Australian Development Corporation v Allco Steel Corporation [1999] NSWSC 736

New South Wales Supreme Court CITATION : Australian Development Corporation v Allco Steel Corporation [1999] NSWSC 736 CURRENT JURISDICTION : Equity Division Construction List FILE NUMBER(S) : 55032/91 HEARING DATE(S) : 12.7.99, 13.7.99, 14.7.99 JUDGMENT DATE : 30 July 1999

PARTIES : Australian Development Corporation Pty Ltd v Allco Steel Corporation Pty Ltd and White Constructions (ACT) Pty Ltd JUDGMENT OF : Foster AJ

COUNSEL : Plaintiff: Mr P Liney 1st Defendant: Mr G McVay SOLICITORS : Plaintiff: Colin Biggers & Paisley 1st Defendant: Sparke Helmore CATCHWORDS : Tort - conversion - damages - conversion of steel - goods specially manufactured or specially acquired for specific use - effect of change in intended use of goods by plaintiff - whether change occurred prior to conversion - "value" of goods - assessment of damages where accurate calculation impossible or inappropriate. CASES CITED : Butler v Egg and Egg Pulp Marketing Board (1966) 114 CLR 185; The Mediana [1900] AC 113; Caxton Publishing Co Ltd v Sutherland Publishing Co Ltd [1939] AC 178; J & E Hall Ltd v Barclay [1937] 3 All ER 620 DECISION : 1. 1st defendant to pay damages of $475,000 to the plaintiff for conversion of the plaintiff's steel. 2. Within 14 days the parties are to advise the Court of a convenient date to hear the question of interest and costs.

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

FOSTER AJ

FRIDAY 30 JULY 1999

55032/91 AUSTRALIAN DEVELOPMENT CORPORATION PTY LTD v ALLCO STEEL CORPORATION PTY LTD & ANOR

REASONS FOR JUDGMENT 1 In these proceedings, the plaintiff, Australian Development Corporation Pty Ltd (ADC), claims damages against the first defendant, Allco Steel Corporation Pty Ltd (Allco), for conversion by Allco of two separate tonnages of steel consisting partly of lengths of raw steel and also of portions of steel upon which fabrication work had been performed by Allco. The steel had been purchased by Allco for the performance of a contract with White Constructions (ACT) Pty Ltd (White) for the fabrication and erection of steel work in a large building project in Canberra known as the Quadrant project. White had entered into a construction contract, as builder, with ADC, as owner/developer of the project. 2 In the proceedings, the two lots of steel were referred to respectively as the "October steel" and the "November steel". These descriptions arose from the fact that the October steel, totalling 503.27 tonnes, was the subject of a progress payment claim made by Allco in that month of 1987 and the November steel, totalling 398.57 tonnes, was the subject of a similar claim in November. 3 Both lots of steel were retained by Allco at its premises at Tomago near Newcastle, prior to their being used in the construction work in Canberra. After the happening of events which do not require description in these reasons, the contract between ADC and White was terminated in August 1988 and the steel, the subject of these proceedings, was sold by Allco in February and March of 1989. The sale was without the consent of ADC which claimed to be the owner of the steel. 4 An order was made in these proceedings by Rolfe J that the issue of liability be determined separately from the issue of damages. In the liability proceedings, Allco disputed that ADC had title to the steel. As a result of decisions made by Rolfe J and by the Court of Appeal, it has been held that ADC was the owner of both lots of steel and that Allco converted each lot by the above referred to sales. 5 Accordingly, the only issue for my determination is the quantum of damages to be awarded to ADC against Allco as compensation for these torts. 6 It has been agreed during the hearing of the proceedings before me that the amount of fabricated steel converted was in fact 510 tonnes and the amount of raw steel was 391.84 tonnes. It has also been agreed that if I find damages for ADC on the basis that it was entitled to the reasonable cost of replacement of the steel, both raw and fabricated, then damages should be assessed in the sum of $1,020,155, this being the lesser of two calculations of damages, on a replacement basis, provided by ADC. 7 If I do not find damages on the "replacement" basis, then the contest between the parties is as to whether I should award damages based upon the price obtained by Allco when it sold the steel in 1989 or whether I should find a higher figure related to calculations introduced into the case by ADC by way of expert testimony. 8 It appears that work on the Quadrant project effectively came to an end in 1987 about 17 months before the sale of the steel by Allco in 1989. As already indicated, the head contract was terminated in August 1988. The steel in question remained at Tomago throughout this period. It was stored in the open at Allco's premises. It was exposed to the elements which occasioned some deterioration through rust. There was a dispute before me as to the extent of that deterioration and its effect upon the utility of the steel for the Quadrant project or for any other building project. Part of the steel had been dealt with for the purpose of producing beams and columns and other structural members in conformity with the structural steel plans for the Quadrant project. The raw steel which had been purchased by Allco for use in the project had, therefore, been modified by its being cut into required lengths and having affixed thereto base plates, cleats, and bracing of various kinds. Also, holes were drilled in portions of it in conformity with the plans. The remaining raw steel consisted of beams, columns and sheets of structural steel in certain lengths and thicknesses which had not been subjected to fabrication. 9 There was some brief and imprecise evidence that certain types of beams and columns amongst the raw material were of a kind commonly used in construction work. However this does not detract from the fact that the raw steel was specially purchased and appropriated for use in the Quadrant project. It was specially identified and specially stored in Allco's premises for removal to the Quadrant site when required. 10 It was the contention of Allco that by the time the steel was sold, it was, by and large, in such a deteriorated condition as to be unsuitable for use in any major building project. This deterioration had been caused by severe rusting. It was the contention of ADC that such rusting as had occurred was not such as to prevent it being used in the Quadrant project or any similar project. The rust could be removed by normal procedures in Allco's fabrication works and the steel readily brought back to suitable condition. I do not propose to review the whole of the evidence given on this particular topic. On Allco's part, evidence was given by Mr Rowland, who was the project manager for Allco at the time. This was supported by Mr Faulkner, who had purchased the steel on behalf of Balcomb Recyclers Pty Ltd (Balcomb). I was not particularly impressed with the evidence of these witnesses. Mr Faulkner had to concede that the description of the steel given in his first evidentiary statement was quite incorrect. Mr Rowland, while steadfastly maintaining the opinion he expressed as to the deteriorated condition of the steel, was, nevertheless, forced to concede that, had a proposition, made in late 1988, that the project should go ahead with Allco dealing directly with ADC, resulted in agreement, then the allegedly deteriorated steel would have been used in the building work. He would not have taken steps to prevent this occurring, despite his views as to the deteriorated condition of the steel. He also gave evidence that certain rust flakes tendered in the case, were typical of the condition of the surface of the steel. I found this evidence to be quite unacceptable. I do not accept the evidence of these witnesses as to the condition of the steel. However I accept that some deterioration had occurred. 11 I am satisfied that the steel, fabricated and unfabricated, was not in a significantly deteriorated condition. I am fortified in this view by evidence called on behalf of ADC to the effect that the steel was observed to be carefully and properly stored in Allco's yard by Mr Hardie, who had the responsibility of inspecting it on behalf of ADC, to ensure that it had been purchased by Allco and allocated to the contract, so that claims for progress payments could be processed. Also, compelling evidence was given by expert witnesses called by ADC as to the fairly minor degree of deterioration that might have been expected, having regard to the period and nature of its exposure to the elements. 12 As indicated, it was ADC's main contention that its damages should be assessed in a sum sufficient to cover the cost of replacement of the steel in its fabricated and raw form. It also submitted that, in so far as it might receive, by such an award, an amount based upon the provision of new, undeteriorated, steel, then it was entitled to such an award because Allco, as tortfeasor, had put it in the position where steel would have to be re-purchased and re-fabricated in order that it could be restored, so far as possible, to the position which it would have occupied had the tort not been committed. This approach was contested by Allco. Accordingly, it is necessary to consider, briefly, the law relating to the measure of damages in conversion. 13 In this regard, I have been assisted by the submissions of counsel during which I was taken to a number of decided cases and textbook references. I need not refer to them in detail. 14 It is clear that the normal measure of damages for conversion is the "value" of the goods converted. The word "value" is, of course, quite ambiguous. As is said in Ogus - The Law of Damages 1973 (at 122): "… "value" as a legal concept has no single ascertainable meaning. It is one of those abstract legal words which varies in its import according to its context and its purpose within that context. By itself it offers no guidance as to how the "valuation" should be accomplished. To state, as courts frequently do in damages cases, that the plaintiff is entitled to "the value of his property" is not to conclude the inquiry as to the assessment of compensation but to commence it." 15 It is also clear that there is no hard and fast rule that, in all cases where a plaintiff's goods have been converted so that they cannot be returned to him, he is entitled to damages from the defendant based upon the cost of replacement of the goods. This is demonstrated quite clearly in the decision of the High Court in Butler v Egg and Egg Pulp Marketing Board (1966) 114 CLR 185, where the Court refused to award to the Board the total cost of eggs to which it was statutorily entitled, but which had been converted by their sale by the producer to a third party. It was said by Taylor and Owen JJ (at 191) that the "principle is that the injured party should receive compensation in a sum which, so far as money can do so, will put him in the same position as he would have been in if the contract had been performed or the tort had not been committed … And this principle is as much applicable to actions of conversion as it is to the case of other actionable wrongs. In most cases of conversion it is, of course, obvious that its application will result in the injured plaintiff recovering the full value of the property converted since that will usually represent the loss that he has sustained by the defendant's wrongful act. Hence the statement which appears so often in the books that the general rule is that the plaintiff in an action of conversion is entitled to recover the full value of the goods converted, but this statement should not be allowed to obscure the broad principle that damages are awarded by way of compensation." 16 In the same case, Menzies J said (at 192): "There is no hard and fast rule that the value of the goods at the time of a conversion is always the measure of the damages to be assessed for the conversion. Often the application of such a rule would produce an obviously unjust result - for example, if goods converted by a defendant had since been recovered by the plaintiff-owner. The true rule is, I think, that stated by Bramwell B. in Chinery v. Viall , viz. that the plaintiff is entitled to recover no more than the real damage he has sustained." 17 I should also make reference to two earlier cases which are relied upon by ADC to support the proposition that the appropriate award of damages in the present case is one that will provide "replacement" value to the plaintiff, it being submitted that such an award is necessary to provide it with restitutio in integrum. 18 The first case is The Mediana [1900] AC 113. This did not involve an action in conversion. However, the speeches contain statements which have had a bearing upon awards of damages for that tort. A lightship belonging to a harbour board was damaged by the negligence of the appellant. The board substituted another lightship for the damaged lightship during the period that repairs were being effected. The substitute lightship was regularly maintained and kept in reserve to meet such an emergency. The cost of maintaining it would have been required whether or not it was used for that purpose. The question was whether a head of damage for "hire of the services" of the substitute lightship could be recovered. The following passage appears in the speech of the Earl of Halsbury LC (at 117): "Now, in the particular case before us, apart from a circumstance which I will refer to immediately, the broad proposition seems to me to be that by a wrongful act of the defendants the plaintiffs were deprived of their vessel. When I say deprived of their vessel, I will not use the phrase "the use of the vessel." What right has a wrongdoer to consider what use you are going to make of your vessel? More than one case has been put to illustrate this: for example, the owner of a horse, or of a chair. Supposing a person took away a chair out of my room and kept it for twelve months, could anybody say you had a right to diminish the damages by shewing that I did not usually sit in that chair, or that there were plenty of other chairs in the room? The proposition so nakedly stated appears to me to be absurd; but a jury have very often a very difficult task to perform in ascertaining what should be the amount of damages of that sort. I know very well that as a matter of common sense what an arbitrator or a jury very often do is to take a perfectly artificial hypothesis and say, "Well, if you wanted to hire a chair, what would you have to give for it for the period"; and in that way they come to a rough sort of conclusion as to what damages ought to be paid for the unjust and unlawful withdrawal of it from the owner. Here, as I say, the broad principle seems to me to be quite independent of the particular use the plaintiffs were going to make of the thing that was taken, except - and this I think has been the fallacy running through the arguments at the bar - when you are endeavouring to establish the specific loss of profit, or of something that you otherwise would have got which the law recognises as special damage." 19 These remarks of Lord Halsbury were considered by Lord Roche in Caxton Publishing Co Ltd v Sutherland Publishing Co Ltd [1939] AC 178 at 192 where he said of the measure of damages in conversion: "There is no dispute but that the measure of damages is the value of the thing converted at the time of the conversion. It is true enough to say that the value is the value to the owner; but it is wrong to say this if you mean what the owner will make out of the thing in money if it is not taken away from him. This latter idea was repelled by this House in a series of cases dealing with such trespasses to goods as deprived the owner of them temporarily. They were cases where the owner either did not use the things at all or not for money gain, for example, spare lightships and dredgers. The Mediana is an instance. It was said in the judgment of Lord Halsbury L.C. in that case that, if the owner of a chair was deprived of it, it was no ground for giving nominal damages that he did not want to sit upon it: and that it might be necessary in such cases to resort to a variety of tests of value during the time of deprivation … So with permanent deprivation or wrongful appropriation of a chattel one of a variety of tests may be the best available test of value according to circumstances." 20 The case of J & E Hall Ltd v Barclay [1937] 3 All ER 620 is, perhaps, the most closely analogous to the present one. It is heavily relied upon by ADC. In it the respondent company had worked for the appellant in the erection and testing of experimental davits of which the appellant was the inventor. After experiments had been conducted, the davits were dismantled. They were kept by the respondent company for a number of years. It then sold them as scrap. The appellant claimed damages for conversion and, at first instance, was awarded their scrap value as damages. It was held on appeal, however, that the appropriate measure of damages was the cost of replacement. Greer LJ (at 623), having said that the proper measure of damages was the value of the converted article, then said: "Then the question is, what is the meaning of "the value of that article"?" Having indicated that "a man whose rights have been interfered with is never entitled to more than what he would have to pay to buy a similar article in the market", his Lordship then turned to consider what the appropriate measure should be in circumstances where there was no available market. He said (at 624): "Now, if there had been a market for the davits, to which the appellant could have gone on the day after he was wrongfully deprived of his davits, and bought them at an agreed price, however much lower that might be or however much higher it might be than what he had originally paid for them, he would have been entitled to the cost of replacement by getting them in the market. But, if he cannot get them in the market, what is his position? He must do that which is analogous to getting them in the market, namely, he must go to the only people from whom he can get goods to put him into the same position as he would have been in if his davits had never been taken away from him, that is to say, he must go to the manufacturer and see for what price the manufacturer will supply him with similar goods … [The plaintiff was] entitled as of right … to say, "I want my goods. If you do not give me back my goods, then you must pay me what I would have to pay in order to put myself into the same position as I would have been in if you had complied with my demand for the goods. I want them for the purposes of further experiments, in order that I may satisfy myself that the design of these davits, and possibly the design of improved davits, may be improved upon." 21 The plaintiff was, accordingly, entitled to receive as damages the cost of the re-manufacture of the davits. 22 It is to be noted that the passage quoted refers specifically to the fact that the plaintiff wanted to use the davits for further experiments. In such circumstances, it was inappropriate to regard them as scrap metal. 23 This case has been the subject of comment in leading texts. Thus in McGregor on Damages, 15th Ed., at 808, the learned author says that in Hall v Barclay, the plaintiff was not limited to the scrap value of the davits "but could recover the cost of obtaining replacements in the absence of a market in which such goods could be bought ready made. There was evidence that the plaintiff would want to use such replacements so that he could not be said to be claiming on the basis of replacement value just in order that the defendant should pay him damages." 24 In Ogus (op cit) at 145, the learned author cites the case for this proposition: "Failing this, (ie being able to acquire a substitute in the market) the plaintiff may recover the cost of manufacturing a suitable substitute. But for this method to be applicable, the plaintiff must show that he intended actually to use and benefit from the article which is to be reproduced - otherwise the reproduction cost will not be a true measure of his loss." 25 In my view, these statements should be accepted as correct. They put a necessary gloss upon the wide statement of principle, if that is what it was intended to be, in the passage from Lord Halsbury's speech in The Mediana. In my opinion, if goods have been specially manufactured or specially acquired to be used by a person in a particular way, and they are converted by a tortfeasor then, if, at the time of conversion, the person required those goods for their original purpose, it follows that he can be restored to his original position only by an award of damages that would cover the replacement cost of those goods. If, however, prior to the conversion he had ceased to have that special need for those goods, then to award him damages based upon the cost of re-manufacturing or re-acquiring those goods would be to compensate him on a false basis. At the time of the conversion the goods would not have been of their original use to him; they would have had some other use which might be radically different from the original one. In my opinion, conformably with the general principles applicable to awards of compensatory damages, proper regard must be paid to such a pre-conversion change of use in order to arrive at the correct "value" of converted goods. 26 I am aware that Hall v Barclay was concerned only with goods specially manufactured for a particular purpose and not with goods specially acquired for that purpose. However, it would, I believe, be inconsistent with the underlying compensatory principle for damages in tort, and unnecessarily artificial, to apply the decision only to items specially manufactured by a person for a particular purpose. 27 In the present case, in my opinion, if the evidence requires the conclusion that, as at the date of its conversion, the fabricated steel, which had been specially worked upon for use by ADC in the Quadrant project and the raw steel which had been specially acquired for the project, was no longer required for that project, then to award damages based upon cost of replacement would be quite erroneous. That is, unless there was a demonstrated use for the steel by the plaintiff in some other project. Failing that, the steel in the plaintiff's hands would be surplus to its requirements and would have a pre-conversion value based upon its sale price as steel. 28 This is the position contended for by Allco. It is necessary to see whether the evidence supports it. 29 The following evidence was given by Mr Schick, the quantity surveyor employed by ADC for the Quadrant project: "Q. … Do you know from your own observations, Mr Schick, as to whether the residential tower was constructed using materials other than steel? A. It was constructed using reinforced concrete.