New South Wales Supreme Court CITATION : Tesrol Joinery Pty Limited v CEFLA Scri [2005] NSWSC 528 HEARING DATE(S) : 23/05/05, 24/05/05, 25/05/05 JUDGMENT DATE : 25 May 2005 Equity Division JURISDICTION : Commercial List JUDGMENT OF : Einstein J DECISION : Indemnity costs ordered. CATCHWORDS : Practice and procedure - Indemnity Costs - Need for Commercial List litigation to be tied to Overriding Purpose Rule - Identified issues - Defendant claiming to 'put the plaintiff to proof' LEGISLATION CITED : Supreme Court Act 1970 (NSW) ADC v White (1999) NSWSC 43 Alghussein Establishment v Eton College [1988] 1 WLR 587 Baltic Shipping Co v Dillon (1993) 111 ALR 289 Commonwealth v Amann Aviation Pty Limited (1991) 174 CLR 64 Damberg v Damberg (2001) 52 NSWLR 492 CASES CITED : Gramophone Co. Limited v Magazine Holder Co. Limited (1911) 28 RPC 221 Houghton & Anor v Immer (No 155) Pty Limited & Anor (1997) 44 NSWLR 46 McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 Oshlack v Richmond River Council (1998) 152 ALR 83 Pollock v Mackenzie (1866) 1 QSCR 156 Tesrol Joinery Pty Limited (ACN 003 111 224) (Plaintiff) PARTIES : CEFLA Scri (Defendant) FILE NUMBER(S) : SC 50159/03 Mr G Inatey SC, Mr V Gray (Plaintiff) COUNSEL : Mr R Scruby (Defendant) Malcolm Johns & Company (Plaintiff) SOLICITORS : Bryan Gorman & Company (Defendant) LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST Einstein J Wednesday 25 May 2005 ex tempore Revised 1 June 2005 50159/03 Tesrol Joinery Pty Limited v CEFLA Scri JUDGMENT The present position in the proceedings 1 During the late morning of the second day of the final hearing the defendant instructed its counsel to communicate to the Court that no submissions were to be put in respect of liability and that insofar as quantum was concerned there were only two matters which would remain in contest. Accordingly, the Court ordered that judgment be entered for the plaintiff in the amounts claimed in exhibits P7 and P8, reserving for further consideration only the items remaining in contest. Submissions have now been received from both parties in relation to these remaining items. Additionally the question of costs of the proceedings requires to be determined and submissions have been addressed by both parties to the court in that regard. Background 2 It is appropriate to first deal with the items remaining in contest. 3 Some short background is necessary. The plaintiff, Tesrol Joinery Pty Limited, ["Tesrol"], at all material times carried on business as manufacturer of kitchen cupboards and other wood products. It is incorporated in Australia. The defendant, CEFLA scri ["CEFLA"], is a manufacturer of woodworking machinery incorporated in Italy. 4 The pleaded case of Tesrol is in general terms that CEFLA contracted to sell to it an automated and in part robotic system called a "spray line". [That was the expression used during the course of the hearing, the more technical term being "Spraybotic"]. The spray line was to perform on an automated basis the functions of preparing kitchen cabinet doors for application for glue, applying the glue, drying the doors after application of the glue and delivering the doors by conveyor to the next process. 5 The spray line was defective. There is voluminous evidence of the defects. There is voluminous of the defective installation and/or commissioning. There is detailed evidence of the extent to which and difficulties which Tesrol experienced where the spray line continually broke down and was ultimately simply put to the side. There is detailed evidence of the many occasions when staff of Tesrol were taken off other duties for the purpose of dealing, in one way or another, with the breakdowns in the spray line or with endeavouring to understand precisely what new problems had arisen, which included amongst many many problems, circumstances in which cabinet doors would, instead of being discharged by the spray line assembly line, simply drop out of the oven trays to be later recovered but then being incapable of further effective use. The evidence is replete with detail of the veritable litany of software and hardware problems thrown up by the malfunctioning, defective equipment, defective installation and defective follow-up by the personnel who came out from Italy for this purpose. Items remaining in contest 6 In the circumstances CEFLA contests two items of alleged damages. 7 In dealing with these relatively small remaining items it is appropriate to approach Tesrol's case by reference to the principles which follow. The principles 8 I accept that insofar as elements of uncertainty are likely to remain in relation to the quantification process, Tesrol for the purpose of quantifying damages, is able to rely upon the "presumption against the wrongdoer". In a recent affirmation of that principle in which the actions of the defendant had made it quite difficult to assess the compensation due to the plaintiff, Handley JA put the matter as follows: "In my judgment the court should assess the compensation in a robust manner, relying on the presumption against wrongdoers, the onus of proof and resolving doubtful questions against the party "whose actions have made an accurate determination so problematic":" Houghton & Anor v Immer ( No 155) Pty Limited& Anor (1997) 44 NSWLR 46 at 59. 9 This principle relies upon the maxim 'nullus commodum capere potest de injuria sua propria': "No man can take advantage of his own wrong": cf ADC v White (1999) NSWSC 43 at 89 et seq. There is a long line of authority to this effect [cf Broome's Legal Maxims, 10th edition, Pakistan Law House, 1989 at 191 et seq, noting that this maxim, being 'based on elementary principles', is fully recognised in Courts of law and equity and, indeed, admits of illustration from every branch of legal procedure']. 10 The principle and its application to several areas of law has relatively recently been discussed in the House of Lords by Lord Jauncey in Alghussein Establishment v Eton College [1988] 1 WLR 587, with whose reasons Lord Bridge, Lord Elwin Jones, Lord Ackner and Lord Goff agreed. There the principle was expressed as providing "that a contracting party will not in normal circumstances be entitled to take advantage of his own breach as against the other party" (at page 591). 11 The principle is applicable to "various and dissimilar circumstances" [per Broome at page 195]. 12 In the Commonwealth v Amann Aviation Pty Limited (1991) 174 CLR 64 Deane J [at 118 to 119] in considering the burden of proof relating to the assessment of damage, pointed out that in many cases proof of the full extent of the loss or injury sustained would involve establishing an evidentiary foundation for positive and detailed ultimate findings by the Court upon the balance of probabilities. His Honour continued [at 118 to 119] saying inter alia: "There are, however, cases where considerations of justice or the limitations of curial method render ultimate findings, about what would have been or will be, impracticable or inappropriate. In such cases damages must be assessed on some basis other than findings about what would have ultimately happened if the repudiation or breach had not occurred or about the precise ultimate implications of the situation which exists after the repudiation or breach"... Electricity charges 13 Tesrol claims the amount of $12,728. 14 The essential proposition put forward by CEFLA is that the most probable conclusion on the evidence is that Tesrol would have had to pay the electricity charges to Kerfoot Electrics Pty Limited in any event. 15 Tesrol's case in relation to electricity charges is made out. 16 There is evidence (Dolman report, exhibit P7, annexures J and O) that Tesrol expended money on electrical works. The work entailed connecting electrical cables to various machines in the Tesrol factory. There is evidence [Kerfoot letter exhibit P9] that approximately ten percent of that work was attributed to the CEFLA spray line. 17 I accept that CEFLA's contention that there was no loss to Tesrol because Tesrol would have incurred the total contract cost of $114,701 in any event even if the CEFLA spray line had never been installed in the factory is prima facie unrealistic and implausible. As the plaintiffs have pointed out in their written submissions, the Court is "not precluded from applying a little common sense": Gramophone Co. Limited v Magazine Holder Co. Limited (1911) 28 RPC 221 at 225 per Lord Loreburn LC quoted in Damberg v Damberg (2001) 52 NSWLR 492 [at paragraph 157]. 18 In any event there is no evidence to support CEFLA's contention. I accept that the only evidence is that approximately ten percent of the electrical works costs related to the spray line. The only inference from exhibit P7 annexures J and O and the Kerfoot letter exhibit P9 is that a portion of the sum of $114,701 relates to the spray line. 19 As already made clear, the principle is that the Court will make the best assessment of damages that the available evidence will justify (Commonwealth v Amann Aviation supra). 20 The Tesrol claim to recover the amount of $12,728 is allowed. Tesrol internal costs 21 The costs in question are wasted employees' costs; training costs on the CEFLA spray line wasted and employee time spent on solving or attempting to solve the problems resulting from the failure of the CEFLA spray line to perform as warranted and coping with the consequences of that failure. 22 CEFLA's contention [at least so far as the claim other than the claim for the accountant's time is concerned] appears to be that Tesrol would have incurred those wages in any event. 23 Annexures M and N to exhibit P7 establish, I accept, that the time of the relevant employees was applied in either training on the spray line or was otherwise lost by reason of their involvement with it and the amount paid by Tesrol for that time was in effect lost. 24 CEFLA's submission is that the wages claimed are not losses caused by CEFLA's breach of contract and that the only available inference from the evidence is that the employees whose wages are claimed by way of damages would have had to have been paid even if there was no breach of contract. 25 In my view this claim requires to be adjudicated by reference not only to the contractual wrongdoer principle referred to above, but also by reference to the necessity for the court to make the best assessment of damages that the available evidence will justify. I accept that the failure of the spray line ever to produce kitchen doors as warranted results in this particular case in the fact that Tesrol is unable to prove with precision, what profits it would have made had the spray line performed as warranted and that in those circumstances Tesrol is entitled to have its damages claims assessed upon the restitutionary principle, rather than upon the principle of being in the position in which it would have been had the spray line performed as warranted. [cf Carter on Contract at 41-110 et seq; Baltic Shipping Co v Dillon (1993) 111 ALR 289; McRae v Commonwealth Disposals Commission (1951) 84 CLR 377. 26 In terms of CEFLA's contention that no damages should be awarded because Tesrol was bound to pay the employees' salaries and wages in any event, I accept that this contention ignores the fact that Tesrol received no benefit for these salaries and wages wasted, whereas if these salaries and wages had not been wasted on consequences of the CEFLA spray line non-performance, Tesrol would have been able to benefit from the productive capacity of the workforce in the time which would then have been available (see annexures M and N to exhibit P7). 27 CEFLA's contention entails the proposition, as the plaintiffs have submitted, that a contractual wrongdoer can cause the total loss of the plaintiff's production capacity but have no liability for the labour cost incurred by the plaintiff while its workforce remains idle. 28 The principle is that the innocent party is entitled to be put in the same position, as best as money can do it, as if the contract had not been broken. In the case of employees that means that the employer is entitled to be reimbursed for the cost of the employees' productive time lost by reason of the breach of contract. Hence in McRae v Commonwealth Disposals Commission the Commonwealth was liable to pay as one head of damages, the wages of the crew of the "Gippsland" incurred in the futile search for the tanker contracted to be sold [see 84 CLR at 418: See also Pollock v Mackenzie (1866) 1 QSCR 156, cited in McRae's case at 413]. 29 For those reasons Tesrol has made its entitlement to recover as damages the proportion of the electricity service costs and the proportion of the labour costs incurred and wasted as claimed. The claim in relation to the accountant's fees is allowed. Indemnity costs 30 To my mind there is considerable substance in Tesrol's submission that a close examination of the approach to the proceedings by CEFLA makes good the proposition that CEFLA at all material times on and after 26 April 2005 knew or should have known that its case, ultimately abandoned, was groundless with no or no reasonable prospects of success. This is particularly bearing in mind the ultimate capitulation of CEFLA and takes into account its expressed intent to put the plaintiff to proof. The reference to 26 April 2005 is a reference to the date when a mediation took place, by which date the plaintiff's material evidence had been served and, on and after which date, CEFLA knew or should have known, that its case was groundless with no or no reasonable prospects of success. 31 In Oshlack v Richmond River Council (1998) 152 ALR 83 Kirby P at 122 said, "If the party unreasonably pursues or persists with points which have no merit such conduct will constitute a consideration relevant to the ordering of costs." 32 That CEFLA did engage [from the time that I have indicated] in unreasonably pursuing points which had no merit is particularly plain in the light of the failure of CEFLA to seek to adduce any evidence at all to answer the essential gravamen of Tesrol's case. The approach is further demonstrated by the election not to cross-examine Mr Bouari, whose evidence clearly required to be tested if CEFLA was to have any prospect of negating liability. Materially, Mr Bouari in his statement, exhibit PX, gave evidence -- "10. I was aware that the production team was having difficulty with the Machine from day one. I recall very soon after commencing production with the Machine a lot of doors went missing. They would go in one end of the Machine but wouldn't come out the other. I recall opening up the part of the Machine called the Oven and finding all of the missing doors lying on the floor damaged. It was apparent to me that the trays in the Oven had been installed incorrectly and had failed to transfer them at the end of the cycle, especially small doors and draw fronts. … 14. The Machine, being designed for spraying of lacquer, was designed to spray lacquer from within 10 millimetres, plus or minus, from the top and bottom of each edge. This was not satisfactory to Tesrol for spraying glue. Whilst Bonzi was at the factory he managed to increase the accuracy to 5 millimetres, although this still did not meet Tesrol's requirements for quality. 15. The most frustrating thing was that when the Machine did begin to fall out of alignment there was no way we would know. The first sign of trouble with the Machine would not be detected until the doors were pressed some 4 hours later. By that time several more loads of doors would have been sprayed. The number of doors being thrown away was enormous. 16. The doors being thrown away were a complete loss to Tesrol. Tesrol does not supply defective doors to its customers. Tesrol does not sell defective doors at a discount or as 'seconds'. Tesrol's reputation is too valuable. … 18. The Machine malfunctioned a number of times and for a number of reasons following Bonzi's departure. I recall that we were stopping and starting it very often. It was very frustrating. I more often than not elected to switch to manual production rather than bother with trying to have it repaired. 19. I recall that in or about mid-December, 2001, only a couple of months following Bonzi's departure, a Cefla engineer by the name of Stefano Caroli ("Caroli") came to the factory. He was in Australia commissioning a Machine for one of our competitors. He did some work on the Machine and advised that he would make recommendations to Cefla for its further modification. 20. Following Caroli's recommendations, Cefla decided to send another technician to the factory. I recall that he arrived in February and that his name was Gabriele Franzoni ("Franzoni"). I was aware that he had been to the factory to work on the Machine some months earlier. I recall that Franzoni only stayed for a very short period of 1 or 2 days. I do not recall exactly what work Franzoni did on the Machine. By this time I had become extremely critical of the Machine and uninterested in the attempts being made to repair and/or modify it. 21. The Machine was never suitable for spraying glue. It was designed for lacquer and was not able to be modified effectively for glue. On top of the inadequate design, it was deficiently built and installed. I recall that technicians from a local engineering business called Ville-Tec Engineering and Repairs ("Ville-Tec") were constantly having to work on the mechanics of the Machine and repair parts." 22. Following Franzoni's visit, I was convinced that the Machine would never operate to the standard Tesrol expected from it and I made the decision to cease using it altogether. Our efficiency in terms of time and re-makes immediately improved dramatically." Conclusion 33 The only matters ultimately the subject of short submissions on quantum have already been dealt with. 34 The principled exercise of the Court's proper discretion is to order that: (1) CEFLA pay the costs of Tesrol incurred up to 26 April 2005 on a party /party basis; and (2) CEFLA pay the costs of Tesrol incurred after 26 April 2005 on an indemnity basis. 35 There is only one matter which remains to be mentioned concerning the approach taken by CEFLA to the proceedings in terms of the express stance to put the plaintiff to proof. It is of crucial significance in terms of the proper conduct of Commercial List proceedings and in terms of the case management of a final hearing for the Court to be squarely and clearly seized of what are the issues to be litigated in the proceedings. To my mind the Overriding Purpose rule [the overriding purpose being to facilitate the just, quick and cheap resolution of the real issues in proceedings] informed by sections such as section 82 of the Supreme Court Act, together with the Practice Note 100 operative in relation to Commercial List proceedings, clearly manifest a requirement that the presentation of cases in the Commercial List be tied to identified issues. I certify that paragraphs 1 - 35 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 25 May 2005 and revised 1 June 2005 ___________________ Susan Piggott Associate 1 June 2005 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.