000 and the small
compressor for $10,000 to $15,000 yielding an overall
return of between $255,000 and $260,000 for the rig, without the Sullair
compressor.
As he said:
"...that was when the boom was really happening46. Because of his back condition, Koosney had to undergo traction treatment for 3 months from August 1986 and was not fit for work until January 1987. In January he commenced employment with Kelly Drilling as its general manager and worked for that firm until June 1987 when it was sold. He subsequently had other work as a contract driller and later formed a new firm called Diamond Kel Drilling.
though then. As I say, I did not want to sell it
and the guy wanted it. He made an offer I could
not knock back."
47. Little is known of the history of the Sullair Compressor 79148 prior to its importation into Australia by Sullair Australia Limited. Warman did not acquire the franchise for Sullair until January 1984 and was not involved in the importation.
48. Rudolf Peter Wieland, who was employed by Sullair Australia from 1981 to 1984 as its service engineer was involved in commissioning Sullair plant and providing customer support and maintenance at various installations. In November 1983 some 5 900cfm compressors and two 750 cfm compressors were brought to Western Australia by Sullair for hire to IPS Kopp for dewatering work on the Woodside Petroleum pipeline running offshore from Burrup Peninsula in the north-west of Western Australia to the Rankin A Offshore Platform.
49. The compressor ultimately purchased by Kewside, No. 79148 (at first mistakenly referred to by counsel in examination-in-chief of Wieland as 79149) came to Western Australia from the Eastern States. It was Wieland's task to prepare all seven compressors for use on the Burrup Peninsula contract. He recalls observing that 79148 was one of two which had seen previous use. He based this judgment on his observation of the condition of perishable components such as hoses and gaskets and the presence of varnish deposits within the hydraulic lines indicating that the compressor had run for "some considerable period". There was also a malfunction in the machine in question which showed that it had been used. These observations were inconsistent with a tachometer reading indicating only 2.71 hours of operation. As to that Wieland said it was obvious that the original tachometer had been damaged and replaced prior to shipment of the machines to Western Australia. According to his estimate there should have been some 1,000 to 2,000 hours on the counter at that time.
50. The nature of the dewatering work was explained by Rodney Kirk-Burnnand, the principal of Kirk Engineering Pty Ltd which was appointed by IPS Kopp as project manager for that contract. The dewatering process adopted in this case used an array of seven compressors, five of which were of 900 cfm capacity and two of 750 cfm. All could generate 350 psi pressure. They were set up side by side and connected to a single manifold pipe in turn connected to the Woodside pipeline. Their first function was to generate compressed air to push water out of the pipeline which has a 42 inch diameter and runs for some 160 kilometres. Foam clearing devices called "pigs" were then pushed through to mop up bulk water in puddles. Finally dried air was pumped in to pick up residual moisture. It was in effect a 24 hour a day, 7 day a week operation.
51. Wieland was responsible for servicing the compressors in the course of their operation on the Burrup job. He kept a record of tachometer counts which indicated for 79148 a total operating time of 564.15 hours for the period 12 November to 4 December 1983. The contract involved a total operating time of some 3 weeks, 2 weeks for cleaning the pipeline and one week for drying it. It was pointed out in cross-examination that assuming, as Wieland said, a commencing time of 2200 hours on 12 November and a finish time of 0600 hours on 4 December, the maximum possible number of operating hours was less than the recorded figure. Wieland suggested a maximum of 528 but the correct figure appears to be 512 hours. He explained the discrepancy by pointing out that the tachometer in truth measures engine revolutions. This measure is expressed in terms of hours of operation by a counter calibrated on the assumption that the engine is running at a rate of revolution such that one hour will pass for a given number of revolutions. If in fact it is only idling then the time shown will be less than the actual time of operation. It follows that if the engine is run at a rate of revolutions higher than the calibrated rate, it should show a greater figure of elapsed time than was in fact the case. Thus a tachometer calibrated on the basis that the machine will ordinarily operate at 1500 rpm should, if the machine operates at 2000 rpm, show 1.3 hours of operation for every hour of elapsed time. This calculation is only by way of example and no doubt involves various assumptions including that of a linear relationship between speed of revolution and time shown on the counter. As to the actual rate of revolution on which the tachometer was calculated or the rate at which the engine operated at Burrup there was no direct evidence. Wieland conceded that the tachometer is not a precision instrument but is a guide to servicing requirements. Nevertheless he maintained that the compressors including 79148 ran non stop save for quick oil checks during the period mentioned. There were no major breakdowns in that time. His own estimate of 564 hours was less than Kirk-Burnnand's of 576 hours which was calculated partly on the basis of the volume of the pipeline and the fact that about thirteen times atmospheric pressure was needed to get the water out. This was able to be related to the time necessary for the compressors to generate the requisite volume of air to be pumped into the pipeline.
52. In the event I am satisfied, having regard to the evidence of both Wieland and Kirk-Burnnand and Speer's estimate of which mention is made later, that the compressor in question ran for over 500 hours at Burrup.
53. After Burrup the compressors were brought back to Perth and the five 900 cfm machines were made ready for a further contract with IPS Kopp in Malaysia. Kirk Engineering was the project manager for this further contract which involved dewatering and drying an offshore pipeline on the east coast of Malaysia. That pipeline had approximately the same volume as the Woodside pipe at Burrup Peninsula. It was a more complicated construction however as there were branch lines of differing diameters running to various platforms. The Malaysian operation took longer than Burrup and Kirk-Burnnand conservatively estimated the minimum operating hours for the compressors there as between 768 and 1008. The probability is that actual operating time there was significantly longer.
54. There were some operational difficulties. Calibration discrepancies in pressure gauges on individual compressors in the array led to the maximum pressure values of some being closed while others remained open. This phenomenon was not noticed immediately and caused the job to take longer to complete than it ought to have. There was no evidence of any deleterious effect on the compressors. There were also problems associated with the servicing of the compressors. The engineer responsible for their servicing did not in Kirk-Burnnand's opinion give them the degree of attention they required. In particular he did not change the oil at the intervals specified by the manufacturer. Kirk-Burnnand's recollection was that the compressors ran for two or three times as long as they ought to have between changes. While he did not see any signs of resulting damage, there was a greater probability of increased wear, pitting and deposits. Air filters were also not changed as often they should with the result that the engines would probably have been burning dirty air and therefore working harder than with a purer air intake. As soon as the undesirable practices in relation to oil and air filter changes became apparent, another person was put in charge of servicing the compressors.
55. Kirk-Burnnand did not actually dismantle or otherwise inspect the
interior of the engines. To that extent his comments about
the effects of the
long oil and air filter change intervals are informed opinion rather than
empirical observation. Asked about
the heat and humidity of the Malaysian
climate, he said it would not, in his opinion, have had any adverse effect on
the compressors.
However while operating on the Malaysian contract the
compressors were run to generate maximum pressure. This suggests that engine
load would have been maximised during that time.
The Representation as to Hours of Operation Of the Compressor
56. It is clear that before Kewside entered into its contract with Warman, Speer told Koosney and Davies that he thought the compressor had operated for about 1,050 hours. This was confirmed, albeit after the event, by Warman's invoice for the compressor which was sent to Kewside on 18 July 1986 and bore the endorsement "APPROX 1050 HOURS RUN". And I have no doubt that Speer honestly believed that to be a fair estimate of the number of hours that the machine had operated to that time. He had looked for records at Warmans relating to the machine which might assist him in coming to a figure, but was unable to find any. Indeed the only written record of the history of the compressor was a job card prepared by Sullair Australia Limited, Warman's predecessor franchisee. This contained a list of parts with the Sullair part numbers, the serial number 79148 and entries which indicated that it had been ordered for IPS Kopp on 1 August 1983 for delivery in September. The document was in fact produced under subpoena by an officer of BTR Indeng which has had the rights to manufacture and distribute Sullair compressors for the last 2 years or so as successor to Warman. The card gave no indication of the earlier history of the unit.
57. Speer's estimate was based first on the assumption that the compressor would have operated at Burrup for about the same time as the 750 cfm compressors which were used there but not sent on to Malaysia. Their tachometer gauges were in good condition and showed between 525 and 550 hours. He had an estimated figure of use in Malaysia given to him by Jim Earthy, who had been sent to that country in connection with the pipeline job. He was not asked to give that figure in evidence but that and the Burrup figure added to operating times on hire in Victoria and at Roxby Downs led to his estimate of 1,050 hours.
58. As can be seen that estimate was not based upon any examination of the compressor's engine but upon the assumption that the known history was the complete history of use. Allowing for a reasonable degree of mutually understood uncertainty, Youngson's figure of less than 2,000 hours which he based on his own examination of the engine at Scott Engineering tended to support Speer's estimate. On the other hand it conflicted significantly with that given by Hocking.
59. As already noted, Youngson's background was that of a qualified fitter, turner and machinist, with considerable experience in working with hydraulic cranes and their engines. He completed his apprenticeship in 1971. Hocking on the other hand, only completed his apprenticeship as a heavy duty motor mechanic in 1983. But his employer for the four years of the apprenticeship was the Detroit Engine and Turbine Company and in that time he was trained in all aspects of the overhaul and rebuilding of Detroit Engines, including 12VZIT diesels of the kind used on the Sullair compressor. He continued to work with that company in Perth for a year after completing his apprenticeship and was then transferred on to contract work it was undertaking at Leinster Power Station near the Agnew mine. He left that employment when the contract was completed and joined Scott Engineering, which was an authorised Detroit engine dealer. Although his years of experience were considerably fewer than Youngson's, it was experience focused on Detroit engines. I accept that Hocking had a thorough familiarity with their characteristics. His conclusions are supported by those of Rudolf Wieland who, at the time of trial, had been a qualified engineer and worked as such in Europe and Australia for some 30 years. It was his observation of the condition of the engine in November 1983, that led him to believe that it had done 1,000 to 2,000 hours before its first known use in Australia on the Burrup Peninsula contract.
60. This evidence was supported by that of John Michael Farrell, who was Service Engineer with Warman from 1984 to the end of 1986. Prior to that he had been employed for 10 years as Chief Engineer by Sullair Australia Limited, Warman's predecessor in the manufacture and distribution of Sullair compressors. His evidence suffered from the disadvantage that he had not seen the compressor or engine in question, but can, in my opinion, be taken into account in conjunction with the direct observations of Hocking and Wieland and also those of Davies. His responsibility as Chief Engineer extended to the design and manufacture of Sullair equipment within Australia and South East Asia. His company imported new Sullair compressors from Michigan and, in the early 1980's, secondhand compressors which had been used on the oil fields in the United States, "...as many as we could sort of get our hands on". He was not asked, and presumably was unable to say by reference to the job card which he was shown, that the compressor 79148 was imported secondhand. However having read Hocking's report he regarded the array of parts requiring replacement as consistent with a major overhaul normally only necessary after 8,000 to 10,000 hours. Assuming that the engine had been poorly serviced and had an operating life to that point of only 1,200 hours, he would not expect to see the kind of damage indicated by Hocking. Poor servicing and extended hours of operation could, he agreed, dramatically shorten the engine's life. Tropical humidity was not such a problem as where the engine is run continuously and maintains its temperature it tends to burn off moisture.
61. Farrell did not believe that Hocking or Youngson had observed glazing in the engine. If it were truly glazed, the glazing could be burned off by running the engine at full power for 3 or 4 hours. If they had seen glazing he thought it would probably have been caused by leaking injectors. But this was a theory already rejected by Hocking who had examined two of the injectors brought to him by Youngson. In the end no persuasive explanation emerged for the glazing but I am satisfied on the evidence of Hocking and Youngson that it was present and affected the time taken to start the engine.
62. That I am not persuaded by Farrell's evidence in this respect does not mean I reject or discount it in others. It establishes the possibility that when the compressor was originally imported into Australia it was secondhand and had seen service in the United States. And Wieland's opinion that it had seen service before coming to Australia was not contested by counsel for Warman. Farrell's general comments about Hocking's observations lend credibility to the latter's and Wieland's opinion that the compressor had already seen substantial hours before it went to Burrup Peninsula. These persons I regard as substantially independent witnesses and their testimony in turn lends greater credibility to Davies who might otherwise be treated with some caution by reason of his association with Koosney and the valuation statement he submitted to UCL Finance upon which comment has already been made.
63. In my opinion, the compressor had done no less than 2,500 hours and
probably in excess of 3,000. The minimum figure of 2,500
I arrive at by
reference to Wieland's minimum of 1,000 hours before Burrup, 500 hours at
Burrup, 750 hours in Malaysia based on Kirk-Burnnand's
minimum, and an
allowance of 250 hours for operating time in Victoria and at Roxby Downs,
which figure is based on Speer's estimate
of 250 to 300 hours for that work.
I accept that the figure of 1,050 offered by Speer was not represented to be
precise. Apart from
any express disclaimer, the very nature of the subject
matter of that assessment to a person familiar with the kind of equipment
under consideration would convey a significant uncertainty. And Koosney was a
person who, while not expert in the detail of compressor
operation, was
broadly familiar with it. He was prepared to accept up to 1,500 hours as
consistent with his requirements. In my
opinion the estimate of 1,050 hours
offered was so far from the true position as to be misleading even to a person
sufficiently informed
to expect some degree of uncertainty in such an
estimate. And assuming for the sake of argument that the minimum of 2,500
hours
could be regarded as low in the sense that that term was used by
Koosney, a proper estimate, having regard to the considerations
adverted to by
Wieland, Hocking, Farrell and Davies would have alerted him to the possibility
that the compressor had seen more than
3,000 hours of service. That was a
possibility and in my view a probability misleadingly excluded by Speer's
estimate.
The Representation as to Overseas Service
64. It is undisputed that the compressor had done a significant number of hours on a pipeline dewatering project on the east coast of Malaysia in 1984. It is also clear that this fact was known to Speer and that he did not disclose it to Koosney or Davies. I can accept that he may have thought that their only concern was whether it was one of a number of suspect compressors imported into Singapore by the Singapore Division of the Sullair Corporation of the United States. On his own evidence his answer was directed to a question whether compressor 79148 was "one of those Malaysian machines". While that carefully framed answer may have been strictly true, it finessed the point raised and would convey to the listener not astute to discern subtleties of expression that this machine had not been used in Malaysia at all. And I am satisifed on the evidence that Koosney was not so attuned to the context in which the question was allegedly put that he could be expected to appreciate that Speer was saying that the machine had not been to Malaysia but that it had not been originally imported into Singapore.
65. In my opinion, the answer to the inquiries about the Malaysian service
was misleading. If it be said that such an approach imposes
a duty on the
vendor of goods to be more forthcoming than the law of deceit or negligence
would require, so be it. The duty imposed
by s.52 of the Trade Practices Act
1974 plainly exceeds the tortious prohibitions of fraud and negligent
mis-statement. In some circumstances full disclosure by a vendor
will be
mandated to avoid misleading or deceptive silence or half truths. And in some
circumstances it will be prudent merely to
avoid the possibility of
contention.
The Pleadings
66. By its statement of claim as further amended at trial, Kewside alleges
that in late February or early March 1986 it made known
to Warman that it
required a compressor suitable for use in its drilling operations and capable
of being fitted to its Schramm drilling
rig with or without modifications. It
is alleged that Speer then orally represented to Koosney that:
1. Warman had the ability to supply to Kewside a usedBy way of defence, Warman pleads that following Koosney's request Speer said that Warman could supply a used compressor and Detroit engine with a six month warranty against wear or loss of capacity to the air end only of the compressor. No warranty would be given in relation to the engine. Warman says that Speer informed Koosney that to the best of his knowledge, information and belief the compressor in question had experienced an approximate total of 1,050 hours of operation but that no records were available. The alleged representation that the compressor had not operated in Malaysia or Indonesia is denied.
Sullair 900/350 DU skid mounted drill compressor
serial number 79148 and by the exercise of this
ability would ensure the compressor would meet
Kewside's requirements.
2. The compressor had experienced an approximate total
of 1050 hours of operation.
3. The compressor had not operated in Malaysia or in
Indonesia.
67. Kewside pleads reliance upon the representations in entering into an agreement partly oral and partly in writing with Warman to purchase the compressor and pay for upgrading of the rig (para.5). Reliance and inducement are denied and the agreement is said to have been entirely in writing.
68. It is said and admitted to have been a term of the contract that title to the goods would remain with Warman until they had been paid for in full (para.5A). The contract was said to be a contract for the sale of goods and this also was admitted, but the alternative plea that it was a hire purchase agreement under the Hire Purchase Act 1959 (now repealed) is denied. The upgrading of the rig and the fitting of the compressor are pleaded and admitted.
69. The representations pleaded in para.4 of the further amended statement of claim are alleged in para.7 to have been false. The representation that the compressor would meet Kewside's requirements is said to have been falsified by the failure of the compressor to work properly, the problems in starting it when cold, the frequent leaks from its seals, the stripping of the blower shaft on two separate occasions, the failure of three starter motors fitted to it, the passage of oil through the separator and the repeated blowing out of hydraulic hoses. The representation as to operating hours is said to be falsified by the fact that the machine had operated for not less than 3,000 to 4,000 hours. Further, it is said that the machine operated in Malaysia in 1984.
70. Warman denies that the compressor failed to work properly, admits that the applicant complained about difficulties in starting the engine but says that it was unable to find any defect and was able to start the engine without difficulty. In any event Warman alleges that the compressor and engine were improperly serviced and operated by Kewside and that this caused the matters complained of. Reliance is also placed on a term of the contract that Warman was not responsible for any defect in the condition of the engine. It denies that the compressor had operated in excess of 1,050 hours and not less than 4,000 hours and as the case was conducted denied the alternative allegation, added late, that the compressor had operated for not less than 3,000.
71. And again while not expressly addressed by the further reamended defence filed on the third day of the trial, it is clear that the respondent did not contest that the compressor had been used in Malaysia but denied that it had represented otherwise. Its case in this regard was that the question put with respect to overseas use related to particular compressors which had been imported into Singapore from the United States and thereafter brought into Australia with suspect engines.
72. Kewside pleads, and it is denied, that the representations constituted misleading or deceptive conduct in contravention of s.52 of the Trade Practices Act 1974 (para.8). A contravention of s.53A is also alleged, but adds nothing to the s.52 plea (para.9). The representations are also said to have been express terms of the contract (para.10). This is denied, as is the allegation that the various failures and falsifying facts pleaded earlier constituted breaches thereof.
73. Alternatively, Kewside pleads an implied term that the compressor would be reasonably fit for the purpose for which it was supplied and relies upon s.14(1) of the Sale of Goods Act and the need to give business efficacy to the contract. Reliance is placed in the alternative on s.5(3) of the Hire Purchase Act. The same matters are relied upon as breaches of the implied term as are said to constitute breaches of the representational terms. Alternatively it is pleaded that the representations constituted negligent mis-statements by reason of Warman's failure to adequately evaluate the condition of the compressor and to warn Kewside of it. By reason of each of the breaches, loss and damage is said to have been suffered.
74. The implied term and the breaches thereof are denied as is the negligent mis-statement and all loss or damage purportedly flowing from them. Further, Warman invokes cl.14.7 of the Warman International Standard Conditions limiting its liability to the correction of defects in the product sold or services supplied and excluding, inter alia, consequential losses.
75. Warman cross-claims for the sum of $53,712.47 said to be the difference between the amount due under the contract of $105,581.42 together with repossession costs of $4,631.05 on the one hand and the proceeds of resale of the compressor said to be $56,500 on the other.
76. By its defence to the cross-claim, Kewside admits that it agreed to pay $105,581.42. It admits the pleaded condition that title and the right of repossession would remain with Warman until full payment, but says that by reason of that provision the contract is a hire purchase agreement under s.2(1) of the Hire Purchase Act 1959. It denies that it breached the contract, does not admit that Warman repossessed the compressor and repeats paras. 1 to 11 of the further amended statement of claim. Kewside further contends that by reason of Warman's contravention of s.52 it is entitled to a declaration under sub-s.87(1A) of the Trade Practices Act that the contract is void, contends in any event that it rescinded the contract and further alleges that if Warman did repossess the compressor it failed to give the statutory notice required by the Hire Purchase Act whereby its rights under the contract were determined.
77. In a reply to the defence to the cross-claim, Warman says that the contract was a conditional contract of sale and that in any event the agreement to provide services was no part of any hire purchase agreement. If they are part of a hire purchase agreement it claims a quantum meruit. And if the agreement was a hire purchase agreement, then it is said that there could be no condition that the goods were reasonably fit for the purpose as they were secondhand and the agreement contained a statement to that effect and a statement negativing all conditions and warranties for fitness and suitability which statements had been brought to the knowledge of Kewside.
78. Kewside's pleaded loss is something in the nature of an ambit claim and
it is sufficient for the moment to say that it is brought
under four
headings:
1. Loss on assets disposed of $32,653.46The Case Against Warman under the Trade Practices Act
2. Repairs to plant due to breakdown
(other than maintenance or replacement) $22,057.79
3. Actual operating loss from 14 May 1986
to and including 18 August 1986 $24,715.03
4. Economic loss from 14 May 1986 to and
including 15 December 1987 $315,631.00
79. Kewside relies upon three representations as constituting misleading or deceptive conduct on the part of Warman. I have already come to the conclusion that, for the reasons outlined, the representations alleged as to the hours of operation of the compressor and that it had not seen service in Malaysia were made and were false. They were in the relevant sense misleading and having been made by an officer of Warman and clearly made in trade and commerce, amounted to misleading or deceptive conduct by Warman in contravention of s.52 of the Trade Practices Act.
80. It was also said that Warman represented that it "had the ability to supply to Kewside a used Sullair 900/350 DU Skid Mounted Drill Compressor serial number 79148 and by the exercise of this ability would ensure that the compressor would meet Kewside's requirements". According to the submission of counsel for Kewside, it was to be implied or inferred from Warman's preparedness to satisfy the request for a compressor to be put on the rig for mineral drilling. The pleading has a number of difficulties about it. On the face of it it gives no clue that it rests upon implication. In any event it is promissory in character and no underlying lack of requisite intent is alleged to negative the intent to perform. Nor is there evidence to suggest that Warman was a company which could not have provided a compressor capable of meeting Kewside's requirements. Less significantly, analysis of the pleading reveals a non sequitur. The representation that Warman was capable of supplying the drill compressor 79148 cannot be a representation that the compressor would meet Kewside requirements. That is a distinct assertion but it was not pleaded as such. In my opinion the third representation relied upon by Kewside provides no foundation for a case of misleading or deceptive conduct on the part of Warman.
81. Returning to the representations as to hours of operation and service in Malaysia, I am satisfied that these were significant factors affecting Koosney's decision to acquire the compressor. The representation as to the hours of operation was the more important of the two. In a sense the Malaysian service question reflected a general concern, as Koosney conceded, that the compressors should not be so old or have been so badly treated as to be unreliable when used in remote locations.
82. As part of its defence to the claim under the Trade Practices Act, Warman referred to the limitations of its warranty to the "air end only" of the compressor and the exclusion of responsibility for any defect in the condition of the engine. To the extent that the provisions relied upon have contractual effect they cannot prevail against the provisions of s.52 or the cause of action created by s.82 of the Act. A disclaimer or exclusion clause will affect liability for misleading or deceptive conduct only if it deprives the conduct of that quality or breaks the causal connection between conduct and loss. Whether it has that effect in a given case is a question of evidence and not a question of law - Abundant Earth Pty Ltd v R. & C. Products Pty Ltd (1985) 59 ALR 211; Hutchence v South Seas Bubble Co. Pty Ltd (1986) 64 ALR 330, 338 (Wilcox J.); Clark Equipment Australia Ltd v Covcat Pty Ltd (1987) 71 ALR 367.
83. In the present case I am satisfied that the conduct which I have found to be misleading or deceptive was not deprived of that character by Warman's limitation of liability, or by its refusal to offer any warranty in relation to the engine. Nor was the reliance placed on the representation by Koosney affected by limitation or refusal.
84. Counsel for Kewside conceded that if his client succeeded with his cause
of action under s.52 there was no point in pursuing
the claim based in
negligence. And the approach taken to the damages claim does not differ from
that applicable in this case to
breach of contract. It is therefore
unnecessary for present purposes to explore the question whether there was a
breach of the contract
between Kewside and Warman. In the circumstances it is
appropriate to turn to the relief claimed in this case and first the claim
for
damages.
Damages And Other Relief
85. The damages claimed in respect of all causes of action comprised losses
said to be consequential upon Warman's conduct whether
it be characterised as
contravening the Trade Practices Act, tortious or in breach of contract. The
various heads of loss were identified as:
1. Loss on assets disposed of $ 32,653.4686. Four schedules were provided giving a breakdown of the amounts claimed under the various heads. They were substantially prepared by Kewside's accountant, Mr Rod O'Brien. The first, entitled "Loss on Assets Disposed of" sets out costs said to have been incurred by Kewside in acquiring various items of plant. It sets off against those costs the proceeds of UCL's sale to Davies International of the rig and other items of plant under the bill of sale. On the debit side was a sum of $7,137.73, the after sale deficiency owing by Kewside to Esanda under a lease in respect of a Acco International Truck used as a backup service truck for carrying rods, water, fuel and oil. That lease was entered into on 7 July 1986. Credits given for some goods returned to suppliers were also taken into account.
2. Repairs to plant due to break-
down (other than maintenance or
replacement) 22,057.79
3. Actual operating loss from 14
May 1986 to and including 18 August
1986 24,715.03
4. Loss of profit from 14 May 1986 to
and including 15 December 1987 315,631.00
87. In general the schedule comprised a list of every item of plant or equipment purchased by Kewside between May and August 1986 for which an invoice could be found. It included equipment consumed or damaged in the course of the operations. One item, a dust collector said to have cost $2,500, was shown in cross-examination to have been disposed of in 1987/88 for $3,500, a fact not mentioned in the schedule.
88. Schedule 2 was headed "Repairs to Plant" and set out the costs which were incurred in repair and maintenance work on plant between June and August 1986. It included the sum of $20,112.98 charged by although not paid to Vickers Keogh, for its work on the hydraulic valves and other items.
89. Schedule 3 headed "Economic Loss" set out Kewside's operating loss between 14 May and 18 August 1986. To arrive at this figure, which was said to be $24,715.03, it added all operating expenses during the period and deducted the sum of $32,436.42 being income received from Hunter Resources, Kewside's only source of income, in that time.
90. Schedule 4 was an estimate of the profit that would have been earned by Kewside between 14 May 1986 and 15 December 1987 when there was a significant fall in demand for drilling services. It was prepared on the assumption that Kewside would have worked at an annual rate of 48 weeks on 13.5 shifts per fortnight. Assuming a drilling rate of 100 metres per 10 hour shift at $20 per metre, 55% of the time and $30 per metre for the other 45%, total projected income would be $793,800. After deduction of costs over the year, net profit would be $198,288. Projected over the period 14 May 1986 to 15 December 1987 this represented a loss of profit of $315,631. The optimism of the assumptions embodied in this schedule are apparent. A more reasoned and conservative estimate of $242,500 was provided by David Stevens, a drilling consultant, who gave expert evidence for Kewside. His calculation was based upon a presumption of virtually constant utilisation in a period of great activity and acute rig shortage. His costings were derived from a computer spread sheet developed in the course of his consulting work to assist in the preparation of quotations for drilling contractors. The costs were based upon his knowledge of contemporary drilling operations. In calculating an annual drilling rate of 25,000 metres on an average shift rate of 100 metres, Stevens took into account the varying progress that may be made according to ground type, the period of inactivity from mid-December to mid-January and the usual incidents of breakdowns, illness, mobilization time and the like.
91. I am prepared to accept his estimate as a reasonable indication of the profit that could have been earned by a drilling contractor with a properly functioning rig during that time. To that extent it provides a measure of the loss of opportunity flowing from Kewside's inability to continue with its contracts after August 1986.
92. The damages recoverable under s.82 of the Trade Practices Act for a contravention of s.52 are measured by the loss or damage suffered by reason of the contravention. The causal connection is not that of the strict logician, but is to be understood according to common sense concepts - Yorkshire Dale Steam Ship Co. Ltd v Minister of War Transport (1942) AC 691, 706. Selection principles influenced by policy and not merely logic operate. Concepts such as contributory negligence and mitigation have no role as such in this process but analogous notions may apply to decide whether or not a claimed loss was truly caused by the contravention in question - Munchies Management Pty Ltd v Belperio (1988) 84 ALR 700, 712; Elna Australia Pty Ltd v International Computers (Australia) Pty Ltd [1987] FCA 230; (1987) 16 FCR 410, 418-9; Pavich v Bobra Nominees Pty Ltd (1988) ATPR (Digest) 46-039.
93. Kewside's decision to acquire the Sullair compressor from Warman was taken after it had decided to acquire the rig and embark upon the new venture of providing essential plant for exploratory drilling as well as the skills and labour of its principal, Koosney. It did so in a financial condition that can only be described as fragile dependent entirely upon income earned from contracts to enable it to meet the substantial financial commitments which it had undertaken.
94. In the event, it suffered a number of setbacks all of which played a role in the failure of its business. These included the problem with the reverse circulation drill rods which gave rise to a delay of about 14 days on the Black Flag job. Leaking seals, defective hydraulic motors, blown hydraulic hoses and a leaking control panel as well as contamination of the hydraulic oil, all contributed to the difficulties experienced with the rig at Black Flag. Slow starting of the compressor accounted for some delay which on Koosney's evidence amounted to about 20% of the time for which the rig was actually working. As only 8 days was spent drilling out of a total of some 38 at Black Flag, this suggests a compressor caused delay equivalent to 1.6 shifts.
95. Despite Rodney Koosney's evidence that the compressor was taking up to 4 hours to get started at Mertondale, I am not satisfied that the percentage of lost time overall was any greater than that at Black Flag. It appears from the drilling records that some 20 days were occupied actually drilling at Mertondale and on that basis 4 day shifts could be said to have been lost by reason of slow starting on the part of the compressor. This represents a total of 5 or 6 shifts over the entire period of 77 days that Kewside was attempting to carry out these contracts. Other problems experienced at Mertondale included delays arising out of the bogging of the rig, the need to obtain a replacement hammer and to strip and clear it and damage to a welder. Koosney's incapacity must also have had some effect on the operation of the business. It may be said that the stripping of the blower shaft on 8 August was the last straw, but by this time it was Kewside's financial fragility that was dominating its difficulties. As early as March or April 1986 Koosney had borrowed $5,000 from his brother because, as he told him, he was desperate and needed the money just to keep going. He had borrowed also from Davies International, he had not paid Vickers Keogh and he owed Warman $105,581. It is my opinion that right from the outset Kewside had very little margin for mishap. The difficulties with the compressor contributed to its demise, but other factors played a much larger role.
96. The perpetrator of misleading or deceptive conduct must to some extent take his victim as he finds him. Loss and damage is not to be measured by what the victim would have lost had he been rich and competent. At the same time, I do not consider that the selection principles to which I have already referred to allow for an eggshell wallet doctrine. The losses claimed, flowing from the collapse of Kewside's business and in particular the amounts sought in schedules 1 and 2 do not display any sufficient causal connection with the conduct complained of to justify their recovery. On the other hand, I consider that the contribution made to Kewside's difficulties by the compressor can be taken as one among a number of factors which conspired to deprive it of the chance of a profit and caused it to sustain an operating loss. The loss of chance is, in my opinion, compensible. In assessing its value I take as the starting point the profit projection suggested by Stevens, namely $242,500 for the 18 month period of high demand to December 1987. The loss of chance attributable to the compressor is in my opinion a small proportion of that amount when appropriate discounts are applied for the financial vulnerability of Kewside and other problems that it faced and which I think fell outside at least the quantitative if not the qualitative framework of the range of difficulties taken into account by Stevens in his assessment.
97. The assessment of the value of the lost chance attributable to the compressor is necessarily a somewhat arbitrary exercise. In my opinion however, 15% of that sum recognises the effect of the compressor defects as significant but not dominant in determining the inability of Kewside to earn any profit. The loss of chance of profit attributable to the compressor is therefore $36,375. Similarly, the operating loss over the relevant period may be treated as a measure of lost opportunity to at least cover costs. Taking the schedule 3 figures of $24,715 as a rough guide, the amount I would assess as the loss of chance to avoid loss is $3,707. On this basis the applicant is entitled to damages in the sum of $40,082.
98. Interest is claimed and will be allowed at the rate of 14% per annum from
the day after the date to which the profit figure is
calculated, namely 31
December 1987. Interest from 1 January 1988 to 18 January 1990 on $40,082. is
$11,463, making a total of $51,545.
The applicant is entitled to judgment in
that amount on the claim.
Cross-Claim
99. To the extent that Warman would be entitled under its contract to recover any amount greater than the cost of installing the compressor and upgrading the rig, the excess would, in my opinion, represent an element of loss flowing directly from the purchase of the compressor and therefore from Warman's conduct in contravention of s.52. In my opinion, recovery on the cross-claim should be limited to $49,365.42 being the cost of installation of the compressor and the upgrading of the rig. That is an expense which would in all probability have been incurred regardless of what model compressor Kewside had elected to purchase. It was a cost incurred in creating the opportunity for profit, the loss of which has been compensated by the award already made. In my opinion there is no scope in this case for the avoidance of the contract by operation of s.87 of the Trade Practices Act.
100. The contention that the contract was a hire purchase agreement depends upon the provisions whereby Warman retains title and has a right to repossess until payment in full of the purchase price. But in my opinion it involved neither a bailment of the compressor nor an agreement for the sale of it by instalments. It could not therefore be a hire purchase agreement under the only relevant parts of the definition of that term in the Hire Purchase Act 1959 (WA). Nor was the contract rescinded. Even at the time that Koosney had formed the view that the compressor was older than represented and, to use his words "clapped out", his objective was to keep it going for long enough to get some of his money back.
101. In the circumstances, Warman is entitled to judgment on the cross-claim
in the sum of $49,365.42 which, it is not disputed,
was properly charged for
the installation of the compressor and the upgrading of the rig. No interest
is claimed on that sum.
CONCLUSION
102. Having regard to the amounts involved and the nature of the issues, it is difficult to escape the feeling that this case might have been resolved by negotiation rather than litigation. In the event nobody wins. I will hear the parties on the question of costs when they have had an opportunity to consider these reasons.
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