FEDERAL COURT OF AUSTRALIA Gibbett v Forwood Products Pty Ltd [2001] FCA 290 TRADE PRACTICES – misleading and deceptive conduct under s 52 of the Trade Practices Act 1974 (Cth) and negligent misrepresentation – applicant purchased wood shavings from first respondent for the purpose of packaging live crayfish – crayfish should not be packaged in wood shavings treated with chemicals – wood shavings treated with chemicals – whether this fact was adequately disclosed – whether representations regarding the amount of the chemical in the wood shavings and its harmful effects were misleading. SALE OF GOODS – whether implied condition that goods would be fit for the purpose was breached – s 14 I of the Sale of Goods Act 1895 (SA) – whether and at what time the applicant relied on respondent's skill and judgment in making representation. Trade Practices Act 1974 (Cth) s 52 Australia New Zealand Food Authority Act 1991 (Cth) South Australian Timber Corporation Act 1979 (SA) Sale of Goods Act 1895 (SA) s 14 I Fair Trading Act 1987 (SA) s 56 Food Act 1985 (SA) Health (Adoption of Food Standards Code) Regulations 1992 Payne v Parker [1976] 1 NSWLR 191 cited Jones v Dunkel (1959) 101 CLR 298 cited Dependable Motors Pty Ltd v Ashford Shire Council (1959) 101 CLR 265 applied Grant v Australian Knitting Mills [1936] AC 85 applied Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441 applied Cammell Laird & Co Ltd v Manganese Bronze & Brass Co Ltd [1934] AC 402 applied Astley v Austrust Ltd (1999) 197 CLR 1 applied Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 applied World Series Cricket Pty Ltd v Parish (1977) 16 ALR 181 applied Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 cited Hill v Van Erp (1997) 188 CLR 159 cited McInerney v Lloyds Bank [1974] 1 Ll Rep 246 cited Shaddock & Associates v Parramatta City Council (No 1) (1981) 150 CLR 225 cited Holmes v Jones (1907) 4 CLR 1692 applied Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625 applied The Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 applied Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 cited KENNETH MAXWELL GIBBETT and BRISK SHAVINGS PTY LTD v FORWARD PRODUCTS PTY LTD (ACN 008 089 727) and THE STATE OF SOUTH AUSTRALIA SG 12 OF 1997 MANSFIELD J 30 MARCH 2001 ADELAIDE IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY SG 12 OF 1997 BETWEEN: KENNETH MAXWELL GIBBETT and BRISK SHAVINGS PTY LTD APPLICANTS AND: FORWOOD PRODUCTS PTY LTD (ACN 008 089 727) and THE STATE OF SOUTH AUSTRALIA RESPONDENTS JUDGE: MANSFIELD J DATE: 30 MARCH 2001 PLACE: ADELAIDE REASONS FOR JUDGMENT the claims and issues 1 This claim concerns the circumstances in which the respondent, Forwood Products Pty Ltd ("Forwood") sold wood shavings to the applicant, Kenneth Maxwell Gibbett ("Gibbett") from about January 1993, and later to the applicant, Brisk Shavings Pty Ltd ("Shavings") from 1 July 1993. It was registered only on that later date. 2 At material times Forwood operated the business known as Mount Gambier Pine Industries ("MGPI"), including its timber mill ("the mill"), at Mount Gambier. The State of South Australia was joined as a respondent because Gibbett and Shavings believed that Forwood commenced operating MGPI only from 1 July 1993. The evidence reveals that it did so from October 1992. Prior to that, MGPI had been operated by South Australian Timber Corporation, an instrumentality of the State of South Australia, established under the South Australian Timber Corporation Act 1979 (SA). As the events to which this proceeding relates occurred from October 1992 only, no claim is now pursued against the State of South Australia. Forwood accepts that, if either Gibbett or Shavings succeed in their claims, any judgment should be entered against Forwood. 3 Gibbett and Shavings claim that Forwood sold and supplied wood shavings to them for the purposes of Gibbett from about October 1992 (in fact, the first supply was in December 1992) and later from 1 July 1993 for the purposes of Shavings then on-selling the wood shavings (after some further processing) for packaging for the export of live crayfish in Western Australia and South Australia. It is common ground that the wood shavings supplied were not fit for that purpose. Forwood in fact identified that circumstance in October 1993 and ceased supplying wood shavings from the mill on 22 October 1993 for that reason. 4 The first claim is under the Sale of Goods Act 1895 (SA). Gibbett and Shavings claim that Forwood knew that the wood shavings were to be used for packaging live crayfish and that they relied upon its skill and judgment to provide wood shavings which were reasonably fit for that purpose. They also claim that Forwood knew that they required wood shavings which had been processed by kiln drying without the use or addition of any chemicals which were or might be regarded as toxic or harmful either to the packaged crayfish or to the consumers of the crayfish. Consequently, they claim that it was either an express or implied term of the contract of sale of the wood shavings, and a warranty of Forwood, that the wood shavings supplied were reasonably fit for that purpose. As they were not fit for that purpose, this claim is simply one for damages for breach of contract. 5 The second claim is based upon contravention of s 52 of the Trade Practices Act 1974 (Cth) ("the TPA") and s 56 of the Fair Trading Act 1987 (SA). It is alleged that in about October 1992 Forwood represented to Gibbett and Shavings that the wood shavings: "(a) were fit for the purpose of use as packaging for the export of live crayfish; (b) were and could be represented as being processed by kiln drying without the use or addition of any chemicals which were or might be regarded as toxic or harmful either to the crayfish themselves or their human consumers; (c) were and could be represented as being, in the terms of the trade, 'kiln dried chemical free'; (d) contained no chemical or chemical residue of any kind which was deemed impermissible or inappropriate for use in connection with the transport of crayfish and in particular live crayfish by any government legislation or regulation, or otherwise given the nature of its intended use." and that those representations were false because the wood shavings were not fit for use for packaging live crayfish for export, and because the wood shavings were not capable of being represented as being "kiln dried chemical free". It is also alleged that Forwood reaffirmed those representations in about July 1993. 6 The third claim is based on negligence. Gibbett and Forwood allege that, in the circumstances in which the alleged representations were made, Forwood owed them a duty of care not to make any negligent misstatements and to ensure no harmful or dangerous chemicals were likely to be present in the wood shavings. That duty of care is alleged to have been breached by Forwood by failing to inform them before 22 October 1993 that the wood shavings contained pentachlorophenol ("PCP") and so were not fit for use in packaging live crayfish for export and did not correspond with the representations. 7 Gibbett and Shavings claim that the consequence of that conduct by Forwood was to bring to an end a budding and potentially very profitable business. The crayfishing season apparently runs from about November in each year to May of the following year (the precise period varies from State to State), so that the unavailability of the wood shavings from 22 October 1993 occurred at a critical time. Shavings could not perform its contracts for the supply of wood shavings. Alternative sources of good quality wood shavings were not available; the alternative supplies contained too much sawdust to be able to be processed and supplied profitably and in sufficient volume. The business of Shavings was unable to continue, although it struggled on until about mid-1995. The claim on its behalf is for damages of $1,507,965 calculated as follows: Year ended Year ended Year ended Total June 1994 June 1995 June 1996 Trading losses 275,693 110,272 385,965 Loss of profits 371,000 371,000 380,000 1,112,000 Total losses 646,693 481,272 380,000 1,507,965 8 That claim was presented through an expert accounting witness Fraser Ahrendt ("Ahrendt"). Although he qualified his views in significant respects as a result of seeing the expert accounting report provided by Trevor Davies ("Davies") to Forwood, and in cross-examination, Gibbett and Shavings maintained that claim. Despite the reductions in its quantum accepted by Ahrendt, there were other matters, they submitted, which warranted its maintenance. They also maintained that there were other heads of loss not dealt with by Ahrendt which justified the quantum of this claim. These matters included claims for loss of opportunity to use the funds which would have been available, interest on the claimed loss, losses after 30 June 1996, and (on behalf of Gibbett) losses on plant and equipment which were either sold or given away as having no value when Shavings' business ceased. 9 Forwood disputes the essential elements of those claims, and that either Gibbett or Forwood suffered losses as they allege. In particular, it disputes that it knew or had reason to know that either Gibbett or Shavings were relying upon its skill or judgment in the supply of the wood shavings, and it also disputes that it was aware or was made aware that the wood shavings had to be chemical free. It further disputes that it made any of the representations alleged. Forwood's case is that Gibbett approached it in late 1992 to supply wood shavings for the packaging of live crayfish for export, and that Gibbett made the judgment about whether the shavings provided were suitable for that purpose. Wood shavings are but a by-product of timber processing at the mill, and it had no special reason to promote the sale of wood shavings to Gibbett or to Shavings because all its wood shavings by-product were already being sold to another enterprise. It was at all times aware that the wood shavings were treated with PCP, and it did not conceal that fact from Gibbett or Shavings. In 1992, it routinely dipped green timber in PCP solution to prevent blue stain fungus. It has done so for many years. Forwood claimed further that it identified the problem with the use of the wood shavings for packaging live crayfish for export only as an incident of investigations about the possibility of PCP leaching from treated wood in response to concerns about PCP treated wood dripping or leaching PCP into ground soil, and then percolating underground so as to propose a threat to the water supply of Mount Gambier. 10 Forwood has not treated timber by dipping it in PCP solution since that possible problem was first identified in August 1993. 11 Forwood also contends that the failure of Shavings' business was not related to Forwood's inability to supply the wood shavings from the mill from 22 October 1993, and it contends in any event that for a variety of reasons the damages claim is grossly inflated. findings 12 Much of the background evidence is not contested. It is possible, therefore, to record findings largely in a historical sequence. Where there is a significant disputed factual issue, I shall note that issue and explain my reasons for my finding in greater detail. 13 MGPI has been operating the mill for many years. I accept Hay's evidence about its history, particularly about the use of PCP. 14 MGPI had originally been owned and operated by his father, until about 1987, and he had been employed by MGPI since the early 1970s. 15 All green timber at the mill had been dipped in a PCP solution to prevent blue mould since the 1950s. As one might expect, its handling and disposition then was not as controlled as it later became. The dipping tank was emptied for cleaning annually, and the liquid solution of PCP was pumped or siphoned into a nearby bore. In the 1970s, presumably to prevent that material concentrating in bore water, it was pumped over the ground surface of the log yard. In the later 1980s, the solution was stored temporarily in a tank and then replaced into the dipping tank. The solid refuse in the dipping tank was incinerated. It was about this time that Hay first learnt (as noted below) that PCP may have significant adverse environmental impact. The drip area was established. Hay imposed much more stringent controls on the usage of PCP, including requiring compliance with a recipe to ensure the level of PCP in solution was established and carefully monitored. 16 At the times material to this action, as part of timber processing in the green mill, the sawn timber was dipped in a tank containing heavily diluted PCP solution. The timber to be dipped was bound together in a large bundle, and dipped in the dipping tank by being lowered whilst suspended from a gantry. The bundle of timber was then suspended at an angle over the dipping tank for a short period to allow liquid run-off from the timber back into the dipping tank. The bundle of timber was then stacked on a concrete floor surface which sloped slightly towards a sump, and remained there for up to an hour or so whilst further liquid run-off was collected for re-use. Many years ago that latter stage did not exist, but was established in part for economic reasons, to catch more of the liquid run-off for re-use, and partly for environmental safety reasons, to prevent PCP solution run-off being absorbed into the ground soil. The treated timber was then stored in the open, and generally after a few days it was manually restacked to improve its drying. It might remain in the open for some months before being taken to the kilns for further and more intensive drying and then processing in the dry mill to the stage of the final product. 17 The green mill and the dry mill processing stages are conducted in physically separate places at the mill, and involve quite different processes. 18 The wood shavings which were sold to Gibbett and to Shavings were by-products of the processing of timber through the moulders as part of the dry mill processing. 19 The PCP used by Forwood, or its predecessors, had been supplied in liquid form by a company called Nufarm. It was supplied in large drums, with the trade name Pentabrite. Those drums clearly identified the nature of the chemicals. 20 In the late 1980s, Nufarm proposed to cease supplying PCP or Pentabrite. At about the same time Russell Hay ("Hay"), who was involved in the operations of the green mill of MGPI in his role as customer services manager, learned of some concerns about the use of PCP in dipping timber. Hay's responsibilities included arranging the supplies of Pentabrite from time to time. He raised those concerns with Nufarm to ensure the Pentabrite was appropriately handled and stored. He started investigating possible alternative processes to prevent blue stain fungus on timber. His aim was to explore whether cheaper and more effective chemical treatments were available which were environmentally safer than organochlorins such as PCP. He perused all material available to him. On the evidence, he was the person within Forwood who had the most knowledge of PCP and its propensities. He became aware that it was "potentially toxic" in certain circumstances. He was unable to find a suitable alternative chemical. Progressively, the safety precautions applicable to the use of Pentabrite or PCP became greater. Employees handling Pentabrite were, by 1992, required to wear protective clothing whilst mixing the solution. In about 1990 or the early 1990s Nufarm ceased manufacturing and supplying Pentabrite. Hay set about endeavouring to secure alternative supplies of PCP. Initially, that was secured by contact with other customers of Nufarm who had acquired Pentabrite but did not in fact require it. Then he located a supply of PCP in solid or flake form which, by arrangement with Nufarm, he had made into the "technical grade" of liquid PCP required for the dipping tank. At that point, I am not confident that the drums of liquid PCP supplied from that specific manufactured process had the Nufarm labelling so clearly indicating that the product was Pentabrite, or contained PCP, as applied when Pentabrite was commercially manufactured and supplied by Nufarm. Previously, the drums had been clearly labelled "Nufarm-Pentabrite-Pentachlorophenol". There was also attached to the wall adjacent to the dipping tank and in the nearby storeroom three sheets of paper containing information about PCP. Hay described those sheets as the Manufacturer's Safety Data Sheets and his "recipe". However, I am unable to find what the content of the two sheets (in addition to his "recipe") contained. The Nufarm Manufacturer's Safety Data Sheets are not in evidence. If these were the ones produced in the early 1980s, from which time Hay said those sheets were displayed, the information may well have been somewhat out of date. The only Manufacturer's Safety Data Sheet in evidence is one of Rhône – Poulenc Specialties Cliniques for its product Cryptogil – Oll (also a PCP produce) which he received in 1992 in the course of his inquiries about PCP and possible alternative products. That document comprises seven pages. When received by Hay, it had certain deletions indicating that the product was available only in flake form. 21 That Manufacturer's Safety Data Sheet of Rhône – Poulenc contained handling precautions which reflected Hay's understanding of the properties of liquid PCP. It was toxic by inhalation, ingestion and skin absorption. Protective clothing, gloves and eye and face protection was required when handling the product, and skin contact was to be avoided. An important note was that the product, either pure or as a solution, should not be discharged into the water supply, or the sewerage system, or into drainage ditches. The product disposal precautions on the sheet stated: "Replace contaminated fluids. Do not release into the environment. Very toxic to fish". Hay said that that information was, as one might expect, consistent with the information provided by Nufarm. 22 Gibbett qualified as an electrical fitter mechanic in 1974. He worked as an electrician for a number of years, but had ceased to do so by the mid 1980s. He and his family were then living in Perth. He worked in property sales and development for a time, and as a truck driver. 23 In November 1991 he commenced operating a transport business under the name Brisk Transport Management, in partnership with one other person. That partnership was dissolved on 31 December 1992. There was, apparently, plenty of work. By 1992, that business was transporting liquor from Perth to Geraldton and places in between, as well as delivering timber products around Perth. As a sideline, he acquired reject timber from a timber mill and re-sized it for resale. Gibbett himself spent about half his time on the run between Perth and Geraldton. 24 In the course of that work, Gibbett learned of the live crayfish export industry. He came to meet James Angus Callander ("Callander"), the general manager of MG Kailis Seafood Exporters ("Kailis") of Dongara in Western Australia, in about late 1991. As he had an interest in timber by-products, he discussed the prospect of supplying to that firm wood shavings for packaging live crayfish for export. In January 1992, he procured a supply of bagged and packed wood shavings (some 900 bags) from a source in South Australia to Kailis. Over the balance of that crayfishing season, until about May 1992, he continued to endeavour to locate better quality wood shavings for that purpose (having regard to colour, shape, size, and springiness as well as the amount of sawdust content) and to explore better ways of packaging and transporting wood shavings. He sold a further three truckloads of wood shavings to Kailis during that season. He also sold wood shavings to two other substantial live crayfish exporters, one in Fremantle and one in Geraldton. Those wood shavings were largely procured from an entity called Peat Soils. By late 1992, Gibbett held the view that its supplies were somewhat overpriced. Also, he was not confident of its ability to supply wood shavings with sufficient regularity and in sufficient volume to meet his anticipated demands. 25 He intended to persevere with that business. 26 By October 1992, Gibbett had secured a contract to supply Fremantle Fishermans Co-operative Society Ltd with a number of loads of wood shavings, and he also had other "forward orders" for the next season from other fish exporters procured in about June 1992 at the end of that crayfishing season for which he had received substantial prepayment. He procured wood shavings supplies from sources other than Forwood, but they were not entirely satisfactory. There were problems with cleanliness, and with the excessive sawdust. 27 In November 1992 Gibbett set about addressing those problems. He decided to screen and sift the raw product in Adelaide, so as to make transport to Western Australia cheaper and to provide a cleaner and better product to his customers. He acquired and converted a sifting machine at nominal cost ($100 per week) for that purpose. He proposed to pack the sifted wood shavings in reusable wool bales. At about the same time, or soon after, the transport business partnership dissolved. Gibbett retained the business (and its debts) and surrendered an interest in the principal physical asset, namely the large truck and trailer. 28 In December 1992, Gibbett made his first contact with Forwood. He attended its premises and met Hay. He explained that he wanted to acquire wood shavings for use in packaging live crayfish for export. There is some dispute as to the balance of that conversation, and about whether there was an inspection of the mill, including the green mill, on that occasion. 29 I have no doubt that each of the witnesses was honest, and endeavouring to provide a full and reliable description of the events to which they respectively referred. Nevertheless, and perhaps inevitably, their recollections differed, sometimes on important issues. That no doubt reflects the fact that the perspective from which they viewed those events differed. It also reflects the passage of time since the events occurred. It is, however, the obligation of the Court to resolve those differences. In part, in doing so, I have taken account of the inherent probabilities of the respective versions of events, and the actions taken by those involved surrounding the occasions to which the evidence relates. I have also had regard to my assessment of the persons involved, with the benefit of having seen them give evidence and, in particular, respond to testing questions in cross-examination. 30 I am not prepared to accept Gibbett's evidence concerning his meetings with Hay as reliable. I think he tended to reconstruct those events, rather than present an accurate version of them, although I am of the view that his reconstruction was not deliberate. One illustration of that unconscious reconstruction of certain events is his evidence that in late 1993, by which time Forwood had ceased supplying wood shavings to Shavings and he had recalled all wood shavings supplied to live crayfish exporters, he claimed that the Western Australian Fishing Industry Council (Inc) urged its members, including Shavings' customers, not to deal further with Shavings. The letter to that effect was called for by counsel for Forwood. The document produced was dated 26 November 1993 in the following terms: "Enclosed please find relevant information concerning possible contamination via treated wood shavings. Whilst Rhys Brown says the risk of contamination is very low, you may care to take action direct with the supplier (if your supplier is Brisk Shavings). This memo should be treated confidentially as any leak to the media would cause both unnecessary and unwarranted attention." 31 The enclosed information, according to the documents produced, included a memo from Western Australian Marine Research Laboratories which suggested that the processors not using Brisk Shavings will need to be contacted concerning other wood shavings used as the same may apply for local pine shavings. In my judgment, the letter does not support Gibbett's oral evidence. 32 Unfortunately, on two occasions on which there are critical differences, other persons present were not called to give evidence. One of those occasions was the first meeting of Gibbett and Hay in December 1992. Brian Smith ("Smith"), a Mount Gambier resident, was also present as he introduced Gibbett to Hay. The other occasion concerned an inspection at the MGPI mill in May 1993 when Gregory Maurice Buckley ("Buckley") was also present with Gibbett and Hay. Buckley at the time was considering whether to acquire an interest in the Western Australian business of Shavings (about to be incorporated). He in fact did so, in circumstances to which I shall refer below. He subsequently brought proceedings against Gibbett and Shavings, and against Forwood, in relation to the contract which he entered into with Gibbett arising out of the same events as those to which this proceeding relates. I am not of the view that either Smith or Buckley was a witness who was naturally to be called by one party or the other; there was no evidence to lead me to a conclusion on that topic: see Payne v Parker [1976] 1 NSWLR 191 at 202 per Glass JA. Consequently, the failure of either party to call those witnesses does not support an inference that their evidence would not have assisted the case of any particular one of the parties: cf. Jones v Dunkel (1959) 101 CLR 298. 33 At the meeting in December 1992, I accept that Hay was under-whelmed at the prospect of selling wood shavings to Gibbett. Hay told Gibbett that Forwood did not have wood shavings available to be sold to Gibbett as another company already purchased all Forwood's wood shavings. They were but a by-product of the mill's operations. It was a strategic benefit, rather than a significant financial benefit, that another company was prepared to buy all the mill's wood shavings. In some timber mills, the wood shavings were simply burnt. This attitude on the part of Hay is confirmed in part by Gibbett's evidence, and also by the need for Gibbett to approach first Lew Parsons ("Parsons") a senior officer in the then Department of Primary Industries who also told him that Forwood was unable to sell him wood shavings, and then apparently an officer in the Premier's Department to secure some supply. 34 In his evidence-in-chief, Gibbett said that he was asked by Hay why the shavings could not be bought in Western Australia. Gibbett's reply (he said) was that the wood shavings available in Western Australia were sprayed with a timber preservative, and that shavings which had a timber preservative in them "were to be avoided". Hay denies that part of the conversation; he says that he was told that the Western Australian wood shavings were very dusty and not suitable for his purpose, but was not told that one problem with them was that they were sprayed with preservative. I accept Hay's version of that part of the conversation. In his cross-examination, Gibbett acknowledged that he did not say to Hay that the wood shavings must be free of preservatives, and agreed that he explained that the wood shavings had to be "clean". In that context, he agreed that "clean" meant free of mud, dust and foreign objects. Representations (b) to (d) alleged in the statement of claim and set out in par 5 above were not attributed to Hay at this meeting by Gibbett in the terms alleged. When cross-examined about those allegations, Gibbett agreed that representations in those terms were not made by Hay, and that the nearest that the conversation came to any such representation was that Hay did say that the wood shavings were "virtually" kiln dried chemical free. That is more consistent with the conversation which Hay acknowledges took place in May 1993, referred to below. Hay's version of the conversation is consistent with Parsons' conversation with Gibbett within a day or so. When Hay told Gibbett that Forwood had no wood chips for sale, he invited Gibbett to take that aspect up with Parsons if he wished. Gibbett did so. 35 Parsons also asked Gibbett why he could not get wood shavings in Western Australia, and was told that there were not enough available and that there was a problem with wood shavings getting on the ground and getting muddy. Parsons was clear that Gibbett did not say that the wood chips in Western Australia were treated with chemicals or preservatives. He was not challenged in cross-examination. I also regard it as unlikely that, if Gibbett were concerned that the wood chips from MGPI be free or virtually free of chemicals, he did not seek a detailed inspection of the mill. On his own evidence he did not do so. He is likely also to have made his concern apparent to Hay in terms that would have prompted Hay to respond by telling him about the dipping tank process. Hay had no reason to promote sales of the wood chips to Gibbett. Indeed, he was reluctant to do so. Those matters, including my impression that Gibbett's recollection about the terms of the conversation, lead me to accept Hay's version of the conversation on that topic. As Gibbett clearly told Parsons that the purpose of the wood chips was for the packaging of live crayfish for export, I accept that Hay was told that, although Hay was also uncertain on that particular topic. It is a natural response to a question about why Gibbett wanted wood chips. 36 I also accept Hay's evidence that, contrary to his usual practice, he did not take Gibbett on the usual tour of the mill on that occasion. They are agreed that after leaving Hay's office, they visited the hopper area where the wood shavings were stored, and Gibbett was then shown the wood shavings and expressed delight at their colour, shape, cleanliness and springiness. That is apparently a consequence of the timber being air dried. However, Gibbett says that they did not go elsewhere in the mill on that occasion, whereas Hay says that he took Gibbett on a tour in the reverse order from his usual tour for visitors. Having regard to my doubts about the reliability of Gibbett's evidence about this occasion generally, and his failure (even on his own account) to direct any conversation to clearly ensuring that the wood chips which he inspected were chemical or preservative free, I doubt that he had the awareness about the need for the wood chips to be preservative free at this time (as he now claims). I accept Hay's version of that tour. It is consistent with that conclusion that, in May 1993 when he clearly became aware (on his own evidence) that the wood chips at MGPI were not preservative free, he did not then immediately bring such arrangements, as then existed, to an end. Consequently, if he were given an inspection of the mill generally, including going past and perhaps having a brief conversation about the dipping tank, it is not something which would have necessarily registered with the thunderbolt which he now claims would have struck him at the time. 37 In his evidence about this occasion, Gibbett said in cross-examination [T60-61] that he knew that timber treated with Pentabrite was "to be avoided". He agreed that, in a practical sense, that meant that he would not buy wood shavings that had been treated with Pentabrite. He was then asked: "Q. My question to you was this: you had a discussion with Mr Hay at the hopper during which he said that the shavings were clean?---On that point he said that there would be no cigarette butts in there. Q. That's right. That was in the context of foreign objects in the shavings?---Man-made foreign objects, yes. Q. That's (sic) was as part of your tour when you went and saw the shavings being vacuum lifted straight off the heads of the moulders?---Correct. Q. But at no time, I suggest to you, did My Hay tell you that the shavings were chemical free?---I've got to agree with you there. Q. Indeed, again I suggest to you that at no time did you say to him that preservatives had to be avoided?---I agree. Not at that meeting. Not at any subsequent ones because I had relied on the fact that I'd ask him to supply me with product that was suitable for the packaging of live crayfish. Q. Mr Gibbett, now you are changing your story with respect. Your statement says that you told you'd learned in Western Australia they were spraying the logs with a timber preservative and that shavings which potentially had timber preservatives in it were to be avoided?---That is correct. Q. Right. You've just told his Honour that that wasn't said at the first tour in December 1992?---No, I'm sorry, I've made a mistake. But it certainly was said, right? It certainly was said, and it was certainly said to Russell Hay that it had to be suitable, it had to be clean because it was used for the packaging of live crayfish. Q. No, I'm not asking you that. You keep on putting in this word 'suitable'. I'm specifically asking you and putting to you that you didn't say the timber had to be preservative free?---I agree with you. Q. So the only word you said was 'clean'. Is that right?---That's correct." 38 My conclusion is that Gibbett has, unintentionally, with the passage of time attributed to himself a greater awareness of, and therefore sensitivity to, preservative treatment of timber at late 1992 than was the case. I think that that is also confirmed by his preparedness to accept wood shavings from Forwood after May 1993 when he inspected and talked about the dipping tank. It is, in my view, also consistent with the terms of the finance application of April 1993 referred to below. 39 The impression I have formed about his memory of that first occasion being somewhat unreliable is also confirmed by another feature. He denied that Hay had told him that no wood shavings were available. However, Hay's version of that part of the conversation is confirmed by Parsons, who also told Gibbett that no shavings were available, and by Gibbett's own conduct in contacting Parsons and then an officer of the Office of the Minister of Primary Industries in an endeavour to secure wood shavings from Forwood. I do not, therefore, accept that Gibbett was told by Hay that he (Hay) had to speak to Parsons before authorising the sale of wood shavings and had been unable to do so, and that Gibbett should therefore contact Parsons direct. In my view, Hay's evidence that Gibbett was told that no wood shavings were available, but that if he wished to take the matter higher up in Forwood's management structure then he could contact Parsons, is the more likely to be correct. 40 As a result of the intervention of an officer of the Minister for Primary Industries, Forwood decided to divert some of its wood shavings to their sale to Gibbett. Parsons told him that Forwood would supply up to twenty tonnes of wood shavings per week at $30 per tonne. Gibbett put in place the appropriate arrangements to make payment for wood shavings received, and for the storage in Mount Gambier of wood shavings received from Forwood, and for their collection from MGPI by a contractor Spehr on his behalf. 41 In January 1993, he again attended at the MGPI premises, in part to address delivery issues. He was accompanied by his mother Lorna Moyle ("Moyle") and by Alan Spehr ("Spehr"). By this time, Moyle was engaged in supervising the sifting of wood shavings (received from other suppliers) to ensure they were "clean", that is contained no dirt or mud or foreign objects. She had been doing so from about October 1992. That work was being carried out at rented premises at Wingfield, a suburb of Adelaide. It was clearly a process which required intensive labour at times from Gibbett and his family and associates in what was really little more than a "backyard operation" to meet the then demand. 42 At this second meeting, the main purpose was to take steps to ensure that Spehr as the local cartage contractor operated efficiently in the collection of wood shavings. At that meeting, the quality of the wood shavings was again discussed with Hay. Moyle said that, consistent with Hay's evidence, the wood shavings had to be free of foreign objects and dirt and fungus. She agreed that no comments were made to the effect that the wood shavings were to be chemical free. It is surprising, if that were the focus of Gibbett as he claims, that that topic also was not addressed. The fact that it was not tends to confirm my conclusion that, at least at this point, Gibbett did not make known to Hay or to Parsons that the wood chips needed to be chemical free. 43 By that time, Gibbett had received some supplies of wood shavings from Forwood. He also decided to carry out the sifting process at Mount Gambier, to avoid double handling (the wood shavings would then be transported directly from Mount Gambier to Western Australia, rather than to Wingfield for sifting) and transport costs would be reduced as the heavier rejected material from the wood shavings supplied, namely the sawdust, would not be carted at all from Mount Gambier. The sifting machine was later modified, and transported to Mount Gambier, and Moyle and others moved to Mount Gambier. Contract labour at Mount Gambier was also engaged. That had all been put in place by about May 1993. By June 1993, the operation in Mount Gambier had expanded. Another sifting machine had been commissioned and acquired. The crayfishing season had completed, or almost completed. 44 On 14 April 1993, at Gibbett's request, Hay on behalf of MGPI wrote confirming that Forwood had agreed to supply to "Brisk Sawdust and Shavings Supplies" dry fine wood shavings up to twenty tonnes per week at $42 per load of 1.4 tonnes. I find that Gibbett's request for a letter in those terms was made to help him in an application to re-finance his businesses, at a time when he was under financial pressure. That letter from MGPI was enclosed in material contained in a finance application on behalf of Brisk Transport Pty Ltd then trading as Brisk Sawdust and Shavings Supplies for finance from a lending institution of $190,000 to cover the purchase of trucks, trailers and equipment at that cost. The finance application indicated that the transport side of Gibbett's business would be expanded, essentially to bring wood shavings from Mount Gambier to Adelaide and Perth. It indicated that Gibbett was operating as a sole trader under the names Brisk Transport Management and Brisk Sawdust and Shavings Supplies, and that he proposed to sell those businesses into Brisk Transport Pty Ltd. 45 By that time, at least, it is clear that Gibbett had some perception that wood shavings tainted with toxins from pesticide treatment were less attractive for packaging live crayfish. The finance application referred to the competitors of the business as being other suppliers of wood chips whose product was: "very dusty and proving unpopular with the Asian importers. The shavings are also tainted in that the timber contains certain toxins. This has come about by the timber being treated with herbicides during its storage. It noted also that "wood wool", a different and more expensive product, was also used by exporters for packaging live crayfish. That application described the wood shavings from MGPI as not being treated with any toxic chemicals. Gibbett acknowledged that he had not given that instruction to his accountant. That document does not indicate the degree of sensitivity to wood shavings treated with preservatives which Gibbett professed as early as December 1992. 46 That application acknowledged that the development of the transport and pine shavings businesses had been at some cost. It claimed profits from the pine shavings business were put back into developing the transport contract to Geraldton. There were outstanding liabilities of some $128,000, in respect of which an offer had been made to pay them off at 10 per cent per month between June and December 1993 and the remaining 30 per cent in January 1994, provided the application for finance was approved. The shelf company Brisk Transport Pty Ltd was first registered on 10 November 1992 and Gibbett became a director at that time. Moyle became a director on 5 April 1993, and I accept then that it became "active". 47 The next event of moment was the involvement of an equity investor into Gibbett's business. Gibbett made contact with Buckley, a Perth based accountant. After negotiations, they executed Heads of Agreement on 9 July 1993. 48 By that agreement, in simplified terms, (1) Gibbett agreed to sell to Shavings the plant necessary to process wood shavings; (2) Gibbett agreed to cause Shavings to grant to Brisk Shavings Supplies Pty Ltd ("Supplies") (a company controlled by Buckley) a licence to sell wood shavings in Western Australia for $150,000, and to provide wood shavings "free of toxins and dust", provided Supplies acquired 11 per cent of the issued capital of Shavings for $50,000 (payable within fourteen days); the $150,000 was payable in equal monthly instalments over five years commencing on 1 December 1993 and bore interest at 6 per cent; (3) Buckley agreed to get Supplies to buy 11 per cent of the issued capital of Shavings for $50,000 (payable within fourteen days); (4) Gibbett agreed to get Shavings to guarantee to Supplies that the gross profit in each year (commencing with the period 1 September 1993 to 31 August 1994) would be $120,000 (calculated at 8,000 bales sold per season at a gross margin of $15 per bale), so that if the actual gross profit in any season was less than $120,000 then the sum of $150,000 payable at $30,000 per year was reduced for each year that it was payable by a percentage of the amount of the shortfall; (5) Buckley would get Supplies to pay Shavings $50,000 on the signing of the document; (6) Gibbett would get Shavings to grant to Supplies options to acquire similar licence agreements from Shavings for South Australia and the Northern Territory, and for the eastern States, each for $200,000. 49 In effect, Gibbett was granting Buckley the exclusive licence to sell wood shavings in Western Australia for $250,000 of which two instalments of $50,000 each became payable on 9 July 1993 (when the Heads of Agreement were signed) and 23 July 1993, and the balance of $150,000 payable in equal monthly instalments over five years provided Supplies' gross profit for each season exceeded $120,000. It contemplated that Shavings would sell the baled wood shavings to Supplies for $45 each and that Supplies would on-sell them at $60 per bale. It also contemplated that the transport business of Gibbett would transport the bales of wood shavings to Western Australia for sale to Supplies. Gibbett's (or Shavings') profit/revenue in respect of sales of wood shavings thereafter would come from the amounts payable by Buckley or Supplies under document, and any profit on-selling the wood shavings in Western Australia to Supplies for $45 per bale. 50 Buckley, or Supplies, duly paid two payments of $50,000 on 9 and 23 July 1993. 51 No other payments were made by Buckley. He later brought proceedings against Gibbett and Shavings, as well as against Forwood. Those proceedings were resolved by private negotiation. I do not know the terms of the resolution of that claim. It is agreed by the parties that the $100,000 received by Shavings has been retained by Shavings. Although that sum appears in the Shavings' financial accounts as a contingent liability (presumably to Buckley or to Supplies), given the resolution of Buckley's claim and the elapse of time, I find that Shavings will continue to retain that sum of $100,000. 52 As part of the process of negotiation with Buckley, and his consideration of the possible investment, Buckley and Gibbett attended MGPI together in May 1993. They there met Hay. According to Gibbett, they were then accompanied by Moyle and his father, and Ross Smith, an employee. There is again some dispute between Gibbett and Hay about what transpired on that occasion. The discussion included the proposed arrangement between Buckley and Gibbett and its term. It also included the quality of the wood shavings, about the assurance of continued supply, and about the volume of wood shavings likely to be required in the future. According to Gibbett, Hay told Buckley that MGPI would supply a further twenty tonnes of wood shavings per month in addition to that previously indicated as available. Hay denies that. He says that he told Buckley that no more shavings were available. I accept Hay's evidence on that topic. He was a party to that conversation, whilst it is possible (in the absence of Buckley's evidence) that Gibbett misheard that part of the conversation, or was not paying close attention to it. Moreover, the arrangements MGPI had with another entity for the supply of wood chips had continued, and I accept that MGPI wished them to continue. No event has been identified which might explain why the wood shavings available to Gibbett might suddenly have doubled. 53 After the discussion in Hay's office, the three men had a tour of the mill. On this occasion, they followed the normal route through the green mill and then to the dry mill. That is, they followed the milling process from its initial stages to its completion. Hay says that Gibbett, in effect, "led" that tour but I suspect that that description is a little overstated. It does not matter. They came to the dipping tank in the green mill. A pack of freshly cut timber was in the process of being dipped into it. That observation prompted further discussion. 54 Hay described, and I accept, that Buckley and Gibbett at that point had a short private discussion. Buckley then asked Hay about the contents of the dipping tank. Hay told him it was PCP or Penta. I do not accept Gibbett's evidence that Hay said he did not know the name of the chemical in the dipping tank. It is clear that Hay did know its name, and to claim that lack of knowledge on his part would imply an element of evasiveness which I do not accept that Hay possessed. I do not accept that at any time he consciously avoided providing accurate information to either Gibbett or Buckley. As I have found, he had no reason to do so. In response to further questioning, Hay said that the PCP or Penta would be concentrated only on the outer edge of the dipped timber. He told Gibbett and Buckley that one client of MGPI, a toy manufacturer, had tested timber from MGPI to ensure it was safe for use in children's toys. It was safe. Hay said that that was hardly surprising, as any residual PCP would be left in the wood shavings and not in the sawn timber itself. I accept Gibbett's evidence that there was further discussion about the extent of PCP in the wood shavings, and that Hay said words to the effect that: "the PCP did not penetrate the timber and only affected the outside surface of the dipped timber, and that the amount of PCP in the outer edge of the wood shavings would be 'barely detectable' and [was] 'virtually nothing'." 55 In a written statement, amended by Hay in his own handwriting, the following appears: "I do recall that I might have mentioned to Ken [Gibbett] at one point that the timber is dipped and the outside of the pack is what comes in contact with Penta and would retain the Penta and that it is not a penetrating process so it would have been certainly trapped in the outer layer of the timber and only on the tip or the leading edge of the shaving 'and would have been very low so as to be barely detectable' [added in handwriting] although I dispute that I would have said to him so as to make the shavings virtually chemical free." 56 In his cross-examination, Hay protested that those words (which were inserted by him on a draft statement prepared on his instructions) were not intended to imply that the wood shavings were suitable for use in packaging live crayfish for export, or that the PCP in the outer edge of the wood shavings was not of any consequence, or that the wood shavings were chemical free or almost chemical free. He was simply trying to be accurate. 57 I find that he did not say that the wood shavings were chemical free. However, I accept Gibbett's evidence that the storeroom adjacent to the dipping tank did not clearly contain forty-four gallon drums of PCP labelled "Pentabrite" because, by this stage, that product may well have been all used and the concocted product described above may have been in use. I am also of the view that, as Gibbett says, there was no Manufacturer's Safety Data Sheet on the wall of the storeroom or adjacent to the dipping tank which readily identified to him the potentially toxic nature of PCP. As I have indicated, I accept that there were three sheets of paper including Hay's "recipe" in plastic sheets affixed to the wall in those areas, but I am unable to make any findings as to their contents. They were there, on Hay's evidence, as information for employees handing Pentabrite and had been there since the early 1980s. I accept they did not come to Gibbett's attention at the time. Hay did not say that he had pointed them out. 58 I reject the evidence of Gibbett that Buckley, on that occasion, said that the wood shavings had to be toxin free or chemical free. The inspection clearly disclosed to Gibbett and Buckley that the timber was treated in some form of chemical, and was not dried only by kiln drying or open air drying. Nevertheless, the discussions between Buckley and Gibbett proceeded. They resulted in the agreement referred to. The supply of wood shavings to Gibbett also continued. He also proceeded with his plans to establish a series of corporate vehicles for his business, including Shavings, Brisk Holdings Pty Ltd ("Holdings") to occupy the property where the wood shavings were to be sifted and the plant and equipment, and Brisk Transport Pty Ltd to operate the transport side of the business. 59 There was a lull in Gibbett's (or Shavings') purchase of wood shavings from MGPI in July and August 1993 whilst Gibbett spent time in Perth on the transport side of his business, and while he arranged for the establishment of new premises in Mount Gambier and the new sifting machine. He was also endeavouring to sell sawdust bales (in turn, a by-product of sifting the wood shavings supplied by MGPI) then held in storage. 60 By August 1993, Gibbett (presumably through Holdings, although there is no direct evidence on the topic) had entered into a long term base for new premises at Mount Gambier, and had commissioned a custom designed sifting machine, which was manufactured in Mount Gambier at a cost of about $17,500. 61 Just before he (or Shavings) was about to resume orders of wood shavings from MGPI, Gibbett was contacted by Hans Kobes ("Kobes"). Kobes was the manager of MGPI. Kobes contacted him to complain that the June 1993 account of MGPI to Gibbett had not been paid, and a cheque in payment had not been met on presentation. Gibbett assured Kobes of his intentions to continue to deal with MGPI for the long term and of his capability to pay for the product. 62 At that time, and indeed by about 30 June 1993 Gibbett had received deposits or prepayments on orders for wood shavings to be supplied to live crayfish exporters in Western Australia for the 1993/1994 season. Those prepayments totalled some $78,000 of which $39,000 was received by Gibbett and brought to account in Shavings and the other half was retained by Supplies on Buckley's account. By that time, Gibbett had some 400–600 bales of wood shavings in storage in Western Australia, and about 300–400 bales of wood shavings in storage in Mount Gambier ready for the next season to commence in Western Australia on 15 November 1993. He also planned to endeavour to develop a similar market for wood shavings in South Australia, and later in Victoria. 63 By 9 September 1993, orders to MGPI resumed and were met. By 18 October 1993, Shavings had received (according to Gibbett) 105.5 loads (about 153 tonnes) from MGPI and had produced about 2,575 bales of wood shavings which had been transported to Western Australia to meet the demand from the commencement of the season (at about 17.5 bales per load, the production should have been of about 1,850 bales). He had also been endeavouring to secure orders in South Australia for the supply of wood shavings to exporters of live crayfish, and had secured one order of thirty bales. 64 In the meantime, MGPI was confronting other issues concerning its use of PCP. On 4 August 1993, it was notified by the Engineering and Water Supply Department on the following terms: "As you have been informed by telephone, testing of groundwater at the above site has revealed that dioxins in significant quantity have been detected in the groundwater. This is of major concern. You would be aware, dioxins are present in the treatment product you use at the site, namely, pentachlorophenol. It is reasonable to assume that the existence of dioxin is due to the continued use of pentachlorophenol at the site. Given the serious nature of this pollution it is imperative that you cease any operations at the site which use pentachlorophenol where there exists a possibility that any of the pentachlorophenol may enter the groundwater. I understand that a number of other products are available that perform the same or similar function to pentachlorophenol and substitution may be the most expedient way to achieve this requirement. This issue needs to be addressed immediately and your absolute cooperation is assumed. Please report progress on actions you undertake to address the problem over the next week to me by close of business on Thursday 12 August, 1993. There may be similar problems associated with discharge from the kilns to the sewer. We are undertaking tests to determine if this is so and will keep you informed." 65 There had been detected some groundwater at the site contaminated by traces of PCP. Importantly, in my view, that letter also referred to a possible source of contamination as being from the leaching of PCP from treated timber stored in the open, rather than from the run-off of PCP solution into the ground when the treated timber was not fully dried from its immersion in PCP solution. The letter of 12 February 1993 from Engineering and Water Supply Department to MGP1 referred to the risk of contamination on the following terms: "Another possible source of contamination could be from the leaching of chlorinated phenols from treated timber which is stored in the open. There is evidence from overseas studies that chlorinated phenols can be leached from treated timber by rainfall, although other reports indicate that it is fairly stable in treated wood. Soil testing in the storage area will be required as part of the overall site investigation to determine if there is a problem with leaching from stored timber. This is discussed further below." No issue was then identified about the safety of the treated timber itself. 66 I accept Kobes' evidence that the information from the Engineering and Water Supply Department provided on 4 August 1993 came as a surprise. That Department routinely tested for possible contamination of groundwater supplies, and previously there had been no similar problem. It had written to MGPI on 12 February 1993 giving directions to ensure groundwater at the MGPI site was not contaminated, including for the concrete drip pad described above. MGPI had complied with those directions. On receipt of the letter of 4 August 1993, Forward immediately caused MGPI to cease dipping timber into PCP solution in the dipping tank. It has not used PCP since. Nevertheless it had on hand substantial stocks of timber treated in the green mill by being dipped in PCP. As the problem identified to them concerned the run-off of PCP from timber, rather than the PCP impregnated timber itself, they proposed to process that timber in the normal operations of the mill. In fact, they did progressively use all that timber stock. It took about two years before that stock of PCP treated timber was exhausted. To August 1993, they believed that there was no problem with leaching of PCP from treated timber. I accept that they believed that the PCP solution, after dipping and drainage, was either recovered or was "set" into the outer edge of the dipped timber. They first believed the issue of ground contamination was caused by timber (after being dipped and after the process of suspension and then resting on the concrete drip pad to catch run-off) simply dripping further PCP solution. Kobes explained the issues as "environment issues" rather than "product issues". 67 However, tests performed in the following period confirmed that PCP, which was previously believed to be "set" in timber was able to leach out due to rainfall on timber stacked in the open. 68 Despite that letter of 4 August 1993, I accept that neither Kobes nor Hay then addressed its significance in relation to the sale of wood shavings to Shavings until later, in October 1993. In the meantime, supply of PCP contaminated wood shavings to Shavings continued routinely in September and early October 1993, and I assume at the rate of about twenty tonnes per week as production continued of the dried PCP treated timber in the dry mill. 69 In the meantime, Forwood was endeavouring to "manage" the problem of the risk of PCP contaminated groundwater with its employees and with the public. A Task Force was established to address the issues and concerns. 70 The Task Force comprised representatives of the Engineering and Water Supply Department, the South Australian Health Commission, the Environmental Protection Authority, and Kobes on behalf of MGPI. It identified the issues; all concerned contamination of the ground surface and of the water supply, including possible contamination of the Blue Lake ecosystem supplying town water to Mount Gambier. It did not refer to any possible problems with the treated timber itself. 71 MGPI considered the use of an alternative blue stain fungicide. It is described in the Task Force minutes of 20 August 1993 as "of very low toxicity compared to PCP". Hay was not then asked whether he had previously considered using that product instead of Pentabrite. Nor was any evidence given to show whether, if that alternative product were used, it would have been effective to control blue stain fungus and importantly whether wood shavings from timber treated with that alternative fungicide would have been suitable for use in the packaging of live crayfish for export. Kobes said that, in fact, this product was not used because it was a "short term fix" which required a significant change of operations of the mill. MGPI was already in the process of planning a different method for kiln drying wood requiring no use of anti blue stain fungicide, and in the meantime it simply air dried or kiln dried its timber. There is no evidence about why the option of air drying or kiln drying timber was not taken earlier, either with the existing facilities or with the new proposed kilns, or about the economic consequences to MGPI of doing so. 72 The first meeting of the Task Force also noted that treated timber leaching trials were about to be undertaken; the necessary equipment to do so had already been procured. 73 The second meeting of the Task Force was on 15 September 1993. The leaching trials had not been undertaken. They were about to start. There is nothing in the minutes to indicate any focus of the impact of PCP upon the treated timber itself, or on uses to which that treated timber might be put. 74 Nevertheless, sometime after that date, that issue arose in relation to the use of wood shavings. I accept Kobes' evidence that he does not now recall how it arose. Within a day or so of that issue arising, Kobes telephoned Gibbett on 18 October 1993. He told him that there was a problem about continuing to supply the wood shavings. A meeting was arranged for 20 October 1993. Kobes also spoke to the South Australian Health Commission at about the same time. It was confirmed to him that PCP was present in the wood shavings, and that the wood shavings should not come into contact with food. A "zero content" of PCP in the wood shavings had to exist. That advice was unequivocal. 75 At the meeting on 20 October 1993 Kobes told Gibbett of that information. Shavings then had about 600 bales of wood shavings in stock at Mount Gambier which Kobes on behalf of Forwood agreed to take back and sell to its other purchaser of wood shavings. Gibbett said that he also had about 600 bales of wood shavings in storage in Western Australia. Gibbett agreed not to sell or deliver any wood shavings supplied by MGPI pending further investigations. Gibbett then reported to Buckley in Perth of the terms of that discussion. I accept Kobes' evidence that, on the following day, Gibbett telephoned him to tell him that Buckley had had certain wood shavings in Perth analysed and that they contained small levels of PCP. 76 There was much evidence then regarding communications between the parties about acceptable levels of PCP in the wood shavings, and about Forwood supplying wood shavings from another of its timber mills which were not treated with PCP. There was some dispute between the parties as to the precise content of those communications. I do not consider that the differences are necessary to resolve. 77 On 22 October 1993 the South Australian Health Commission formally advised Forwood that wood shavings containing PCP should not be used as packaging for food contact. Forwood through Kobes accepted that advice. On 22 October 1993, Forwood wrote to Gibbett to that effect. That letter added: "In the light of this, arrangements have been made to provide freshly processed shavings from the Mount Gambier Sawmill." 78 Forwood also operated timber mills called the Mount Gambier Sawmill, and the Nangwarry Mill. Apparently neither dipped timber in PCP to prevent blue mould. Wood shavings from the Nangwarry Mill had already been provided to Shavings, but Gibbett regarded them as unsuitable because of excessive sawdust content. That was one of the problems with wood shavings generally, but apparently the wood shavings from the MGPI mill had less sawdust content because of the way they were treated and then dried, and also because (for some reason not explained in detail in the evidence) they were larger and springier. Kobes told Gibbett then that wood shavings from the Mount Gambier Sawmill were the last available option. 79 Kobes kept contemporaneous notes of most of his conversations with Gibbett at about this time. I accept his evidence that he did so accurately, and that they assist him in giving reliable evidence about those conversations. He was confident that Gibbett told him that he (Gibbett) had previously seen the process of dipping timber into a chemical solution. The terms of those acknowledgments are consistent with the events which transpired at the May 1993 inspection. 80 In the next several days, Gibbett arranged for the resale of all bales of wood shavings delivered to customers in Western Australia, and for their safe disposition. He also arranged for the safe disposition of wood shavings held in bales in Perth and Adelaide and the cleaning of the processing area at Mount Gambier. Bales which had been used to hold contaminated wood chips were also disposed of. 81 On 20 October 1993, Shavings through its solicitors demanded from Forwood a suitable alternative supply of wood shavings. Those supplied from the Nangwarry Mill were said to be "sub-standard" because they were smaller, and consequently less attractive to consumers, and contained too much sawdust. 82 Forwood, by letter of 28 October 1993 to Shavings, offered to supply wood shavings from either its Nangwarry Mill or its Mount Gambier sawmill, free from PCP. It specifically refused to guarantee that the wood shavings would be free of any contamination, as it could not include the possibility of some oil from the moulding machines getting on to some shavings, and it would not guarantee that in all cases shavings would be free from chemical contamination, even though it agreed to take reasonable precautions to ensure that on the occasions when some chemical treatment was applied shavings from that timber would not be supplied. It sought formal acceptance of those conditions. Gibbett declined to accept them. In the meantime, however, those alternative sources of supply of wood shavings were being provided. There was sufficient raw product to meet demand. I accept Gibbett's evidence that, for reasons related to the nature of the wood shavings received from those two mills, he found it very difficult to process/sift the product to generate efficiently and in a timely manner wood shavings of the quality he sought and which (in a contaminated form) were available from MGPI. Essentially, there was too much sawdust with the wood shavings. He had the new sifting machine, which had been acquired in August 1993, altered in an endeavour to operate effectively with the differently composed new wood shavings. 83 In early December 1993, Gibbett refused to take any more wood shavings from Forwood from its Mount Gambier Mill or its Nangwarry Mill. It was not contended that he was unreasonable in that step. At the time Kobes had told him that MGPI was about to embark upon its new wood drying method, which involved no chemical dipping, and that he expected that wood shavings from timber not dipped in any chemical might be available from about April 1994. Shavings had, by then, more or less abandoned plans to service its clients properly for the 1993/94 crayfishing season. No evidence was led, or cross-examination directed to, whether Shavings had sought supplies of wood shavings from other sources such as those it used in 1992, although Gibbett said he was reluctant to go back to the previous principal supplier. I accept that Kobes did not at that time promise the availability of clean wood shavings from MGPI at April 1994, and that he told Gibbett that those clean shavings would only become available when the stacked treated timber had been used up in the normal course. As it happened, that took about two years. In the meantime, as timber was processed under the new drying method, timber which had been treated with PCP was also being processed. There was a risk that clean wood shavings might be mixed with wood shavings from timber dipped in PCP solution processed at about the same time. Understandably, Forwood was not prepared to guarantee that it would supply uncontaminated wood shavings from the MGPI Mill in those circumstances. I also accept that it was not cost effective for MGPI to isolate wood shavings from timber passing through the moulders in the dry mill which had been dipped in PCP solution from wood shavings from timber passing through the moulders in the dry mill which had not been dipped in PCP solution. 84 In December 1994, Gibbett acquired some wood shavings from MGPI's stockpile. He had them examined. They were free of PCP contamination. He believed, for some reason, that Forwood was holding out on him. I think the explanation is a much more simple one. It is simply that the sample of wood shavings he took was from undipped timber. But that does not mean that MGPI was confident that all shavings in the storage silo were from timber which had not been dipped in PCP solution. 85 There was some evidence about Gibbett's investigation of the characteristics of PCP on or in wood shavings. He had various samples tested by Francis Leslie Peddie ("Peddie"), who consults to industry on food processing and product contamination problems. Peddie was of the view that there was an acceptable level of PCP contamination of the wood shavings when used for packaging live crayfish for export. His tests, however, disclosed some samples of wood shavings considerably exceeded that level. He proposed a testing regime which would indicate if the level of PCP were less than 0.1 mg/kg. In that event, he regarded the PCP treated wood shavings as suitable for use in packaging live crayfish for export. Most samples were below that level. In my judgment, the views of Peddie on the acceptable level of PCP in wood shavings used for packaging live crayfish for export are sterile to resolution of the issues in this proceeding. Forwood had its own advice, which was equally unequivocal that no PCP could be present in wood shavings used for packaging live crayfish for export. It acted on that advice. The practical position was that, knowing the purpose for which the wood shavings were to be used, it refused to provide them to Shavings. Peddie agreed that the stockpiled wood shavings should not be used for packaging live crayfish for export, as some tests disclosed a much higher level of PCP contamination than he considered acceptable. The difference in expert opinion was what might be acceptable for the future. 86 It is clear that no level of PCP at all is tolerated in crayfish. The Australia New Zealand Food Authority, Food Standards Code ("the Code") is given statutory force by the Australia New Zealand Food Authority Act 1991 (Cth) and its operative in South Australia by reason of the Food Act 1985 (SA) and in Western Australia by reason of Health (Adoption of Food Standards Code) Regulations 1992 (WA). Standard A14 Maximum Residue Limits in the Code, clause 3(2), provides that the maximum residue limit for a chemical is no detectible residue unless a detectable residue limit is listed in the Code. Schedule 1 lists only five food items in which pentachlorophenol or its sodium salt has any permitted detectible residue. Those items do not include crayfish. Thus there is no tolerated level of PCP in crayfish. The Code does not apply directly to wood shavings, as they are not "food" as defined, but the risk of PCP leaching into the crayfish from the wood shavings packaging has the practical consequence, accepted by Forwood, that the wood shavings supplied by it for that purpose should also have no PCP contamination at all. I find that its attitude was entirely reasonable. 87 One dispute between Kobes and Gibbett was whether Gibbett, in a telephone conversation on 6 November 1993, said that one reason he had come to MGPI for wood shavings was because he was aware, from testing wood shavings in Western Australia two years previously, that certain Western Australian timber mills used PCP solution to control blue stain or blue mould. I think Kobes must be mistaken in his note of that conversation. I accept Gibbett himself had done no testing two years previously, and indeed was not then active in selling wood shavings to importers of live crayfish. I have also found earlier in these reasons that he was not as aware of the implications of dipping timber in some form of chemical solution in relation to the export of live crayfish as he claimed, either at November or December 1992 or even in May 1993. Otherwise, his reaction to the inspection in May 1993 (as I have found, an inspection including inspecting the dipping tank) would have been quite different. It is highly unlikely that he would, if his knowledge were as he claimed in evidence, have simply let the matter pass. Even if he did not know of the name Pentabrite or PCP, and was not told it, it is hard to accept that he passively let matters go on without finding out more about the dipping solution. I have found that he was told by Hay of the name Penta or Pentabrite. I think he simply did not recognise the implications of that process for his product. It is consistent with that view that the telephone conversation also included the note that: "Ken agrees that dipping process was viewed and briefly discussed but not considered to be a problem." 88 Shavings had stopped operating on 7 December 1993. Gibbett proposed to resume operations at the end of April 1994 when he anticipated that clean shavings from MGPI would be available. He had some foundation for that anticipation from what Kobes had told him in December 1993. As noted above, MGPI was not able to supply uncontaminated wood shavings from the mill at that time or for a considerable period thereafter. By that time, he had effectively replaced all the product pre-ordered and baled by 18 October 1993, but the effort of doing so had demonstrated to him that the production prospects with the nature of the wood shavings available did not justify continuing. 89 In December 1993, Gibbett also closed down the transport business (presumably then operating under Brisk Transport Pty Ltd) as the contract to transport to breweries between Perth and Geraldton was lost. 90 The excessive sawdust component of the wood shavings supplied from Mount Gambier Mill and Nangwarry Mill brought its own problems. Shavings could not get rid of the stockpile. Shavings was prosecuted by the local council and was fined $1,500; the fine has not been paid. Shavings spent about $9,300 then disposing of that excessive sawdust. 91 In late 1994, communications took place between solicitors for the parties on the terms on which Forwood would resume the supply of wood shavings to Shavings. Forwood required: 1. a letter from Australian Quarantine Inspection Service that, in its opinion, uncontaminated wood shavings are suitable packaging for the export of live crayfish; 2. an indemnity against third party liability; and 3. current product liability insurance for $5 million. 92 Supplies of wood shavings from Nangwarry Mill were made available, but Gibbett's solicitors complained that it was of "inconsistent quality". As MGPI still had treated timber to process, it was not in a position to offer uncontaminated wood shavings from that mill. The supply of wood shavings from Nangwarry Mill was not continued, as Shavings found that it contained too much sawdust. The difficulties in procuring reliable and satisfactory new wood shavings meant that orders for the sale of wood shavings were also difficult to procure from exporters of live crayfish. consideration of claims 93 In the light of those findings, I do not consider that Gibbett has made out any entitlement to relief in respect of the sales of wood shavings by Forwood to him in the period December 1992 to May 1993. 94 There was no express condition of the agreement then entered into that wood shavings supplied by Forwood would be fit for the purpose of packaging live crayfish for export. Section 14 I of the Sale of Goods Act 1895 (SA) implies the condition that the goods supplied under a contract for sale and purchase are reasonably fit for the purpose for which they are supplied only where the buyer "makes known to the seller the particular purpose for which the goods are required, so as to show the buyer relies on the seller's skill or judgment." 95 In my judgment, the circumstances in which the agreement in December 1992 was made and including the discussion between Gibbett and Hay at that time lead to the conclusion that Gibbett was not relying on Forwood's (or Hay's) skill and judgment in deciding to acquire the wood shavings at that time. He had a greater knowledge of the requirements of live crayfish exporters for packaging material, and I have found that he made his own judgment about the physical characteristics of the wood shavings from MGPI. The only real assurance he sought, and the only real requirement of those exporters which he conveyed, was that the wood shavings be "clean", that is free of dirt and like material. There is no feature of his dealings with Hay, or with other officers of Forwood, at the time which could reasonably be said as conveying to Forwood or Hay that he was relying upon their skill and judgment to provide wood shavings which were suitable for packaging live crayfish for export by reference to their being free of chemicals or in any other respect, except that they be "clean" in the sense described: see Dependable Motors Pty Ltd v Ashford Shire Council (1959) 101 CLR 265 per McTiernan J at 281. I also conclude that Gibbett did not in fact rely upon the skill and judgment of Forwood or of Hay at the time to provide wood shavings which were chemical free or which more generally were suitable for packaging live crayfish for export. The real situation is that, until Gibbett's approach, Forwood and Hay had not addressed at all the suitability of wood shavings from MGPI for that purpose and were not then called upon by anything Gibbett said to address that question. 96 For similar reasons, I do not consider that Forwood or Hay represented to Gibbett then that the wood shavings from MGPI were fit for the purpose of use as packaging for the export of live crayfish. I have already concluded, largely on the basis of Gibbett's own evidence, that neither Forwood nor Hay at that time made representations that the wood shavings from MGPI were "kiln dried chemical free" or any other representations about the chemical content of the wood shavings as alleged (and as set out in par 5 of these reasons). 97 The claim based upon negligence in respect of the agreement of December 1992 and the supply of wood shavings to May 1993 must also fail. The claim is premised upon the making of the representations and warranties pleaded, so as to give rise to a duty of care "not to make any negligent misstatements and to ensure no harmful or dangerous chemicals were likely to be present in the shavings supplied by it". 98 As I have concluded that, at that time, Forwood and Hay were not aware that wood shavings for packaging live crayfish for export had to be free of chemical impregnation, and were not aware that Gibbett was relying upon their skill and judgment in that regard, the claim that they were negligent upon the basis alleged must also fail. 99 The next point of focus was the period May to June 1993, that is on the occasion of the inspection of the mill in the presence of Buckley in May 1993 and the subsequent supply of wood shavings pursuant to the ongoing informal agreement firstly to Gibbett and then from 1 July 1993 to Shavings. Forwood has accepted that its conduct in May 1993 "continued" so as to be relevant to its relationship with Shavings from 1 July 1993. 100 On the occasion of the mill inspection in May 1993 with Buckley present, I have found that the dipping process was observed. It caused Gibbett and Buckley to ask Hay about the process. I have further found that Hay then described the dipping tank as containing PCP or Penta, which would be concentrated only on the outer edge of the dipped timber, namely in part of the wood shavings. I have also found that, in response to further questioning, Hay said that the amount of PCP or Penta in the wood shavings would be "barely detectable" and was "virtually nothing" but he did not say that the wood shavings were "chemical free". Moreover, I have rejected Gibbett's claim that Buckley, on that occasion, said that the wood shavings had to be toxin free or chemical free. 101 There is nothing to suggest that Forwood, or Hay, had learnt of, or had any reason to know of, the requirements of the exporters of live crayfish about the quality of packaging material independently of the communications with Gibbett and later Buckley. As I have not accepted Gibbett's evidence that Hay was told by him, and then in May 1993 by Buckley, that the wood shavings had to be chemical free, I do not accept that either Gibbett or Forwood have made out their claim for damages for breach of contract in respect of the sale and supply of wood shavings from May 1993. There were no further relevant communications in the period to late October 1993 when the supply of wood shavings ceased. The communications which I have found to have taken place did not constitute an express warranty that the wood shavings were suitable for the purpose of packaging live crayfish for export. 102 The pleaded purpose, which was (it is claimed) made known to Forwood and Hay was that: "… the shavings were to be onsold for use as packaging for the export of live crayfish … The shavings had to be, and be able to be represented as, processed by means of kiln drying without the use or addition of any chemicals which were or might be regarded as toxic or harmful either to the crayfish themselves or to their ultimate human consumers." 103 Although it is clear that Forwood, through Hay and Parsons, knew that the wood shavings were to be supplied for packaging live crayfish for export, I have rejected the evidence that Hay was told that the wood shavings had to be kiln dried and chemical free. Nor, on my findings, was Hay expressly told that the wood shavings had to be free of any chemicals which might be regarded as toxic or harmful to crayfish packaged in them or to consumers. However, the consequence of the discussion in May 1993 adjacent to the dipping tank was that both Gibbett and Buckley exhibited some concern about the fact that timber from which wood shavings would ultimately be taken was being dipped in some form of chemical solution. They asked Hay about that. He told them what it was, and the extent to which it penetrated the timber. He did not then leave it to them to decide what they wished to do, but explained further that the PCP would be barely detectable. He was then aware of the potentially harmful properties of PCP, due to the information about it which he had received both from the supplier and in the course of his enquiries about procuring replacement supplied once Nufarm ceased to manufacture liquid PCP. The general nature of that awareness is described in par 21 above. 104 In my judgment, at that meeting, Gibbett was relying upon the skill and judgment of Forwood through Hay as to the properties of the PCP solution, in particular as to the suitability of wood shavings from timber dipped in PCP solution for packaging live crayfish for export. Had he, or Buckley, then been told that the consequence of the wood shavings coming from timber dipped in the PCP solution was that they should not be used for packaging live crayfish for export, I find that the transaction would not then have been proceeded. Nor would Buckley have entered into the Heads of Agreement dated 9 July 1993. Although they each proceeded, knowing that the timber was dipped in PCP solution, I infer that they relied on what Hay conveyed to them about its properties in so doing: cp. Grant v Australian Knitting Mills [1936] AC 85. There was more than mere disclosure of the purpose for which the wood shavings were required. That reliance was a substantial and effective cause of the transaction proceeding: Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441 ("Ashington Piggeries"). It was not necessarily the only cause of the transaction proceeding, but it need not have been: Cammell Laird & Co Ltd v Manganese Bronze & Brass Co Ltd [1934] AC 402 at 414, 419, 427. Hay was possessed of knowledge relevant to that matter, and conveyed a picture nevertheless that the wood shavings (to put it in a negative way) were not unsuitable for that purpose. Although I entirely accept that Hay was being both conscientious and honest in his answers, in my view the circumstances indicate that he was in error in those views. It is true that it was only when the capacity of PCP solution to leach from treated timber was identified that Forwood and Hay recognised that the wood shavings should not have been used for the purpose of packaging live crayfish for export. But the warranty implied by s 14 I of the Sale of Goods Act 1895 (SA) is not dependent upon the seller exercising proper skill and judgment, or exercising due care: see Ashington Piggeries (at 488). 105 Consequently, in my judgment, Gibbett and Shavings have established that they are entitled to damages for breach of contract by reason of Forwood selling to Gibbett between May 1993 and June 1993 and then selling to Shavings between July 1993 and October 1993 wood shavings which were not suitable for the purpose of packaging live crayfish for export when Forwood impliedly warranted the suitability of the wood shavings supplied for that purpose. By reason of the decision in Astley v Austrust Ltd (1999) 197 CLR 1 there is no question of their entitlement to damages being reduced for contributory negligence. 106 The misrepresentation claim will succeed only if, in the circumstances as I have found them to be, the observation of Hay that any PCP in the wood shavings was "barely detectable" conveys a fact which is misleading or deceptive: Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177. Although that observation of Hay was literally true, and was believed by him, in the circumstances it was capable of conveying the further meaning that wood shavings treated with PCP at the mill were not so contaminated as to be unsuitable for use in packaging live crayfish for export: see eg. per Brennan J in World Series Cricket Pty Ltd v Parish (1977) 16 ALR 181 at 201. I have found that it did convey that further meaning to Gibbett. The true picture was distorted by that response or observation of stay without conveying the further information which he had about the characteristics of PCP as summarised in par 21 of these reasons. As I have said, I am confident that Hay did not intend to present any incomplete picture by his observation, but in the particular circumstances I consider that the failure to add that further information did lead to the observation being misleading; see eg. Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31. For reasons given earlier, I do not consider that the other alleged representations (being those identified as (b)-(d) in par 5) are established. I am also satisfied that Gibbett and Shavings relied upon the representation which I have found to have been misleading and deceptive in continuing to seek and accept wood shavings from Forwood up to October 1993 for the supply of treated wood shavings to exporters of live crayfish and in connection with the business of doing so. 107 In my judgment, there was also clearly a sufficiently proximate relationship between Forwood and Gibbett as to give rise to a duty of care owed by Forwood to Gibbett in relation to the information provided by Forwood to Gibbett in May 1993: see eg. Hill v Van Erp (1997) 188 CLR 159. I have also concluded, on balance, that there was a failure to take reasonable care by Hay in the discussion which took place in May 1993 adjacent to the dipping tank. It may be accepted that even a literally accurate statement (as his was, that the presence of PCP in wood chips would be barely detectable) may nevertheless give rise to liability for a negligent misstatement. See eg. McInerney v Lloyds Bank [1974] 1 Ll Rep 246 at 254. It is easy to apply the wisdom of hindsight to determine such an issue, but the question whether there was then a departure from the standard of care of a person in Hay's position must be judged at the time when, and in the particular circumstances in which, he found himself. In my view, because the issue as to the nature of the dipping process was raised, it was reasonable to expect him to respond in the light of his knowledge as to the purpose of the question. He was aware of the purpose for which the wood shavings were required. His response, given that knowledge and the knowledge he had about the characteristics of PCP by then, was in my judgment inadequate. It was an answer which conveyed that the presence of PCP in the wood shavings was not, or was unlikely to be, of any consequence. It was not apparently qualified, or put into the context that PCP was a dangerous compound to use and was subject to quite rigorous manufacturer's guidelines, or that Forwood had progressively introduced careful regimes to protect its employees and the environment from exposure to it. 108 In the light of those conclusions it is necessary to refer only briefly to the further "fall back" contention of Gibbett and Shavings that by early August 1993, upon receipt of the letter from the Engineering and Water Supply Department of 4 August 1993 (referred to in pars 65 and 66 above), Forwood negligently failed to inform Gibbett and Shavings of the potential problem of PCP leaching from the wood shavings supplied by Forwood, and negligently continued to supply wood shavings, until about 20 October 1993. 109 In my judgment, as the supplier of wood shavings to Shavings at the time, Forwood was negligent in failing soon after 4 August 1993 to recognise, and inform Gibbett and Shavings, of the risk that the wood shavings might be unsuitable for use in packaging live crayfish for export. The information given in May 1993 should have been updated: cp. Shaddock & Associates v Parramatta City Council (No 1) (1981) 150 CLR 225. damages 110 The assessment of damages is not straightforward. There is no issue as to the proper principle to apply in the assessment of damages for breach of warranty: Holmes v Jones (1907) 4 CLR 1692 at 1709; Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625 at 637; The Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64. It is clouded principally by the disputed claims of Gibbett and Shavings as to level of profitability of Gibbett's wood shavings business in the 1992/93 year and by the assessment of its prospects in the following years. 111 It is also important to note that the contract by which Forwood was to supply wood shavings was not for a specified term of years. It is clear that Gibbett and Shavings assumed that wood shavings from the mill would continue to be readily available in sufficient quantity to satisfy his growth expectations more or less indefinitely. But that was not the contract. It was to provide about twenty tonnes of wood shavings per week, more or less regularly, for an unspecified period. Given what Forwood knew of Shavings' plans, including its relocation to Mount Gambier, I conclude that the contract was terminable on reasonable notice. In the circumstances, that notice would have been no longer than any one crayfishing season, that is relevantly by about June 1994. 112 Moreover, I find that Forwood was not obliged to provide a specific quantity of wood shavings per week. The arrangement was less specific than that. It was dependent upon wood shavings being available. If, for some reason, suitable wood shavings were simply not available for a period, I do not consider that Forwood would have been in breach of its contract with Gibbett, and later Shavings, in then not supplying wood shavings to them. It was clearly understood by all parties that the wood shavings were only a by-product of timber processing at the mill. Forwood would not have been expected to process timber simply to generate wood shavings for Gibbett or Shavings. It was not obliged by the contract to maintain its particular production processes, or timetables. I think that those considerations reflect upon the claimed loss of future profits by Shavings. In my judgment, if Forwood had identified the problem with the wood shavings in June 1994 it would not have been in breach of its contract to then decline to provide wood shavings to Shavings for the next crayfishing season. 113 In addition to that general conclusion, it is necessary to determine what the prospects of Gibbett's and Shavings' businesses were to determine the losses sustained by them as a result of the breach of warranty. I add that the parties did not contend that, if the claim for damages for breach of warranty were to succeed, the measure of damages for misrepresentation or for negligence would be assessed in a manner which would produce a greater award of damages. That involves looking at the claimed performance of Gibbett's wood shavings and transport businesses in the 1992/93 financial year as well as the projections for the succeeding period. 114 The financial figures for Gibbett for the financial year ended 30 June 1993, prepared by his then accountant, show that he traded at a loss of $68,077 on total sales (the transport and wood shavings businesses) of $479,055. Total sales included $55,000 for the transport of wood shavings, treated as revenue in the transport side of the business and as an expense in the wood shavings side of the business. The loss was contributed to by a loss of $124,530 in the transport business, and a profit of $56,453 (on sales of $211,718) in the wood shavings business. There was an excess of liabilities over assets of some $105,000. In the previous year, the transport business had made a loss of $3,158. 115 When Gibbett engaged Ahrendt in late 1994 to do his accounting work, after his move from Western Australia to South Australia, Ahrendt revisited the 1992/93 figures. Gibbett's business records were found to be incomplete and not up to date, and not all routine accounting records were maintained. The financial records were maintained by Gibbett's wife Jillian Gibbett to the best of her ability, but her evidence was that she had no bookkeeping experience. I accept that Gibbett and Jillian Gibbett did keep a number of primary records and computer records. Ahrendt therefore worked primarily from banking records and cheque butts and pay-in books, supplemented by other primary records and by oral instructions. He did not have regard to cash transactions which were not somehow verifiable by reference to some documentation. Ahrendt prepared accounts for Gibbett trading as Brisk Transport (it appears Brisk Transport Pty Ltd did not separately commence operations) for the years ended 30 June 1993, 30 June 1994 and 30 June 1995, and for Shavings for the years ended 30 June 1994 and 30 June 1995, and consolidated statements of operations for the two businesses for those two years. He also later prepared a report dated 10 October 1996 of his opinion of the losses sustained by Gibbett and by Shavings as a result of the termination on 18 October 1993 of the supply of wood shavings from MGPI. That report (the Ahrendt report) was based upon the summary of losses as calculated from the financial statements and on projections of market share provided by Gibbett. Ahrendt did not query Gibbett's projections of his market share. However, in the light of the report of Trevor Davies of 1 August 2000 to Forwood's solicitors suggesting that the projected market share was unrealistically high, Ahrendt did qualify his opinion. 116 The first challenge was to the profit figure of the shavings business for 1992/93 as calculated by Ahrendt. Davies thought it should be $56,453, rather than $86,453. The difference essentially depends upon whether an adjustment of at least $30,000 should be made for moneys received and included as sales revenue in respect of bales pre-sold to be delivered in the 1993/94 year. In effect, he said, that $30,000 is an advance payment and was not for bales sold in the 1992/93 year. There is little doubt that about $30,000 of the sales revenue of $207,708 for that year represented moneys already received for sales in the next financial year. Gibbett effectively acknowledged that. In my view, that amount should not be included in the sales brought to account in the 1992/93 trading statement. It should appear as current creditors (prepayment) in the balance sheet at 30 June 1993, and to the extent that the bales to be sold were already in stock at 30 June 1993 would also appear as stock on hand in that balance sheet. Davies was cross-examined to test his conclusion, but I accept his characterisation of those payments as they accord with Gibbett's evidence, and they are not brought to account or otherwise recorded as trade creditors as would otherwise have been the case. They must be in the "sales". The adjusted sales figure therefore reduces to about $178,000 and the adjusted earnings before interest and tax (and without deducting legal costs and establishment costs) reduces to about $67,000. The percentage profit then reduces to about 37.6 per cent. 117 There is also some doubt about the amount of those prepayments. If all stock on hand were "pre-sold", that is if moneys had been received in advance for sales of all that stock, the prepayment would have been in excess of $55,000. The figure of $30,000 is an estimate only. The figure of $55,421 comes from the value of the bales on hand at 30 June 1993, and was a calculation made by Gibbett. It is doubtful if all those bales had been fully prepaid. 118 In addition, Davies does not accept that the expenses reliably reflect production costs and other expenses. He estimates the expenses to be about $120,000 (or $145,000) based on three items: $ Product costs (at $6.40 x 3,250 bales) 20,800 Freight (at $17.80 x 3,250 bales) 57,850 Administration and general 40,000 119 That may be compared with Gibbett's finance submission of April 1993, where he clearly had a significant cash shortfall, which said that the product costs (raw material and sifting and baling) were $9.40 per bale and that the transport costs were $19.50 per bale, that is a direct cost in total of $28.90 per bale. 120 The $40,000 was later altered by Davies to $65,000 to cater for increased salary and wages costs. 121 In the accounts prepared by Gibbett's accountants in 1993, the expenses included an item of $31,260 for materials. The accounts prepared by Ahrendt do not include that item. They identify gross profit on trading at $192,446, made up of sales of $207,718 less expenses of $31,260 and subcontractors of $18,012, plus closing stock of $34,000. The evidence now shows, as Gibbett acknowledges, that that $34,000 comprised $30,000 for wool bales which were reused for holding wood shavings, rather than being baled wood shavings. On that basis, I accept the accounting evidence that the closing stock should not be shown as $34,000, but as $4,000. The $30,000 for the bales or bags themselves should appear in the balance sheet as a current asset. The result is that, on Ahrendt's figures, the gross profit on trading reverts to $162,446 and (for the reasons given already) the sales figure should also be reduced by some $30,000 further reducing the gross profit on trading to $132,446. Accepting Ahrendt's expenses at $50,993 plus transport costs of $55,000, that then produces an operating profit of $26,453 and a percentage profit on sales of about 15 per cent. If the prepayments exceeded $30,000, the profit and percentage profit would be further reduced. If the add-backs Ahrendt effected (interest, establishment costs and legal costs) are included, the adjusted earnings before interest and tax would be $36,952 and the profit percentage about 20 per cent. 122 I note also that Ahrendt's analysis does not really allow for any direct production costs, other than materials and subcontractors. Presumably his "other expenses" include other direct production costs. I also note that the allowance of $4,000 for closing stock is a very low one having regard to the evidence about the number of baled wood shavings on hand at 30 June 1993. Furthermore, there is (as Gibbett said) further expenses incurred but taken as cash drawings and now shown in the accounts. Davies also makes the point that Ahrendt has assumed a direct linear relationship between sales and expenses in his projections, but that assumption may not be accurate especially as the 1992/93 season was produced on a piecemeal basis and apparently largely with a partly voluntary labour force. 123 Gibbett sought to enhance the picture of the financial success of his two businesses by his evidence. He claimed to have paid cash for a forklift and welder ($4,500), photocopier ($1,500), two trucks ($1,500 each), two other trucks (partly unspecified cash and party by contra), six large eskies to transport crayfish (more than $200 each), airline tickets (unspecified amount), fuel for car travel between Adelaide and Perth (unspecified amount), conveyors ($2,000 for two), gold alluvial plant converted to a screening machine ($5000), conversion costs for the gold alluvial plant ($3,000), tarpaulins (more than $6,000 for four) and "a heap of tools, mainly new, perhaps $30,000 to $40,000 worth" for the factory at Mount Gambier. He said some of this money came out of the bank account. It is unclear to me to what extent those cash items are not accounted for in the financial statements. There was little evidence on the topic. The depreciation schedule to the Gibbett financial statements at 30 June 1994 lists a number of items of plant and equipment, furniture, and motor vehicles, so I am unable to make any finding on the balance of probabilities as to how much of Gibbett's drawings (shown as $5,128 for 1992/93 and $28,396 for 1993/94 from the transport business) was for the acquisition of assets of his business. I accept that some part of the 1993/94 drawings was applied for that purpose, but I do not find that it was of the order of $23,500 as claimed in 1993/94. The consequence of any such adjustment would be to increase the current assets somewhat, thereby reducing the net liabilities over assets, but also to the extent that such expenditure amounted to an expense thereby increasing the operating losses, and so further reducing proprietor's funds. 124 Davies gave evidence that the reported operating profit of the shavings business should be reduced by $55,000 to allow for transport costs (a proposition with which Ahrendt agreed) and by the further sums of $30,000 for bales claimed wrongly to represent sales and of up to $55,421 for "pre-sales" or deposits paid for sales in the 1993/94 year. That would effectively reduce the profit to a nominal one. 125 I am not persuaded that the shavings business of Gibbett during 1992/93 was anywhere near as profitable as he claimed. I have accepted that the figures prepared by Ahrendt should be altered along the lines referred to above. In that period, although the wood shavings supplied by Forwood were in fact contaminated by PCP, that fact did not emerge and those wood shavings were therefore regarded as acceptable for packaging live crayfish for export. In that period, much of Gibbett's wood shavings came from another source. I accept that they were not as suitable as those from the MGPI mill. I also accept that his processing methods, that is principally sawdust removal, were in an evolutionary stage so that there was a greater efficiency of processing available to him (and to Shavings) after 1992. On the other hand, I think that his costs of production were probably reduced by the volunteer family labour which was available to him and which, I find, was progressively to become paid labour as his enterprise became more professional. Doing the best I can, on the material, in my judgment Gibbett made a net profit of something in the order of 15-20 per cent on sales in his shavings business in that financial year. 126 As I have observed, Gibbett was clearly "cash strapped" in April 1993. That is despite any deposits or prepayments which had started to flow by that time. I find that that position was, at least in part, because the transport business was clearly unprofitable and Gibbett did not isolate the costs of operating the two businesses. Moreover, I find that it was part of his plan to capitalise on the wood shavings business as providing an ongoing source of work for the transport business. But for Forwood ceasing to supply wood shavings in October 1993, I find that Gibbett would have continued to operate the transport business (ultimately through Brisk Transport Pty Ltd), including to transport wood shavings to Western Australia. 127 There is not much evidence about why the transport business was so unprofitable. Ultimately, it ceased when the liquor cartage contract was lost but that occurred some time after October 1993. I find that it would have continued to be unprofitable; there is no real reason to think otherwise. Gibbett was also, in my view, likely to have applied funds available to him across the two businesses to keep it running. However, I do not specifically reduce the damages I would otherwise award by consolidating the projected profits of Shavings with the likely losses in the transport business. By July 1993, the wood shavings business was being operated through a separate legal entity. I have, however, had regard in a general way to the fact that Gibbett's management attention and efforts would have been spread over both the business of Shavings and the transport business at material times. 128 It is clear that in 1992 Gibbett made some good contacts with live crayfish exporters including Kailis and the Fremantle Fishermen's Cooperative. At that time, Kailis was sifting wood shavings itself to get useable quality wood shavings for packaging. Gibbett then started supplying Kailis with sifted wood shavings, and did so reliably. Kailis acquired about 1,620 bales from Gibbett in the 1992/93 season and expected to acquire about 1,500 bales or more from him in the following year. The delayed attempts by Shavings to meet those needs, once the prepared bales in storage could not be used due to PCP contamination, from supplies of wood shavings from the Nangwarry Mill and Mount Gambier Mill of Forwood led to Kailis getting its wood shavings from other sources. The Fremantle Fisheries Cooperative also found Shavings' wood shavings of good quality, and reliably supplied. It was one of the largest live crayfish exporters in Western Australia and he became its major supplier of wood shavings. After October 1993, as the supply of wood shavings from Shavings was no longer reliable, that cooperative also obtained wood shavings from other suppliers. 129 I am satisfied on that evidence that Shavings had good sales prospects had it been able to secure from MGPI wood shavings of the same quality as those provided up to 18 October 1993, and which were not from timber dipped in PCP. On the other hand, the evidence of Callender (Kailis) and Corbo (Fremantle) suggest that alternative satisfactory supplies of wood shavings were readily available, perhaps not quite so reliably. Neither suggests that Shavings/Gibbett had a significant price advantage. 130 Ahrendt's summary of loss, according to his opinion as qualified and adjusted in the light of Davies' report was as follows: YE June 1994 YE June 1995 YE June 1996 Total Trading losses 275,693 110,272 - 385,965 Loss of profit 240,000 240,000 240,000 720,000 Total losses 515,693 350,272 240,000 1,105,965 131 Davies did not address the claim for trading losses for 1993/94 or 1994/95. Nor were Gibbett or Ahrendt cross-examined much about them. In 1993/94 Shavings had a reported operating loss of $203,734 adjusted to $167,958 after removing legal costs as an expense, based on sales of $141,023 and a gross profit on trading of $129,807. I have not removed the interest charged in arriving at that figure. In 1994/95, it reported an operating loss of $117,553 on sales of $60,145 and a gross profit on trading of $33,860. In each year, I have not taken out accountancy fees, although they are quite high. If the legal costs of $28,137 are removed, there was a trading loss of $89,416. 132 The real contest was about the projected loss of profit. The loss of profit put forward by Ahrendt was calculated on the basis of 4,735 bales sold in Western Australia at $45 per bale ($423,795) plus 1,055 bales sold in South Australia ($47,457) plus 900 bales sold in Victoria ($45,000) producing $516,270 sales at a net profit margin of 46.7 per cent producing $240,943. The sales in Western Australia represented 60 per cent of the available market (as he was instructed) and 30 percent of the available market in South Australia, and a designated number in Victoria. That reflected projected sales of 6,690 bales overall. The net profit margin of 46.7 per cent which he used was the same as the net profit before tax and interest of the wood shavings side of Gibbett's business to 30 June 1993 in accordance with the financial accounts Ahrendt prepared to cover that period. 133 Davies' evidence challenged a number of those conclusions or assumptions, in addition to that concerning potential sales into Western Australia, which Ahrendt himself acknowledged and allowed for in his evidence in chief leading to his revised summary of loss set out above (compared to his calculation set out in par 7 above). 134 The calculation, in addition, assumes that MGPI could efficiently process and supply good quality wood shavings free of chemical contaminant at all material times. That is not the case. I have accepted its evidence that it could not do so. The wood shavings sold to Gibbett in the latter part of the 1992/93 season were also contaminated, but were used as if they were free of that contamination. That is simply because the problem was not then identified. On the other hand, at least part of the production costs in the 1992/93 year related to a period when "inferior" wood shavings (that is containing more sawdust) were procured from another supplier. 135 Davies considered that Ahrendt's future sales projections were unrealistic. Ahrendt accepted that in respect of the sales in Western Australia, but maintained Shavings would be able to secure 60 per cent of that market. The claimed loss was adjusted to reflect that assumption. 136 The forecast sales for 1993/94 season, on which Ahrendt's revenue for that year was projected, were $796,000. That is a very significant increase on sales of about $208,000 in the 1992/93 season. It was first made up as follows: $ Bales Western Australia 649,750 11,400 South Australia 101,250 2,250 Victoria 45,000 900 137 As noted, Ahrendt subsequently adjusted those figures in the light of Davies' report to more conservative levels for Western Australia and South Australia as follows: Bales 423,795 9,418 (at $45) 47,475 1,055 45,000 900 516,270 138 Ahrendt then applied a 46.7 per cent profit margin to that sales figure to generate an assumed profit for 1993/94 and 1994/95 of about $240,000. At assumed profit margins of 20 per cent and 15 per cent, that assumed profit margin becomes about $103,000 and $77,500 respectively. I have expressed above my view that the level of profitability of Gibbett's wood shavings' business in 1992/93 was in the order of 15-20 per cent. I do not think that he was likely to improve that level of profitability much, if at all, thereafter. I am not persuaded that he had the managerial skills to do so, and his operating expenses had increased with new equipment and premises and extra labour. 139 In my judgment, the anticipated level of market penetration would not have been achieved in the years following 1992/93 season as claimed by Gibbett and Shavings. The fact that both Kailis and Fremantle Cooperative were apparently able to procure alternative supplies of wood shavings quite readily after October 1993 indicates that the market was not there for the taking in the way in which Gibbett had anticipated. Moreover, I have regard to the fact that Gibbett would have had some difficulties with his operations. He clearly had a lack of working capital. His cash flow was sensitive to live crayfish exporters being prepared to pay partly in advance to provide him with operating capital, and he had managerial shortcomings. His transport business was not running profitably, and in the way he operated was likely to continue to provide a drain on cash availability within Shavings. The prospect of disrupted supply was in my judgment a real one. The evidence about the cost advantages of the wood shavings, and their other advantages, must be weighed against the fact of there being other suppliers of wood shavings and of other packaging materials which had serviced the industry for some time. I suspect Gibbett would have had his work cut out servicing his Western Australian customers, and endeavouring to encroach into the South Australian market, and that his prospects of any significant sales in Victoria were relatively small. 140 The sales into Western Australia were required to provide gross revenue to Supplies of $480,000 to qualify for receipt of Buckley's further five payments each of $30,000. Gibbett had, in effect, sold the profits over $45 per bale to be earned from sales in Western Australia for that sum. It represents 8,000 bales (at $60). At twenty-two boxes of crayfish per bale, and 8 kg of crayfish per box, that encompasses 476,000 kg of crayfish. That in turn represents about 62 per cent of the live crayfish exported from Western Australia in 1992/93 (of 2,272,632 kg). I am not persuaded that sales of wood shavings in Western Australia by Shavings in the seasons following 1992/93 season would have reached anywhere near that share of the market. It is a figure greater than Ahrendt's adjusted anticipated sales figure. The Buckley premium payable per year was reduced by the amount by which Buckley's sales fell short of $480,000. In my judgment, they would have fallen well short of that figure. I do not consider that Gibbett has really suffered anything in fact in relation to receipt of the Buckley premium as the eligibility test was pitched so high as to be unachievable. 141 In my view, Shavings was unlikely to penetrate the Western Australian market to any such degree. Doing the best I can on the material before me, I consider that Shavings may have sold between 5,000 and 6,000 bales of wood shavings to that market, so the sales would have been between $225,000 and $270,000 (at $45 per bale, the agreed sale price to Supplies), and probably towards the lower end of that range. I am also cautious about its capacity to obtain, and process, sufficient wood shavings of sufficient quality to enable Shavings to sell more than relatively modest supplies of wood shavings into the South Australian or Victorian markets. 142 The finance submission of April 1993 explained that each load of wood shavings (1.4 tonne) produced about 17.5 bales of saleable wood shavings. The optimum production from the available wood shavings for each week was therefore 245 bales. Allowing for the fact that constant supply was not guaranteed and for the fact that optimum rates of production would not be continuously achieved, and for about 30-40 weeks' production per year, it is unlikely that Shavings would have produced more than about 7,500 bales per year of wood shavings. After satisfying the Western Australian market, I think it is reasonable to allow further revenue of about $40,000 for sales of wood shavings in South Australia and Victoria. Accordingly, if the provision of wood shavings had continued for the balance of 1993/94, in my judgment Shavings would have received about $275,000 or a little more for the sale of wood shavings to exporters of live crayfish. Its net profit would have been in the order of $40,000-$55,000. 143 Instead of achieving that result, Shavings and Gibbett were obliged to recall and replace some 2,800 bales of wood shavings in and after October 1993. There was duplication of production costs for that process, as well as inefficiency due to the available wood shavings bearing much more sawdust. There was also no doubt considerable time and expense incurred in endeavouring to procure alternative supplies of wood shavings and in dealing with customers of Shavings and in securing the recall and replacement of the PCP contaminated wood shavings. I accept that the loss of $275,693 during that year was the consequence of those matters. 144 I am not satisfied that Shavings' trading loss of $110,272 is attributable to the breach of warranty by Forwood. It was incurred, necessarily, some nine months or more after the breach and at a time when, in my judgment, Forwood was not then in breach of any ongoing contractual warranty. It is clear that Gibbett sought to revive Shavings' business in that financial year, after having effectively stopped production in December 1993. He had by then fully explored alternative sources of supply of wood shavings and found none that were satisfactory, including those available form Forwoods' mills at Nangwarry and Mount Gambier. The previous supplier of wood shavings, he found, to be erratic and of poor quality and expensive. I am unable to attribute the trading losses in that period to Forwood's breach of warranty: cp. Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653. 145 I am also unable to be satisfied that Shavings should recover much by way of additional damages for loss on realisation of its assets. It is not clear that there were assets owned by it which reasonably were sold as a result of the breach of warranty. In addition, given the term of the contract for the supply of wood shavings, I am not persuaded that the whole of any loss realised upon sale of such assets should be attributed to the breach of the warranty. The inability to use the assets for profit making in the 1993/94 year is itself reflected in the damages to be allowed for loss of profit. I also allow a relatively nominal sum for diminution in the value of its assets. 146 Any damages suffered by Gibbett is also problematical. In so far as the supply contract was with him, that is until 30 June 1993, I am not persuaded that he suffered any loss. The bales of wood shavings then on hand appear somehow to have been transferred to Shavings, together with the plant and equipment of Gibbett used to then in his wood shavings business. He also gave evidence of personal expense incurred in the period from October 1993 to try and mitigate the loss being suffered by Shavings. I am prepared to accept that those expenses, if reasonably incurred, are recoverable from Forwood by reason of its liability for misrepresentation and in negligence. 147 However, I do not think that much expenditure of that nature has been proved. The picture of which assets Gibbett himself owned, and somehow provided to Shavings for its use (as distinct from being conveyed to Shavings after 1 July 1993) is not clear. There was one particular piece of equipment which, he claimed, was substantially modified at a cost of some $20,000, after October 1993. That was the sifting machine installed at Mount Gambier in August 1993. It was modified to accommodate wood shavings from other mills which had a greater sawdust content. There is no direct evidence that this equipment was paid for or owned by Gibbett or by Shavings or Holdings. The statement of account in evidence to 30 September 1993, is in the name of "Brisk Sawdust & Shavings Supplies" with a balance then outstanding of $19,864, of which $760 only was invoiced in September. Gibbett said he had not paid anything much off that account after September 1993, and the liability for $20,683 for "material modifications" which appears in the Shavings financial statements to 30 June 1994 is accepted by Gibbett as relating to that account. It is therefore hard to accept Gibbett's claim that he expended very considerable sums on the modification of that machine after October 1993. I think he must be in error. He did not suggest the capital expenditure was in other accounts. The fact that there is minimal depreciation attributed to that item in those accounts is consistent with and explainable, as Ahrendt said, simply by the lack of proper information about the nature of that asset. Apart from that item, the imprecision of Gibbett's evidence leads me to adopt the conservative figure of $10,000 to encompass his claims. 148 For those reasons, in my judgment, I award damages to Shavings in the sum of $325,000. That figure is one arrived at having regard to the allowance discussed above for loss of profits plus the trading loss for the 1993/94 year and a sum for diminution of the value of its assets. It is a figure which takes into account the various factors and contingencies to which I have referred. I also award damages to Gibbett in the sum of $10,000. 149 I will hear the parties as to interest and costs before formally making orders. I certify that the preceding one hundred and forty-nine (149) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield. Associate: Dated: 30 March 2001 Counsel for the Applicants: M Hoile Solicitors for the Applicants: Herman Bersee Counsel for the Respondents: P O'Sullivan with him S Gupta Solicitors for the Respondents: Crown Solicitor for the State of South Australia Dates of Hearing: 16, 17, 18, 20, 23, 24, 25 October 2000 Date of Judgment: 30 March 2001