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Tranquility Pools& Spas Pty Limited v Huntsman Chemical Company Australia Pty Limited [2011] NSWSC 75 (25 February 2011)
Last Updated: 15 April 2011
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Case Title:
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Tranquility Pools & Spas Pty Limited v Huntsman
Chemical Company Australia Pty Limited |
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Medium Neutral Citation:
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Hearing Date(s):
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1-5, 8-12, 15, 16, 22-26, 30 November 2010, 9
& 10 February 2011 |
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Decision Date:
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Jurisdiction:
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Decision:
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The Referee's findings bind the parties and the
Court. The plaintiffs pleaded case against the defendant for breach of
contract and contravention of sections 52 and 53 of the Trade Practices Act 1974
(Cth) is made out. The parties will be given an opportunity to adduce
further evidence from their accounting experts to value the damages payable in
accordance with the Court's findings on the destruction of business claim.
The plaintiffs have established a liability to all pool owners with failed
pools. The plaintiffs will be exposed to claims of failed pool owners for a
maximum period of 10 years not 16 years. Pool owners with failed pools are
entitled as against the plaintiffs to full replacement of the pool and making
good of the premises.
In relation to all pools that have presently failed
the plaintiffs are entitled as against the defendant to damages under section 82
of the Trade Practices Act. In relation to pools which will fail in future,
which will result in a liability of the plaintiffs, s 87 of the Trade Practices
Act is engaged. |
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Catchwords:
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Defective product claim Fibreglass swimming
pools Claim that defective resin sold by the defendants to plaintiffs had
caused unseemly blistering and blackspots to hundreds of fibreglass
swimming
pools Plaintiffs claim entitlement to sue on be half of 837 owners of pools
manufactured with allegedly defective resin Plaintiffs claim that all
defective swimming pools necessary to be replaced Reference out Effect of
adoption of referee's report Reference not to be treated as some kind of
"warmup" for the real contest Cause of failure Whether failure of the
pools caused by the defendant or by the plaintiff Whether defendant had
contravened sections 52 and 53 of Trade Practices Act 1974 (Cth) Whether
alleged representations were made by the defendant Whether representations
induced the Plaintiffs to buy the product Whether defendant made out defence
of contributory negligence under s 82(1B)Whether defendant breached implied
contractual terms of merchantable quality and fitness for purpose Whether
defendant estopped from relying on standard terms and conditions which would
have greatly restricted such a claim Assessment of claim to damages and
expense to the businesses of the Plaintiffs as a result of the pool
failures Whether plaintiffs entitled for damages on basis that defendant's
defective product had destroyed their business Whether plaintiff could rely
on data favoured by it to establish trends in the swimming pool market Court
left to determine, on all the evidence, but for the pool failures, how
plaintiffs' business would have performed Quantum of plaintiffs'
consequential loss Whether plaintiffs' liable to customers with failed pools
Whether alleged express warranty incorporated into plaintiffs' contract with
customers who contracted directly with it Whether alleged express warranty
formed a collateral contract between plaintiffs and customers where pool
purchased through a third
party dealer Hospital Products Ltd v United States
Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at 61 applied Fairey Australasia Pty
Ltd v Joyce [1981] 2 NSWLR 314 considered Whether customers could rely on
express warranty contained in warranty cards, brochures, and conveyed orally
Whether plaintiffs use of "sampling" evidence from a subset of customers
appropriate Civil Procedure Act 2005 (NSW) ss 56, 62 considered Whether
customers could rely on implied contractual terms as to merchantability and
fitness for purpose against plaintiffs Trade Practices Act 1974 (Cth) s 71,
Sale of Goods Act 1923 (NSW) s 19 applied Whether plaintiffs also liable to
customers under Pt V Div 2A of the Trade Practices Act 1974 (Cth) Whether
that Division applied to "goods" once they had become fixtures Theo Holdings
Pty Limited v Hockey [2000] FCA 665; (2000) 99 FCR 232 considered Trade Practices Act 1974
(Cth) ss 74B, 74D, 74F, 74G applied Whether plaintiffs liable to subsequent
purchasers of properties including failed pools manufactured by
plaintiffs Whether letters written by plaintiffs stating that warranties
covering vendors would be transferable to purchasers affected a novation
Alternatively whether plaintiffs liable to subsequent purchasers under Pt V
Div 2A of the Trade Practices Act 1974 (Cth) Limitation periods applicable to
plaintiffs' liability to customers Whether maximum liability, under express
warranty, was 10 or 16 years VAI Industries (UK) v Bostock & Brawley
[2003] BLR 359 considered Whether, as against plaintiffs, pool owners
entitled to complete replacement of their failed pools or some lesser
rectification method Willshee v WestCourt [2009] WASCA 81, Tabcorp Holdings
Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 83 ALJR 390, applied. Whether any of
lesser suggested rectification methods meet the relevant test laid down by the
authorities Consideration of costs of replacement of failed pools Proper
approach to sections 82 and 87 of the Trade Practices Act 1974 (Cth) Wardley
Australia v Western Australia [1992] HCA 55; (1992) 175 CLR 514 considered Whether
plaintiffs' liability to its customers constitutes damage |
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Legislation Cited:
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Cases Cited:
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Texts Cited:
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JD Heydon, Cross on Evidence (6th ed, Butterworths,
2000) D Byrne and JD Heydon Cross on Evidence, (4th Aus ed, Butterworths,
1991). KR Handley, Spencer Bower and Handley Res Judicata (4th ed,
LexisNexis, 2009) Julian Bailey, "Novation" (1999) 14 Journal of Contract Law
189 Lord Diplock, "The Courts as Legislators", The Lawyer and Justice (Sweet
& Maxwell, 1978) |
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Category:
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Parties:
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Tranquility Pools & Spas Pty Limited (First
Plaintiff) Tranquility Pools & Spas (Manufacturing) Pty Limited (Second
Plaintiff0 Huntsman Chemical Company Australia Pty Limited (Defendant) |
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Representation
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Mr J Stevenson SC, Mr N Kabilafkas
(Plaintiff) Mr S Donaldson SC, Mr G Sirtes SC, Mr T Maltz |
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- Solicitors:
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I E Duffield (Plaintiff) DLA Phillips Fox
(Defendant) |
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File number(s):
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Publication Restriction:
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JUDGMENT
The proceedings before the Court
- The
proceedings before the Court concern the manufacture of fibreglass swimming
pools.
- The
plaintiffs [ Tranquility Pools & Spas Pty Ltd and Tranquility Pools &
Spas (Manufacturing) Pty Ltd] manufactured the fibreglass
pools using a vinyl
esther product (the product) supplied by the defendant [Huntsman Chemical
Company Australia Pty Ltd].
- To
be more precise :
The first plaintiff (TPS):
(1) Was at all material times until on or about 5 September 2003 a manufacturer
of swimming pools for homes either for retail sale
and installation by it, or
for wholesale sale to dealers for retail sale and installation by them;
(2) Was engaged in the business of selling and installing swimming pools made by
the Second plaintiff from on or about 5 September
2003.
The second plaintiff (TPSM):
(3) The second plaintiff has been from on or about 5 September 2003 a
manufacturer of swimming pools for homes for wholesale sale
to dealers
(including the first plaintiff) for retail sale and installation by them.
- The
plaintiffs' case is that the pools the subject of this litigation were either
sold wholesale to the pool dealers or were sold
and installed at a retail level
by the plaintiffs. The case is that the defendant's product was defective. The
case is that as a
result, numerous pools made using the product have developed
blistering and black spots and this problem will affect all pools made
by using
the product. The plaintiffs' case is that every pool made using the product will
have to be replaced as the problem is not
remediable in situ.
- The
plaintiffs sue for :
- (1) Breach of
contract on the basis that the product was not of merchantable quality;
- (2) Contravention
of sections 52 and 53 of the Trade Practices Act on the basis that they
bought the product induced by certain representations made as to the product,
which representations were false,
misleading and deceptive.
The issues
- Without
being exhaustive the issues include :
- (1) Whether the
alleged representations were made by the defendant and whether they induced the
plaintiffs to buy the product;
- (2) Whether the
failures in the swimming pools made by the plaintiffs using the product were due
to the product;
- (3) Whether all
837 pools made by the plaintiffs using the product will have to be replaced;
- (4) The total
cost of replacing and/or repairing the affected pools;
- (5) An
assessment of the claimed damage and expense to the businesses of the plaintiffs
as a result of the pool failures.
- Later
in these reasons it becomes necessary to provide the reader with an
understanding of how fibreglass pools are manufactured.
For the moment attention
should be first given to a background overview of the nature of the proceedings.
I proceed accordingly.
Background overview
- The
proceedings before the Court are of particular significance to many hundreds of
fibreglass pool owners who entered into contracts
with the plaintiffs, as
manufacturers and suppliers of fibreglass swimming pool.
- The
plaintiffs manufactured in the order of 837 such pools using a vinyl tester
product supplied by the defendant.
- As
will be apparent from the extensive reasons below the Court's finding is that
the product was defective and as a result, numerous
pools made using the product
have developed blistering and black spots and this problem will affect all pools
made using the product.
- Numerous
pool owners have given evidence and generally to the same effect :
- (1) Their
evidence is that they spent considerable sums in purchasing their pools, in the
main having first carried out their best
endeavours to determine study the
market.
- (2) In almost
all instances they were very careful in determining which of several colour
schemes to select.
- (3) The pool
which they selected was often to be the pivotal showpiece of their property.
- (4) Sundry work
was being carried out either by the pool owners themselves or by contractors in
the form of putting in the surrounds
and/or shrubs or trees.
- (5) After some
time their pools began to develop blisters and black spots which were unseemly.
- (6) At a time
when the transactions took place between these individuals and those from whom
the pools were purchased, they were given
warranties.
- (7) They have
now patiently waited many years for these proceedings to travel through the
Court system in the expectation that the
results of these proceedings will be
that they will be provided with new fibreglass pools which will not develop
blisters or black
spots which they regarded as their entitlement by reason of
the general circumstances and the warranties which they were given.
- (8) They expect
that any consequential works [which may be necessary as part and parcel of the
remediation of so much of their properties
as will be affected when the new
pools are installed] will be funded by those responsible for the defective
product.
Adoption of the referee's report
- It
is common ground that on 20 September 2007, Professor Robert Burford ("the
Referee") delivered a report on certain questions that
had been referred to him
for determination ("the Report").
- In
summary, the Referee, ultimately found that [the Report at [104]]:
- (1) the Pool
Failures were caused by the use of Hetron 922 in the barrier layer;
- (2) there was
no evidence to suggest that substandard manufacturing standards existed (and
hence could contribute to the Pool Failures);
and
- (3) it is
probable that over a decade most, if not all pools, will suffer osmosis
("Fail").
- To
be more precise :
The questions asked of the referee were:
"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?" [
Tranquility Pools & Spas Pty Ltd v Huntsman Chemical Company Australia
Pty Ltd NSWSC 58 [2008] at [7]].
His answers were provided at paragraph [104] of the report read as follows:
"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 Tranquility Pools, has caused failure. Pools which did not use
this material as a tie layer,
but made by Tranquility, 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
Tranquility using identical manufacturing methods, except
using other vinyl
esters in the tie layer, between April 2002 and 2004 have failed.
What role, if any, has the product played in relation to the Pool Failures?
The Hetron 922 supplied to Tranquility 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
Tranquility during the relevant period, nor is there
any evidence to suggest
that substandard manufacturing standards existed.
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.
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".
- On
20 February 2008, Bryson AJ ordered that the whole of the Report be adopted by
the Court.
- Huntsman
did not appeal this order. It has, however, adduced a great mass of evidence
which, if accepted, would contradict some or
all of the Referee's findings. The
extent to which those findings are binding upon the parties and the Court is a
significant area
of contest.
- Very
shortly after the commencement of the current final proceedings questions were
raised by both parties concerning the status to
be given by the Court to the
undoubted fact that the whole of the referee's report had been adopted. Of
particular note is the fact
that in paragraph 20 of the plaintiffs' contentions
it had pleaded that the product-caused the pool failures.
The principles
- It
is convenient before making a ruling on this in limini issue to revert to the
principles
- In
Fidelitas Shipping Co Limited v V/O Exportchleb [1965] 2 All ER 4,
Diplock LJ made a number of important observations concerning the nature of
issue estoppel.
- In
particular Lord Diplock put forward the following propositions [at 10] :
Arbitration, like litigation, is concerned only with the legal
rights and duties of the parties thereto. It is concerned with facts
only in so
far as they give rise to legal consequences. The final resolution of a dispute
between parties as to their respective
legal rights or duties may involve the
determination of a number of different "issues," that is to say, a number of
decisions as
to the legal consequences of particular facts, each of which
decisions constitutes a necessary step in determining what are the legal
rights
and duties of the parties resulting from the totality of the facts. To determine
an "issue" in this sense, which is that in
which I shall use the word "issue"
throughout this judgment, it is necessary for the person adjudicating upon the
issue first to
find out what are the facts, and there may be a dispute between
the parties as to this. But while an issue may thus involve a dispute
about
facts, a mere dispute about facts divorced from their legal consequences is not
an "issue."
In the case of litigation the fact that a suit may involve a number of
different issues is recognised by the Rules of the Supreme
Court which contain
provision enabling one or more questions (whether of fact or law) in an action
to be tried before others. Where
the issue separately determined is not decisive
of the suit, the judgment upon that issue is an interlocutory judgment and the
suit
continues. Yet I take it to be too clear to need citation of authority that
the parties to the suit are bound by the determination
of the issue. They cannot
subsequently in the same suit advance argument or adduce further evidence
directed to showing that the
issue was wrongly determined. Their only remedy is
by way of appeal from the interlocutory judgment and, where appropriate, an
application
to the appellate Court to adduce further evidence: but such
application will only be granted if the appellate Court is satisfied
that the
fresh evidence sought to be adduced could not have been available at the
original hearing of the issue even if the party
seeking to adduce it had
exercised due diligence.
This is but an example of a specific application of the general rule of
public policy, nemo debet bis vexari pro una et eadem causa.
The determination
of the issue between the parties gives rise to what I ventured to call in ... an
"issue estoppel." It operates
in subsequent suits between the same parties in
which the same issue arises. A fortiori it operates in any subsequent
proceedings
in the same suit in which the issue has been determined. The
principle was expressed as long ago as 1843 in the words of Wigram V.
C. in
Henderson v Henderson which were expressly approved by the Judicial
Committee of the Privy Council in Hoystead v Commissioner of Taxation I
would not seek to better them:
"I believe I state the rule of the Court correctly when I say, that where a
given matter becomes the subject of litigation in, and
of adjudication by, a
Court of competent jurisdiction, the Court requires the parties to that
litigation to bring forward their whole
case, and will not (except under special
circumstances) permit the same parties to open the same subject of litigation in
respect
of matter which might have been brought forward as part of the subject
in contest, but which was not brought forward, only because
they have, from
negligence, inadvertence, or even accident, omitted part of their case. The plea
of res judicata applies, except
in special cases, not only to points upon which
the Court was actually required by the parties to form an opinion and pronounce
a
judgment, but to every point which properly belonged to the subject of
litigation, and which the parties, exercising reasonable diligence,
might have
brought forward at the time."
Issue estoppel applies to arbitration as it does to litigation. The parties
having chosen the tribunal to determine the disputes between
them as to their
legal rights and duties are bound by the determination by that tribunal of any
issue which is relevant to the decision
of any dispute referred to that
tribunal. An arbitrator today has power to make an interim award determining
particular issues separately
from other issues in the arbitration. It is, I
understand, conceded by Mr. Goff, on behalf of the owners, that if the
arbitrator
does so, his interim award creates an issue estoppel as respects the
issue determined by the interim award. Neither party can at
any subsequent
hearing in the arbitration advance arguments or adduce evidence on that issue
directed to disputing the correctness
of the determination previously made. ...
In choosing arbitration as the method of determining disputes as to their
respective legal rights and duties, the parties constitute
the arbitrator the
exclusive tribunal to determine all disputed questions of fact, but they do not
thereby constitute him the exclusive
tribunal to determine all the legal
consequences of those facts. His determination of legal consequences of facts is
subject to correction
by the High Court. He is thus not the exclusive tribunal
to determine all the issues relevant to the dispute referred to him. Any
reference to arbitration under the Arbitration Act 1950, contemplates
that, if the appropriate statutory machinery is invoked, the High Court may in a
corrective role form part of the tribunal
to determine all or any of the issues
relevant to the dispute. The machinery can be invoked by the arbitrator, either
of his own
motion or by direction of the Court, stating his award whether final
or interim, or any part of such award as a special case for
the decision of the
High Court. Where his award is a final award stated in the form of a special
case, it does determine all the
issues between the parties though the
determination is inchoate. It still contains one or more potential alternative
determinations
of the legal consequences of the facts which the arbitrator has
found until the award is completed either by failure of the parties
to set down
the special case for hearing or by the High Court's answering the questions of
law stated. Once his final award is made,
whether or not stated in the form of a
special case, the arbitrator himself becomes functus officio as respects all the
issues between
the parties unless his jurisdiction is revived by the Court's
exercise of its power to remit the award to him for his reconsideration.
But
this is merely the way in which the principle nemo debet bis vexari pro una et
eadem causa affects the arbitrator's functions.
He has decided the questions of
fact as to which he is the exclusive tribunal; he has determined their legal
consequences subject
only to correction by the High Court on the stated
questions of law. The parties cannot reopen the same matters again before him.
Where his award is an interim award stated in the form of a special case, it
determines the particular issue or issues to which it
relates in alternative
ways dependent upon the answer of the High Court to the question of law stated
in the special case. It creates
an issue estoppel or issue estoppels between the
parties and the arbitrator is functus officio as respects the issues to which
his
interim award relates...
- K
R Handley the learned author of Spencer Bower and Handley, Res Judicata
(4 th ed, LexisNexis, 2009) makes the following observations in part 5.28
under the heading "Finality" :
Issue estoppels operate in later stages of the same suit, whenever
the trial is split. Where questions of liability in common law
proceedings are
separately determined and the claimant succeeds, the Court enters interlocutory
judgment for damages to be assessed.
The judgment is final for purposes of res
judicata , and binding on the parties in the assessment, but would not support
an action
until the assessment was completed.
- The
author then cites the central proposition put by Diplock LJ in Fidelitas
:
"Where the issue separately determined is not conducive of the suit
the judgement upon that issue is interlocutory ... and the suit
continues. Yet I
take it to be too clear to need a citation of authority that the parties to the
suit bound by the determination
of the issue. They cannot subsequently in the
same suit advance an argument or reduce further evidence directed to showing
that the
issue was wrongly determined."
- The
New South Wales Court of Appeal stated in Super Pty Ltd v SJP Formwork (Aust)
Pty Ltd (1992) 29 NSWLR 549 at 563, "a reference is not to be treated as
some kind of warm-up for the real contest". See also Bass v Permanent Trustee
Co [1999] HCA 9; (1999) 198 CLR 334 where the Chief Justice and five other judges said at
paragraphs 45 and 46 as follows
The purpose of a judicial determination has been described in
varying ways. But central to those descriptions is the notion that such
a
determination includes a conclusive or final decision based on a concrete and
established or agreed situation which aims to quell
a controversy. In R v
Trade Practices Tribunal; Ex Parte Tasmanian Breweries Pty Ltd (1970) 123
CLR 36 [52] , Kitto J said:
"[J]udicial power involves, as a general rule, a decision settling for the
future, as between defined persons or classes of persons,
a question as to the
existence of a right or obligation, so that an exercise of the power creates a
new charter by reference to which
that question is in future to be decided as
between those persons or classes of persons... [T]he process to be followed must
generally
be an inquiry concerning the law as it is and the facts as they are,
followed by an application of the law as determined to the facts
as determined;
and the end to be reached must be an act which ... entitles and obliges the
persons between whom it intervenes, to
observance of the rights and obligations
that the application of law to facts has shown to exist."
Similarly, Professor Borchard in his pioneering work, Declaratory
Judgments stated [53]:
"A judgment of a Court is an affirmation, by the authorized societal agent of
the state ... of the legal consequences attending a
proved or admitted state of
facts. It is a conclusive adjudication that a legal relation does or does not
exist. The power to render
judgments, the so-called 'judicial power,' is the
power to adjudicate upon contested or adverse legal rights or claims, to
interpret
the law, and to declare what the law is or has been. It is the final
determination of the rights of the parties in an action which
distinguishes the
judgment from all other public procedural devices to give effect to legal
rights." (footnotes omitted).
Returning to the contentions of the parties
- In
consequence of the importance of the issue the Court invited first the
defendants, then the plaintiffs and finally the defendants
in reply, to set out
their submissions on the above issue. The Court's invitation followed the
passing down to the parties of certain
questions to be answered.
- The
questions were as follows :
The defendant's position on the referee's report appears to be as
follows:
(1) Its primary submission is that although the referee's report accepts the
proposition that there is some link between the pool
failures and the use of
Hetron 922, it does not answer the real question of whether if the product was
used properly by Tranquility
it would have resulted in pool failures.
How is this consistent with the referee's finding that there was
no "evidence to suggest that substandard manufacturing standards
existed" at
Tranquility?
(2) The defendant has a secondary position that Tranquility itself has not been
content to rest with the referee's findings and has
attempted to lead further
scientific evidence regarding the cause of failure of the swimming pools. This
is part of a general contention
by the defendants that the issues put to, and
decided by the referee, were not sufficient to decide the case without further
consideration
of scientific issues.
Does the defendant seek to contend that the referee's report,
whatever it is held to decide, only applies to the twelve pools it concerned?
The defendant's contentions
- The
defendants initial contentions required to be paraphrased.
- Their
answer to question 1 was broadly as follows :
- (1) The short
answer to the first question is that there is no inconsistency between the
observation made or conclusion drawn by the
referee regarding the state of the
evidence adduced before him and the case which the defendant wishes to put
because;
(a) The referee was not asked to determine issues of
merchantability or fitness for purpose, or any other ultimate issue in the case;
and
(b) To the extent that issues remain to be determined, because they were not
finally resolved by the adoption of the referee's report,
the parties are at
liberty to adduce evidence relevant to those questions whether or not the
evidence was potentially relevant to
issues being determined by the referee and
whether or not the referee made observations regarding the state of that
evidence in the
course of his report.
(2) The referee was asked to consider and report to the Court on the question of
what has caused certain defined 'Pool Failures',
and what role (if any) Hetron
922 played in those failures. He was further asked to identify what proportion
of the other pools manufactured
in the relevant period by the plaintiffs would
fail. ...
(3) As a consequence of the fact that the scientific investigation of the issues
that were referred was not "finalized" at the time
that the Referee's report was
provided, the Referee could not answer the questions referred comprehensively;
in particular, the referee
could not explain the mechanism by which Hetron 922
caused pool failures, and could only "relate" the product to pool failures in
some unarticulated way (at [104(2)]).
(4) There can be no doubt that a report which identified and articulated the
mechanism of failure was contemplated by the parties
when the issues were
referred and would have been of greater utility to the Court in deciding the
"ultimate issues". However, the
plaintiffs moved the Court for the adoption of
the report that Professor Burford had been able to produce at that time. The
consequence
is .. that consideration of scientific issues has not been exhausted
and there will inevitably be an overlap in the matters the subject
of evidence
before the referee and the matters the subject of evidence before the Court.
(5) More particularly, scientific evidence that is relevant to an ultimate issue
(such as merchantability) must still be adduced,
even if the referee considered
part of that evidence when assessing the anterior question of causation. An
example of such a matter
is the question of manufacturing standards. It cannot
be that anything that is relevant both the anterior question of causation and
also relevant to the ultimate question of merchantability is now barred from
examination, merely because it was partially considered
in relation to the
anterior question of causation.
(6) It is notable, but not an essential element of the defendant's argument,
that the referee did not engage extensively with the
question of manufacturing
standards, or express a positive finding about manufacturing standards, but
merely referred to what he
concluded was an absence of evidence of substandard
manufacturing (at [104(2)]). One reason for the absence of any detailed
consideration
is that the referee himself purposely excluded evidence relating
to successful pool manufacturers on the basis that it would add
"unsustainable
complexity" (at [64]-[65]).
- The
defendants second and alternative argument included the following parameters :
- (1) The
evidence relevant to the argument identified by the Court is also relevant to
issues that do not turn upon establishing that
the defendant's resin was used in
some way that was "substandard" and consequently, that do not raise any conflict
with the observation
of the referee that has given rise to the concern.
- (2) It remains
open to the defendant to argue that the product was not unmerchantable because
it was plainly capable of being used
successfully in the tie layer of swimming
pools. There may be a range of "standard" manufacturing methods, some of which
lead to
blistering and some of which do not. Evidence of successful use of
Hetron 922 by other swimming-pool manufacturers suggests that
appropriate
methods for successfully using Hetron 922 must exist.
- (3) It is not
the case that unless the defendant proves that Tranquility used "substandard"
manufacturing techniques, then Tranquility's
claim that the resin was
unmerchantable is made out. On the contrary, for the purpose of proving a breach
of contractual warranties,
the onus of proving that Hetron 922 was "defective"
(and hence unmerchantable or unfit for purpose) rests on Tranquility at all
times.
- The
defendants answer to question (ii) was put inter alia as follows :
- (1) The
"certain pools" referred to in the definition of "Pool Failures" were the 12
pools selected by the parties and subjected to
scientific analysis and report;
but
- (2) The report
was not confined to 12 pools, because the fourth question required that the
referee attempt to extrapolate from his
conclusions in connection with the 12
identified pools and estimate how many of the pools constructed with the
"Product" would fail.
- (3) The answer
to the question which does seek an extrapolation beyond the 12 pools was plainly
of limited utility. The referee's
answer to what he identified as question (3)
was that: "It is probable that over a decade most, if not all, Pools will fail".
- (4) That
conclusion does not serve to discharge the plaintiffs' burden of proof other
than to the extent that it establishes that
50% of pools will fail.
- Before
giving the Court's decision it remains to add that the defendant's reply
submissions included the following paragraph :
- (1) While the
Court will not entertain a submission that there is no connection between the
pool failures and the use of Hetron 922,
any argument in connection with the
ultimate issues that is consistent with that finding, and any evidence relevant
to such an argument,
remain open to the defendant.
- (2) Accordingly,
issues that remain open include whether Hetron 922 was merchantable and the
closely associated issue of whether the
failures experienced by Tranquility are
a consequence of its failure to properly use the product.
- (3) That
factual issue is of relevance to the question of whether the alleged
representations were misleading and to questions of
contributory negligence.
- Also
before giving the Court's decision it is appropriate to examine certain of the
defendant's defences. I proceed accordingly
Huntsman's defences - the 12 pools only contention
- In
final address Huntsman indicated that it no longer pressed a previous argument
that the reference was confined to 12 pools only:
T1088.30.
Huntsman's defences - the re-agitation by Tranquility argument
- The
position in this regard may be summarised as follows:
- (1) Huntsman
has repeatedly submitted that it was Tranquility, not Huntsman that first
attempted to "re-open" the findings of the
Referee. It is not clear what the
consequence of this submission is said to be.
- (2) If it is
suggested that the plaintiffs have in any way waived the benefit of the Report,
or are by their conduct since its adoption
somehow estopped from relying upon
its findings, then such a claim has never been pleaded.
- (3) The subject
matter of the two reports of Professor George served after the adoption of the
Referee's report and before service
of Dr Pilato's first report, is dealt with
below. Neither attempted to reargue any matter before the Referee.
- (4) In respect
of the number of pools expected to fail, Tranquility has adduced statistical
evidence of the number expected to fail
as this is relevant to the quantum of
their claim, and is an issue which was not determined by the Referee (who only
determined that
"most, if not all" pools would fail).
Huntsman's defences - the "substandard manufacturing"
finding
- The
position in this regard may be summarised as follows :
- (1) Huntsman
appears to be submitting that the Referee's statement at paragraph [104](2) that
"[t] here is no evidence to show that
other changes in manufacturing occurred at
Tranquility during the relevant period, nor is there any evidence to suggest
that substandard
manufacturing standards existed" was an "observation" and not a
"finding" (with the consequence that it is not binding upon the parties
and the
Court).
- (2) In the
context in which it appears, this "observation" has all the force of a finding.
The most important part of the context
is that the one of the questions that the
Order for Reference asked the Referee to answer was "What other factors (if any)
have played
a role in the Pool Failures"?
- (3) In his
reasons for adopting the Report in whole, Bryson AJ noted that the questions as
posed in paragraph [104] of the Report
were put in somewhat different terms. His
Honour goes on to state, however, that the answer to this question "is to be
understood
from the terms of the report as a whole" [at [10]].
- (4) The Referee
noted [at [46]] that "there is general agreement between the experts that
Tranquility is regarded as a competent Pool
manufacturer (see summary Points of
Agreement, 11 August 2007) and there is no evidence that has been produced to
indicate that significant
personnel changes or changes in methods occurred
during the relevant manufacturing period". The "Points of Agreement" between
Professors
George and Shanks referred to stated relevantly that:
All evidence indicates that there were no inherent
problems in manufacturing and, as noted by the referee, there was agreement (at
Meeting 1 and Meeting 2) that the manufacturing process at Tranquility was at
the upper end of the spectrum and not implicated in
the failure.
(5) The Referee was asked to investigate and report on, inter alia, the
questions of whether Hetron 922 had caused the Pool Failures
and whether any
other cause could be identified by him. In the course of so doing, he
investigated, among other things, Tranquility's
manufacturing methods. This is
far from surprising. The universe of possibilities as to what could have caused
the Pool Failures,
either alone or in combination, was:
(a) something inherent in the Hetron 922 (including its
additives);
(b) something inherent in another component (such as the glass); and/or
(c) Tranquility's manufacturing methods.
(6) It was essential that the Referee consider the possibility that the Pool
Failures were caused by deficient manufacturing.
(7) But in circumstances where:
(a) the experts of both parties agreed as to the excellence of
the manufacturing method;
(b) there was no other evidence of deficient manufacturing; and
(c) there were no failures with any other resin despite the fact that the
same manufacturing methods and same personnel were involved,
it was not surprising that the Referee concluded he could "rule out"
substandard manufacturing as a cause.
(8) That the Referee expressed his conclusion without using the words "I find"
does not alter the fact that it was indeed a finding.
The Referee was not a
lawyer, but a scientist. His reasons " are not to be construed minutely and
finally with an eye keenly attuned to the perception of error " [
Politis v Federal Commissioner of Taxation (1988) 16 ALD 707 at
708 per Lockhart J] .
(9) The Referee was asked to investigate and report on the question of whether
there were other factors which materially contributed
to the Pool Failures. He
did so. He expressed his conclusion on this question in the part of the Report -
paragraph [104] - where
he was expressing his final findings. It follows that
his conclusion, in the context in which it appears, that there was no evidence
of substandard manufacturing standards, is a finding that there were none.
(10) Huntsman submits that the Referee did not consider the question of
manufacturing standards (essential to the question of whether
there
substandard manufacturing standards) because he purposely excluded such
evidence. This was an argument agitated by Huntsman before Bryson AJ in
support
of their submission that the Report ought be rejected. His Honour stated:
[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] ... 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.
(11) The Referee was asked to investigate and report on what caused the Pool
Failures, whether the Hetron 922 played a role and whether
any other factor
played a role. It would have been obvious that, at the commencement of the
investigation, one of the possible causes
was deficient manufacturing. If
Huntsman wished to contend that deficient manufacturing was a cause of the Pool
Failures, then it
was obliged to bring forward that evidence before the Referee.
As the NSW Court of Appeal stated in Super Pty Ltd v SJP Formwork (Aust) Pty
Ltd (1992) 29 NSWLR 549 at 563, a reference is not "to be treated as some
kind of warm-up for the real contest".
(12) Huntsman is bound by the consequences of its conduct. It failed to adduce
evidence and its own expert agreed with the expert
of the plaintiffs. The
Referee had no other choice but to make the finding that he did.
(13) Huntsman's contributory negligence defence was first pleaded by the
defendant in its Further Amended Defence filed on or about
11 May 2010, almost
exactly three years after the Order for Reference. It is not open for the
defendant to in substance re-open a
matter that had been decided by the Referee,
merely by amending its pleading.
Decision
- In
what follows the plaintiffs submissions are generally adopted as correct.
- In
short :
- (1) The
consequence of the Court's unqualified adoption of the Report is that:
(a) the allegation in paragraph 20 of the Defence cannot
be made out; and
(b) the defendant is not able to make any submission or ask the Court to make
any finding of fact in accordance with the particulars
to that paragraph, which
particulars have been adopted as the basis for the pleading at paragraph 27
(which denies that the Product
was not merchantable or fit for the purpose of
use in the barrier layer of swimming pools).
(2) The Referee's first finding is that the product caused the pool failures.
(3) The Referee's second finding is (relevantly) that there is no "evidence to
suggest that substandard manufacturing standards existed"
at the time of the
manufacture of the pools incorporating the Product.
(4) The Referee was asked to make a binding determination about the causes of
the pool failures. The only alternatives were the Product,
other components
(such as glass), deficient manufacturing procedures or a combination of these
factors. In those circumstances, a
finding that there is no evidence of
substandard manufacturing standards is a finding that there were no substandard
manufacturing
standards.
(5) The Referee's third finding is that "most, if not all Pools will fail".
(6) The plaintiffs correctly accept that further evidence is required to give
precision to the word "most".
(7) The above-described three findings do not, of themselves, determine any of
Tranquility's causes of action, whether in contract
or pursuant to the Trade
Practices Act.
(8) They are nevertheless deemed to be findings of the Court which the parties
are not permitted to contradict and which this Court
is bound to accept. Thus,
in Wenco Industrial Pty Ltd v W W Industries Pty Ltd [2009] VSCA 191 at
[11] per Redlich & Bongiorno JJA and Beach AJA ], the Victorian Court of
Appeal stated:
The orders of [the trial judge] adopting the referee's report
were interlocutory. There was no final disposition of the rights of
the parties.
The referee's answers in response to the reference and the Court's unqualified
adoption of them were not decisive of
the applicant's proceedings. The report
quantified certain matters prior to the determination of liability issues by the
Court. Yet
the parties were bound by the answers. They could not subsequently
advance argument or adduce further evidence designed to demonstrate
that the
answers were wrongly determined Fidelitas Shipping Co Limited v V/O
Exportchleb [1966] 1 QB 630 at 642 per Diplock LJ. The only remedy the
parties have is by way of appeal from the interlocutory order made.
(9) Thus, it is not open to the parties to contradict findings in fact made by
the Referee and adopted by the Court, whether or not
they are "ultimate
findings".
(10) Australian Energy Limited v Lennard Oil NL (No 2) [1988] 2 Qd R 230
- stands for the proposition that where the orders of a Court adopting a report
are ambiguous, those orders are to be construed conformably
with the reasons of
that Court in pronouncing those orders.
(11) In this case, the order made by Bryson AJ was that the Report "be adopted
in whole". There is no ambiguity in that order requiring
clarification by
reference to his Honour's reasons.
(12) The result is that the only relevant matters now before the Court are the
Referee's conclusions and reasons, and the order for
adoption.
A more precise identification of the further issues of fact
and/or law requiring to be determined in these proceedings
- A
more precise summation of the issues of fact and/or requiring to be determined
by the Court is as follows :
- (1) the extent
to which the Report is binding on the parties and the Court;
- (2) on the
plaintiffs' Trade Practices Act claims, whether:
(a) the pleaded representations ("the Representations")
were made,
(b) any or all of the Representations were false, misleading or deceptive,
(c) the Representations, alone or in combination, were a material inducement
in the purchase and use by the plaintiffs of Huntsman's
Hetron 922 in the
barrier layer of its fibreglass swimming pools,
(d) the use of Hetron 922 materially contributed to the Pool Failures, and
(e) whether Tranquility failed to take reasonable care in the manufacture of
the Failed Pools, and if so, whether that failure materially
contributed to the
Pool failures;
(3) on the plaintiffs' claims in contract, whether:
(a) Huntsman is permitted to rely upon its terms of contract
excluding and limiting liability for breach of contract,
(b) the Hetron 922 supplied to the plaintiffs was of merchantable quality
and/or fit for the purpose of use in the barrier layer of
swimming pools, and
(c) those breaches of contract materially contributed to the Pool Failures;
(4) the quantum of Tranquility's loss for the destruction of its business;
(5) the quantum of Tranquility's consequential losses;
(6) the quantum of Tranquility's present liability to its customers, which in
turn depends upon:
(a) the terms of any contract between Tranquility and its
customers,
(b) whether Tranquility breached that contract,
(c) whether Tranquility is otherwise liable to its customers pursuant to a
provision of part 2C of the Home Building Act 1989 (NSW) and/or division
2A, part V of the Trade Practices Act 1974 (Cth),
(d) whether any of these causes of action (by customer against Tranquility)
are statute-barred, and
(e) whether Tranquility's liability to its customers is "damage",
(f) the customers' legal entitlement as against Tranquility, and
(g) the quantification/assessment of that entitlement; and
(7) the quantum of Tranquility's likely liability to future customers, which
depends upon the same issues as set out in (f) above
plus the likely number of
pools that will Fail in such a way that Tranquility will be liable in respect of
that Failure.
- It
is further convenient to at this time focus on the consequences of the adoption
both in relation to the Trade Practices Act claim as well as the contract
claim. I proceed accordingly:
Consequences of adoption - the trade practices act claim
(1) The plaintiffs, to make out the defendant's liability pursuant to breach of
sections 52 and 53(a) of the Trade Practices Act 1974 (Cth), need to
establish, on the balance of probabilities, that:
(a) the four Representations pleaded in paragraphs 10 and 11 of
the Summons were made;
(b) one or more of those Representations was or were misleading or deceptive
(in respect of section 52) or in breach of section 53;
(c) the breach(es) of section 52 and/or 53(a) caused (materially contributed
to) the Pool Failures, and hence the plaintiffs' loss and damage flowing
therefrom, which
in turn requires the plaintiffs to establish that:
i. the Representations were a material inducement in the purchase of the
Product; and
ii. use of the Product was a cause of the Pool Failures.
(2) The defendant has, in turn, pleaded in paragraphs 36, 37 and 38 of the
Defence, a claim for contributory negligence, which, in
the event that the
plaintiffs establish the foregoing matters to the satisfaction of the Court,
requires the defendant to establish,
on the balance of probabilities, that:
(a) the plaintiffs, failed to take reasonable care in the
manufacturing of the Failed Pools; and
(b) that failure was a cause of the Pool Failures.
(3) The Report has not decided whether the Representations were made, whether
they were breached (though see section D below in respect
of the Fourth
Representation), or whether the plaintiffs relied upon them. Those matters must
be established by other evidence.
(4) The Report has, however, decided - finally - that the Product caused the
Pool Failures and that there was no contributory negligence.
(5) It must follow from the Referee's finding that there is no "evidence to
suggest that substandard manufacturing standards existed"
that not only can the
defendant not make out its case of contributory negligence at paragraphs 36 - 38
of the Defence , but that
it also cannot make out the matters in paragraphs
20(d) and (e) of the Defence.
(6) It is no longer open to the defendant to submit that the plaintiffs failed
to construct swimming pools "in a good and workmanlike
manner" or to use
"reasonable practices in the manufacture of swimming pools". A failure to use
"reasonable practices" is to use
"substandard manufacturing standards" and that
issue has been decided by the Referee adversely to the defendant.
Consequences of adoption - the contract claim
(7) The plaintiffs quite rightly accept that the issue of whether the Product
was merchantable or whether it was fit for the purpose
of use in the barrier
layer of fibreglass swimming pools has not been finally decided by the Referee.
(8) Although that ultimate issue remains to be decided, the parties
remain bound by the Referee's findings. The parties cannot make a submission (or
advocate
a finding) which, as a critical step in its reasoning, depends upon a
proposition of fact or law which contradicts the Report. Those
findings are
binding for all purposes, including the plaintiffs' claim in contract. They are
not limited to the plaintiffs' claim
under the Trade Practices Act .
(9) The defendant can no longer assert, for any purpose, including its claim
that the Product is merchantable and/or fit for purpose,
that the Product did
not cause the Pool Failures, or that substandard manufacturing procedures on its
part contributed to such failures.
It follows that the defendant may not assert
the matters particularised under paragraph 20(d) of the Defence - insufficient
wet-out,
overly variable laminate thickness and incomplete cure - as evidence of
negligent manufacture, rather than as flowing the use of
the Product in the
barrier layer.
(10) The defendant may not rely on these matters for the purposes of paragraph
20 of its Defence (on the issue of causation) or paragraph
36 (contributory
negligence), or paragraph 27 (merchantability or fitness for purpose).
(11) The defendant is therefore limited to arguing, by reference to the "other
manufacturers" evidence particularised under paragraph
20(e) of the Defence,
that the Product is merchantable and/or fit for purpose by reason of the fact
that the plaintiffs' manufacturing
method is distinct from those of the typical
user of the Product. That is, the defendant must establish that the plaintiff
did not
use the Product in the ordinary way.
(12) It will not be sufficient for the defendant to establish, if it can (the
issue is in contest), that although the plaintiffs
used the Product in the
ordinary way, they did so utilising some deficient manufacturing process.
(13) Two further points remain
(a) The first is the reference in paragraph [7] of the
defendant's submission to the Referee's refusal to include evidence going to
other manufacturers. The Referee was not required to conduct the reference in
the manner of a Court hearing. The adoption of the
Report in whole by the Court
makes this complaint irrelevant for the issues that remain to be decided. To the
extent that evidence
from other manufacturers could have influenced matters
decided by the Referee, the time for complaint was before Bryson AJ.
(b) Second, this evidence was properly excluded by the Referee because, at
that time the defendant refused to disclose the identity
of these others
manufacturers: see paragraphs [14] and [15] of the affidavits of Noel Godfrey
dated 15 June 2007, and exhibits NG-2
and NG-3 thereto. The defendant has only
done so relatively recently. The defendant is bound by the consequences of its
own conduct.
How to further the enquiry?
- Notwithstanding
the finding that the report is binding upon the Court and the parties, both
parties contended that this was an appropriate
case in which [against the event
that the Court's decision on the binding nature of the referee's report may be
incorrect] the Court
should nonetheless proceed by examining the issues. Whilst
I have had a degree of anxiety in relation to the prudence of the Court
acceding
to this request the fact is that this is a very unusual case affecting numerous
individuals and may well be approved very
likely to go to the Court of Appeal. I
proceed accordingly to deal with the scientific evidence and its evaluation.
Returning to giving a hopefully user-friendly summation of how
fibreglass pools of manufactured
Explaining some of the basics
- There
are a number of terms which require to be understood. It seems convenient to set
out a glossary of terms at the end of these
reasons.
The process
- Fibreglass
pools are manufactured:
- (1) on a mould
using a specialised type of spray/chopper gun;
- (2) in layers:
(a) all of which comprise a resin (either vinyl ester or
polyester); and
(b) certain of which (the barrier and structural layers) also comprise glass
fibre.
- In
the layers comprising resin and glass fibre (the barrier and structural layer):
- (1) the
combination of resin and glass provides toughness and durability;
- (2) the
function of the resin is to hold the glass fibres in those layers together;
- (3) the glass
fibres and resin are fed into the chopper gun; the chopper gun chops the glass
fibres and mixes them with the resin;
and then sprayed on the mould depositing a
thin coat of the mixture. The process is repeated until the required thickness
is achieved;
- (4) once the
resin and fibreglass have been sprayed onto the preceding layer, the material is
" laminated" or " rolled " by a laminator using a roller similar
to a paint roller) to ensure that:
(a) the fibreglass bundles are "wetted" by the resin;
(b) air is released; and
(c) the fibreglass is "de-bundled" so that the resin "wets" the individual
fibres.
- The
viscosity of the sprayed material is important:
- (1) The
material sprayed must, as it leaves the chopper gun, have a viscosity allowing
it to be sprayed towards and onto the mould;
- (2) The
material must nonetheless, once it hits the mould, have a viscosity sufficient
to hold the position on the mould in which
it is placed by the spray gun;
- (3) The
material must not "slump" or drape down the side of the mould while it is
curing;
- (4) The
variable viscosities necessary to achieve this result are provided by mixing in
a thixotrope [a substance which promotes the
ability of a liquid to change from
a "thicker" (viscous, or less free flowing) state to a "thinner" (less viscous,
or more free flowing)
state, and back again].
Resin
- In
this case, the resin used in the barrier layer was a vinyl ester resin.
- The
product supplied by the defendant was Hetron 922 comprising:
- (1) vinyl ester
resin;
- (2) styrene (a
solvent whose function is to create cross links in the vinyl ester resin,
thereby adding to the strength of the finished
product);
- (3) various
components used in the manufacture of the vinyl ester resin, including ethylene
glycol;
- (4) an
initiator (see below - of marginal relevance to the issues);
- (5) a
promoter/stabilizer (copper naphthenate - see below); and
- (6) a
thixotrope (see below - of critical relevance to the issues).
Glass Fibres
- The
glass fibres:
- (1) are
manufactured in rovings (a "string" comprising glass fibres drawn out but not
twisted);
- (2) are coated
with and bound together by "sizing" which:
(a) is a protective coating on the bundles of fibres;
(b) comprises polyvinyl acetate or vinyl acetate ethylene polymer;
(c) is susceptible to hydrolysis (chemical breakdown due to reaction with
water usually in the presence of a catalyst such as alkali);
(d) enables the rovings to be bound together in a roll (called a "cheese");
(e) enable the fibreglass rovings to be unravelled from the "cheese" and fed
into a chopper gun in which the glass fibres are chopped
into small pieces and
mixed with the vinyl ester resin and sprayed onto the pool mould (see below).
The size holds the bundles of
fibres together and protects them from abrasive
damage.
Layers
- Gelcoat
Layer
- (1) The first
layer to be applied to the swimming pool mould (and thus the outer or top layer
when the pool shell is removed from
the mould) is the gelcoat layer.
- (2) The gelcoat
layer:
(a) is comprised of polyester resin;
(b) does not contain fibreglass,
(c) forms a semi-permeable membrane through which water will migrate.
(3) The gelcoat layer is a cosmetic layer and provides the colour of the pool:
(a) The pool can be a tinted monochrome colour (blue, sand,
white or jade). These comprise approximately 20% of the relevant Tranquility
pools.
(b) Or the colour can be a "shimmering" colour (with highlights) usually
within a clear gelcoat. Such pools comprise 80% of the relevant
Tranquility
pools.
- Mist
Layer
In most of the 80% of cases where the gelcoat is clear (that is in
the case of non-monochrome gelcoats), the next coat is the mist
layer which;
(a) does not contain fibreglass
(b) is comprised of tinted vinyl ester resin (and provide the pool colour and
so that the pool does not take on the colour of the
barrier layer - see below)
Gelcoats originally came solely in monochrome " solid " colours,
usually a shade of blue, white, "sand" or jade. Tranquility, however, like some
other fibreglass swimming pool manufacturers,
had developed an array of
specialised " non-solid " colours which, to a lightly tinted gelcoat,
added mica for a "shimmering" effect and/or gelcoat chips and dust for a
"speckled"
effect.
- Barrier
Layer
The next layer (in 80% of cases the third layer) is the barrier
layer (also called the tie, or corrosion layer);
(a) The role of which is to prevent pool water which is migrating through the
gelcoat layer from attacking the fibreglass and general
purpose resin in the
structural layers (see below);
(b) In Tranquility pools is comprised of fibreglass and vinyl ester resin, as
described above.
- Structural
Layers
The next two layers (in 80% of the cases the fourth and fifth
layers) are the "structural" layers of the pool which:
(a) provide the strength of the pool;
(b) are comprised of fibreglass and general purpose resin.
- Final
Layer
The final layer is a gelcoat like product which:
(a) is sprayed on the "back" of the shell;
(b) whose only function is to improve the appearance of the "back" of the
finished product.
- The
gelcoat, barrier/tie/corrosion layers and the structural layers of the pool
comprise the " laminate" of the pool.
Resin
- Best
practice is to use vinyl ester resin in the barrier layer because it is:
- (1) less
susceptible to hydrolysis;
- (2) tougher
(than the alternative, viz polyester resin);
- (3) susceptible
to co-mingling, so that it is easier for subsequent pool layers to bond to it.
- Polyester
resin is:
- (1) now
uncommonly used in the barrier layer;
- (2) but used in
the gelcoat and structural layers (albeit in differing varieties);
- (3) susceptible
to hydrolysis:
(a) which is the reason it is not suitable for use in the
barrier layer;
(b) is nonetheless suitable for use in the gelcoat layer because there is no
glass fibre in the gelcoat layer;
(c) is nonetheless suitable for use in the structural layer because the
structural layer is protected by the barrier layer (that being
the purpose of
the barrier layer).
- As
mentioned, the vinyl ester resin used by Tranquility was Hetron 922 which
comprised:
- (1) vinyl ester
resin;
- (2) styrene;
- (3) other
(minor) components used in the manufacture of the vinyl ester resin including
ethylene glycol;
- (4) an
initiator (see below);
- (5) a promotor
(see below); and
- (6) a
thixotrope.
- Because
of the manner in which the barrier layer is applied to the pool mould (see
above) it is necessary that the vinyl ester resin,
which is a liquid:
- (1) have the
correct flow properties so that it can be sprayed onto the mould, cover the
mould, not slump on the mould; and then,
- (2) cure or set
so that it becomes solid.
- In
order to achieve this a number of steps must be taken.
Initiator
- The
first is to add to the mix a catalyst or initiator which:
- (1) initiates
the process whereby the liquid of vinyl ester resin can be converted to a gel
and to then set;
- (2) is a
peroxide (methyl ethyl ketone peroxide);
- (3) is
mechanically metered (1.5%, 2%, 2.5%) by spray gun settings as determined by the
operator;
- (4) is adjusted
in amount depending on the temperature at the time.
Promoter
- To
ensure that the initiator operates effectively regardless of the temperature it
is necessary to add a promoter:
- (1) the
function of which is to accelerate the decomposition of the initiator;
- (2) one
promoter added by Huntsman to Hetron 922 was copper naphthenate, the use of
which decreases the heat produced during cure
(and is thus an "exotherm") and
lowers the temperature at which the resin/glass mixture solidifies.
- (3) Another
promoter added is cobalt octoate:
(a) less is needed when the weather is warmer so that;
(b) vinyl ester resin is provided in a "Winter" grade (with more promoter);
or
(c) a "Summer" grade (with less promoter);
(d) this is usually (and in this case was) incorporated by the vinyl ester
resin manufacturer at its factory so that the resin is:
(i) provided in a "promoted" form; and
(ii) either a Winter or Summer blend.
Thixotrope
- Vinyl
ester resins, when applied to a swimming pool mould as a part of a barrier
layer, must also contain a thixotrope:
- (1) the
function of which is (as outlined above) to act as viscosity control agent and
thus enable the resin to change from a liquid
(high viscosity) state to a liquid
of lower viscosity solution when pumped and sprayed, and to re-thicken when the
material is at
rest, thus enabling its ready application when sprayed onto
intricate mould configurations such as for pools;
- (2) in the
absence of which the vinyl ester resin would be deposited onto the mould from
the spray gun but would then run off or slump
down the pool mould;
- (3) which can
either be incorporated into the vinyl ester resin by the resin manufacturer at
its factory (in which case the vinyl
ester resin is supplied to the pool
manufacturer as " thixed ") or at the pool factory by the pool
manufacturer - e.g. by Compass Pools - in which case the vinyl ester resin is
described as "
unthixed".
- (4) the object
of using a thixotrope is that the vinyl ester resin will have a:
(a) low viscosity at high shear [the strain
produced by pressure in the structure of a substance when its layers are
laterally shifted in relation to each other ]
(so that it can be sprayed); and
then
(b) high viscosity at low shear or rest (so that once it is on the mould it
reunites quickly and sets);
(5) for example, toothpaste contains a thixotrope so that:
(a) it is in a gel form in the tube;
(b) remains at high viscosity at low shear (when transferred from the tube to
the toothbrush); and
(c) has low viscosity at high shear (when brushed into the mouth).
- Thixotropes
can be either " unmodified" or "modified".
- Unmodified
thixotrope:
- (1) comprises
fumed silica;
- (2) silica
comprises SiO 2 and:
(a) is a highly purified "sand";
(b) is in the form of a fine powder (little like flour);
(3) "fumed" means that the SiO 2 is heated in order to make extremely fine
particles.
- The
natural state of thixotrope is unmodified.
- Unmodified
fumed silica is naturally hydrophilic:
- (1) that is wet
by water;
- (2) like an
unwaxed motor car;
- (3) like plain
flour.
- Unmodified
fumed silica can be modified by putting a coating of silicone on the fine
powders. This:
- (1) Is done by
the supplier;
- (2) adds
significant expense.
- Modified
fumed silica becomes hydrophobic:
- (1) that is, it
repels water;
- (2) like a car
waxed using a silicone car wax;
- (3) like talcum
powder (on which water "beads" up).
- It
is necessary to match the thixotrope (unmodified or modified) with the substance
in which it is to function.
- The
thixotrope recommended for use with vinyl ester resins is a hydrophobic
thixotrope, not a hydrophilic thixotrope.
- Three
thixotrope manufacturers (Degussa, Cabot and Wacker) recommended against
hydrophilic thixotropes for vinyl ester resin.
- Other
manufacturers of vinyl ester resin used hydrophobic thixotrope (e.g. Derakane -
which Tranquility used before they used Hetron
922).
- These
proceedings concern the use by Tranquility of Huntsman's Hetron 922 in the
barrier layer of its swimming pools in the period
24 April 2002 to 21 April 2004
("the Hetron Period"). Before proceeding to set out the basic history of the
dealings between the
parties (and the aftermath to those dealings), it is
important to briefly set out the importance of the barrier layer.
Osmotic blistering
- This
may be explained as follows:
- (1) All
fibreglass in aqueous environments, principally swimming pools, spas and boat
hulls, is vulnerable to a process known as "osmotic
blistering". This process
commences when water migrates into the laminate and reacts with certain
compounds therein in a process
known as " hydrolysis" .
- (2) Unsaturated
poly-ester resins (as are often used in the structural layers of fibreglass
swimming pools) are known, for example,
to be vulnerable to hydrolysis when in
the presence of glass fibres. Another compound susceptible to hydrolysis is the
protective
coating on the glass fibres which is known as "sizing". The sizing
usually comprises poly vinyl acetate or an ethylene vinyl acetate
co-polymer.
- (3) The process
of "wet out" - ensuring as far as possible during the process of spraying and
lamination that each glass fibre is
covered with resin - is important, among
other reasons, because the resin dissolves the sizing.
- (4) In certain
circumstances, the accumulation of the breakdown products of hydrolysis
commences a process of " osmosis ", whereby water from a region of a low
concentration of water-soluble materials (such as the water inside a pool)
migrates through
the semi-permeable cosmetic and mist layers to a region of a
high concentration of water-soluble materials (the barrier and/or structural
layers). This process builds up pressure inside the laminate which then leads to
distortions in the surface of the laminate known
as " blistering ".
- (5) In many
blisters, the pressure increases to the point where it bursts leaving a crack in
the cosmetic layer. In such a case the
water will react with the cobalt salts
from the promoter in the resin to form a black reside of cobalt oxide. These are
known as
"blackspots".
History of dealings between Tranquility's principals
and Huntsman
- The
plaintiffs' principals are Kevin Kahler and David Annakin. In 1977, Mr Annakin
commenced employment with a fibreglass swimming
pool manufacturer known as
International Pools Pty Ltd ("International"). In 1986, Mr Kahler purchased
International. In 1987, Mr
Annakin became factory manager of International.
- International
used, at various times, two resins in the barrier layer of its pools
manufactured by the defendant (then known as "Chemplex
Sales (Australia) Pty
Limited"). These resins were the vinyl ester resin then described as "Hetron
922" and a modified poly-ester
resin known as "Aropol 7000".
- In
the period 1986 to 1993, International increased its sales from approximately
180 pools a year to approximately 1,500 pools a year
- an increase of just over
35% annually for a period of seven years.
- In
1993, however, International received a number of complaints from its customers
that the pools it had sold were defective because
they suffered from blisters
and blackspot characteristic of osmotic blistering.
- Mr
Kahler and Mr Annakin formed the view that the osmosis outbreak was the result
of the use of Aropol 7000. The seller of Aropol
to International, Ferro
Corporation (Aust) Pty Ltd ("Ferro"), commenced proceedings against
International and related entities for
the price of unpaid resin. Mr Kahler
caused International and related entities to issue a cross-claim against Ferro
alleging that
the Aropol 7000 was defective. Ferro, in turn, issued a
cross-claim against the defendant, the manufacturer.
- Those
proceedings were heard by Cole J of this Court. His Honour handed down judgment,
in so far as it related to liability, on 8
August 1994 [ Ferro Corporation
(Aust.) Pty Limited v International Pools (Aust.) Pty Ltd , (unreported,
Supreme Court of New South Wales, 8 August 1994, Cole J], finding, inter alia,
that the Aropol 7000 was the "dominant
cause" [at page 16] of the failures in
pools manufactured using it by International [the plaintiffs do not rely on this
finding in
this proceeding, as Aropol 7000 was a different resin. It is,
however, an important part of the background and relevant to the David
Annakin's
state of mind when representations are later made to him on behalf of the
defendant in respect of Hetron 922]. The remaining
issues in those proceedings
were ultimately resolved by agreement, with the establishment of a trust from
which International would
pay for repairs.
- The
first plaintiff, Tranquility Pools & Spas Pty Ltd ("TPS"), was incorporated
on 20 August 1999 at the direction of Mr Kahler.
The directors were Mr Annakin
and Donald Magner, the former being the factory manager and the latter in charge
of sales. The great
majority of the shares were (and remain) held on trust for
Mr Kahler's family.
- From
its incorporation in 1999 until April 2002, the first plaintiff predominantly
used a vinyl ester resin known as "Derakane 411/SPV
1265" (hereafter "Derakane
411") (then produced by a company known as "Fibreglass International" or "FGI")
in the barrier layer of
its swimming pools.
- Sometime
just before April 2002, a Huntsman representative - Glen Rapson - attended upon
Mr Annakin and stated that the vinyl ester
resin manufactured by it for use in
the barrier layer of swimming pools - Hetron 922 - was cheaper than Derakane
411. Mr Annakin
stated that he was reluctant to deal with the defendant again
after the experience International had had with Aropol 7000.
- Mr
Rapson then made the following representations:
- (1) that the
Hetron 922 Huntsman would provide Tranquility for use in the barrier layer of
its swimming pools was a "20 year old product"
and a "proven product" ("the
first representation");
- (2) that it was
"the same" as the Derakane 411 currently resin being used by Tranquility ("the
second representation"); and
- (3) that
Huntsman "would stand behind its products" ("the third representation").
- Shortly
thereafter, Mr Annakin caused the first plaintiff (TPS) to use Hetron 922 as the
predominant resin in the barrier layer of
its swimming pools. TPS continued to
do so until September 2003 when its shares were sold to Gary and Vicki Martine
at which time
it became exclusively a retailer of fibreglass swimming pools
manufactured by a new company, the second plaintiff - Tranquility Pools
&
Spas (Manufacturing) Pty Ltd ("TPSM"). TPSM assumed the manufacture and
wholesaling part of the business of TPS.
- TPSM
continued to use Hetron 922 in the barrier layer of the pools it manufactured
until 21 April 2004.
Huntsman experiments with Hetron 922
- Thixotropes
can come in two forms: "hydrophilic" [literally "water-loving" and in this
context meaning "water attracting"] and "hydrophobic"
[literally "water-fearing"
and in this context meaning "water repelling"]. Hydrophilic thixotropes are
"unmodified fumed silicas":
highly purified silicon dioxide (the primary
component of sand, quartz and glass, among other things) heated in a way to
create extremely
fine particles. To the naked eye and touch they look somewhat
like flour. In their natural state they are hydrophilic in that they
are "wet"
by water and absorb it, again like flour.
- Hydrophilic
thixotropes can be "modified" to become hydrophobic. This modification may be
done by the manufacturer of the thixotrope,
and usually involves coating the
silica particles with a "silicone". Being hydrophobic, the modified fumed silica
repels water -
like talcum powder upon which it beads up. The process of
modification makes hydrophobic thixotropes significantly more expensive
[Dr
Durrant said that hydrophilic thixotropes are about half the price of
hydrophobic thixotropes: T 550.12].
- Thixotropes
must be matched with the liquid to successfully impart a desired thixotropic
effect. Prior to 2002, most commonly, only
hydrophobic thixotropes were used in
vinyl ester resins. The three principal manufacturers of thixotropes - Degussa,
Cabot and Wacker
- recommended against the use of hydrophilic thixotropes in
vinyl ester resins.
- As
at late 1988, the resin then known as Hetron 922 was only ever sold with a
hydrophobic thixotrope according to this prevailing
wisdom. On or about 15
November 1988, Dr Graham Durrant, a Research Chemist employed by Huntsman,
conducted some laboratory tests
to see if the unmodified (hydrophilic) fumed
silica known as "Wacker N20" would impart thixotropy to Hetron 922. The results
of his
tests were inconsistent, so he temporarily shelved the project.
- Dr
Durrant resumed testing on 25 July 1994. These tests entirely failed and the
project was shelved once more.
- Dr
Durrant returned to his project on 28 October 1997. These tests returned what he
considered to be good results. Given that success,
he decided to create
fibreglass panels as if he were manufacturing a swimming pool for the purpose of
conducting laboratory "blister"
tests, designed to test the resin (including its
additives) for water resistance. The panel created with Hetron 922 and the
hydrophilic
thixotrope ("Aerosil 200") performed poorly.
- Dr
Durrant states that at the time he did not consider the possibility that the
fault lay with the thixotrope, but rather with another
additive - "methyl
maleate" - which was water soluble and hence "susceptible to water ingression,
which can result in blistering".
- The
defendant manufactured Hetron 922 under licence from the patent holder, Ashland
Inc. Late in 2000, Ashland issued new manufacturing
instructions to Huntsman.
One of these instructions resulted in the addition of (the water-soluble)
ethylene glycol. Another was
the consequence of the adoption of the patented
"F-CAT Technology" by Ashland, which included, inter alia, the addition of the
promoter
copper naphthenate.
- In
December 2000, Dr Durrant issued an internal manufacturing instruction regarding
Hetron 922 - Number 53125, Revision 13 - incorporating
these changes to the
manufacturing and composition of Hetron 922.
- On
28 November 2001, Dr Durrant conducted comparative testing of the thixotropic
effect of unmodified (hydrophilic) and modified (hydrophobic)
fumed silicas with
Hetron 922 (including styrene and promoters, because these could also change the
viscosity of the resin) in the
laboratory. He did further tests into January
2002. The results for the hydrophilic thixotrope were good.
- As
a result of these tests, Dr Durrant issued a written manufacturing instruction
in March or April 2002 that Hetron 922 in its "thixed"
and "promoted" form (ie
with added thixotrope, promoter and accelerator) was to use the hydrophilic
Wacker N20 as the thixotrope
[Exhibit P29; it is apparent from this exhibit that
the formal decision to make the change was made on or about 27 March 2002 and
that the first batch of this new formulation was created on 12 April 2002].
- At
the time the Hetron 922 was provided to Tranquility, neither Dr Durrant nor any
other person had conducted water resistance tests
of any kind on the new
formulation.
The pool failures and the aftermath
- When
Huntsman supplied the first batches of Hetron 922, Ben Cooper - Tranquility's
chopper gun operator who, with two laminators,
fashioned the barrier and
structural layers of all Tranquility pools - reported that the resin was
alternatively too viscous during
spray or slumping on the mould. Huntsman stated
that these difficulties could be rectified with the addition of further styrene
and
promoter and that appeared to resolve the difficulties that had been
reported.
- During
the period 24 April 2002 to 21 April 2004 ("the Hetron Period"), Tranquility
manufactured 1033 pools. Of those, 837 pools were
manufactured using Hetron 922
in the barrier layer ("the Hetron Pools"). The other 196 pools were manufactured
using four other vinyl
ester resins: Derakane 411, Megaresin VetP15, St Gobain
CV, and another resin manufactured by Huntsman known as "Estarez 7222" ("the
Non-Hetron Pools").
- Tranquility
ceased using Hetron 922 on 21 April 2004 after it had confirmed a complaint from
a customer that a Hetron Pool had exhibited
blistering and blackspot.
Thereafter, many such further complaints were made. At the present time, such
complaints have been made
and confirmed in respect of 428 Hetron Pools ("the
Failed Pools").
- There
have been no complaints in respect of the Non-Hetron Pools, nor any other pool
manufactured by Tranquility during the entire
period of its existence. Recent
inspections of a substantial set of non-Hetron Pools revealed that none of them
were affected by
Osmosis.
- The
plaintiffs contend that as a result of the osmosis outbreak, Tranquility's
business has diminished to the point where it is presently
incurring substantial
losses. The plaintiffs' contention is that it manufactured and sold 262 pools in
the financial year to 30 June
2001 to a height of 616 in the financial year to
30 June 2005 (with 592 being sold in the previous financial year). The
plaintiffs'
further contention is that in the financial years to 30 June 2009
and 2010, however, Tranquility manufactured only 202 and 214 pools
respectively
- and some of these were manufactured "on consignment", in that they were
manufactured without first having been ordered
and sold.
- Tranquility
has brought these proceedings to recover compensation for the destruction of its
business and for consequential loss,
including its liability to customers which
have been provided with defective pools.
Causation
The nature of the enquiry
- As
Tranquility has accepted, it must establish, on the balance of probabilities,
that the Hetron 922 caused (materially contributed
to) the Pool Failures.
- However,
it is not necessary for Tranquility to identify the precise reason, as a matter
of science, or the precise "constitutional
deficiency or deficiencies" in Hetron
that caused the Pool Failures: [ Narellan Pools Pty Limited v Huntsman
Chemical Co Australia Pty Limited [2010] FCA 267 at [104] & [177] per
Edmonds J]. The question is a question of law to be answered as a matter of
common sense and is not bound by scientific
or philosophical notions of
causation [see March v E & MH Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506 at
509 per Mason CJ and at 529 - 530 per McHugh J].
- The
question to be answered is "did the use of Hetron 922 materially contribute to
the Pool Failures"? Although the "how" and "why"
it might have done so might
assist in arriving at the answer to that question, they are not necessary to
answer it.
The evidence of Professor George
- Professor
George [currently Emeritus Professor of Polymer Science at the Faculty of
Science of Technology at the Queensland University
of Technology] was both by
his credentials, by the content of his respective reports, by his demeanour, by
the manner in which he
gave evidence in chief and during his cross-examination
an extremely careful witness.
- He
had provided a considerable number of reports each of which was carefully
considered. Where during his extensive cross examination,
propositions were put
to him testing the reasons for his conclusions, he was able to immediately take
issue with those propositions
by exposing his reasoning processes in a fashion
which I regarded as logical and pervasive.
Identifying Professor George's several reports
- His
several reports were as follows :
- (1) First
report dated 3 October 2008;
- (2) Second
report dated 15 December 2008;
- (3) Third
report of 16 March 2010;
- (4) A further
report of 19 March 2010;
- (5) A further
short report of 1 September 2010;
- (6) A lengthy
report including his report on the conclave dated 1 September 2010;
- (7) A report of
27 October, 2010;
- (8) A report of
23 November, 2010.
- At
the commencement of his examination in chief the following overview of his
extensive experience came forward :
Q. Is this right, that generally your area of speciality is
composites?
A. Yes.
Q. But you have particular experience don't you, in the swimming pool
manufacturing area?
A. Yes certainly my main area of interest is where material fail,
particularly polymeric materials which this is in the category.
My CV is in a
sense split into two. When I was previously a defence scientist I worked both at
the defence materials research laboratories
in Maribyrnong on composite
materials and also at the United States Army Materials Mechanics Research Centre
on failure of composite
materials and ways of improving them. So in terms of the
interaction of that experience with this case I have had the experience
of
analysing composite materials, looking at the failure of them, and in many cases
being able to make recommendations in that frame
work.
Q. Now at page 6 of your CV, page 129 of your affidavit you list some
companies and projects with which you have been involved?
A. Yes.
Q. Do you not. And are the ones that bear particularly on the question of
your experience with swimming pools are the ones that we
see starting on page
130 at paragraph 50?
A. Relying on my memory yes.
Q. That is International Pools, osmotic failure of fibreglass and repair
technology?
A. Yes I was actually a referee for the Supreme Court in that matter.
Q. There was some litigation in that matter was there?
A. Yes and convened meetings, conclaves of experts which are chaired and on
the basis of evidence over considerable period, we prepared
a report which went
forward to the judge at that time.
Q. And that was Cole J was it?
A. Cole J, yes.
Q. So in the International Pools litigation you played the same role that
Professor Burford has played in--
A. That's correct.
Q. In paragraph 52 you make reference to the Building Services Corporation
and you say swimming pool failure and repair protocols?
A. Yes I was contacted by the Department of Fair Trading to work with the
pool builders to come up with a specification for repair
of a very large number
of pools which had failed and as part of their responsibility to the owner the
department undertook to develop
the best method at the time to be able to repair
them, so I worked with the pool builders to come up with a very strict and tight
specification.
Q. And in paragraph 53 there is a reference to Pool World, osmotic failure of
fibreglass what was that about?
A. I was then asked to give comment, because of my background in this area,
I've been asked for a number of clients when they have
had a problem for my
expert opinion on what might have caused that problem.
Q. Pool World a company is it?
A. Yes.
Q. What was the problem that Pool World had that you were involved in?
A. Well there was both a gelcoat issue and a blister issue and when one looks
at blistering that can occur in a number of different
places in a laminate, very
often, and often in boats it is behind the gelcoat and others are deeper into
the laminate, so in this
case we are talking about them deeper into the tie
layer, but a lot of the blisters actually occur quite close to the surface and
I
recollect that that was a gelcoat blister.
Q. Was the Pool World matter a Court case or were you simply giving advice to
the company about a problem they had?
A. No, no it did not go to Court.
Q. On page 8 of your CV, page 131 of your report, at paragraph 7 you mention
Narellan Pools, blistering of vinyl Ester tie layers,
I think that was
involvement in Court proceedings in the Federal Court?
A. Yes, that was in the Federal Court.
Q. Between Narellan and the current defendants?
A. That's correct.
Q. You gave advice to Narellan; did you play in the same sort of role that
you're playing for Tranquility in this?
A. Yes I was an expert witness of the Court in that matter and I worked with
Professor Shanks. We mentioned conclave, we didn't have
a referee in that case
and we also wrote our reports on that matter which was then heard before Justice
Edmonds.
Q. You'd have the pleasure of being cross-examined by Mr Sirtes in that case
I think?
A. Yes I was.
Q. The last one on your list is Tranquility Pools which of course is the case
that we're in now correct?
A. That's correct. There were other times when I have been consulted by aqua
techniques in a matter of glass problems, again an inter
facial failure. So I've
been able to use the experience that's been gather to help pool builders when
they do have a problem from
time to time.
The evidence of Dr Pilato
- Dr
Pilato early in his cross-examination was asked and gave the following answers :
Q. You were present when I asked Professor George to emphasise the
particular projects with which he has been involved in relation
to the swimming
pool industry?
A. Yes.
Q. And you would agree with this, wouldn't you that he has had a good deal
more experience than you have in relation to the swimming
pool industry?
A. Surely has.
Q. And has had a good deal more experience than you have in relation to the
manufacture of swimming pools, fibreglass swimming pools?
A. I would agree.
Q. Now isn't it fair to say that for all the length and depth of your
experience in the scientific world you've had until this case,
no direct
experience with swimming pools?
A. That's correct.
Q. Now and I think your principal area of expertise is in the aerospace
industry, is that oversimplifying things?
A. I think it's probably in high performance composites and aerospace but not
necessarily aerospace itself.
Q. Now, you know don't you that a central if not the central issue in the
proceedings before his Honour is whether the Hetron 922
with a hydrophilic
thixotrope caused the blisters?
A. Yes.
Q. But it's fair to say isn't it, that you offer no scientific opinion on
that question?
A. Yes.
Q. You agree with me?
A. I agree.
Q. And that is so isn't it, despite the fact that you were asked that very
question by those instructing you?
A. Please repeat that.
Q. You offer no scientific opinion on the question of whether or, cannot the
hydrophilicity of the thixotrope caused the blistering
despite the fact that
amongst other questions you were asked that very question?
A. In my response in the conclave I put a hash mark there and I did not
really fully respond to the identity or I should say the factor
of the
hydrophilic.
- Professor
Pilato had been asked to answer the following questions which he addressed in
his expert report of 20 September 2009 :
5.1 Determine the locus of failure of the pool cut outs numbered
65, 86, 289, 384, 385, 443, 479, 532, 534, 536, 551, 582, 677, 712,
735, 907,
971 and 13A and compare this with the locus of failure in respect of the
blistered panels from the cut outs from the earlier
12 pool shells considered
and described in Professor Burford's report of 20 September 2007.
5.2 Do you agree with Professor George's conclusion at page 3 of this report
dated 3 October 2008 that the above 18 pool cut outs:
5.2.1 have common features with respect to blister formation; and
5.2.2 that all showed large blisters and the location is unambiguously within
the tie layer of the pool.
If you disagree with these conclusions, please state your reasons.
5.3 Are the results of the testing requested by you consistent with the
findings of the earlier separate studies of cut-outs from
12 pools manufactured
by Tranquility as placed before Professor Robert Burford?
5.4 Do the results of the testing requested by you increase the statistical
reliability that all pools manufactured using the same
materials and showing
blistering will have an identical locus of failure?
5.5 What are the possible manufacturing, constituent ingredient or other
potential causes of the failure of the pools numbered 65,
86, 289, 384, 385,
443, 479, 532, 534, 536, 551, 582, 677, 712, 735, 907, 971 and 13A?
5.6 Of those causes, in respect of the 18 further cut outs examined by
Professor George, can one be singled out on the available information
as THE
cause? Or THE causes? Can H922 or the thixotrope used be singled out as the
cause of the likely cause? Alternatively, from
your examination of those
samples, can you make any observations about the manufacturing techniques used
or choices made by Tranquility?
Were any of those choices, or were the
techniques in any way implicated (or potentially implicated) in the failures of
the pools?
5.7 Is there any further testing or fact gathering which should be undertaken
to determine the cause or likely causes of failure,
in respect of those 18
samples, if the present information is insufficient?
5.8 Anything else you consider might be relevant to the issues in this
proceeding.
- As
is apparent from question 5 .6 he was asked [looking at, amongst other things,
the third line,] can Hetron 922 or the hydrophilic
thixotrope, cause blisters?
The following was then put to him :
Q. Now if you turn to page 10 of your report, you answer question 6
and can I suggest that the substance of your answer we see in
paragraph 46,
where you do with what you call the thixotrope hypothesis?
A. Yes.
Q. And what you say is that since other companies have had success with
Hetron 922 and you mean by that, other customers of Huntsman?
A. That's right.
Q. Have had success with 922, you say there was a basis for saying that it is
unlikely that the Hetron or the thixotrope per se caused
the problem, right?
A. Yes.
Q. Now that is the extent isn't it to which you deal with the question of
whether or not the hydrophilicity of the thixotrope caused
the blisters?
A. Yes.
Q. And you offer don't you a conservative opinion, that is, there's simply a
basis to say it's unlikely?
A. For the lack of a better words, yes
Q. And that was as robust of you as you thought you could probably express
then and indeed now, correct?
..
Q. As robust, you?
A. Yes.
Q. As you thought you could probably express then and now?
A. At that particular time.
...
Q. That remains your view doesn't it, that's as--
A. That remains my view yeah.
..
Q. It remains your view doesn't it that since other companies have had
success with Hetron 922, that is a basis for saying that it
is unlikely that the
Hetron 922 or the thixotrope, per se, caused the problem?
A. That's correct.
Q. And that remains the extent to which you have treated with that question?
A. Yes
- This
exchange with the cross-examiner was broadly typical of the approach taken by Dr
Pilato through much of his reports and certainly
through a deal of his
cross-examination.
An overview of the scientific evidence
- Before
going further it is convenient to give an overview of the scientific evidence. I
proceed accordingly.
- The
answers given by Professor George and Dr Pilato at the Conclave show that it is
common ground that:
- (1) the pools
failed by osmotic blistering (Conclave Answer 1);
- (2) the locus
of failure in the majority of pools was in the barrier layer (Conclave Answer
4); and
- (3) small
blisters occurred totally in the barrier layer and large blisters were in the
barrier layer and extended into the structural
layer (Conclave Answer 31).
- Professor
George explained that blistering in the barrier layer of swimming pools occurs
primarily when either:
- (1) there has
been a problem in the wetout of the fibreglass material by the resin used in the
barrier layer; or
- (2) there are
water soluble materials present in the resin.
- As
to (a), Professor George explained:
In the process of fabrication of a pool an essential step is wetout
in which the sizing agent on the fibres is dissolved and the resin
can then bond
to the fibre. In some cases the fibreglass may only be wet through so
from the appearance of the laminate to the process operator during fabrication
there has been adequate working of the resin but
the sizing agent holding the
bundle of fibres together has not dissolved, so the fibres have not separated
from their bundle. Thus
at the microscopic level full wetout has not occurred,
the fibre bundle is still intact and there is the potential for slow hydrolysis
of the sizing material when water migrates through the laminate and condenses in
the region of the sizing agent...
This hydrolysis of the sizing agent...results in the liberation of acetic
acid which can then further attack the glass resin interface
with the loss of
adhesion between the glass and resin and the appearance of "dry fibres". The
appearance of these dry fibres is thus
symptomatic of a blister and an effect of
the aggressive chemistry occurring in the blister fluids that has hydrolysed
away the residual
sizing agent. (Emphasis original)
- As
to (b), Professor George explained:
...it is uncertain if there are significant hydrolysis products
present in the blister fluids from these pools. This suggests that
the resin
must in itself contain water-soluble materials that can accelerate blister
formation. Such products (diethylene glycol)
have been found in blister fluids
and these were identified by Mr Keith Ayres from Huntsman as coming from the
original Hetron 922
formulation.
- Huntsman
made four significant changes to the Hetron 922 it supplied to Tranquility.
These changes were:
- (1) the use of
FCAT technology which may have slowed cure;
- (2) a higher
level of styrene;
- (3) the
inclusion of water soluble materials such as ethylene glycol and diethylene
glycol; and
- (4) the use of
the inappropriate, hydrophilic thixotrope in the resin.
- Professor
George concluded that of the four factors outlined in the preceding paragraph,
the inclusion of hydrophilic thixotrope:
... is the one with the clearest correlation [to failure], but it
is considered likely that in Tranquility pools it was a combination
of factors
that led to their catastrophic failure. The precise mechanism operating for
blister formation may never be known, the
important result is the problem was
only present when hydrophilic thixotrope was used in Hetron 922 synthesised by
the FCAT process
using ethylene glycol and then formulated with extra styrene.
- In
the reference before Professor Burford, Professor George offered a more detailed
analysis of the scientific reason why the hydrophilicity
of the thixotrope was
likely to have caused the blistering.
- Before
Professor Burford, Professor George opined that:
- (1) the water
uptake of hydrophilic thixotrope far exceeds that of hydrophobic thixotrope and
that:
- (a) the
addition of hydrophilic thixotrope has the effect of destroying the
intramolecular hydrogen bond in the vinyl ester resin
and causes the hydrophilic
thixotrope to bond with the resin, rather than with itself; and
- (b) this may
result in enhanced hydrolysis and may have accelerated the ingress of moisture;
and
- (2) alternatively
that the hydrophilicity of the thixotrope caused it to settle and thus result in
variable performance. That is,
there would be variations in the spray pattern
from the chopper gun, which the chopper gun operator (or the laminator) may be
able
to accommodate but which would "contribute to uneven performance including
poor fibre wetout and void formation even in the hands
of an expert laminator".
- There
was also before the Referee a Joint Report signed by Professors George and
Shanks on 24 and 26 March 2007 respectively. As a
part of their "Points of
Agreement" the Professors stated:
Tranquility may have included more glass fibre in the vinyl ester
tie-layer than other manufacturers, which in itself would not cause
a problem,
but in conjunction with hydrophilic fumed silica the resistance to water could
be insufficient .
- Based
on, inter alia, that material Professor Burford:
- (1) considered
cut-outs from 12 blistered Tranquility pools;
- (2) found that
it was clear that acetic acid was present in the blister fluid and noted that it
was agreed between Professor George
and Professor Shanks (the expert then
retained by Huntsman) that this was derived from degradation or hydrolysis of
the sizing present
as an interfacial coating on the fibreglass (clause 23);
- (3) concluded
that there was adequate evidence for the possibility that vinyl ester hydrolysis
was the potential contributor to the
blistering of the pools (clause 30);
- (4) noted the
thesis of Professor Shanks that if the glass fibre content used by Tranquility
was higher than that used by other manufacturers,
this, together with the
hydrophilic thixotrope in Hetron 922 "may have increased the hydrophilicity
above that tolerated by the Hetron
922 VE resin" (clause 37);
- (5) found that
"Hetron 922 containing ethylene glycol and in particular hydrophilic thixotrope,
that has been used in the tie layer
in Tranquility pools, has caused failure"
(clause 104(1));
- (6) found that
the Hetron 922 "caused blistering" and that "although a full scientific
understanding of the reasons for this are not
finalised, enough is now known to
relate this to the pool failures" (clause 104(2)); and
- (7) found that
it was probable that, over a decade, most if not all of the 837 pools
manufactured by Tranquility with Hetron 922 would
fail (clauses 102(3) and (4)).
- Following
Bryson AJ adoption of Professor Burford's report and prior to receipt of Dr
Pilato's first report in September 2009, Professor
George did not treat further
with the question of the role played by the hydrophilic thixotrope in blister
formation.
- This
was for the obvious reason that, so far as Tranquility was concerned, that
question had been resolved by the adoption by the
Court of Professor Burford's
report.
- Rather,
prior to receipt of Dr Pilato's first report in September 2009, Professor
George's reports were confined to expressing the
opinions (both of which arose
from Huntsman's pleadings):
- (1) that the
locus of failure in pool cut-outs taken from a further 18 blistered pools
manufactured by Tranquility was the same (that
is in the barrier layer) as that
in the cut-outs from the 12 pools considered by Professor Burford; and
- (2) that, by
reason of the hydrophilicity of the thixotrope used in Hetron 922, Hetron 922
was neither the "same as" or "an equivalent
product to" Derakane 411-350.
- Thereafter,
Professor George's reports responded to those of Dr Pilato
- In
his reports, Dr Pilato did not:
- (1) address,
let alone dispute the conclusions of Professor George referred to in his reports
of 3 October 2008 and 15 December 2008;
or
- (2) offer any
scientific opinion on the question of whether the Hetron 922 with a hydrophilic
thixotrope caused the blisters (as he
agreed) [T831.37] despite being asked to
do so by Huntsman's solicitors.
- On
what Dr Pilato described as the "thixotrope hypothesis" (that is, the central
scientific question in this case), Dr Pilato did
no more than opine that:
- (1) because
other manufacturers had "success" with Hetron 922, it was "unlikely" that the
thixotrope, per se, caused the problem;
and
- (2) it was
"more likely" that the problem was caused by a "differing manufacturing
technique" adopted by Tranquility.
- All
of Dr Pilato's reports addressed that second question, that is whether the
blistering problem was caused by some aspect of Tranquility's
manufacturing
techniques [as he agreed at T 834.37].
- Dr
Pilato offered the thesis that a combination of the following factors, each
referable to Tranquility's manufacturing process, pointed
to the conclusion that
it was Tranquility's manufacturing process, not the Hetron 922 itself, that
caused the blistering in the pools.
The factors were:
- (1) commingling
of the structural and barrier layers;
- (2) voids in
the barrier layer;
- (3) bare glass
fibres in the barrier layer;
- (4) high
resin:glass ratio;
- (5) variable
layer thickness; and
- (6) low
temperature during lamination.
- Examination
of each element of this thesis shows that neither alone, nor in combination, can
they provide a credible explanation for
the blistering in the pools.
- There
was an evolution in the development by Dr Pilato of this thesis.
- In
his report of 7 February 2010, Dr Pilato said that "the" cause of the blisters
was inadequate resin:glass ratio causing bare glass
fibres to be present at the
time of manufacturing.
- In
his next report, of 7 June 2010, Dr Pilato said that there were a number of
factors which, in whole or in part, explained the failures,
namely:
- (1) bare glass
fibres;
- (2) commingling;
- (3) voids in
the gelcoat.
- As
to voids in the gelcoat, Dr Pilato did not subsequently pursue that argument and
agreed in cross-examination that it could be put
aside [T 840.3].
- In
his 9 June 2010 report, Dr Pilato said that there were "two other factors which
are potential explanations, and to which there
is evidence, but about which it
is difficult to hold strong views...one way or the other", namely:
- (1) variable
layer thickness; and
- (2) high glass:
resin ratio (that is, inadequate resin).
- Thus,
in his report of 9 June 2010, Dr Pilato had relegated allegedly inadequate
resin:glass ratio from being "the" cause of blistering
to a "potential"
explanation about which it was difficult to hold strong views one way or the
other. When this was put to Dr Pilato
in cross-examination [at T 840.32], Dr
Pilato stated that "it should be recognised as a contributing factor" [T
840.40].
- Further,
in his report of 8 September 2010, Dr Pilato advanced, for the first time, the
argument that low temperature during lamination
might also be a contributing
factor although this thesis was only abandoned in cross-examination (see below).
- Dr
Pilato agreed that it was a conventional scientific method to test any
hypothesis by reference to a control sample [T 841.33-50].
- Dr
Pilato agreed that he had not tested the hypotheses referred to above against a
control sample [T 842.4].
- There
were two obvious control samples against which Dr Pilato could have tested his
hypothesis, as Dr Pilato agreed. Those control
samples were, first, there were
almost 200 Tranquility pools made during the Hetron Period using a vinyl ester
resin other than Hetron
922, which had not failed and, second, the "gold
standard" Compass pools [T 841.6].
- During
the conclave, Professor George raised the question of testing Dr Pilato's
hypothesis against these controls [T 844.35].
- Ultimately,
Dr Pilato did consider samples from the Tranquility/non Hetron pools (which had
not failed) and samples from Compass pools.
This analysis led to his 16 November
2010 report.
- Having
already committed himself to his hypothesis, Dr Pilato's task was to endeavour
to reconcile his hypothesis to those controls,
as he agreed [T 844.45].
- He
sought to do so in his report of 16 November 2010 and was, for the reasons
developed below, unsuccessful.
- It
is convenient to deal with the individual elements of Dr Pilato's evidence
separately .
Commingling
- This
was one of the factors which Dr Pilato said explained in whole or in part pool
failure. In his report of 9 June 2010 he said:
The vinyl ester layer has been contaminated by poly-ester from the
"structural" layer, perhaps as a result of Tranquility not allowing
the tie
layer to cure properly before the structural layer was applied. Poly-ester is
known to readily degrade by hydrolysis.
- Dr
Pilato's thesis was that the vinyl ester barrier layer was contaminated by
poly-ester from the structural layer, probably because:
The chopper gun operator during the second (night) shift, Mr Ben
Cooper, had control over the timing of applying the layers and is
likely
responsible for the commingling of the vinyl ester resin and the poly-ester
resin, most likely [because the structural layer
was added too quickly to the
tie layer] before the tie layer had time to properly cure.
- In
cross-examination, it was pointed out to Dr Pilato that the evidence in these
proceedings establishes that Mr Cooper was the only
chopper gun operator used by
Tranquility between 2002 and 2004 and that his modus operandi remained
unchanged throughout the period, whether he was fabricating pools using Hetron
922 (which have failed) or pools using other
vinyl ester resins (which have not
failed) [T 845.44-50].
- Dr
Pilato agreed that, for his thesis concerning commingling to be correct, it must
follow that Mr Cooper adopted a particular procedure
when spraying pools with
glass mixed with Hetron 922 and adopted some other procedure when he was
spraying pools with some other
vinyl ester resin [T846.47].
- Dr
Pilato also agreed that Mr Cooper's (unchallenged) evidence that he behaved the
same way no matter what pool he was spraying was
inconsistent with Dr Pilato's
thesis [T847.5].
- That
concession is, alone, sufficient to dispose of this aspect of Dr Pilato's
thesis.
- However,
there was more.
- Dr
Pilato asserted that commingling was the "extra" factor necessary to cause
blistering [T849.43]. Dr Pilato agreed that, if commingling
was that "extra
factor" one would only expect to see it in Tranquility pools which had failed
when Hetron was used [T850.29] and
not in Tranquility pools which had not used
Hetron and had not failed or in Compass pools (which had not failed).
- After
the suggestion was made by Professor George at the Conclave that Dr Pilato test
his hypothesis against control samples (from
non-Hetron non-failed Tranquility
pools and from Compass pools), Mr Stuart from Ashland and Professor Colbert from
the University
of Texas tested 12 skimmer box cut-outs characterised as being in
Group X, Group Y and Group Z as follows:
Group X: 4 skimmer box cut-outs from pools manufactured by
Tranquility using a vinyl ester resin other than Hetron 922, and which
had not
failed.
Group Y: 4 cut-outs from pools manufactured by Tranquility with Hetron 922
which had not yet failed.
Group Z: 4 skimmer box cut-outs from Compass pools which had not failed.
- Dr
Pilato placed particular emphasis on the "fuzzy boundaries" observed by Mr
Stuart in his FTIR analysis [T 847.14].
- But
Mr Stuart's analysis showed that this "fuzzy boundary" or commingling had
occurred in a pool manufactured by Tranquility, using
a vinyl ester resin other
than Hetron 922, and which had not failed. Dr Pilato agreed that the existence
of commingling in a sample
from a pool when manufactured by Tranquility, using a
vinyl ester resin other than Hetron 922 and which had not failed was
inconsistent
in his thesis that commingling was linked with blistering [T
852.30].
- Dr
Pilato also agreed that the analysis performed by Mr Stuart of one of the
Compass cut-outs (from Group Z) which had not failed
also revealed commingling
[T 852.41-50].
- When
these matters were pointed out to Dr Pilato the following exchange took place:
Q. Isn't it obvious from that, that commingling is likely not a
factor causing blistering?
A. If it's the only reason for blistering that will be correct, but it's not.
- Furthermore,
far from establishing that commingling was a potential cause of blistering, the
evidence established that commingling
was a desirable aspect of swimming pool
manufacture.
- Dr
Pilato agreed that [T 848.24]:
Inter layer adhesion requires that a previous layer be not
completely cured when a next layer is applied. If the previous layer has
been
completely cured, then the next layer will not be able to adhere by some
commingling inter-diffusion at the surface.
- That
is precisely the point. In order that the structural layer adhere properly to
the barrier layer it is necessary that it be applied
before complete cure of the
barrier layer in order that proper adhesion between layers be achieved.
- This
was emphasised in one of the scientific works to which Dr Pilato himself
referred, namely the Cook Composites and Polymers publication which
stated [Exhibit P38 at p.205, 2 nd column]:
[Vinyl ester] resins offer the best secondary bonding capabilities.
The VE resins are best for three reasons. First, the VE chemistry
itself
provides several bonding sites that remain active even in a fully cured
laminate. Second, VE resins are more susceptible to
air inhibitions than other
resins, offering an uncured layer in which the secondary laminate can
commingle (emphasis added).
- The
result is that the evidence established that:
- (1) commingling
provides no explanation for the blistering in the Tranquility pools; and
- (2) commingling
does not bespeak any shortcoming in manufacturing practice by Tranquility.
Voids
- Dr
Pilato nominated voids as another of the factors which, in whole or in part,
explained the pool failures and stated:
Bare glass fibres present in the vinyl ester layer, particularly as
a consequence of an excessive number of voids being in the tie
layer at the time
it was manufactured. The extent of voids seen are (sic) due to a failure to
properly "roll out" air trapped in
the resin at the time of manufacture .
- Dr
Pilato's thesis was that the presence of voids bespeaks some inadequate
manufacturing process at Tranquility [T 855.31].
- Professor
George's evidence was that:
- (1) voids in
the structural layer of a swimming pool are an inevitable consequence of the
chopped glass and resin spray up process
(as Dr Pilato agreed [T856.21-29]) used
in their manufacture; and
- (2) all pool
manufacturers have voids in their laminates (as Dr Pilato agreed [T 856.35]).
- Dr
Pilato agreed that he would not really "expect a voidless pool to be
manufactured" [T 855.48].
- In
his evidence in chief, Professor George identified voids, clearly visible to the
naked eye, in the barrier and structural layers
of samples taken from Compass
pools which have not failed [Exhibits P16, P17, P18, P19 & P20].
- Further,
Professor George gave evidence that there were very strong theoretical reasons
why voids would not cause blistering, namely
that voids limit the osmotic
pressure necessary for delamination (as a necessary condition of blister
formation) and that a void
is not a nascent blister.
- Dr
Pilato agreed that the existence of voids, itself, did not indicate any defect
in Tranquility's manufacturing process and that,
standing alone, the existence
of voids in the barrier layer of Tranquility pools would not be sufficient to
impeach Tranquility's
manufacturing process [T 857.5].
- Dr
Pilato also agreed that voids similar to those found in the skimmer box samples
of Tranquility pools which had failed, were also
found in Compass pools (which
had not failed) and in Tranquility non-Hetron pools that had also not failed.
- Dr
Pilato agreed that those facts pointed against the probability that the
existence of voids played any role in the pool failures
[T 857.8-31: the
question at T 857.29 should read "You can answer that just by saying yes, don't
you, it does point against the probability" (emphasis added)].
- Dr
Pilato reanalysed the data in respect of voids and swimming pools in his report
of 16 November 2010 by reference to the 12 skimmer
box cut-outs in Groups X, Y
and Z, referred to above.
- Once
Dr Pilato had made necessary corrections to his analysis at paragraphs 40 to 43
of his report of 16 November 2010, his analysis
revealed voids in non-failed
Compass pools comparable to those in the failed Tranquility pools.
- Examination
of the average void contents for each of the samples in Groups X
(Tranquility/non-Hetron/not failed), Y (Tranquility/Hetron/
not failed yet) and
Z (Compass/not failed) showed void contents in all cases well below the figure
of 5% nominated by Dr Pilato as
being within an acceptable range.
- Professor
George was not challenged in relation to his evidence that these average void
contents were "sufficiently close to render
any significance of void content as
a factor in poor manufacturing techniques leading to blistering unlikely".
- Most
significantly, in relation to this issue (and other issues) Dr Pilato stated
that:
All samples of Non Hetron/Tranquility [by which Dr Pilato meant
Groups X (Tranquility/non-Hetron/non-fail) and Y (Tranquility/ Hetron/not
failed
yet) - see T 853.44-50] and Compass/Hetron 922 showed good wet out of fibres in
both the tie layer and the structural layer
with little or no appearance of
apparent voids, cracks, or bare fibres which were very common in the
Tranquility/ Hetron 922 pools
[by which Dr Pilato meant the 18 Tranquility/
Hetron pools which had failed which were the subject of Dr Pilato's first
report].
- Dr
Pilato agreed that this statement meant that when he examined Tranquility pools
which were made between 2002 and 2004, by Mr Cooper,
not using Hetron, which of
course had not failed, there was no problem with any of the following [T
854.17-30]:
- (1) voids;
- (2) cracks;
- (3) bare
fibres.
- In
cross-examination the following exchange took place [T 854.32]:
Q. So for any of those factors to be causative of blistering you'd
have to assume wouldn't you that Mr Cooper had some different technique
that he
utilised when he was making Tranquility pools with Hetron than when he was
making Tranquility's with some other resin?
A. Truly [it] is a puzzle.
- Bearing
in mind Mr Cooper's unchallenged evidence that before, during and after the
relevant period he used the same manufacturing
process when fabricating all
pools (whether using Hetron 922 or not), the obvious answer to that "puzzle" [as
was put to Dr Pilato
at T854.37] was that [T 854.40]:
The question of voids, cracks, bare fibres had nothing to do with
what caused the problem with the pools that we are talking about.
- Dr
Pilato did not, in terms, accept that proposition but allowed that the fact that
Tranquility had had no problems before or after
using Hetron 922, and no
problems using other vinyl ester resins when it was using Hetron 922 was, from a
point of view of a scientist
examining the problem of the cause of the
blistering in the pools, a "plainly relevant" matter [T 855.7].
- In
considering the matter of voids, Dr Pilato placed particular emphasis on what
Professor George described as the "outliers", namely
the results for two (only)
skimmer boxes showing a void content in excess of 8%.
- In
relation to the pools from which those samples were taken, Dr Pilato stated
that:
It is questionable and surprising to me that these pools possessed
sustained structural integrity with the unusually high void content
within the
structural layer that is expected to maintain pool strengths when filled with
water. It questions the comment made earlier
in the referee's report [that]
"again there is general agreement between the experts that Tranquility pools is
regarded as a competent
pool manufacturer". (Emphasis original)
- In
fact inspection of these two pools (both when filled with water and empty)
showed no signs of any structural problem.
- Dr
Pilato agreed that if (as is the fact) that an inspection of these pools
revealed no sign of any structural stress or other problem,
that would be
inconsistent with his "debating point" concerning these "outlier" pools [T
868.27].
- The
conclusion to be drawn from the totality of this evidence is that the voids
observed by Dr Pilato in the barrier layer of the
Tranquility pools which failed
are a normal consequence of proper manufacturing process and played no role in
the pool failures.
Bare glass fibres
- This
was another aspect of the first of the three factors identified by Dr Pilato in
his report of 9 June 2010 as explaining blister
failure. As mentioned above, Dr
Pilato said:
Bare glass fibres present in the vinyl ester layer, particularly as
a consequence of an excessive number of voids being in the tie
layer at the time
it was manufactured. The extent of the voids seen are (sic) due to a failure to
properly "roll out" air trapped
in the resin at the time of manufacture.
- Dr
Pilato agreed that the issue of bare glass fibres related to the issue of voids,
and that his thesis was that the existence of
bare glass fibres in the voids
bespoke some kind of manufacturing defect on Tranquility's part [T 868.45].
- The
foundation for Dr Pilato's thesis concerning bare glass fibres was, originally,
the statement made by Mr Stuart from Ashland that:
The "dry" glass fibre appearance suggests that there may have been
insufficient wetting of the glass fibres in some areas of the vinyl
ester layer,
or that the resin has been somehow degraded under the blistered area. It cannot
be concluded based on the cross sectional
images whether the observed dry glass
was present before blister formation (and therefore a possible cause), or if the
dry glass
resulted from resin degradation related to penetration of swimming
pool chemicals.
- As
Mr Stuart explained in his cross-examination, his views about the significance
of the appearance of dry glass fibres have evolved
since his report of 24 June
2008 [see T 703.30ff].
- Ultimately
Mr Stuart expressed the view that:
Contrary to previous statements...examination of blisters in early
stages of formation gives little reason to suspect poor resin wetout
of the
glass.
- Mr
Stuart agreed that his final view was that evidence of dry fibres did not
bespeak insufficient wetout but rather indicated some
kind of degradation of the
vinyl ester resin, or attack on the glass sizing, but not poor wetout of the
glass [T 705.34-40].
- Although
Dr Pilato said he did not agree with Mr Stuart's analysis [T 2872.5], the result
is that Dr Pilato is now at odds, on this
matter, with the scientist who
conducted the tests upon which Dr Pilato based his opinion - as he agreed [T
872.18].
- In
my view Mr Stuart's opinion is to be preferred.
- In
any event, as the voids in which the bare glass fibres were observed are an
inevitable aspect of competent swimming pool manufacture,
not indicating any
deficiency in manufacturing process by Tranquility (see above), the proper
conclusion is that the existence of
bare glass fibres in those voids could not
have been a factor leading to the pool failures.
- As
mentioned earlier, in his report of 16 November 2010, Dr Pilato stated that the
samples of Tranquility/non-Hetron/non-failed pools
in Group X, as described in
the report of 16 November 2010, showed little or no appearance of "voids, cracks
or bare fibres", pointing
to the probability that bare fibres played no role in
the pool failures.
Resin to glass ratio
- As
mentioned earlier, Dr Pilato originally nominated the allegedly insufficient
amount of resin used by Tranquility as being "the"
cause of the pool failure.
- In
his report of 9 June 2010, Dr Pilato relegated the "inadequate amount of resin
used by Tranquility" to being a potential explanation
about which it was
difficult to hold strong views.
- In
answer to interrogatories, Mr Annakin stated that Tranquility aimed for a resin
to glass ratio of 2.5:1.
- Originally,
Dr Pilato argued that analysis of the Ashland data comparing the percentage of
glass in the tie layer of the pools showed
that Tranquility had fallen well
short of achieving its resin:glass ratio of 2.5:1.
- In
his report of 16 March 2010 Professor George pointed out:
The key point is that what has been measured in the Ashland report
of 21 October 2009 and what Tranquility's David Annakin has reported
in his
response to interrogatories are different parameters. The Tranquility operator
when making the tie layer of a pool measured
the volume of resin before and
after the run and noted that value against his aimed target of 2.5:1. The
Ashland analysis reports
the mass of solid resin in the tie layer after it has
been fabricated and cured but makes no correction back to what that would mean
in terms of the wet resin (i.e. vinyl ester plus styrene)...
Not accounting for this partial loss of resin weight on spraying the pool and
the consequent volume and thickness decrease on cure
to form the solid laminate
amounts to a significant error in simply equating the dry resin fraction with
the wet resin to glass ratio
at the time of fabrication... It is also noted in
the context of an appreciation of the consequences of a wet application process,
that Dr Pilato appears to be unaware of the manufacturing process of Tranquility
(or any other pool manufacturer using a wet spray-up
process).
- In
the light of that evidence, Dr Pilato stated that:
I acknowledge that these are dry values and one must generate wet
values to account for these dry values.
- Professor
George's evidence was that:
- (1) once the
wet/dry adjustment was made, the average composition of the Tranquility skimmer
box cut-outs was within the Ashland guidelines
(of 60-70% resin and 30-40%
glass); and
- (2) Tranquility
non-Hetron pools (which did not fail) had the same resin to glass ratios as
those which did fail.
- Dr
Pilato produced a document that purported to compare the resin to glass ratio in
a Compass sample with that in three skimmer box
samples taken from failed
Tranquility pools [Exhibit D 18].
- According
to that calculation, the conversion of the "dry" ratios revealed by the Ashland
testing yielded "wet" resin:glass ratios
in the three failed Tranquility pools
of 0.9:1, 0.92:1 and 2.13:1. Obviously, a wet resin:glass ratio as low as 0.9:1
or 0.92:1 would
suggest a very serious problem in Tranquility's manufacturing
processes. This was the point that Dr Pilato's calculations were designed
to
show.
- However,
the evidence revealed that Dr Pilato's calculations were seriously flawed. The
details of Dr Pilato's errors are set forth
in Professor George's document
entitled "Sheet handed up to Professor George by Mr Donaldson 24 November 2010"
[part of Exhibit D18].
The calculations in that document revealed that the
correct wet resin:glass ratio of the two allegedly egregious examples was 1.9:1
(and not 0.9:1 or 0.92:1).
- It
turned out that Dr Pilato's calculations were not only incorrect but also based
upon the following assumptions (none of which are
supported in the evidence) [T
873.17-41]:
- (1) that the
resin transfer efficiency of the Compass pool was the same as, or comparable to
that of the Tranquility pools; and that;
- (2) such
assumption of comparability in turn assumed that:
- (a) the
volatilisation and cure losses of the styrene monomer in the variety of Hetron
used by Compass was the same as that in the
variety used by Tranquility; and
- (b) the Compass
and Tranquility production facilities were identical in terms of spray
equipment, catalyst concentration, rate of
cure and prevailing temperature and
humidity.
- Dr
Pilato agreed that if (as is the fact) any one of those assumptions was wrong
then his analysis at Exhibit D18 involved the comparison
of "apples and oranges"
[T 873.46].
- Professor
George pointed out that the appropriate manner in which to look at the various
statistics concerning resin:glass ratio was
to look at the statistics as a whole
and express values in terms of a mean and standard deviation.
- Professor
George explained that this method was appropriate as the scientific techniques
adopted to analyse the barrier layer of swimming
pool samples (be they the ASTM
method using the data of Mr Stuart or the Computer Tomography method adopted by
Professor Colbert)
only permit analysis of a tiny sample from each swimming pool
(in the case of Computer Tomography, 1 cm 2 ) [see generally T 713.26
- 716.29].
- In
his report of 23 November 2010, Professor George calculated the resin:glass
ratios as a mean and standard deviation [Exhibit P13
at 2.26] with the following
results:
- (1) Group X
(Tranquility/non-Hetron/non-failure) - (35.7 +/- 2.97)% glass;
- (2) Group Y
(Tranquility/Hetron/no failure yet) - (36.9 +/- 1.8)% glass;
- (3) Group Z
(Compass/non-failure) - (36.9 +/- 1.8)% glass;
- (4) Group Y
plus the 18 samples from Tranquility/Hetron failed pools - (36.43 +/- 4.3)%
glass.
- This
analysis shows that, although Compass pools on average, use slightly less glass
in the tie layer than Tranquility, there is no
significant difference in the
glass: resin ratios between Tranquility pools which:
- (1) used Hetron
and blistered;
- (2) used Hetron
but have not (yet) blistered; or
- (3) did not use
Hetron at all and have not failed.
- At
one point, Dr Pilato pointed to a document published by FGI, the distributor of
the vinyl ester resin Derakane, as supporting the
proposition that a resin:glass
ratio of 3:1 was desirable [Pilato, 8 Sep 10 at item 17 and Attachment 3] (and,
inferentially, that
the resin:glass ratio of 2.5:1 aimed for by Tranquility was
inadequate).
- Professor
George pointed out that the Derakane publication was irrelevant, as it was a
part of instructions for the manufacture of
a "chopped strand mat" laminate, as
opposed to a laminate manufactured by spray layup (as in this case). Professor
George said this
would be "obvious to anyone experienced in swimming pool
fabrication".
- Faced
with this evidence, Dr Pilato abandoned this aspect of his thesis [T 877.36].
- In
cross examination this exchange took place [T 877.27]:
Q. So you didn't see the difference?
A. I saw the ratio and seized that opportunity.
- This
was an example, of Dr Pilato's inexperience in the area of swimming pool
manufacture and inclination to advance arguments, not
properly tested or
analysed, in support of Huntsman's position.
- The
conclusion from this evidence is that such variation as there is between the
resin:glass ratio used by Tranquility and other manufacturers
such as Compass
does not and cannot provide an explanation for the blistering of the Tranquility
pools and does not bespeak any deficiency
in Tranquility's manufacturing
process.
- In
this regard, it is important to recall that, before the Referee, both Professors
George and Shanks agreed that, if it were the
case that Tranquility used more
glass fibre than other manufacturers, this "in itself would not cause a problem"
(but "in conjunction
with hydrophilic fumed silica the resistance to water could
be insufficient").
Layer thickness
- Dr
Pilato nominated the variability of layer thickness in the Tranquility pools
which have failed as "potential explanation" for the
blistering about which it
was difficult to hold strong views one way or the other.
- However,
Professor George gave evidence, which was not challenged, that the same or
similar thickness variability observed in the
Tranquility pools which failed was
also to be seen in Tranquility pools made with other vinyl ester resins (and
which did not fail)
and in Compass pools which also did not fail.
- This
alone points to the improbability of layer thickness variability being a factor
relevant to blistering.
- However,
the point was made most vividly by the skimmer box cut-out identified by Dr
Pilato at the outset of his examination in chief
[Exhibit D 23].
- This
was a cut-out from a Tranquility pool, manufactured during the period
Tranquility was using Hetron 922, but using the vinyl ester
resin Derakane (not
Hetron 922) and which did not fail and which, according to Dr Pilato, manifested
[T 829.9]:
...the irregular layer configuration from the gelcoat mist layer,
the tie layer and structural layer - you see a ripple effect and
inconsistency
in terms of these various layers that I've already identified.
- The
fact that such variability was manifest in a Tranquility pool, made with
Derakane, and which did not fail, points to the high
probability that layer
thickness has nothing to do with the problem.
Temperature during lamination
- As
mentioned above, Dr Pilato raised the probability of low temperature during
lamination as being a potential cause of blistering
in his fourth report.
- Dr
Pilato agreed that he advanced this aspect of his thesis on a tentative basis [T
888.6].
- Dr
Pilato agreed that if low temperature during lamination was a factor, he would
expect to see a correlation between pools manufactured
at low temperature and
blistering.
- He
agreed that he had seen no such correlation and accordingly did not press this
aspect of his thesis [T 888.12-31].
Conclusion
- This
analysis of the evidence reveals a number of things.
- First,
for all the length and depth of Dr Pilato's experience, he was ill equipped to
offer any opinion about any matter relevant
to the questions before the Court.
- Second,
Dr Pilato was, on occasions, prepared to offer arguments supportive of his
thesis, without proper consideration of their merit
or weight (for example, in
relation to the FGI/Derakane resin:glass ratio and in relation to the relevance
of ambient temperature
during lamination).
- Finally,
and most importantly, none of the factors relied on by Dr Pilato as showing that
some aspect of Tranquility's manufacturing
process (rather than a problem in the
Hetron 922) was the cause of the pool failures can withstand critical analysis.
- The
Court is therefore left with the two incontrovertible facts:
- (1) there is no
theory of any substance upon which it can be concluded that poor manufacturing
standards existed or that they contributed
to the Pool Failures; and
- (2) Tranquility
has manufactured approximately 4,000 pools since its incorporation. It has used
at least four resins other than Hetron
922 in so doing, including Huntsman's own
Estarez 7222. Of these pools, the only pools that have failed are those which
contained
Hetron 922.
- Causation
need only be determined on the balance of probabilities. In the light of these
facts, Tranquility has discharged the burden
of proof borne by it.
Evaluating the scientific evidence
- Whilst
it is extraordinarily difficult to identify all of the inconsistencies in Dr
Pilato's sundry several theses it was quite clear
that he remained even at the
end of his cross examination in a state where he was quite simply unable to
formulate any clear point
of view.
- Naturally
an expert may well be correct in expressing the point of view that having
examined the issued to him or her, the only assistance
that such an expert could
give would be to indicate that it was simply not enough information to hand to
permit of a reasonable hypothesis
one way or the other. But the number of times
that Dr Pilato through his reports and cross-examination had been shown to
simply be
incorrect or to have been shoddy in his approach to a very delicate
topic gave me no real satisfaction in his tentative conclusions.
- My
impression was that Dr Pilato had sat on the fence and not been able to
satisfactorily treat with the true issues for determination.
Unfortunately he
also and exhibited a tendency to search through literature in an attempt to
bolster his theories. Whilst this form
of endeavouring to bolster one's opinions
may sometimes be innocuous I was troubled by this tendency.
- For
those reasons I have no doubt but that the approach taken by Professor George in
his many reports and during his cross-examination
completely outflanked Dr
Pilato's endeavours to assist the Court. The contrast between the two experts
was tangible :
- (1) Professor
George manifestly being on top of the topic to the extent of not being able to
be wrongfooted by his cross-examiner;
[This is not to suggest that Professor George had not
himself changed his position relating to vinyl ester hydrolysis. The Referee
in
fact commented [at 33] that this was not to be regarded as sinister, it being
quite normal in the scientific sphere to learn more
as information emerged. But
by the time Professor George had taken the witness box in the final proceedings
it was very clear that
he had mastered the subject]
(2) Dr Pilato unfortunately not being able to explain his sundry points of view:
and on numerous occasions having to concede to having
changed his point of view
repeatedly:
- (a) Indeed in
Dr Pilato's 20 September 2009 report he had been asked in terms whether he could
express an opinion about whether Hetron
922 with hydrophilic thixotrope caused
blisters;
- (b) the only
extent to which he had been able to answer this question was by saying that
since other companies had had success with
Hetron 922 there was a basis
for saying that it was unlikely that the Hetron 922 or the thixotrope per se
cause the problem;
- (c) That had
always been the extent to which he had dealt with the question of whether or not
the hydrophilic of the thixotrope caused
blisters. That remained his position
during his cross-examination.
(3) Close to the end of Dr Pilato's cross-examination he was taken to the topic
of temperature during lamination which he had raised
for the first time in his 9
October 2010 report. Even here as the cross examination reveals he was unable to
press the theory :
Q. You say there Dr Pilato that the significant variation to
occur several factors are involved and you list a whole lot of them and
we have
discussed many of those factors, haven't we?
A. Yes.
Q. But in your sub paragraph 10 of 10 you mention as a factor which might be
relevant, extremely low temperatures during night shift
as low as 7 degrees
Celsius, significantly below 15.5 Celsius that you mentioned there?
A. Yes.
Q. You are referring to a recommendation or some observations made in another
aspect of the Cooks Composite Document?
A. The Cook Book.
Q. The Cook Book, all right, well it is fair to say, isn't it, that what we
see at sub paragraph 10 of 10 here is the first time you've
proffered the
proposition that temperatures during lamination maybe a factor relevant to
blistering?
A. I think it's the first statement.
Q. Is this an example of you looking through literature to try to find
references that might assist the argument that there is some
problem with
Tranquility's manufacturing process that you could call in aid to --
A. No, it wasn't that because during the Conclave I was able to get the
production CD or DVD that Professor George sent to me and
it was an opportunity
to really examine these records which I had not seen before so this is really
the first time it really pops
up. Yes, that truly occurred to me but I really
had no way of knowing whether temperature really played a role or not until I
saw
this DVD.
Q. Right so you saw the records and what did they show, did they show
temperatures?
A. Yes.
Q. Did you then look through the literature to see whether temperatures might
give a clue to what happened?
A. That partly.
Q. And is it fair to say that what you were doing was to see whether the
temperatures that those records revealed could be co-ordinated
by you to bolster
your argument about Tranquility's manufacturing processes?
A. There is more to it than just that.
Q. Right, well if temperature played a role, you would expect to see,
wouldn't you, a correlation between the extent of blistering
in pools and the
date of manufacture?
A. (No verbal reply)
Q. Or at least the temperature at which they were manufactured?
A. That's correct.
Q. So you would expect to see more blistering in winter than in summer say?
A. No, not necessarily.
Q. A low temperature - your thesis here which can I suggest you are
developing tentatively, do you agree with that, is that --
..
Q. You are developing here, aren't you, the thesis, that lamination at low
temperature could be the cause of the problems which led
to the blistering?
A. One of the problems, yes.
Q. One of them and is it fair to say that you were advancing that thesis on a
tentative basis?
A. Tentative, yes.
Q. In fact you are saying this maybe one of the factors?
A. Yes.
Q. Now if low temperature during lamination was a factor, you would expect to
see a correlation, wouldn't you, between pools manufactured
at low temperature
and blistering?
A. I expected it but I didn't see it.
Q. If there were no such correlation between blistering and temperature
lamination then that would eliminate low temperature, wouldn't
it?
A. It would, yes.
Q. And it does, doesn't it?
A. It does primarily because - if I may finish?
Q. Of course?
A. It was a question of where the temperature was determined and we have not
been able to obtain that answer yet.
Q. All right, well that means, does it, that the tentative thesis you've
advanced about temperature is one you don't press?
A. I don't press it because I don't have the answer to where temperature was
determined.
[Transcript 886- 888]
- Both
parties went to extreme limits to pursue their respective claims. It is plainly
unnecessary for the Court to examine every opposing
argument. However there is
considerable substance in the following sections of the plaintiffs closing
submissions in reply on the
question of whether the use of Hetron 922 materially
contributed to the pool failures :
The mechanism of failure
(1) Tranquility's case that the Hetron 922 resin was defective does not
"entirely" depend on the "circumstantial evidence" that it
only suffered pool
failures when using Hetron 922.
(2) Tranquility certainly relies on that circumstantial evidence and submits
that it is a powerful factor pointing to a likely defect
in the Hetron 922.
Tranquility's manufacturing processes - indeed its manufacturing personnel -
were the same before, during and
after the time that it used Hetron 922. And
yet, in its whole trading history, it only suffered pool failures when using
Hetron 922.
(3) As Professor George stated, the precise mechanism operating for blister
formation may never be known.
(4) I accept that it is not necessary for Tranquility to identify the precise
mechanism, as a matter of science, for the pool failures.
(5) Nonetheless, Tranquility has established the likely mechanism of failure,
namely that advocated before the Referee by Professor
George and Huntsman's
former expert, Professor Shanks.
(6) These hypotheses were not "rejected" by the Referee.
(7) The Referee stated:
Both experts devised and discussed
chemical mechanisms which involve not only the breakdown of a vinyl ester
polymer, but also hypothesise
on the possible formation of fragments that might
be detected either directly or indirectly by gas chromatography and mass
spectrometry
.
(8) It is true that the Referee said [at [104]] "a full scientific understanding
of the reasons for [the blistering] are not finalised".
(9) I accept that this statement by the Referee reflects the technical
complexity of the blistering process and the difficulty of
drawing unambiguous
mechanistic conclusions.
(10) Importantly the Referee added "enough is now known to relate this product
to Pool Failures", making clear that he accepted Professors
George and Shanks'
hypotheses as being open on the evidence.
(11) Indeed, the Referee made specific note ("with particular interest" [the
Report at [36]]) of Professor Shanks' opinion that:
If the glass
fibre content used by Tranquility was higher than the glass fibre used by other
manufactures, this together with the
untreated silica [ie hydrophilic
thixotrope] may have increased the hydrophilicity above that tolerated by the
Hetron 922 VE resin
.
(12) The Referee thus made clear that he attached particular significance to
this observation.
Manufacturer's warning
(13) Huntsman suggests that none of the "warnings" given by thixotrope
manufacturers against using hydrophilic thixotropes and vinyl
ester resins was
"in any way an association or suspected association between blistering, or water
resistance of any kind and hydrophilic
thixotropes" and submits:
The absence of any suggestion of that kind casts serious doubt
on any thesis suggesting that the "hydrophilicity" of an untreated
fumed silica
has any impact at all on the capacity of a cured resin to perform adequately in
the presence of water.
(14) In my view that misstates the evidence.
(15) In his report of 14 August 2007 before the Referee, Professor George
stated:
The observed behaviour of the hydrophilic thixotrope is
consistent with the literature from all manufacturers of silica (Wacker, Cabot
and Degussa) and in particular it is noted in Cabot Corporation Technical Data
Sheet TD-123 of 2004: "Cab-O-Sil TS-720 Treated Fumed
Silica in Vinyl Ester
Reins" in which the following statement is made on page 1: "Conventional grades
of silica have been tried as
thixotropes in VE with little or no success.
Additives that improve the performance of conventional fumed silicas are
considered
undesirable since they can impair other laminate properties including
water resistance ". (Emphasis added)
(16) Cabot thus directly highlights the impairment of water resistance resulting
from the use of hydrophilic thixotrope.
Other manufacturers
(17) Huntsman places great emphasis on the fact that other swimming pool
manufacturers that used Hetron 922 have not suffered pool
failure to the same
extent as Tranquility.
(18) In particular, Huntsman point to the fact that the most significant
consumer of Hetron 922, Compass Pools, suffered no relevant
failures.
(19) The fact that Compass suffered no failures is readily explicable by
reference to two features of its manufacturing process.
- (a) The first
is the "Patented Layer System" that Compass incorporated into its pool
manufacturing process [see Exhibit P4].
- (b) As
Professor George explained:
The pools built by Compass are significantly different
in construction from those built by Tranquility...Compass pools have developed
a
ceramic composite protective core which is applied after the vinyl ester barrier
layer (containing Hetron 922) and contains a vinyl
ester resin that is
formulated to have a short gel time. This results in a high exotherm (heat
evolution) from the gelling and cure
reaction of the resin which post-cures the
barrier layer, basecoat and gelcoat which are applied on the mould over the
preceding
four hours.
This patented process was a major innovation by Compass Pools and
differentiated their pools from all others on the market. This produced
the same
effect as if the resin had been subjected to an oven post-cure treatment...
It should also be noted that a post-cure process results in a further
cross-linking of the resin, consumption of any unreacted residual
styrene
monomer and thus lowers the risk of osmotic cell formation and subsequent
blistering and black spot formation.
(c) Mr Mewett, from Compass described the function of the "ceramic microsphere
mix" in this "ceramic composite protective core" [T
524.25]:
...the uniqueness of the core is that it's a product that
doesn't absorb any moisture, it is repellent of water vapour and this is
a spray
coat that does not have any glass fibre so there's no issues of induced human
error by way of having to laminate and pack
and consolidate.
(d) Mr Mewett agreed that this layer had a short gel time, which resulted in
high heat evolution or exotherm and that [T 524.39]:
The heat generated is enough that you could feel it with your
hands six inches off the surface, the heat will probably take 20 minutes
to
dissipate, that in itself is not a post cure process but it greatly helps with
the layers that have been immediately applied underneath
it in a matter of two
or three hours before.
(e) Mr Mewett agreed that this process did help post-cure the resin and agreed
that this had "a beneficial effect so far as possible
blistering of the pool is
concerned" [T 525.34].
(f) Mr Mewett was asked whether there was anything in particular in the ceramic
microsphere mix in this third waterproofing barrier
that assisted guarding
against osmotic reactions and blistering and he replied [T 526.1]:
Yes it's - the value of it is it's substituting for glass fibres
and glass fibres are a known source of osmotic origin.
(g) In around 2000, Mr Enzo Palma, then General Manager of Huntsman's Composites
Business Group, told Mr Beale (from Aquatic Leisure
Technologies Pty Limited)
that:
For best results you must post cure Hetron 922, otherwise it
will not reach maximum cure .
(h) Although Mr Beale did not use the post cure process in Aquatic's swimming
pool manufacture [T 752.30], the fact that Compass
adopted a procedure,
equivalent thereto is likely to explain, at least in part, why Compass did not
experience blistering problems
with Hetron 922.
(20) Second, Compass Pools adopted a recirculating system pursuant to which
Compass "mixed or agitated the Hetron 922 prior to use".
Mr Mewett described the
details of that system in his affidavit of 16 February 2010 [at [2]].
(21) Professor George opined before the Referee that the hydrophilicity of the
thixotrope caused it to settle and result in variable
performance.
(22) So far as Compass' manufacturing process, Professor George said:
I have shown in a report to the Referee that the effect of the
use of [hydrophilic thixotrope] was that it settled out from the resin.
It was
thus unavailable to control the viscosity uniformly over the period for which it
was needed, namely the spray up and consolidation
process...
In the process [at Compass] described by Mr Mewett as operating in his
factory in the period that Hetron 922 with hydrophilic thixotrope
was used, the
effect of the recirculating pump system would have been to disperse the
thixotrope more uniformly in the resin than
in the direct dispensing system used
by Tranquility Pools.
This would contribute significantly to the difference in performance of pools
built by the two companies.
(23) These two factors provided a clear explanation for the absence of pool
failures at Compass.
(24) Contrary to Mr Godfrey's original evidence, Huntsman did receive complaints
from other users of Hetron 922.
(25) Huntsman received complaints of blistering arising from the use of Hetron
922 from each of Freedom Pools and Spas, AAA Pools
and Kiama Fibreglassing &
Repairs. Huntsman also received a complaint from Narellan Pools [T 532.5],
albeit in respect of its
product Hetron 942, a blend of Hetron 922 and Hetron
914.
(26) It is true that, leaving Narellan to one side, the number of pools the
subject of these complaints was of a much lower order
than those arising from
Tranquility's use of Hetron 922.
(27) Nonetheless, the fact remains that complaints were received from these
"other manufacturers".
Durrant blister tests
(28) Vivid evidence of the causative role played by the hydrophilicity of the
thixotrope used in Hetron 922 and the blistering in
the Tranquility pools
emerges from the evidence given by Dr Durrant of the blistering tests he
conducted immediately after Tranquility
first notified Huntsman of the
blistering in its pools.
The Blister Tests on 26 April 2004
(29) Huntsman was first notified of blistering in a Tranquility pool on 21 April
2004.
(30) Five days later, Dr Durrant conducted an experiment to investigate the
cause of the blistering.
(31) Dr Durrant tested panels made with a common gelcoat but containing, in the
tie layer:
- (a) no
thixotrope;
- (b) a
hydrophobic thixotrope (Aerosol 202); and
- (c) a
hydrophilic thixotrope (Wacker N20).
(32) Dr Durrant recorded the results as follows:
All panels with
N20 [ie Wacker N20 - a hydrophilic thixotrope] show bad fibre prominence and
blistering - all panels without [hydrophilic
thixotrope] - not much change.
(33) Dr Durrant explained that the "bad fibre prominence" that his experiment
revealed could (although he said, did not necessarily)
bespeak an adverse
reaction caused by the hydrophilicity of the thixotrope [T 570.14-18].
(34) But what the experiment revealed was that each and every one of the panels
made using hydrophilic thixotrope blistered, and
that none of those made using
hydrophobic thixotrope did [T 571.6-8 (the words "used for the" in the
transcript should be "using
hydrophilic")].
(35) Although Dr Durrant expressed himself more cautiously ["I thought it was a
possibility": T 572.33-40], the 26 April 2004 tests
showed, clearly, that the
hydrophilicity of the thixotrope introduced by Huntsman to Hetron 922 in May
2002 was the cause of the
blistering of which Tranquility was complaining.
The Blister test on 1 June 2004
(36) Several weeks later, on 1 June 2004, Dr Durrant conducted further blister
testing on panels designed to replicate, as far as
possible, a swimming pool
structure [T 574.33].
(37) Dr Durrant was asked to conduct this test by Huntsman's Technical Service
Manager, Mr Keith Ayres. Dr Durrant agreed that the
reason that this test was
conducted was that Huntsman was considering the possibility that the change from
hydrophobic to hydrophilic
thixotrope in Hetron 922 "was having an adverse
effect on the performance of the product" [T 575.5].
(38) Again, Dr Durrant compared the blistering to panels with a hydrophilic
thixotrope (Wacker N20) and the hydrophobic thixotropic
(Aerosil 202). This time
Dr Durrant conducted the tests without using a gelcoat.
(39) The result of the tests was that the blistering on the panel with the
hydrophilic thixotrope (Wacker N20) gave a rating of 5.
This is the worst score
possible, as Dr Durrant agreed [T 575.48]. The blistering on the panels using a
hydrophobic thixotrope (Aerosil
202) was 2 [see Exhibit P8].
(40) Dr Durrant agreed that the blistering on the panel using hydrophilic
thixotrope was far worse than on the panel using hydrophobic
thixotrope [T
576.13].
(41) These tests provided further confirmation that it was the hydrophilicity of
the thixotrope in the Hetron 922 that was causing
the blistering.
The Blister test on 17 September 2004
(42) Dr Durrant conducted further tests on 17 September 2004 using four
different hydrophilic thixotropes.
(43) Dr Durrant's note in relation to the experiment was [Exhibit P9]:
All five [although four hydrophilic thixotropes were tested,
there was a fifth experiment with one of those hydrophilic thixotropes
using
extra styrene: T 576.5] show bad fibre pattern and blistering. No real
differences.
(44) One of the thixotropes tested was Wacker N20 with Hetron 922 LVPS, the
variety most commonly supplied to Tranquility between
2002 and 2004. Dr Durrant
agreed it was for this reason that this variety of Hetron was included in the
experiment [T 577.33-42].
(45) In the experiment, the Wacker N20 and the Hetron 922 LVPS achieved the
worst score, of 5 [T 578.3].
Conclusion to be drawn from these experiments
(46) The accumulation of the results of the experiments of 26 April, 1 June and
17 September 2004 made it clear that, despite the
more cautious language adopted
by Dr Durrant [T578.28], the Tranquility blistering problem was caused by the
use of the Wacker N20
hydrophilic thixotrope in the Hetron 922 LVPS supplied to
it by Huntsman.
Why did Tranquility pools, alone, suffer catastrophic
failure?
(47) Huntsman points to the fact that Tranquility purchased less than 12% of the
Hetron 922 sold by Huntsman between April 2002 and
April 2004 yet accounts for
the vast majority of pool failures in pools manufactured using Hetron 922 during
that period. Huntsman
argues that the reason for this must lie in some
deficiency in Tranquility's manufacturing process.
(48) There are a number of answers to this argument.
(i) that the findings by the Referee preclude
Huntsman from advancing this argument.
(b) In any event, such a contention fails to take into account the following
matters:
- (i) First, the
unchallenged evidence is that, before, during and after the critical period of
2002 to 2004, Tranquility followed the
same manufacturing process and, indeed,
engaged the same operator, Ben Cooper, to perform the crucial task of applying
the resin
glass mixture to the pool moulds.
- (ii) Between
2002 and 2004, Mr Cooper, using the same procedure, manufactured 837 pools using
Hetron 922. Of those, 428 have been
confirmed as suffering from blistering.
During the same period, Mr Cooper, using exactly the same procedure, made 196
pools using
a vinyl ester resin other than Hetron 922 - including 43 with
Huntsman's Estarez 7222 vinyl ester resin. Not one of those 196 pools
has
developed blisters.
(c) In those circumstances, how could it be that the blistering was caused by
some shortcoming in Mr Cooper's operations?
(49) Second, Tranquility manufactured its swimming pools in accordance with
industry standards.
(50) The procedures adopted by Tranquility were essentially the same as those
employed by the Freedom companies, and Harvest pools.
(51) Mr Beale from Aquatic Leisure Technologies gave evidence that the
procedures adopted by Tranquility incorporated all of the
mechanisms required to
build a well-constructed and reliable pool and that, although Aquatic purchased
its vinyl ester resin unthixed
and unpromoted [T 746.17], the procedures adopted
by Aquatic Leisure Technologies to manufacture its pools were otherwise
essentially
the same as those adopted by Tranquility [T 744.1 - 747.29].
(52) Third Dr Pilato found that there was "[g]ood wetout of fibres in both the
tie layer and the structural layer [and] little or
no appearance of apparent
voids, cracks or bare fibres" in the four skimmer box cutouts taken from
Tranquility Pools manufactured
between 2002 and 2004 using vinyl ester resins
other than Hetron 922 and from pools manufactured by Tranquility during that
period
with Hetron 922 but which have not yet been reported as failed [Report 16
November 2010 at [46]].
(53) As was put to Dr Pilato in cross-examination, it must follow that for any
of those factors (poor wetout, voids, cracks or bare
fibres) to be causative of
blistering, it is necessary to conclude that Mr Cooper used some different
technique when making Tranquility
pools using Hetron 922 than when he was making
Tranquility pools with some other resin [T 854.32 and TS [179]]. But he did not.
(54) Tranquility did not suffer from blistering before or after it used Hetron
922 with the hydrophilic thixotrope. Nor did Tranquility
suffer any pool
blistering during the time it used Hetron 922 on those 196 occasions when it
manufactured swimming pools using a
vinyl ester resin other than Hetron 922.
(55) The conclusion is irresistible that the hydrophilicity of the thixotrope in
Hetron 922 was the causative factor leading to blistering.
(56) Why, then, did other pool manufacturers using Hetron 922 not have the same
catastrophic experience?
(57) As to Compass, the probability is that it suffered no failures because of
the differing manufacturing process outlined above.
(58) Otherwise, the reason is likely to be found in the conclusions expressed by
Professors George and Shanks in their Joint Report
of 24 and 26 March 2007, and
by Professor Shanks in his report of 18 August 2007 (both to the Referee):
Tranquility may have included more glass fibre in the vinyl
ester tie-layer than other manufacturers, which in itself would not cause
a
problem, but in conjunction with the hydrophilic fumed silica the resistance
to water could be insufficient. (Emphasis added)
If the glass fibre used by Tranquility was higher than the glass fibre used
by other manufacturers, this together with the untreated
silica [ie hydrophilic
thixotrope] may have increased the hydrophilicity above that tolerated by the
Hetron 922 VE resin [the Report
at [37]].
(59) As mentioned above, this was the factor that the Referee found to be of
special interest.
- Accepting
that without investigation of the precise glass levels used by the "other
manufacturers" it is not possible to draw any
final conclusions about this, it
is an open possibility that it was this factor - which does not bespeak any
shortcoming in Tranquility's
manufacturing processes - which resulted in
Tranquility, alone amongst users of Hetron 922, having pool failures to the
extent the
subject of evidence in these proceedings.
The Trade Practices Act Claims
- Tranquility
relies on two categories of causes of action: the first being causes of action
based upon a breach of sections 52 and 53 of the Trade Practices Act 1974
(Cth) in respect of express representations made by Huntsman, and the second
founded on breaches of the contract of supply.
The Express Representations
- Tranquility
relies upon three express representations (made by Mr Rapson at the meeting
referred to above):
- (1) that Hetron
922 (including all additives) - both in its present form and in the form as it
would be supplied by Huntsman to Tranquility
in the event that a contract of
supply was entered into - is and will be both a 20 year old product and a proven
product;
- (2) that Hetron
922- both in its present form and in the form as it would be supplied by
Huntsman to Tranquility in the event that
a contract of supply was entered into
- is (and will be) the same as Derakane 411; and
- (3) that
Huntsman would stand behind Hetron 922.
- Huntsman
admits that Third Representation, does not admit the Second Representation and,
in respect of the First Representation, admits
that Mr Rapson "made a
representation that a product known as 'Hetron 922' was a 20 year old product
and was a proven product".
- The
only evidence of the words used by Mr Rapson is contained in paragraph 35 of Mr
Annakin's affidavit of 12 April 2007, where Mr
Annakin records Mr Rapson as
saying:
Our vinyl ester resin, Hetron 922, has been around for over 20
years and it's a proven product. It's the same as the Derakane 411
that you're
buying from FGI. Anyway, if anything did go wrong, we would stand behind our
product.
- Huntsman
did not call its former employee, Mr Rapson, to contradict Mr Annakin's
evidence. Mr Annakin was not cross-examined to suggest
that Mr Rapson said words
different to those he gave in his affidavit save that it was suggested the word
"equivalent" was used instead
of the "same", a proposition which he rejected [T
162.16 - 163.27].
- In
litigation for final relief, it is accepted that where a party fails to call a
witness the Court may infer that the evidence which
such witness could have
given would not have assisted the relevant party's case. That principle is
generally known as the rule in
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298, but
outside altogether of that authority, the principle simply expresses an
inference which the Court may reach.
- The
following extracts clarify the position in concerning how to approach the
principles laid down in Jones v Dunkel :
"The unexplained failure by a party to give evidence, to call
witnesses, or tender documents, may - not must - in appropriate circumstances
lead to an inference that the uncalled evidence would not have assisted that
party's case. The appropriate circumstances exist where
it was within the power
of the party to tender the evidence which was not tendered." (JD Heydon,
Cross on Evidence , 6th ed, Butterworths, 2000 at [1215])
"This instance of a Jones v Dunkel inference..., also available where
there is unexplained failure by the party to call a witness or tender
documentary evidence, can
entitle the judge or jury more readily to accept the
evidence of the opposite party which might have been contradicted, or more
readily
to draw any inference fairly available from the evidence called by the
other party. A Jones v Dunkel inference cannot fill gaps in the evidence,
or convert conjecture and suspicion into inference, but unless it is to be empty
of content
the inference if drawn may weigh the scales, however slightly, in
favour of the opposing party." [ Adler v Australian Securities and
Investments Commission [2003] NSWCA 131 at [649] per Giles JA, Mason P and
Beazley JA agreeing]
"[T]he rule [in Jones v Dunkel ] only applies where a party is
"required to explain or contradict" something. What a party is required to
explain or contradict depends
on the issues as thrown up in the pleadings and by
the course of evidence in the case. No inference can be drawn unless evidence
is
given of facts "requiring an answer". [D Byrne and JD Heydon Cross on
Evidence , 4 th Aus ed, Butterworths, 1991 at [1215]].
- As
the plaintiff has contended the defendant's submissions in relation to the first
representation ["20 years old proven product"]
may in essence be reduced to
three propositions :
- (1) the
representation was true at the time it was made;
- (2) the fact
that Hetron 922 had "developed" over time did not render the representation
false; and
- (3) Mr
Annakin's reliance on the representation was "limited".
- Huntsman
notes that at the time the representation was made (in about March 2002) the
change from a hydrophilic thixotrope had not
yet occurred. I accept that this
ignores the fact that the incorporation of F-CAT technology (and with it
ethylene glycol and copper
naphthenate) took place in December 2000. This was a
material change.
- Huntsman's
submission pays no regard to the context in which this representation was made.
As Mahoney J stated in Wright v TNT Management Pty Ltd [(1989) 15 NSWLR
679 at 683; [cited with approval by Mason P in Sydney Harbour Casino
Properties Pty Ltd v Coluzzi [2002] NSWCA 74 at [51]. See Gate Gourmet
Australia Pty Ltd (in liq) v Gate Gourmet Holding AG [2004] NSWCA 149 at
[265] per Einstein J]:
In considering whether a person has engaged in conduct which is, in
the relevant sense, misleading what essentially is in question
is not what the
actor intends or gives another to understand by his conduct: it is what the
conduct gives that person to understand
or what is to be taken from that
conduct.
- It
may be that - in one sense - Mr Rapson "was speaking entirely of the past" when
he assured Mr Annakin that Hetron 922 was a "20
year old product" and a "proven
product".
- But
it was clear from the context - namely Mr Rapson's "pitch" that Mr Annakin cause
Tranquility to buy that product - that what the reasonable person in Mr
Annakin's shoes would "take" from that representation, was that the product
to be sold to Tranquility was a "20 year old product" and a "proven product"
- and hence safe to use.
- On
Huntsman's case all that Mr Rapson represented was that Hetron 922 has been
proven over time, but that Huntsman might provide a
different product, albeit
bearing the same name.
- The
fact that Mr Annakin understood that the precise formula might be proprietary
information has nothing to do with whether he understood
he would be getting a
product different from the one that he had used in the past. If the formula is
protected information, any lay
person would regard it as being immutable rather
than as being the subject of continuous "development".
- Huntsman's
submission that Mr Annakin "did not regard Mr Rapson's comments as suggesting
that throughout those 20 years, and into
the future, there could be no
development of the product whatever" is contrary to the evidence.
- The
evidence given by Mr Annakin under cross-examination was [T 163.42 - 164.1
(emphasis added)]:
Q. And you knew from your own experience that Hetron had been
around for a long time, you didn't need Mr Rapson to tell you that?
A. That's correct.
Q. You'd had experience of using Hetron 922 without difficulty?
A. That's correct.
Q. And the fact that this salesman told you it was a 20 year proven product
meant absolutely nothing to you at the time, did it?
A. It would re-enforce it was the same material .
- To
say that a product is the subject of "development" means it is being altered, or
changed. There would be no reason for anyone not
a chemical engineer to believe
that any chemical formulation would be the subject of "development". On the
contrary, a lay person
is likely to understand that a chemical formulation is
immutable, and that a product which has been "developed" (ie altered or changed)
is a different product which would be expected to be given a different name.
- In
any event, in each case the possibility that Hetron 922:
- (1) might have
been the subject of "development" in the past, or
- (2) might be
the subject of change in the future, or
- (3) that what
might be sold to Tranquility was different from what was used by him at
International,
was not put to Mr Annakin in cross-examination.
- The
representations regarding Hetron 922, being made in the context of an imminent
sale, were representations with a continuing effect.
As Turner LJ stated in
Traill v Baring (1864) 4 De G J & S 318 at 329; [1864] EngR 305; 46 ER 941 at 946:
I take it to be quite clear, that if a person makes a
representation by which he induces another to take a particular course, and
the
circumstances are afterwards altered to the knowledge of the party making the
representation, but not to the knowledge of the
party to whom the representation
is made, it is the imperative duty of the party who has made the representation
to communicate to
the party to whom the representation has been made the
alteration of those circumstances; and that this Court will not hold the party
to whom the representation has been made bound unless such a communication has
been made.
- This
statement of principle has been repeatedly approved and applied in the context
of section 52 see eg Tiplady v Gold Coast Carlton Pty Ltd [1984] FCA 152; (1984) 3 FCR
426 at 458 per Fitzgerald J and Macquarie Generation v Peabody Resources Ltd
[2000] NSWCA 361 at [6] per Mason P and at [84] per Beazley JA.
- Mr
Rapson made his representations in about March 2002. Within weeks, at the most,
Hetron 922 - with a materially altered composition
incorporating a hydrophilic
thixotrope - was being sold to Tranquility. Tranquility was not informed of that
change or earlier changes.
In the circumstances, Huntsman had an obligation to
inform Tranquility that the representations made to them were no longer true.
- On
the question of reliance, Huntsman concedes that there was at least "limited"
reliance. Despite its reference to Mr Rapson's representations
as a "sales
pitch", Huntsman does not go so far as to suggest that the representations were
mere puffs. Of course, they were not.
Far from it.
- Mr
Rapson made specific representations regarding Hetron 922 in response to
expressed concerns from Mr Annakin. Mr Annakin only commenced
purchasing the
product after Mr Rapson gave him the specific assurances that he did.
- A
false, misleading or deceptive representation, to be causative, need not be the
sole or even dominant inducement Travel Compensation Fund v Tambree t/as R
Tambee & Associates [2005] HCA 69; (2005) 224 CLR 627 at [32] per Gleeson CJ (Kirby
& Callinan JJ agreeing on this issue), also at [49] per Gummow & Hayne
JJ; see also the extracts from
Henville v Walker [2001] HCA 52; (2001) 206 CLR 459
collected by me at [271] - [275] in Gate Gourmet Australia Pty Ltd (in liq) v
Gate Gourmet Holding AG [2004] NSWCA 149:
Misrepresentation will rarely be the sole cause of loss. If, in
reliance on information, a person acts, or fails to act, in a certain
manner,
the loss or damage may flow directly from the act or omission, and only
indirectly from the making of the representation
... Where the reliance involves
undertaking a risk, and information is provided for the purpose of inducing such
reliance, then if
misleading or deceptive conduct takes the form of
participating in providing false information, and the very risk against which
protection
is sought materialises, it is consistent with the purpose of the
statute to treat the loss as resulting from the misleading conduct.
- Furthermore,
as Beazley JA stated in Macquarie Generation v Peabody Resources Ltd
[2000] NSWCA 361 at [81] - [82]:
The representation does not have to be the only inducing cause of
the contract. Nor does it have to be the decisive or a necessary
factor in the
decision taken by the representee ... Rather, the inducement will be proved if
it is established that the representation
was one of the factors which
contributed to the decision which was made ... If the representation does not
affect the decision making
process, that is, does not play a part in the
decision which is made, there will be no inducement ...
Thus, it is not relevant for the Court to determine whether, if the true
position had been known, the representee would or would not
have altered his
position in relation to the contract. 'It is enough if a full and exact
revelation of the material facts might have
prevented him from doing so'.
- The
finding is that had Mr Rapson been frank about the product that he was
persuading Tranquility to buy, Mr Annakin would not have
had a bar of it.
- The
Court finds that Mr Rapson said words attributed to him, and that he did so as a
representative of Huntsman.
The Second Representation (same as Derakane 411)
- Huntsman's
submissions that this was only a representation of existing fact is rejected for
the same reasons as those applying to
the First Representation.
- Huntsman
submits further that the representation was true because they "were equivalent
in the sense that they were both vinyl ester
resins with similar performance
specifications and consequently, suitable for a range of similar applications".
- Once
again, this submission has no regard to context, and seeks to place an
artificial limit upon the representation that has no regard
to the words
actually used. In terms of what the reasonable person would "take" from the
Second Representation, it is not that the
two resins were exactly the same -
they were, after all, different products - but that they would function
the same.
- This
accords with the evidence of Mr Annakin [T 165.50 - 166.28 (emphasis added)]:
Q. And when you were told something to the effect that Hetron 922
was the same as Derakane 411 you took that to mean that it was a
high quality
vinyl ester resin suitable for use in the barrier layer of a swimming pool?
A. Correct.
Q. And you didn't think they were identical products?
A. Not identical no.
Q. You thought they were effectively interchangeable?
A. Yes.
Q. But you didn't take Mr Rapson's word for that did you?
A. Well it was suitable for what I was doing .
Q. Well you had some experience of using Hetron 922--
A. Yes--
Q. In the construction of swimming pools, correct?
A. That's correct.
Q. And you relied on that experience in deciding to try it again?
A. To trial some yes.
Q. And you only took the material on trial?
A. Correct.
Q. And you decided to check for yourself whether or not Hetron 922 would be
relevantly the same as Derakane 411?
A. Would perform the same that's correct yes .
- Mr
Annakin's understanding was not limited to the sense that both Hetron 922 and
Derakane 411 were vinyl ester resins used in the
barrier layer of swimming
pools. That they were only "the same" or even "equivalent" in that limited sense
was never put to him.
- Mr
Annakin's understanding was that they would perform the same, and that - like
Derakane 411 - the Hetron 922 would be suitable for
use by him.
- The
Hetron 922 proved not to perform the same and not to be suitable for use. The
fact that the two resins might be "equivalent" in
some limited sense is
irrelevant. In circumstances where Tranquility suffered:
- (1) no failures
with Derakane 411, and
- (2) many
failures with Hetron 922,
- (3) using
exactly the same manufacturing procedures,
it could not be argued that the two resins functioned the
same or were - in substance - "the same".
- It
goes without saying that if Mr Annakin had been told that both products could be
used for the barrier layer of swimming pools,
but that in one case (Derakane
411) he would not have osmosis and the other (Hetron 922) that he would in most
cases, he would not
have made the change.
- I
accept the plaintiffs' contention that Mr Leggett's evidence takes the matter no
further.
- Although
he opined that Hetron 922 and Derakane 411 were "equivalent base products" he:
- (1) was an
engineer with no experience in the manufacture of fibreglass swimming pools;
- (2) only
compared the two base resins used in each product [T 540.10];
- (3) did no more
than observe that the base resin in both products was Bisphenol A and for this
reason (alone) said he had no reason
to doubt the products were interchangeable
[T 542.5 - .22];
- (4) made no
comparison of the products as altered by additives, such as thixotropes [T
541.42];
- (5) in drawing
his conclusion as to the interchangeability of the products had no regard to
whatever additives might be added to either
product [T 543.3]; and
- (6) in
particular, did not take into account the hydrophilicity of any thixotrope that
might be added to either product [T 544.6].
- In
the result Mr Leggett's evidence is given no weight.
The Third Representation ("stand behind our products")
- Huntsman
asserts that the circumstances of the statement made by Mr Rapson in this case
are distinguishable from those that arose
in the Ferro litigation.
- Although
the precise factual circumstances in the two cases are - of course - distinct,
Huntsman was unable to point to any factor
which convinced me that they were
relevantly distinguishable, such that one or more of the elements of an estoppel
are not made out.
- Mr
Rapson made the representation to Mr Annakin in an attempt to induce him to act
upon it. Despite the characterisation of this as
being part of a "sales pitch",
Huntsman have not submitted (and could not submit) that it follows from this
that the representation
was a mere puff, or that no reasonable person would have
placed any reliance upon it.
- The
only reasonable construction of this representation - in the sense of what would
be "taken" from the representation - is that
Huntsman would compensate
Tranquility if there was something wrong with the product, which carries with it
the further representation
that Huntsman would not rely upon any terms that
would otherwise exclude or limit Tranquility's right to compensation if the
Hetron
922 proved unmerchantable or not fit for purpose.
- The
submission that Mr Annakin recognised that Huntsman's terms of sale
circumscribed the extent to which Huntsman would "stand behind
its product" is
made contrary to the evidence:
Q. You knew that the terms and conditions of sale defined the
contract between Huntsman and Tranquility in connection with the sale
and
purchase of the resin?
A. Correct.
Q. And you have already told us that you were aware that customarily those
terms and conditions would include provisions which defined
the obligations of
the parties in the event that something went wrong with the product, you've told
us that already?
A. Yes.
Q. That's the case, isn't it?
A. Sorry.
Q. You knew that it was customary for terms and conditions of sale to define
the obligations of the parties in the event that something
went wrong?
A. Yes, correct.
Q. But you didn't take the trouble to read what these terms and conditions
provided?
A. No, I was relying on Glen Rapson stating that he - that the company would
stand behind its product.
Q. That was a very, very general statement, wasn't it?
A. Well if I realised that the company was going to hide behind its--
..
A. Well if - if I realised that Huntsman were going to hide behind their -
the warranty on the back of the invoices I wouldn't have
considered dealing with
them.
- The
question that was put to Mr Annakin was whether he was aware that it "was
customary for terms and conditions of sale to define
the obligations of the
parties in the event that something went wrong".
- It
was not put to Mr Annakin that he understood the words "if anything did go
wrong, we would stand behind our product" to mean "if
anything did go wrong,
what would happen between us would be governed by the Huntsman terms and
conditions" .
- No
doubt the reason this was not put to Mr Annakin is that it offends common sense.
- It
is also contrary to the evidence: as Mr Annakin's further answers revealed, he
understood those words to mean precisely the opposite.
This is particularly in
the context where Huntsman had previously sought to shelter behind its terms in
the Ferro litigation, and Mr Rapson was seeking to allay Mr Annakin's
concerns about again dealing with Huntsman.
- Despite
the difference in context, the only reasonable meaning that could be assigned to
those words was the one found by Cole J in
Ferro at pages 31 - 33.
The implied Fourth Representation
- The
further finding is that the Fourth Representation - that Hetron 922 was fit for
use by Tranquility in the barrier layer of its pools - arose by
implication.
- As
the plaintiff has contended, the implication arises by reason of the three
express representations and the context in which they
were made. Because of
International's unhappy experience with Aropol, Mr Annakin was reluctant to
purchase another resin from Huntsman.
- The
finding is that the three express representations conveyed:
- (1) in respect
of the First Representation ("The Product is a 20 year old product and is a
proven product"):
"Hetron 922 is a product that has been
marketed in the same form for 20 years and has been 'proven' (whether by testing
or otherwise)
to be able to be successfully used in swimming pools";
(2) in respect of the Second Representation ("The product is the same as
Derakane 411 that [Tranquility] is buying from FGI"):
"Hetron
922 functions just like the Derakane 411 (the product you presently use in your
barrier layers)"; and
(3) in respect of the Third Representation ("If anything does go wrong Huntsman
will stand behind the Product"):
"Huntsman will compensate you
if what I have said is not true".
- I
accept that taken together, the three express representations would be taken by
the reasonable person to mean not just that Hetron
922 was generally safe (fit)
for use in the barrier layer of swimming pools, but that it was fit for use
by Tranquility in the same manner in which it currently manufactured
fibreglass swimming pools with Derakane 411.
- Huntsman
has made no or no acceptable submissions in respect of this representation,
either on whether it ought be inferred from the
words Mr Rapson did use, or on
whether it was breached.
Alleged absence of misleading conduct towards the second
plaintiff
- The
Court rejects Huntsman's contention that whether or not the four representations
were capable of misleading the first plaintiff
(TPS), they could not have been
capable of misleading the second plaintiff (TPSM) 12 months later.
- The
finding is that the representations had a continuing effect. As stated in
Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourmet Holding AG [2004]
NSWCA 149 at [284]:
In short a representation may, depending always upon the precise
circumstances in which it was made and upon later circumstances,
have a
continuing effect during the period of time following the date upon which the
representation was made. The relevant period
of time dealt with in the
authorities is, for obvious reasons, invariably the period between the point in
time when the representation
was made and the point in time when it is acted
upon by the representee, often by concluding a contract. Hence the springing up
of
the suggested duty upon the representor not to leave the representee under an
error when the representation requires to be corrected,
failing which
correction, the representee continues ignorant of the intervening change of
circumstances, and goes on by relying upon
the representation as having
continuing effect .
- The
finding is that Huntsman never corrected any of the representations. The
business of TPSM was the very same business as that of
TPS - and the very same
business to which Mr Rapson wished to sell Hetron 922. It was operated by
exactly the same person - David
Annakin. In these circumstances, with no change
in circumstance between the time Mr Rapson made the representations and the time
TPSM assumed conduct of that business:
- (1) Huntsman,
to avoid contravening sections 52 and 53(a), remained under a continuing
obligation to correct its representations; and
- (2) there was
no severance of the chain of causation between the original representations and
the causation (by reliance) of Mr Annakin
switching from using Derakane 411 in
the barrier layer of the business' swimming pools to using Hetron 922.
Breach - the First & Second Representations
- The
plaintiffs have contended that further consideration of the Third and Fourth
representations is more properly conducted in the
context of consideration of
the claims framed in contract. This proposition is accepted.
- Tranquility
pleads that the First and Second Representations were each:
- (1) A
representation of existing fact in respect of the Product (defined as the vinyl
ester resin Hetron 922 in the form actually
supplied to Tranquility including
all additives such as thixotropes, promoters and ethylene glycol;
- (2) A
representation with continuing effect up until the last delivery of the Product
by Huntsman to Tranquility, in respect of the
product as it was at the time of
supply to Tranquility;
- (3) A
representation as to the nature of the Product as it would be supplied by
Huntsman to Tranquility in the event that a contract
for supply was entered
into.
- In
respect of the First Representation, the evidence of Dr Durrant is that Huntsman
altered the formulation of thixed and promoted
Hetron 922:
- (1) from
December 2000, by incorporating ethylene glycol, copper naphthenate and other
components of Ashland's patented "F-CAT" technology;
- (2) from April
2002, by the use of the hydrophilic thixotrope Wacker N20 in place of the
hydrophobic Aerosil 202; and
- (3) in respect
of the resin actually supplied to Tranquility, the incorporation of additional
styrene and promoter.
- As
the plaintiffs have contended, regardless of how the representation is
characterised, the Hetron 922 as supplied to Tranquility
was not a "20 year old
product". It had not been marketed in the same form for 20 years. At the time
the representation was made,
a highly significant change was about to be made to
the product, namely the incorporation, for the first time, of a hydrophilic
thixotrope.
Other changes had been made to the product over the preceding years.
- The
changes made in December 2000 and April 2002 to the composition of were material
changes (whether or not, either alone or in combination,
they can be isolated as
the mechanism of failure to a scientific standard).
- Plainly
enough a reasonable person would understand that a product can be "proven" in
two ways: either through actual use, or through
rigorous scientific testing.
- In
the present case, the new formulation of hydrophilically thixed and promoted
Hetron 922 was sold to Tranquility immediately after
the change to hydrophilic
thixotrope [the evidence of Mr Godfrey discloses no earlier sale to any other
party: affidavit of Mr Godfrey,
28 May 2010 at [16] - [24] and Exhibit NG-7]. It
had not been "proven" through use.
- Furthermore,
as the evidence of Dr Durrant, outlined above, discloses, and even if the sort
of laboratory blister tests he earlier
conducted were capable of relevantly
"proving" a new product, Dr Durrant had conducted no blister testing in relation
to Hetron 922
in the formulation sold to Tranquility, no water resistance tests
of any kind of Hetron 922 with a hydrophilic thixotrope since 1997
(which tests
had, in any event, been failures), nor any testing at all with the formulation
incorporating the water-soluble ethylene
glycol. No testing was done until 2003
and 2004 (which tests also gave negative results).
- The
finding is that the First Representation was:
- (1) misleading
and deceptive contrary to section 52 of the Act; and
- (2) false and
misleading in respect of its composition and history contrary to section 53(a)
of the Act.
- As
the plaintiff contends, in respect of the Second Representation, it might be
accepted that the reasonable person [and Mr Annakin
[T 165.3 - 166.6]] would not
(and did not) understand the statement that Derakane 411 is "the same" as Hetron
922 to mean that it
was absolutely identical in all respects.
- However,
the Court accepts that in the context in which that statement was made in the
present case, the reasonable person would [and
Mr Annakin did [T 166.8-12]]
understand the statement to mean that the two products would function in
materially the same way.
- Putting
aside that Derakane 411, manufactured by FGI, almost certainly did not
incorporate Ashland's "F-CAT Technology" and that,
during the Hetron Period, it
was sold in Australia with a hydrophobic thixotrope, the plain fact is that:
- (1) Tranquility
did not suffer osmosis in its pools manufactured with Derakane 411;
- (2) more than
half of the pools it made with Hetron 922 have Failed; and
- (3) Tranquility's
method of manufacture using the two products was identical.
- As
the plaintiffs have contended, it follows that the two products as sold and used
with their additives could not be, in any real
sense, "the same". Hence by
making the Second Representation, Huntsman contravened sections 52 and 53(a) of
the Trade Practices Act.
The Breach of Contract Claims
Incorporation of terms
- Huntsman
admits that it was a term of the contract of sale between it and Tranquility
that Hetron 922 be of merchantable quality.
It pleads, however, that other terms
on its invoices (clauses 8, 9 and 10) ("the Terms") were also incorporated and
that the effect
of these clauses was that the usual implied term as to fitness
for purpose was excluded, and that the remedy for breach of the merchantability
terms was drastically limited.
- It
is in this context that the Third and Fourth Representations are particularly
significant. Tranquility submits and the Court accepts
that, by reason of these
representations, Huntsman is estopped from asserting that the Terms have been
incorporated into any contract
between it and Tranquility, and from denying that
the term implied by section 19(1) of the Sale of Goods Act 1923 of
fitness for purpose has been so incorporated.
- The
elements of equitable estoppel were set out by Brereton J in Waterman v
Gerling Australia Insurance Co Pty Ltd [2005] NSWSC 1066; (2005) 65 NSWLR 300 at [83] - [84];
see also [96] (citations omitted):
Thus, in promissory estoppel, it is necessary for a plaintiff to
establish (1) that it has adopted an assumption as to the terms of
a legal
relationship with the defendant; (2) that the defendant has induced or
acquiesced in the plaintiff's adoption of that assumption;
(3) that the
plaintiff has acted in reliance on its assumption; (4) that the defendant knew
or intended that the plaintiff so act;
and (5) that it will occasion detriment
to the first party if the assumption is not fulfilled.
- The
finding is that all these elements have been made out:
- (1) Tranquility,
via Mr Annakin, adopted the assumption that Huntsman would compensate it if
anything went wrong with the product
and, implicitly, would not enforce any
terms and conditions to the contrary [T 170.18 - 171.16];
- (2) that
assumption was induced by Mr Rapson via the Third and Fourth Representations;
- (3) Tranquility,
via Mr Annakin, relied upon that assumption T 170.35 - 171.37];
- (4) though
there is no direct evidence from Mr Rapson, as Huntsman did not call him, the
only inference reasonably open is that Mr
Rapson conveyed the Third and Fourth
Representations intending that Mr Annakin would act on them and purchase Hetron
922; and
- (5) Were
Huntsman is permitted to rely upon the Terms, then Tranquility's claims in
contract would be reduced to nothing because of
the notice requirement in clause
10.
- In
Ferro [at pages 31 -33], Cole J found this kind of estoppel in favour of
International on the basis that Huntsman had made a representation
to it
essentially identical to the Third Representation in the present case. If any of
the above be wrong, I think there was substance
in Tranquility's alternative
submission that the Third Representation was misleading and deceptive because
Huntsman never had any
intention of waiving compliance with the Terms. However,
given my conclusions above it is unnecessary to analyse this argument in
any
detail.
Breach
- Huntsman
places a great deal of reliance upon the experience of other manufacturers in
its submissions in this question. That evidence
has been addressed above.
- What
remains is that Tranquility suffered catastrophic failures, which were caused by
the Hetron 922 LVPS/LVPW, and those failures
were not due to substandard
manufacturing procedures.
- The
reason for the difference in experience with the only other significant
purchaser of Hetron 922 LVPS / LVPW, Barrier Reef, is
a matter of speculation.
There is no evidence either way. Tranquility had the benefit of the Referee's
findings. Huntsman bore the
evidentiary onus of rebutting the inferences that
arise from those findings.
- In
Australian Knitting Mills Ltd v Grant [ [1933] HCA 35; (1933) 50 CLR 387 at 418;
[followed by Branson J (Jacobson J agreeing) in Medtel Pty Ltd v Courtney
[2003] FCAFC 151; (2003) 130 FCR 182 at [63]; see also Mistral International Pty Ltd v
Polstead Pty Ltd [2002] NSWCA 321 at [73] - [75] per Sheller JA, Meagher JA
and Beazley JA concurring], Dixon J (as his Honour then was) expressed as
follows the approach
to be pursued when considering whether goods purchased are
of merchantable quality:
The condition that goods are of merchantable quality requires that
they should be in such an actual state that a buyer fully acquainted
with the
facts and, therefore, knowing what hidden defects exist and not being limited to
their apparent condition would buy them
without abatement of the price
obtainable for such goods if in reasonably sound order and condition and without
special terms .
- Any
pool manufacturer aware of the true nature of Hetron 922 LVPS or LVPW, and
particularly its propensity to cause blistering (as
revealed by Tranquility's
experience, but also by Dr Durrant's 2004 experiments) would not purchase it
without abatement of price.
Hence it is not merchantable. As this product had
only one use, it was also not fit for its purpose.
- In
any event, Hetron 922 was not fit for use by Tranquility and hence
rendering the Fourth Representation false, misleading or deceptive.
Causation
- Tranquility
correctly accepts that to show it has suffered loss or damage "by" Huntsman's
contravening conduct (s 82 of the Trade Practices Act ), it must
establish, on the balance of probabilities, that:
- (1) the
Representations were a material inducement in the purchase and use by
Tranquility of Hetron 922 in the barrier layer of its
swimming pools; and
- (2) using
Hetron 922 materially contributed to the Pool Failures (and the losses flowing
therefrom).
The second issue has been dealt with above.
- On
the first issue [ that of reliance] I accept that it is critical to keep in mind
the context in which these representations were
made.
- Mr
Annakin was extremely reluctant to purchase anything from the defendant because
of the experience International had had with Huntsman's
Aropol 7000.
- The
relevant principles concerning the role played by reliance in relation to the
question of causation were summarised by Wilson
J in Gould v Vaggelas
[(1985) [1985] HCA 85; 157 CLR 215 at 236; these principles have been repeatedly affirmed,
see eg Havyn Pty Ltd v Webster [2005] NSWCA 182 at [116] per Santow JS
(Tobias & Brownie JJA agreeing)]:
- (1) Notwithstanding
that a representation is both false and fraudulent, if the representee does not
rely upon it he has no case.
- (2) If a
material representation is made which is calculated to induce the representee to
enter into a contract and that person in
fact enters into the contract there
arises a fair inference of fact that he was induced to do so by the
representation.
- (3) The
inference may be rebutted, for example, by showing that the representee, before
he entered into the contract, either was possessed
of actual knowledge of the
true facts and knew them to be true or alternatively made it plain that whether
he knew the true facts
or not he did not rely on the representation.
- (4) The
representation need not be the sole inducement. It is sufficient so long as it
plays some part even if only a minor part in
contributing to the formation of
the contract.
- The
last point is of immediate relevance. The representation need not be the sole or
even dominant factor in causing the representee
to change their course of
action. It need only constitute a "material", meaning anything that is not de
minimus [ Bonnington Castings Ltd v Wardlaw [1956] UKHL 1; [1956] AC 613 at 621 per
Lord Reid (Viscount Simonds agreeing); March v E & MH Stramare Pty Ltd
[1991] HCA 12; (1991) 171 CLR 506 at 514 per Mason CJ (with whom Toohey & Gaudron JJ
agreed) and at 532 per McHugh J] inducement. Mr Annakin, when pressed on this
point in cross-examination, insisted the First Representation had "an impact"
upon his choice [T164.18-20].
- In
any event, the causation inquiry does not occur in a vacuum, but in the context
of the particular contravention alleged. Tranquility
submits and I accept, that
any reliance which Mr Annakin may have placed on his own experience with Hetron
922 was in the context
where Mr Rapson had just represented to him that the
Hetron 922 which would be provided to him would be "the same" not only as the
"Derakane 411" he was currently using, but - by virtue of the First
Representation - "the same" as the Hetron 922 he had used in
the past.
- The
finding is that Mr Rapson's representations were calculated to induce Mr Annakin
to purchase Hetron 922 and he in fact did so.
- A
"fair inference" of reliance arises from this fact.
- I
accept that it is supported by the credible direct evidence of Mr Annakin that
he in fact did so.
- As
stated above, to rebut this evidence of reliance, evidence must be adduced
showing that Mr Annakin knew the true facts or that
they played no role in his
decision-making process. As the plaintiff has contended these two matters can be
tested by postulating
whether, had Mr Rapson not misled Mr Annakin, Mr Annakin
would nevertheless have purchased the Hetron 922.
- Assuming
Mr Rapson:
- (1) nor any
other Huntsman representative, did not meet Mr Annakin at all, it is clear that
he would have continued using Derakane
411;
- (2) made only
the representation regarding price, the uncontradicted evidence given by Mr
Annakin regarding his conversation with
Mr Rapson was that this was insufficient
to sway him given his experience with Aropol 7000; and
- (3) represented
the true position - "we have been experimenting with its composition, have run
no tests for water resistance and you
will be the first company to use it
commercially in its new form" - there can be no doubt that Mr Annakin would not
have had a bar
of it.
- Mr
Annakin says he was extremely wary of using another product manufactured by
Huntsman. Subsequent events demonstrate that his concern
was soundly based. It
is difficult to envisage a more compelling case of reliance than that presented
by the present facts.
- The
finding is that but for the Representations, Tranquility would not have used the
reformulated Hetron 922 in the manufacture of
its pools and therefore it:
- (1) would not
have suffered the Pool Failures;
- (2) would not
have had the liability to its customers to replace those pools; and
- (3) would not
have had its business destroyed beyond recovery.
Contributory negligence
- Huntsman
pleads that its liability to Tranquility ought be reduced by reason of
contributory negligence pursuant to section 82(1B) of the Trade Practices Act
.
- Tranquility
submits, in relation to this pleading, that:
- (1) as
Tranquility's cause of action against Huntsman arose prior to the commencement
of section 82(1B) - 26 July 2004 - the defence is not available to Huntsman;
- (2) a finding
that Tranquility failed to take reasonable care in respect of its manufacturing
is equivalent to a finding that it had
"substandard manufacturing standards" and
hence Huntsman is prevented by the adoption of the Referee's Report from making
such a
submission; and
- (3) in any
event, Huntsman has failed to discharge its onus of proof to establish that
Tranquility was negligent in its manufacturing,
or that any such negligence (if
it existed) materially contributed to the Pool Failures.
- Section
82(1B) of the Trade Practices Act was inserted by item 5 of schedule 3 of
the Corporate Law Economic Reform Program (Audit Reform and Corporate
Disclosure) Act 2004 (Cth). Schedule 12 of that Act added a new section 1466
to the Corporations Act 2001 (Cth) in the following terms:
The amendments made to this Act and the Trade Practices Act
1974 by Schedule 3 to the amending Act apply to causes of action that arise
on or after the day on which that Schedule commences.
- Schedule
3 of the amending Act commenced on 26 July 2004.
- A
cause of action pursuant to section 82 accrues on damage [ Wardley Australia
Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514]. Tranquility alleges that it
suffered damage broadly falling into three kinds:
- (1) loss of
profits flowing from loss of sales due to the damage suffered to its reputation;
- (2) liability
to customers to replace or rectify their pools; and
- (3) expenses
incurred in managing the complaint outbreak.
- I
accept that on the evidence Tranquility first suffered a loss of sales sometime
on or about 1 January 2005. I further accept that
on the other hand Tranquility
first suffered damage on the other two heads before 26 July 2004.
- The
first confirmed complaint was that of Mr and Mrs Shaunessy in Lorn on 20 April
2004. By June 2004, there had been a sufficient
number of confirmed complaints
for Mr Kahler to issue instructions as to the dealing of complaints. Tranquility
first suffered "damage"
in respect of this liability when a complaint is
confirmed because at that time the cause of action the customer has against
Tranquility
is complete, and hence the liability of Tranquility is no longer
contingent but, to use the words of the High Court, "ascertainable"
[ Wardley
Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514].
- It
is not only Tranquility's liability to customers which first crystallized before
26 July 2004. The first expense it incurred in
the management of the complaints
was on 10 June 2004 - the invoice of $386.34 for Lo Chlor chemicals to mask
blistering and blackspot
[Exhibit SGA14; Exhibit SGA15. The actual payment was
made on 22 June 2004: Kahler, 6 Feb 09 at [50] & Exhibit KWK66]. The first
invoice in respect of work done to manage the complaints (by meeting with
Huntsman representatives) was issued by Mr Kahler on 23
July 2004.
- Tranquility's
causes of action pursuant to section 82 of the Trade Practices Act ,
having arisen before the commencement of sub-section (1B), are not subject to
the contributory negligence defence: I & L Securities Pty Ltd v HTW
Valuers (Brisbane) Pty Ltd [2002] HCA 41; (2002) 210 CLR 109.
- In
any event, the defence, if it be available, has not been made out.
- Contributory
negligence is an affirmative defence and hence Huntsman bears the onus of proof
[ Boyd v Leftwich (1982) 43 ALR 280] in establishing both that:
- (1) Tranquility
failed to take reasonable care; and
- (2) that
failure was a cause of Tranquility's loss or damage.
- Even
putting the Referee's findings to one side, the Defendant has two substantial
difficulties in the path of discharging its onus
of proof:
- (1) first, to
establish that Tranquility has been negligent, it needs to prove that
Tranquility's manufacturing has fallen short of
some objective standard, the
Defendant has called no evidence which is capable of establishing what
"reasonable" manufacturing standards
might be; and
- (2) second, if
Tranquility did have negligent manufacturing standards, and they were capable of
causing Pool Failures, then one would
have expected to see some failures
in pools manufactured with resins other than Hetron 922 in the period 20 August
1999 to the present day. There have been
none.
- On
the first issue, Huntsman has sought to rely solely upon:
- (1) alleged
breaches of Australian Standard AS/NZ 1834 ("the Standard"); and
- (2) the
evidence of Dr Pilato.
- In
respect of the use of the Australian Standard as evidence of negligence, King CJ
stated in Chicco v The Corporation of the City of Woodville (1990) Aust
Torts Rep 81-028 at 67,895 that:
Publications containing safety standards approved by the Standards
Association of Australia were admitted by consent. These standards
do not have
legal force, except, of course, to the extent that they may be given such force
by a particular statute. They had no
legal force in the circumstances of the
present case. It is permissible for an expert on safety to have recourse to such
public standards,
if he sees fit, as one of the sources from which he informs
himself as to matters relating to the subject on which he is expert.
But the
standards, themselves, have no legal or evidentiary force.
- Chicco
has been repeatedly followed in this respect [see eg Maynard v Rover
Mowers Ltd [2000] QCA 26 at [17] per McMurdo P, Thomas JA & Helman J and
Hughes v Van Eyk [2008] NSWSC 525 at [68] per Hislop J] , including by
Porter J in Kent v Gunns Ltd [2009] TASSC 30 where his Honour held that
"[i]n short, a Standard such as AS-1755 is merely a guideline without any
legally binding effect. In the
absence of statutory embodiment, their relevance
in any proceedings would only be to the extent that there has been expert
evidence
as to the extent to which they express good practice".
- Huntsman
and Dr Pilato rely especially in clause 6.3 ("Corrosion barrier") of the
Standard, which provides:
The corrosion barrier shall be constructed from a suitable resin,
or a resin/fibrous reinforcement composite, manufactured in accordance
with the
respective materials specification. It shall be free from dry fibres,
delamination from the cosmetic layer, and air bubbles
.
- The
evidence of Professor George, however, is that using the method of manufacture
which has the resin/glass mixture sprayed onto
a mould and then rolled by
laminators - the same method which is used by Compass - it is impossible to
remove all air bubbles (voids)
[T 797.1-29]. This has been dealt with above.
Such a manual process would also be unable, at least consistently, to achieve
complete
wet out of all fibres, even in the hands of an expert.
- There
is no evidence that the Standard has been given the force of law in this
country. It is plain that section 6.3 expresses not the minimum standard of care
required of the "reasonable" manufacturer, but an ideal for which a manufacturer
should
strive. As Barwick CJ stated in Purcell v Watson (1979) 26 ALR 235
at 237 (which concerned an appeal by a pedestrian who had sued a driver for
personal injuries against the trial judge's apportionment
for contributory
negligence):
Of course, a counsel of perfection would be for a pedestrian to
step off the roadway, albeit into a puddle on the shoulders of the
road,
whenever the lights of an oncoming car approached: or at any rate when the
lights appeared to be 50 yards or more away from
him. Doubtless life is more
securely preserved by such a course, particularly as negligent driving or lack
of proper control of a
motor vehicle is less than unusual. But we are not
dealing with perfection or even with wisdom. The requirement of the law is no
greater than the pedestrian take reasonable care for his own safety, not care
that eliminates all risk, but reasonable care.
- As
has been stated in respect of the discharge of retainer by solicitors, the duty
is to exercise reasonable care, skill and diligence. The standard of care
is not to be measured against a "counsel of perfection" [ Carew Counsel Pty
Ltd v French [2002] VSCA 1; (2002) 4 VR 172 at 185 per Winneke P (with whom Buchanan &
Vincent JJA agreed)] or that of a "particularly meticulous and conscientious
practitioner"
[ Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp
[1979] Ch 384 at 403 per Oliver J].
- If
the Standard is unable to provide a safe guide to the required standard of care
in the present case, then Dr Pilato is even less
so. He candidly conceded that
he had no experience at all with the manufacture of fibreglass swimming pools [T
831.16-28]. His ability,
therefore, to express any expert opinion on the
question of whether Tranquility had substandard manufacturing procedure was
extremely
limited. This was graphically demonstrated, for example, by his
admission of basic errors revealing a profound ignorance of pool
manufacturing
methods, such as, for example, his citation of recommendations related to
"chopped strand mat", as explained earlier.
.
- Taking
into account that on this issue the burden of proof is placed upon Huntsman, I
accept that the evidence before the Court is
simply insufficient to satisfy the
Court either that Tranquility had substandard manufacturing procedures
or that any such procedure caused the Pool Failures.
- Ultimately,
the most eloquent rebuttal to this defence, however, remains the fact that the
only Pool Failures ever suffered by Tranquility pools - whether before
the Hetron Period (reaching back to 1999), during it or after (to
the present
day) - were with pools which were manufactured with Hetron 922. Tranquility
submits that this fact alone is sufficient
to reduce the contributory negligence
contention to a remote possibility - not the probability that is required to
discharge Huntsman's
onus of proof.
- I
accept that the sole basis put forward for a finding that this defence has been
made out is that the Court ought draw an inference
from the fact that no other
manufacturers suffered the extent of pool failures that Tranquility did.
- Huntsman's
submissions pay no regard to the fact that:
- (1) Tranquility
has no pool failures using other vinyl ester resins, despite using the same
manufacturing process and personnel at
all times;
- (2) the Referee
found, with the agreement of Huntsman's expert Professor Shanks, that
Tranquility did not have substandard manufacturing
procedures; and
- (3) Huntsman
adduced no evidence of what were reasonable manufacturing standards against
which those of Tranquility could be measured,
in circumstances where it bears
the onus of proof.
- Huntsman
contests Tranquility's argument that the defence is not applicable as it applies
only to causes of action arising on or after
26 July 2004. Huntsman asserts that
each purchase of Hetron 922 was a separate act of reliance and hence a separate
cause of action.
- Huntsman
cites no authority for this proposition. It is expressly contradicted by Austin
J in Clutha v Millar [2002] NSWSC 362 at [34]; [see also his Honour's
subsequent judgment Clutha v Millar (No 3) [2002] NSWSC 642 where his
Honour adhered to this view], where his Honour stated:
It would be absurd to hold, in a case where the defendant's breach
of duty extends over a period of time and causes loss constituted
by failure to
avoid transactions that occur repeatedly during that period, that a new cause of
action arises with each such transaction.
Since Clutha was a substantial trading
company during the September/February period, I infer that it incurred many
thousands of separate
debts during that period. Hence, the plaintiff's
proposition would entail that many thousands of causes of action arose during
that
time. The only purpose of distinguishing each such cause of action from
every other would be to allow some of them to be brought
within the limitation
period. There would be no other rational basis for drawing any distinction.
Properly understood, the complaint
is that a continuing duty was breached by
failure to act during the whole of the specified period, leading to a single
loss.
- There
are two ways to characterise Tranquility's cause of action against Huntsman in
respect of the latter's contravention of section 52 and 53(a) of the Trade
Practices Act :
- (1) as the
breach of an ongoing obligation to correct unqualified representations, which
obligation extended throughout the Hetron
Period; and/or
- (2) breach of
an obligation which extended so far as Tranquility decided to switch to Hetron
922 as its primary resin for the barrier
layer of its swimming pools, in which
case each subsequent purchase flowed from that decision (and hence the initial
breach).
- In
the latter case, there is but one cause of action which crystallises when the
first damage occurs. There is no "new" reliance.
The reliance is one and the
same in respect of every purchase.
- If
the former characterisation be correct, then, as there was an ongoing obligation
with separate reliance in each case, by the reasoning
in Clutha there is
but one cause of action - and that crystallised on 20 April 2004.
- The
Court accepts that there were multiple causes of action, one for each purchase
of Hetron 922. In consequence two of Tranquility's
heads of damage - destruction
of business and consequential expenses - flow not from damage to any individual
pool (and hence traceable
to any one purchase of Hetron 922), but from the pool
failures in general. That being so, each and every Pool Failure materially
contributed to those losses being suffered.
- As
each and every Pool Failure contributed to those heads of loss, then that damage
is recoverable as compensation on each and every
cause of action. In such a case
the plaintiff is entitled to elect which cause of action they shall pursue to
judgment on the basis
of which is the most advantageous [see A stley v
Austrust Ltd (1999) 197 CLR 1 at [44] per Gleeson CJ, McHugh, Gummow &
Hayne JJ]. In such a case, Tranquility has made clear that it would elect to
claims those heads
of loss pursuant to causes of action which arose prior to 26
July 2004, and hence not subject to section 82(1B) of the Trade Practices Act
.
Quantum
- Tranquility's
damage was said to fall into three broad categories: loss of profits consequent
on the destruction of its business;
costs incurred by reason of the Pool
Failures; and present and future liability to customers who purchased a Failed
Pool.
The destruction of business claim
- Both
parties addressed significant submissions on this issue. One feature of the
respective addresses concerned each of the parties
casting major aspersions upon
the veracity of one and other's experts. Essentially, in this area, the
plaintiff had retained Mr McGuinness
as their expert whilst the defendant had
retained Mr Gower .
- The
curriculum vitae of each expert is set out in Appendix A.
- By
the time of final address, it was clear that the plaintiff no longer contended
that the Court should adopt the hypothesis developed
by its expert, Mr
McGuiness. Instead, the plaintiff essentially contended that the Court had to
make its own findings based on how
it resolved the various issues.
- It
is of course trite to observe that the Court's role is to closely examine all of
the evidence including that put forward by each
of the experts and then to carry
out its best endeavours to determine the relevant issues. The Court is not bound
hand and foot by
the opinions of the experts but must reach its own considered
decision.
- The
plaintiff contended that a range of issues required resolution by the Court for
the purpose of quantifying its loss under this
head of damage. By the time of
final address it was apparent these issues were:
- (1) Tranquility's
actual production and sales;
- (2) the market
evidence;
- (3) the alleged
possible recovery of the business
- (4) the
commencement of the loss period;
- (5) the proper
date for valuation
- (6) whether the
decline in sales from 1 January 2005 was caused by the osmosis outbreak
- (7) the
appropriate discount rate
- (8) Tranquility's
plant capacity;
- (9) the "but
for" hypothesis;
- (10) the use of
post-loss data;
- (11) adjustments
for working capital; and
- (12) grossing
up for income tax.
The parties' positions as to the approach to adopt in
this area
- The
plaintiffs contended as follows:
- (1) Both Mr
McGuiness and Mr Gower have valued a number of scenarios.
- (2) The Court
will, however, be unable to safely adopt the value of any of those scenarios as
Tranquility's damages for destruction
of business unless the Court finds that
every assumption and every methodological assessment upon which that scenario is
based is
in accordance with the findings of the Court on the foregoing matters.
- (3) The
appropriate course in respect of this aspect of damages is for the Court to make
findings on the foregoing matters and then
invite the parties to adduce very
brief further evidence from Mr McGuiness and Mr Gower valuing the loss in
accordance with those
findings (including for statutory interest).
The defendants' position
- The
defendant first contended in this area that there were a number of profound
difficulties associated with the assessment by Mr
McGuiness of the second
plaintiff's losses. Amongst these difficulties highlighted by the defendant was
that Mr McGuiness' report
was said to be based on unproven and unrealistic
assumptions. Essentially by the time of final address this had become a
non-issue
because the plaintiff was no longer seeking for the Court to adopt Mr
McGuiness' hypothesis.
- The
defendant essentially then contended that Mr Gower's evidence was the only
evidence before the Court which constituted an expert assessment of
Tranquility's likely losses. The defendant contended that the
plaintiffs'
response to this situation was to invite the Court to give its assessment of the
loss and to, in effect, commission the
preparation of some further assessment
based upon methodology and assumptions to be determined by the Court. The
defendant contended
that the plaintiffs' proposal was unorthodox and offended
against principles of finality of litigation and the just quick and cheap
determination of disputes.
- Specifically,
the defendant contended that if, by reason of the plaintiffs commissioning a
calculation based on unproven assumptions,
the Court was left in a situation
where it only had the defendant's expert evidence before it, then that situation
was entirely a
result of the plaintiffs' forensic decisions.
- Ultimately,
I am satisfied that the plaintiffs' proposed approach to this area of the case
is appropriate. I do not think the plaintiffs'
suggested approach offends the
"just, quick and cheap" injunction in the Civil Procedure Act 2002 (NSW).
There would be nothing just in the Court rejecting the many hypotheses of both
parties, finding that Tranquility has suffered
substantial loss and refusing to
award damages because there is no evidence of the precise calculation for a
hypothesis which does
not precisely meet the Court's findings on the many
disputed matters underlying the hypotheses.
The legal framework
- In
my view each of the following observations hold true:
- (1) The
critical findings the Court must make on this aspect of the plaintiffs' claim is
in respect of the hypothesis it is asked
to form in respect of what would have
occurred in its business but for the osmosis outbreak consequence on the use of
Hetron 922
[see T 606.1-4].
- (2) The process
of weighing the many possibilities involves the assessment of many variables.
The Court is nevertheless, by the nature
of the task, required to form a single
view about the quantum of loss. As has been repeatedly recognised this will
involve a degree
of speculation.
- (3) Once
causation is established, although the plaintiff retains an evidentiary onus,
the balance of probabilities has no role to
play and assessing the facts upon
which the hypothetical (whether past or future or, as in this case, both) on
that basis would be
an error of law: Fightvision Pty Ltd v Onisforou
[1999] NSWCA 323; (1999) 47 NSWLR 473 at [137] - [144] per Sheller, Stein & Giles JJA.
- (4) In the
great majority of cases, a scientific or actuarial approach is, given the
imponderables, an exercise in spurious precision,
and the proper approach is for
the Court, having weighed all the possibilities, to settle on a single
hypothesis on a qualitative
and intuitive basis [ Idoport Pty Limited v
National Australia Bank Limited [2007] NSWSC 23 at [11] - [12] per Einstein
J]. In the result it is not an arbitrary exercise of power for the Court to
weigh up competing factors and make
a determination, even if, as is often the
case, the task cannot be undertaken in a mathematical or precise manner. As the
Court of
Appeal found in Norris v Blake ... mathematical weightings of
potential outcomes in loss of chance cases might be unsustainable and reliance
rather should be placed
on more intuitive methods to determine loss [ Norris
v Blake (by his tutor Porter) [No 2] (1997) 41 NSWLR 49 at 71 - 73 per
Clarke JA, Handley & Sheller JJA agreeing] . Similarly, the Courts are
frequently required to estimate damages
that are not capable of precise
quantification and require a degree of approximation and even guesswork [
Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 at
83 per Mason CJ & Dawson J , at 138 per Toohey J and at 153 per Gaudron J;
Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10; (2003) 196 ALR
257 at [37] - [38] per Hayne J ]. The Court is no stranger to intuitive
determinations, or determinations made without absolute precision, arrived
at by
acting judicially [ cf Murray v Shillingsworth [2006] NSWCA 367 at [10]
per Santow JA]. It is misconceived to suggest that such determinations or
approaches are arbitrary.
- (5) Where this
hypothetical is being posed in the case of an income stream which has a limited
history but significant potential for
growth - as was the case with the
plaintiff (a talented actor) in Norris v Blake , and with the plaintiff
(a champion boxer) in Fightvision Pty Ltd v Onisforou - it is important
to allow for both negative and positive possibilities, including that of
explosive growth.
- (6) Thus, in
Norris v Blake , Clarke JA, speaking for the Court, stated in respect of
the plaintiff's claim for lost earnings, that "[t ]he proper approach is
to
assess what it was most likely he would earn during the rest of his working life
and adjust this for contingencies including the
possibility that he might have
done far better" [at 73].
- (7) His Honour
noted that this statement of principle was "consistent with the observations by
Windeyer J in Bresatz v Przibilla " [(1962) [1962] HCA 54; 108 CLR 541 at 544]:
Moreover, the generalisation, that there must be a
"scaling down" for contingencies, seems mistaken. All contingencies" are not
adverse:
all "vicissitudes" are not harmful. A particular plaintiff must have
had prospects or chances of advancement and increasingly remunerative
employment. Why count the possible buffets and ignore the rewards of fortune?
Each case depends upon its own facts. In some it may
seem that the chance of
good fortune might have balanced or even outweighed the risk of bad .
- In
Fightvision Pty Ltd v Onisforou , the Court followed these remarks [at
[142]:
Although in many cases the hypothetical exercise of earning
capacity is not controversial, it may be, so that the vicissitudes include
allowance for the validity of the hypothesis as well as for the imponderables or
chances affecting its realisation. That is why the
allowance for vicissitudes is
not restricted to adverse contingencies but includes positive prospects [ see
Bresatz v Przibilla [1962] HCA 54; (1962) 108 CLR 541 at 544; Mitchell v Mulholland
(No 2) [1972] 1 QB 65 at 77; Norris v Blake (No 2) at 73 ]. It can
make no difference in principle if a past hypothetical event is in question
rather than a future hypothetical event,
or if damages for loss of profits
rather than for lost earning capacity is in question.
Tranquility's actual production figures
- The
parties are in dispute as to the number of pools that have been produced to
date, in relevant financial years, by Tranquility.
- The
plaintiffs contend that the number of pools produced by Tranquility up to
financial year 2010 are as contained in produced summaries
annexed to Mr
Kahler's affidavits. These summaries simply set out set out the number of pools
produced and do not contain any supporting
documentation.
- The
defendant has quite clearly placed in issue at least the number of pools that
Tranquility claims it produced in the financial
years ending 30 June 2009 and 30
June 2010. As part of a wider debate that occurred on 30 November 2010, Huntsman
stated that it
only accepted the figures in the production summaries for these
financial years as an assertion made by Mr Kahler as to what he claimed
the
production figures were: see T928.12-29-929.30.
- The
defendant takes this position in reliance on the reports of Mr Gower, who drew
attention to alleged inexplicable increases in
the cost and volume of chemicals
used to produced Tranquility pools, specifically in the 2009 financial year.
Similarly, Mr Gower
highlights increases in the labour costs to produce
Tranquility pools. The defendant uses these parts of Mr Gower's reports to
submit
that Tranquility could be expected to have produced many more pools in
the financial year 2009 than is reported in its production
summaries
(approximately 150 more than the roughly 200 produced).
- The
defendant is essentially asking the Court to infer that the number of pools
produced by Tranquility is much greater than that
stated in its production
summaries.
- As
the plaintiffs highlighted, a finding that the production summaries were not
accurate would amount to a finding of dishonesty against
Mr Kahler. I do not
make any such finding. As the plaintiffs contended, this serious allegation was
not put to Mr Kahler on the two
occasions he was cross-examined. The defendant
highlighted that it was put to Mr Kahler that his companies had not accurately
reported
their income to revenue authorities. In my view if the defendant wished
to submit that the production summaries were false this had
to be squarely put
to Mr Kahler. The ultimate holding in this area is that the Court accepts the
production summaries as evidence
of Tranquility's actual production figures.
Conflicting evidence as to data for discerning a trend in
swimming pool market
- The
parties are at odds as to which evidence should be accepted as to trends in the
swimming pool market, which is relevant to assessing
the business destruction
claim. At the heart of this issue is whether it can be shown that Tranquility's
decline is due to a market
decline rather than the osmosis outbreak.
- There
are four sources of market data before the Court, the first three of which
ultimately emanate from Reed Construction Data:
- (1) the data
contained in exhibits KWK60 and KWK61 to the affidavit of Mr Kahler sworn 6
February 2009 in respect of the financial
years 2001 - 2006 inclusive. This data
is then used by both Mr McGuiness and Mr Gower;
- (2) the data Mr
Gower obtained in respect of the financial years and contained in Annexure H to
his report of 14 September 2009;
- (3) the data
obtained from Robert Wild, Chief Executive Officer of Cordell Information, a
trading unit of Reed Business Information
Pty Ltd, and set out in respect of the
financial years 2004 - 2010 in exhibit ROW-2 to his affidavit of 29 October
2010, as corrected
by his affidavit of 23 November 2010, and in respect of the
financial years 2001 - 2003 in exhibit P27; and
- (4) the council
data exhibited to the affidavit of Nawaar Hassan of 19 November 2010.
- What
these data sets report for NSW & the ACT, Queensland, Victoria and the
Eastern Seaboard for the period 1 July 2000 - 30 June
2010 is set out
respectively in Tables 1, 2, 3 and 4 (see Appendix B ), (although the
council data is only from 12 of the 120 local councils in NSW listed in the data
which forms exhibit ROW-2 to the affidavit
of Mr Wild).
Appendix
B
- The
data in Mr Kahler's affidavits (covering the years 2001-2006) and the data
compiled in Annexure H to Mr Gower's report (covering
the years 2007-2009) does
not match the data brought forward by Mr Wild for those years. This is despite
the fact that these data
sets appear to come from the same source (Reed
Constructions Data). The discrepancy is not explained in the evidence.
- The
real significance of the dispute as to data is that for the years 2001-2004, the
Wild data, which the plaintiff relies on, shows
the NSW and ACT and Queensland
swimming pool markets as being markedly smaller than the position indicated by
the Kahler data, relied
on by the defendants. The Wild data also shows that
after the boom year of 2005, the swimming pool market declined, but stayed well
above its pre-2005 levels. In contrast the Kahler/Gower data shows the market
post-2005 falling below its pre-2005 levels. The difference
between the two data
sets is usefully illustrated in the following graphs.
- By
the time of final address it was clear that real issue in this area was whether
Tranquility should be permitted to rely on the
Wild data. The basis of the
defendant's objection was essentially that the Wild data did not match the data
published by Cordell
during the period 2001-2004, that the Wild figures were
contrary to the data put forward in Mr Kahler's evidence and relied upon
by Mr
Gower, and that the data was allegedly contrary to the plaintiffs' response to a
notice to admit facts.
- In
relation to the notice to admit facts, Tranquility, in a notice disputing facts
dated 6 October 2010, admitted that the information
contained in a table in
Huntsman's notice to admit for the years 2001-2006 "accurately represents the
number of council approvals
recorded by Reed Constructions ... for those years".
I accept Tranquility's submission that this does not prevent it relying on the
Wild data, since it did not admit that the Kahler/Gower data accurately
represented trends in the pool market for the relevant years.
- It
needs to be borne in mind that Mr Wild was called by Huntsman on 25
November 2010 after Mr McGuiness and Mr Gower, who were utilising the
Kahler data, gave evidence on 22 November 2010. That is, Huntsman adduced the
Wild
data, which it now complains is contrary to the Kahler data which the two
accounting experts relied upon.
- Furthermore,
Huntsman could have explored with Mr Wild why the data he produced to the Court
was markedly different to that published
by Reed for the years 2001-2004. It did
not do so. In this circumstance, as the plaintiff submitted, to the extent that
it is appropriate
to draw a Jones v Dunkel inference, that inference runs
against Huntsman.
- Mr
Wild's evidence as to the data set he produced to the Court was as follows. Mr
Wild is the Chief Executive Officer of Cordell Information,
a trading unit of
Reed Business Information Pty Ltd. Cordell Information produces various
publications that contain information as
to swimming pool development approvals.
Cordell Information requests information about development approvals for
swimming pools issued
directly from local councils. It has no power to compel
councils to provide information. Some councils provide information voluntarily.
Some refuse to. Similarly some provide information regularly and some provide
information intermittently. When information about
development approvals for
swimming pools is received from a Council, it is passed to the relevant
department within Cordell Information
and entered onto an electronic database
managed by Cordell Information. After the information is entered onto the
database, the original
documents provided by the Council are destroyed. This
database is used to produce Cordell's various publications. In response to
a
subpoena, Mr Wild arranged for an extract from the Cordell database to be sent
to the Court.
- It
is true that Cordell purchased the database in March 2003. But there is no
reason to believe that this change altered the method
of calculation.
Furthermore, Mr Wild did not disclose any change in recording practices after
the purchase of the database.
- In
my view Mr Wild's evidence demonstrates that the data set produced to the Court
on his behalf was put together in an entirely logical
way. The Court holds that
the plaintiff is able to rely upon it.
- The
next issue is that the plaintiff contends that it is appropriate to double the
Wild figures to gain an accurate understanding
of the size of the pool market.
As outlined above, Mr Wild acknowledges that his company does not capture all
pools built in any
locality, but is completely reliant upon local councils
voluntarily reporting their data. It is plain that the "Wild Data" is therefore
but a subset of the market.
- Importantly,
the basis for doubling the Wild data, which as outlined below, I accept as
entirely reasonable, arose from evidence adduced
by Huntsman. Huntsman
adduced evidence from Ms Nawaar Hassan, a law graduate with its solicitors, in
which Ms Hassan described a process whereby
she obtained data from twelve
councils in NSW regarding the number of development approval applications
received for swimming pools,
for the financial years 2005-2010. Since the data
provided by Mr Wild to the Court was broken down on a council by council basis,
I accept that it is appropriate to compare the data reported by councils in Ms
Hassan's evidence and the Reed data produced by Mr
Wild. Such a comparison is
contained in three tables [the three tables are set out in Appendix C]. That
comparison reveals that,
in respect of 12 local councils chosen by the
defendant, that on average, Reed captures 53% of council approvals.
Appendix
C
- Of
course, there is no evidence before the Court that suggests that the
installation of a pool requires council approval. It must
be accepted that a
proportion of pools are sold without council approval. A conservative assumption
is that that Reed Data captures
50% of the market. Thus the plaintiff contends
and I accept that the Wild data should be doubled to understand the overall size
of
the swimming pool market.
- The
defendant had several other complaints about the approach of doubling the Wild
data to discern an accurate market trend. These
included:
- (1) that on the
plaintiffs' figures arrived at in this way there was a six-fold increase in the
NSW and ACT swimming pool market between
2003-2005, and the plaintiff had not
put forward an expert to suggested this was reasonable nor was this put to Mr
Gower;
- (2) that the
growth rates revealed in the figures relied on by Tranquility were so high that
the figures should be disregarded;
- (3) that the
trend in sales results of Compass, a significant pool manufacturer, closely
tracked the trend in the published Reed data
relied on by Mr Kahler, and showed
the Wild data to be radically different (as illustrated by a graph produced by
the defendants
which became MFI P9);
- (4) that Mr
Gower had had regard to material other than the Reed data in conducting his
analysis, which did not support the high growth
rates in the market indicated by
the Wild data.
- In
the particular circumstances that pertain, I do not think that any of this
should preclude the plaintiff from relying upon the
Wild data. As outlined
above, I do not see it as inappropriate for the plaintiff, having effectively
abandoned its expert, to make
contentions based on the evidence as to the
findings the Court should make. As outlined above, the Wild data, which the
Huntsman
now complains contradicts the evidence of the accounting experts,
was adduced by Huntsman after the accounting experts gave evidence.
Moreover, Huntsman had the opportunity to ask Mr Wild about any alleged
anomalies in the data.
As outlined above, I accept as sound both the way in
which the Wild data was complied, and the logic, based on the Hassan evidence
adduced by Huntsman , for doubling it.
- Finally,
I am not convinced that the qualitative material relied on by Mr Gower, in the
form of two media articles, appearing as Annexure
F to his report of 14
September 2009, is a strong enough basis for the Court disregarding the Wild
data.
- The
result is that the plaintiff is permitted to rely on the Wild data, doubled, in
order to assess the overall size of the swimming
pool market. This is the basis
on which the destruction of business claim is to be assessed.
- I
will now set out two tables which utilise the data that I am permitting the
plaintiff to rely upon. The first table represents the
market trend as against
Tranquility production:
FY
Production
NSW & ACT
Eastern Seaboard
2001
262
-
2,608
-
11,398
-
2002
326
+24%
2,172
-17%
11,174
-2%
2003
508
+56%
2,192
+1%
10,066
-10%
2004
592
+17%
4,342
+98%
13,574
+35%
2005
616
+4%
12,188
+181%
27,140
+100%
2006
457
-26%
9,610
-21%
20,560
-24%
2007
399
-13%
8,840
-8%
20,580
0%
2008
358
-10%
8,160
-8%
17,148
-17%
2009
202
-44%
6,312
-23%
18,438
+8%
2010
214
+6%
7,406
+17%
19,536
+6%
- The
movement in Tranquility's market share is revealed by the second table:
FY
Sales
NSW & ACT
Eastern Seaboard
2001
262
10%
2%
2002
326
15%
3%
2003
508
23%
5%
2004
592
14%
4%
2005
616
5%
2%
2006
457
5%
2%
2007
399
5%
2%
2008
358
4%
2%
2009
202
3%
1%
2010
214
3%
1%
Tranquility's capacity at the Taree plant for the purposes of the but for
scenario
- The
parties disagree as to the maximum capacity of the Taree plant. This is
obviously relevant to the but for hypothesis.
- Mr
Annakin - who has many years of relevant experience, having operated as factory
manager at both International and Tranquility -
deposed that:
- (1) If the
Taree factory operated for 7 days a week, the greatest number of pools which
could theoretically be manufactured would
be 18.
- (2) Therefore,
if the factory were to operate for 50 weeks a year, its theoretical maximum
output would be 900 pools.
- (3) In reality,
taking into account, other practical estimations, he believed that the maximum
output for the Taree premises would
be about 850 pools per year.
- Mr
Annakin was not challenged as to his estimate under cross-examination. However,
the defendant draws on the sentence which follows
Mr Annakin's estimate, where
he deposes that "these figures assume a constant demand ... However it is my
experience that demand
varies depending on the season".
- The
defendant submits Mr Gower's calculation of the Taree plant's maximum capacity
should be adopted. Mr Gower has had regard to the
variations in seasonal demand
for pools, and determined the maximum capacity to be 664 per annum.
- As
Mr Gower accepted under cross-examination, his calculation was premised upon
Tranquility sticking rigidly to its policy of only
making pools to order. Mr
Gower agreed that, if some production was rescheduled from the summer period, in
which the factory could
not keep up with demand, to a quieter period, the
maximum capacity of 850 pools per annum could be achieved: T663.31-664.36.
- I
accept the plaintiffs' proposition that if Tranquility started to approach a
"seasonal variation limit" - whereby it could not build
all the pools that
customers demanded in the summer period - it would likely have altered its
policy for example by using periods
where the factory had slack to build pools
on consignment for sale during busier periods. There is evidence that
Tranquility has
been willing to shift its business methods to match the
prevailing circumstances - for instance, by producing consignment stock,
as it
did from 2006, and as was done with International.
- For
the above reasons I accept that the maximum capacity of Tranquility's Taree
plant which should be used for the "but for" calculations
is 850 pools per year,
as supported by Mr Annakin's evidence.
The use of post-loss data
- The
parties are also in dispute as to whether it is appropriate to use data after
the date of loss to inform the "but for" hypothesis.
- Mr
McGuiness says that it is not appropriate to use post-loss data in forming the
"but for" hypothesis, because it will mean contaminating
the hypothesis with the
consequences of the very event that hypothesis is designed to correct. Mr Gower
contests this view.
- Tranquility
submits that if post-loss data is used to inform the hypothesis, it can only be
after an analysis which attempts to disentangle
the consequences of the loss
triggering event from those other factors. The basis in principle for including
post-loss data can only
be that those events would have occurred in any event.
Absent this process of analysis, it would be an error of law to use such data
[see, in the valuation context, Ackers v Austcorp International Ltd
[2009] FCA 432 at [484] - [487] per Rares J ].
- It
does not appear that Mr Gower has conducted such an analysis. In any event, the
distortions to Tranquility's financial performance
that he points to in respect
of revenues per pool, the cost of chemicals and labour and gross profit margins
only become evident
in an increasing way in the latter years when Tranquility's
financial position has significantly deteriorated.
- As
I outline below, I reject Mr Gower's contention that the pool failures only had
a "nominal" effect on Tranquility's business and
it follows that the distortions
in Tranquility's performance in these later years must be tied to the
consequences of the osmosis
outbreak - including the use of labour for tasks not
related to production, and the production of pools on consignment.
- That
being so, I accept Tranquility's submission that it is unsafe to use post-loss
data in forming the "but for" hypothesis.
- I
accept Tranquility's submission that the calculation of the revenue per pool and
the costs of business for the "but for" scenario
should be as determined by Mr
McGuiness. However, I do not accept Tranquility's contention that it would have
established two new
plants. The result is I have had to alter Mr McGuiness'
assumptions, and the findings are as follows for the purposes of calculating
the
"but for" scenario:
- (1) average
revenue per pool, use actual FY 2005 base ($5,000) and grow at CPI (3%);
- (2) gross
profit percentage: 50%;
- (3) fixed
operating expenses of $350,000 (being the actual expenses for the Taree plant),
growing at CPI.
Interest rate
- Tranquility
submits that the appropriate discount rate to future cash flows is 18.2%. It is
true that Mr Gower and Huntsman were critical
of Mr McGuiness' approach to
determining the appropriate discount rate, in particular his choice of
comparable entities. However,
by the time of final address, senior counsel for
Tranquility put that the discount rate of 18.2% appeared to be common ground.
Huntsman
did not address this point during final address.
- I
accept Tranquility's submission that the appropriate discount rate is 18.2%. I
further accept Tranquility's contention that this
rate reflects a significant
risk weighting to future earnings which must be taken into account in forming
the "but for" sales scenario,
lest negative vicissitudes be double-counted.
- I
accept Tranquility's contention that future cash flows must be discounted back
to the date of loss - 1 January 2005 - using the
midpoint in any financial year
as an approximate date of incurring of the profits lost in that year. Statutory
interest must then
be applied to compensate Tranquility for the loss of those
funds between 1 January 2005 and the date of judgment.
But for
hypothesis
- It
is now necessary to turn to the issue of what Tranquility's sales would have
been "but for" the osmosis outbreak.
- The
forming of the appropriate hypothesis as to how Tranquility would have performed
but for the osmosis outbreak is a matter for
the Court. It is to be guided by
the legal principles in this area outlined above, and needs to include an
allowance for both positive
and negative vicissitudes. As outlined above, I hold
that the application of the discount rate to any but for earnings will allow
for
negative vicissitudes.
Tranquility's but for hypothesis
- The
plaintiff submits that the Court should accept a scenario which it has devised,
which is supported by various evidence. The plaintiffs
contend that this
scenario " allows for modest growth which gives due weight both to the explosive
growth seen at both Tranquility
and International, the uncontradicted evidence
of specific dealers that they wished to order many more pools from Tranquility
and
the decline in the market since 2005". The plaintiffs' favoured scenario is
as follows:
- (1) This was a
business which in the 3 years between 2001 and 2004 rose 31% a year in a falling
market. When Mr Kahler and Mr Annakin
operated International in the period 1986
- 1993, they had an annual rate of increase in sales of approximately 35%. They
were expert
and knowledgeable in the industry and had a record of success.
- (2) Furthermore,
unlike the non-comparable data Mr Gower uses for the market in the period 2001 -
2009, the data provided by Mr Wild
shows that although 2005 was undoubtedly an
outlier, the market in 2006, 2007 and 2008 was approximately double the 2004
market,
and in 2009 and 2010 the market was over 50% and 75% higher.
- (3) Tranquility
achieved what can only be described as extremely impressive growth to 2004, the
last year it was not affected by the
osmosis outbreak. Furthermore, there is
uncontested evidence that many more dealers wished to purchase Tranquility
products, from
which it is to inferred that, but for the Pool Failures,
Tranquility would have achieved continued market growth in NSW, as well
as make
further inroads into the markets in Queensland, Victoria and overseas to which
it already sold.
- (4) Of the 461
pools made during the Hetron Period which have had their addresses identified -
the 428 Failed Pools and the 33 Non-Hetron
Pools - 1 was sold to Japan, 11 to
the Far North Coast of NSW, 2 to Queensland and 30 to Yarrawonga in Victoria.
This showed that
there was a market for Tranquility pools in these places.
Factories closer to those markets would have permitted Tranquility to have
significantly greater access to them.
- (5) Importantly,
at all times in 2001 - 2010, NSW has represented less than half the Eastern
Seaboard market. Although the NSW market
has substantial room for growth itself
(850 pools represents an estimated market share of 11.5% - less than Tranquility
had in 2002,
2003 and 2004), Queensland and Victoria had very significant room
for growth.
- (6) Lastly,
save for the production of brochures, Tranquility undertook almost no
advertising and relied entirely on word of mouth.
This puts its impressive
pre-outbreak growth into even starker relief. It stands to reason that the
expansion plans envisaged - and
pursued - by Mr Kahler and Mr Annakin, would
have been supported and buttressed by an appropriate advertising campaign, and
this
would have increased name recognition and sales.
- (7) In
particular, Tranquility submits the following scenario is appropriate:
- (a) start from
the last unaffected year - 2004 and 592 sales;
- (b) allow
growth at 25% for the "boom" year 2005 - 740 sales;
- (c) allow an
additional year for construction of the two further factories;
- (d) sales
remain static in 2006 at 740 sales to reflect the correction in the market;
- (e) allow 20%
growth for the next five years as the two factories achieve initial market
penetration in Queensland and Victoria -
less than the growth of both
International and pre-outbreak Tranquility to making an allowance for negative
vicissitudes and some
cannibalisation of existing markets; and
- (f) then 15%
growth until Tranquility "stabilises" at about 2,000 pools per year (just over
10% of the estimated Eastern Seaboard
market), at which point it can be assigned
a "terminal value" as a mature business. This conservatively assesses damages
short of
the 2,500 actual capacity of the three factories.
- (8) If the
Court rejects the hypothesis that Tranquility would have built one or both of
the intended future factories, then these
figures will need to be adjusted to
reflect that maximum capacity.
Huntsman's position as to the but-for scenario
- Huntsman
submits that the Court should adopt the conclusions arrived at by Mr Gower.
- The
substance of Mr Gower's opinion evidence was essentially as follows.
- (1) NSW pool
approvals declined during the period 2005 to 2009 from 6,005 to 2,485, a decline
of 59% during the four-year period.
[as noted above I think the plaintiff is
able to rely on the Wild data instead].
- (2) For the
reasons provided above in my opinion the decline in the number of pools
manufactured by Tranquility (and Tranquility's
reported profitability) during
the period 2005 to 2009 is attributable to:
- (a) The decline
in the market demand for pools during the period 2005 to 2009. That is, even if
the Pool Failures had not occurred,
the number of pools manufactured by
Tranquility and its profitability would have been adversely impacted by the
decline in market
demand.
Tranquility's ability
to manufacture pools is constrained by their market share of the number of pool
approvals. In the absence of
increased advertising expenditure or the sacrifice
of gross profit margin (neither of which are apparent in Mr McGuiness'
forecasts),
Tranquility's market share will remain unchanged. ...
(b) The impact of the Pool Failures on the Tranquility business. Tranquility's
market share during the period 2005 to 2009 remained
relatively unchanged and
averaged 9% of pool approvals. This indicates to me that impact of the Pool
Failures on Tranquility's business
was nominal.
(3) Mr Gower assumed that:
- (a) The maximum
practical capacity of Tranquility's plant(s) was 664 pools per annum having
regard to the seasonality of demand;
- (b) The maximum
market share which Tranquility could reasonably expect, whilst maintaining its
existing profit margins and promotional
expenditure was 10% of NSW pool
approvals whilst operating one facility at Taree.
(4) Similarly, Mr Gower reasoned:
"The maximum output achieved
by Tranquility was 616 pools during the 2005 financial year. During this year
NSW pool approvals reached
a peak of 6,005 pools. Tranquility's market share
declined from 14% to 10%. This may indicate that, at production of 616 pools,
Tranquility
was approaching maximum capacity and was unable to meet any further
significant increase in demand".
(5) Under cross-examination, at T671.37-44, Mr Gower agreed with the following
propositions:
Q. The big picture is, is it not, that from 2001 to 4, that
Tranquility sales are expanding rapidly but the market's either declining
or
steady?
A. That's correct yes.
Q. And in the boom year of 2005, Tranquility figures stall for some reason,
and yet the market is going gang-busters?
A. That's correct yes.
(6) At another point in cross-examination of Mr Gower the following exchange
occurred (T658.37-659.22):
Q. And you say that that indicates to you the impact of the pool
failures on Tranquility's business was nominal?
A. That's correct yes.
Q. That conclusion assumes doesn't it, that Tranquility would not have
continued to increase its market share if the pool failures
hadn't occurred?
A. That's correct yes.
Q. But upon that assumption you say do you that the decline in the pools
manufactured is other than nominally, completely attributable
to the decline in
the market?
A. It's largely, yes, I do say it is nominal, that's correct.
Q. A factor, decline in market demand on the one hand?
A. That's correct yes.
Q. And obviously you admit it's a possibility don't you, that in fact the
pool failures might have had an impact on the number of
pools manufactured by
Tranquility?
A. Yes. I don't express it quite in those terms, but--
Q. But I'm asking you to?
A. I've finished my answer.
Q. Right. Mr Donaldson's quite right, I shouldn't interrupt you. But I think
you said to me, you don't express yourself in those terms
but what I'm asking
you, you admitted the possibility don't you that the pool failures have had some
impact on declining pool sales?
A. Yes.
Q. But what you say in this expression of opinion is, on the one hand decline
in the market is a factor?
A. That's correct.
Q. And the only other factor pool sales has but a nominal effect, you say?
A. Those are the two types identified, yes.
- Essentially
Huntsman's contention was that there was no basis for assuming that the decline
in Tranquility sales late in the year
ended 30 June 2005 was not reflective of
the trend in the broader market. Huntsman contended that there was every
likelihood that,
as with the Tranquility sales, the increased sales in the
broader market in the 2005 financial year were the product of a boom in
the
first half of the year, and that the decline, reflected in reduced sales over
the next four years, commenced late in the 2005
financial year, as occurred at
Tranquility.
- Huntsman
further submitted that the capacity constraints facing Tranquility may have been
broader than physical capacity constraints,
and could explain Tranquility's
growth rate, well below the market in 2005. Huntsman also disputed that the
osmosis problem had become
widespread enough, by either June 2004 or January
2005, to explain the decline in Tranquility's growth rate.
- Huntsman
also sought to draw support from Exhibit IJM29 to Mr Mewett's affidavit of 2
October 2010. That exhibit is a quarter by quarter
breakdown of the sales of
Compass pools by state. It is true that that exhibit reveals for NSW and ACT, in
the second and third quarters
of the 2005 financial years Compass' sales first
dropped and then stagnated. Huntsman submitted that this was evidence of a
general
market wide slowdown that would explain the drop in Tranquility's sales.
However, in my view Tranquility provided a comprehensive
rebuttal to this point.
As Tranquility highlighted, when Exhibit KWK60 - which is the Reed data for Mr
Kahler obtained for the NSW
swimming pool market, on a quarter by quarter basis
- is compared to Tranquility's quarter by quarter sales, it is apparent that
from the second quarter of financial year 2005 Tranquility's sales initially
grew much more slowly than the market and then significantly
declined, at which
point the market was still expanding rapidly. I accept, as Tranquility submits,
that this shows that Tranquility
declined ahead of the market.
Decision as to but for scenario
- Ultimately,
I do not fully accept either of the parties' submissions as to the but for
scenario.
- Firstly,
I reject Mr Gower's essential proposition that but for the osmosis outbreak,
Tranquility simply would have maintained the
market share it had achieved by the
2005 financial year, and not increased that market share. In my view Mr Gower
did not give sufficient
weight to the substantial growth that Tranquility had
achieved in the financial years 2001-2004. These were years, as Tranquility
submitted, where the wider market was either stagnant or declining.
- Secondly,
I also do not accept Tranquility's proposition that but for the osmosis
outbreak, it would have opened two new factories,
and in this way penetrated new
parts of the eastern seaboard market . The Court's holding is that the but for
scenario is to be calculated
on the basis that Tranquility only would have
maintained the Taree factory.
- I
have also had regard to Mr Gower's opinion that in circumstances the Australian
swimming pool market is dominated by a small number
of significant manufactures.
He opines that, in circumstances where the total pool market is not experiencing
growth, any growth
in Tranquility's volume and market share will occur at the
expense of significant competitors who were likely to defend their position:
September 2009 report at [67]-[69].
- Even
accepting this opinion, I am of the view that Tranquility's performance in the
years prior to the osmosis outbreak, where it
achieved significant growth in the
face of a stagnant or declining market, demonstrates that it was capable of
gaining market share
from its competitors.
- I
accept Tranquility's submission that the appropriate starting point for the
but-for scenario is the last unaffected year, financial
year 2004, where
Tranquility had 592 sales.
- I
accept Tranquility's submission that it is appropriate to allow for 25% growth
for the boom 2005 financial year, which would have
taken Tranquility to 740
sales.
- In
financial year 2006 there was a substantial market correction. In my view it is
appropriate to assume that Tranquility's sales
would have remained static in
that year.
- In
financial years 2007, 2008, 2009, and 2010, it is true that the swimming pool
market never reached the heights of the 2005 boom
year. However, I accept
Tranquility's submission that on the Wild data, which I have held it is entitled
to rely on, in these later
years the market was substantially higher than its
pre-2005 levels. The significance of this is that there was a bigger market in
which Tranquility could attempt to expand its sales. I am of the view that it is
appropriate to assume that but for the osmosis outbreak,
Tranquility would have
grown its sales by 5% in financial year 2007. I accept that this growth rate
would have been repeated in 2008
and again in 2009, however during that
financial year Tranquility would have achieved its maximum capacity at the Taree
plant of
850 pools per year.
- In
my view after this time, Tranquility would have maintained its market share, but
it would have been unable to grow it due to manufacturing
constraints.
- As
I have stated above I do not accept that Tranquility would have expanded its
business with two more plants in the way that the
plaintiffs contend.
- This
is the essential 'but for' hypothesis which will need to be taken into account
in determining the damages for the destruction
of business claim.
For the purposes of the "but for" calculation when should the
loss period be taken to have commenced
- The
parties are in disagreement to issues that relate to when the loss period should
taken to have commenced.
- Tranquility's
position is that the commencement of the loss (in respect of this head of loss)
was 1 January 2005.
- Tranquility's
submissions in this area were essentially as follows. Tranquility had suffered a
significant drop in market share in
financial year 2005, which was a "boom" year
for pool sales. On the facts, after the first complaint was confirmed on 20
April 2004,
Tranquility from about June 2004 had to set up procedures for
dealing with multiple complaints, and dealers began reporting loss
of sales by
early 2005. Tranquility also relied on its month by month sales figures for
financial year 2005:
Month
FY 2004
FY 2005
Change
July
35
53
+51%
August
38
62
+63%
September
52
64
+23%
October
59
67
+14%
November
66
67
+2%
December
42
53
+26%
January
51
41
-20%
February
53
56
+6%
March
56
49
-13%
April
51
44
-14%
May
54
38
-30%
June
35
22
-37%
- As
Tranquility submitted these figures show that January was the first month in
which its sales were below that of the previous year,
and that month also
appears to have been the start of a long term decline.
- Tranquility
also utilised a comparison of exhibit KWK60 - which contained quarter by quarter
sales figures for the NSW market - with
its quarter by quarter sales for
financial years 2004 and 2005. That comparison was as follows:
NSW Market (KWK60)
Tranquility
FY 2004
FY 2005
Change
FY 2004
FY 2005
Change
Jul - Sep
1240
1658
+34%
125
179
+43%
Oct - Dec
969
1780
+84%
167
187
+12%
Jan - Mar
602
1266
+110%
160
146
-9%
Apr - Jun
1304
1301
-
140
104
-26%
- Huntsman
in its final submissions was critical of Tranquility's submission that the
commencement of the loss was 1 January 2005. Huntsman
submitted that the Court
should accept Mr Gower's opinion that Tranquility had reached the maximum market
share it could obtain in
financial year 2005.
- Ultimately,
I am satisfied that the plaintiff is correct that the loss should be calculated
as beginning on 1 January 2005. In part
this reflects that, as I have outlined
above, I do not accept Mr Gower's hypothesis that the pool failures only had a
nominal impact
on Tranquility's stales. I am also convinced that submission is
correct when regard is had to the comparison between the market data
Mr Gower
had access to, in the form of exhibit KWK60, and Tranquility's stales, on a
quarter by quarter basis in the time surrounding
the osmosis outbreak (as
extracted above). As the plaintiff submits, that table shows, on figures that
were all before Mr Gower,
at least by the January quarter of financial year
2005, Tranquility's sales were in significant decline, at a time when the market
was experiencing rapid growth. As the plaintiff submits, it was not the case
that the entire market declined in the second half of
financial year 2005.
The appropriate date to value the loss at
- As
the parties agree, as a matter of law the loss is to be valued at the time it
occurred. As outlined above, I have accepted the
loss occurred on 1 January
2005.
The alleged recovery of Tranquility's business
- The
parties are in disagreement as to whether it is reasonable to assume that
Tranquility's business will over time recover its market
share.
- Tranquility
essentially submits that Mr Kahler's evidence on this matter should be accepted.
Mr Kahler deposes that he has kept Tranquility
operating for the purposes of
these proceedings (despite believing the company will never again trade
profitably), so that the customers
are not panicked into a stampede of claims
and to keep certain employees employed. Based on his experience with the fate
that befell
International, he does not believe the business will ever again
derive significant profits.
- Tranquility
points to various material to support Mr Kahler's view, included Tranquility's
market share as calculated on the Wild
Data. On that data Tranquility's market
share dropped dramatically from 14% of the NSW market in 2004 to 5% in the boom
year of 2005,
and has declined to 3% in 2010, assuming that the 214 made in that
year have all been sold.
- Huntsman's
submits as follows on this issue:
- (1) Mr Gower's
assumption that Tranquility will gradually recover its market share is
manifestly reasonable. Tranquility traded profitably
every year from the time
the problem emerged up to and including 30 June, 2009 and that is assuming the
accuracy of its questionable
financial records. As at 30 June, 2009 it had very
substantial net assets and an obvious capacity to recover from the problems
associated
with blistering as the significance of that historical event fades.
It must be remembered in this regard that the calculation proceeds
on the
assumption of a finding that Tranquility's difficulties arose through no fault
of its own, during a confined period, and as
consequence of the use of a resin
which it no longer uses. The suggestion that it will be unable to recover its
market share in due
course is unsustainable.
- (2) The
assumption of recovery is also strongly supported by the fact that there has
been a marked increase in Tranquility's pool
sales for the year ended 30 June,
2010. Even on the numbers reported by Tranquility, sales have increased from 202
in 2009 to 214
in 2010, an increase in line with the reported upturn in the
swimming pool market. The prediction that Tranquility will ultimately
recover
its market share is also corroborated by the Compass experience. Compass,
another pool manufacturer, suffered a large osmosis
outbreak in the 1990s,
involving almost 300 pools (Exhibit D11, and Transcript at T492-494), and yet
the Compass business did not
perish. The figures reported by Mr Mewett show that
business did not sink. On the contrary, Compass operates a business that has
sold over 1,300 pools in each year since 2002, with a peak of 2,119 pools in
2004 (Mewett Affidavit 2.10.10, Exhibit IJM 29).
- (3) The
evidence of Messrs Kahler and Annakin regarding their expectations for
Tranquility's future is in the nature of argument and
should be accorded no
weight. So too is Mr Kahler's evidence as to his purposes in continuing to
trade. That evidence is also largely
irrelevant. It may well be that Mr Kahler
proposes to shut the company down and trade through a new entity under a new
name as he
did following the International Pools litigation. The fact that he
regards that as the most attractive course available to him does
not demonstrate
that either company would not recover its market share if Mr Kahler didn't elect
to shut it down. It reflects nothing
more than Mr Kahler's business strategy.
- (4) In any
event, argumentative evidence from Mr Kahler should be accorded no weight and
his other evidence approached with caution.
He has shown throughout the
prosecution of his claim a marked tendency to seek to support it with misleading
and inaccurate information.
His evidence regarding his purpose in instructing
his accountant to produce inaccurate financial records (that is, as a means of
deceiving purchasers of swimming pools) [T 938-939] is a clear indication that
he cannot be treated as a reliable witness where his
financial interests are
concerned.
- Ultimately,
as Tranquility submits and I accept, it is crucial to bear in mind that Mr
Annakin and Mr Kahler have now been associated
with two businesses that have
been damaged by an osmosis outbreak. It was possible for them, and for Compass,
to recover from one.
However, there is nothing which convinces me that it will
be possible for their business to recover from its second osmosis outbreak.
The
plaintiff was able to point to a range of evidence from pool dealers which
highlights the likely damage to Tranquility's reputation
and therefore
viability. That evidence was not challenged in cross-examination.
- Ultimately,
I do not accept Mr Gower's hypothesis that Tranquility will gradually recover
its pre-osmosis market share over time.
Working Capital
- There
is a debate between the parties as to whether working capital should be taken
into account when calculating the loss of profits.
Essentially Mr Gower was of
the view that historically, Tranquility did not have the need to fund working
capital. He noted that
in the years 2004 and 2005 Tranquility had negative
working capital (ie. no funds employed). His report also makes clear that in
financial year 2006 Tranquility had positive working capital (ie funds
employed). Mr McGuiness was of the view that it was appropriate
to adjust for
working capital. Having read the evidence, I have concluded that it is not
appropriate to adjust for working capital.
In any case this matter only has a
very minor impact on the calculation of damages.
The tax issue
- I
accept the plaintiffs proposal that, the Court having made findings above as to
the nature of the loss suffered by Tranquility,
it is appropriate to hear brief
submissions as to what, if any adjustment should be made to the damages awarded
to Tranquility to
take account of the capital gains tax or income tax
consequences of the Court's findings.
Consequential loss
- The
parties agree that the costs under this head of loss sum are $757,181.96.
The plaintiffs' pleaded case as to its liability to customers
- The
plaintiffs plead that they are liable to remedy the Pool Failures in relation to
pools sold by them.
- The
obligation to remedy is said to arise pursuant to breaches of various
contractual and statutory terms. It is necessary to examine
the sundry
permutations that arise.
- There
are essentially three main circumstances that need to be borne in mind:
- (1) Some retial
customers purchased pools directly from Tranquility;
- (2) Some pools
who were sold by Tranquility to dealers who then sold the pools to customers;
- (3) In a
limited number of cases the original customer has subsequently sold their
property including the pool to a subsequent purchaser.
There is a debate over
the rights of such subsequent purchasers. I will put this debate to one side at
present but return to it later.
The express warranty
- Although
there are numerous permutations that arise in this area of the case, the
plaintiffs' primary position was that it was liable
to both customers that had
purchased pools directly through it and customers that had purchased pools
through dealers under the terms
of the purported express warranty it gave.
- The
terms of the alleged express warranty were that:
- (1) the pool
shell has been fabricated to the highest standards of manufacture and raw
materials;
- (2) the pool
shell was to be free from defects caused by workmanship or raw materials used in
the fabrication process for ten years
from the date the pool shell is first
filled with water.
The alleged express warranty in cases where
Tranquility sold pools directly to customers
- At
a fundamental level, whether the terms of the alleged express warranty were
incorporated into the contract between the first plaintiff
and customer - namely
that the pool shell has been fabricated to the highest standards of manufacture
and raw materials, and is to
be free from defects ... from ten years from when
it is first filled with water - depends upon whether the first plaintiff made a
promise to the pool owner to this effect.
- In
this area the plaintiff relies on the principles outlined by Gibbs CJ in
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR
41. At 61, Gibbs CJ stated:
A representation made in the course of negotiations which result in
a binding agreement may be a warranty - ie it may have binding
contractual force
- in one of two ways: it may become a term of the agreement itself, or it may be
a separate collateral contract,
the consideration for which is the promise to
enter into the main agreement. In either case the question whether the
representation
creates a binding contractual obligation depends on the intention
of the parties ... a statement will constitute a collateral warranty
only if it
was "promissory and not merely representational", and it is equally true that a
statement which is "merely representational"
- ie which is not intended to be a
binding promise - will not form part of the main contract. If the parties did
not intend that
there should be contractual liability in respect of the accuracy
of the representation, it will not create contractual obligations.
In the
present case Mr Blackman, who made his statements fraudulently, had of course no
intention that they should amount to contractual
undertakings, but he could not
rely on his secret thoughts to escape liability, if his representations were
reasonably considered
by the persons to whom they were made as intended to be
contractual promises, and if those persons intended to accept them as such.
The
intention of the parties is to be ascertained objectively; it "can only be
deduced from the totality of the evidence" ... "The
question whether a warranty
was intended depends on the conduct of the parties, on their words and
behaviour, rather than on their
thoughts. If an intelligent bystander would
reasonably infer that a warranty was intended, that will suffice." The
intelligent bystander
must however be in the situation of the parties, for "what
must be ascertained is what is to be taken as the intention which reasonable
persons would have had if placed in the situation of the parties".
- This
applies to representations in documents as well as those made orally [see eg
Emu Brewery Mezzanine Ltd (In Liq) v Australian Securities and Investments
Commission [2006] WASCA 105; (2006) 32 WAR 204 at [20] - [28] per Pullin JA ].
- Tranquility
accepts, as it must, that if the Warranty - in whatever form it may have
existed - was not referred to at or before the point of contract , then
it cannot have been incorporated into the contract.
- Huntsman
does not admit that any warranty card or brochure containing a warranty, or
equivalent oral warranty, was provided to customers
at the time of any sale, or
alternatively prior to the entry into the contract of sale by the customer and
the plaintiffs.
The alleged express warranty in circumstances
where customers purchased Tranquility pools through a dealer
- In
this circumstance, the plaintiff alleges that a collateral contract arose - at
the time of the contract of sale between dealer
and customer - between
Tranquility (contracting through the dealer as its agent) and the customer,
pursuant to which Tranquility,
in consideration for the customer agreeing to
enter into the contract of sale with the dealer, agreed with the customer to
abide
by the terms of its express warranty.
- It
is said that the warranty was made orally by the dealers to the customers and
also in writing, through the provision of warranty
cards and/or brochures.
- Huntsman
at one point asserted that the incorporation of the Warranty by oral reference
had not been pleaded and could not be the
subject of submissions. To ensure
clarity, I note that I granted the plaintiff leave, which was non-contentious
between the parties,
to file a Sixth Further Amended Commercial List Statement.
In that document it is clearly pleaded as particular (i) to paragraph
20A that,
in relation to contracts between Tranquility and customers who purchased
directly from it, the express warranty was both
written and oral. It is pleaded
that in so far as it was oral it was made by Tranquility representatives to the
customer. In respect
of the collateral contract said to have existed where a
customer purchased through a dealer, it is pleaded as particular (ii) to
paragraph 20B that, particular (i) to paragraph 20A is repeated, as if the sales
representative of Tranquility was the dealer. Thus
it is clearly pleaded that
the alleged collateral contract was formed in writing and orally.
- In
this area the defendant relies on Fairey Australasia Pty Ltd v Joyce
[1981] 2 NSWLR 314, a decision of this Court (Yeldham J). In that case, the
first defendant obtained a written quotation for the supply and installation
of
an air-conditioning system from Regulaire, an intermediary vendor. The quotation
stated inter alia that a warranty card would
be provided, and that Regulaire,
the intermediary vendor, purchased a warranty service from the manufacturer.
After acceptance of
the quotation and installation of the air conditioner, the
first defendant was handed the warranty document. In the warranty document
the
manufacturer, Fairey, set out the terms of its warranty.
- Yeldham
J held, at 316B, that because the warranty document was handed to the first
defendant after she had contracted with Regulaire,
the intermediary, there was:
No basis for holding that there was a collateral contract between
her and the plaintiff [manufacturer], the consideration moving from
her being
her agreement to buy from Regulaire a product of the plaintiff. So much was
conceded by counsel for the defendants. Hence
there was no contract between the
plaintiff and first defendant of the type with which cases such as Shanklin
Pier Ltd v Detel Products Ltd [1951] 2 KB 854 and Andrews v Hopkinson
[1957] 1 QB 229 were concerned.
- The
defendant submits that the present case is within the decision in Fairey.
The defendant contends that the brochures which pool owners were given prior
to contracting to purchase a pool either from a pool
dealer or the plaintiffs
directly merely contained a representation that a warranty of some description
would be forthcoming. The
defendant draws on the fact that the warranty card was
often provided after pool owners contracted to purchase a pool.
Consideration of existence of express warranty both where
customer purchased directly from Tranquility and where purchased through
dealer
- I
accept the plaintiffs' submission that the relevant principles are those set out
by Gibbs CJ in Hospital Products , extracted above. I further accept the
plaintiffs' submission that the officious bystander aware of the surrounding
circumstances
- including the widely available brochures, or warranty cards -
would conclude that Tranquility, as a matter of intention objectively
ascertained - intended to be bound by its warranty in respect of each and every
sale of its swimming pools (absent any express disclaimer
in respect of any
particular sale).
- It
is true there was a point of difference between the warranty cards and the
brochures, draw upon by Huntsman. I now set the relevant
texts out:
Brochure - Page 7
Warranty Card
"TRANQUILITY FIBREGLASS POOLS ARE WARRANTED AGAINST DEFECTS CAUSED BY
WORKMANSHIP AND/OR RAW MATERIALS USED IN THE FABRICATION PROCESS,
FOR 10 YEARS
FROM WHEN THE POOLS (SIC) IS FIRST FILLED WITH WATER."
Subject to the exclusions listed below, Tranquility Pools & Spas Pty
Limited warrants the Shell to be free of defects caused by
workmanship and/or
raw materials used in the fabrication process, for 10 years when the Shell is
first filled with water.
- Applying
the relevant principles, I do not see this difference as of substance. The
holding is that the warranty - whether contained
in a brochure or warranty card
or conveyed orally - is promissory. The name itself is significant - a warranty
is by definition a
contractual undertaking as opposed to a mere representation.
The warranty was an inducement to enter into the contract of purchase.
The
intelligent bystander would have no difficulty concluding that the intention of
the parties, objectively understood, was that
the warranty - in whatever form it
was conveyed - was to be binding upon Tranquility.
- It
follows from the above that the express warranty:
- (1) was
incorporated into contracts between Tranquility and customers who purchased
directly from it;
- (2) formed a
collateral contract between Tranquility and customers who purchased from a
dealer.
- It
also follows that I reject Huntsman's submissions in this area which were
essentially that only the warranty cards gave rise to
the alleged express
warranty, and therefore only customers who received the warranty card at or
piror to the point of contracting
could rely on the express warranty.
- I
now need to turn to the evidence to explain in which cases I will accept that
the express warranty was conveyed, in any form, to
customers.
Use of sampling evidence from the customers
- Huntsman
objects to the use of a sample of evidence from the customers.
- I
accept Tranquility's submission that calling all the customers would have been a
gross mismanagement of the resources of the parties
and the Court considering
the relative importance of their individual evidence.
- Section
62(3)(b) of the Civil Procedure Act 2005 vests in the Court the express
power to limit the number of witnesses. Section 56(2) of that Act enjoins the
Court to have regard to the overriding purpose of "the just, quick and cheap
resolution of the real issues
in the proceedings".
- I
accept as correct Tranquility's contention that if it had gone to the immense
expense of obtaining evidence from 428 customers,
it would have inevitably faced
an order pursuant to section 62(3)(b). In adducing evidence from a significant
sample - 43 witnesses
(10%) - it was seeking to comply with the obligation
placed on it and its legal representatives by section 56(3) & (4) of the
Civil Procedure Act .
- I
am informed that of the 42 affidavits of pool owners relied upon by Tranquility,
15 of those pool owners were randomly selected
by Huntsman, seven were selected
by Huntsman due to proximity with repairers, 19 were selected on the basis that
they had cut-outs
from their pools taken by Tranquility, and one was selected by
Huntsman due to the pool's geographic location. This information as
to the
makeup of the sample of customers who gave evidence to the Court does nothing
but confirm in my mind that the approach I favour,
of using the sample to make
extrapolations as to the wider class of all pool owners, is appropriate.
- The
customers' evidence is relevant to the following issues:
- (1) the
contractual arrangements between them and Tranquility and any dealers;
- (2) to avoid
any suggestion that they are seeking an uncovenanted benefit.
- Although
these are important issues, I accept that it would be wholly disproportionate to
have required the attendance of each and
every pool owner to give evidence of
these matters.
- In
the circumstances it is appropriate for the Court to draw the inferences from
the evidence that has been adduced.
- Appendix
D to this judgment contains references to the evidence of the pool owners who
were called as to the receipt of the warranty
either in the form of warranty
cards, brochures, or oral references to a warranty. Tranquility accepts that
some warranty cards were
provided after the point of contract. However, what the
evidence shows is that for all but 2 of the 43 pool owners who gave evidence,
the warranty was referred to at or prior to the point of contract either through
the provision of a warranty card, a brochure, or
the making of oral reference to
the warranty.
Appendix D
- In
relation to the two exceptions, firstly, Mr Ashley Gordon, who purchased a pool
from Tranquility, gave evidence under cross-examination
that he could not
remember when he received the warranty: T562.43-563.02. Another pool owner, Mr
Anthony Mark Richardson, who purchased
a pool through International Pools, a
dealer, received a warranty certificate and was orally referred to the existence
of a warranty,
at the point of installation, that is after the point of
contract. Thus as the plaintiff accepted, for 2 out of the 43 pool owners who
gave evidence it has not been shown that
the warranty was referred to at or
prior to the point of contract. In such cases, the plaintiff argues that the
warranty was incorporated
pursuant to "some kind of incorporation by
availability". However, as the plaintiff conceded, this has not been pleaded.
The result
is that for these 2 pool owners I find respectively that the alleged
express warranty was not incorporated into Mr Gordon's contract
with
Tranquility, and did not form a collateral contract between Mr Richardson and
Tranquility.
- I
accept the plaintiffs' submission that it is appropriate from the above "sample"
evidence for the Court to make an inference in
relation to the situation of the
remainder of the 428 pool owners whose pools have failed. I accept, as the
plaintiff submitted,
that I should infer that a group, proportional to the 41/43
in the sample, had the warranty communicated to them in one of the three
forms
at or prior to the point of contract. It follows that I also make the inference
that a group, proportional to the 2/43 in the
sample, will not have had the
express warranty communicated to them in any form at or prior to the point of
contract.
- The
Court finds that where a pool was supplied which had latent defects, such that
it would develop osmosis, the express warranty
will have been breached.
- The
relevance of the above findings is that in all cases where pools have failed,
except for a subset equivalent to the proportion
2/43, Tranquility has succeeded
in showing it has a liability to pool owners under the express warranty. For the
small subset who
are not in such a class it necessary to consider the alleged
implied terms as to merchantability and fitness for purpose.
Alleged implied terms that pool shell was of merchantable
quality and reasonably fit for purpose
- Tranquility
pleads that terms that the pool shell was of merchantable quality, and
reasonability fit for installation in the premises
of the customer and for use
as a swimming pool, were implied into:
- (1) Contracts
between Tranquility and customers who purchased directly from it;
- (2) Contracts
between a dealer and customers who purchased from a dealer;
- (3) Contracts
between Tranquility and dealers.
- Whether
the pleaded terms were implied into these contracts turns on the application of
the relevant legislation invoked by the plaintiffs.
Consideration of implied contractual terms where Tranquility
sold directly to customer
- There
is only limited evidence before the Court as to Tranquility's dealings with pool
dealers and customers, in the form of 11 sample
contracts which the defendant
tendered in volume 5 of exhibit D25. That evidence indicates that where
Tranquility sold a pool directly
to a customer, it entered into a contract of
purchase with the customer, and a separate installation contract was entered
into between
a third party installer and the customer. In my view it is
appropriate to conduct the analysis in this area based on the facts provided
by
the limited evidence. That is, it appears Tranquility contracted to supply a
pool shell and related accessories but did not install
the pool shell itself.
The fact that the balance of the total price under the contract of purchase with
the customer was due to Tranquility
upon delivery is consistent with this
characterisation.
- The
plaintiff invokes s 71 of the Trade Practices Act, Sections 71 (1) and
(2) apply "Where a corporation supplies ... goods to a consumer in the course of
business". Under s 4C(c) a reference to
the supply of goods includes a reference
to the supply of goods together with services. In general fixtures do not fall
within the
definition of "goods" in s 4 of the Trade Practices Act :
Theo Holdings Pty Limited v Hockey [2000] FCA 665; (2000) 99 FCR 232 at [9]- [12], (it is
necessary to consider this issue in much greater detail below in relation to
another context within the Act). Tranquility's
contracts with customers
purchasing from it were for the supply of a pool before it was affixed to the
land. I am satisfied that
Tranquility's supply of a swimming pool to customers,
who would then have it installed by an third party installer, constituted a
"supply of goods".
- There
was no point taken by Huntsman to the effect that pool owners do not fit the
definition of "consumer" under the Trade Practices Act . Accordingly, s
71(1) will apply and support the alleged term as to merchantable quality. In
relation to s 71(2), I am satisfied that it was by implication made known to
Tranquility the particular purpose for which the goods were being acquired
(namely installation in the customer's premises and use as a swimming pool).
Accordingly, Tranquility's alleged implied condition
as to fitness for purpose
will be supported by s 71(2).
Consideration of implied contractual terms between Tranquility
and pool dealers
- In
relation to the contracts between Tranquility and dealers:
- (1) Section 71
of the Trade Practices Act will not apply since it relates to the supply
of goods by a corporation to a consumer . Section 4B which defines the
situations in which a person shall be taken to have acquired particular goods as
a consumer, expressly
excludes the situation where a person acquires goods for
the purpose of re-supply: s 4B(1)(a).
- (2) I am
satisfied that the contract between Tranquility and pool dealers was a contract
for the sale of goods. The contract was "for
a chattel to be made and
delivered": Lee v Griffin (1861) 1 B and S 272; 121 ER 716 at 717,
referred to with approval in Deta Nominees Pty Ltd v Viscount Plastic
Products Pty Ltd [1979] VicRp 17; [1979] VR 167 at 181-182. Accordingly, s 19 of the Sale
of Goods Act 1923 and its equivalents in others states and territories would
apply, and therefore the alleged terms as to merchantable quality and fitness
for purpose will be made out.
Consideration of implied contractual terms in
contracts between pool dealers and customers
- On
the limited evidence before the Court, it appears that some dealers entered into
contracts with customers for the supply and installation
of pools and others
entered into contracts for supply only.
- Where
there was a "supply only contract" I am satisfied, on the above reasoning, that
this was a contract for the sale of goods.
- Where
there was a contract for the supply and installation of a pool, I am also
satisfied that this was a contract for the sale of
goods. Support for this
position is found in the decision of the Full Court of the Supreme Court of
Queensland in Symes v Laurie [1985] 2 Qd R 547, where it was held that a
contract to for the sale, removal, and affixing on an new-site of a pre-existing
home was a contract of
sale. At 550 Kelly J noted that "there is no reason why a
sale of goods may not be found within a contract one of the terms of which
involves affixation of goods to land", citing in support Collins Trading Co
Pty Ltd v Maher [1969] VicRp 3; [1969] VR 20 at 24.
Result as to alleged implied terms as to merchantability and
fitness for purpose
- These
terms have been established by Tranquility in:
- (1) Contracts
between it and customers who purchased pools directly from it;
- (2) Contracts
between Tranquility and pool dealers;
- (3) Contracts
between pool dealers and customers.
- I
am satisfied that in all three of the permutations, where the pool that was
supplied had latent defects, such that it would later
develop osmosis, the
implied terms as to merchantability and fitness for purpose will have been
breached.
- The
real significance of this, is that in relation to the minor subset of customers
with failed pools who could not rely on the express
warranty (a proportion of
2/43) Tranquility has shown that it will be liable to them. Thus Tranquility has
satisfied me that it is
liable to all pool owners save for those who have sold
their homes and pools to subsequent purchasers, which I consider below.
The largely abandoned Home Building Act case
- I
should note that Tranquility had pleaded, in addition to the implied terms as to
merchantability and fitness for purpose, an implied
term that materials used in
creating the pool shell were good and suitable for that purpose, said to be
supported by s 18B of the Home Building Act 1989. However, it was clear
by the stage of final address that this argument had been largely abandoned,
with the plaintiff conceding
much of the argument could not succeed. To the
extent which it may remain, I do not find it necessary to consider this argument
since
the plaintiff has succeeded in establishing a liability to customers under
the express warranty and implied terms as to merchantability
and fitness for
purpose.
Tranquility's alternative case for liability to customers under
Division 2A, Pt V of the Trade Practices Act
- Tranquility
submitted that if the Court rejected that some or all of the customers could sue
it under the express warranty, or at
all in contract, it would still be liable
to such customers pursuant to certain sections of Division 2A, pt V of the
Trade Practices Act .
- I
have already found that:
- (1) Tranquility
will be liable to nearly all customers under the express warranty;
- (2) In relation
to the small group of other customers who cannot rely on the express warranty,
Tranquility will be liable under implied
contractual terms as to fitness for
purpose and merchantability.
- Accordingly,
in one sense I do not need to proceed into to this area. However, it appears
that in relation to the group who cannot
rely on the express warranty, if
Tranquility can show it is liable under Division 2A, Pt V, in addition to
under implied contractual terms, this may have some impact upon the applicable
limitation periods and therefore upon the appropriate
orders to be made. The
parties agree that an action under a provision of Division 2A is subject to a
absolute maximum limitation
period of ten years from the time of the first
supply to the consumer of the goods in question: s 74J(3).
- The
essential point raised by Huntsman against the application of Division 2A, Pt, V
was that the pools became fixtures once installed
and hence were no longer
"goods" to which that Part applied.
- I
now turn to resolve the debate between the parties on this essential point
raised by Huntsman.
- Huntsman
relied upon the decision of Dowsett J in Theo Holdings Pty Ltd v Hockey
[2000] FCA 665; (2000) 99 FCR 232. In that case, the Minister for Financial Services and
Regulation had issued notices pursuant to section 65F(1) of the Trade
Practices Act to the effect that certain fire doors ought be the subject of
a product recall. It was contended by the applicants seeking to overturn
these
notices that these notices could not apply to doors that had been installed and
become fixtures.
- Section
65F(1) provides:
Subject to section 65J, where:
(a) a corporation (in this section referred to as the "supplier"), in trade
or commerce, supplies on or after 1 July 1986 goods that
are intended to be
used, or are of a kind likely to be used, by a consumer;
(b) one of the following subparagraphs applies:
(i) it appears to the Minister that the goods are goods of a kind which will
or may cause injury to any person;
(ii) the goods are goods of a kind in respect of which there is a prescribed
consumer product safety standard and the goods do not
comply with that standard;
(iii) the goods are goods of a kind in relation to which there is in force a
notice under subsection 65C(5) or (7); and
(c) it appears to the Minister that the supplier has not taken satisfactory
action to prevent the goods causing injury to any person;
the Minister may, by notice in writing published in the "Gazette", require
the supplier to do one or more of the following:
(d) take action within the period specified in the notice to recall the
goods;
(e) disclose to the public, or to a class of person specified in the notice,
in the manner and within the period specified in the
notice, one or more of the
following:
(i) the nature of a defect in, or a dangerous characteristic of, the goods
identified in the notice;
(ii) the circumstances, being circumstances identified in the notice, in
which the use of the goods is dangerous; or
(iii) procedures for disposing of the goods specified in the notice;
(f) inform the public, or a class of persons specified in the notice, in the
manner and within the period specified in the notice,
that the supplier
undertakes to do whichever of the following the supplier thinks is appropriate:
(i) except where the notice identifies a dangerous characteristic of the
goods - repair the goods;
(ii) replace the goods;
(iii) refund to a person to whom the goods were supplied (whether by the
supplier or by another person) the price of the goods;
within the period specified in the notice.
- After
referring to some texts which supported the view that the definition of "goods"
in the Act appeared to preserve the common law
distinction between goods and
fixtures, Dowsett J held at [13]-[18]:
[13] To some extent, argument proceeded upon the basis that
the doors were either goods for the purposes of s 65F(1) or they were not.
However, the question may be rather more complex. Section 65F(1) prescribes
three criteria which must be met in order that the minister
be entitled to act.
First, as already indicated, s 65F(1)(a) requires that there be a supply of
goods by a corporation. It is common
ground that such supply must be of goods as
defined. Secondly, s 65F(1)(b) requires that the minister form a view as to the
nature
of the goods, presumably at some time after the supply contemplated by s
65F(1)(a). Probably, the relevant time is that at which
the opinion is formed.
In other words, it must appear to the minister that the goods are, at the time
at which he forms the opinion,
goods which satisfy one of the three alternative
requirements of s 65F(1)(b). An opinion about part of a building would not be an
opinion concerning goods, suggesting that the goods must still exist in that
form at the time at which the minister forms the relevant
opinion. Thus the
subject matter of any proposed recall notices must be capable of description as
"goods" at two potentially different
times. Thirdly, s 65F(1)(c) requires that
the minister form an opinion as to steps taken by the supplier to prevent the
goods causing
injury. Arguably, this provision also contemplates the continued
existence of the "goods" in that form, although other interpretations
are
possible.
[14] If the various requirements of s 65F(1)(a), (b) and (c) are
satisfied, the minister may make an appropriate publication in the Gazette,
requiring the supplier of such goods to do one or more of the acts prescribed in
s 65F(1)(d), (e) and (f). Each of those prescriptions
also contemplates the
continued existence of the goods as such. For example s 65F(1)(d) authorises the
minister to require the supplier
to take action to recall the goods. It is not
clear what is meant by the expression "recall", but it probably includes the
various
specific steps identified in s 65F(1)(f), namely repair, replacement or
refund of the purchase price. If the word "goods" has the
meaning attributed to
it by s 4, the paragraph would not authorise the minister to require a supplier
to take such steps where the
goods have become part of a building and therefore
can no longer be so described. It may be possible to sever them from the
building
so that they are again goods, but this could only be done by, or with
the consent of the owner. The Act does not bind such an owner,
and obtaining
consent to severance would pose a problem for a supplier seeking to comply with
a recall notice. Whether or not goods
have been incorporated into a building or
remain as goods, compliance with a recall notice will usually require such
consent. Nonetheless,
if it was intended that the minister be empowered to
require removal of part of a building, one would have expected an express
conferment
of such power.
[15] In the course of argument it was suggested that where "goods",
although incorporated into a building, are capable of continued identification
and capable of removal without substantial damage to the building (or presumably
to the "goods"), they may be goods for the purposes
of s 65F(1). Nothing in the
Act suggests such an approach. Indeed, it might be thought that s 65F(6)
suggests the contrary. That
subsection provides:
Where the supplier, under sub-section (1), undertakes to repair goods or
replace goods, the cost of the repair or replacement, including
any necessary
transportation costs, shall be borne by the supplier.
[16] The reference to a supplier undertaking to "replace goods" is
obviously to replacement as an alternative to repair or refund as contemplated
in s 65F(1)(f). The subsequent reference in s 65F(6) to the "cost of the repair
or replacement" may be wide enough to include the
cost of severing goods and
reinstalling them after repair, or installing replacement goods, although a
narrower meaning, limited
to the cost of the actual repair or replacement goods
is also possible. In any event, where the supplier chooses to refund the
purchase
price of the goods, s 65F(6) would not oblige it to pay the cost of
removing the defective goods or installing replacements goods
(presumably
obtained from another supplier). If s 65F(1) were intended to authorise a recall
notice for goods incorporated into a
building, one would have expected provision
in s 65F(6) for the payment of such costs.
[17] In the course of argument much was said about the need to give
full effect to provisions which are designed to protect the public.
It was said
that accordingly, s 65F(1) should be broadly construed. In the present case,
however, parliament has used a term ("goods")
which has a commonly understood
meaning and has defined that term in a way which seems to reinforce that common
understanding, albeit
with some express extensions. If the clear distinction
between goods and fixtures on land is to be abandoned, then that common
understanding
would be seriously undermined. Such an outcome would be
inconsistent with parliament's adoption and definition of the term in question.
[18] Although the matter is of some difficulty, I have come to the
conclusion that the minister's power to issue a recall notice pursuant
to s
65F(1) applies only to the extent to which the "goods" in question meet that
description at the time at which the notice is
given, as well as at the time of
supply by the relevant corporation. It is not presently necessary to consider
the position in the
event that the goods have ceased to be goods between the
time of such a notice and the time when the supplier might reasonably have
been
expected to comply with it.
- In
the context of Division 2A of Part V of the Act, section 74A(8) provides that
"[f]or the purposes of this Division, goods shall
be taken to be supplied to a
consumer notwithstanding that, at the time of the supply, they are affixed to
land or premises".
- I
accept the plaintiffs' submission that the decision of Theo Holdings is
based upon the premise that whether or not the word "goods", wherever it appears
in the Trade Practices Act is apt to embrace goods that have become
fixtures, depends upon:
- (1) the time at
which the particular reference is to be applied;
- (2) the
legislative context of the provision; and
- (3) whether the
reference being construed, where it is found, is apt to be applicable to such
goods.
- I
further accept the plaintiffs' submission that it follows that the word "goods"
could have a different meaning in different parts
of the Act [see State of
New South Wales v Ibbett [2005] NSWCA 445; (2005) 65 NSWLR 168 at [5] - [11] per Spigelman CJ
and at [123] & [124] per Basten JA], or even different parts of the same
provision [ Maddox v Storer [1963] 1 QB 451] , depending on their
context.
- Section
74G is the provision in relation to which this debate took place. That section
provides:
(1) Where:
(a) a corporation, in trade or commerce, supplies goods (otherwise than by
way of sale by auction) manufactured by the corporation
to a consumer; or
(b) a corporation, in trade or commerce, supplies goods manufactured by the
corporation to another person who acquires the goods for
re-supply and a person
(whether or not the person who acquired the goods from the corporation) supplies
the goods (otherwise than
by way of sale by auction) to a consumer;
and:
(c) the corporation fails to comply with an express warranty given or made by
the corporation in relation to the goods; and
(d) the consumer or a person who acquires the goods from, or derives title to
the goods through or under, the consumer suffers loss
or damage by reason of the
failure;
the corporation is liable to compensate the consumer or that other person for
the loss or damage and the consumer or that other person
may recover the amount
of the compensation by action against the corporation in a Court of competent
jurisdiction.
(2) For the purposes of any action instituted by a person against a
corporation under this section, where:
(a) an undertaking, assertion or representation was given or made in
connection with the supply of goods or in connection with the
promotion by any
means of the supply or use of goods; and
(b) the undertaking, assertion or representation would, if it had been given
or made by the corporation or a person acting on its
behalf, have constituted an
express warranty in relation to the goods;
it shall be presumed that the undertaking, assertion or representation was
given or made by the corporation or a person acting on
its behalf unless the
corporation proves that it did not give or make, and did not cause or permit the
giving or making of, the undertaking,
assertion or representation.
- The
pools - swimming pools - were supplied as goods. They were therefore "goods" at
the time (1)(a) or (b) applied to them.
- Tranquility
submits and the Court accepts that "the goods" in subsections (1)(c) and (d) are
the "goods" referred to in subsections
(1)(a) or (b). The question then, from
Theo Holdings , is whether the "time" at which (c) and (d) apply, and the
nature of those provisions, make it inapposite to apply to goods which
have
become fixtures.
- Tranquility
submits and the Court accepts that in this section, as opposed to section 66F,
it does not. The reasoning of Dowsett J
in Theo Holdings was firmly based
upon the fact that a recall would require the severance of the goods from the
land to which they were affixed, which
land might be owned by a person who would
not consent to the severance.
- There
is nothing in section 74G of that kind. It provides a cause of action for
monetary compensation. There is nothing inherent in
the section which would
require severance.
- The
purpose of the Division 2A is to extend the sorts of contractual liability that
exist between vendor and purchaser to manufacturer
and consumer [ Zaravinos v
Dairy Farmers Co-op Ltd [1985] FCA 77; (1985) 7 FCR 195 at 198 per Lockhart J]. Huntsman
does not suggest that the fact that the pools had become fixtures meant that
customers who had contracts
(collateral or otherwise) with Tranquility could not
claim damages in compensation for the breach of contract - whether that be for
breach of the Warranty or one of the implied terms of merchantability and
fitness for purpose.
- If
Huntsman's submission as to the proper approach to Division 2A were accepted,
this would leave a very significant lacuna in the
scope of those provisions such
that that a person who acquires goods that become fixtures might have a
contractual remedy against
the manufacturer if they contracted with them
directly, but not otherwise. As Lord Diplock stated, if " the Courts can
identify the
target of Parliamentary legislation their proper function is to see
that it is hit: not merely to record that it has been missed"
[ "The Courts As
Legislators", The Lawyer and Justice (Sweet & Maxwell, 1978) at 274
extracted and approved by McHugh J in Kingston v Keprose Pty Ltd (No 3)
(1987) 11 NSWLR 404 at 424].
- As
Mason & Wilson JJ stated in Cooper Brookes (Wollongong) Pty Ltd v Cmr of
Taxation (Cth) [1981] HCA 26; (1981) 147 CLR 297 at 305 at 320 - 321:
In some cases in the past these rules of construction have been
applied too rigidly. The fundamental object of statutory construction
in every
case is to ascertain the legislative intention by reference to the language of
the instrument viewed as a whole. But in
performing that task the Courts look to
the operation of the statute according to its terms and to legitimate aids to
construction.
The rules, as D C Pearce says in Statutory Interpretation, p 14, are no more
than rules of common sense, designed to achieve this
object. They are not rules
of law. If the judge applies the literal rule it is because it gives emphasis to
the factor which in the
particular case he thinks is decisive. When he [sic]
considers that the statute admits of no reasonable alternative construction
it
is because (a) the language is intractable or (b) although the language is not
intractable, the operation of the statute, read
literally, is not such as to
indicate that it could not have been intended by the legislature.
On the other hand, when the judge labels the operation of the statute as
"absurd", "extraordinary", "capricious", "irrational" or
"obscure" he assigns a
ground for concluding that the legislature could not have intended such an
operation and that an alternative
interpretation must be preferred. But the
propriety of departing from the literal interpretation is not confined to
situations described
by these labels. It extends to any situation in which for
good reason the operation of the statute on a literal reading does not
conform
to the legislative intent as ascertained from the provisions of the statute,
including the policy which may be discerned
from those provisions.
Quite obviously questions of degree arise. If the choice is between two
strongly competing interpretations, as we have said, the advantage
may lie with
that which produces the fairer and more convenient operation so long as it
conforms to the legislative intention. If,
however, one interpretation has a
powerful advantage in ordinary meaning and grammatical sense, it will only be
displaced if its
operation is perceived to be unintended.
- Tranquility
submits and the Court accepts that both a literal and purposive construction of
section 74G favours the view that the
cause of action under that section does
not cease to apply if the goods supplied become fixtures. Subsections (1)(a) and
(b) identify
the "goods" the subject of the cause of action, the words "goods"
having the extended definition for which section 74A(8) provides.
- The
rest of that section attaches to "the goods" earlier identified. Unlike with
section 66F, there is nothing in the context of those
later provisions which
suggests from the nature of those provisions that the legislature intended to
deny compensation where goods
had become fixtures.
- That
being so, a literal as well as a purposive construction supports Tranquility's
construction. The purpose of the Division was
to extend sale of goods type
remedies between manufacturer and ultimate consumer. Those remedies are
available even if, at the time
of loss, the goods are no longer in existence,
let alone identifiable: see, for example, cases concerning animal feed such as
Henry Kendall & Sons v William Lillico & Sons Ltd (Hardwicke Game
Farm) [1968] UKHL 3; [1969] 2 AC 31 and Ashington Piggeries Ltd v Christopher Hill Ltd
[1972] AC 441.
- Tranquility
submits and I accept that the language of the provisions would need to be
"intractable" to displace this evident purpose.
It is not. There is nothing in
section 74G(1)(c) itself which indicates that that section is limited to
goods which are "goods" at any particular time.
- For
the above reasons I accept Tranquility's approach on the essential construction
issue in relation to Division 2A debated between
the parties.
- For
the above reasons, in my view, in sections 74B, 74D, and 74G, later references
to the "goods" which were initially supplied, refer
back to the goods initially
supplied and do not exclude goods that have become fixtures. There is no reason,
on a purpose interpretation,
that those three sections would not apply where
goods that were initially supplied have since become fixtures.
- In
relation to s 74F, I have some doubt as to whether the plaintiffs' essential
construction argument can succeed. That section concerns
a failure by a
corporation to ensure facilities for the repair of the goods, or a part was,
reasonably available to the consumer
at the relevant time. It seems that this
context may mean that that section does not apply to goods which, after their
initial supply,
become fixtures. However, this doubt makes no difference to my
conclusions, since even if it be misplaced, and s 74F could have application
in
the present case, I would conclude, as outlined below, Tranquility has no
liability under it.
- The
significance of the way I have construed sections 74B, 74D and 74G is that the
analysis will be the same for pool owners who are
"consumers" and so-called
subsequent purchasers who derive title from consumers.
Applying
s 74G
- I
am satisfied that:
- (1) The
plaintiffs fall within the deeming provision that defines a manufacturer of
goods under s 74A(3).
- (2) The type of
swimming pools manufactured by the plaintiffs and acquired by the plaintiffs
were "goods of a kind ordinarily acquired
for personal, domestic, or household
use or consumption", to which Division 2A, pt V of the Act refers: s74A(2)(a).
- (3) The pools
owners fall within the definition of "consumers" under the Trade Practices
Act since either:
- (a) The price
of the goods or services will not have exceeded the prescribed amount:
s4B(1)(a)(i), (b)(i), or
- (b) The goods
or services were of a kind ordinary acquired for personal, domestic or household
use s 4B (1)(a)(ii), (b)(ii).
- Thus
s 74G(1)(a) will apply where Tranquility sold a pool directly to a consumer, and
s 74G(1)(b) will apply where the pool was sold
through a dealer.
- I
am satisfied that Tranquility's warranty, as evidenced by the warranty cards and
brochures, constituted an "express warranty" as
defined by s 74A, since it was
an assertion or representation, in relation to the quality, performance or
characteristics of the
goods, given or made either in connection with the supply
of the goods or in connection with the promotion by any means of the supply
or
use of the goods, the natural tendency of which was to induce persons to acquire
the goods.
- Section
74G 1(c) applies where the corporation fails to comply with an express warranty
given or made by it in relation to the goods. As Tranquility
contended, there is
no requirement that the warranty be incorporated into any contract between the
corporation and the consumer,
or that the warranty be specifically brought to
the customer's attention. Indeed, the whole purpose of Division 2A is that its
provisions
are to apply where there is no privity of contract.
- The
Court finds that Tranquility has failed to comply with the express warranty
given or made by it in relation to pools (as evidenced
by the warranty cards and
brochures). This reflects that in the warranty cards and brochures, Tranquility
asserted or represented
that the pool shell had been fabricated to the highest
standards of manufacture and raw materials, and that the pool shell was to
be
free from defects caused by workmanship or raw materials for ten years from the
date the pool shell was first filled with water.
This was not the case where the
pool shell suffered from defects which meant that it would later develop
osmosis. Where osmosis has
become apparent, the consumer, that is the relevant
pool owner, will have suffered loss or damage by reason of this failure. Thus
I
accept that Tranquility is liable to compensate pool owners for the loss or
damage, and has succeeded in showing it is liable,
under s 74G.
Section 74B
- Tranquility
seeks to rely on s 74B, which provides:
(1) Where:
(a) a corporation, in trade or commerce, supplies goods manufactured by the
corporation to another person who acquires the goods for
re-supply;
(b) a person (whether or not the person who acquired the goods from the
corporation) supplies the goods (otherwise than by way of
sale by auction) to a
consumer;
(c) the goods are acquired by the consumer for a particular purpose that was,
expressly or by implication, made known to the corporation,
either directly, or
through the person from whom the consumer acquired the goods or a person by whom
any antecedent negotiations
in connexion with the acquisition of the goods were
conducted;
(d) the goods are not reasonably fit for that purpose, whether or not that is
a purpose for which such goods are commonly supplied;
and
(e) the consumer or a person who acquires the goods from, or derives title to
the goods through or under, the consumer suffers loss
or damage by reason that
the goods are not reasonably fit for that purpose;
the corporation is liable to compensate the consumer or that other person for
the loss or damage and the consumer or that other person
may recover the amount
of the compensation by action against the corporation in a Court of competent
jurisdiction.
(2) Subsection (1) does not apply:
(a) if the goods are not reasonably fit for the purpose referred to in that
subsection by reason of:
(i) an act or default of any person (not being the corporation or a servant
or agent of the corporation); or
(ii) a cause independent of human control;
occurring after the goods have left the control of the corporation; or
(b) where the circumstances show that the consumer did not rely, or that it
was unreasonable for the consumer to rely, on the skill
or judgment of the
corporation.
- S
74B will only have potential application where the pool in question was
purchased through a dealer. Where goods only have one purpose
it is not
necessary that that purpose be made known to the corporation. That
manufacturer's knowledge may be assumed: Carey-Hazell v Getz Bros & Co
(Aust) Pty Ltd (2004) ATPR 42-014 at [212]. In my view, fibreglass swimming
pools only have the purpose of being installed and used as swimming pools,
meaning the
defendant's knowledge of this purpose may be assumed. Pools were not
reasonably fit for that purpose if they suffered from faults
which meant they
would later develop osmosis. Where osmosis has become apparent, the owner will
have suffered loss and damage by
reason of the goods not being reasonably fit
for the relevant purpose. Thus in my view, Tranquility will have a liability to
pool
owners whose pools were supplied through dealers under s 74B.
Section 74D
- The
plaintiffs further rely on section 74D. That section provides:
(1) Where:
(a) a corporation, in trade or commerce, supplies goods manufactured by the
corporation to another person who acquires the goods for
re-supply;
(b) a person (whether or not the person who acquired the goods from the
corporation) supplies the goods (otherwise than by way of
sale by auction) to a
consumer;
(c) the goods are not of merchantable quality; and
(d) the consumer or a person who acquires the goods from, or derives title to
the goods through or under, the consumer suffers loss
or damage by reason that
the goods are not of merchantable quality;
the corporation is liable to compensate the consumer or that other person for
the loss or damage and the consumer or that other person
may recover the amount
of the compensation by action against the corporation in a Court of competent
jurisdiction.
(2) Subsection (1) does not apply:
(a) if the goods are not of merchantable quality by reason of:
(i) an act or default of any person (not being the corporation or a servant
or agent of the corporation); or
(ii) a cause independent of human control;
occurring after the goods have left the control of the corporation;
(b) as regards defects specifically drawn to the consumer's attention before
the making of the contract for the supply of the goods
to the consumer; or
(c) if the consumer examines the goods before that contract is made, as
regards defects that the examination ought to reveal.
(3) Goods of any kind are of merchantable quality within the meaning of this
section if they are as fit for the purpose or purposes
for which goods of that
kind are commonly bought as it is reasonable to expect having regard to:
(a) any description applied to the goods by the corporation;
(b) the price received by the corporation for the goods (if relevant); and
(c) all the other relevant circumstances.
- In
Courtney v Medtel Pty Ltd [2003] FCA 36; (2003) 126 FCR 219 at [194] Sackville J held
that:
It will be seen that s 74D(3) is framed affirmatively. It has been
held by the English Court of Appeal, in relation to very similar
statutory
language, that goods which do not fall within the definition of merchantable
quality are to be regarded as unmerchantable:
Rogers v Parish Ltd at 946
per Woolf LJ. ... I think that s 74D(3) should be construed in the same way. ...
Section 74D(3) directs attention to the question of whether goods of any kind
are as fit for the purpose or purposes for which goods
of that kind are commonly
bought as it is reasonable to expect. As Cooper J pointed out in Rasell v
Cavalier Marketing (Aust) Pty Ltd [1991] 2 Qd R 323 at 348, s 74D(3)
requires a determination of two matters:
(i) the ``purpose or purposes for which goods of that kind are commonly
bought''; and
(ii) whether the goods supplied are as fit for the purpose or purposes so
identified as is reasonable to expect, having regard to the listed criteria.
...
So far as the second matter is concerned, in Graham Barclay Oysters Pty
Ltd v Ryan (2000) 102 FCR 307, Lindgren J noted (at 445) that the words ``as
it is reasonable to expect'' raise a question as to the identity of the person
or
persons the reasonableness of whose expectations is in question. He
considered that it was consistent with both the objective nature
of the
statutory standard and the consumer protection purpose of the provision to hold
that the reasonable expectations to consider
were those of a reasonable consumer
placed in the position of the actual consumer. Lee J (at 330) agreed with
Lindgren J on this
issue, while Kiefel J appears to have taken (at 462) a
similar approach. (The appeal to the High Court did not challenge the Full
Court's conclusions on ss 74B and 74D of the TP Act : Graham Barclay Oysters
Pty Ltd v Ryan [2002] HCA 54; (2002) 211 CLR 540). Lindgren J's analysis is consistent with
that of Cooper J in Rasell v Cavalier Marketing at 348.
- Fibreglass
swimming pools are obviously commonly bought for installation into a premises
and use as a swimming pool. The Court holds
that swimming pools which suffered
from defects such that they would develop osmosis were not as fit for this
purpose as is reasonable
to expect having regard to the relevant factors. Where
osmosis has become apparent, the pool owners will have suffered loss or damage
by reason that the goods are not of merchantable quality. Thus Tranquility will
also have a liability under this provision.
Section 74F
- Tranquility
seeks to rely on s74F. That section provides:
(1) Where:
(a) a corporation, in trade or commerce, supplies goods (otherwise than by
way of sale by auction) manufactured by the corporation
to a consumer; or
(b) a corporation, in trade or commerce, supplies goods manufactured by the
corporation to another person who acquires the goods for
re-supply and a person
(whether or not the person who acquired the goods from the corporation) supplies
the goods (otherwise than
by way of sale by auction) to a consumer;
and:
(c) at a time (in this section referred to as the relevant time) after the
acquisition of the goods by the consumer:
(i) the goods require to be repaired but facilities for their repair are not
reasonably available to the consumer or a person who
acquires the goods from, or
derives title to the goods through or under, the consumer; or
(ii) a part is required for the goods but the part is not reasonably
available to the consumer or a person who acquires the goods
from, or derives
title to the goods through or under, the consumer;
(d) the corporation acted unreasonably in failing to ensure that facilities
for the repair of the goods were, or that the part was,
reasonably available to
the consumer or that other person at the relevant time; and
(e) the consumer or that other person suffers loss or damage by reason of the
failure of the corporation to ensure that facilities
for the repair of the goods
were, or that the part was, reasonably available to the consumer or that other
person at the relevant
time;
the corporation is liable to compensate the consumer or that other person for
the loss or damage and the consumer or that other person
may recover the amount
of the compensation by action against the corporation in a Court of competent
jurisdiction.
(2) Subsection (1) does not apply where the corporation took reasonable
action to ensure that the consumer acquiring the goods would
be given notice at
or before the time when he or she acquired the goods that:
(a) the corporation did not promise that facilities for the repair of the
goods, or that parts for the goods, would be available;
or
(b) the corporation did not promise that facilities for the repair of the
goods, or that parts for the goods, would be available after
a specified period,
being a period that expired before the relevant time.
(3) Where the corporation took reasonable action to ensure that the consumer
acquiring the goods would be given notice at or before
the time when he or she
acquired the goods that the corporation did not promise that:
(a) facilities for the repair of the goods, being facilities of a kind
specified in the notice, would be available;
(b) parts for the goods, being parts of a kind specified in the notice, would
be available; or
(c) facilities for the repair of the goods would be available at, or parts
for the goods would be available from, a place or places
specified in the
notice;
the corporation is not liable to compensate the consumer or a person who
acquires the goods from, or derives title to the goods through
or under, the
consumer for loss or damage suffered by the consumer or that other person by
reason of the failure of the corporation
to ensure that facilities of the kind
specified in the notice, or parts of the kind specified in the notice, were
available, or that
facilities for the repair of the goods were available at, or
parts for the goods were available from, a place or places specified
in the
notice, as the case may be.
(4) In determining whether a corporation acted unreasonably in failing to
ensure that facilities for the repair of goods were, or
that a part was,
reasonably available to a person at the relevant time, a Court shall have regard
to all the circumstances of the
case, and in particular to the existence, at the
relevant time, of circumstances that prevented those facilities or that part
being
so available, being circumstances beyond the control of the corporation.
- As
outlined above, I have a doubt as to whether Tranquility's approach to
interpretation on the goods/fixtures question is correct
in relation to this
section. Thus it may be that this section cannot have application in the present
case. However, I will put that
to one side, in order to explain why I think, in
any case, Tranquility would not have a liability under s 74F. Section 74F would
prima facie apply both where Tranquility sold a pool directly to a consumer, or
where the pool was sold through a dealer. Applying
subsection 1(c)(i) I accept
that pools which have failed will require to be repaired but facilities for
their repair will not be
reasonably available to the consumer, or a person
deriving title through them. The real question is whether, applying subsection
(1)(d), Tranquility acted unreasonably in failing to ensure that facilities for
the repair of pools were reasonably available to
the consumer. In determining
this question, the Court is to have regard to all the circumstances, and in
particular to the existence,
at the relevant time, of circumstances that
prevented those facilities being so available, beyond the control of
Tranquility. Having
regard to all the circumstances, I am not persuaded that
Tranquility acted unreasonably in failing to ensure that facilities for
repair
were reasonably available to pool owners. In my view, the circumstance of the
defective resin, which caused blistering, being
used so widely, and thus causing
so many pools to require repair, is really what prevented repair facilities
being reasonably available.
The blistering problem was so widespread that
Tranquility could not, without bringing about its own demise, have provided
repair
facilities. In my view, the widespread nature of the osmosis problem was
a circumstance beyond the control of Tranquility. It was,
on the factual
findings I have made, the responsibility of Huntsman.
- For
the above reasons, even if Tranquility's approach as to the goods/ fixtures
debate were correct in relation to this section, Tranquility
would still not
succeed in showing that it has a liability to pool owners under this section.
Conclusion as to Division 2A, Pt 5
- I
have found that Tranquility has only succeeded in showing that it has a
liability to customers under sections 74B, 74D and 74G.
- As
stated above, in one sense this does not advance the overall analysis, since I
had already found that Tranquility was liable to
all pool owners. However, it
may have relevance for limitation periods and therefore the form of orders.
- An
action under a provision of Division 2A may be commenced within 3 years after
the day on which the cause of action accrues. A cause
of action is deemed to
have accrued on the day on which the consumer, or a person deriving title
through them, first became aware
or ought reasonably have become aware:
- (1) For s 74B,
that the goods were not reasonably fit for the purpose referred to in that
section;
- (2) For s 74D,
that the goods were not of merchantable quality;
- (3) For section
74G, of the failure of the corporation to comply with the express warranty
refereed to in that section.
- Thus
the limitation period for actions by pool owners under sections 74B, 74D and 74G
will be three years after the day on which the
consumer, or a person deriving
title through them, first became aware or ought to reasonably have become aware
that their pool suffered
from osmosis.
- The
parties agree that an action under a provision of Division 2A is subject to a
absolute maximum limitation period of ten years
from the time of the first
supply to the consumer of the goods in question: s 74J(3).
Consideration of subsequent purchasers
- Of
all the pools which have failed, 25 have so far changed ownership. That is, the
customer who purchased the pool from Tranquility
or a dealer has sold their
property, including the pool, to an incoming purchaser.
- Tranquility
submits it has a liability to such "subsequent purchasers" in two ways.
The first way - Novation
- Tranquility
argues there has been sufficient conduct for a novation of the right of action
against it under the express warranty from
the original pool owner to subsequent
purchasers of properties that have been sold.
- Tranquility
relies on the decision in Fightvision Pty Ltd v Onisforou [1999] NSWCA 323; (1999) 47 NSWLR
473. In that case, Sheller, Stein and Giles JJA stated inter alia:
[78] Novation is a transaction by which all parties to a contract
agree that a new contract is substituted for one that has already
been made:
Olsson v Dyson [1969] HCA 3; (1969) 120 CLR 365 at 388, per Windeyer J, which Bainton J
referred to. Novation involves the extinguishment of one obligation and the
creation of a
substituted obligation in its place. Intention is crucial to show
a novation: see, eg, Vickery v Woods [1952] HCA 7; (1952) 85 CLR 336 at 345, per Dixon
J as his Honour then was. A novation may be express or implied from the
circumstances. ...
[86] In Upper Hunter County District Council v Australian Chilling and
Freezing Co Pty Ltd [1968] HCA 8; (1968) 118 CLR 429 at 437, Barwick CJ said that in
searching for the contractual intention, "no narrow or pedantic approach is
warranted, particularly
in the case of commercial arrangements". This equally
applies, in our view, when searching for an intention that there be a novation.
- In
Olsson v Dyson [1969] HCA 3; (1969) 120 CLR 365 at 390 Windeyer J stated "[T]he
requirements of our law are satisfied by a tacit agreement to extinguish the
former obligation, and
this is inferred when an inconsistent obligation is by
agreement substituted".
- I
have also had reference to a useful journal article by Mr Julian Bailey,
"Novation" (1999) 14 Journal of Contract Law 189, wherein at 212 it is
stated:
Thus, the existence of novation being a question of fact,
and the consent of all parties being requisite, the inquiry in each case
will
be: on the facts, did the parties intend that a novation should occur? That is,
did the parties intend that the original contract
should be rescinded and that a
new contract be created by way of substitution?
- In
the present case Mr Kahler deposes as to the process Tranquility undertook where
a pool owner whose complaint had been confirmed
by Tranquility wished to sell
their property. Mr Kahler directed that a standard form letter be sent to the
Tranquility pool owner/vendor,
the obvious purpose of which was to be shown to
potential purchasers. The letters stated inter alia "All warranties are fully
transferable
to any new owner of the property". Mr Kahler deposes in his
affidavit of 6 February 2009 that on each of the 14 occasions when such
a sale
had occurred, he spoke with the solicitor or conveyancer acting for the vendor
and the equivalent person acting for the purchaser.
He deposes that
representatives of the purchaser always said to him words to the effect "my
client reserves its rights". Mr Kahler
deposes as to an essentially identical
process in relation to owners of Tranquility pools who were endeavouring to sell
their properties
(but may not have actually done so).
- The
evidence further indicates that Tranquility's internal "complaints register" was
updated to reflect changes in ownership of properties
that included pools
confirmed as failed. After a change of ownership, Tranquility sent subsequent
purchasers standard form letters,
which stated inter alia "This letter will
confirm that we have adjusted our records to reflect that you are now the
beneficiaries
of the warranty applicable to the Tranquility swimming pool
installed on your property".
- In
final address, the defendant submitted that there was insufficient evidence for
a finding that there had been a novation because
there was insufficient evidence
of the original pools owners consenting to their rights as against Tranquility
being extinguished.
The defendant suggested that a pool owner who had sold their
property could retain rights as against Tranquility on the basis that
they had
endured a blistered pool for a number of years and may be entitled to a
solatium.
- It
is true that no original pool owners, who sold their properties, gave evidence
to the Court. However, there is evidence before
the Court from two subsequent
purchasers, Ms Ion and Mrs Symonds. What their evidence indicates is that the
letters sent by Tranquility
to the original purchasers of failed pools were
shown to the subsequent purchasers at the time of the real property transaction.
- In
my view the defendant's argument does not properly characterise the role of the
letters provided by Tranquility and shown by the
original owners to the
subsequent purchasers. It is important to bear in mind that a narrow or pedantic
approach is not warranted
in searching for an intention for there to be a
novation. In my view, both Tranquility in providing the letter, and the
original owner in utilising the letter, which stated that the warranty was
transferable, intended that the original contract, or part of a contract,
constituted by the express
warranty would be extinguished. That is, I think the
original owners, in utilising the letters in the form they were written,
consented
to their rights under the express warranty being extinguished. In my
view, Tranquility, as evidenced by the letters, intended the
original express
warranty as between it and the original owner, to be substituted by a new
contract, in the form of the express warranty,
between it and the subsequent
purchaser of the property. In my view the subsequent purchasers, who the
evidence indicates were shown
the Tranquility letters when purchasing the
property, intended to enter into a new contract with Tranquility whereby they
would have
the rights conferred by the express warranty.
- I
also think it is of some significance that Tranquility clearly regarded itself
as bound by a new agreement with the subsequent purchaser,
as reflected in the
letters sent to subsequent purchasers stating that they were now the
"beneficiaries" of the express warranty,
and the updating of its internal
records to reflect this perception.
- On
the above basis, I hold that Tranquility is successful in making out its
novation argument.
- In
my view there is one potential complication to the above analysis that arises
from the "sample" evidence of pool customers outlined
earlier. That evidence
showed that not all pool owners could establish that they had a valid express
warranty claim against Tranquility.
Rather, a proportion of pools owners equal
to 41/43 (or approximately 95%) could establish that they had a contractual
claim based
on the express warranty against Tranquility. Accordingly, 5% of the
25 original owners (approximately 1.25 owners) who have sold
their properties
will not have had a valid contractual claim based on the express warranty as
against Tranquility.
- In
my view this complication does not alter the conclusion in relation to
subsequent purchasers. Even if the original owner did not
have a valid
contractual claim under the express warranty as against Tranquility, which the
parties purported to extinguish, in my
view both Tranquility and the subsequent
purchaser intended to enter into a new contract whereby Tranquility made
a promise to the subsequent purchaser in the terms of the express warranty. In
my view, the subsequent purchaser
will have offered consideration to support
this new contract by agreeing to enter into the main contract of sale for the
property
with the original owner.
Exacerbation of own loss?
- The
defendant pleads that to the extent Tranquility has caused its own losses, it is
not liable for such losses, giving the particular
of the undertakings provided
by Tranquility to subsequent home owners as set out in Mr Kahler's evidence.
- I
do not accept this contention. In my view, in circumstances where Tranquility
had given an express warranty to pool owners, and
the pool had developed osmosis
such that that warranty had been breached, it was entirely reasonable for
Tranquility to provide a
letter promising that the warranty would be transferred
to a subsequent purchaser of the property in question.
The second way - Pt V Div 2A of the Trade Practices Act
- Tranquility
contends that in addition to the novation argument, it has a liability to
subsequent purchasers under this Division.
- In
this area, Huntsman pleads that in relation to s74B, 74B, 74G, and 74F, at the
time any property on which a pool was affixed was
sold to a so-called
"subsequent purchaser", any pool was no longer a "good" within the meaning of
those sections and therefore the
pool was not "acquired", nor title "derived" to
it, as a "good" by a subsequent purchaser within the meaning of those sections.
- In
my view, for the reasons I have outlined above in interpreting the relevant
sections of the Division, this submission of Huntsman's
should fail. As outlined
above, in my view, in sections 74B, 74D, and 74G, later references to the
"goods" which were initially supplied,
refer back to the goods initially
supplied to the consumer (that is, the original purchaser) and do not exclude
goods that have become
fixtures. There is no reason, on a purpose
interpretation, that those three sections would not apply where goods that were
initially
supplied to the consumer have since become fixtures, and a person
derives title to such goods through the consumer.
- Under
sections 74B, 74D and 74G, cause of action are conferred upon a consumer, or a
person who acquired goods from, or derives title
to the goods through or under
the consumer, and suffers loss or damage by reason of the reason specified. For
the reasons I have
outlined above in applying sections 74B, 74D, and 74G, I am
satisfied that Tranquility would have a liability to subsequent purchasers
under
each of these sections.
Limitation issues
- Tranquility's
liability to pool owners will be limited by limitation periods. The parties are
in dispute as to the maximum period
for which Tranquility will be liable to
claims by pool owners. Essentially, Tranquility submits that under its express
warranty,
pool owners will have a maximum of 16 years in which to sue it,
whereas Huntsman contends Tranquility will only be liable for a maximum
of 10
years under the express warranty.
- It
will be apparent from the analysis below that I ultimately favour Huntsman's
position, that is the maximum claims period is 10
years.
Limitation periods applicable to claims under the terms of the
express warranty
- Tranquility
submits that it will be liable under the warranty for 16 years from the date the
relevant pools were manufactured on the
basis that the warranty constituted a
promise that pools would be free from defects for the whole of the 10 years
after they were
filled with water. The defendant submits customers have ten
years from the date the pool was sold in which to commence a claim under
the
warranty. It relies on VAI Industries (UK) v Bostock & Brawley [2003]
BLR 347, a decision of the English Court of Appeal.
- In
that case, the warranty in question stated "all equipment is to be warranted as
free from defects ... the warranty period is for
no longer than 24 months from
FOB. ..." By the time the buyer had instituted proceedings, delivery or FOB had
occurred outside of
the normal six-year limitation period. Thus if the relevant
breach of warranty were construed as occurring on the day defective goods
were
delivered, the claim would be statute barred.
- However,
the buyers submitted that the warranty imposed on the supplier a continuous
obligation to have the equipment free from defect throughout every day of
the 24-month period so that failure to do so was a breach
which occurred on each
day including the last day.
- Ward
LJ, dissenting, held at 370 that the "If the warranty continues for two years it
... is a promise that for each day of the two
year period the equipment will be
free from defect. For every day it continues to have a defect there is a breach
...". Thus, Ward
LJ held that there was a breach of warranty including on the
last day the warranty was valid. Applying the usual limitation period
to this
breach of contract, the claim was not statute barred.
- Carnwath
LJ, in the majority, held at 371 that the cases cited:
"tend to confirm ... that a clause of this kind is generally to be
interpreted as giving rise to a single breach at the time of delivery,
even though the obligation at that point is to ensure that the goods are in a
condition that will
remain fit for purpose for a reasonable time thereafter ...
While each of these cases must be interpreted in the light of the particular
wording of the contract in question, I believe that clearer words would be
needed ... to create a continuing obligation ..."
- Newman
J similarly held at 372 that there was a single breach by reason of the presence
of defects within the warranty period. Newman
J commented:
"[t]he scope and meaning of the warranty is contained in the first
sentence. The first three words of the second sentence, "the warranty
period",
relate not to the meaning and scope but to the period of time in which the
warranty was to have effect as a promise to be
answerable for any defect ...
which manifests itself in that period."
- In
the present case the warranty card, which is said to support the express
warranty stated, "Tranquility ... warrants the Shell to
be free of defects
caused by workmanship and/or raw materials used in the fabrication process, for
10 years when the Shell is first
filled with water."
- Tranquility
submits that the proper interpretation is that the Warranty would be breached if
a pool manifested osmosis on the last
day in the tenth year and it would not be
necessary to commence proceedings that day. Instead, the normal six-year
limitation period
would begin to run from that date, thus producing the 16-year
maximum claims period.
- I
do not accept Tranquility's submission. At least implicitly, Tranquility
contends that the express warranty was only breached when
the osmosis manifested
itself.
- In
my view, the proper interpretation is that if a pool was supplied with a latent
defect, such that it would eventually develop osmosis,
the express warranty
would be breached upon supply, since the shell would not be free of defects
caused by workmanship and/or raw
materials. That is, as Huntsman submits, at the
time of delivery the customer's cause of action for breach of the express
warranty
would have accrued. In my view, the words "for 10 years when the Shell
is first filled with water", define the period in which a
claim for breach of
the express warranty, based on the fact that defects had become manifest, could
be made against Tranquility.
- I
have dealt above with the limitation periods relevant to claims against
Tranquility under Pt 5 Div 2A of the Trade Practices Act . As noted
there, the parties were in agreement that the maximum period that claims could
be brought under Part 5, Division 2A, against Tranquility was ten years from the
date of supply of the pool in question: s 74J(3).
The measure of the loss
- In
this part of the case the parties are at odds as to the entitlement of the owner
of a failed pool as against Tranquility. Essentially,
the debate concerns
whether pool owners are entitled to complete replacement of their failed pools
or some lesser rectification method.
The test of unreasonableness - examining the principles through
the recent authorities
- The
Court has been referred to a number of authorities some of which date back to
the mid-1990s and the least one of which [ Robinson v Harmon [1848] EngR 135; (1848) 1
Exch 850; (1848) 154 ER 363] dates back to 1848.
- The
more recent authorities of particular note appear to be the following :
- The
recent decision of the Western Australian Court of Appeal in Willshee v
WestCourt concerned a claim by the appellant that WestCourt Ltd (WestCourt)
breached a term of a contract for the construction of a house by
using inferior
or second quality limestone in the external cladding of the house. The trial
judge upheld Mr Willshee's claim, but
awarded him damages which reflected only
the cost of cleaning and sealing the limestone, and some repainting necessitated
by the
cleaning and sealing work. Mr Willshee's claim for damages in an amount
equal to the costs of, and associated with, replacement of
the inferior
limestone was rejected by the trial judge.
- The
Court of Appeal observed inter alia as follows :
[61] Since the decision of the trial judge, the Australian law
applicable to issues of this kind has been elucidated by the decision
of the
High Court of Australia in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd
(2009) 83 ALJR 390; [2009] HCA 8. That case concerned a claim for damages by
a landlord as a result of breach of a covenant in the lease by the tenant
carrying out
work, which resulted in the substantial remodelling of the foyer of
the building leased without the approval of the landlord. The
trial judge held
that there had been a breach of covenant, but awarded damages in the sum of
$34,820, being the difference between
the value of the property with the old
foyer, and the value of the property with the new foyer constructed by the
tenant. On appeal,
the Full Court of the Federal Court of Australia had
increased the judgment sum to $1.38 million, made up of $580,000 to reflect
the
cost of restoring the foyer to its original condition, and $800,000 for loss of
rent while the restoration work was taking place.
The High Court upheld the
decision of the Full Court.
[62] In doing so, the High Court emphatically rejected the proposition that a
party entering into a contract was at complete liberty
to break the contract
provided damages adequate to compensate the innocent party were paid - in the
Tabcorp case being damages in
the amount of the diminished value of the
landlord's reversionary interest. Rather, the High Court reaffirmed the "ruling
principle"
[13] that the measure of damage at common law for breach of contract
was that stated by Parke B in Robinson v Harmon [1848] EngR 135; (1848) 1 Exch 850 at 855;
[1848] EngR 135; (1848) 154 ER 363, 365:
The rule of the common law is, that where a party sustains a loss by reason
of a breach of contract, he is, so far as money can do
it, to be placed in the
same situation, with respect to damages, as if the contract had been performed.
[63] Applying that principle to the facts of this case, under the terms of
the contract for the construction of his house, Mr Willshee
was entitled to a
house constructed using limestone which was all of high quality. That is not
what he got. Under the 'ruling principle',
he was entitled to damages in the
amount required to put him in that position - namely, by demolishing the
existing external wall
and replacing it with limestone which was all of high
quality.
[64] As the High Court points out in Tabcorp , the words of Baron
Parke in Robinson v Harmon are not to be equated with being placed in 'as
good a financial position as if the contract had been performed' [13]. So, in
the case
of land and buildings, diminution in value is not the only measure of
damages available - although, of course, in some cases it may
be the appropriate
measure.
[65] The earlier decision of the High Court in Bellgrove v Eldridge
[1954] HCA 36; (1954) 90 CLR 613 stands firmly against the proposition that
diminution in value is the ordinary measure of damages awarded against a builder
as a
result of departure from a building contract. In that case, a builder who
had breached his contract in respect of the composition
of the concrete in the
foundations of the building and in respect of the mortar used in the erection of
its brick walls, asserted
that the relevant measure of damage was the difference
between the value of the house and land as constructed, and the value which
it
would have had if the building contract had been performed. That contention was
rejected. In the joint judgment of Dixon CJ, Webb
and Taylor JJ, it is observed
that the ordinary measure of damage is the cost of the building work which is
required to achieve conformity
with the building contract (617 - 618). If that
work requires the demolition and reconstruction of the house, then, subject to
one
qualification, that is the appropriate measure of damage.
[66] The qualification to which the High Court referred in Bellgrove
was that 'not only must the work undertaken be necessary to produce
conformity, but that also, it must be a reasonable course to adopt'
(618). On
the facts of Bellgrove's case, the High Court was of the view that
insistence upon the performance of the remedial work by demolition and
reconstruction was
entirely reasonable given the nature of the breaches of the
building contract.
[67] In the present case, part of the reasoning relied upon by the trial
judge was the proposition that Mr Willshee's concern was
primarily aesthetic,
but it could not be said that his view of aesthetic desirability would
necessarily be shared by others, and
there was no term of the contract requiring
a particular aesthetic standard to be achieved, nor any objective measure by
which Mr
Willshee's views could be assessed.
[68] The decision in Tabcorp establishes that this process of
reasoning is erroneous. Although in the present case there was no express term
of the contract relating
to the aesthetic standard to be achieved by the
limestone cladding, there was a term of the contract which required the
limestone
cladding to be of high quality. It was breach of that term which
resulted in accelerated deterioration of the limestone surfaces
which Mr
Willshee did not regard as aesthetically pleasing. As the High Court points out
in Tabcorp , the question of whether or not Mr Willshee's views in this
respect are idiosyncratic, or would be shared by others, is not to the
point
[16]. Mr Willshee entered into a contract which he considered served his
interests, and he is entitled to the performance of
that contract quite
irrespective of the views which other people might form in relation to the
advancement of those interests, such
as views relating to the aesthetic
appearance of the house.
[69] In Tabcorp , the High Court also elucidated and explained the
qualification of 'unreasonableness' established by the earlier decision
Bellgrove . It established that this qualification is only to apply in
'fairly exceptional circumstances ... only ... where the innocent party
is
"merely using a technical breach to secure an uncovenanted profit"...' [17]
(quoting from Radford v De Froberville [1977] 1 WLR 1262 (Oliver J).
[70] Applying that test to the circumstances of the present case, it could
not be said that WestCourt's breach of contract was, in
any sense 'technical'.
It was a serious and significant breach, which had a significant impact upon the
rate at which the external
cladding of the house weathered and deteriorated, and
which has had a significant impact upon the appearance of the house.
[71] Nor could it be reasonably concluded that Mr Willshee is pursuing his
claim in order to secure a profit to which he has no entitlement
under the
building contract. Mr Willshee gave evidence in the strongest terms of his
displeasure upon discovering that a significant
part of the limestone used for
the external cladding of his house was of inferior quality. That evidence was
entirely plausible and
reasonable, and was not rejected by the trial judge.
WestCourt submits that the evidence does not sustain the conclusion that Mr
Willshee will in fact use the damages awarded to undertake the relevant remedial
work (appeal ts 47). However, there are passages
in the evidence of Mr Willshee
(see, for example, ts 272) which suggest that it is his intention to undertake
the reconstruction
work in the event that damages are awarded. In any event, the
question of whether or not the work will in fact be undertaken is 'quite
immaterial': Bellgrove (620).
[72] Notwithstanding the decision in Bellgrove , under the more recent
formulation of the test in Tabcorp , it is conceivable that the
subjective intention of a plaintiff may be relevant to the application of the
qualification to the 'ruling
principle' of damages. However, a defendant wishing
to rely upon the qualification carries the onus of proving the facts relevant
to
its application. In the present case it was not put to Mr Willshee in the course
of his cross-examination, that he had no intention
of using the damages awarded
to undertake the necessary reconstruction work. Accordingly, WestCourt cannot
now rely upon the lack
of evidence as to Mr Willshee's intention to sustain an
assertion that this case comes within the 'fairly exceptional circumstances'
which would result in Mr Willshee being denied the ordinary measure of damage.
[73] As regards the decision of the House of Lords in Ruxley , upon
which the trial judge placed significant reliance, in Tabcorp , the High
Court observed that on one view, the result of that case was inconsistent with
the principles established by earlier English
decisions [18]. In any event, the
High Court distinguished that case on the facts. It is equally distinguishable
from the facts of
this case.
[74] In Ruxley , the builder departed from the building contract by
constructing a swimming pool which had a maximum depth which was some 9 inches
shallower than that specified by the contract. However, the evidence established
that the pool as constructed was perfectly safe
to dive into.
[75] With respect to the trial judge, that is a very different situation to
the present case. In the present case there was a contractual
obligation to
supply limestone of high quality for use as the external cladding of the house.
The external cladding of a house is
quite obviously a matter of great
significance and importance to its owner. Notwithstanding that contractual
obligation, WestCourt
installed a significant quantity of limestone which was of
inferior quality, with the result that it deteriorated rapidly, necessitating
significant remedial work. Even though the deterioration did not adversely
affect the structural soundness of the building, it was
nevertheless material to
the calibre and quality of the building supplied, when compared to the calibre
and quality of the building
for which Mr Willshee contracted.
[76] In this case, application of the 'ruling principle' governing the
measure of damages for breach of contract means that Mr Willshee
is entitled to
the amount of money required to put him in the position in which he would have
been had his house been constructed
using only limestone of high quality. As it
could not be concluded that Mr Willshee was relying on a technical breach of
contract
to obtain for himself a profit which was outside the terms of the
building contract in claiming damages measured in this way, the
trial judge
erred in concluding that the case came within the qualification of
'unreasonableness' referred to in Bellgrove .
- I
have not been able to find fault in the exposition of principle to be found in
the judgment on appeal in Willshee . In particular the High Court had
made clear in Tabcorp that the test of unreasonableness is only to be
satisfied by fairly exceptional circumstances.
- In
Wheeler & Anor v Ecroplot Pty Ltd [2010] NSWCA 61 McFarlane JA [with
whom McColl and Basten JJA agreed] had occasion to consider the principles to be
derived in Bellgrove v Eldridge .
- In
broad terms Wheeler dealt with the following circumstances :
In September 2002 Mr and Mrs Wheeler contracted with the respondent
building company to have a home built for them on land which they
had acquired
at Wagga Wagga.
The home was completed in March 2003 but by late 2003 some cracks appeared in
the walls and some doors were found not to be opening
and closing properly.
These problems increased over the following couple of years during which time
investigations and some limited
repairs were undertaken. The appellants
commenced proceedings alleging breaches by the respondent of the relevant
building contract
and claiming rectification costs.
The trial judge found that whilst the respondent builder had committed
breaches of contract in using too much landfill and in failing
to embed the
footings far enough into the natural soil, the loss which the appellants
suffered was not causally related to those
breaches. She directed that judgment
be entered in favour of the respondent.
On their appeal, the appellants' contentions were that the observed damage
had been caused by the excessive landfill breach found
by the primary judge and
by a further breach by the respondent builder in allowing the fill to dry out
before the concrete slab of
the home was laid.
The primary judge's finding of a breach in the former respect was not
challenged by the respondent and in the view of McFarlane JA
a breach in the
latter respect was made out on the evidence. Further, the evidence established
that the latter breach materially
contributed to the damage that was suffered.
The appellants' claim for damages was in the sum of $127,649.64 comprising
rectification costs of $113,124.64 and relocation costs
of $14,525. McFarlane JA
concluded that the need for relocation was not established and that an amount of
$5,900, relating to some
of the claimed rectification costs, should be deducted
from the appellants' damages.
The primary component of the balance of the rectification costs claimed was
the cost of underpinning to embed the footings into the
natural soil to the
depth required by the contract below.
The appellants did not contend that the observed damage was caused by the
breach as to the footings but asserted that they were entitled
to have footings
embedded to the contractual depth to attempt to ensure the stability of their
home. McFarlane JA concluded that
they were so entitled and that it was
reasonable for the appellants to incur the cost of underpinning to rectify the
respondent's
breach.
- The
following propositions are to be found at paragraphs 80 and 81 of the judgment :
[80] These conclusions conform with the principle to be derived
from Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 that in the
case of a building contract such as the present the prima facie measure of
damages is the "amount required to rectify
the defects complained of and so give
to [the plaintiff] the equivalent of a building on [his or her] land which is
substantially
in accordance with the contract" (at 617 per Dixon CJ, Webb and
Taylor JJ). A qualification to that principle was stated in Bellgrove to
the effect that "not only must the work undertaken be necessary to produce
conformity [with the contract], but that also, it must
be a reasonable course to
adopt" (at 618).
[81] In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd the High
Court commented in relation to this qualification that the example given in
Bellgrove of a situation where rectification would be unreasonable "tends
to indicate that the test of 'unreasonableness' is only to be satisfied
by
fairly exceptional circumstances" (at [17]). Another example of unreasonableness
is a situation where the cost of the "proposed
rectification is out of all
proportion to the benefit to be obtained" ( Brewarrina Shire Council v
Beckhaus Civil Pty Ltd [2006] NSWCA 361 at [82] - [88] citing South
Parklands Hockey & Tennis Centre Inc v Brown Falkiner Group Pty Ltd
[2004] SASC 81 at [90]; see also: Westpoint Management Ltd v Chocolate
Factory Apartments Ltd [2007] NSWCA 253; Kirkby v Coote [2006] QCA
061; Gagner Pty Ltd v Canturi Corporation Pty Ltd [2009] NSWCA 413;
(2009) 262 ALR 691; and Building Insurers' Guarantee Corporation v The Owners
- Strata Plan No 57504 [2010] NSWCA 23). There is in my view no such radical
disproportion in this case, nor any other factor, which would lead to the
appellants' desire
to have their home accord with the contractual standard
concerning footings being regarded as unreasonable in the relevant sense.
Overview
- In
truth the judicial determination concerning what is or is not reasonable can
only be determined in the light of the particular
facts before the Court. In the
present litigation the Court has not been satisfied that the steps proposed by
the defendant would
necessarily solve the problems. Nor could it be that the
pool owners should suffer the fate of effectively being guinea pigs at risk
of
having their pools remediated, only to find that this further remediation in due
course also fails. For the reasons given otherwise
in this judgment the only
practicable [although expensive] manner of dealing with the situation is for the
fibreglass shells to be
replaced and for the defendants to also make good the
premises in which any such pool has been installed.
[Of course any owners who press for the alternative form of relief,
have an entitlement to require that the defendant pay to them
an amount equal to
the cost of replacing the fibreglass shells and the making good of the premises
in which such pool had been installed]
Suggested rectification methods
- Huntsman
has put on evidence of a number of "rectification" methods short of replacement:
the International "Nushell" method, the
Compass "Reshell" method, grindback and
respray or resurface, vinyl liners and the use of pool chemicals. None of these
fit within
the "ruling principle" reaffirmed by the High Court in Tabcorp
.
- Pool
chemicals, vinyl liners and grindback remedies can be dismissed immediately.
None of those methods provide the customers with
what they paid for. Further,
save a complete grindback and respray executed to the highest standards, none of
those methods cure
the "disease" - osmosis - which would be expected to return
and respread.
- All
of those methods, including grindback and respray, would force upon the
customers a significantly inferior product to that which
they purchased. In the
case of customers who had a pool with a "shimmering" or "sparkly" finish, it
would also impose on them a monochrome
coloured pool.
- As
has already been noted Willshee decisively rejected a measure of damages
based upon a rectification method which did not restore the property to the
contractual standard.
- Tranquility
accepts that both the Tranquility Nushell and Compass Reshell methods are
superior to the other methods put forward. The
finding is however, that neither
method meets the principle of restoration set out in Tabcorp and
Willshee .
- The
evidence of Mr Kahler, Mr Annakin and Mr Cutts is that the Nushell method:
- (1) is not
available for "non-solid" colours (in circumstances where 335 of the 428
confirmed Failed Pools fall into that category);
and
- (2) in respect
of pools with solid colours, requires the use of waterline tiles and "controlled
cutting" and subsequent repair.
- The
Compass Reshell method appears to suffer from neither drawback. The evidence of
Mr Kennedy, however, is that:
- (1) it has been
attempted a sum total of only four times;
- (2) on one of
those occasions it failed, requiring the entire defective pool to be replaced;
- (3) it is an
experimental process still under development;
- (4) it has not
had an engineering specification or approval which, Tranquility submits, would
be necessary before the Court could
be satisfied it could be applied to over 400
pools; and
- (5) it is
imperfect in that the bonding is solely at the top.
- Furthermore,
the witness called by the defendant to prove this method, Mr Mewett, gave no
evidence that this method was sufficiently
developed for mass production or that
Compass was either willing to do so or capable of doing so. That being so, I
accept that it
would be unsafe for the Court to value the costs of replacement
on the basis of an untried and untested and, practically speaking,
only
hypothetically available procedure.
- The
finding is that only full replacement will appropriately compensate the
customers.
The cost of replacement
- The
parties' expert quantity surveyors have come to substantial agreement regarding
the cost of replacement of ten selected pools.
Those pools were selected by Mr
Kahler as representative pools by a process which he explained and upon which he
was not cross-examined.
- The
experts had only three differences of opinion: (1) the need for a second day for
a crane (ie whether it was necessary to remove
the old pool by crane, as opposed
to cutting it up on site; it was common ground that a crane would be needed to
bring the new pool
shell on site), (2) whether a ramp was needed for the Vaughan
site and (3) whether any economies of scale would be achieved by virtue
of the
large number of pools to be replaced.
- On
the first issue the finding is that the defendant has not adduced evidence that
the process of cutting up the pool is possible
in the manner suggested. Nor has
it been put to the OH&S experts for evaluation as to the precautions might
be required.
- On
the second issue, I accept that it is plain from the photographs of the Vaughan
site that some kind of ramp would be necessary
to avoid damage to the stepped
landscaping leading up from street level to the Vaughan's backyard.
- In
respect of the third difference, Mr Meredith produced a report of 23 November
2010 in which he expressed the opinion that a "reduction"
of about $4,500 per
plus (plus GST) per pool could be achieved.
- That
opinion was based on the assumptions that:
... there were a number of pools and that the work could be managed
in areas and staged to provide continuity of work; and [there
were] a number of
similar projects in close proximity to each other to minimize travel and down
time, offering good long term and
stable work for the trade labour over a couple
of years with a good stable income with few risks.
- Mr
Meredith specified particular areas where he stated savings could be made.
- In
relation to those, he agreed, for instance, that he had made no enquiries of an
insurance broker in respect of the insurance premium
saving he asserted [T
806.43] and that he was speculating about whether his "anticipated" discount on
the cost of pool shells could
be achieved [T 807.3].
- Generally
he agreed that before any final figure could be arrived at, it was necessary to
make assumptions about how many pools the
replacer was doing, where those pools
were in relation to each other and the nature of the sites in those areas [T
808.29-44].
- Although
he said he could "make some calculations based on experience", he agreed that,
really, the amount of any discount was not
knowable [T 808.48].
- He
denied that all one could do is make a guess at the discount achievable ("I
wouldn't call it a guess" [T 809.2]).
- However,
taking into account the degree of speculation involved, and the nature and
variety and nature of the assumptions necessary
to be made, I accept that the
proper conclusion to be drawn from his evidence that little more than guesswork
is involved in arriving
at any "per pool" figure saving that might be achieved
for a "bulk job".
- Furthermore
I accept as correct the plaintiffs' contention that the matter is so uncertain
that the Court ought not to hazard a guess.
- The
defendant seeks to rely upon the evidence of Mr Evans to guide the process of
assessment.
- Mr
Evans gave evidence of the price for which he would replace 28 of the 428 pools
that have failed.
- Tranquility
objected to such evidence on the basis of his failure (indeed his inability) to
expose any process of reasoning whereby
he arrived at his quoted prices [
Assafiri v The Shell Company of Australia [ 2010] NSWSC 930 (McDougall
J)] .
- Ultimately,
his evidence was admitted on the voir dire [T 957.3] .
- I
accept that although Mr Evans has many years experience as a builder, his only
experience in relation to the replacement of fibreglass
swimming pools comprises
replacement of 10 such pools in 1989, in the aftermath of the Newcastle
earthquake [T 595.8-13].
- I
accept that his written quotations are opaque so far as concerns the method used
to arrive at the quoted figures.
- He
stated that he could not recall precisely the calculations he performed for each
quotation and said that, in any event, it was
"not necessary for me to prepare
detailed calculations" as to how much extra a particular site would cost over
and above a "base
cost".
- It
turned out that Mr Evans adopted an extremely rudimentary method to arrive at
his quotations. He simply calculated the volume of
one of the fifteen [T 963.12]
Tranquility pool shapes relevant to the sites the subject of his quotations (the
"Classic 8") and performed
an assessment of the fixed and base costs in respect
of that pool shape. Then, by reference to the differing volumes of the other
pool shapes, Mr Evans simply performed an arithmetical calculation (using the
volume of Classic 8 as denominator and that of the
other pool shape as
numerator) of the corresponding variable costs for that pool and added the fixed
costs to the figure so derived
[T 970.33].
- As
to fixed costs Mr Evans adopted an assumed figure (based on his assessment in
respect of the Classic 8 pool) and applied it to
all the other quotations, no
matter what the difference in site configurations and requirements. For example,
he assumed that it
would cost $700 to crane a pool shell into each of the 28
sites in inspected, site without getting a quotation from any crane operator
[T
965.7] and no matter what the particular site was like. He could not say how
that figure was calculated and simply asserted it
was a "mean average" and that
"I know it" [T 967.15-20].
- The
finding is that Mr Evans's evidence amounts to no more than evidence of the
price at which he says he would replace the pools
in the sites he inspected.
Even to that extent, it was undertaken as a hypothetical exercise where he knew
there was no prospect
that he would be bound to those quotations (by being
awarded the jobs) and possibly making a considerable loss.
- Quantity
surveyors are experts are at determining the costs of building works. That is
the task before the Court. Both Mr Radcliffe
and Mr Meredith approached the
enterprise of assisting the Court with this task methodically and with careful
reasoning which they
exposed to the world.
- The
finding is that the evidence of Mr Evans, on the other hand:
- (1) provides no
basis upon which the Court could make any assessment of the reasonableness of
that figure; and
- (2) fails to
provide that basis because, as Mr Evans made clear, that basis simply does not
exist.
- The
Court's decision is to reject the evidence given by Mr Evans as the probative
value is substantially outweighed by the danger
that the evidence might :
- (1) be unfairly
prejudicial to the defendant; or
- (2) Be
misleading or confusing; or
- (3) Cause or
result in an undue waste of time.
- In
any event Mr Evan's evidence is appropriate to be regarded as of no weight.
- The
mean for Mr Radcliffe's determination for the ten pools, adjusting for the
Vaughan ramp, and escalated to October 2010 is $77,278.53.
Adding a figure for
vicissitudes of 10% produces a figure of approximately $85,000.
- Tranquility
submits and the Court accepts that it is further appropriate that an amount for
solatium is awarded is in the amount of
$2,000 in respect of each pool to
represent inconvenience and distress [see Willshee at [79], where the
Court awarded $5,000 to Mr Willshee for this head of damage ].
- The
finding is that Tranquility's liability in respect of each of the 428 confirmed
complaints is, in October 2010 dollars, $87,000.
The appropriate form of orders
- There
was an extensive debate between the parties as to the appropriate form of orders
in this case. Much of this debate concerned
the proper approach to sections 82
and 87 of the Trade Practices Act 1974 (Cth). In what follows I make
findings as to the proper application of those sections in the present case.
However, as I will explain
below, the parties will need to assist the Court in
formulating an appropriate set of orders consistent with this judgment.
The approach to sections 82 and 87 of the Trade Practices Act
1974 (Cth)
[In what follows the plaintiffs submissions are generally adopted]
Damage
- Huntsman,
by paragraph 32B of its Defence, pleads that Tranquility's liability to its
customers does not constitute "loss or damage"
within the meaning of section
82(1) of the Trade Practices Act 1974 (Cth) ("the Act"). This pleading
raised close questions in terms of the High Court's decision in Wardley
Australia Ltd v Western Australia Ltd [1992] HCA 55; (1992) 175 CLR 514.
- Huntsman's
argument failed to apply what the Court said in that case to the present facts.
As the plaintiffs have contended when that
task is undertaken, it becomes clear
that in respect of the 428 customers who have already complained ("the Present
Complainants"),
Tranquility:
- (1) has either
already expended money to replace those customers' pools; or
- (2) is subject
to a presently existing, non-contingent and ascertainable liability to replace
(alternatively, to rectify) those pools;
in either case those payments and that liability is
actual and not merely prospective "damage".
- In
Wardley , the majority [Mason CJ, Dawson, Gaudron & McHugh JJ ] held
that:
- (1) loss or
damage is the gist of an action under section 82 at 525;
- (2) the cause
of action does not accrue until "actual" loss or damage is sustained at 525; and
- (3) "actual"
damage is to be distinguished from "likely or potential" or "prospective" damage
at 526 - 527.
- The
facts in Wardley concerned an indemnity that the plaintiff had given to
the National Australia Bank, which indemnity was held to have been given by
reason of the misleading and deceptive conduct of the defendants. The
plaintiff's liability to the bank depended upon a number of
contingencies being
fulfilled [at 523 - 525]. The majority's critical reasoning on whether a
contingent liability constituted actual
damage held as follows at 532 (emphasis
added):
If, contrary to the view which we have just expressed, the English
decisions properly understood support the proposition that where,
as a result of
the defendant's negligent misrepresentation, the plaintiff enters into a
contract which exposes him or her to a contingent
loss or liability, the
plaintiff first suffers loss or damage on entry into the contract, we do not
agree with them. In our opinion,
in such a case, the plaintiff sustains no
actual damage until the contingency is fulfilled and the loss becomes actual;
until that
happens the loss is prospective and may never be incurred . A
deferred liability may stand in a different position but there is no
occasion
here to discuss that matter.
In the result, we agree with the decision of von Doussa J in SWF Hoists
and Industrial Equipment Pty Ltd v State Government Insurance Commission
(1990) 6 ANZ Ins Cas 61-002 . There the insured sued the insurer for loss
suffered as a result of a misrepresentation as to the extent of the indemnity or
liability
coverage provided by a proposed contract of insurance. His Honour
held that actionable actual loss (as opposed to a mere potential for loss)
occurred only when the insured was called on
by a third party to make payments
against which it would have been entitled to be indemnified by the insurer under
the contract as
represented . When the events entitling the third party to
make the demand for payment occurred and when the insurer indicated, prior to
the making
of that demand, that it would not indemnify the insured against any
such demand, there was no more than a potential for loss.
- It
has to be said that this is a difficult area of analysis. So much is apparent
from portion of the judgment of Deane J in Wardley which makes it clear
that, at the very least, the case law on this question is mixed (at 540-541)
- His
Honour stated (at 540): "Nor does the rejection of such a qualification provide,
by analogy or otherwise, a general answer to
the question whether the mere
incurring of a contingent liability to make a future payment of itself
constitutes loss or damage for the purpose of determining when a cause of action
of which loss or damage is a necessary
ingredient accrues or arises..."
- In
Wardley , His Honour referred in a footnote to his note in Hawkins v
Clayton (1988) 164 CLR 539 at 588, to the following effect: "...That is not,
of course, to say that the general rule may not be subject to
qualification in
some special circumstances or that its application may not involve unresolved
difficulties in special categories
of case (e.g., cases where all that is
involved at the time of a tortious act is a risk of future economic loss
)..." (emphasis added).
- The
decision of SWF Hoists is particularly instructive. In that case, the
plaintiff insured was informed by the defendant insurer, incorrectly and in
breach
of section 52 of the Act, that its inter-state employees were covered by
workers' compensation insurance. An interstate employee
of the plaintiff was
killed while working. The plaintiff's claim to the insurer was denied. The
Workers' Compensation Board made
payments to the family of the deceased worker
and subsequently claimed those payments from the plaintiff.
- One
of the questions that arose for decision was whether the plaintiff's cause of
action arose as soon as the defendant denied its
claim. Von Doussa J held,
consistently with the High Court's later decision in Wardley , that "the
cause of action does not accrue until the plaintiff has suffered damage [and] It
is not sufficient to found a cause of
action ... that there be a potentiality of
loss" [at 76,699-76,700]. His Honour held [at 76,701 -76,703]:
I do not consider that the applicant suffered harm or injury to its
interests at the time when the respondent said in its letter of
29 April 1983
that it would not accept the claim. At that stage the applicant could not have
sued the respondent for damages. There
was then a potentiality for loss but no
more. If the deceased's dependants made no claim the applicant would suffer no
loss ...
At the time when the applicant received the letter from the respondent dated
29 April 1983 the applicant came under no liability to
make a payment. The only
liability to make a payment which the applicant incurred in respect of the death
of the deceased arose under
the Queensland Workers Compensation Act ...
In my opinion the applicant first suffered material injury or harm when the
obligation created by sub.s 8(5) and s 19A [of that Act]
arose. At that point
the potentiality of loss eventuated. The right of recovery for which sub.s 8(5)
provides is in respect of "the
amount so paid". The obligation to pay the amount
of the compensation to the Crown does not accrue, by the terms of sub.s 8(5),
until
the Board makes payment. Payment is a condition precedent to the right
created by the statute ... Until payment to the dependants
of the deceased
occurred, the applicant was under no obligation to the Crown, and under no
liability to make a payment under the
provisions of the Queensland Workers
Compensation Act .
I consider the applicant first suffered harm in the relevant sense when it
came under a legal liability to make payment to the Board.
This occurred when
the Board accepted the claim and made payment to the dependants on 3 March 1987,
within three years of the commencement
of the action.
- To
similar effect, in Wardley , Brennan J held that where a contravention of
section 52 of the Act by the defendant causes the plaintiff to enter into a
transaction
[at 537]:
The quantification of the diminution in value of an asset or of a
liability incurred or the value of any benefit acquired may not
be ascertainable
at the time when the burden of the transaction is borne. In that event, the
suffering of any loss cannot be said
to occur before it is reasonably
ascertainable (not before it is ascertained) that the burdens which the
plaintiff has borne are
greater than the value of the benefits that the
plaintiff has acquired or will acquire. In other words, no loss is suffered
until
it is reasonably ascertainable that, by bearing the burdens, the plaintiff
is "worse off than if he had not entered into the transaction".
- And
later [at 537-538 (emphasis added)]:
There is a sense in which it is right to say that, when a
misrepresentation induces a plaintiff to enter into a transaction in which
the
plaintiff suffers a loss, the loss is suffered once the plaintiff becomes bound
to the transaction. The die is then cast and
what follows can be viewed as
evidence proving the extent of the loss suffered when the first binding step was
taken. That may be
the correct analysis when the first binding step is such
that, whatever extrinsic circumstances may transpire, a loss must be suffered.
For example, when an asset is purchased for a price and, by reason of an
inherent defect, it is worth less than the price paid ...
a loss may be said to
be suffered when the plaintiff pays the price or becomes bound to pay the price.
Similarly, when an agreement imposes on a plaintiff an obligation to pay an
amount of money without acquiring a benefit and the amount
to be paid is
quantified by no factors extrinsic to the agreement save the passing of time, it
is right to say that the loss is suffered
when the agreement to pay becomes
binding on the plaintiff. But when the actual loss that a plaintiff suffers
depends not only on the making of an agreement but also on circumstances
extrinsic
thereto, the loss is not suffered until those circumstances have
transpired and, in benefit and burden cases, not until the loss
is
ascertainable. The present case does not involve any acquisition by the State of
a contractual benefit: there was simply an indemnity
given to the Bank which
entitled the Bank to demand the payment of money upon certain contingencies.
The State was not under any liability to pay until those contingencies
occurred and the amount of the Rothwells deficiency was demanded
by the Bank in
writing. No liability to pay the Bank was incurred until the demand was duly
made. In claims arising out of misleading or deceptive conduct, as in claims
in tort, liability is for loss suffered or damage done, not
for loss or damage
merely foreseeable, threatened or imminent ... In a case where the relevant
loss consists of a pecuniary liability, the liability must be absolute though it
is not necessary that
the amount be immediately payable.
- As
soon as Tranquility sold pools manufactured by it with the latent defect (the
propensity to blister and blackspot) resulting from
use of Huntsman's Hetron
922, it came under a potential and contingent liability to the customers
. The contingencies which needed to be fulfilled for this prospective loss
to become, in the language of Brennan J, "absolute" where:
- (1) the
customer's pool's latent defect would need to become patent, ie the pool would
need to display the disfiguring symptoms of
osmosis; and
- (2) the
customer would need to make a claim upon Tranquility.
- The
Court accepts that nothing else was required.
- The
only alleged unfulfilled contingency that Huntsman has identified is that
the customers have not commenced proceedings [T 1070.35-45].
- But
as Tranquility has contended in order that Tranquility's loss become "absolute"
it was not necessary that a customer commence
proceedings. All that was
necessary was that a "claim" be made. As the majority in Wardley , in
expressly affirming the decision in SWF Hoists stated, all that was
required for the prospective loss to become "actual" was that the Workers
Compensation Board "called on" the
employer to pay the amount owing under the
Workers Compensation Act (Qld) . It did not require the Board to commence
proceedings.
- Similarly,
as extracted above, Brennan J held that "when an agreement imposes on a
plaintiff an obligation to pay an amount of money
without acquiring a benefit
and the amount to be paid is quantified by no factors extrinsic to the agreement
save the passing of
time, it is right to say that the loss is suffered when the
agreement to pay becomes binding on the plaintiff". His Honour did not
require
the counterparty to that contract to sue for the plaintiff's liability under
that agreement - only that the liability exist.
- Tranquility
correctly took violent issue with Huntsman when the latter contended that there
is no actual "loss or damage" for the
purposes of section 82 of the Act. This
was where Huntsman had for the first time, sought to rely upon the decisions of
Van Win Pty Ltd v Eleventh Mirontron Pty Ltd [1986] VicRp 49; [1986] VR 484 and St
George Bank Ltd v MJK Pty Ltd [1999] FCA 1752 in support of its proposition.
Huntsman had sought to assert that the decisions upon which Tranquility relies
are distinguishable
as they arise in the context of indemnities.
- Tranquility
correctly disputes that the decisions upon which Huntsman relies and those upon
which it relies are truly distinguishable
on that basis. The fact that some
cases arise concerning guarantees or indemnities and others in cases concerning
tortious claims
for damages is merely a factual distinction. Tranquility submits
and the Court accepts that the principle underlying the different
result in the
two sets of decisions is that, on the facts, in one case the liability was
contingent and in the other it was actual
and certain. It is this principle
which forms the ratio decidendi of the High Court in Wardley .
- Critically,
in a case where the damage asserted by the plaintiff is liability in damages to
a third party, it is not always necessary that that liability be
determined by a judgment before it constitutes "actual" damage to the plaintiff.
That this
is so, is noted by O'Loughlin in St George Bank Ltd v MJK Pty Ltd
[at [31] (emphasis added), extracted by the Tobias JA (Meagher JA &
Foster AJA agreeing) in Wardman v Hatfield [2003] NSWCA 283 at [17]]:
This line in reasoning in Van Win's case also leads to the
conclusion that the respondents in these present proceedings do not yet
have a
cause of action for misleading or deceptive conduct - they have not suffered
loss or damage for the purposes of s82 of the
TBA until there is an actual or
certain liability : Wardley v State of Western Australia (1992) 175
CLR 154 at 525. I am satisfied that the respondent's intended claims against the
accountant under the Trade Practices Act and the FTA and the intended
claim in negligence cannot be maintained at this stage.
- After
all, liability might be concluded (for instance) by a settlement between the
parties. In this case, for example, Huntsman does
not (and could not) submit
that the payments to the four pool owners who have had their pools replaced -
without the institution
of proceedings, let alone the conclusion of them - were
not "actual damage". It follows that although a judgment is a conclusive
way of
showing that damage is actual and certain, as opposed to prospective or
contingent, it is not the only way.
- The
critical distinction between this case and both Van Win and MJK is
that in those cases, as opposed to this case, the plaintiff's liability to the
third party in those cases was being resisted. In
the present case, however,
Tranquility has accepted the customer's claims as valid. The commencement of
proceedings by the customers
is unnecessary.
- That
the true distinction between cases such as Wardley , SWF Hoists
and Wardman on the one hand and Van Win and MJK on the
other is not that the former cases concern indemnities and the latter
concern actions brought in tort, is explained by the Full Court of the Federal
Court in Wardley (affirmed by the High Court on appeal), where their
Honours explained the decision in Van Win in the following terms [
State of WA v Wardley Australia (1991) 30 FCR 245 at 245 per Spender,
Gummow & Lee JJ (emphasis added)]:
In Van Win Pty Ltd v Eleventh Mirontron Pty Ltd ... a
negligence case, the owner of a house sued in 1977 the relevant council for the
negligent issue in 1976 of a building permit for
the house. In 1984 the council
joined a firm of consulting engineers to which it had referred the plans for the
house before issuing
the certificate. The Victorian Full Court held that the
claim against the engineers did not disclose a cause of action because the
council had not yet suffered any damage as a result of the negligence pleaded
against it. The council's cause of action against the engineers might never
crystallise; it might win the case against it brought by the plaintiff
or the
case might be discontinued ...
In our view, the cause of action brought by the State, on the pleading as it
stands, crystallised at the earliest when the bank, as
detailed in para 45 of
the amended statement of claim, requested the State to indemnify it in respect
of the demand made upon the
bank by the provisional liquidators of Rothwells. No
date is specified, but it was between November 1988 and May 1989.
- The
key is whether the liability has "crystallised". Where a claim was resisted, as
it was in Van Win and MJK , the liability would not "crystallise"
unless and until there was judgment. If, however, the claim was settled or
accepted, then
liability would "crystallise" at that time -judgment would not be
necessary. Indeed, in those circumstances, the matter may never
(and probably
would never) proceed to judgment.
- The
only contingencies that Huntsman has been able to identify have been
whether the customers will pursue Tranquility, and whether they will
accept a
lesser sum in lieu of their lawful entitlement.
- These
are false contingencies. In the present claim, all the Present Complainants have
"called upon" Tranquility. Tranquility has
accepted their claims. Tranquility's
liability to its customers has, at that point, crystallised, because there is no
further contingency
to be fulfilled - there is no prospect that Tranquility
might "win" against the customers, or that the customers will discontinue
their
"claim", because there is no fight to be had. Upon this Court finding that
Tranquility is indeed liable to its customers, all
the contingencies have been
fulfilled.
- This
is so, despite the fact that this Court has yet to ascertain the extent of that
liability. For liability to be actual, it need
not be ascertained, only
ascertainable. This was made clear, inter alia, by the Court of Appeal of this
Court in Wardman v Hatfield [2003] NSWCA 283 at [23] by reference to the
decision of Van Win :
In my opinion, therefore, once the opponents' liability under the
guarantee crystallised into an actual liability, he suffered loss
which
completed his cause of action against the claimants. Although it was submitted
by the opponent that any monetary loss sustained
by him could not be ascertained
until judgment had been obtained in the landlord proceedings, that argument
confuses the difference
between sustaining an actual and measurable loss on the
one hand and the quantification of that loss on the other. That distinction
was
referred to by Kaye J in Van Win in the following terms (at 489):
".....that confusion is likely to enter into consideration of this type if
the distinction between damage occasioned from a tortious
act and damages
resulting or flowing from such damage, injury or harm is not kept clear. Damage
is injury or harm resulting from
a wrongful act while damages are compensation
and money awarded for the resultant injury or harm."
- The
Court's finding is that Tranquility suffered actual loss or damage each time it
accepted a claim by a customer that complained
of the symptoms of osmosis in a
Hetron Pool.
- There
are extremely sound policy reasons why the commencement of suit is an
unnecessary step in transforming what might have been
a contingent liability
into an absolute one. Where a liability exists, the purpose of proceedings is
not to create that liability - for if that liability did not already
exist the proceedings would fail [with the exception of certain equitable suits
such as those to declare the existence of remedial constructive trusts, which
can be presently put to one side ] - but to enforce that liability. Where
that liability, however, is acknowledged, proceedings are completely
unnecessary.
- In
the present case, each of the Present Complainants has:
- (1) suffered
damage;
- (2) a valid
claim against Tranquility for breach of contract and pursuant to the Act, for an
ascertainable sum;
- (3) has called
upon Tranquility to fulfil its legal obligation.
Tranquility has accepted those claims.
- The
proposition that Tranquility has no actual liability to those customers because
it has not acted in a way which pressed to customers
to commence proceedings to
enforce their legal rights is rejected. The waste of both societal and judicial
resources that would flow
from such a holding is obvious. As Huntsman noted,
many customers would be prevented for practical reasons from asserting their
legal
rights because the ability to assert that right has increasingly become a
"luxury" available only to the wealthy [T 1070.40-42].
Had Huntsman's submission
been accepted, the customers would only have an "actual" right, and hence
Tranquility an "actual" liability,
if Tranquility refused the claim and dared
them to claim their rights.
- The
Court accepts that Wardley makes clear that a liability to third parties is
itself loss or damage so long as that liability is "actual" and not
merely "prospective" or "contingent".
- Although
Huntsman hints that some customers might have taken their own steps to arrange
for "localised repairs" [20 T 1070.43-45]
with parties other than Tranquility,
there is no evidence that any customer has taken steps which would have the
effect of extinguishing
or reducing Tranquility's liability.
- The
onus of adducing such evidence lies upon Huntsman, not Tranquility. Tranquility
need only prove, on the balance of probabilities
[in the light of the principles
set out at TSR [301] - [309]], that it has suffered "actual" loss. By proving
that each Present Complainant
has suffered damage and made a claim to
Tranquility, it has done so. If Huntsman wished to contradict this in pursuit of
its own
pleading it bore, at least, the evidentiary onus of showing that other
steps have been taken.
- In
any event, the present evidence is that dealers referred all claims directly to
Tranquility. This stands to reason. The implicit
suggestion that a dealer or
other party would be prepared to accept liability where Tranquility had admitted
fault is unlikely in
the extreme.
- That
being so, the following fall within Tranquility's claim for damages pursuant to
section 82:
- (1) compensation
for destruction of business;
- (2) reimbursement
in respect of payments already incurred; and
- (3) its
liability to the Present Complainants.
- Tranquility
correctly accepts, however, that its liability in respect of the Future
Complainants is merely prospective because one
or both of the contingencies set
out in above have not been fulfilled. Tranquility's liability to these customers
is the subject
of a separate claim pursuant to section 87 (albeit based upon the
same breaches of sections 52 and 53(a) of the Act).
Expenses Incurred "Managing" Alleged Contingent Loss
- It
was submitted by Huntsman that costs expended "managing" contingent losses are
themselves contingent, and not actual, losses in
that "it's simply spending
money to avoid someone suing you, is itself just money spent in a sense as a
contingency and not actual
loss" [T 1074.9-12]. This submission would appear to
apply to Tranquility's claim for expenses.
- This
contention is rejected. The payments were not loans, with the prospect of them
being recovered. Huntsman has not identified any
contingency - such as is the
case with mortgage lenders - which could result in that loss being made good.
The loss was "absolute"
as soon as Tranquility parted with the money.
- Huntsman
has not suggested that the payments in fact made were not caused by their
alleged breaches of contract and/or the Trade Practices Act . Nor could
it. Those payments were made directly in response to the position that
Tranquility found itself because of the use of
Huntsman's product.
- Tranquility
need only establish, in each case, breach, causation and damage. If breach is
established, the second goes without saying
and has not been contested and the
third, with respect, is obvious.
- Huntsman
accepts that the alleged vicissitudes it has identified in its addendum
submissions on orders cannot be taken into account
if the Court makes an award
pursuant to section 82 [see 20 T 1073.5-8; see TSR [421] - [426]].
- In
oral submissions, however, it submitted that the Court has the discretion to in
any event discount damages awarded pursuant to
section 82 (ie damages where the
Court has determined there is an "actual" loss) by reason of section 87. Mr
Sirtes SC said [T 1067.13-42; this submission is repeated at 1071.38-40,
1072.6-14 & 1074.35-38]:
And what we submit secondly is that even if s 82 is available with
respect to the $36 million claim that the Court has a choice between s 87 and s
82 and ought in the interests of justice for the reasons we have set out in our
addendum, make orders under s 87.
The relationship between s 82 and s 87 has been dealt with by the High Court
in the case of I & L Securities which I don't believe is - your Honour is
familiar with
the case but I don't think it's been referred to directly. Can I
give your Honour the citation and particular part of the judgment.
It is dealt
with - the question of 82/87 distinction is dealt with by the Chief Justice,
Gleeson CJ and by Gaudron J and McHugh J
in different parts of the judgment.
... the particular paragraph is that of Justice McHugh at 120. Can I just
read very quickly what his Honour says. In one paragraph
his Honour says, in
relation to the 82/87 debate "With respect...reduce an award under s 82". The
question his Honour was dealing with is, if a Court comes to the conclusion that
someone has suffered damages and it finds it
has suffered damages, can it reduce
the damages under s 87. And what the Court, each of the Judges say you can't use
s 87 to reduce damages that have actually been suffered.
His Honour says "Section 87 does not give...by the contravening conduct". Now
we would submit that there are, in this case, a range of reasons set forth in
our
addendum submissions as to why the justice of the situation would commend
your Honour, even if your Honour was against ours submission
about whether or
not these pool claimants' potential claims constitute a loss that's recognisable
and compensable under s 82 that your Honour ought still fashion relief under s
87.
- The
Court accepts that the submission is directly contrary to the what was stated by
the High Court in the case cited, namely I & L Securities Pty Ltd v HTW
Valuers (Brisbane) Pty Limited [2002] HCA 41; (2002) 210 CLR 109.
- The
headnote of the decision [at 110] records:
"Held ... By Gleeson CJ, Gaudron, McHugh, Gummow, Hayne and
Callinan JJ, Kirby J not deciding, that s 87(1) did not confer a discretion to
reduce or modify an award of damages made pursuant to s 82(1)".
- This
unambiguous and simple statement of principle is borne out by the judgments of
the majority justices. The Chief Justice stated
[at [20]]:
However, once the amount of the loss or damage suffered by
contravening conduct is established, then that is the amount which, pursuant
to
s82, a plaintiff has a right to recover. That right is not made subject to s87,
either expressly or by implication. There is no warrant for reading s87 as
conferring upon a Court a discretionary power to take away, or modify, the right
conferred by s82. And, when regard is had to the wide range of circumstances to
which s87 might apply, it is not necessary to treat the power in s87 to make an
order for part compensation as qualifying s82 in order to give that power ample
scope for practical application.
- Gaudron,
Gummow & Hayne JJ noted [at [40]] that the Court of Appeal of Queensland
held that section 87 provided a means by which a Court could provide
compensation for only part of the damages to which the plaintiff would otherwise
be entitled to pursuant to a cause of action under section 82. Their Honours
rejected this view [at [61]]:
Nothing in the words of s82 or s87 requires or permits a Court to
make orders which will compensate a person who has suffered loss or damage by
conduct in contravention
of a relevant provision of the Act for only part of the
loss or damage which has been suffered by that person by that conduct and
which
will not be, or has not been, remedied by the making of some other order under
s87.
- Some
reliance was placed on observations made by McHugh J. Yet his Honour stated
quite plainly at the outset of his reasons for judgment,
consistently with the
other members of the Court (other than Kirby J), that " Section 87 does not
confer any discretion to reduce
the damages to which an applicant would
otherwise be entitled under s 82". His Honour later expressed his reasons for
this conclusion,
saying, in part [ at [117] - [120]] :
Sections 82 and 87 provide complementary but independent powers. If
there is any conflict between the two sections - and I do not
think that there
is - that conflict is best resolved by giving full effect to the specific
provisions of s 82 when they apply. The
conflict is then alleviated by treating
the general provisions of s87 as a supplementary power to be used when an award
under s 82
will not properly compensate the applicant for its loss or damage. Of
course, there is nothing to stop a Court going directly to
s 87 and including in
the applicant's relief all the compensation that it could recover under s 82.
But the terms of s87 provide
no warrant for depriving an applicant of the right
that s82 gives it.
... Section 87 does not give a Court the power to award damages compensating
a claimant for part of the loss that it suffers. "It
gives a Court the power to
make orders that compensate the claimant in whole or in part for the loss or
damage". Those two formulations
are not equivalents. As I & L submits,
nothing in s 87 suggests that the amount of a compensable loss may be reduced.
Nor does
anything in the section suggest the grounds upon which such a reduction
might be made. Rather, the insertion of the words "in whole
or in part for the
loss" emphasises the availability of the remedies under s 87 in situations where
those available under s80 and
s82 are not appropriate, or are not sufficient, to
remedy the loss or damage brought about or that may be brought about by the
contravening
conduct.
- Callinan
J also held that rights to damages pursuant to section 82 were not fettered or
limited by section 87 [at [220]].
- In
my view the reasons of the High Court in I & L Securities could not
be clearer. The Court - contrary to Huntsman's submissions - does not have the
power or discretion to reduce damages to
which Tranquility is lawfully entitled
- damages which in the present case are designed to compensate the hundreds of
customers affected
by the consequences of Huntsman's wrongful conduct.
- Sections
82 and 87 provide for separate remedies for breaches of sections 52 and 53(a)
(among others). The Court accepts that the
result in I & L Securities
makes it plain that as in other cases where a plaintiff has alternate and
inconsistent causes of action or remedies available (such
as a client suing
their solicitor in both contract and tort), it is entitled to elect at the point
of judgment: United Australia Ltd v Barclays Bank Ltd [1941] AC 1 at 28 -
30 per Lord Atkin .
- In
any event, in respect of the 428 Present Complainants, Tranquility's claim
pursuant to section 87 is only an alternative to its
primary claim pursuant to
section 82.
- Huntsman's
invocation of what McHugh J said in I & L Securities at [120], upon
which it particularly relies [20 T 1067.28-42], not only provides no foundation
for its submission that this Court
has the discretion via section 87 to reduce
damages that ought be awarded to Tranquility pursuant to section 82, it also
provides
the basis for holding that the course of action proposed by Huntsman in
its addendum submissions is not available pursuant to section
87 either.
- As
Greenwood J noted in Khoury v Sidhu (No. 2) [2010] FCA 1320 at [67]:
The phrase "in whole or in part" does not suggest that the
combination of orders that a Court makes under s 87 should do less than
"provide
for the full compensation for all the loss and damage that is not prevented by
the making of the Court's orders": I &
L Securities per Gaudron, Gummow and
Hayne JJ at [53]; McHugh J at [120].
- The
orders proposed by Huntsman in this addendum offend this principle, and would
result in under-compensation of the customers in
at least the following respects
[HS [368]]:
- (1) customers
with monochrome pools would have their pools ground back and resprayed resulting
not in "conformity" with what they
purchased (and Huntsman did not suggest in
oral submissions that grindback & respray did result in "conformity");
- (2) payment for
monochrome pools would be "capped" at $15,000 per pool of monochrome pools
despite the fact that the evidence of the
only credible expert (Mr Tuckwell)
shows that the cost would be substantially in excess of this; and
- (3) payment for
non-solid colours would be capped at $22,500 per pool despite the fact that the
only credible evidence of the costs
of doing a Tranquility "Nushell" is $32,000
per pool (plus vicissitudes and solatium) and that the costs of a Compass
"Reshell" must
be even greater due to the necessity of extending the "lip" such
that it does not become a hazard, not to mention that replacement
- restoring to
the customers what each of them paid for - would be $87,000 per pool.
- Section
87 does not provide a licence for under-compensation through some sort of
balancing or bargaining process between plaintiff
and defendant. The
compensation principle of restoring to customers what they paid for is just as
binding on the Court pursuant to
that section as it is pursuant to section 82.
If a customer is entitled to replacement, as Tranquility contends it is, this is
just
as true for orders made under section 87 as it is under section 82.
- Tranquility
submits and the Court accepts that Huntsman's submissions in this respect could
accurately be characterised as an attempt
to reintroduce the freestanding
principle of reasonableness or proportionality.
- In
this respect, the proposed caps and reduction for alleged vicissitudes are
particularly likely to lead to under-compensation. Under
Huntsman's proposal,
the funds assigned to pool owners would not only be capped at an amount
insufficient to perform the method of
rectification upon which they are based,
but then are subject to a swingeing deduction of 35% for alleged and partly
unspecified
"uncertainties and vicissitudes".
- In
respect of the Future Complainants, the only relevant contingencies are the
number of customers who will make a valid complaint
against Tranquility. Whether
such complainants might not commence proceedings, or whether they could be
persuaded to accept a settlement
sum less than what would compensate them for
their loss, are not, matters which the Court could lawfully take into account in
fashioning
orders pursuant to section 87.
- Tranquility
submits and the Court accepts that it has established actual damage and hence an
entitlement to damages pursuant to section
82 in respect of the 428 Present
Complainants. Tranquility accepts that the Future Complainants - the further 143
estimated to report
a complaint - must be the subject of an order pursuant to
section 87. Tranquility contends and the Court accepts that the only orders
that
are capable of compensating those customers without imposing an injustice upon
Huntsman are those proposed by it, especially
as the fact that Huntsman is now
not operating has the consequence that orders for indemnities and progress
payments are inappropriate,
being subject to the risk of Huntsman's insolvency.
Evidence taken on the voire dire
- On
only a few occasions the Court permitted evidence to be taken on the voire dire,
generally with the acquiescence of the parties.
- The
parties have usefully summarised those occasions in the following tables:
Witness
Transcript Reference
Class of Evidence
Why taken on Voir Dire
Smyth, Glenn
3/11/10 T204 line 1 - 207 line 37
Owners' hopes/subjective intentions regarding pool rectification
(see legal argument at T 189 line 38to 192 line 50) Global customer evidence
relevance objection (Huntsman made concession after this
witness that this class
of evidence could be admitted subject to relevance - see T243 at line 12 - 34)
Mewett, Ian
VOIR DIRE 1
11/11/10 T572 line 1 - T574 line 36
XXN on para 17 of Mewett affidavit 10/6/10 (opinion evidence re Derakane v
Hetron, equivalence issues)
Argument as to whether Mewett in a position to give specialised evidence of
scientific matters. Judge to permit Counsel to return
to this matter in final
address, as to whether evidence should be treated as expert or lay evidence (see
argument and decision from
T568 line 33 to T571 line 27)
VOIR DIRE 2
11/11/10 T582 line 1 -T582 line 22
Questions in re-examination as to Mewett's evidence in XXN about the
differences between a resin containing hydrophilic thixotrope
& a resin
containing hydrophobic thixotrope
As above
VOIR DIRE 3
11/11/10 T585 line 1 to T586 line 31
Further question arising from re-examination, as to whether Mewett's opinions
expressed in XXN about hydrophilic v hydrophobic thixotropes
were based on
advice he received
As above (and only put as to Mewett's state of mind - see T585 at 31 to 36)
Evans, Christopher
30/11/10 T 957 line 1 - T972 line 3
Evans' evidence as to cost of replacement and whether that being put forward
as expert evidence as to reasonable cost of replacement
Judge to permit Counsel to return to this matter in final address (see legal
argument from T950 line 32 and Judge's ruling at T956
at line 25)
- It
is common ground that after many witnesses called by the plaintiff had been
cross-examined the parties came to an agreement whereunder
the class of evidence
dealing with the owner's hopes/subjective intentions regarding pool
rectification could be admitted subject
to relevance. In that regard the
evidence of Mr Glenn is allowed.
- The
evidence given by Mr Mewett in the voire dire (as identified in the above
schedule] is allowed and is generally dealt with as
a matter of weight.
- The
evidence of Mr Evans is rejected and dealt with above.
The way forward
- The
Court has attempted to deal with all of the matters of disagreement between the
parties. The Court has attempted to resolve a
detailed debate between the
parties that went to the form of orders that would be appropriate. The parties
indicated that they wished
to have an opportunity to attempt to agree the form
of orders that would be made, in relation to pools that have not yet failed,
under s 87 of the Trade Practices Act 1974 (Cth), and I am satisfied this
is appropriate. The parties are to bring in short minutes of order consistent
with these reasons.
- Due
to the findings I reached in relation to the destruction of business claim, it
will be necessary for the parties to adduce brief
evidence from the accounting
experts, consistent with my findings, in order to calculate the amount of
damages payable under that
head of damage.
- As
noted above, the parties will be given an opportunity to briefly address as to
what, if any, adjustment should be made to the damages
awarded to the plaintiffs
to take account of the taxation consequences of the Court's findings.
Glossary of terms
- It
seems appropriate to set out a glossary of terms relevant to the issues of this
case:
Term
Definition
Accelerator
An ingredient added to a resin by its manufacturer which speeds up the curing
reaction.
Acetic Acid
The material produced following Hydrolysis of Sizing.
Aerosil 200
A Hydrophilic Thixotrope manufactured by Degussa.
Aerosil 202
A Hydrophobic Thixotrope manufactured by Degussa.
Barrier Layer
Layer (containing vinyl ester resin and fibreglass) to protect structural
layers from 'attack' by pool water.
Blackspot
The deposit (generally cobalt oxide) from the release of Blister fluids into
the pool when the osmotic Blister bursts. The cobalt
salts are from the Promoter
included in the resin.
Blister
The distortion of the surface of a pool due to pressure built up in the
Laminate by the process of osmosis. If the blister bursts
then Blackspot
results.
Catalyst
Incorrect (but extremely widely used) word used to describe an Initiator.
Cheese
A tubeless package of continuous fibreglass Rovings as delivered by the
roving manufacturer.
Chopper
The 'gun' used in the production of a fibreglass pool which chops fibreglass
Rovings; mixes them with catalysed resin; and then sprays
the mixture into the
pool mould.
Copper Naphthenate
A Promoter introduced in December 2000 by Huntsman in its production of
Hetron 922. See F-CAT technology.
Corrosion Layer
Synonymous term for Barrier Layer
Cosmetic Layer
The first layer applied in the manufacture of a fibreglass pool. A layer
which provides or contributes to pool colour.
Crosslinking
The chemical process occurring when the resin and styrene react to transform
the resin to a gel and then to a solid. The rate of this
process is controlled
by the amount of initiator and promoter used in building the pool.
Cure
The action of crosslinking the resin and bonding it to the fibreglass
Derakane 411
An epoxy based Vinyl Ester Resin manufactured by Dow Chemicals.
Diffusion
The process of migration of a substance from a region of low concentration to
a region of high concentration. For example migration
of water molecules across
the Gelcoat. This occurs as vapour unless the water can condense at a site in
the Laminate.
Estarez 7222
An epoxy based Vinyl Ester Resin manufactured by Huntsman.
Ethylene Glycol
A water soluble chemical introduced in December 2000 by Huntsman in its
production of Hetron 922.
F-CAT Technology
Technology patented by Ashland Inc and introduced in December 2000 by
Huntsman in its production of Hetron 922.
FTIR
Fourier Transform Infrared Spectroscopy. An analytical technique used to
determine the chemical composition of materials.
Fumed Silica
A high purity free-flowing synthetic silica powder that is used as a
Hydrophilic Thixotrope.
Gelcoat
A polyester resin (nearly always tinted) used in the Cosmetic layer. Also
used as a name for the Cosmetic Layer itself.
Hetron 922
An epoxy based Vinyl Ester Resin manufactured by Huntsman under licence from
Ashland Inc.
Hydrolysis
A chemical breakdown due to reaction with water usually in the presence of a
catalyst such as an alkali.
Hydrophilic
Type of thixotrope.
From the Greek:- hydros = water; philia = love.
Un treated fumed silica.
Oxford: "Having a tendency to mix with, dissolve in, or be wetted by water.
The opposite of hydrophobic."
Hydrophobic
Type of thixotrope.
From the Greek:- hydros = water; phobos = fear.
Treated fumed silica.
Oxford: "Tending to repel or fail to mix with water. The opposite of
hydrophilic."
Initiator
An ingredient added during pool manufacture to instigate cure by reacting
with the promoter added to the resin by its manufacturer.
This starts a chemical
reaction between the resin and the styrene monomer in the resin, resulting in
the 'mix' becoming a solid.
Laminate
The combination of all manufactured layers of a fibreglass pool.
Micrograph
A photograph taken through a microscope.
Mist Layer
In most pools, the 2 nd layer and that which provides or contributes to pool
colour.
Modified
In the case of a Thixotrope, the transformation by the application of an
appropriate coating to a Fumed Silica in its basic state
(Hydrophilic), such
that it becomes Hydrophobic.
Osmosis
The passage of water from a region of low concentration of water soluble
materials (the water inside the pool) through a semi-permeable
membrane (the
Cosmetic Layer), to a region of high concentration of water soluble materials
(inside the Barrier and Structural Layers
of a the Laminate).
A term used to describe the appearance of blisters, blackspot and/or cracking
in a fibreglass swimming pool.
Polyester Resin
Resin used in Gelcoat and Structural Layers.
Promoter
An ingredient in a resin added by its manufacturer which reacts with the
Initiator added by the pool manufacturer, to instigate cure.
This starts a
chemical reaction between the resin and the Styrene monomer in the resin,
resulting in the 'mix' becoming a solid.
The promoter is a cobalt compound that
remains unaltered at the end of this reaction.
Roving
String-like bundle of continuous glass filaments gathered together without
mechanical twist into a single bundle and coated with Sizing.
SEM
Scanning Electron Microscope. An instrument that enables materials to be
examined at higher magnification than from an optical microscope.
Shear
The 'strain' that mixing, agitation or spraying causes to a liquid thereby
modifying its viscosity. For example, the viscosity of
household paint changes
from high to low, upon agitation (high shear), but subsequently returns to low
viscosity (low shear or at
rest).
Sizing
A coating on fibreglass Rovings vulnerable to Hydrolysis. Necessary to hold
the bundle of glass filaments together and to provide
protection from abrasive
damage during transport and actual pool manufacture.
Structural Layers
Those layers (containing Polyester Resin and fibreglass) which provide the
structural integrity of the pool shell.
Styrene
A reactive chemical that is added to a resin to 'thin' it (improve flow).
Also a participant in the process of the 'mix' becoming
a solid. (see Promoter).
Thixed
A resin into which a Thixotrope has been incorporated.
Thixotrope
A substance which promotes the ability of a liquid to change from a "thicker"
(viscous, or less free flowing) state to a "thinner"
(less viscous, or more free
flowing) state, and back again. It must confer the quality of high Viscosity at
low Shear, and low Viscosity
at high Shear. Added to resin to modify flow
attributes.
Tie Layer
Synonymous term for Barrier Layer
Unmodified
In the case of a Thixotrope, the fumed silica in its basic (Hydrophilic)
state.
Unthixed
A resin into which a Thixotrope has not been incorporated.
Vinyl Ester Resin
Resin used in Barrier Layer to prevent Osmosis.
Viscosity
The flow characteristics of a liquid. A free flowing liquid (eg water) has a
low viscosity; whereas a less free flowing liquid (eg
honey) has a high
viscosity.
Void
A region of a Laminate where there is neither resin nor fibreglass. Generally
caused by air entrapment during spray up of the Laminate
or air release on cure.
Wacker N20
A Hydrophilic Thixotrope manufactured by Wacker. The Thixotrope used by
Huntsman in the Hetron 922 supplied to Tranquility.
Wet out
The process of breaking up the fibre bundles to wet the individual fibres
with resin so they are surrounded by resin on cure. This
is achieved by rolling.
Wet through
The process of wetting the fibre bundles with resin and releasing the air.
This is achieved through rolling.
The large number of witnesses who gave evidence in the hearing
- A
considerable number of witnesses gave evidence. It is appropriate to essentially
list them, and their relevance to the proceedings
in order to provide that
information to the reader.
Plaintiffs' employees
- The
principals of Tranquility [essentially Mr Kahler and Mr Annakin] gave evidence]
as did Mrs Suzan Annakin, an employee of Tranquility
- Mr
Kahler gave evidence on 2 and 30 November 2010: His relevance to the proceedings
is as follows:
- (1) From July
1986 to late 1999, Managing Director of a number of companies known as the
International Pools Group of companies (International),
a predecessor of the
plaintiffs.
- (2) Controls
the affairs of the first and second plaintiffs. The vast majority of shares in
the first and second plaintiffs are held
on trust for Mr Kahler's family.
- (3) Controls
the affairs of PFI Pty Ltd, which owns the plant and equipment at the TPSM
factory. Mr Kahler's family trust beneficially
owns PFI.
- (4) Since
October 2004 has been in charge of managing the osmosis outbreak for
Tranquility.
- Mr
Annakin gave evidence on 3 November 2010. His relevance is essentially as
follows:
- (1) Director of
plaintiffs;
- (2) Factory
manager of Tpsm;
- (3) Factory
manager at international pools from 1988 onwards;
- (4) Worked at
International from 1977.
Plaintiff ex employees
Ben Cooper:
Gun operator employed by plaintiffs since 2001
Graeme Cutts:
(a) retired pattern maker, employed by International to design and make pools,
(b) used by plaintiffs in current proceedings to inspect various pools.
Donald Magner:
(a) Between 1999-2003 a director of tpsm and responsible for the part of
business relating to retailing pools;
(b) Vast majority of tranquillity pools sold to customers (rather than dealers)
were managed by him;
(c) Previously general manager for International Pools from 1990-97;
Competing Manufacturers
Stephen Ward:
Sole director of Harvest Pools Pty Ltd
Roy Laybutt:
Managing director AAA pools, another manufacturer
Steven Carlson:
Fibreglass repairer
Ian Mewett (appeared as a witness for the plaintiff and defendant):
Director of compass pools
Lewis Beale:
Aquatic Leisure pools
Pool dealers
John Candy
Ronald Spice
Oswold Collins
Rodney Bragg
- The
defendant's witnesses in this category were as follows :
Pool repairers called by defendant
Peter Doris:
Pool builder
Lawrence Zahra:
Pool repairer
Derek Kramer
Pool resurfacer
Andres Timmermanis
Manager of company that manufactures a distributes "crystal chem" products
for pool care
Michael Tuckwell (appeared as a witness for the plaintiff and defendant):
(a) Managing director Duraglaze NSW Pty Ltd
(b) Duraglaze engages in refurbishment of fibreglass pools. Also provides
fibreglass shell insert into concrete pools ( a roll on
fibreglass surface).
Martin Kennedy
(a) Sub contractor to Compass Pools
(b) Pool renovator and specialist repairer
Christopher Evans
General manager of CCE constructions, which specialises in remedial building
construction including swimming pools.
Defendant employees
Noel Godfrey
General manager commercial, Huntsman
Graham Durrant
Organic chemist formerly employed by Huntsman
Geoffrey Houghton
Industrial chemist employed by huntsman
Scientific witnesses
Michael Leggett
Expert who prepared report comparing Hetron 922 and Derakane 411
Mark Stuart
Staff scientist group co-ordinator spectroscopy & microscopy group at
Ashland inc
Other witnesses essentially dealt with in the above reasons
- Then
there were the scientific experts principally Professor George, Emeritus
professor of polymer science Queensland university of
technology, who appeared
for the plaintiff and Dr Pilato, consultant in the area of composites and
reinforced matrix systems advanced
composites, composite analysis and related
areas, who appeared for the defendant. The judgment deals in detail with their
evidence.
- Then
there were the forensic accountants called by the respective parties namely Mr
McGuiness and Mr Gower. Their evidence is also
dealt with in detail in the
reasons.
- Then
there were the quantity surveyors called by the respective experts namely Mr
Radcliffe called by the plaintiff and Mr Meredith
called by the defendant. There
evidence is also dealt with in some detail in the reasons.
- Then
there was Mr Robert Wild called by the defendant, he is the CEO of Cordell
Information which publishes information in relation
to swimming pool
construction approvals. His evidence is dealt with above.
Pool
Owners
- The
pool owners who gave evidence for the plaintiff were as follows:
Glen Smyth
Tracey Gannaway
David Moye
Michelle Gibson
Martin Francis
William Carter
Vicky Martine
Kylie Jones
Janette Wilson
Gillian Workman
Michael Jenner
Thomas Scott
Joanne Hayter
Deanne Ion
Anthony Richardson
Philip dagger
Tracey Wallace
Stephen Leeder
David Graham
Neil Smith
Timothy Berrell
Ruth Cronin
Trevor Fardell
Trevor Mutch
Ashley Gordon
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