New South Wales Supreme Court CITATION : Sural SpA & Anor v Downer EDI Rail Pty Limited [2007] NSWSC 1234 HEARING DATE(S) : 8/10/07, 9/10/07, 11/10/07, 12/10/07, 15/10/07 - 19/10/07, 22/10/07 - 24/10/07 JUDGMENT DATE : 7 November 2007 JURISDICTION : Equity Division Technology and Construction List JUDGMENT OF : Einstein J DECISION : Defendant/cross-claimant succeeds in its claims for breach of contract - Verdict to be entered for the defendant/cross claimant. CATCHWORDS : Contract - Novation - Variation - Formal contract for the manufacture and supply by Italian company of conductor to be used by Australian company in construction of electricity power lines in Western Australia - Terms of informal arrangements between contracting parties for the variation/novation of contractual obligations - Inferences from evidence of conversations, communications and subsequent conduct - Contractual construction - Causation - Damages for breach of contract - Duty to mitigate - Expert evidence - Jones v Dunkel LEGISLATION CITED : Evidence Act 1995 (NSW) ABB Engineering Construction Pty Ltd v Abigroup Contractors Pty Ltd [2003] NSWSC 665 Abigroup Contractors Pty Ltd v ABB Service Pty Ltd [2004] NSWCA 181 Adler v Australian Securities and Investments Commission [2003] NSWCA 131 Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 Allen v Carbone (1975) 132 CLR 528 Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452 Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 Bellingham v Dhillon [1973] 1 All ER 20 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 Brunninghausen v Glavanics (1999) 46 NSWLR 538 B Seppelt & Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147 Cardwell Shire Council v Calabrese (1975) 49 ALJR 164 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Dunkirk Colliery Company v Lever [1878] 9 Ch D 20 FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343 Fightvision Pty Ltd v Onisforou & Ors (1999) 47 NSWLR 473 Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 Garnac Grain Co Inc v HMF Faure & Fairclough Ltd & Bunge Corp [1968] AC 1130 Geebung Investments Pty Ltd v Varga Group Investments (No.8) Pty Ltd (1995) 7 BPR 14,551 Godecke v Kirwan (1973) 129 CLR 629 Graham Evans Pty Ltd v Stencraft Pty Ltd (2000) 16 BCL 335 G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 Harpers Trading (Singapore) Pte Ltd v RFL International Ltd (unreported, Supreme Court of New South Wales, Carruthers J, 12 December 1994, BC9403441) Hasell v Bagot Shakes and Lewis Ltd (1911) 13 CLR 374 Heysham Properties Pty Limited v Action Motor Group Pty Limited & Ors (1996) 14 BCL 145 CASES CITED : Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 Hoad v Scone Motors Pty Limited [1977] 1 NSWLR 88 Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 Inland Revenue Commissioners v Raphael [1935] AC 96 Integrated Computer Services Pty Limited v Digital Equipment Corporation (Australia) Pty Limited (unreported, Court of Appeal of New South Wales, McHugh, Mahoney and Hope JJA, 23 December 1988, BC8801158) James Findlay & Company Limited v NV Kwik Hoo Tong Handel Maatschappij [1929] 1 KB 400 John R Keith Ltd v Multiplex Constructions (NSW) Pty Ltd & Anor [2002] NSWSC 43 Jones v Dunkel (1959) 101 CLR 298 London & South of England Building Society v Stone [1983] 3 All ER 105 Love & Stewart Ltd v S Instone & Co Ltd (1917) 33 TLR 475 Masters v Cameron (1954) 91 CLR 353 Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507 Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1 Munce v Vinidex Tubemarkers Pty Ltd [1974] 2 NSWLR 235 Narni Pty Ltd v National Australia Bank Limited [2001] VSCA 31 NRMA Ltd v Morgan (1999) 31 ACSR 435 Payzu Ltd v Saunders [1919] 2 KB 581 Pobjie Agencies Pty Ltd v Vinidex Tubemakers Pty Ltd [2000] NSWCA 105 Raguz v Sullivan (2000) 50 NSWLR 236 Reardon-Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 Roper v Johnson (1873) LR8CP 167 Ryan (Receiver & Manager of Homfray Carpets Australia Pty Ltd) v Textile Clothing & Footwear Union Australia [1996] 2 VR 235 Sacher Investments Pty Limited v Forma Stereo Consultants Pty Limited [1976] 1 NSWLR 5 Schellenberg v Tunnel Holdings Pty Ltd (2000) 170 ALR 594 Segenhoe Limited v Akins (1990) 29 NSWLR 569 Simonius Vischer & Co Ltd v Holt & Thompson [1979] 2 NSWLR 322 Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310 Smailes & Son v Hans Dessen & Co (1906) 95 LT 809 Sotiros Shipping Inc & Anor v Sameiet Solholt (The "Solholt") [1983] 1 Lloyd's Rep 605 TCN Channel Nine v Hayden Enterprises Pty Limited (1989) 16 NSWLR 130 Telstra Corporation Limited v Australis Media Holdings (1997) 24 ACSR 55 Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486 Tomko v Palasty [2007] NSWCA 258 Wenkart v Pitman (1998) 46 NSWLR 502 Sural SpA (First Plaintiff) PARTIES : Sural CA (Second Plaintiff) Downer EDI Rail Pty Limited (Defendant) FILE NUMBER(S) : SC 55058/04 COUNSEL : Mr Lally QC, Mr J Slattery (Plaintiffs) Mr M Leeming SC, Mr M Jones (Defendant) SOLICITORS : Clayton Utz (Plaintiffs) Corrs Chambers Westgarth (Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TECHNOLOGY AND CONSTRUCTION LIST Einstein J Wednesday 7 November 2007 55058/04 Sural SpA & Anor v Downer EDI Rail Pty Ltd JUDGMENT The proceedings 1 These proceedings concern obligations arising under a contract for the supply and construction of electricity power lines in an area of Western Australia to the north of Perth ["the Project"]. 2 The first plaintiff Sural SpA ["SpA"] is incorporated in Italy. The second plaintiff Sural CA ["CA"] is incorporated in Venezuela. In the circumstances detailed in these reasons, both companies were at times involved in the supply of conductor to be used in the subject Project known as "G" 54/7/3.00 ACSR/AC conductor. 3 An issue involves the novation or variation of the only formal contract ever entered into between the parties [entitled "Formal Instrument of Agreement"]. That contract had been entered into on 16 August 2002 between CA and the defendant, Downer EDI Rail Pty Ltd (formerly Evans Deakin Pty Ltd t/as Downer PTR) ["Downer"] which is an Australian engineering corporation. It provided amongst other things that: i. Sural CA would manufacture and supply Downer with a certain quantity of conductor packed onto non-returnable steel drums; ii. the steel drums on which the conductor was to be supplied were to be in accordance with Australian Standard C365.11; iii. the conductor was to be delivered by Sural CA to Fremantle [CFR (Incoterms 2000)] in four "batches" by certain specified dates; iv. Downer was entitled to liquidated damages for delay in delivery calculated at a rate of 0.25% per day of the value of the conductor which had not been delivered up to a maximum of 10% of the value of the conductor of which delivery had been delayed; and v. Sural CA was to provide security in the amount of 10% of the contract sum in the form of a bank guarantee. 4 Serious civil unrest took place in Venezuela in late November 2002 up to January 2003 leading to Sural CA proposing to Downer that the contract be carried out by the Sural group facility in Italy, Sural SpA. The material communications were both oral and in writing. It is common ground that the proposal was ultimately put into place and that either by variation or novation, SpA became a contractual party: i. The Sural parties contending that the altered contractual position involved SpA being substituted for CA as the sole contractual party; ii. Downer having pleaded that the altered contractual position involved CA and SpA being jointly substituted as the Sural contractual parties, but during final address conceding the correctness of the Sural analysis. The structure of the pleaded cases 5 The structure of the pleaded cases is as follows: Summons i. By the Summons SpA seeks: a) a finding that there was a novation or variation of the contract in or about May 2003 such that the conductor was to be supplied and delivered by SpA instead of CA and that Downer would pay SpA for the conductor; b) the recovery of a debt it claims it is owed, in an amount of US$321,209.47. Defence ii. Downer has defended that claim, on the basis that it claimed a set-off for liquidated damages based upon late delivery of conductor. It has quantified the liquidated damages claim at US$316,627.22 which, when added with an interest component of US$4,582.25, relevantly totalled US$321,209.47. Reply iii. In reply, SpA claims that the liquidated damages amount has already been taken up by the application of security held by Downer, and therefore there is no separate right to hold back this amount. Downer claims that it is entitled to keep the whole security for the defects liability period, and is therefore entitled to hold back the further sum. In substance the dispute comes down to whether Downer was entitled to keep the whole security for the defects liability period. Amended cross-claim iv. By way of the amended cross-claim, Downer claims that the product that was supplied, in particular the drums upon which the conductor was wound, did not accord with the terms of the contract and, that as a consequence of that breach, it has suffered substantial losses. v. The four principal alleged breaches of contract are said to have arisen because the conductor supplied was: a) wound onto drums in a manner that did not comply with industry standards and did not allow roll-out of the conductor at speeds that accorded with ordinary industry standards ("winding breach"); and b) on poorly designed wooden drums and not on non-returnable steel drums ("steel drum breach " ); and c) on drums which failed to comply with the latest edition of Australian Standard C365II – Drums for bare stranded conductors, Part II; Metal Drums (being Australian Standard AS 3983-1991) ("standards breach"); or d) on wooden drums which failed to comply with the ANIE (the Italian Association of Electrotechnical and Electric Companies Standard) ("wooden drum breach"). Defences to amended cross-claim vi. There are various defences raised to Downer's cross-claim. Without being exhaustive it suffices for present purposes to note that they fall into two broad categories: a) The Sural parties claim that there was a variation of the terms of the contract which had the effect that the drums did not need to be steel, but wood, and that it otherwise complied with the Agreement. b) The Sural parties contend that the cause of loss occasioned to Downer was its own acts and omissions, not any default on the part of the Sural parties. Overview of the issues in dispute 6 Again but without being exhaustive, the principal issues in dispute appear to be as follows: i. When was the contract novated/varied and what was the effect of that novation/variation upon sundry rights and obligations of the parties including: a) the rights and obligations of the parties with respect to security? b) the requirement to supply the conductor packed onto non-returnable steel drums? ii. Has Sural SpA committed the winding breach, the steel drum breach, the standards breach or the wooden drum breach? [As will be seen in the reasons which follow, the ultimate findings of breaches of contract do not depend upon non-compliance with particular standards for the reason in particular, that the experts agreed that failure to comply with the code limits was neither sufficient proof of inadequacy nor a satisfactory explanation of the problems which occurred.] iii. If so, did that breach cause any loss and damage suffered by Downer? iv. If so, how much loss and damage was suffered by Downer by reason of that breach? The somewhat unusual issues which arise 7 A feature of the litigation involves the seeming lack of formality in the manner in which the parties: i. failed to ensure that any formal document was brought into existence setting out the terms of the altered contractual position; ii. engaged over a reasonably extended period of time in a mix and match of telephone conversations and emails on a number of contractual topics [with the resultant need for the Court to pay very close attention to the detail of these inter partes communications] in order to reach findings as to: a) the date when any novation or variation to the contract occurred; b) the terms of any novation or variation. 8 An extensive volume of evidence [both documentary and through the very many witnesses called] treated with the four alleged breaches. The principles 9 There are a number of principles which require to be kept in mind, including principles concerning contract [novation/variation], mitigation and assessment of quantification of damages. Determining when parties have first entered into a binding contract or have later agreed to a variation or novation of a pre-existing contract 10 Where the issue before the Court concerns identification of the occasion when parties have first entered into a binding contract or have later agreed to a variation or novation of a pre-existing contract, a number of matters require close consideration. 11 There are a number of authorities which treat with the proper approach to be taken in such cases. Naturally each case must be determined upon its particular facts. On more than one occasion I have had an opportunity to endeavour to summarise a number of the principles which obtain. For present purposes it seems convenient to simply repeat the statements of principle to be found in John R Keith Ltd v Multiplex Constructions (NSW) Pty Ltd & Anor [2002] NSWSC 43 [which statements were in turn repeated in ABB Engineering Construction Pty Ltd v Abigroup Contractors Pty Ltd [2003] NSWSC 665 and later affirmed by the Court of Appeal: Abigroup Contractors Pty Ltd v ABB Service Pty Ltd [2004] NSWCA 181 without adverse comment as to the expression of principle]. 12 The following passages are taken from John R Keith at [217]-[238]. "[In relation to the Masters v Cameron issue] it is necessary to recall the three classes for which the decision of the High Court is authority. The passage in question [in Masters v Cameron (1954) 91 CLR 353] at 360 is in the following terms: "Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract. In each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution… Cases of the third class are fundamentally different. They are cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own…" … the seeds of what has now been called the "fourth class" were sown in the earlier case of Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310: "One in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon while expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms." (Per the majority consisting of Knox CJ, Rich and Dixon JJ at 317.) In Love & Stewart Ltd v S Instone & Co Ltd (1917) 33 TLR 475, His Lordship Lord Loreburn stated at 476: "It was quite lawful to make a bargain containing certain terms with which one was content, dealing with what one regarded as essentials, and at the same time to say that one would have a formal document drawn up with the full expectation that one would by consent insert in it a number of further terms. If that were the intention of the parties, then a bargain had been made, nonetheless that both parties felt quite sure that the formal document could comprise more than was contained in the preliminary bargain." In Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 McClelland J. by reference to Sinclair Scott and Co Ltd v Naughton (1929) 43 CLR 310 referred to a fourth class in terms of Masters v Cameron , namely the situation where the parties were content to be bound immediately and exclusively by the terms which they had agreed upon, whilst expecting to make a further contract in substitution for the first contract containing, by consent, additional terms. On the issue which arose in Baulkham Hills of whether or not there was a binding contract, McClelland J at 627 put the matter as follows: "There was a binding contract, if and only if, by the exchange of letters the parties mutually communicated their respective assents to being legally bound by terms capable of having contractual effect: see the discussions in Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 at 9254ff and Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309. In the last mentioned case Mahoney J A (at 326) identified three questions which it is often useful to consider in such a context as the present, namely "….did the parties arrive at a consensus?; (if they did) was it such a consensus as was capable of forming a binding contract?; and (if it was) did the parties intend that the consensus at which they arrived should constitute a binding contract?" On appeal to the Court of Appeal, McClelland J's decision was affirmed on the basis of the principle quoted above in Sinclair, Scott . In G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631, the Court of Appeal held that, "…the decisive issue is always the intention of the parties which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances: Godecke v Kirwan (1973) 129 CLR 629 at [63]; Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 332-4, 337. If the terms of a document indicate that the parties intended to be bound immediately , effect must be given to that intention irrespective of the subject matter, magnitude or complexity of the transaction." (Per McHugh JA (as his Honour then was) at 634E-F, with whom Kirby P and Glass JA agreed.) [Emphasis added.] …the fourth class has now passed into common parlance insofar as the courts are concerned and is referred to regularly as an accepted classification: see Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486; Heysham Properties Pty Limited v Action Motor Group Pty Limited & Ors (1996) 14 BCL 145; Telstra Corporation Limited v Australis Media Holdings (1997) 24 ACSR 55; Brunninghausen v Glavanics (1999) 46 NSWLR 538. I accept that regardless of classification, the principle that is now recognised is that there can be an informal contract with the expectation that other terms will be negotiated and by consent included in the formal document. That is, to say that such further negotiations and activity regarding other terms is still to take place does not mean the existing informal contract is not binding: Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 [per Ipp J (as he then was) at 110-111]. …the fourth class was considered in Graham Evans Pty Ltd v Stencraft Pty Ltd (2000) 16 BCL 335 [Full Federal Court (French, Whitlam and Dowsett JJ) and see also transcript of special leave application which was refused]. Evans brought an action against Stencraft claiming damages for breach of contract. The claim was dismissed at first instance. Evans appealed to the Full Federal Court. The Full Federal Court, in reversing Spender J at first instance, considered Masters v Cameron and applied Baulkham Hills and in so doing upheld the appeal unanimously. The Full Court held that parties may be bound immediately by the terms which they agree upon, whilst expecting to negotiate the terms of, and make a further contract in substitution for, the first contract. Brambles Holdings Ltd v Bathurst City Council (Unreported, 2001, NSWCA, Mason P, Heydon JA and Ipp AJA) was a case in which the "difficulties" of pressing too far the classical theory of contract formation based upon offer and acceptance (see also Pobjie Agencies Pty Ltd v Vinidex Tubemakers Pty Ltd [2000] NSWCA 105 per Mason P at [1]). Heydon JA said in that case, whilst considering the principles of the law of contract that: "Offer and acceptance analysis does not work well in various circumstances." [at paragraph 71] In that case, Heydon JA set out succinctly the conventional and accepted principles of the law of contract: "The first relevant principle of law is that pre-contractual conduct is only admissible on questions of construction if the contract is ambiguous and if the pre-contractual conduct casts light on the genesis of the contract, its objective aim, or the meaning of any descriptive term: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347-352. The second relevant principle is that post-contractual conduct is admissible on the question of whether a contract was formed: Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 at 77; Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 at 668, 669 and 672; B Seppelt & Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147 at 9149 and 9154-9156; Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR [97023] at 9255. The third relevant principle is that post-contractual conduct is not admissible on the question of what a contract means as distinct from the question of whether it was formed. As explained by Priestley JA (Meagher JA agreeing) in Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 326-330, the status of the relevant High Court authorities is unclear: hence unless it is demonstrated that the later decisions of the Victorian Full Court and Court of Appeal against admissibility, Ryan v Textile Clothing & Footwear Union of Australia [1996] 2 VR 235 and FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343, are clearly wrong or they are overruled, they should be followed in New South Wales. No attempt was made to demonstrate that they are clearly wrong. The fourth relevant principle is that the construction of a contract is an objective question for the Court, and the subjective beliefs of the parties are generally irrelevant in the absence of any argument that a decree of rectification should be ordered or an estoppel by convention found." Hence in determining the circumstances surrounding the formation of the agreement, the matrix of facts, it is the objective intent that is paramount. Whether any relevant individual representative thought that an agreement existed or that it did not exist, is irrelevant to the exercise unless there exists an argument concerning estoppel. As Lord Wilberforce has said in Reardon-Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989: "When one speaks of the intention of the parties to the contract one speaks objectively - the parties cannot themselves give direct evidence of what their intention was - and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties." Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1907) 5 CLR 647; Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68; Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548-549; Geebung Investments Pty Ltd v Varga Group Investments (No.8) Pty Ltd (1995) 7 BPR 14,551 (supra); Anaconda Nickel (supra) are also authorities supporting the proposition that in ascertaining the relevant intention, that is the intention to contract, relevant circumstances may include prior negotiation and subsequent conduct. A fundamental question falling for consideration is whether the conduct of the parties viewed in the light of surrounding circumstances shows or is indicative of an agreement having come into existence. "In an ongoing relationship, it is not always easy to point to the precise moment when the legal criteria of a contract have been fulfilled. Agreements concerning terms and conditions which might be too uncertain or too illusory to enforce at any particular time in the relationship may by reason of the parties' subsequent conduct become sufficiently specific to give rise to legal rights and duties. In a dynamic commercial relationship new terms will be added or will supersede older terms. It is necessary therefore to look at the whole relationship and not only at what was said and done when the relationship was first formed." [Per McHugh JA (as he then was) in Integrated Computer Services Pty Limited v Digital Equipment Corporation (Australia) Pty Limited (unreported, NSWCA, McHugh, Mahoney and Hope JJA, 23 December 1988); see also Raguz v Sullivan (2000) 50 NSWLR 236 at 251.] Questions of the relevance and probative value of evidence in circumstances in which the issue concerned whether or not an enforceable contract had been entered into were also before the Court in Film Bars Pty Ltd v Pacific Film Laboratories (1979) BPR 97023. As McClelland J put it, such questions cannot properly be considered independently of a consideration of the relevant issue namely what it is in point of fact that constitutes the making of a contract in circumstances such as here obtained. As his Honour points out, such a contract is made " by the mutual communication between the parties of their respective assents to being bound by identifiable terms otherwise capable of having contractual force, the mutual communication typically taking the form of offer and acceptance ". As his Honour (citing Williston on Contract, 3rd ed, Vol 1 paragraph 21) points out, one is not concerned with the subjective thing known as meeting of the minds, but the objective thing, the manifestation of mutual assents which is essential to the making of a contract [at page 9254]. Film Bars [at page 9255] is also authority for the proposition that: "in determining whether the communications between the parties constitute a contract the Court is not confined to a consideration of the terms or manner in which the communications were made: they must be interpreted by reference to the subject matter and the surrounding circumstances including, inter alia, the nature of, and the relationship between, the parties, and previous communications between them, as well as to standards of reasonable conduct in the known circumstances." …subsequent communications may have probative value depending upon the light they throw on the proper interpretation of earlier communications alleged to constitute the contract. Post-contractual conduct is not admissible on the question of what a contract means as distinct from the question of whether it was formed [cf Brambles Holdings supra; cf the recent decision of the Court of Appeal in Tomko v Palasty [2007] NSWCA 258 where this principle was affirmed [Einstein J, Mason P concurring]. Subsequent communications can also legitimately be used against a party as an admission by conduct of the existence or non-existence, as the case may be, of a subsisting contract... Considerable assistance in terms of following the relevant principles…is to be obtained from the decision of the New South Wales Court of Appeal in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540. … The matter was put in the following terms by the Chief Justice (at 550 and following) with whose reasons for judgment Hope and Mahoney JJA agreed: "…The case involves the objective determination of the intention of the parties from a consideration of a series of communications exchanged by them in the context of their dealings over a period of time. In those circumstances it is both appropriate and necessary to have regard to the commercial circumstances surrounding the exchange of communications and, in particular to the subject matter of those communications: Allen v Carbone (1975) 132 CLR 528 at 531-532. Furthermore, as was noted earlier, it is proper to have regard to communications between the parties subsequent to the date of the alleged contract to the extent to which those communications throw light upon the meaning of the language which is being considered for the purpose of determining whether it expresses an intention one way or the other upon the critical matter. At the least, such subsequent communications will often form part of the context in which the particular exchanges in question are to be evaluated. The position is by no means so clear, however, in connection with internal memoranda… or statements as to subjective intention made by individuals in the course of giving evidence. As it happens, although the learned judge had a good deal of material of this kind put before him at the hearing, it was not particularly helpful even if admissible. In the first place, a great deal of it was equivocal and individual pieces of evidence were contradictory in effect. Some of the persons who participated in the negotiations in question were called to the witness box and vigorously examined as to what was going on inside their minds at particular times. This process in the end principally served to demonstrate what might have been expected to be the case, that is to say, that the witnesses, not being lawyers themselves, were in a state of considerable confusion about the issue that ultimately emerged as determinative of the rights of the parties… In so far as acts or statements of the kind referred to, not involving communications between the parties, are claimed to be relevant in a case such as the present upon the ground that they constitute an admission, it seems to me that it will often be necessary to identify with some care the fact which is said to have been admitted. As was noted, there may be cases in which the issue is such that the fact of the subjective state of mind of one or other of the parties is relevant. Normally, however, what is in issue is not their subjective state of mind but their "intention as expressed" (cf Inland Revenue Commissioners v Raphael [1935] AC 96 at 142 per Lord Wright) and caution may need to be exercised in relating the fact which is said to be admitted to the fact which is legally relevant." [emphasis added] Novation 13 Novation is a transaction by which, with the consent of all parties concerned, a new contract is substituted for one that has already been made. Intention is crucial to show a novation. A novation may be express or implied from the circumstances. However, when searching for such an intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements. Novation may be inferred from evidence of informal conversations and the subsequent consistent pattern of conduct of the parties: Fightvision Pty Ltd v Onisforou & Ors (1999) 47 NSWLR 473 at 491-493. Variation 14 Variation by contract (as opposed to waiver or estoppel) involves two contracts, the existing one and the contract of variation: Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 at [19]-[31]. The existence of a contract of variation must be clearly demonstrated by reference to the ordinary rules of contract formation [Cheshire and Fifoot's, "Law of Contract", Eighth Australian Edition at [22.4]]. Principles concerning mitigation 15 Downer's submissions accurately summarised these principles. 16 The general principle is that a plaintiff must take all reasonable steps to mitigate the loss to it consequent upon the defendants' wrong and cannot recover damages for any such loss which it could have avoided, but has failed, through unreasonable action or inaction to avoid. In British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 at 689 Viscount Haldane LC described the principle in terms of a "duty". Although not strictly relevant for current purposes, it should be noted that the "duty" to mitigate is something of a misnomer for the reasons identified by Sir John Donaldson MR (as he then was) in The Solholt [1983] 1 Lloyd's Rep 605 at 608: "A plaintiff is under no duty to mitigate his loss, despite the habitual use by the lawyers of the phrase 'duty to mitigate'. He is completely free to act as he judges to be in his best interests. On the other hand, a defendant is not liable for all loss suffered by the plaintiff in consequence of his so acting. A defendant is only liable for such part of the plaintiff's loss as is properly to be regarded as caused by the defendants' breach of duty. As Viscount Haldane LC put it [in British Westinghouse Electric and Manufacturing ] at 689: The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps. And later: "Whether a loss is avoidable by reasonable action on the part of the plaintiff is a question of fact not law. This was decided in Payzu Ltd v Saunders [1919] 2 KB 581." See also Wenkart v Pitman (1998) 46 NSWLR 502 at 524. 17 In Payzu Ltd v Saunders [1919] 2 KB 581 at 586 McCardie J posed the following question in relation to mitigation: "The question, therefore, is what a prudent person ought reasonably to do in order to mitigate his loss arising from a breach of contract. … the plaintiffs … were fully entitled to consider the terms in which the offer was made, its bona fides or otherwise, its relation to their own business methods and financial position, and all the circumstances of the case…" 18 As can be seen from these well-established principles, the defendant assumes an onus to establish that the plaintiff has acted unreasonably in respect of the minimisation of loss occasioned by the defendant's breach. If the defendant is unable to discharge that onus, the normal measure of damages will apply [Roper v Johnson (1873) LR 8 CP 167; Hasell v Bagot Shakes and Lewis Ltd (1911) 13 CLR 374 at 388; British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London [1912] AC 673 at 689; Garnac Grain Co Inc v Faure & Fairclough [1968] AC 1130 at 1140; Munce v Vinidex Tubemarkers Pty Ltd [1974] 2 NSWLR 235 at 240; TCN Channel 9 v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 158; Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1 at 17 and 29; Wenkart v Pitman (1998) 46 NSWLR 502 at 504, 520-523 and 535; Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507 at 509 and 513]. 19 As Downer has contended, the Court does not weigh the conduct of the plaintiff in fine scales for the benefit of the defendant, [see Banco de Portugal v Waterlow & Sons [1932] AC 452 at 506: "Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticize the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of duty owed to him has acted reasonably in the adoption of remedial measures and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken" [cited in Simonius Vischer & Co Ltd v Holt & Thompson [1979] 2 NSWLR 322 at 355]. Nor will the Court impose a high standard on the plaintiff [Sacher Investments Pty Limited v Forma Stereo Consultants Pty Limited [1976] 1 NSWLR 5 at 9; Harpers Trading (Singapore) Pte Ltd v RFL International Ltd (unreported, Supreme Court of New South Wales, Carruthers J, 12 December 1994)], or judge the actions of the plaintiff with the critical eye of hindsight [Banco de Portugal v Waterlow [1932] AC 452 at 506]. After all, in this situation it has already been accepted that the defendant is the wrongdoer [Banco de Portugal v Waterlow [1932] AC 452 at 506; Sacher Investments Pty Limited v Forma Stereo Consultants Pty Limited [1976] 1 NSWLR 5 at 9; Harpers Trading (Singapore) Pte Ltd v RFL International Ltd; Segenhoe Limited v Akins (1990) 29 NSWLR 569 at 582]. 20 The pragmatic approach to the assessment of the plaintiff's actions is governed by the following principles: i. it is a matter of fact in all the circumstances. [For example, in Sotiros Shipping Inc & Anor v Sameiet Solholt (The "Solholt") [1983] 1 Lloyd's Rep 605 at 609: "If they could have found a different but identical ship, clearly it would have been reasonable that they should have bought it and the price of that purchase would have established the measure of their loss. However there is no suggestion that any such vessel was available. This left them with the alternative of buying Solholt"]; ii. the Court does not expect the plaintiff to undertake "any obligation to do anything other than in the ordinary course of business" [ Dunkirk Colliery Co v Lever [1878] 9 Ch D 20 at 25 per James LJ, cited by Viscount Haldane LC in British Westinghouse at 689; see also Bellingham v Dhillon [1973] 1 All ER 20 at 23-24; London & South of England Building Society v Stone [1983] 3 All ER 105 at 120-122]; iii. the mitigation principle does not require a plaintiff to act in a way it perceives to be commercially unwise for it. [In James Findlay & Co Ltd v NV Kwik Hoo Tong Maatschappij [1929] 1 KB 400 at 410, 415 and 418 the plaintiff's loss could have been offset had they insisted upon their legal rights under a pre-existing contract with a third party. However that pre-existing contract was based upon a premise that the plaintiff had subsequently found out was incorrect, so that whilst enforcement was strictly available, to do so would have tarnished the plaintiff's commercial reputation. Greer LJ at 415 said: "I see nothing immoral or unconscionable in an endeavour to hold to their bargain the Indian sub-purchasers who had bought goods on different terms from those on which the respondents bought them - namely, as goods which were certified by the bill of lading as having been shipped in September. The respondents would have been perfectly entitled, as a matter of business morals, to hold the sub-purchasers to their bargain and make them pay damages if they did not take the goods. But it is wholly unreasonable to say that that would be the ordinary course of business which they ought to pursue to diminish the damages. People have not to consider what is right in a strict court of conscience; they have to consider the effect of their conduct upon their business relations with other people, and I have little doubt that it would not have suited the respondent's business, nor would it be reasonable as a matter of business to require them, to do what is suggested in order to diminish the damages, if prima facie they are entitled to recover damages from the defendants." In Harpers Trading (Singapore) Pte Ltd v RFL International Ltd (unreported, SCNSW, Carruthers J, 12 December 1994) the Court found that the requirement to mitigate did not require the plaintiff to "fire sell" its product in circumstances where it was perceived it would be commercially unwise to do so. See also Smailes & Son v Hans Dessen & Co (1906) 95 LT 809 at 814; and the dissenting judgment of Samuels JA in Hoad v Scone Motors Pty Limited [1977] 1 NSWLR 88 at 100]. Assessing quantification of damages 21 The Sural parties' summary of the well-established general principles in assessing the quantification of damages is accepted as correct: i. Only loss which is caused by the breach in question is compensable [ Cardwell Shire Council v Calabrese (1975) 49 ALJR 164 at 165]. A claimant bears the onus of establishing the extent of its loss on the balance of probabilities. To satisfy the requirements of that rule, a claimant must, if it is to recover more than a nominal amount, affirmatively establish loss capable of being measured in monetary terms. In many cases, proof of the full extent of the loss will involve establishing an evidentiary foundation for positive and detailed ultimate findings by the Court on the balance of probabilities. 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 [ Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 118 per Deane J]. Ultimately, as much certainty and particularity must be insisted upon in proof of damage as is reasonable having regard to the circumstances and to the nature of the acts themselves by which the damage is done [ Amann at 138 per Toohey J]. ii. Nevertheless, damages will not be awarded if the evidence does not comply with a minimum standard: Cheshire and Fifoot's, "Law of Contract", Eighth Australian Edition at [23.23]. This minimum standard will not be satisfied if the evidence of loss is essentially speculative, unreliable, inaccurate, incomplete and/or ill-founded as a matter of fact [ Narni Pty Ltd v National Australia Bank Limited [2001] VSCA 31 at [31] per Tadgell JA]. iii. In a claim based on wasted expenditure, the claimant is only entitled to damages for additional expenditure incurred as a result of the breach. The claimant is not entitled to damages for expenditure it would have incurred in any event. Jones v Dunkel 22 It is important to recall the principles laid down in Jones v Dunkel (1959) 101 CLR 298. The following extracts clarify the position in this regard: "[The] unexplained failure by a party to give evidence, to call witnesses, or tender documents…may, not must, in appropriate circumstances lead to an inference that the uncalled evidence would not have assisted that party's case… The appropriate circumstances exist where it was within the power of the party to tender the evidence which was not tendered..." (JD Heydon, Cross on Evidence , 7th ed, Butterworths, Sydney, 2004 at [1215].) "This instance of a Jones v Dunkel inference, also available where there is unexplained failure by the party to call a witness or tender documentary evidence, can entitle the judge or jury more readily to accept the evidence of the opposite party which might have been contradicted, or more readily to draw any inference fairly available from the evidence called by the other party. A Jones v Dunkel inference cannot fill gaps in the evidence, or convert conjecture and suspicion into inference, but unless it is to be empty of content the inference if drawn may weigh the scales, however slightly, in favour of the opposing party." [ Adler v Australian Securities and Investments Commission [2003] NSWCA 131 at [649] per Giles JA, Mason P and Beazley JA agreeing.] "[T]he rule [in Jones v Dunkel ] only applies where a party is "required to explain or contradict" something. What a party is required to explain or contradict depends on the issues in the case as thrown up in the pleadings and by the course of evidence in the case. No inference can be drawn unless evidence is given of facts "requiring an answer". (JD Heydon, Cross on Evidence , 7th ed, Butterworths, Sydney, 2004 at [1215].) [Passage quoted with approval in the joint judgment of Gleeson CJ and McHugh J in Schellenberg v Tunnel Holdings Pty Ltd (2000) 170 ALR 594 at 608- 609.] The contractual position 23 It seems convenient first to treat with the contractual position. The 16 August 2002 formal contract 24 Without being exhaustive, particularly significant provisions of the original contract were as follows: i. Sural CA is described as "Supplier" and Evans Deakin Pty Ltd (trading as Downer PTR) is described as "Purchaser". ii. The "Scope of Work" (Part D) is described as: The Works to be carried out require the Supplier to provide all labour, plant, machinery, equipment, supervision, engineering and materials necessary for the quality assurance, supply, manufacture, testing, packing onto non returnable steel drums and into containers, transporting to the wharf at the port of departure, loading on board the vessel at the port of departure and delivery CIF (Inco terms 2000) Fremantle Western Australia of 54/7/3.00 ACSR/AC conductor code name "Golf" in accordance with Western Power Corporation's Specification for Contract No TD6.9.1 (relevant extracts of this Specification are included in Annexure Part F of the Contract), and the Contract. The requirements for delivery purposes are detailed in Annexure Part G. iii. The applicable "Standards" (Part H) are described as: Unless otherwise agreed in writing by the Purchaser all design, material and workmanship shall comply with the latest editions of the Australian Standards. The following Australian Standards will be applied: AS 3607 Conductors – Bare overhead, aluminium and aluminium alloy-steel reinforced C 36511 Drums for bare stranded conductors, Part II; Metal Drums (It should be noted that the "latest edition" of the Australian Standard (being AS 3983-1991) was attached to a facsimile dated 25 June 2002 from Les Waldron of Downer to Mr Riviere and Ms Holzhaker.) iv. Clause SC-7.3 included: Unless otherwise agreed in writing by the Purchaser conductor drums shall be non returnable steel type in accordance with Australian Standard C365.11 so as to enable smooth running out in lengths as long as can be conveniently handled and erected . The drums are to be constructed so as to withstand rough handling in transit and be of a type, size and construction which will ensure that during and after winding of the conductor onto the drums and during transport and storage, the conductor will not be damaged in any way … [Emphasis added.] v. Clause SC-8 provided: All materials used under this contract shall be new and of the best quality and of the class most suitable for working under the conditions specified and shall withstand the variations of temperature and atmospheric conditions arising under working conditions without distortion or deterioration or the setting up of undue stresses in any part , and also without affecting the strength and suitability of the various parts of the works which they have to perform. No repair of defective parts will be permitted without the sanction in writing of the Purchaser. All work shall be carried out and completed in a neat and workmanlike manner to the approval of the Purchaser. vi. The procedure for Variations is described in clause GC16. The "Delivery Schedule" (clause SC-15; Part G) recorded: 1. batch 1 to be delivered on 30 June 2003; 2. batch 2 to be delivered on 30 July 2003; 3. batch 3 5to be delivered on 30 August 2003; 4. batch 4 to be delivered on 30 September 2003; vii. Clause GC17.1 provided for the payment of Liquidated Damages for every day in which the delivery was late, such amount being 0.25 per cent per day of the value of the conductor, calculated in accordance with SC-2.2 which had not been delivered at the Place for Delivery by the Date for Delivery for that conductor, limited to a maximum liability of 10% of the value of the conductor of which delivery had been delayed (Clause SC-11). viii. Interest was payable on all moneys due to either party at a rate of 5 per cent per annum, compounded at six monthly intervals (GC-23). ix. Payments and set-offs were dealt with in GC22.2 to GC22.4. Limitation of liability was dealt with in GC-27. x. Security was dealt with in clause SC-3 and GC5.2 – GC5.7. 25 The particular parameters laid down by the contract which require to be steadfastly kept in mind may be summarised as follows: i. Sural CA agreed to supply the conductor to Downer: a) in four batches on 30 June, 30 July, 30 August and 30 September 2003; b) in lengths of 3500m per drum weighing 4844 kg (Sural CA's quotation dated 16 August 2001 signed by Mr Riviere and Ms Holzhaker, incorporated by Annexure I); c) on "non returnable steel type" drums in accordance with Australian Standard C365.II; and d) drums were "to be constructed so as to withstand rough handling in transit". ii. The obligation upon Sural CA to supply was capable of being varied by the parties in writing and only in writing. See SC 7.3 ("Unless otherwise agreed in writing") and also GC 16.1). 26 As the reasons and the evidence make plain, there were two variations in writing which occurred, at two separate times: i. first, a variation [herein termed the novation] whereby the supply was to be made by Sural SpA; ii. secondly, a variation whereby in lieu of the security by way of bank guarantee, Downer would retain from the payment for the first batch of conductor, an amount of 10% of the total contract price. The ultimate holding concerning the claimed steel to wooden drums variation 27 As the evidence and the reasons make plain there was no oral agreement to vary the obligations under the contract to supply the conductor on wooden drums. It is common ground that there was no agreement in writing to that effect. The approach taken to setting out the evidence 28 It is inappropriate to endeavour to chronicle all of the evidence. This is particularly the case where there were so many emails passing between the parties at material times, not to mention the number of conversations which occurred. The approach taken in this judgment is to attempt to deal only with those communications which seem to have particular significance for the issues arising for determination. Even so it has been necessary to deal with many emails and with some correspondence. All of the communications have of course been taken into account in order to make the factual findings. 29 It is pertinent to also note that in relation to the factual issues as to the alleged breaches of contract, many witnesses were called to give evidence as to what they had seen and in some cases [as where the first-hand hearsay rule applied], as to what others had told them had occurred. At the same time the volumes of written material inter alia comprising the actual site records were before the Court. Mercifully there were some useful summaries of the site records. Here a deal of the evidence has had to be referred to in order to make material factual findings. 30 Although it was the case that one or other of the witnesses called by either party disagreed in a number of instances with the version of conversations said to have taken place with the other, in some instances the inconsistencies in their different versions played no part in being determinative of any finding in these reasons. Of course other instances involve vital questions of whose version is accepted. The reliability of witnesses Ms Holzhaker 31 Ms Holzhaker [a product manager with the Sural group of companies at the relevant time] appears to have carried out her level best to accurately recall the events in respect of which she gave evidence. [She was based in Venezuela until approximately 10 June 2003 at which time she relocated to Italy.] In the nature of things that evidence was often that she acted at the dictate or direction of Mr Riviere, yet curiously, when he gave evidence, he did not seem to always agree that this had happened with the regularity she had expressed. 32 It has been difficult to determine some of the reliability issues on the balance of probabilities. The Court has in many instances, [including that of having to assess the reliability of Ms Holzhaker], required to closely study the contemporaneous written documents. But in several instances a close examination of the contemporaneous documents seen in the light of contradictory evidence given by other witnesses, particularly Mr Riviere, has ultimately led to the Court accepting the evidence of certain of the Downer witnesses as the more reliable: and in particular accepting the evidence of Mr Antoniazzi as being more reliable than that given by Ms Holzhaker. This is not to say that Ms Holzhaker did not earnestly believe that the content of the conversations said by her to have occurred was otherwise than as she stated in her affidavits and in the witness box. However in other instances, Ms Holzhaker's evidence as to the content of conversations is held to be the more reliable. 33 Ms Holzhaker was clearly confused from time to time in her recollection of events and conceded that her recollection was less than perfect. In particular at one stage she gave evidence under cross-examination that Mr Riviere was at a particular time, negotiating with Mr Antoniazzi concerning the supply of wooden drums as one of the technical issues under discussion on 28 April 2003. She then moved away from that answer, later accepting that she did not know [if wooden reels had been the subject of the discussion]. Neither Mr Riviere nor Mr Antoniazzi gave evidence of any such discussion at this time and no contemporaneous documents recorded such discussions. Hence the difficulties encountered in accepting some of her evidence. Mr Riviere 34 The evidence given by Mr Riviere requires to be very carefully treated with for the reason that he was obviously very partisan to the Sural interests: his evidence was that his parents were ultimately the beneficial owners of SpA as well as CA [T 199-200]. The answers given by Mr Riviere were in a number of instances, inconsistent with the contemporaneous materials. In some instances his evidence clearly requires to be rejected. 35 Mr Riviere verified a creditor's statutory demand for payment of debt issued by SpA to Downer and dated 9 June 2004. That affidavit included Mr Riviere deposing that SpA was a creditor of Downer in respect of a debt totalling US $321,209.47 that was owing pursuant to the Formal Instrument of Agreement dated 16 August 2002 (as varied). He deposed that as part of his duties with SpA, he was responsible for the implementation of the agreement and had inspected the business records of SpA in relation to its client Downer. He deposed that the debt was due and payable by Downer. 36 Critically for present purposes, he deposed that he believed that there was no genuine dispute about the existence or amount of the debt. 37 He was closely cross-examined on this last mentioned sentence in his affidavit. That cross-examination extended over many pages [commencing at T 320]. It is quite plain that he must have known that there was indeed a genuine dispute about the existence and amount of the debt. This was patently clear from the terms of the detailed 9-page letter from Downer addressed to the Sural companies and dated 10 May 2004 [PX 1804] which gave chapter and verse in the most graphic terms to the contention by Downer of its rights at law. This matter reflects adversely on Mr Riviere's credit. 38 Another indicator of Mr Riviere's evidence being sometimes unreliable concerns the following: i. the numerous occasions, when Mr Antoniazzi sought the issue of the bank guarantee stipulated in the contract without success; ii. the clear inference from the evidence that SpA at all material times had the greatest difficulty in procuring such a bank guarantee but without acknowledging any such difficulty, continued to fob off the requests for that guarantee with various excuses; iii. the fact that notwithstanding the obligation to provide the bank guarantee, Mr Riviere was still writing in late March 2003 indicating that SpA proposed to open the bank guarantee once the parties moved closer to the date of shipment, where the inference from all of the evidence is that there was no proper basis for putting that proposal forward; iv. Mr Riviere's refusal under cross-examination to concede that notwithstanding Mr Antoniazzi's request of 27 March 2003 that the bank guarantee be urgently established, Mr Riviere had to have had the gravest doubts that SpA could achieve any such thing; v. that this was in fact the then state of affairs becomes tolerably clear from in particular, the later correspondence sent to Mr Antoniazzi by Ms Holzhaker, which, with respect to the security issue, made the observation that Sural's guarantee credit line "is quite full" because of the amount of different deliveries around Europe; vi. the appropriate inference is that this had been the state of affairs throughout, which inference is supported by the end result where no guarantee was ever furnished. 39 Another indicator of the unreliability of the evidence given by Mr Riviere is exemplified by his reluctance to agree with propositions put to him that he thought would advance Downer's case. Examples include what in the main would seem to be uncontroversial facts: · that conductor is a long-lead item; · that by May 2003 Downer realistically had little choice but to accept Sural's conductor; · that Type 22 wooden drums [in accordance with the Italian ANIE standards] were a relatively unusual drum for the Taranto factory to make; · that Downer was making it absolutely clear that it regarded wooden drums as a breach of contract; · that it was cheaper for Sural SpA to obtain wooden drums than steel drums. 40 Additionally there are the circumstances concerning Sural's dealings with the supplier Construzione Legno Sud ["CLS"] and in particular Mr Riviere's familiarity with those dealings: i. he initially claimed to be unaware of the identity of any individual with whom he had dealt with at CLS; ii. he initially claimed that Sural SpA still bought wooden drums from CLS, then said that it had last bought drums from CLS in 2005 or 2006; [I accept that this ignorance was certainly curious given the centrality of the wooden drums to these proceedings.] 41 Then there is the fact that notwithstanding the repeated requests for documents relating to the wooden drums, not one of which was discovered prior to the hearing, Mr Riviere was able to supply invoices on short notice after cross-examination commenced. Yet it was he who gave instructions to Sural's solicitors, and he who verified Sural's discovery. Mr Todaro 42 Mr Todaro was a mechanical engineer employed by SpA. He was at all relevant times based in Italy. On one occasion he visited the Downer work site in Western Australia to implement a program involving the insertion of inflatable bladders into the wooden reels supplied by Sural to Downer in response to alleged problems experienced by Downer in the unwinding of the wooden drums. His evidence was given through an interpreter and I was unable to discern any area in respect of which his evidence could be seen to be unreliable. Mr Fanelli 43 Evidence [both in affidavit form as well by video-link] was given by Mr Fanelli. He had visited Australia in late November and early December 2003 to undertake work involved in rewinding electrical conductor from the full to the empty wooden reels supplied by SpA, the reels being located at the Ridolfo premises. His evidence was that the rewinding was successful, although the conductor on only 7 of the 30 drums were not damaged by the rewinding process [which was stopped for that reason]. This evidence is inconsistent with that given by Mr Chigioni [Downer's logistic manager] that the trial was equivocal: [Mr Chigioni not having been required for cross-examination]. 44 In my view Mr Fanelli's evidence requires very careful assessment. It is inconsistent with the evidence given by Mr Barona that the rewinding process was abandoned following excessive tail extrusion and layers of the conductor biting on themselves and jamming. It is plain that Mr Fanelli took a number of photographs whilst in Australia but only the three photographs the subject of cross-examination had been produced. He appears to have first denied that Mr Guazzelli had discussed with him the nails found in the layers of conductor and to then have proceeded to give evidence of what he claimed to say to Mr Guazzelli in response. In the result the evidence by Mr Fanelli can be given little weight. Mr Antoniazzi 45 Mr Antoniazzi impressed me as a generally reliable witness. He was the Downer procurement manager for the subject Project. In that role he was responsible for co-ordinating the supply of materials and equipment necessary for the transmission line project [including conductor]. 46 There were extensive communications between Mr Antoniazzi and, in the main, Ms Holzhaker, being his counterpart first in Venezuela and then in Italy when she relocated there on or about 10 June 2003. He was very careful with his answers. Generally his evidence was often corroborated by contemporaneous documentation. There was no matter put to him in cross-examination which to my mind could be seriously pointed at as suggesting a general lack of reliability. Having said that, it remains the case that in a few instances his recollection of conversations with Ms Holzhaker is rejected in favour of her version. Mr Barona 47 Mr Barona was Downer's contract manager. Since 1987 Mr Barona has been engaged in preparing tender estimates for power transmission line projects. From 1990 he was appointed contracts manager (western zone) and since that time had prepared numerous tender estimates, including for at least 30 major tenders for Australian and international power transmission projects. He was the person responsible for the tender for this Project in 2001. His evidence appeared to me to be reliable. Unfortunately there were a number of questions put to him in cross-examination which he could not answer because of a degree of confusion to the witness where the questions were simply misconceived. His answers were carefully given. He was clearly very familiar with the materials. I was impressed by his approach in the witness box. To my mind there was no section of the cross-examination which seriously tested the reliability of his evidence. Mr Rantucci 48 Mr Rantucci was the Downer site manager at the project site from 11 February 2004. Mr Rantucci records that he was seconded from a Queensland project to assist Mr Hendrick [Downer's project manager] with the "stringing" of conductor because of the problems being experienced with its "run out" [the rolling out of the conductor off its wooden reels]. As site manager he oversaw construction of the project to which he was assigned, from a technical perspective. His role on this Project involved supervising the stringing and reporting daily to Mr Hendrick, spending time both in the field and in the site office. In the course of his activities, various reports were completed by both himself and those who reported to him. The leading hand (Mr Glen Dickenson) completed a supervisor's daily report and the brake operator (Mr David Price) completed a conductor run out report for every "pull" [a pull defined as the stringing of a 10.5km length of the transmission line]. Mr Rantucci completed daily activity reports, which dealt mainly with stringing activities as most other preliminary activities had been completed by the time he arrived. Examples of the reports appear at Exhibit SR1 tab 2. I accept his evidence as reliable. Mr Guazzelli 49 Mr Guazzelli was the Downer project supervisor at the Project site. It was his role to supervise the stringing of the Project, a capacity he continued in until 16 January 2004. He has significant experience [detailed below] in stringing conductor of the type similar to the Sural conductor. His evidence appeared to me to be entirely reliable. Mr Hendrick 50 Mr Hendrick was the Downer project manager of transmission line projects and the project manager for the relevant Project. He was Downer's senior on-site representative. His duties included dealing with their client Western Power Corporation, reporting on issues affecting the financial and operational performance of the Project and the co-ordination of work activities. In my view his evidence was entirely reliable. He was very careful with his answers and were generally consistent with contemporaneous documents. Other witnesses 51 Certain witnesses who had sworn affidavits for Downer were not required for cross-examination. Hence subject to rulings in terms of admissibility objections, the affidavits of Mr Moy who had been the Downer general manager, Mr Ritky who had been a senior design engineer with Downer, and of Mr Chigioni, who had been Downer's logistics manager, are before the Court. Mr Chigioni's duties included co-ordinating the equipment and personnel for transmission projects being conducted by the Downer group of companies and liaising with other managers and personnel within Downer in relation to the progress of transmission line projects. He has been working on transmission line projects in different capacities for over 40 years. 52 Overall responsibility for the whole electricity line business of the Downer group was with Mr Danny Paris as Manager Transmission Lines, reporting to Mr Moy as General Manager. Assessing the experience of the Downer personnel assigned to the Project 53 There being so many contentious areas, [most particularly in relation to usual work practices as well as the special focus upon the problems faced by Downer on this particular Project], I accept that a reasonably important parameter involves the need to assess the experience of those with respective responsibilities to supervise and to carry out the stringing process in particular, and the other processes necessary to achieve completion of the Project. The finding is that Downer had assembled a very experienced project team in this regard: · The background and experience of Messrs Antoniazzi, Barona, Rantucci, Guazzelli, Hendrick and Todaro has already been set out. · The evidence given by Mr Guazzelli and Mr Rantucci, clearly demonstrates the very extensive experience held by the core stringing team [which in the main comprised persons often with very many number of years of experience with Downer]. The chronology with respect to drum delivery and modification 54 Basic to being able to follow the events which occurred is an understanding of this chronology [MFI D5]: Date Event 26.06.03 Sural packed 49 drums (Batch 1) 7.08.03 Batch 1a delivered 28.08.03 Sural packed 50 drums (Batch 2a) 10.09.03 Sural packed 40 drums (Batch 2b) 2.10.03 Batch 1b and 2a delivered 16.10.03 Batch 2b delivered 6.11.03 – 8.11.03 Millarte in Australia 12.11.03 Meeting between Sural and its drum supplier, following which a decision is made to change the timber from fir to larch. 16.11.03 – 19.11.03 Riviere and Holzhaker in Australia 28.11.03 – 10.12.03 Fanelli and Sardiello in Australia and rewind conductor at the Ridolfo yard Riviere sends email to Antoniazzi attaching procedure for rewinding conductor and corrective action to be taken in relation to batches 3 and 4, including: · change from fir to larch timber; 30.11.03 · the use of helicoidal nails; · fixing of the internal drum; and · insertion of plastic in rewound drums. 5.12.03 – 9.12.03 Antoniazzi visits Sural's Taranto factory 9.12.03 Sural packed 55 drums (Batch 3a) 9.12.03 Riviere determines to cease rewinding due to damage to Conductor. 16.12.03 Sural packed 25 drums (Batch 3b) 14.01.04 Sural packed 60 drums (Batch 4a) 15.01.04 Batch 3a and 3b delivered 05.02.04 Sural packed 43 drums (Batch 4b) 26.02.04 Batch 4a and 4b delivered 02.04.04 – 06.04.04 Todaro and Giuliani in Australia and conduct inflatable bladder trial The circumstances in which the SpA Italian facility took over manufacture and supply Tracking the later events from the contractual perspective 8 January 2003 55 On 8 January 2003 Mr Antoniazzi sent an email to Ms Holzhaker advising that there had been reports of civil unrest and general strikes occurring in Venezuela and asking for advice as to what had occurred and whether or not Sural had been or would be affected [PX 853]. 13 January 2003 – Disputed conversation 56 As between Ms Holzhaker and Mr Antoniazzi, there is an issue as to when a particular conversation took place and as to what was said. The finding accepts the evidence of Mr Antoniazzi which was that the conversation took place on 13 January 2003 in words to the following effect: Mr Antoniazzi: "How is everything in Venezuela? Has our order been affected in any way?" Ms Holzhaker: "Things have been difficult, but fortunately Sural's production has not been adversely affected by the political situation. You don't need to worry, Sural will still be able to produce Downer's order here in Venezuela." Mr Antoniazzi: "Has production of our order started?" Ms Holzhaker: "No, not at this stage, but it will start shortly." Mr Antoniazzi: "What is the production capacity of your manufacturing facility?" Ms Holzhaker: "Our facility has the same capacity to manufacture 30 kilometres of conductor per day, so your order can easily be completed in accordance with the time schedule in the agreement." [I make clear that save as referred to in email communications, I do not accept that there was ever discussion in these early communications in which Mr Antoniazzi accepted any proposal that if the transfer to SpA proceeded, the parties could refine structural issues once all technical and commercial issues had been agreed. Subject to that particular matter it is pertinent to note that even had the conversation been in the terms suggested by Ms Holzhaker, which purported to give some additional detail to the problems faced, I am unable to discern that any finding made in these reasons would have been different – the fact being that the general circumstances were outlined in so many of the emails which followed.] 15 January 2003 57 On 15 January 2003 an exchange of emails took place. Ms Holzhaker confirmed that the political situation in Venezuela was very difficult and that Sural had been having discussions concerning manufacturing products for some of its clients in its Italian plant. She advised that in order to meet its customers needs, this facility included a full line of services including attention to quality, close technical support and timely delivery. The same email attached the fabrication schedule and the ISO 9002 [the Taranto plant's quality certificate] for Sural SpA and asked whether Sural could ship the material from its Italian plant 58 Mr Antoniazzi had in his email said inter alia: "… In response please note the following: 1) Downer has no objection to the manufacture and supply of the conductor from Sural's Italian subsidiary located in Taranto, Italy subject to the following: · We need to know now, that your intention is to definitely manufacture and supply the conductor from Sural's Italian subsidiary in Taranto. · All additional costs or other financial implications that may result from the move to the Taranto facility will be borne by Sural. · Approval from our Client Western Power, · That the supply programme not be compromised. However we advise that the program supplied is acceptable. Although the first batch supply dates cannot be changed we are in a position to possibly relax a little the successive batch delivery dates if what you have shown on your programme is presently overly tight for you and would be of benefit to you. Let us know if this interests you and perhaps send a revised programme reflecting your more desired programme for our consideration. · Please advise/provide the following information and statistics for the Taranto facility: a. What is the plant capacity (tonnes conductor per year). b. Quantity of conductor produced in the last 12 months (type, km, project, country). c. Does Sural have a supplier listing for the Italian Plant. d. Sample Quality Plan, etc. e. All particulars of the Taranto facility including exact location, contact details, brochures or literature. f. If available, the names and contact details of two to three Independent Testing and Inspection companies that have/or do visit the facility for other Clients." 16 January 2003 59 On 16 January 2003 Ms Holzhaker sent a facsimile to Mr Antoniazzi attaching information regarding Sural's Italian plant. 17 January 2003 60 On 17 January 2003 Mr Antoniazzi sent an email to Ms Holzhaker requesting Sural's responses to outstanding questions, namely: a) Was it Sural's intention to definitely manufacture and supply the conductor from Sural's Italian subsidiary in Taranto? b) What additional costs or other financial implications would result from the move to the Taranto facility? Would these be borne by Sural? c) Would the supply programme be compromised? 21 January 2003 61 On 21 January 2003 Mr Antoniazzi sent an email to Ms Holzhaker seeking confirmation of the following matters: · that Sural's intention was to definitely manufacture and supply the conductor from Sural's Italian subsidiary in Taranto; · that all additional costs or other financial implications that may result from the move to the Taranto facility would be borne by Sural; · that the supply program would not be compromised; and adding the following with respect to the supply programme: "However, we advise that the programme supplied is acceptable. Although the first batch supply dates cannot be changed we are in a position to possibly relax a little the successive batch delivery dates if what you have shown on your programme is presently overly tight for you and would be of benefit to you. Let us know if this interests you and perhaps send a revised programme reflecting your more designed Programme for our consideration." 29 January 2003 62 On 29 January 2003 Mr Riviere wrote to Mr Antoniazzi advising that: 1. Sural's Italian facility would definitely manufacture and supply the conductor for the Project; ii. the supply schedule would not suffer further delays; iii. all additional costs or other financial implications that may result from the move to Italy would be borne by SpA; iv. with respect to the bank guarantee at that time Sural was in the process of sending its financial statements to its European bank in order to renew its credit facility and would have to wait for their response in relation to this matter but would send the draft soon as they could. [It is appropriate to interpolate that there were numerous subsequent requests by Mr Antoniazzi to Sural for updates on the issue of the missing bank guarantee. These requests were continually fobbed off with one excuse or another and at the end of the day no such guarantee was ever furnished. In these circumstances, when referring to further email or other correspondence, I do not intend to include the bank guarantee segments of the communications.] 30 January 2003 – Disputed conversation 63 There is then a further dispute as between Ms Holzhaker and Mr Antoniazzi as to the content of a conversation which took place between them on 30 January 2003. The alternate versions are as follows: The version of Mr Antoniazzi Mr Antoniazzi: "I have not heard from you regarding my questions." Ms Holzhaker: "I am sorry for the delay. We have been having a rough period here but I am preparing a response to your questions." Mr Antoniazzi: "Is Sural going to manufacture the conductor in Italy?" Ms Holzhaker: "Yes." Mr Antoniazzi: "Downer would be prepared to agree to the manufacturer of the conductor being moved to Italy so long as all costs associated with the move are borne by Sural." Ms Holzhaker: "All costs will be paid by Sural." Mr Antoniazzi: "Will the delivery programme be compromised by the change?" Ms Holzhaker: "No it will stay the same." Mr Antoniazzi: "Please send the quality plan for the Italian facility and a list of independent Italian inspection companies." Ms Holzhaker: "Yes I will." Mr Antoniazzi specifically denies that Ms Holzhaker said anything about addressing commercial and technical issues but agrees that she raised the amending of the letter of credit to change the supplier in terms to the following effect: "The name in the letter of credit will need to be changed to reflect this." The version of Ms Holzhaker Mr Antoniazzi informs her that in principle Downer was content for the contract to be moved to Italy provided any costs associated with the move was borne by Sural. She mentioned that there would obviously be certain commercial and technical issues that would need to be addressed given that the agreement was in Sural CA's name and that the new supplier will be Sural SpA. Mr Antoniazzi said that those issues would be resolved at a later date but that in the meantime he required a letter from Sural SpA to the effect that Sural SpA would manufacture and supply the conductor from Italy and that all additional costs or other financial implications as a result of the move to Italy would be borne by Sural SpA. The conversation is said to have included words to the following general effect: Mr Antoniazzi: "In principle, Downer is happy for the contract to be moved to Italy provided any costs are met by Sural." Ms Holzhaker: "Obviously commercial and technical issues will need to be addressed because the existing agreement in the name of Sural CA and the new Supplier will be Sural SpA." Mr Antoniazzi: "These issues can be resolved later but I need a letter from Sural SpA that Sural SpA will manufacture and supply the conductor for Italy and any additional costs as a result of the move to Italy will be covered by Sural SpA." 64 The finding as to the content of this conversation accepts as the more reliable, the evidence given by Mr Antoniazzi. 65 On 30 January 2003 a facsimile was sent by Ms Holzhaker to Mr Antoniazzi attaching a quality plan for Sural's Italian facility and included names of the Italian companies recommended for quality inspection and testing. 21 March 2003 66 On 21 March 2003 Western Power wrote to Downer giving approval to the change from CA to SpA as the supplier of the conductor subject to the changing cost being neutral to Western Power; the date for completion remaining unchanged; the technical characteristics of the conductor complying with the specification and SpA complying with all of the requirements of the specification especially with regards to supplier of documentation. 25 March 2003 67 On 25 March 2003 Mr Antoniazzi sent an email to Mr Riviere reminding the latter of a telephone conversation which they had held on about 6 March 2003, to which Downer had expected an email response on a number of issues within a few days and asking for an urgent response. The issues included requests for confirmation that Sural had received the wire from Canada and when production would begin, if it had not already started. Mr Antoniazzi observed that if production had not or would not commence very soon, Downer feared that Sural would not meet the first delivery obligation of 30 June 2003 [PX 895]. 68 The reply email from Mr Riviere of the same date advised that wire from Canada was expected to arrive at the end of March and that Sural did not expect any delay in the Fremantle delivery program and intended to ship as per that program [PX 895]. 2 April 2003 – Request for addendum to contract 69 On 2 April 2003 Ms Holzhaker sent an email to Mr Antoniazzi reading: Regarding the fact that the material will be supplied by Sural SpA and not by Sural CA , we kindly request an addendum for Part A of the … formal instrument of agreement." The email went on to make clear that the addendum was intended to replace the reference to the supplier as Sural CA [at its Venezuela address] by a reference to the supplier as Sural SpA [at its Taranto address in Italy] . 70 The return email from Mr Antoniazzi of the same date cryptically responded: "We will revise and send shortly" [PX 899]. Further disputed conversation 71 There is an issue as to the terms of a conversation between Ms Holzhaker and Mr Antoniazzi: Mr Antoniazzi's version contending that the conversation took place on 2 April 2003 was as follows: Ms Holzhaker: "We have asked for the amendment to Part A of the Agreement to make it clear that Sural SpA will be the supplier." Mr Antoniazzi: "I'll send you something on this shortly. What is the status of production and the bank guarantee?" Ms Holzhaker: "You'll have to check with Carlos Riviere on that." Ms Holzhaker's version [contending that the conversation took place two or three days after 2 April 2003] was as follows: Ms Holzhaker: "I received your email but still have not received that amended agreement. I need you to send me the amendment of Part A of the Agreement to remove Sural CA and insert Sural SpA as soon as possible." Mr Antoniazzi: "I appreciate this, it's not an issue. Don't worry. I'll prepare the amendment and send it. What is the status of production?" Ms Holzhaker: "You will have to check this with Carlos." 72 In my view this is a circumstance in which Ms Holzhaker's evidence is the more reliable – when tested against the contemporaneous documentary evidence. 73 The following further communications include a mix of emails and conversations [and in relation to the conversations, several matters were subject of dispute]: 9 April 2003 i. email of 9 April 2003 from Mr Antoniazzi to Mr Riviere, copied to Ms Holzhaker and Mr Barona, seeking urgent advice as to the status of the following: · production of Golf conductor; · confirmation of despatch dates for Batches 1, 2, 3 and 4; and · establishment of bank guarantee. 15 April 2003 ii. email 15 April 2003 from Mr Antoniazzi to Mr Riviere and Ms Holzhaker, and copied to Mr Barona, seeking urgent advice as to the status of the following: · production of Golf conductor; · confirmation of despatch dates for Batches 1, 2, 3 and 4; and · establishment of bank guarantee. The email also seeks advice as to whether Sural manufactures high temperature conductors or whether it could recommend a supplier. 28 April 2003 iii. email 28 April 2003 from Mr Antoniazzi to Ms Holzhaker seeking clarification as to whether the only changes to be made to the Formal Instrument of Agreement are those specified in her email dated 2 April 2003. Further, the letter seeks advice as to the proper beneficiary of the letter of credit: is it to be Sural CA or Sural SpA. 2 May 2003 iv. email 2 May 2003 from Mr Pecoraro to Mr Antoniazzi confirming that production and delivery of the Sural conductor is on schedule in accordance with the agreement. The email also requests the opening of the letter of credit before the establishment of the bank guarantee. 14 May 2003 vi. email 14 May 2003 from Mr Pecoraro (Sural) to Mr Antoniazzi proposing the use of wooden reels to hold the Sural conductor in lieu of steel reels as required under the agreement. The email provides as follows [certified English translation PX 935]: "As regards the packaging of the wire, the contract said it had to consist of metal reels, size 84" by 34" by 45". We now suggest that wooden reels could be used instead of metal reels. Their dimensions would be as follows: flanges 2,160mm drum 1,250mm, distance between flanges 1,240mm. We normally use these reels for all our clients. Because of their larger flexibility, we believe they offer a better protection to the product. The wooden reels would of course be prepared and fumigated according to international and Australian law requirements." 15 May 2003 vii. email 15 May 2003 from Mr Antoniazzi to Mr Pecoraro, copied to Messrs Fragomeno and Barona [PX 937]. "We have discussed Sural's proposal to supply the conductor in wooden reels in lieu of steel and advise we are reluctant to accept your proposal for the following reasons: 1. The reason why we insist for the reels to be made of steel results from bad past experiences obtained from conductor supplied on wooden reels. The three main areas are that: 1. wooden reels are more susceptible to be damaged during shipping, transport to site and on-site itself as our long experience in the powerline construction industry has shown; 2. wooden reels do not have the rigidity of steel and can deform allowing the conductor to 'cut' into the underlying layers and at times getting tangled when the conductor is being unwound causing the stringing operation to be disrupted and delayed; 3. the wooden reel's arbor holes tend to quickly wear away causing uneven/rough running out of conductor. Also, all conductor that is to be supplied as spare for the Client must be supplied on steel drums. In order to give your proposal further consideration, please supply the following information: · A drawing of the proposed wooden drum to be used; · The protection that will be placed over the conductor; · The proposed manner in which the drums will be loaded and packed into the sea containers; · The kilometres of conductor that will be supplied on each drum; · What guarantees can Sural provide that the proposed wooden drums will not cause us difficulties if we accept; · Please advise what financial incentive Sural is prepared to offer to Downer (USD/drum) in order to accept the risk associated with the use of wooden drums, except for drums for the Client's spare conductor. We await your early reply along with the promised detailed production status." [Emphasis added.] 16 May 2003 viii. email 16 May 2003 from Mr Pecoraro to Mr Antoniazzi enclosing photographs of wooden drums, photographs of conductor wound on to wooden drums being loaded into containers, a sketch of the Sural proposed wooden drum and details of the Sural proposed fumigation treatment. 19 May 2003 ix. email 19 May 2003 from Mr Antoniazzi to Mr Pecoraro stating as follows: "Firstly we received your email of the 16 May 2003 and advise we need immediate clarification and information on the following: 1. Confirmation that the drums of conductors shown in the pictures are not part of our Order and have just been sent to show the typical drums you are proposing. 2. Your schematic of a wooden reel shows only four bolts holding the flanges together, whereas the pictures show reels having six bolts. Also your schematic does not show a holed metal plate over the arbor hole. My email of the 15 May 2003 was only partially answered by yourself. Please urgently reply to the other points that were contained therein and listed below for your convenience. · The kilometres of conductor that will be supplied on each drum. · What guarantees can Sural provide that the proposed wooden drums will not cause us difficulties if we accept. · Please advise what financial incentive Sural is prepared to offer Downer (USD/drum) in order to accept the risk associated with the use of wooden drums, except for drums for the Client's spare conductor. We await your early reply along with the promised detailed production status. At this present point in time without Downer receiving any acceptable answers to the above requests, we must decline your proposal to supply conductor on wooden reels and insist that all of the conductor be supplied on steel drums." x. email 19 May 2003 from Mr Pecoraro to Mr Antoniazzi stating that Mr Petracchi (Western Power's representative) had made his inspection and that production is proceeding well. xi. email 19 May 2003 from Mr Pecoraro to Mr Antoniazzi. "Sural['s] years [of] experience guarantees a save and perfect product by using wooden reels. Those reels are rated and being used for quantities non-greater than 5100 kg and are under European standards. In Europe, steel reels are not possible to find. Wooden reels are more expensive but we and the other cable manufacturers have always used these reels. These reels have presented no problem at all. Furthermore they hold high loads and in case of impact they are more flexible than steel reels. … In this case we can't give a financial incentive because wooden reels are more expensive than the steel ones previously foreseen in Venezuela." Regarding a question about whether pictures attached to an earlier email of Mr Pecoraro were pictures of the reels for the EDI Project: "All of the attached photos are those regarding your product except for the ones in the container that belonged to other orders." 21 May 2003 xii. email 21 May 2003 [PX 978] from Mr Antoniazzi to Mr Pecoraro, copied inter alia to Ms Holzhaker and Mr Riviere: "We are extremely annoyed and disappointed that Sural intends supplying the conductor on wooden reels contrary to the agreed steel reels in the formal instrument of Agreement. We find it extremely hard to believe Sural's advice that steel reels cannot be found in Italy/Europe and that wooden reels are more expensive to purchase. To what then is the comparison being made if the metal reels can't be found? We want to know what guarantee will Sural give to Downer that the wooden reels will stand up to both the shipment and site handling treatment. We need Sural to send by facsimile or email a copy of the Italian and/or European standard and drawing upon which the proposed reels will be made. We need to know the type of timber is [being] used and for how long it has seasoned, if at all. Please note carefully that the two spare drums of Client conductor MUST be supplied on steel drums, absolutely NO exceptions. As the current production equates to approximately only 6% of the total job, we request Sural supply us a weekly production update, every Monday. Please advise when Sural anticipates that the first shipment will be ready, as it appears that the first shipment will find it very difficult to reach Australia by the 30 June 2003. We have been ready to issue the letter of credit for some time now but are unable to do so until Sural supplies its bank guarantee for the performance bond, YES Sural must issue the bank guarantee first." 23 May 2003 xiv. Fax 23 May 2003 from Mr Pecoraro to Mr Antoniazzi attaching what appears to be part of the Italian specification for the wooden reels. 26 May 2003 xv. email 26 May 2003 from Mr Antoniazzi to Mr Pecoraro regarding the ANIE drum standard faxed on 23 May 2003. Mr Antoniazzi asks whether the table faxed to Downer is from the drum manufacturer's quality manual or Sural's and why dimensions proposed on 15 May 2003 are different from dimensions in the standard. 27 May 2003 xvi. email 27 May 2003 from Mr Antoniazzi to Mr Pecoraro: "We are URGENTLY awaiting your confirmation and couriering to ourselves of the promised Bank Guarantee for the Performance Bond. For your information the Letter of Credit has been put in place as a sign of good faith." 27 May 2003 [Accepting the version of a conversation given by Mr Antoniazzi as against the version of the conversation given by Mr Riviere] xvii. A particularly significant factual issue arises as between the evidence given by Mr Riviere of a conversation which he says took place on about 23 May 2003 but which conversation is denied by Mr Antoniazzi who says that there was a conversation of 27 May 2003. There is nothing in the debate as to the precise dates. The significance of the alternate versions inheres in the fact that the version put forward by Mr Riviere, includes evidence that he said that SpA could only proceed on the basis of wooden reels. The finding is that Mr Antoniazzi's evidence as to this conversation is reliable. The conversation was to the following effect: Mr Riviere: "I want to explain to you why we have used wooden drums for your conductor and ensure you that their use will not cause any problems. Our Italian facility uses wooden drums all the time. The political instability in Venezuela caused a backlog of orders Sural needed to complete and Downer's was towards the bottom of this list. This necessitated the move of the manufacture to Italy." Mr Antoniazzi: "We are very disappointed with being supplied the conductor on wooden drums contrary to the contract." Mr Riviere: "You don't have to worry at all about the conductor being on wooden drums – they won't cause you any problems. We've used them to hold conductor of this type many times and never had problems. We're fully confident that the use of wooden drums for your conductor will not cause you any problems." Mr Antoniazzi: "Well, our experience with wooden drums has not been good and that's why we specifically required steel drums in the contract." Mr Riviere: "Look, we pondered walking away from the contract altogether and taking our chances in Court if you decided to sue us. But rather than do this, we decided to go ahead with the contract and supply your conductor as we didn't want to tarnish the good reputation of Sural. We can assure you that the wooden drums will not cause you any problems and that we will deliver on time. All is well under control and to program." Mr Antoniazzi: "You have left us in a very difficult position by leaving it this late to tell us that you have used wooden drums. We are now on the eve of the batch of the first of your shipment of the conductor and you are in default of the contract by supplying the conductor on wooden drums. If we decide not to accept your first batch now, we will have massive disruption to our construction program and additional costs due to the lag time in obtaining conductor from another supplier. You must understand the position you have put us in." Mr Riviere: "You shouldn't worry about the wooden drums, they will perform well." Mr Antoniazzi: "We really need some financial incentive to permit the use of wooden drums. We have genuine concerns about their suitability and, if they are not suitable, we will be exposed to additional cost and delay. We have factored into our costings the re-sale of the steel drums following the unwinding of the conductor. That's why the contract specified non-returnable steel drums. Even if the wooden drums are suitable for the conductor, I doubt whether we would be able to resell them following the unwinding. Rather, from our experience, I expect there will be additional costs removing and disposing of the wooden drums after the unwinding. Even the fact that the conductor is being supplied from Italy gives rise to additional duty." Mr Riviere: "There will be no issue about the suitability of wooden drums. As I already advised you, we're happy to cover any additional costs." [Under cross-examination in relation to the conversation, Mr Antoniazzi gave evidence that when Mr Riviere said that SpA would not supply the conductor on steel drums, Mr Antoniazzi said that he was disappointed with this approach which went against/was contrary to the contract: T 397-398. This evidence is accepted as reliable"] [I note that Mr Riviere denies that this conversation took place and contends that a conversation took place on 23 May 2003 to the following effect: a) he said that the agreement to supply conductor was entered into between CA and his company; b) he said that it was originally intended that CA would provide the conductor from Venezuela; c) he said that this had been rendered impossible due to the political instability there; d) he said that this was neither party's fault and was unforeseeable, but that it had nevertheless rendered performance of the agreement impossible; [His evidence was that Mr Antoniazzi said "yes, I know".] e) he said that as far as SpA was concerned, it simply could not supply a conductor on metal reels and that the best that it could do was to supply on the wooden drums described in an email sent by Mr Pecoraro; f) he said that he was aware that Downer had not yet sent an addendum to Ms Holzhaker clarifying the fact that CA would no longer be supplying the conductor; g) he said that SpA had signed no contract with Downer and that unless SpA supplied on wooden reels, it would not proceed with the proposed agreement; [His evidence was that Mr Antoniazzi said that he had acknowledged this, but that they should try to work through the issues; that as to the issue of "financial incentive", there was a differential in duty payable in Australia for goods imported from Italy as opposed to Venezuela in that importation from Italy attracted additional duty of 1%; and that SpA should be responsible for this and should also offer some other financial incentive to Downer because of the use of wooden reels.] h) he said that any talk of "financial incentive" was inappropriate and that the cost to SpA of wooden reels was higher than the cost of metal reels in Venezuela; i) he said that the position of SpA was clear; j) he said that if this was not acceptable to Mr Antoniazzi, Downer would need to look to source its conductor elsewhere; [His evidence was that Mr Antoniazzi said that it was imperative that the parties continue to try to reach agreement by exploring the provision of conductor by SpA from Italy and said that he would consider the issues.] k) he said that he would do the same and that they should have further discussions in the next few days [to which proposition Mr Antoniazzi agreed]. Notwithstanding the apparent confusion as to the exact date of conversations which took place between Mr Antoniazzi and Mr Riviere at about this time, when it was put to Mr Riviere under cross-examination that in these conversations Mr Antoniazzi had made absolutely clear that he was not agreeing for the rest of the supply of conduct to come forward on wooden drums, gave evidence that "[ Mr Antoniazzi ] was not agreeing or disagreeing…" Mr Riviere inferred that it was a matter of negotiation at this point in time [T 253-254]. 28 May 2003 – Disputed conversation xviii. 28 May 2003 - Conversation between Ms Holzhaker and Mr Antoniazzi as follows: Mr Antoniazzi: "I am preparing the document and it is just a matter of sending it to you. Are you sure you only need the name changed?" Mr Holzhaker: "As far as I can tell this is all that is required to switch Sural SpA to Sural CA because Sural SpA will appear as the supplier." Mr Antoniazzi: "Ok, leave it to me." Although this conversation is denied by Mr Antoniazzi, the finding is that the conversation did take place. 29 May 2003 xix. email 29 May 2003 from Mr Pecoraro to Mr Antoniazzi regarding compliance of the wooden drums on which Sural wound the conductor with the ANIE Standard provided to Downer in the fax dated 23 May 2003 (received 26 May 2003 by Downer). The drums are said to be a modified form of drum type T22 so as to permit the winding of conductor away from the edges of the drum and with a sealing to protect the conductor; xx. email 29 May 2005 from Mr Antoniazzi to Mr Pecoraro, copied inter alia Ms Holzhaker, stating as follows: "Thank you for your reply to some of my requests. Please answer ALL of the following questions . 1. Where is Sural's Bank Guarantee? 2. Please send the missing pages from the ANIE standard requested and advise from where the table T22 came. 3. Considering Sural's inability to supply the conductor on the originally agreed steel reels, thereby realising a large saving, we find it unacceptable that you want Downer to pay for the airfreight of the 50m of [sample] conductor. Please urgently send the material requested at your own expense. 4. In your email you say that Sural would be interested in purchasing the dismantled wooden reels. If so, then what is Sural prepared to offer for each reel? 5. We had previously requested a weekly update of the production, where is it? 6. We had requested the supply of all material tests carried out to date, where are they? Your urgent responses to ALL of the above questions is requested." The finding with respect to the parties having agreed to the novation of the contract 74 As Downer has submitted there is ultimately no material difference as between : i. a finding that the contract was varied on 29 January subject to a condition subsequent [requiring Western Power to give its approval]; or ii. a finding that the contract was not varied until 21 March 2003 when that approval was given. 75 The former constitutes the correct analysis. 76 The finding as to the content of the variation is that Downer reached agreement with CA and SpA that there would be a full novation of the contract such that SpA would be substituted for CA as the relevant Sural party to the contract. At that time there was no agreement nor discussion of any variation other than that concerning the identity of the contracting parties and no suggestion that CA would remain a joint contracting party. 77 To the extent that: i. Ms Holzhaker had given affidavit evidence that the alteration from Venezuela to Italy was subject to discussion of "certain technical and commercial issues", that evidence is rejected; ii. Mr Riviere gave evidence that his conversation with Mr Antoniazzi on 6 March 2003 included a statement that his discussions were "subject to reaching agreement on all legal and technical issues", that evidence is rejected. 78 In each case Mr Antoniazzi gave evidence denying these suggestions. He denied that any statements had been made that the discussions were subject to reaching agreement on all legal and technical issues. That denial was not the subject of any cross-examination. As Downer has contended the suggestion is inherently implausible: why would the person charged with ensuring procurement of a major material in the Project agree to leave the contract up in the air? Further the implausibility is all the greater when one has regard to the dedication with which Mr Antoniazzi sought to follow up his numerous requests of Sural in respect of other aspects of the contract [notably, the bank guarantee]. As earlier observed post-contractual conduct is relevant to determining whether [as Sural contends] there was no contract in place or whether and when the contract was varied. Steel or wooden drums 79 As earlier indicated in these reasons, the finding on the issue as to whether there was ever an agreement on the part of Downer to accept wooden drums in lieu of the steel drums required under the agreement is that on the evidence accepted as reliable, no such variation of the agreement was ever agreed upon. 80 One has to bear in mind some parameters of the background chronology. In particular: i. On 13 March 2003, CLS gave a quote to Sural for the supply of type 22 wooden drums at 229 euros per drum. ii. On 1 April 2003, Mr Avella on behalf of Sural SpA placed orders for type 22 wooden drums to be supplied as follows: · 55 on 16 June 2003; · 55 on 23 June 2003; · 45 on 25 July 2003; · 45 on 1 August 2003; · 45 on 15 September 2003; · 45 on 22 September 2003; · 98 no later than 12 December 2003. 81 As Downer has contended: i. the orders for wooden drums were placed shortly after Western Power's approval of supply from Taranto; ii. there were 4 orders, corresponding to the 4 batches of conductor to be supplied to Downer; iii. there is substantial correspondence between the quantity of each order and the quantities subsequently delivered to Downer in the 7 tranches; iv. the orders were all for Type 22 drums, a relatively unusual drum for the Taranto factory. 82 The balance of probabilities clearly favours a finding that most or all of those orders were specifically placed to meet the supply to Downer. 83 It is also pertinent to note that the aluminium steel core, around which the aluminium conductor would be wound in the Taranto factory, had been ordered from Intral in Canada, and was expected to arrive in Italy at the end of March. At [T 232.7-19] of Mr Riviere's cross-examination: "Q. At the time you wrote this e-mail [25 March 2003, email at PX 895], Sural SpA had placed its order with Intral for the AS core? A. That is correct. Q. The first batch of the AS core had already been made? A. That is correct, I believe so, yes. Q. It had been shipped from Canada? A. I think so, yes. Q. And it was expected to arrive in Taranto in the next five or six days? A. In Italy, sir." 84 Hence, it is clear that Sural SpA was taking significant steps to arrange for the conductor to be supplied to Downer. 85 Production of Downer conductor had commenced no later than 2 May 2003. That production [or, at least, most of it] was wound onto wooden drums. It is clear that by 16 May 2003 a substantial quantity of Downer's conductor had been wound onto the CLS wooden drums: Mr Pecoraro sent photographs of the drums on 16 May 2003 and confirmed that they were pictures of Downer conductor. By 19 May 2005, Mr Pecoraro advised that: "There are 22 reels ready for shipment, each of them being 3500 m / 5000 kg. This makes over 110 metric tonnes ready and we keep producing." 86 The balance of probabilities favours the finding which is made that SpA had determined, unilaterally, to seek to supply conductor to Downer on wooden drums, and produced and wound onto wooden drums, conductor worth hundreds of thousands of dollars, before mentioning to Downer that it was not complying with its obligation to provide non-returnable steel drums. The finding is that the first indication Downer had that SpA was proposing to supply the conductor on wooden drums was not until 14 May 2003. [See email from Mr Pecoraro dated 14 May 2003 (PX 935).] 87 The reasons have already made clear that in relation to the disputed conversations between Mr Antoniazzi and Mr Riviere at the end of May 2003, the versions given by Mr Antoniazzi are the more reliable. That the contemporaneous documents make clear that Mr Antoniazzi's opposition to supply on wooden drums remained unchanged before the disputed conversation(s) is apparent from the following strong indications by him of Downer's dissatisfaction with supply on wooden drums: i. Mr Antoniazzi's response of 15 May 2003 identified three reasons why " we insist for the reels to be made of steel ". However, he sought further information from Mr Pecoraro, and asked what financial incentive might be offered. ii. On 19 May 2003, Mr Antoniazzi followed up Mr Pecoraro's incomplete response, again seeking guarantees that the wooden drums would not cause difficulties and again asking for a financial incentive. He left the position clear beyond all doubt: "At this present point in time, without Downer receiving any acceptable answers to the above requests, we must decline your proposal to supply conductor on wooden reels and insist that all of the conductor be supplied on steel drums." iii. Mr Pecoraro responded in a fashion which prompted a further round of inquiries from Mr Antoniazzi as well as an inquiry with "TEMA": who confirmed steel drums were available in Italy, but were three times more expensive than wooden drums. iv. Mr Antoniazzi once again, on 21 May 2003, made Downer's position very clear: "we are extremely annoyed and disappointed that Sural intends supplying the conductor on wooden reels contrary to the agreed steel reels in the Formal Instrument of Agreement". 88 Standing back from the matter there are a number of particular reasons why the background thrown up by the evidence requires a rejection of Sural's contention that Mr Antoniazzi and Mr Riviere varied the contract so as to entitle the supply of wooden drums: i. to do so would represent a complete about-face by Mr Antoniazzi from the stance he had hitherto expressed. That is inherently improbable. ii. as Mr Antoniazzi understood it, so to do would materially prejudice Downer. He understood Downer's concern with wooden drums. He also appreciated the loss of the ability to re-sell hundreds of valuable steel drums. It is difficult to discern why Downer would give up those rights, save in return for something. iii. if Sural had reduced the price, or given Downer some "financial incentive" for which Mr Antoniazzi had been asking consistently at this stage, then the position would have been completely different. But Sural was unwilling so to do. As Downer has colourfully put it: "not lightly would this Court infer that Mr Antoniazzi agreed to the quid without receiving any quo". iv. Mr Antoniazzi well understood that Downer was realistically not in a position to reject the first shipment of conductor that had been wound on wooden drums. Downer would be unable to obtain a replacement supply within the Project's required timeframe. v. If SpA's contractual obligations were varied in those conversations, why when conductor arrived in Fremantle, did Mr Antoniazzi seek to hold Mr Riviere to the formal contract, and when he did so, why did Mr Riviere fail to invoke the alleged oral agreement in response? In particular: a) On 28 August 2003 Mr Antoniazzi sent an email to Ms Holzhaker (copied to Mr Riviere) recording "Please be advised that all additional direct and indirect costs that have or will result from Sural's inability to supply the required steel reels as per the Formal Instrument of Agreement, will be back-charged to Sural …as has always been our position, we strongly insist that the proper steel reels be used for all future shipments." The response from Ms Holzhaker did not dispute this proposition. b) On 10 September Mr Antoniazzi sent an email to Ms Holzhaker (copied to Messrs Riviere and Fragomeno) asking whether shipments 2(b), 3 and 4 would be supplied with non-returnable steel drums in line with the contract. Again, the response from Ms Holzhaker did not dispute the asserted contractual entitlement. c) On 13 October 2003, Mr Antoniazzi once again requested for the supply of conductor on steel drums. vi. On 14 October 2003 Mr Antoniazzi (in the context of responding to a force majeure claim) recorded: "Downer has bitterly and reluctantly had to accept the supply of conductors in wooden reels in lieu of non-returnable steel reels that was stipulated in the Formal Instrument of Agreement. This action, apart from being in breach of Contract has in itself brought substantial savings to Sural …" vii. There was no written response in which the obvious breach of contract is disputed. 89 In endeavouring to understand SpA's approach at the time there is some relevance in the fact that Mr Riviere seems to have misunderstood the legal situation, apparently believing that the physical acceptance of the conductor on wooden drums in Australia did not give any remedy for damages [cf T 269-270]. 90 Save in one respect, it is unnecessary to return to the conflict in the evidence given by Mr Antoniazzi and Mr Riviere already dealt with in the reasons. The additional consideration concerns why it is not surprising that Mr Antoniazzi's recollection seemed very clear. As Downer has submitted: i. on the one hand, this was one of two major projects for which Mr Antoniazzi was procurement officer, and the Sural conductor was a major item in one of those projects; ii. on the other hand, it is quite plain from the contemporaneous documents that Mr Riviere was travelling a great deal at the time, trying among other things to cope with the sudden influx of orders to the Taranto plant, and was dealing with a number of customers. 91 The position would have been quite different had SpA provided some financial incentive but it failed to do so. Importantly the fact that SpA would absorb the additional 1% customs duty attaching to supply from Italy as opposed to Venezuela had been promised on 29 January 2003 92 Downer also points to the failure of Sural to comply with the contractual stipulation that variations were to be in writing as a further reason why the contractual case fails. At the very least, the parties' failure to reduce the alleged variation to writing is a further circumstance tending against its occurrence. The estoppel claim 93 There is no substance in the claim put forward by SpA that Downer by route of a conventional estoppel, cannot now deny that it agreed to accept supply of conductor on wooden reels instead of steel reels. It was months after the late January 2003 conditional novation agreement [by the substitution of SpA for CA as the sole contracting party] when for the first time, Downer was informed that SpA proposed to supply on wooden drums, which proposition was always firmly rejected as constituting a contractual breach. Downer having been informed that wooden drums would be arriving only six weeks before the first batch was due to arrive in Fremantle, was placed in an invidious position and whilst protesting at this contractual breach, was entitled to make enquiries as it did. Nothing that it did thereafter in terms of the inter partes communications amounted to an acceptance of a contractual variation permitting supply now of wooden drums. Downer was entitled to elect between exercising one of two rights: the first was to accept SpA's conduct as repudiatory; the second was to claim as it has, damages for breach of contract. It made clear that it was holding SpA to its contractual obligation to provide steel drums. A close examination of the sundry oral and written communications makes quite clear that Downer did not act unconscionably in relation to this issue. And of course, SpA's contention that it had relied upon an assumption that Downer was content to accept wooden drums, must on the evidence be accepted as reliable, be rejected out of hand. Variation qua 10% retention in lieu of bank guarantee 94 As the reasons have already made clear, for many months Mr Antoniazzi pursued Sural CA and later Sural SpA for the bank guarantee to which Downer was entitled under the contract. For many months, Mr Riviere, Ms Holzhaker and Mr Pecoraro gave undertakings which turned out to be illusory. The finding is that the true position was known to Mr Riviere at all times, cf T 224: "Q The truth of the matter is, isn't it, that at the middle of February 2003 Sural SpA had already obtained pretty much as much financial accommodation from its bank as its bank was going to let it have? A. Meaning our bank line was almost full, yes." 95 Various excuses were made, until on 13 June 2003, after all relevant communications relating to the supply on wooden drums, Ms Holzhaker told Mr Antoniazzi the truth ("our guarantee credit line is quite full") and proposed that in lieu of the bank guarantee, Downer would hold as security, 10% of the total value of the conductor to be supplied under the varied agreement by deducting such sum from the first payment [for the first delivery] to Sural SpA. The details of this, and the manner of invoicing, were subsequently agreed between them on or about 18 June 2003. The parties agreed that Downer would release the agreed security to Sural SpA on a pro-rata basis after Downer received each shipment [see PX 1035-1038; 1039-1040; 1042]. At the relevant time, Mr Antoniazzi was unaware of the provision in the contract for retention of security for the defects liability period of 2-years, and lacked actual authority to bargain that away, but plainly he had ostensible authority to deal with Ms Holzhaker. 96 As Downer has contended, nothing turns on the entitlement to keep the whole amount of the security for the defects liability period [after the ultimate completion of deliveries] for present purposes. It seems that neither party turned their mind to the 2-year defects liability period during which the security was agreed to be held (see GC 20, GC 24, Annexure A at PX 775 and definition of "Defects Liability Period"). In those circumstances, the outcome was to apply those provisions to the substituted security being the agreed 10% of the total value of the conductor. 97 There appears to have been no issue taken by the parties that on the one hand, the defects liability period allowed Downer to hold onto the security for the relevant 2-year period after the last shipment had arrived, yet on the other hand, it had been agreed between the parties that Downer would release the agreed security back to Sural SpA on a pro-rata basis after Downer received each shipment. 98 The agreed 10% security was in the amount of US$334,918.86 and was deducted by Downer from payment for the first shipment. 99 SpA's contention is then as follows: i. Downer has used the agreed security: a) in satisfaction of any liquidated damages payable by SpA; and b) in satisfaction of the 1% additional duty payable by SpA as a consequence of delivery of the conductor from Italy; ii. the amount of the liquidated damages paid by SpA [being all liquidated damages other than for "batch 4b"] is $279,108.26. This is said to have been paid by way of set off against the agreed security; iii. The amount of the 1% additional duty paid by SpA as a consequence of the delivery of the conductor from Italy [being the 1% duty on all deliveries other than for "batch 4b"] is US $29,709.30. This is said to have been paid by way of set off against the agreed security. iv. In SpA's closing submissions, the final approach was to take into account the whole amount of liquidated damages and 1% additional duty owed [i.e. being inclusive of all deliveries, including batch 4b]. That is: a) the amount of liquidated damages payable by Sural SpA for all conductor supplied to Downer was US$316,627.22 [as per the 'total' figure shown in the table in Downer's defence at [11], as at 18 March 2004]; b) the amount of the 1% additional duty payable by Sural SpA for all conductor supplied to Downer was US$33,461.20 [being 1% of the total value of the conductor delivered as set out in the table in Downer's defence at [11]]. c) The addition of the above amounts for liquidated damages and 1% additional duty totals US$350,088.42. Since this amount owing by Sural SpA exceeds the US$334,918.86 amount of security held by Downer by US$15,169.56, Sural SpA is still obligated to pay Downer US$15,169.56 to make up for the shortfall. [I note that the amount of debt claimed in its summons has since been reduced by this amount for this reason.]. v. By reason of the matters set out above, Sural SpA contends: a) Sural SpA has paid all liquidated damages; b) Sural SpA has paid the 1% duty on all deliveries of conductor; and c) There is no security that need be returned to Sural SpA. 100 SpA's contentions regarding the notional reduction of the security held by Downer in satisfaction of the liquidated damages and 1% additional duty are rejected. Downer's contrary submissions relied upon the unchallenged evidence of Mr Moy who was not required for cross-examination. 101 Further, it appears that the set-off calculations propounded by SpA did not allow for the varying interest components that may attach to the liquidated damages that arose in different periods [corresponding to how much delay each delivery involved and when the additional duty was incurred on each occasion]. Downer contended that the interest on liquidated damages alone calculated as at 18 March 2004 is in the amount of US$4,582.25. The amount of interest attaching to the additional 1% duty payable has not been calculated by Downer as they contend the additional 1% duty is, to date, still owed to them. 102 Apart from one outstanding issue, the matter ultimately resolves into the following brief analysis, as contended by Downer: 1. Downer paid for all conductor delivered, save for the agreed 10% retained as security from the first batch, and part of the last batch 4b: Mr Moy's 24 June 2005 affidavit at [75]. 2. The 10% security is still retained by Downer: Mr Moy's 24 June 2005 affidavit at [75(a)]. [Although Ms Holzhaker expressed the view that Downer was appropriating the security deposit to pay for liquidated damages (Ms Holzhaker's 22 March 2005 affidavit at [37]), that evidence was admitted on the limited basis of her subjective view. Mr Moy's evidence to the contrary is uncontradicted.] 3. From the price payable for batch 4b, Downer deducted liquidated damages of $316,627.22 and interest of $4,582.25, and paid only the balance of $72,758.13: PX 1775 and PX 1804. It was entitled so to do by way of a set-off (either pursuant to GC 22.4 of the contract, or in equity). 4. Downer was entitled to retain the security as a substitute for the bank guarantee – for the 2-year defects liability period which expired in April 2006. It continues to retain the security to this day, and has always acknowledged that Sural SpA should be given credit for this in the calculation of any judgment debt against it. 103 The remaining issue is whether the additional 1% duty payable as a result of conductor coming from Italy in lieu of Venezuela has been paid by Sural to Downer. The Court accepts Mr Antoniazzi's evidence that Downer had paid the additional 1% duty payable and now seeks repayment of this amount [$48,060 plus interest] from Sural in accordance with what Mr Riviere had agreed on 29 January 2003. 104 The materials in evidence and the cross contentions concerning this issue included: a) The contemporaneous email from Mr Antoniazzi to Ms Holzhaker dated 15 September 2003 showing the "security to be reimbursed" in respect of the first shipment being set-off against the amount of liquidated damages payable in respect of that shipment as well as the 1% duty differential [which I infer was payable for that specific shipment]. [See Ms Holzhaker's 22 March 2005 affidavit at [36] and PX 1091; PX 1092 and PX 1172.] b) During Mr Antoniazzi's cross-examination at trial, Mr Antoniazzi confirmed that the procedure he adopted for the first shipment was adopted for each of the following shipments [T 375:52]: Mr Lally: Q. The procedure that you adopted for that first shipment, did you adopt that for each of the following shipments? Mr Antoniazzi: A. I did, yes. c) In response to this evidence of Mr Antoniazzi, Downer contended that this cross-examination had been put on a false premise [T 822:36]. The question was asked by Sural's leading counsel after referring the witness to PX 1091 [which detailed the set off from the security of the amount owed from Sural for liquidated damages and 1% additional duty for the first shipment]. Downer contends that at the time this question was asked, the cross-examiner either did or ought to have known that that what was put was not true. This is said to be because what in fact happened was that all the invoices were paid in full (which I infer to mean to include the first shipment, despite the seeming effect of PX 1091). Mr Antoniazzi's evidence that the set-off occurred in all subsequent shipments is said by Downer to be wrong. 105 The state of the evidence justifies a finding accepting Downer's approach to satisfying itself of the liquidated damages and relevant interest owing to it. Hence Sural SpA is required to reimburse Downer for the additional 1% duty payable on all deliveries. Mr Moy's evidence that Downer continues to hold the 10% security and has otherwise paid Sural for all of the conductor supplied by way of letter of credit [except for Batch 4b] was uncontradicted. Also uncontradicted was his evidence that batch 4b was paid by Downer on 17 May 2004 [a reduced amount because Downer claims to have set off the total liquidated damages amount owed]. Breach of contract 106 This aspect of the proceedings was heavily litigated. Its significance was always obvious. Unfortunately, as is often the case, it becomes necessary to descend to the detail. In this particular case that detail [much of which is technical] is nothing short of vital to the end result. However at the end of the day it is fair to say that the vast preponderance of the evidence before the Court sustained Downer's overarching contention that the run out problems it experienced arose because of the deficiencies in the wooden drums which had been provided. The way forward 107 It seems convenient to move through the reasons concerning breach broadly in the following fashion: i. to give an overview of the findings of breach; ii. to describe the stringing procedures; iii. to explain the timing issues; iv. to describe the evidence of wasted conductor cable; v. to then deal in detail with the respective performance of the fir and larch drums [interspersing this evidence with the events which took a number of Sural employees including Mr Riviere to Australia] and in each case, concluding the examination by summarising the Sural reaction to the observations of the continuing problems. 108 It will then be practical to treat with the following matters: i. aspects of the forensic approach taken to the litigation by Sural; ii. the positive defences which came forward in Sural's case [generally alleging disparate causes of the loss and damage claimed to have arisen by reason of matters capable of being sheeted home to Downer, as for example mishandling of the drums and conductor]; iii. a treatment of the evidence given by the experts called on causation, loss and damage; iv. to set out the ultimate findings of drum deficiency; 109 Finally the findings as to the quantum of the damages will be dealt with. Overview of the findings of breach 110 The ultimate findings can be expressed in a number of ways 111 In overview the evidence justifies the finding that the manner in which the conductor was wound on to the drums did not allow for "the smooth running out in lengths as long as could be conveniently handled and erected" [SC 7.3]. They did not provide the serviceability needed for the runout of the conductor, permitting a far slower run out rate than that experienced by Messrs Hendrick, Chigioni, Rantucci and Barona on similar transmission line projects. This was because the layers were not firmly and evenly wound onto the drums, which had the consequence that voids were allowed to form, such that there was potential for intermixing of the conductor layers and tail feed, causing jamming of the inner layers of the conductor during unwinding. The more detailed findings of the drum deficiencies are set out later in these reasons. The stringing process 112 Downer provided a convenient brief overview of the activities required to be undertaken to complete a project of the nature the subject of these proceedings: also carefully described by Mr Hendrick in his affidavit. Most relevant is the way in which the transmission line cable is strung out between the electricity transmission structures [towers] extending the length of the power transmission line. 113 The procedure for "stringing" of conductor cable on the Project can generally be described in the following terms: i. The "stringing" operation itself consists of a number of sub-activities: (a) setting up conductor drum and winch sites along the line route (typically some 10km apart, depending on terrain etc); (b) installation of stringing sheaves (pulleys) on each structure in the section to be strung; (c) run out of pilot wires and/or draw wires, and placing the draw wires in sheaves; and (d) connecting the phase conductors [wires] and overhead earthwires [OHEW] to each draw wire, and then pulling the draw wire, conductors, and OHEW's through the strining sheaves in the section of line between the drum and winch sites. ii. Following conductor and OHEW run out, the tension in the phase conductors and OHEW's is adjusted until the specified sag and tension is achieved in each span of the section of line being strung (this is known as "sagging"). iii. Following sagging, the stringing sheaves are removed from each structure and the phase conductors and OHEW's are permanently attached to each structure in the section of line just strung. iv. The stringing sheaves removed from the section of line just strung are then relocated to another section of the transmission line, and made ready for use on the next section. v. This process is continued sequentially along the line route until the whole line is strung. vi. A Transmission Line Contractor would normally have sufficient sheaves to cover 3 or 4 sections of the line, so that the stringing process can be carried out efficiently and without disruption. [Cf Mr Masters' 26 July 2006 report at para 6.3–6.8. See also Mr Chigioni's 23 June 2005 affidavit at [15] and Mr Hendrick's 1 July 2005 affidavit at [17] where the process is described in the following terms: (a) First, the draw wire crew dragged out a plated wire rope (known as a draw wire) from the first tower of the particular run. Typically, the crew extended the draw wire past the structure where the draw wire was to be installed by say 100 metres along the 10.5 km stretch or 20 to 25 towers. (b) Second, certain items of line hardware and sheave/pulley were then fitted to the structure as each of the two earth wire locations and the six conductor cable locations. (c) Third, the draw wire is then lifted up and onto the pulley. (d) Fourth, once the draw wire is drawn out approximately 10.5 kilometres, a lynch and tensioner were placed at either end of the draw wire. The winch commenced pulling the draw wire until such time as the draw wire was lifted clear of the ground and other obstructions such as trees. (e) Fifth, the conductor cable was then attached to the draw wire at the tensioner end by a special fitting called a "stocking". A tensioner at the other end would slowly wind in the draw wire, pulling the conductor cable between the transmission line structures. (f) Sixth, the procedure was repeated for the six draw wires for conductor cable (as well as for the two draw wires for the earth wire)]. The timing issues 114 As Downer has contended, a number of witnesses provided various estimates [all other things being equal], as to their respective experience of the time that it should take to a pull 10.5 km of conductor cable on a transmission line project such as the present: i. Mr Hendrick gave evidence that it usually takes about four hours to pull 10.5 kilometres of conductor cable on a transmission line project (including "downtime" for reel changes and joints being conductor cable lengths, assuming the need for three joints per pull). ii. Mr Chigioni gave evidence that it is his experience that the usual pace of conductor run out on similar transmission line projects is about 3 km/hr (i.e. a run out of 800-900m in 15 minutes and "down time" of 15 minutes to change the draw wire every 800-900m). iii. Mr Rantucci's experience of using similar winches to those used on the Project was that conductor should be capable of being pulled out at a rate of 900m per 20 minutes (including reel change at the winch) and for a join between 3.5 km lengths of conductor to take about 20 minutes. iv. Mr Barona gave evidence that of the items in his tender estimate, those the subject of the greatest variability are those concerned with unknown underground conditions. In his view over the last 15 years his estimates, to the extent concerned with stringing activity, have been accurate within a variation of 15%. He allowed 265 man hours per kilometre for stringing on this Project. In my view nothing in the otherwise materials before the Court casts real doubt upon this evidence which is presently accepted. The period when the stringing activities took place 115 The stringing activities on the Project itself began on or about 9 October 2003 and did not end until about 13 August 2004. The average time taken to pull 10.5 km of conductor cable during the project? 116 During the Project, the average time to pull 10.5 kilometres of conductor cable was in the order of 15-18 hours, allowing that some days the process was much slower than others (compared to the average of four hours referred to above). Mr Rantucci also records his observations of slow run-out, and provides some examples for pull 150-172 and pull 113-141. Wasted conductor cable 117 There is before Court evidence which establishes that in addition to these delays in the time required for the stringing operations, the result of those operations included an extremely high proportion of wasted conductor cable. When Mr Rantucci arrived on the Project site in early February 2004 he observed a large amount of wasted conductor, which he estimated was in the order of 2.5 tonnes. At the end of the Project he observed semi-trailer loads of conductor waste being transported to the scrap metal merchant, being a level of wastage he had never seen in his 20 years of experience. Approach to performance of fir and larch drums 118 It has to be remembered that separate consideration has to be given to the performance of: i. the fir drums (i.e. batches 1, 2a and 2b) ii. the larch drums (i.e. batches 3a, 3b, 4a and 4b). [I note that some of the evidence material to each category is given by the same witnesses.] 119 In giving that separate consideration, one must recall that neither the process of fabricating the wooden drums nor the process of winding on of the conductor to those drums was fully automated. Naturally also the principal elements of the drums were wood, which is no more than a variable material. As Downer has contended the existence of these significant variable elements in the process has to be taken into account in order to appreciate why it is that there may have been slight variations between performance during run out of the drums, even for drums from the same batch. 120 Many of the findings on these performance issues reflect the Downer contentions, which in the main constituted a fair summary of the evidence and contemporaneous documents. The performance of the fir drums The observations of Mr Guazzelli 121 Mr Guazzelli was not challenged as to the observations that he made on site as to the performance of the fir drums in practice. As Downer has contended his evidence was to the following effect: i. He went with Mr Barona to undertake an inspection of the first batch of drums that arrived. He is the person holding the ruler next to the flange illustrating the dishing effect on the flange in some photos attached to emails. He recalled observing from an early stage that gaps in the layers were packed with cardboard and rags to take up space. One of his early complaints is referred to in an email from Mr Barona to Messrs Paris/Antoniazzi dated 13 October 2003. ii. Until he left the Project in January 2004, he observed the progress of the stringing on site almost daily. His evidence was that almost every drum of conductor had run out problems, some suffering from far worse problems than others. His evidence was that there were not many drums Downer did not experience problems with. The main problems that he observed were: a) poor winding of the conductor on the drums such that the top layer of conductor forced its way into and became wedged in other layers of the conductor, jamming and causing damage to the other layers of conductor by scratching them. His evidence was that when jamming occurred the men on site had to stop the run out and free the jammed conductor; b) nail damage to the conductor, either by snagging on the nail heads poking out of the flange or from nails within the conductor layers. iii. He observed that about a third of the drums had some protruding nails which could then snag and damage the conductor [steps taken to prevent this involved the stringing team manually punching the visible nail heads into the flanges of the drums]. iv. He also recalled seeing from time to time through the layers of the conductor, items such as glass from broken bottles and lunch wrappers and plastic bottles with Italian wording on them. v. He further explained problems by reference to photographs. vi. He recalled having a number of discussions with Sural personnel. One such conversation concerned nails being found through the conductor. Mr Guazzelli recalls that following an initial attempt being made by the Sural representative to give an explanation of nail movement (from the centre), when further pressed the representative remained silent. He also recalls a discussion with a person who he identifies sufficiently to make clear it is Mr Riviere. Mr Riviere had no ready answer for him when uneven winding was identified to him and an explanation was called for. vii. He was on hand when some of the drums that had been rewound at the Ridolfo yard were tested on 5 December 2003. During the first test he recalled that one of the rewound drums was fine and the other was not good, in that it was less successful during run out than the other. This is consistent with the contemporaneous report prepared of this run-out test. In particular, he went to the brake site regularly to observe the stringing and observed that the same problems occurred with the rewound drums namely, the flanges would still bow on the rewound drums allowing the conductor to slip within the layers. viii. He was also present when some of batch 2b was run-out on 5 December 2003. He identifies photos taken from that occasion which reveal that the second (inner) layer of conductor had been compressed and damaged during winding at the factory and had to be cut out, the outer layer of the conductor was not smooth, which indicated unevenness in an inner layer of the conductor and damage to an inner layer, and protruding nails which had to be punched manually into the flange to avoid damage the conductor. ix. Overall, based on his experience [which amounted to in the order of 45 years experience in the power transmission line construction industry (including over 40 years of stringing cable similar to the conductor)], he holds the view that the wooden drums of conductor were the worst drums of conductor he had ever seen. To him the protruding nails, distortion of the flanges, uneven winding of conductor layers not being even and debris he found within the layers of conductor indicated to him that the construction and the quality assurance of the drums was very poor. Further, the wooden drums with which he had previously had experience, were much more stable. Mr Chigioni – not required for cross-examination 122 Mr Chigioni was not required for cross-examination at all. That being so, the Court is entitled to have complete confidence in relying upon the evidence recorded in his affidavits. As Downer contended, his observations as to the performance of the drums was to the following effect: i. from August 2003 he was receiving complaints from Mr Guazzelli that the conductor was getting caught between the layers, because the drum was not adequate for the conductor as the flanges were warping and widening out as the drum was rolling and each layer was falling in on top of one another [resulting in jamming]. ii. He was also receiving complaints and observations from Mr Guazzelli and Mr Rantucci to following effect: "The problems aren't going away. The conductor is continually jamming as the layers fall in on each other during run out. Productivity is way down as we have to keep stopping the run out to repair damaged conductor because of all the knotting and tangling. The drums are so weak that they distort under the weight of the conductor just standing in the field. We just can't get the conductor off the drums without it knotting and tangling. We drilled a hole in one of the drums and found a cavity at the bottom of the cheek of the drum; so it's clear the conductor is not wound tightly enough to allow normal run out. Nails appear to be working themselves out of the drums as they warp and distort during run out. This is also causing damage to the conductor and slowing our productivity. The conductor is moving independently from the drum during run out because the conductor is not wound tightly enough. We are also experiencing excessive tail feed. We are having problems with virtually every drum we try to run out. We are doing our best." iii. He was also copied in on various emails to similar effect. iv. Mr Chigioni gives evidence as to Mr Riviere's visit to Australia. v. The next major event recounted by Mr Chigioni was the attendance by Mr Fanelli and Mr Sardiello in Australia to undertake the rewinding process. The result of the rewinding process was the equivocal trial that took place on 5 December 2003 [the email record being sent to Mr Chigioni on 6 December 2003]. vi. Mr Chigioni personally visited the project site between 19 and 23 January 2004. His observations are consistent with those of the other Downer witnesses. He saw that the conductor was rotating on the axis of the drum when the men were trying to unwind it off the drums; the nails that held the cheeks of the drums together were working their way out and causing damage to the conductor on contact; the men had to stop and start to free the conductor that was jammed in the layers; they had to continuously repair places on the conductor where it had unwound; and in some cases, the damage was too extreme and a section had to be cut out and rejoined. He also observed that because of these problems, the stringers could only run out at a speed of less than 1km/hr which, based on his experience, knowledge and expertise, was substantially below the usual rate. Even so, that pace led to the drum creaking as the run out was conducted. Once again, it is important to note that his observations at that time related to the fir drums. vii. Mr Chigioni expresses the opinion (being an opinion based upon 39 years of experience, knowledge and expertise with transmission line projects) that: (i) the conductor drums were very weak, meaning that the drums buckled simply under the weight of the conductor and, during run out, would warp and wobble resulting in tangling of the conductor as well as loosening of nails from the sides of the drums [resulting in significant damage to the conductor]; and (ii) the conductor was not wound tightly enough on the drums and, therefore, would run out loose, resulting in the outer layer of the conductor on a drum often becoming wedged and jammed in the gaps in the inner (bottom) layers (mostly towards the edge of the drum) causing "bird caging" and damage to the conductor. He has never experienced problems that were similar to, and to the extent of, the problems with the conductor on this Project. Mr Hendrick 123 Mr Hendrick gave evidence to the following effect: i. He was first informed of a potential problem by Mr Guazzelli in August 2003, prompting him to attend the project site to inspect the conductor himself. At the time of his site visit he observed that the wooden drums had bowed flanges, collapsed or crushed flanges, no lagging to protect the conductor, missing nuts and/or bolts from the steel-plate centre hole, and loose nuts on the steel rods [located on the inner side of the inner lagging or thimble]. ii. This prompted his first email to Mr Antoniazzi: "We have grave concerns for our conductor drums and thought you should inform the suppliers. Basically, the drums appear unable to adequately support the weight of the conductor. The drum edges are folding away from the conductor which has a huge potential to disrupt the conductor runout [if one layer moves into the gap and gets trapped]. The centre steel plate is also not very secure with bolts pulling out and a considerable amount of bolts simply with no nuts." iii. After receipt of a further email containing complaints about run-out problems, he again visited the site on 14 October 2003. At that time he observed that the wooden drums would turn/spin independently from the loosely wound conductor, layers of the conductor were intermixing [falling in on each other] because the conductor was not firmly and evenly wound, the tail end of the conductor worked its way loose out of the wooden drum and flew around as the drum spun [this is known as " tail-feed "] which caused layers of the conductor to intermix [fall in on each other], centre steel-plates of the wooden drums were falling off due to missing nuts and bolts [some were even pulling out when all nuts and bolts were in place], the wooden drums wobbled and distorted which caused the outer layers of the conductor to become wedged under the inner layers [especially at the drum side or flange], and the conductor would catch on nail heads that had worked their way out of the sides of the wooden drums. He observed that this had the consequence that the conductor would jam, knot and tangle during run-out, resulting in damage, the need to conduct repairs to the conductor, wastage of the conductor [some of the damaged Sural Conductor could not be repaired and had to be discarded] and the run-out proceeding below normal speed for a transmission line project similar to this Project. iv. Mr Hendrick gave evidence that because of the on-going problems experienced with stringing of the conductor, he had to regularly put at least two extra men at the site of the run-out of the conductor to assist with the problems with the conductor. v. He observed that the above problems being experienced continued throughout the entire stringing of the conductor [October 2003 to August 2004], although the crew became more and more adept at minimising the problems as time went on. vi. He attended meetings with Mr Riviere during Mr Riviere's visit to Australia. Mr Barona 124 Mr Barona was not a regular attendee on site. Nevertheless he did attend on a number of occasions and makes the following observations, also noted by Downer in its submissions: i. In or about October 2003 he observed that (i) as the drum of conductor started running out and the drum turned, it started to made creaking noises and wobbled as it spun; (ii) there was excessive tail extrusion as the drum spun and the run-out had to be stopped to cut away the extruding tail of conductor; (iii) the layers of conductor started to bite in on themselves and the top layers of the conductor fell into the bottom layers causing the conductor to jam during the run-out; and (iv) the run-out was being conducted at a reduced speed and the crew had to continually stop the run-out to deal with the jamming of the conductor. ii. He also recounted various conversations with Mr Riviere. iii. He gave some evidence as to the events at the time that Messrs Fanelli and Sardiello visited Australia to conduct the rewinding process. In particular he recalled that with a test drum, he observed [in the presence of the Sural representatives] excessive tail extrusion, layers of the conductor biting on themselves and jamming. Mr Fanelli then said "I see the problem now". He recalls that the rewinding process was abandoned after about two weeks. 125 As Downer has submitted the contemporaneous e-mails that relate to the fir drums are plainly consistent with the observations contained in the evidence of its employees. A convenient chart was prepared summarising these communications many of which were forwarded to other Downer and Sural personnel: DATE DETAILS OF COMMUNICATION Email from Antoniazzi to Holzhaker plus photos 28.2.2003 poor workmanship signs of deformation concerns about effect on runout 2.9.2003 Email Antoniazzi to Holzhaker seeking advice in response to concerns about drums 2.9.2003 Email Holzhaker to Antoniazzi Spoke to wooden drum manufacturer and they are arranging for a solution in the next shipments Email Barona to Paris recording complaints of Guazzelli loose winding 13.10.2003 birdcaging cardboard pieces filling gaps distortion 13.10.2003 Email Antoniazzi to Holzhaker passing on the above and also referring to bumps on the surface of the wound conductor indicating that beneath there is cross over of conductor causing irregularity 14.10.2003 Facsimile from Downer to Holzhaker (incl photos) … supply of wooden reels has meant that Downer has had to run the risk of encountering construction difficulties, delays and associated costs when running out conductor as a result of potentially warped or damaged drums, causes of which have already been seen and notified to Sural after the first shipment Email Hendrick to Paris (incl photos) bottom layer not firmly and evenly wound following layers are not firmly and evenly wound wedging into inner layer gaps 15.10.2003 layers of conductor move/slide across each other causing abrasive damage wedging slow down of pull when reach the sides drum buckling nail damage 27.10.2003 Email Antoniazzi to Holzhaker – asking about technical visit to inspect issue of wooden drums and poor winding Email Hendrick to Barona and others (incl photos) damaged conductor nail heads catching 28.10.2003 bird cages broken strands conductor abrasions and markings suggestion that timber not properly seasoned 30.10.2003 Email Tanner (Western Power) to Barona (with photos) showing conductor problems 3.11.2003 Email Antoniazzi to Holzhaker (with photos) More photos of "problematic reels that are causing Downer great difficulty, delays and amounting (sic) costs" 12.11.2003 Email Hendrick to Paris (with photos) showing unevenness in winding Email U'Chong to Antoniazzi (with photos) of the rewinding at the Ridolfo yard during Riviere's visit (he is in some of the photos). Photos show: severe tail feed 18.11.2003 uneven winding damaged conductor significant marking of wood on drums 1.12.2003 Email Paris to Riviere – attaching memorandum recording actions and agreements made between Downer and Sural during visit 1.12.2003 Email Riviere to Antoniazzi – proposed solutions for the drums in Australia and corrective actions 2.12.2003 Email Riviere to Paris comments on actions and agreements email (general agreement with content) Rewound drum trial (with photos) wedging 5.12.2003 damaged conductor coach screws coming loose nail damage severe marking of wood on drum 8.12.2003 Email Hendrick to Barona (with photos) – glass damage through layers of conductor (Chinotto bottle) 9.12.2003 Email Paris to Riviere objecting to Fanelli/Sardiello leaving site as Downer was continuing to have problems with batch 2a and 2b Email Riviere to Paris re results of rewinding: 9.12.2003 risk of causing damage to conductor increases the more the drum is manipulated most drums had conductor damage during rewinding recommends using batch 2b or rewound drums until arrival of batch 3a (i.e. effectively recommending against the use of batch 2a) 19.1.2004 Email Hendrick to Riviere (with photos) – severe nail damage 21.1.2004 Photos taken by Fanelli (note the wood is green in colour) Email Rantucci to Antoniazzi (observations when running out some rewound drums): 3.4.2004 drums appear to be worse than new drums damage either from nails on the wooden drums or from damage already marked 126 Also tendered were the daily activity reports and supervisors reports for the Project. The evidence from Mr Rantucci [for the period of his involvement on the Project, likely applicable to the preceding period as well] was as follows: i. The supervisor's daily reports were prepared by persons that reported to him, [as far as he was aware they were prepared by people who knew about the matters contained in them], he would receive and see the documents every day, they would be filled in and dropped off daily; to the best of his knowledge they were accurate and he had no reason to believe they were not accurate, he requested that time lost be recorded for their own productivity. ii. Daily activity sheets were prepared by him from 11 February onwards, based upon the supervisor's daily reports and what he was seeing on the site; he attempted to record the amount of time lost by any delay accurately. 127 Plainly the reaction of Sural representatives to the complaints of these problems is relevant. In particular Mr Riviere on a number of occasions made reference to the mass of the conductor being wound onto these drums, that it comprised a mass that the Sural companies were not used to, and also made reference to the greater difficulties in manufacture, transportation, handling and use of drums of that weight. As Downer has contended, this lack of familiarity arose despite the fact that it was precisely this weight per drum that Sural CA [later Sural SpA] had contracted to supply. Mr Millarte – not called as a witness by Sural 128 Mr Millarte has been identified in these proceedings as the most senior quality assurance officer at the Taranto factory specialising in wire and cable at the time of production for Downer. When the problems were first reported to Sural by Downer [principally concerning the distortion of the flanges and the looseness of the winding] he was the person sent to Australia to investigate. He was not called by Sural to give evidence as to what he saw and what he found. Apart from the obvious adverse inference to be drawn from Sural's failure to call Mr Millarte, there is some evidence that assists in drawing a conclusion as to the opinions he came to during his visit: i. During his visit to Australia, Mr Millarte had two conversations with Mr Barona [which were not challenged] to the following effect: Mr Millarte: "I have seen the problems and spoken to head office about how we can solve them. We believe we can prevent the problems by winding the conductor onto the drums at the factory with a greater tension and we will start to do that immediately." Mr Barona: "Won't that potentially increase the possibility of the layers biting in on each other?" Mr Millarte: "No, you're wrong on that, it won't. It will solve the problem, rather than increase the problem. You'll see when you get the next batches." Mr Barona: "I heed your advice, you're the manufacturer." And subsequently: Mr Barona: "You haven't been here for that long, you should stay longer and witness more of the run-out to get a better understanding of the problems." Mr Millarte: "I have seen enough to understand the problems. I have to get back to Italy as I have some issues I need to deal with back home." ii. The problem, as diagnosed by Mr Millarte, was at least that the conductor was not being wound on with sufficient tension. iii. Mr Millarte returned to Taranto. It is not entirely clear what occurred at the meeting apparently held with CLS when he returned, as the evidence of Mr Riviere is not entirely clear [Ms Holzhaker does not recall and no one else from the meeting (Messrs Millarte, Caprino, Schiano and others from CLS) was called]. The position appears to be that it is accepted that Mr Millarte was the first Sural representative to go to Western Australia, and that when he went back he saw Mr Riviere before Mr Riviere came over to Western Australia. It also appears to be the case that a meeting took place between Sural and CLS, which resulted in changes to the drum design prior to Mr Riviere coming out to Australia. The persons at the meeting are not clearly identified. At one stage it would appear that Mr Riviere thought the meeting consisted of the CLS owner and two office people, and from Sural Messrs Millarte, Riviere, Caprino and Ms Holzhaker [Ms Holzaker has a different recollection of her attendance]. It is clear that Mr Millarte was at the CLS meeting and told those present what he observed whilst in Australia. After initially saying that not all changes were recommended by Mr Millarte, Mr Riviere then claimed that the recommendations were made by Mr Schiano of CLS and that he did not recall Mr Millarte making any changes. He also started by saying that Mr Antonio Caprino, the Sural Logistics Manager, may have been the person to suggest incrementing the density of the wood, but later in his evidence he became clear that the recommendation came from Mr Caprino, bolstering that evidence by saying that Mr Caprino had more experience in relation to wood than himself, and that Mr Caprino said a higher density wood would be better and would contribute positively to any problem. At another time he claimed that Mr Schiano proposed some changes which Mr Riviere wrote in an email – higher density wood, changing the position of the rods to be at the same level as the inner drum, checking the nails. Whatever the true position at the meeting, it appears clear that, as a consequence of Mr Millarte's Australian observations, a series of recommendations came forward, which included those recorded in an email of 13 November 2003 that "further improvements were to be made to the reels part of which was the use of harder/heavier timber", the change of position of the rods and some modifications to the nailing of the drums. iv. It is apparent that there were other steps being taken internally to adjust the winding process that was being undertaken. 129 In the result and on the basis of the observations of Mr Millarte when he was in Australia, decisions were taken to alter the way in which the drums were wound and to strengthen the drums. Mr Riviere and Ms Holzhaker travel to Western Australia 130 Mr Riviere travelled to Australia with Ms Holzhaker later in November 2003. The evidence is that during that visit, both Mr Riviere and Ms Holzhaker recall observing drums that had the dishing effect in the flanges [although both claimed that they did not observe all drums to have this appearance]. 131 Mr Barona recalled that during this visit he had the following discussions with Mr Riviere: i. one in which Mr Riviere said words to the effect: "We will ensure that future drums are on more seasoned timber than the initial batch, which I feel were a bit green. That's why I think the nails are popping out." ii. another in which Mr Riviere said that Sural would: a) re-wind the batch 1 Sural drums of conductor in Australia at the Ridolfo yard; b) modify the batch 1 Sural drums of conductor to reduce differential movement by the addition of three coach screws on both sides of the drum, at the edge of the inner thimble; c) also run-out a selection of four to five Sural drums of conductor from batch 2a (which had also arrived in Australia) to see if the same unwinding problems were being experienced with those drums; and d) bear the costs of each of those actions. iii. another in which words to the following effect were spoken: Mr Riviere: "We can rewind onto the used wooden drums, and I will select the better wooden drums to use" Mr Barona: "Won't the rewinding the conductor on to the same drums result in the same problem at site." Mr Riviere: "I've already rewound from a wooden drum on to another wooden drum and I had no problems." 132 Mr Hendrick recalled that during Mr Riviere's visit on one occasion Mr Riviere said to him words to the effect: "We have taken steps to strengthen the drums used for Batches 3 and 4 of the conductor and have delayed shipment of Batch 3 so the stronger drums can be used. For Batch 1 drums we feel that if we re-wind the drums so as to tighten the conductor, this should help the run-out problems being experienced at the site. We should also trial a sample of the Batch 2 drums delivered to date to see whether there are similar run-out problems with this batch of conductor." The unwinding/rewinding trials during Mr Riviere's visit revealed the same run-out problems as were being experienced on site. In particular, one drum took almost half a day to unwind. He recalls that during the trials Mr Riviere said to him: "Despite the problems we're experiencing with the re-winding, we think we should continue with the rewinding to tighten the conductor on the drums delivered to date in an effort to avoid the run-out problems on site. I'll arrange for two experienced Sural representatives to come to Australia to perform this task." 133 Mr Chigioni recalled: i. When Mr Riviere came to Australia he was shown the drums in the Ridolfo yard, most of which were distorted under the weight of the conductor and how the timber of the drums was cracking, and cracks in the flanges of the drums. He recalls Mr Riviere apparently being initially in a state of denial as to the existence of the problems, pending the undertaking of trials. The initial trial was conducted on an admittedly inadequate Pirelli re-winding machine. Nevertheless, even from that initial test, problems of excessive tail run out and tangling of conductor started to manifest themselves, prompting Mr Riviere to suggest that "The problems could be due to movement differential between the outside walls of the drum and the inner thimble." Mr Riviere suggested in his affidavit that differential movement had been suggested by Downer – however this is contrary to what is recorded in the agreed summary of his visit to Australia. Further, Mr Chigioni was not cross examined to suggest that his recollection was wrong. Further, and in any event, Mr Riviere must have thought sufficiently of the idea to instruct Mr Fanelli to install coach screws into the drums when he attended the Ridolfo yard [an instruction which is only consistent with Mr Riviere accepting differential movement as a problem]. ii. During Mr Riviere's trip he was involved in a round table meeting in which he suggested to those present that: "We have taken steps to strengthen the drums to be used for Batch 3 and 4 of the conductor and have delayed shipment of Batch 3 to put the conductor on the stronger drums. This will prevent the problems arising in future batches, so we just need to solve the problems with the drums you have." It was also decided at this meeting that steps ought to be taken to try to set up a system at the Ridolfo yard to roll or wind the conductor from a full drum to an empty drum to fully investigate these problems. This prompted Mr Riviere to hire the Bullivants conductor rewinder [to better handle the weight of the conductor] and to have it set up in the Ridolfo yard. 134 As Downer has contended, the position that Mr Riviere was in is further illustrated by the fact that on 20 November 2003, prior to the further trial with the Bullivants machine, he attached some coach screws to one or two drums to stop the drum from rotating, and advised Mr Chigioni that he was prepared "to try anything that may fix the problem." The rewinding was then commenced and soon after it had started the same problems were encountered, namely, jamming of the layers and the conductor not being able to free itself from the drum, wobbling and creaking at the very slow pace of about 1km/hr. The unwinding was stopped periodically to repair the damage and then the conductor was released again. The same problems occurred numerous times during the unwinding of the drum. It took half a day to unwind one drum. Mr Riviere was present during the whole process and participated in the unjamming of the wedged conductor and in carrying out repairs to the conductor. The problem was not isolated to the first drum that was tried. Similar problems were encountered with other drums that were sought to be rewound over the following days. It appears that it was at this time that Mr Riviere started to be satisfied with the enormity of the problems faced by Downer. On or about 21 November 2003 he had a conversation with Mr Chigioni to the following effect: Mr Riviere: "This is the first time that this has ever happened. I won't use this fabricator ever again. I have spoken to Italy and they believe we should continue to unwind and rewind the drums you currently have. The international transport may have loosened the conductor layers, so if we re-wind the conductor, that should help the actual stringing on site." Mr Chigioni: "From what we've seen, that appears to be a waste of time, as we are facing the same problems doing the re-winding here as those in the field including damage to the conductor. Our men should be stringing in the field, not spending time here working out a solution. This is something you must fix ASAP." Mr Riviere: "I will provide two experienced people from our Italian factory to do the whole rewinding exercise." 135 It is clear that at least by this stage Mr Riviere was fully appreciating the problems were seriously affecting Downer. The explanation provided had nothing to do with any suggested deficiencies in the Ridolfo yard. 136 Following his visit, Mr Riviere sent an email to Mr Antoniazzi dated 30 November 2003 [PX 1326-1327] setting out Sural's proposal for solving the problems being experienced with the conductor: "1) Rewinding procedure for lot 1: · An approximate amount of 30 reels currently at site have a high possibility of being rewound. · These reels are to be rewound on timber reels that are available after having rewound 4 reels on steel reels. · The empty timber reels are to be tightened and the inner drum protected with plastic, check for possible loose nails to be carried out. · As material is being rewound and damage is found the following procedure is to be implemented: a. Slight damage: lay loss, no damage to wires, mark with black paint. The conductor should be closed with Teflon closing blocks and in case there is a little looseness this will disappear when tensioning the conductor. b. Wire Damage or broken strands: conductor to be marked with red paint and a junction sleeve is to be used. · Special care to be taken when hoisting conductor. Under every circumstance the conductor reels are to be hoisted using a spreader bar that prevent the hoisting chains from touching the flanges at any moment. · Special care is to be taken with the renumbering of rewound reels. The original number with the addition of the letter "R" will be used in order to keep the original traceability. · Coach screws are to be used to fix the timber drums. Corrective action for lot 3 & 4: · Material change: Initial reels were made with fir wood. The decision is to use larch, that has a higher density. The difference between the two woods is 27% density increase. This change will assure a higher resistance of the material thus reducing the deformations that can occur. · Positioning nails: Helicoidal nails will be used in order to prevent the fixing nails from becoming loose and hurting the conductor. · Fixing nails: These are to be increased to 90mm instead of 80mm and these will also be helicoidal. The increased length will assure a better anchorage of the nail to the wood. · Internal drum: Internal drum will be fixed in order to prevent the exit of the exit of the conductor end. · In rewound drums insert plastic in order to reduce the exit of the conductor tail." 137 Sural then sent Messrs Fanelli and Sardiello to the Ridolfo yard to participate in a rewinding of approximately 30 drums, which took close to two weeks to be undertaken. This rewinding process was at Sural's cost. 138 In addition, steps were being taken at the Taranto factory to modify the processes used for the winding on of the drums. It appears that the steps that were being taken principally concerned the application of greater tension during the winding process to wind the conductor onto the drums in a much tighter fashion. This was the suggestion first volunteered by Mr Millarte. It also appears [from Mr Fanelli's evidence] that steps were taken to improve and make more accurate the winding processes in the factory: "We carried out different tests to improve the winding procedure as much as possible, and some of our colleagues from the maintenance department helped us so that the winding process could be more accurate." 139 These adjustments were introduced to try and get a better result from the winding. 140 In summary, the Sural reaction to observation of the state of the fir drums was to take the following steps: i. make various admissions as to their deficiencies, including laying blame on the drum manufacturer; ii. call a meeting with the drum manufacturer, which had the result of substantially modifying the drums, in terms of both the wood used [changing to a more dense wood – larch] and a change in design [as to the placement of the horizontal rods, and changing the means of fixing]; iii. take internal steps to modify the winding on procedures adopted in the factory. It appears that this included at least increasing the tension by which the drums were wound; iv. spend considerable expense on sending experienced staff to Australia, particularly Mr Millarte, Mr Fanelli and Mr Sardiello to both inspect the problems and attempt a solution; v. spend considerable expenditure on rewinding drums in Australia. The performance of the larch drums 141 As mentioned above, the larch drums were intended by Sural to be the answer to the problems that had to date been faced by Downer in attempting to cope with the fir drums. The evidence reveals that the performance of those drums was not substantially better [although some of the problems that had been experienced with the fir drums, in particular the popping out of nails, were lessened]. Observations of Downer staff Mr Rantucci 142 Mr Rantucci has 22 years of experience in power line construction. 143 Mr Rantucci gave the following evidence in his first affidavit: i. The first day that Mr Rantucci was on site is an exemplar of a typical day in terms of run-out. The happenings of that day are recorded in an email prepared by Mr Hendrick which recorded: "Today we started to run out the conductor on the new improved drums – Pull No. 7. The whole day consisted of starting the pull – 2 drums, top phase. After approx 1.4km, drum no. C101818 was so jammed we could not free the conductor to run out. There was almost no brake on the drum during run out. This drum was subsequently cut-away and replaced. We continued pulling with one original drum and the newly replaced drum. We then had to replace the original drum because we managed to run out the entire 3.5km. We are continuing to run out but daylight has beaten us today. All day we ran approximately 5km of conductor, when we should be running 10.4km. As it now stands a second drum is starting to have problems as shown. Comments from the Supervisors and Leading Hands include: (1) This may be worse because at least we could free the jammed conductor in the last batches. (2) We are cutting off tails at a rate of 3m per 500m of run out conductor. (3) WesternPower is convinced it is not us or our plant but there is a definite problem with the product. (4) WesternPower will have photos in their email tomorrow. At this stage we cannot predict a new duration for run out. . . . ." Mr Rantucci also identifies the photographs attached to that email as being photographs of the stringing problems experienced that day. He also prepared a handwritten note of that first day on site: "…Problems with conductor drums like before. Something is happening, wire is getting caught. 500m run out three metres pulled out of tail, little brake today pulled out 5.2km…. Peter has said that it is worse than original batch as it will jam in and cannot come out. Today one drum went out 1.4km, got jammed had to cut it and abandon then use another drum with approx four runs left on it, jammed again. Tomorrow will have to cut and see if it frees up and join, otherwise, will have to put a new drum on …" He also completed a daily activity report for that day which described the delays experienced in the following terms: "Major problems with Conductor drums, scrapped one drum 2.1km & 1km on another, conductor jammed all day, lost six hours." ii. Also at the time of arriving on site, Mr Rantucci observed a large amount of wasted Sural Conductor, approximately two and half tonnes, in a large pile on the site, which he was later told by staff on site consisted of tangled Sural Conductor, or off-cuts of Sural Conductor, which had been discarded because of the problems being experienced with the run out of the Sural Conductor prior to his arrival at the Project site. This was not a phenomenon that Mr Rantucci only experienced at the time he first arrived on site. Wastage remained a major issue throughout. He gave evidence that at the end of the project in August 2004 he observed two semi-trailer loads of Sural Conductor waste [which was caused by the problems experienced with the run out of the Sural Conductor] being transported to the scrap metal merchant [having already seen two large mountains of wasted conductor when he first came on site]. In his 20 years of experience he had never seen this level of wastage from a conductor run out. In contrast, for a job of this size he would normally expect to see one tray truck load of wastage at the end of the job. iii. He observed the following recurring problems: The tail of the Sural conductor kept feeding out from the drum as it was wound out, creating a void under the centre of the drum. Two to three metres of the tail would come out and swing around causing a danger to the workers in the vicinity. When this happened, the stringing team needed to stop the run out and cut the tail piece of Sural conductor off. Knotting and tangling of the Sural conductor would occur as the Sural conductor approached the flanges (or side) of the drums, and the top layers of the Sural conductor would fall into the lower layers creating tangling. That resulted in the conductor rubbing together and being damaged [dealt with by applying repair sleeves or cutting out conductor and replacing it with a mid span joint]. Because of the contractual requirement with Western Power [being one mid span joint per 400m span between the transmission towers], if there was two badly damaged sections of the conductor in the same span, the crew had to spend significant time adjusting the conductor to ensure that the joints were in different spans. iv. The wooden flanges of the drum creaked and wobbled [the wobbling created gaps and resulted in the layers falling in on each other at the flanges]. Also, as the flanges of the drums wobbled, the nails would work their way out of the wooden drums and damage the Sural Conductor [although the crews advised him that the nail problem was more pronounced on the earlier batches]. v. On many occasions that the Sural conductor was loose on the drums instead of being tightly wound [see also his email to Mr Hendrick dated 18 May 2004 in the following terms]: "FYI, find attached 3 photos of conductor drum No C101824 You will notice the gap between the wooden side of the drum and the conductor. You can see how big a gap there is. This gap started appearing after the second layer was paid off. The conductor pushed its way through 4 layers of conductors. With some perseverance the conductor was able to be freed and the drum was slowly paid out. The drums are loosely wound !!!!!" vi. Movement of the conductor relative to the drum, suggesting loose winding [this was often checked by simple experiment]. vii. Foreign objects, such as pieces of timber, were found between the layers of conductor [in voids]. viii. He found that the problems were most pronounced during the period in which the rewound drums [rewound at Ridolfo] were used. Those 25 to 30 drums were left until last as they appeared to Mr Rantucci to be of the poorest quality. These drums were observed to contain damaged conductor [some damage being marked with black paint]. They gave rise to the most pronounced run out problems. ix. The later batches of Sural conductor [Batch 3 and 4] also suffered problems on run out and, for the most part, the run out of the Sural Conductor [no matter what drum was used] had to operate at reduced speed. x. Because of the problems being experienced it was often necessary to assign two additional workers to the brake when pulling out the Sural conductor. xi. He identified the processes that were adopted to try and minimise these problems, being identified as potential engineering solutions for trial following internal Downer discussions [Messrs Hendrick, Antoniazzi, Rantucci and Chigioni]. The solutions that were identified for trial were: a) to plug the gap between the Sural conductor and the spool with dowel rods to prevent the Sural Conductor moving separately to the drum [this proposal did not eliminate the problem as the dowels placed pressure on the planks in the spools which then cracked]. b) the placement of balloons between the conductor and drum [the trial of this method was not successful]. c) spinning a drum backwards at the depot in an attempt to tighten the conductor on the drum [this trial was not successful]. d) cutting off the tail end of the conductor and plugging the hole through which the tail was feeding by securing the tail through using wedges to hold in the tail and to slow the rate of run out. e) to minimise the knotting and tangling of the conductor, the stringing team developed a practice of wedging the conductor out from the flanges and of stopping the unwinding as the conductor approached the flanges to manually move the strand of the conductor towards the middle of the drum. He describes this as very time consuming but effective in reducing the occurrence of tangling. f) [The most efficient solution] to slow down the run out of conductor and be very cautious when the Sural conductor was being pulled from near the flanges of the drum. He said that this helped to ensure that the problems with the run out of the Sural conductor were kept at a minimum [although the problems did continue as the quality of the drums (including the tightness and evenness of the wind on the drum) varied from drum to drum across all batches]. Mr Ritky – not required for cross-examination 144 The report prepared by Mr Ritky of the trials summarised the ultimate result of them: "Conclusion The method developed by the site crew is the best option for installing this conductor. The batten method produced improvement, but not enough to justify the implementation for the remaining drums. We managed to tighten the inner layer, but there is no way of tightening the successive layers, except by winding backwards – which can increase jams. The problems on site are caused by two factors. The conductor is loosely wound onto the drum, and the drums are not adequate for the mass of conductor. It is suggested that steel drums are used in the future wherever possible. If wooden drums are procured, these should have a maximum of 3 tons of conductor, be reinforced with a central barrel support, and have the conductor wound tightly onto the barrel." 145 He gave evidence that the Project took a lot longer that the ordinary rate, and gave supporting examples. The estimate of pull out time [at [23] of his 1 July 2005 affidavit] was described by him to be an average rate that can be achieved without major obstacles. He said [and it was not challenged] that he had never worked on a job, before or since, where the time taken for run out was so slow. 146 He made reference to the Sural inflatable bladder ['balloons'] trial. He observed that trial. He observed that the task of insertion of the bladders appeared to him to be very difficult and time consuming as it involved filing the central hole of the hub plate to remove any sharp edges, inserting the balloons [one by one] into the central core and manipulating them into position. After observing that, he left the supervisors on site [Messrs Zilliani and Blasi] to keep him informed. He recalls receiving a report in terms that: i. it took about an hour to insert and inflate the balloons [including manipulating them into position within the central core before fully inflating them and tightening & locking the drum flange nuts]; ii. a total of three balloons were needed per drum; iii. the trial run out was at pretty much the same slow speed that the stringing crew had adopted for the Project; and iv. the Sural representatives left the site and gave the stringing crew a small number of balloons. a) There were not enough balloons left for multiple drums so that, if the balloons were further trialled or used after the Easter break, it would be necessary to not only insert them into a drum, but also remove them from a drum and re-use them. In Mr Rantucci's opinion, the balloon solution did not offer any improvement to the run out speed and required additional time and manpower to insert the balloons [and, if further supplies of the balloons could not be sourced, to also remove and re-use them]. Following internal discussion, the bladders were not used for the run out on return from the Easter break. Rather, Mr Hendrick asked the crew to continue running out the conductor using the methods that had been developed. The main reason for this was that [as Mr Rantucci had observed and discussed with Mr Hendrick], the insertion of the balloons into the spool was time-consuming and fiddly which would have required additional manpower at the site and, even doing this, the run out speed would have remained no better than it currently was. Given the amount of time the installation took, Mr Rantucci believed that there would be very little, if any, time saving over running out the Sural conductor in the manner adopted for the Project. The legitimate holding of that opinion, or its reasonableness, was not the subject of challenge. 147 As Downer contended, there is a significance in contrasting Mr Rantucci's observations of the performance of the Sural drums with the performance of the six steel drums of Olex conductor that were run out at (Mr Rantucci's 1 July 2005 affidavit at [54]): A run out of 6 drums of the Olex conductor cable took place on 15, 17 and 19 July 2004. I was on site for part of that time and observed that the run out was markedly faster and smoother than the run out of the Sural Conductor that I had observed on the Project. There was no jamming of the conductor cable nor were there any repair rods required. The run out of the Olex conductor cable was recorded on video footage. DVDs of footage taken on 15 and 17 July 2004 appear at tab 14 of exhibit "SR1". Based on that footage, the rate of run out of the Olex conductor cable from the steel drum was approximately 3.8km/h (excluding reel change). This speed, in my view, is the normal speed for the run out of cable conductor of the type of the Sural Conductor on a project like the Project … 148 In addition, Mr Rantucci's observations were supplemented by his oral evidence, in particular: i. He agreed that he experienced intermixing, tangling, drums wobbling and flanges warping [he could see and hear them creaking]. He said that the dropping of a layer of conductor preceded its tangling. ii. He said that all drums were pulled out at lower speed, and on some occasions [very few] there was no tangling. Knowing what the problems were they pulled out at lower speeds. Going slower was one of the steps taken to prevent the problems as best as possible. He cannot remember a time when there was not a problem; every day had some sort of issue. iii. Further, his evidence was: "A. There were some drums that the outer layers had already dropped, so you knew you were going to have a problem with them from the start. Some them did start [sic], they had a nice layer on the top one. As soon as you started unravelling you could see probably one layer come off and the second one, that side had already dropped and it already started falling in. So you would know very soon, as soon as the drum, one or two layers from the top and from then on we just had issues until we took it all off." iv. Further, his evidence was: "Q. What happens then, is everyone called into the office and said to have lunch and a long afternoon because your group are now going to try and find some other solution and then a week later you get back to some other area and ask them for a fresh drum and the other drum to go out? I would just like to get an idea of the actual story, what could be done and was done as quickly as possible or couldn't be done. Do you mind just explaining a little bit of that to us? A. Yes, no problem, your Honour. What we did, we definitely didn't go back to the depot. The people on site, the experienced people we had there, we just tried all different types of things so that we could get the conductor out and one of them was as soon as we saw the gap appearing we used to put these wedges in to try to keep the conductor all firm and when the conductor got to the side of the spool, we used to stop it and manually pull all the conductor to the middle and then we keep pulling and - because the middle part was the part that used to kind of go a little bit better. So we had a combination of all these things just to keep the job going. Q. So you had to get to be able to use that drum and it's a matter of working out how to disentangle the problem and then continue with that drum? A. That's correct, your Honour. Q. And just explain the wedge to me, please, again. What is the wedge? A. As soon as you started pulling, the gaps used to appear on the sides and that's where we got the dropping and then it would start tangling if you didn't do anything about it. Q. Yes? A. So as soon as the gap, we used to make these wooden wedges, about one foot long, 300mm, and just push it manually against the spool and the conductor, just to try to keep it nice and tight. Q. To fill the gap? A. Yes. Q. I see? A. And the other one we used to do, the tail used to keep feeding out so the first thing that we found out was if we tried to stop this tail, so we used to put this big wedge in the hole of the tail. Q. The tail being the last bit that you would come to at the very end? A. Yes. Q. And that was already zipping around like it shouldn't be? A. Yes, that one there used to come out by itself, which was amazing, you know. We stopped that first time and we put the wooden wedges in and if we saw it getting very bad we used to stop and shift the layers to the middle manually so the stringing operation would stop and there would be five fellows around this drum physically moving it and then when it was kind of back into the middle again we would start the run again. Q. Presumably those who were working on the site after a while became quite used to and adept at understanding the sorts of problems and knowing the sorts of ways to get around them and then did get around them? A. That's correct, your Honour, yes. Q. One of the ways they got around them was to slow down the rate at which it was paid off, is that correct? A. That's correct, yes." v. Further, his evidence was: A. In the beginning, your Honour, we did try to find some better drums and we did try to run a little bit quicker and the problem was that if you are pulling a bit quicker and you do get a drop or a tangle that's when it does really get jammed and you can never get it out, you know, so if you are pulling slowly and you see it going bad you stop and then you can save it. It did occur early on in the piece that we were pulling maybe a little bit quicker and when it got to the ends it got really caught and so far this it damage the conductor. We had to cut it, put in a splice and try to unravel it that way, you know. That was the reasoning behind, you know, we said look, let's pull slower and at least the job keeps going. Q. As I gather you are saying, correct me if I'm wrong, because it was very difficult to know what might or might not happen you had to assume the worst all the time? A. That's correct. Q. In order to cope with it should it happen? A. Yes. Q. Is that what you are saying? A. That's correct, yes, correct. Q. To repeat what you have said, you had less problems when it was run out, when the conductor was run out at a slower rate? A. That's correct, yes." 149 Mr Ritky made the following observations: i. the conductor was hanging loose on the drums giving rise to: (i) intermixing of conductor layers on the drums [that is the "paying out" end of the conductor was not always at the top layer of the conductor]; (ii) "tail feed" causing jamming of the inner layers of the conductor [that is, the inner layer of the conductor was being pushed out of the tail hole and drum anchor point resulting in running out stoppages and conductor wastage]; ii. the centre barrels of the drums were not supported by internal disks resulting in the barrel deforming under the weight of the conductor; the drum would flex and wobble during run out; and nails protruded out of the drums into the conductor layers causing damage to the conductor during run out as the drum turned; iii. the drums were made from low-grade timber which, in his experience, was not appropriate for conductor of the weight of that supplied by Sural on each drum [in his experience conductor of this weight is normally supplied on steel drums]; iv. the wooden drums would deform due to the weight of the conductor in circumstances where they were simply stood on uneven ground. Mr Chigioni 150 Mr Chigioni gave no evidence as to actual observation. The evidence of significance from him concerns the constant complaints that he was receiving from Mr Rantucci in terms of those set out above in the section concerning the fir drums. They were complaints clearly made by Mr Rantucci during the period of use of larch drums. Mr Hendrick 151 Mr Hendrick gave evidence that: i. the problems continued until the run out was completed [which included the period in which the larch drums were used]; ii. he could not recall any stage of the running out of the Sural conductor on the wooden drums at which the problems experienced were more acute and that the problems continued until the run out was completed [which included the period in which the larch drums were used]. 152 This is indicative of a continuum of the problems from the use of fir to larch drums. 153 Mr Hendrick identified his email from the first day of the larch drum run out, which was in the following terms: "Today we started to runout the conductor on the new improved drums – Pull No. 7. The whole day consisted of starting the pull – 2 drums, top phase. After approx 1.4km, drum no. C101818 was so jammed we could not free the conductor to runout. There was almost no brake on the drum during runout. This drum was subsequently cut-away and replaced. We continued pulling with one original drum and the newly replaced drum. We then had to replace the original drum because we managed to runout the entire 3.5km. We are continuing to runout but daylight has beaten us today. All day we ran approximately 5km of conductor, when we should be running 10.4km. As it now stands a second drum is starting to have problems as shown. Comments from the Supervisors and Leading Hands include: (1) This may be worse because at least we could free the jammed conductor in the last batches. (2) We are cutting off tails at a rate of 3m per 500m of runout conductor. (3) WesternPower is convinced it is not us or our plant but there is a definite problem with the product. (4) WesternPower will have photos in their email tomorrow. At this stage we cannot predict a new duration for runout. . . . ." 154 Mr Hendrick identified the general problems experienced with the larch drums in the following terms: i. some wooden drums would still turn/spin independently from the loosely wound Sural conductor; layers of the Sural conductor were still intermixing [falling in on each other] because the Sural conductor was not firmly and evenly wound; the end of the Sural conductor would still work its way out of the wooden drum which caused layers of the Sural Conductor to intermix; and some wooden drums would still wobble and distort causing the layers of the Sural conductor to intermix; ii. there were fewer nail problems with the "new" wooden drums [due to the masonite protective barrier], although staples which secured the masonite from time-to-time caught on and damaged the outer section of the Sural Conductor during run-out and some nails did work themselves out past the masonite and into the layers of Sural Conductor; iii. on some "pulls" [or run-outs] these problems did not arise and/or were mostly avoided by efforts of the stringing team [who conducted the run-out at a reduced speed to what they otherwise would have including slowing down or stopping before the reaching the drum sides [or flanges] to limit intermixing]. However, on other "pulls" these problems were constant despite the efforts of the stringing team; iv. in the circumstances, the run-out of the conductor was below normal speed for a transmission line project like the Project and problems with the run-out of the conductor continued throughout the entire stringing process [whether using conductor wound on the original drums, the rewound drums or the "new" drums]; v. there was differential movement between the Sural conductor and the drum [proven by a test performed by Mr Rantucci]. 155 He identified by way of contrast, the roll out of the Olex drums [which were rolled out by the same means and by the same crew as had rolled out the Sural conductor] (Mr Hendrick's 1 July 2005 affidavit at [79]): Further, and in contrast, in respect of additional conductor cable Downer had to purchase from Olex for the Project [so as to make up for the Sural Conductor wasted and discarded because of the problems experienced with the run-out of the Sural Conductor], Downer experienced no run-out problems with this additional conductor cable from Olex and was able to run-out this additional conductor cable from Olex at normal speed ... This additional conductor cable from Olex [which was the same type of conductor cable as the Sural Conductor] was supplied on steel drums. 156 The balance of Mr Hendrick's evidence on this topic is as a recipient of correspondence to and from those on site. He was the person that made the decision not to persist with the so-called bladder solution that had been devised by Sural. He gives his reasons for this decision. There was no suggestion in his cross-examination that he did not genuinely hold the opinions identified or that it was unreasonable for him to hold them. 157 The contemporaneous emails that relate to the larch drums are consistent with the observations contained in the evidence of the Downer employees. The originating communications [many of which were forwarded to other Downer and Sural personnel] are set out below: DATE DETAILS OF COMMUNICATION 23.1.2004 Photos showing warped flanges (first batch of larch drums) Email Hendrick to Paris (with photos) re first day of run out of larch drums: · jamming 11.2.2004 · drum cut away and replaced · ran out about half of what would expect to run out · may be worse because could free jammed conductor in last batches · cutting off tails at a rate of 3m per 500m of run-out conductor 11.2.2004 File note of Rantucci re days run out 13.2.2004 Email Antoniazzi to Riviere – encountering problems with conductor embedding itself into the drum Todd (for Paris) to Riviere · jammed conductor 13.2.2004 · loose layers · tails working out of drum · conductor jammed so deep it had to be cut away Email Paris to Riviere · conductor not wound tight enough · gap between conductor and drum at bottom as much as 15-25mm 18.2.2004 · gap remains almost constant as rotate drum · significant differential movement · excessive tail feed · run out of two phases so far and had to abandon about two km of conductor due to it being badly jammed 19.2.2004 Email Antoniazzi to Hendrick suggesting a potential means of avoiding tail feed Email Ritky to Paris reporting on various methods to prevent conductor jamming during run out. The problems that were identified were: · loose winding 15.3.2004 · large void present between inner layer of conductor and drum barrels · tail of conductor forced out during run out · jamming Email Rantucci to Antoniazzi (with photos) 28.3.2004 · photos of damaged conductor · flathead nails working loose (not experiencing the same problem when staples used on masonite) · since drum spins at different speed to the conductor the nails hook and rub and damage the conductor 29.3.2004 Email Blasi (for Riviere) to Antoniazzi – worked out possible solution for unwinding problems 1.4.2004 Email Antoniazzi to Paris/Hendrick – visit by Sural to attempt to expand the drum so as to eliminate the looseness by the use of central bladders to be inserted through the drum's central shaft hole Email Rantucci to Hendrick (with photos) 18.5.2004 · gap next to flange started to appear as second layer was paid off · conductor pushed its way through four layers of conductors · drums are loosely wound 158 Here again reference should again also be made to the Daily Activity Reports and Supervisor's Reports for the Project. The summary at tab 2D of Mr Master's Exhibit MM1 reveals considerable wastage of time attributed to the drums [in addition to the waste of time occasioned by the slower rates at which the drums could be run out]. DVD footage 159 The DVD footage before the court is extensive [the longer versions form part of Professor Bradford's exhibits]. The footage is entirely consistent with all of the problems that have been identified and explained by the Downer employees. 160 One of the matters of most significance in respect of the footage is the obvious relative speeds of the run out of the Sural drums and the Olex drums. Reaction of Sural Representatives 161 The best example of the awareness of Sural to the continuing problems with the drums supplied is the fact that they worked on and spent considerable money [in terms of fabricating bladders in London and sending experienced personnel to Australia] to trial a bladder solution. The solution had the sole objective of seeking to expand the central drum of the reels so as to avoid the loose winding, tail feed and differential movement that was being experienced by Downer. 162 Generally in relation to the forensic approach taken to this litigation by Sural the following matters are to be noted: i. No quality assurance records were produced in relation to the quality of the drums of their construction. The inference is that Sural undertook no systematic quality checks in this regard. ii. No expert evidence was adduced to prove the structural properties of the fir or larch wood used. The only expert called by the Sural companies, Mr Simms, clearly does not have relevant expertise. It is certainly curious that Mr Simms had not inspected the drums from the run-out that were stored in Western Australia (his home state), but was simply sent to Taranto to inspect alleged representative drums, despite the fact that the drum inspected in Taranto: a) is of doubtful provenance: b) has not been exposed to transportation or winding in the field; c) has not been exposed to the same temperature or humidity; d) is clearly holding less conductor than those supplied to Downer (by reference to the amount of flange exposed above the conductor layers wound on it); Mr Simms conceded that the drum he observed was not as representative as those that were in Australia. iii. This failure to call evidence is significant in light of the overwhelming case as to the drum deficiencies that have been presented by Downer. iv. Sural has not attempted to explain the evidence that indicates that unseasoned wood was used. v. The drums were put together [having been delivered in a flat pack from the drum supplier] by the logistics department at the Taranto factory. No evidence is adduced from anyone involved in that process. vi. The winding process appears to have been undertaken by a workforce of production operators working the cable line. In 2003 the relevant department included 30 to 35 people. None of those persons were called. The production operators were directly supervised by three quality assurance personnel – Mr Gianluca Perrone [manager of the quality department], and two inspectors, Mr Nicola Millarte and Mr Giuseppe Urso. None of those three were called. Messrs Millarte and Urso remain employees of Sural. It is to be noted that the persons nominated by Mr Riviere as being responsible for determining the need to rewind were the production operators and quality assurance personnel. The expert evidence called 163 Both Downer as well as Sural adduced evidence from experts in relation to causation, loss and damage: i. Downer called Professor Bradford who produced three reports, the second and third of which responded to the first and second reports of Mr Simms who was called by Sural. ii. Mr Simms in turn responded to each of the three reports produced by Professor Bradford. 164 Each of the experts approached their given tasks sometimes upon a common basis but sometimes from different perspectives. Both experts agreed that the contributing factors to the alleged problems with the drums were complicated and could not be quantified with sufficient precision. The experience and qualifications of the experts 165 Professor Bradford is a Professor of Civil Engineering and a Scientia Professor at the University of New South Wales. His extensive curriculum vitae states that he currently holds a Federation Fellowship with the Australian Research Council, awarded by the Australian Government to support pre-eminent research at the international level. At present, he is the only structural engineer in Australia to be awarded such a Fellowship. He also holds a Scientia Chair at the University of New South Wales, which is awarded by the university for outstanding research excellence amongst its professoriate. Professor Bradford is the Director of the Centre for Infrastructure Engineering and Safety and has undergraduate degrees in science and civil engineering as well as a PhD in structural engineering and Doctor of Science from the University of Sydney and the University of New South Wales, respectively. He has taught, research and practised structural engineering for over 20 years and acted as a consulted to industry and has been involved in a large number of expert reports on behalf of Unisearch Limited during his time at the University of New South Wales. He is a member of multiple editorial boards and has written extensively in his areas of expertise. 166 Mr Simms' curriculum vitae showed that he had 19 years experience in private practice as an independent consulting engineer in the area of, among others, investigating mechanical failures, industrial and vehicle accidents as well as the testing of motor vehicles for compliance with safety standards. Prior to commencing private practice, he had had 12 years experience as the Engineer in Charge of the Police Department's Licensing Division (in charge of vehicle inspection system throughout Western Australia and responsibility for technical policy relating to motor vehicle design and usage). He had also, concurrently in the same 12 years, held the position as a WA representative on the Australian Motor Vehicle Certification Board and the Australian Vehicle Standards Advisory Committee. He had had experience in giving expert evidence in courts on a number of occasions, in mostly motor vehicle cases where he provided his opinion as to what were the dynamics of a motor vehicle accident at a given scene. Relevantly, he had no substantive tertiary training in relation to the properties of wooden structures but some experience dealing with some wooden structures during his employment as an undergraduate student and in his subsequent experience in the design of upper storey extensions of residential house and the crane industry. He conceded that his training in relation to wooden structures was all by way of self-education. Hence there are grave problems with the issue of his having acquired section 79 specialised knowledge permitting him to express the views he does. As no objection was taken to his expertise, I have treated with his opinions by regarding the matter as going to weight cognisant that his more general training may permit certain opinions as admissible. However his reports and cross-examination satisfied me that his opinions were particularly uninformed on many topics. 167 In the result the opinions of Professor Bradford are generally accepted where in conflict with those of Mr Simms. Professor Bradford's views were supported by careful explanations and his reasoning processes were transparent. His command of the materials was clear. He was an impressive witness. 168 Generally the experts dealt with issues concerning: i. the structural rigidity of the wooden drums provided by Sural; ii. the loose and uneven winding of conductor on the drums; iii. the damage caused to conductor by nails; iv. the undesirable dynamic response or effects from the interaction of conductor and the wooden drum; v. mishandling of the drums, including: (a) the failure to use a spreader bar when lifting the drums by chain; and (b) lifting the drums by using a forklift in an improper manner; vi. failure to use a motorised pay off device; vii. failure to use [or properly use] a brake during pay off; viii. non-compliance of the Sural drums with standards; ix. re-winding of conductor as a rectification measure; x. use of inflatable bladders as a rectification measure. Dealing with the positive defences which came forward in Sural's case Insufficiently trained employees 169 There was no substance in the defence which alleged that the loss and damage was caused by failure to use sufficient or sufficiently trained employees or agents in handling the drums or conductor during loading, unloading and pay off. 170 There was an abundance of evidence that Downer placed its most experienced persons on the Project. There was no suggestion that at any time there was a lack of personnel on hand to operate the stringing equipment. As Downer has contended, whilst there was some attempt made to cross examine Mr Hendrick about the staffing of the stringing team, that cross-examination was ultimately of no consequence, as the questions were directed at the "stringing team/crew", which it was clear Mr Hendrick treated as including all of the individual crews involved in the stringing out process, including the crews that constructed the towers. 171 In particular, the evidence given by Mr Hendrick was to the effect that the stringing crew operating on this Project were made up of both Downer employees and contract labour, but he then referred to the subcontractors involved in tower erection, before agreeing that the stringing crew predominantly comprised Downer employees rather than subcontractors. I accept that it is unsurprising that Mr Hendrick would think in these terms. He was the person responsible for the overall project; not just the run-out component. This is the context in which he agreed that there were occasions where they were short of manpower on stringing conductor, but this was rectified by use of subcontractors – referring to the tower assembly subcontractors. He also made reference to the occasion when another project in Queensland finished, at which time personnel came to the Western Australian Project and Downer pulled out subcontractors and placed their own men in. 172 Potentially more relevant evidence could have been adduced if directed specifically at the run-out crew. In this respect the evidence of Messrs Guazzelli and Rantucci is more to the point. Mr Guazzelli gave evidence that a normal crew consisted of 8 or 9 men. He said that people along the line were called in from other crews to assist in overcoming problems [although their time remained recorded on the supervisor's daily report for their crew]. Mr Rantucci said that the typical size of the team in the context of the difficulties being experienced was 10, and has no recollection of a team consisting of less than 10. The point of importance was the numbers of personnel at the brake and winch. In his experience one could do with less on a team, but not with less numbers at the brake and the winch. There is no evidence from anyone attending the site at the time [including any Sural employee doing so] that the full compliment was not in position. In fact, the evidence is that it was often necessary to assign 6 people to the brake whilst pulling out the conductor and that at least 2 extra men were assigned to the site of the run out to cope with the problems. Alleged mishandling of the drums and conductor 173 Nor is there substance in the proposition that there was evidence of widespread mishandling in this regard [which centrally focused upon inter alia the alleged failure to use spreader bar, lifting the drums by chain and rough handling of the drums with forklifts]. 174 Without the use of a spreader bar, the chain that is threaded through the spindle of the drum forms an acute angle at the common lifting point at which the chain is attached to the crane, thereby inducing a horizontal inward force on each side of the drum. 175 The evidence simply does not sustain the proposition that there was a widespread practice of drums being lifted without spreader bars: i. The evidence that is relied upon appears to be principally based upon that of Mr Riviere [who appears to have witnessed one drum being lifted without a spreader bar; a matter that was explained by the Ridolfo manager as possibly being attributable to the fact that a new driver was operating that day; and which was resolved immediately]. ii. In none of the contemporaneous documents is it ever suggested by Mr Riviere that this was the cause of the widespread problems with the drums. iii. The evidence otherwise consists of some observations of Ms Holzhaker in relation to the transportation of drums by forklift. Her observation is based upon her comparison to limited observation of what occurred in the Taranto factory. iv. Sural has chosen to not call any of the persons from its employ who, by virtue of their actual occupations, are more likely to be able to give evidence as to any perceived differences in degree of the handling. v. None of the persons called by Downer witnessed any improper handling of the drums at the Ridolfo yard [subject to their involvement on the one occasion involving the spreader bar that was the subject of discussion with Mr Riviere]; vi. albeit that the exposure of the Downer witnesses to the Ridolfo yard was somewhat limited, it was undoubtedly more extensive than that of Mr Riviere and Ms Holzhaker. 176 It is important to also recall that the terms of the contract require that the steel drums be "constructed so as to withstand rough handling in transit and be of a type, size and construction which will ensure that during and after winding of the conductor onto drums and during transport and storage, the conductor will not be damaged in any way" [SC 7.3 of the Formal Instrument of Agreement] and "new and of the best quality and of the class most suitable for working under the conditions specified and shall withstand the variations of temperature and atmospheric conditions arising under working conditions without distortion or deterioration or the setting up of undue stresses in any part, and also without affecting the strength and suitability of the various parts of the works which they have to perform" [SC 8]. 177 Sural did not establish widespread handling of the drums at a level that was worse than the contemplated contractual standard of rough handling. 178 It is next convenient to consider the manner in which the experts dealt with the alleged mishandling of the drums, first concerning the failure to use a spreader bar when lifting the drums by chain. 179 Mr Simms' opinion was that on a wooden drum, the compression would cause some local damage to the flange on either side of the reel and would cause forces to be transferred to the conductor (thereby disturbing (intermingling) the layers of the conductor). 180 Mr Simms performed calculations of the horizontal force on the drums in his reports and it was his opinion that lifting the drum in the above-described manner was likely to cause disruption (intermingling) of the conductor. Professor Bradford agreed that the lifting of wooden drums in this manner would exacerbate the problems of the deformation of the drums, but noted that Mr Simms hypothesis was somewhat contradictory to his theory on the structural stiffness of the drums in Mr Simms' first report [in that he had expressed the view that the mass of conductor was rigid and precluded the ability of the drums to deflect]. Professor Bradford also gave evidence that when a wooden drum was fully wound with 3.5km of conductor, as opposed to (hypothetically) being half loaded, the forces on the top layers of the conductor [being closer to the lifting chains] differed in a way that the flanges would predictably deflect to a lesser degree. Mr Simms basically agreed with this evidence [T 659:47–660:9]. Further during his cross-examination, Professor Bradford gave evidence that under certain conditions where the horizontal inward force was sufficiently large a steel drum may actually yield (bend and deform in shape) and if the same force was applied to a wooden drum, his estimate was that the timber would actually break. This was not reported by Downer to have occurred in practice. 181 As to the manner in which the experts dealt with the alleged lifting of the drums by the use of a forklift in an improper manner the position is as follows. 182 Mr Riviere gave evidence that on his visit to Downer's storage facility at Ridolfo between 16 and 22 November 2003, he saw that the wooden reels were moved around in a very rough manner by forklift, with the forklift blades often making heavy contact with the drums [15 April 2005 affidavit at [24]]. Downer put forward a number of witnesses who deposed to never having seen any mishandling of the Sural drums on the occasions they visited the Ridolfo yard. 183 Mr Simms opinion was that if the forklift used was of inadequate capacity and/or was not operated properly, there was a significant risk that the drums could be damaged and the conductor disturbed in a way that would cause problems during run out. In particular, it was said that "if a drum was picked up or lowered carelessly such that a vertical load was applied to one flange this could cause the drum to skew in such a way that it would rotate with a wobble and also disturb the conductor in a way whereby a gap could open up on one side resulting in layers dropping down into the layer below". 184 Similarly Professor Bradford's opinion was that given the tendency of the wooden drums to flex and the disproportionate mass of conductor on them, it was almost self-evident that any improper handling of the drums would result in damage to the conductor induced by flange distortion. Again Professor Bradford noted Mr Simms' seemingly contradictory position in that he accepted the possibilities of drum wobble, undesirable dynamic effects as well as conductor being wound unevenly in this regard, but had earlier rejected Professor Bradford's hypothesis, when discussing the structural soundness of the drums under the disproportionate weight of conductor. Failure to use bladders 185 A careful treatment of the principles with respect to mitigation of loss was set out early in these reasons. The matter particularly involves the issue of the alleged failure of Downer to use bladders. By definition this defence must properly be considered as a mitigation defence as the premise to it must be that there is a deficiency in the drums sufficient to require the use of inflatable bladders. 186 The finding is that there was no substance in the proposition that the loss and damage claimed was caused by failure to use or to adequately use pneumatic bladders during pay off: During April 2004, Sural representatives proposed the use of (low pressure pneumatic) inflatable bladders to be inserted inside the drums and inflated to provide a more rigid barrel and therefore to produce a stiffer drum. 187 This mitigation defence seems to be directed at the period of time after the trial in April 2004 [that is, many months into the experiencing of problems]. It is to be noted that the reason that Sural agreed to undertake this trial at that time is because Downer was by then refusing to pay further money to it [the outstanding money related to shipment 4b]. It follows that the defence appears to be directed at a short period of time. 188 In attempted discharge of the onus upon it, Sural appears to singularly rely upon the views of Mr Todaro, who seems to have reached the conclusion that the bladder trial conducted by him was a success. 189 One needs however to consider the perceptions of Downer at the time. 190 There is no evidence that the bladders enabled the conductor to be run out at any faster rate than could be run out without them. On Mr Todaro's evidence, the advantage of the use of the bladder is that its use meant that [at least for the trialled drums] there was not the need to have as many stops during the slow run-out as was needed without the bladders. However for the purposes of working out what was efficient for the run-out, that is not the end of the enquiry. 191 The comparison to be made is between the lengthy time it took to install the bladders when compared to the time allegedly saved as a consequence of less stops. 192 The Downer staff were of the view that the use of the bladders was not an efficient alternative. The evidence of Mr Rantucci and Mr Hendrick is probably the best summary of the views then held by the Downer staff. There is no clear evidence put forward by Sural to suggest that the bladder solution represented a clearly more efficient means of dealing with the deficient drums. It was not suggested to Mr Rantucci and Mr Hendrick that there was anything unreasonable in the decision taken by Downer to not persist with this perceived inefficient means of overcoming the drum problems. 193 Notably, Sural's expert, Mr Simms, stated that it was his opinion that: "The use of a pneumatic bladder was not a practical solution to the alleged problems by virtue of delays caused by inserting and removing the bladders likely to have been as long as the delays caused by the alleged cable jamming. The bladders would add little or nothing to the inherent structural stiffness of the drums." 194 Professor Bradford's opinion of this rectification measure was that it would have increased the flexural stiffness of the drum somewhat as well as its robustness. Mr Simms however was of the opinion that the only effect would be to cause the drum to expand and hence tighten the lower layers of windings. Nevertheless both experts shared the view that this procedure was practically inefficient given the limited number of bladders that were available and the necessity to remove these bladders from the empty drums after run out and to then insert them into wound drums prior to run out. This measure therefore further compromised the industry run-out rate of the conductor. The adjustment of the brake 195 Nor is there substance in the defence that the loss and damage claimed was caused by failure to use or properly use of breaking mechanism during pay off. It was Mr Todaro who put forward this view at the same time as conceding that he had had absolutely no practical experience in the running out of conductor in the field. 196 Mr Simms did not support this theory. Professor Bradford believed that the problems Downer experienced with the run-out would have been exacerbated by an inadequate braking system. 197 However the experts agreed that the braking device used by Downer [observed in the DVDs] performed satisfactorily and was adequate from the documentation provided. 198 No witness who had had actual practical experience of operating drum stands in the field was called to support the theory. 199 Mr Rantucci's evidence was: "A. You have these people walking around there. There was three or four fellows walks around the brake and if they could see the conductor coming off the spool, coming on to the tensioner would sag or flop around or something, they would put a bit more tension on to it. We didn't want to put too much tension on it, because the more tension you put on it, the more it used to cut in so we were trying to find the happy medium. They did monitor it and if it was too loose then the conductor would drag on the ground or something, so they did monitor it, yes, to answer your question." And further in relation to the adjustment of the brake: "Q. And is your evidence that it is only necessary to do so when you observe the cable becoming loose? A. It can also be too - it could be too much or not enough. The people, the workers around there keep an eye on it. If it is too tight they loosen it a bit and if it's too loose they'll tighten it a bit but they are always looking at it anyway. Q. And when would they notice that it was becoming too tight? A. They're just there all the time. Q. Presumably that's when they notice some kind of a problem, is it? They loosen it when they notice some kind of a problem arising? A. I am talking about just normal, in normal - they just keep an eye on it. When we had the problems, we used to stop her. That wasn't even - they had to loosen it right off to get some - to be able to be turn the spool, to move the layers or to try to unjam it. Q. So what you are saying is that one of the techniques that was employed to alleviate the problems was to loosen the brake, is that the effect of what you have just given? A. We used very minimal brake. Q. Yes, yes. A. Yes. Q. And you found that that helped alleviate some of the problems? A. It reduced the jamming on the ends." 200 Mr Guazzelli's evidence was: "The manual brake shown in EDI.449.032 was used to regulate the running out of the Sural Conductor by ensuring that there is no excess cable running forward. The tensioning on the brake was set by manually turning the screw at the beginning of the run out of the drum and once the right tension was set, the tension was controlled from the hydraulic tensioner which was constantly manned. The manual brake was then monitored and adjusted when tangling was likely. On the Project, the stringing team tended to set the brake a bit loose, as tension, although required for the run out, exacerbated the tangling." 201 Further, he gave evidence in the witness box that: i. if Downer applied more of the hand brake onto the drum itself, that would give more tension from the drum to the tensioner, and that would cause the conductor to wedge itself in between the loose layers; ii. by releasing it a little bit more than he would for a metal drum it would make things a little bit better; iii. prior to starting the activity of running out it was necessary to assess the drum and take a decision on how to run out. In this case, because of the gaps in the conductor, a decision was taken to leave the brake on the drum a little bit looser so it would not wedge itself inside the cavities; iv. that men were watching all the time, and that if no problem was perceived, there was no reason to touch the brake. He gave evidence of the necessity for the tension between the tensioner and the drum to be kept constant because slack reduces the friction on the tensioner drums and it can become dangerous. He gave evidence that that was why one had to keep things constant i.e. to make adjustments if there were problems of the above nature. 202 I accept as correct, Downer's submission that there has been no cogent explanation to the Court as to different handling of the brake could have made things any different. 203 Further the technique adopted by Downer for the brake on site was adopted in part to deal with the falling in and wedging experienced at the edges of the drum. It is not suggested that the tension between the drums and the tensioner was maintained at the degree of precision for optimal performance. To the contrary, the evidence is that the tension was kept on the looser side in an attempt to reduce the wedging. Motorised pay off 204 Mr Simms was of the view that a motorised pay off device may have been theoretically ideal but would present some practical difficulties in implementation. It was his view that if Downer did not already own such equipment, it would be unreasonable to expect them to provide it. Professor Bradford did not believe the problems were caused or contributed to by the lack of a motorised pay off device. He further explained during his cross-examination that he believed such a device had no impact upon the forces at play [T 625-626]. 205 There was no substance to the defence that the loss and damage claimed was caused by failure to use a motorised pay off. The theory is rejected by a comparison as to what had occurred on site when the Olex steel drums were deployed. There was no need for a motorised pay off to be deployed at that time to successfully run out all six of the drums. 206 In the result none of the five positive defences raised by the Sural companies in paragraphs 20(a)-(e) of the Further Amended Defence to Cross-Claim are of substance. 207 It seems next appropriate to give more attention to the cross examination of the respective opposing experts. The manner in which each cross-examiner treated with the opposing expert Professor Bradford's cross-examination 208 Without being exhaustive, Mr Slattery's cross-examination of Professor Bradford involved the areas discussed below. There were attempts made to erode the strength and logic of his conclusions and the method in which they were reached. Ultimately, Professor Bradford's hypotheses were not in any serious fashion successfully challenged by the cross-examiner. 209 Mr Slattery cross-examined Professor Bradford on the variations in his hypotheses as to the cause of the problems in his three reports. Professor Bradford did not agree with Mr Slattery's proposition that his hypotheses in his various reports put forward as causative of the difficulties had changed: rather his hypotheses had been refined as other variables and assumptions were accommodated following the exchange of reports with Mr Simms and further information being made available. This included factors such as the strength of the steel rods and the mass of conductor spinning around a deformed barrel of the drum [T 627]. These variations in his reports did not in my view denigrate the seeming logic behind his final opinions that seem to have been solidly established with clear transparency of reasoning processes. The reasons underlying the variations in his reports were carefully explained. 210 Professor Bradford agreed with Mr Slattery that he could not exclude other possible causes of problems [T 629:10], one of which may have been the mishandling of the drums, but he reasoned why it was less likely to be so [T 629:20]. He explained that there were so many parameters that interacted in different ways that all could not be perfectly measured in his reports. Nevertheless he believed he had taken into account all those factors that in his experience and expertise were seemingly obvious [T 623-624]. 211 Mr Slattery attempted to challenge Professor Bradford's reasoning and conclusions by asking him whether the validity of his hypotheses were undermined if he were to assume that one of the Sural wooden drums did not exhibit the effects of his hypotheses. Professor Bradford explained that not every drum was identical, not least because the timber from which they were manufactured was of "very high variability" [T 605:53] so it was not possible to predict how each and every drum would behave. This seemed to be an entirely reasonable explanation given he could not practicably take all the variables into account. For this reason he had assumed that all the drums were similar as coming from the same generic batch of timber, manufacturing conditions and dimension in his reports [T 603]. 212 Professor Bradford explained the process by reference to which he formulated and tested his hypotheses, after having the problems defined to him in his letter of engagement. He did not agree that any hypothesis as to the cause of the problems could only be as good as its ability to describe what was able to be observed in practice in the DVD footage [T 596]. Further he accepted that the DVD footage and photographic images of drums taken in Western Australia during the Project would necessarily show those drums after they had been through the process of transport and handling to get them from the Taranto factory to Fremantle in Western Australia. The experts had not been asked to assume that the transport of the drums to Western Australia had involved particular problems: so that speculation on these matters was inappropriate. 213 Mr Simms took issue with the industry conductor run out rate that Professor Bradford referred to in his first report as 3.5-4 kilometres per hour. When questioned by Mr Slattery, Professor Bradford explained that the perceived average industry run out rate set out in his reports was based on i. the documentation provided to him; ii. asking people in the industry [T 631:25]; iii. his recourse to the Institute of Electrical and Electronic Engineers (IEEE) Guide to the Installation of Overhead Transmission Line Conductors 2003 [PX 1534]. The IEEE Guide had an estimated industry rate of 5-8 kilometres per hour which substantiated his reference to the industry standard, and even made his estimate appear conservative. Mr Simms' cross-examination 214 Again without being exhaustive, Mr Leeming's cross-examination of Mr Simms covered the areas dealt with below. 215 Mr Simms confirmed during his cross-examination that he had not looked at any Sural drums that Downer had kept from the Project. Apart from what he had seen in the DVDs, the only Sural drums he had seen in person were the drums he saw at the Taranto factory in January 2007 [T 643:10]. He accepted Mr Leeming's proposition that the DVDs of what actually happened in Western Australia to the drums that had come out from Italy were more representative than the drums shown in the video footage at the Taranto factory [T 649:1]. 216 Mr Simms explained that the dishing of the flanges, that is accepted to have occurred on some drums shown in the evidence, was a natural effect of cable being wound onto the drums. He expressed the opinion that deflection of the flanges logically occurred in all drums whether they were the Sural drums or drums compliant with the Australian or Italian (ANIE) standard, and therefore did not think it was a likely explanation for the problems. To my mind this seemed to ignore the degree of dishing that would occur on each type of drum. Further, it is somewhat speculative in that Mr Leeming established that Mr Simms had had no practical experience of problems occurring in a roll out of conductor on wooden drums compliant with Australian standards. 217 Only under cross-examination did Mr Simms introduce further explanations and possible reasons for the dishing of the flanges of the drum and why it would not have been a cause of Downer's problems [T 651-656]. His explanation for not having included these further opinions in his reports or in a new report was that he did not having enough time and had been otherwise occupied. The introduction of these further explanations was somewhat stilted and did not reflect well on the manner in which Mr Simms had been briefed or on the amount of time he had been able to devote to his reports. 218 Mr Simms was critical in his reports of Professor Bradford's estimate of the run out rates shown in the DVDs in that, in his view, they did not constitute irrefutable evidence of the actual run out rates for the entire Project. However during cross-examination, he was not able to describe the type of evidence he would expect to be available in order to be satisfied as to the actual run out rate: since he had not 'given a great deal of thought as to how much evidence might constitute sufficient' evidence. He merely suggested some records that may have been kept for each drum [T 657:30]. Structural rigidity of the wooden drums provided by Sural 219 Professor Bradford's conclusions were based significantly on the hypothesis that the drums lacked the requisite structural rigidity such that they deflected under the weight of conductor wound onto them. When combined with poor quality control when conductor was wound on during manufacture, it was his opinion that this resulted in the problems Downer appeared to have suffered. 220 Mr Simms and Professor Bradford disagreed in key respects as to what conclusions could reliably be deduced from the video footage and as to what extent any drum distortion was due to the inherent structural inadequacy of the drums. 221 Professor Bradford's opinion was that it was possible, with high probability, to attribute the cause of the problems with the drums from the videos. On his viewing, the videos were consistent with the contemporaneous documents [the numerous emails and photographs] that were sent to Sural during the material time. He gave evidence that he could observe flange wobble [the distorted rotation of the 'cheeks' of the drum during run-out] in the videos and that this could be attributed to the flexible nature of the drums. Annexed to his third report was a photo [Appendix B] that was said to be a drum at the Project site which showed the warped deformation of the flange [that is, the flange was not in a plane but had deflected [bent] outwards. His evidence was that this was consistent with the jamming of conductor near the flanges during the winding on process, with the effects being more profound as more conductor was wound onto the drum, with the deflections being greater and the surface of the wound-on conductor becoming less straight. 222 Despite taking into account the steel rods in the drum barrels [in his second report, and not his first], Professor Bradford did not agree that the stiffness of the rods meant that the flanges did not deflect under the weight of the conductor. He agreed with Mr Simms that the inclusion of the rods reduced the flange deflection but contended that a degree of deflection still occurred [as per his calculations]. His opinion was that the cable jamming that occurred was a result of flange deflections in that gaps opened up in the windings of conductor causing jamming. [Professor Bradford explained that his calculations in the first report did not accommodate the effect of steel rods in the barrel of the drums because he did not have the data provided at the time of the original report]. 223 In contrast, Mr Simms agreed that the video evidence provided by Downer did appear to show some problems with conductor run-out, but he did not agree that the cause of the problems could be reliably identified from the videos alone, nor that they could be accepted as typical of all drums used in the Project. Mr Simms expressed the view that Professor Bradford's predictions of deflection in his calculations omitted significant factors and over-estimated the deflection. He did not believe that the calculated deflection was evidenced in the actual drums and gave evidence that if such deflection had occurred, it should have been visible to the eye. However he agreed that the Sural drums were structurally inferior to drums that would have been complaint with Australian or Italian standards for wooden drums. He agreed with the general proposition that lighter and less rigid drums may be prone to problems. 224 Professor Bradford calculated that the barrel of the drums also deflected under the excessive weight of conductor wound onto them. The bending effect in the barrel was said to cause the flanges to bow outwards at the bottom and inwards at the top of a horizontally placed drum, which produced a wobble of the drum when the conductor was run out [dynamic warping]. This was said to be consistent with the wobbling he observed in the DVDs made available to him. 225 In short, Professor Bradford's opinion was that the wooden drums were not of adequate strength for the great amount of conductor wound onto them. The barrel and the flanges (to a lesser extent as calculated in his second report) of the drums were distorted. As conductor was being run out during the stringing process, the drums were rolling in a way that Professor Bradford observed wobbling of the flanges resulting in the layers of conductor falling into each other, causing them to tangle and jam. The loose and uneven winding of the conductor onto the drums 226 In Professor Bradford's opinion, the ineffective run-out of the conductor during stringing was attributable to the poor quality of the initial winding of the conductor onto the timber drums at the Sural factory. DVD footage is said to show clear visual evidence of this poor quality control, as well as Figure 1 and 2 in his first report, where the outer layers of the cable have become wedged between the layers below them, causing problems with overlapping and potential knotting of the conductor. The original drum was observed by Professor Bradford to show considerable unevenness in the winding of the conductor in its near to full-wound condition adjacent to both flanges. This was said to be consistent with a heavily loaded and flexible drum that was experiencing deflection, which localised the uneven winding near the flanges. 227 Professor Bradford did not agree with Mr Simms that with poorly wound conductor, the "issue of flange deflection had fallen away" since the conductor being wound on would apply a progressive force against the flange as the cable wedged between the wound layers. With sufficient force of the cable pressing against the flexible flanges this caused the flanges to deflect outwards. 228 In addition, Professor Bradford observed in DVDs during the conductor run out [when most of the conductor had been unravelled on a given drum] evidence of loose winding, which in his opinion was indicative of poor workmanship in the initial winding and/or of poor quality control in the factory. With the conductor not being wound tightly enough on a drum, conductor was prone to running loose which resulted in the outer layers of conductor often becoming jammed in the gaps in the lower layers. This could cause "bird caging" [where the conductor strands separate and form a bubble effect] and damage to the conductor. 229 Mr Simms' opinion of Professor Bradford's conclusion with respect to loose winding was that it did not appear to be supported by the evidence in that some drums were well wound on the DVDs provided to the experts [extracted in DVD Exhibit D5-D7 showing the run out of various drums on the Project and the footage taken at the Taranto factory taken by Mr Antoniazzi]. He found it difficult to accept that conductor was wound on to the drums in a poor fashion during manufacture and was of the view that the disruption of conductor winding on the drum had possibly occurred after the drums left the factory. While Mr Simms had the opportunity to personally observe the manner in which drums were wound at the Taranto factory in January 2007, Professor Bradford did not view this as relevant since Mr Simms did not see the actual drums of conductor or the run out of such drums associated with the relevant Project which had occurred over 3 years prior. 230 Professor Bradford's opinion [on Downer's reported problems of tail feed causing jamming of the inner layers of conductor] was that it could have been attributable to the inappropriate tail hole [used to keep in place the tail end of the conductor in a given drum] given the large masses of conductor being run out. The movement of the tail may have been a result of the dynamic effects of the unwinding of conductor, and was exacerbated by the drum wobble. This tail movement prevented the inner layers of the conductor from unravelling correctly and so resulting in the jamming of these layers of the conductor. Damage caused to the conductor by protruding or loosened nails 231 The experts discussed the nailing of the flange planks on the wooden drums. They were in agreement that the evidence showed instances when nails in the flanges had worked themselves loose as the drums rolled out and that they could have contributed to conductor damage. Little or no weight can be given to the fact that during Mr Simms' inspection of a number of drums in January 2007 at the Sural factory, it was his observation that in the main, the nails were punched well below the inner face of the flanges and were properly clenched over on the outside, thereby unlikely to worse loose or present a problem. The few non-countersunk nails which did not pass through the flange and were unclenched were assumed by Mr Simms to have been used during the initial manufacture of the drums and that they could work loose and could cause conductor damage. A need to cease the operation to repair the damaged conductor was thereby required. Professor Bradford also suggested that the nails may have worked themselves loose as the drums were rolled out [with the warped flanges rotating in a distorted manner]. The undesirable dynamic response or effects from the use of drums with insufficient stiffness with poor conductor winding 232 Professor Bradford expressed the opinion that due to the deformation of the barrel of the drum and the great weight of 3.5km worth of conductor, the mass of conductor wound onto the barrel was not symmetric with respect to the axis of rotation about which it was spinning. Professor Bradford observed in the DVDs, that the "drums were not spinning freely because the distribution of mass in the system [was] not symmetric (either axially symmetric with respect to the barrel axis or symmetric with respect to a vertical axis through the mid-length of the drum)". This was also impacted by the uneven winding and the predicted deflection of the slats [planks] used in the construction of the drum barrel and the effect created was said to be an undesirable dynamic response which compromised the smooth run out. Non-compliance of the Sural drums with standards 233 It was common ground between the experts that the wooden drums did not in some respects comply with the relevant Australia/New Zealand Standard or with the relevant Italian ANIE standard. Obviously the drums did not comply with the corresponding standards for steel drums simply because they were not steel. Correspondence from Sural stated that the drums were of Type 22 in the Italian ANIE standard which was incorrect since the dimensions were not consistent with Type 22, or with any of the configurations in the ANIE standards. However Mr Simms opinion was that non-compliance did not necessarily mean that the wooden drums were inadequate or not fit for their purpose. 234 Professor Bradford agreed that the failure to comply with the ANIE specification was not sufficient proof of inadequacy nor was it a satisfactory explanation of the problems that occurred. Professor Bradford noted that the size of the drums could be pushed outside of its code limits provided in the standards whilst still be serviceable and of sufficient strength. Re-winding of the conductor as a rectification measure 235 Professor Bradford expressed the view that the re-winding of the conductor onto empty wooden drums of the same type did little to rectify the run out problems because the drums still possessed inadequate flexural stiffness. The wobbling of the drums and intermixing of the conductor still occurred during run-out because of the deformed drums. Further the drums still contained the original nails that could loosen during run-out. As a result, the run-out rate was still compromised because of the need to alleviate essentially the same problems that occurred with the originally-wound cable. 236 Mr Simms did not accept Professor Bradford's views. The ultimate findings of drum deficiencies 237 The evidence justifies a finding that the drums were deficient: i. plainly they fell outside of the contract which had required the supply of non-returnable steel drums; ii. they were poorly designed: a) they were substantially weaker than steel; b) they caused flexing and wobbling during run out; c) they exhibited an inability to support the load placed upon them, and a deficient design of the centre barrel; d) the nails protruded out of the drums causing damage to the conductor; 238 I accept as correct the contention by Downer that the breaches of contract are exhibited by both: i. breaches of clause SC 7.3 of the Special Conditions of Contract; ii. breaches of clause SC 8 of the Special Conditions of Contract. 239 In relation to the former, the breaches are a priori [as the reasons and the materials in evidence make clear]. The drums were not of a steel type; they did not enable smooth running out in lengths as long as could be conveniently handled and erected; they were not constructed so as to withstand rough handling in transit and they were not of a type, size and construction which would ensure that during and after winding of the conductor onto the drums and during transit and storage, the conductor would withstand significant damage in any way. 240 Indeed in relation to each of clauses SC 7.3 and SC 8, I accept as correct the proposition put by Downer that either by the route of a textual implication or a more conventional BP v Hastings implication [BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266], there is seen to have been a contractual obligation to supply the conductor on drums able to be run out at a reasonable rate. 241 Each of these provisions would be [and were] breached if, as was here the case, the drums could only be rolled out at substantially less than the run-out rates usually experienced on similar transmission line projects: cf the evidence given by Messrs Hendrick, Chigioni and Rantucci earlier identified in theses reasons, noting that Mr Chigioni was not required for cross-examination. That is to say, the clauses yield to the construction that there is a contractual obligation to provide drums from which conductor can be unwound otherwise than at rates which are substantially less than the run-out rates usually experienced on similar transmission line projects. 242 Ultimately the findings do not depend upon non-compliance with particular standards for the reason in particular that the experts agreed that failure to comply with the code limits was neither sufficient proof of inadequacy nor a satisfactory explanation of the problems which occurred. Such non-compliance would not itself necessarily mean that the wooden drums were inadequate or not fit for their purpose. The size of the drums could be pushed outside of its code limits provided in the standards and still be serviceable and of sufficient strength. 243 The findings can be expressed with more particularity by reference to the performance of the drums, in short: i. all of the wooden drums (whatever the configuration) supplied by Sural were substantially inferior to the steel drums that were required by the contract in the performance of the functions of storage, transportation and run-out of 3.5km of conductor (weighing approximately 5 tonnes) required by the contract to be stored on each drum; ii. the fir drums (batches 1, 2A and 2B) were manifestly deficient in the performance of the functions of storage, transportation and run out of the 3.5km of conductor required by the contract to be stored on each drum. iii. Most of the problems that have manifested themselves in the run-out of the drums arose from a combination of three matters: a) the weight of the conductor was simply too heavy for the drums; b) the conductor was loosely and unevenly wound onto the drums; c) at least some of the drums in these batches contained unseasoned timber. iv. The problems caused by the drums not being sufficiently strong to carry the weight of the conductor manifested themselves in three ways: a) flange distortion, creating: - gaps at the edge between the conductor and flanges, and - a wobbling effect during run-out, resulting in dynamic effects including the loosening of drums and resulting drum damage. b) differential movement between the conductor and the drum (being that the conductor did not spin at the same rate as the drum consequent upon a gap existing between the bottom of the drum and the conductor) having two effects: - significant tail feed (the tail of the conductor closest to the barrel of the drum would push out of the drum, and therefore part of the conductor on the inside layer did not remain in situ), resulting in falling in of the conductor, and - loosening of layers. v. The loose and uneven winding (exacerbated by the gaps, loss of internal layers, and other loosening) has affected the conductor's positioning on the drum at the time of run-out, resulting in tangling and jamming of the conductor, which has two consequences: a) stopping the run-out, and b) damaging the conductor. Unseasoned timber has less strength than seasoned timber, with the consequence that problems manifesting themselves due to use of the wooden drums were exacerbated. To minimise these effects, Downer ultimately adopted the practice of running out the conductor at a rate significantly slower than ordinary industry speed. This was a reasonable step for it to take. Even with the adoption of that reasonable precaution, damage to the conductor and stoppages could not be avoided. vi. the larch drums (batches 3A, 3B, 4A, 4B) were manifestly deficient in the performance of the functions of storage, transportation and run out of the 3.5km of conductor required by the contract to be stored on each drum. Many of the same problems that arose in relation to the fir drums also arose with the larch drums, although to differing degrees. The main differences were: a) tighter winding of some of the larch drums exacerbated the jamming of conductor near the flanges; b) for those drums where masonite was affixed to the flanges with staples, damage caused by nails catching the conductor or falling in was reduced (this was not so when the masonite was affixed by nails); c) there is no evidence that these batches of drums were affected by unseasoned timber. Causation 244 The factual findings clearly show that the breaches of contract were causative of Downer's relevant loss. Damages – Quantification of Downer's cross-claim for damages due to problems experienced with the drums The delayed stringing process 245 Downer's revised tender estimate had stated an estimate of 79 days for the stringing process whereas the stringing process ultimately took 152 days to complete: this being overwhelmingly due to the problems with the Sural drums set out earlier in these reasons. Method 1 – quantified loss $2,717,701 [later adjusted for arithmetic errors to $2,706,807] 246 Downer's quantification of its claim for damages was primarily based upon so-called "Method 1". This method sought to quantify the additional costs in fact incurred by Downer for the Project said to be attributable to the breaches of contract. It involved the subtraction of the revised tender cost estimate for the entire stringing process from the actual costs incurred [recorded in account records and summarised in spreadsheets], but making allowances for the cost of other lost time incidents [and other expenses] not related to the breaches of contract [totalling $290,655]. Finally, the cost of additional materials and miscellaneous costs associated with rectifying damaged conductor and drums was added. The need to subtract the revised tender cost estimate instead of the initial tender cost estimate was due to the need to take into account the changes to the scope of work after the initial tender was awarded to Downer. Method 2 – quantified loss $2,760,821 247 Downer also put forward an alternative method, so-called "Method 2", for the quantification of its claim for damages so as to provide an independent confirmation of the robustness of the quantum of its claim derived from Method 1. 248 Method 2 involved the extrapolation of the average conductor run out rates for both the Sural and Olex supplied conductor [the latter being used as an example of the rate that ought to have been expected had the Sural conductor been supplied on steel drums], for the purposes of calculating the differences in run out speeds and hence the days required to string the entire line. The difference in days was then multiplied by what was said to be "the actual daily cost" of stringing activities which then gave a total loss of $2,760,821. [The method gave allowance for additional "lost times" due to the need to repair or replace damaged sections of the Sural conductor and also was adjusted for other recorded stoppages not related to Sural conductor issues.] 249 The quantified loss figure was contended by Downer to be well 'within the range' of the ultimate figure arising from the calculation of Method 1 and thereby to provide some confidence in the Method 1 calculation. Criticism of Method 2 250 Sural's attack on Method 2 rested on the proposition that the video footage of the Olex run out exercise [used to attain the average run out rate for steel drums] was performed at a time when the parties were in dispute as to Sural's statutory demand. I acknowledge that this was so, but in light of the evidence given by the Downer employees which I have accepted as to the unprecedented slow run out rate of the Sural conductor, I accept that the calculated Olex run out rate used in Method 2 provided a reasonable estimate and sensible check on the damages figure resulting from Method 1. Mr Merric Masters 251 Downer's quantification of its cross-claim for damages has been the subject of verification by Mr Merric Masters, an expert called by Downer. His curriculum vitae shows that he qualified as a professional engineer in 1973 and has had extensive professional work experience in managing all aspects of transmission line projects during his career until his retirement in April 2001 to pursue part time consultancy work. He has worked on 37 transmission line projects and of particular present relevance, has had significant experience in the "costing of construction contracts for the commissioning of transmission lines". 252 The challenge to Mr Masters' s79 (Evidence Act 1995) specialised knowledge failed. He was plainly qualified to provide the opinions he did in relation to Downer's two methods of quantification of its claim: cf interlocutory judgment delivered ex tempore on 16 October 2007 (revised 17 October 2007) and the subsequent affidavit of Mr Masters sworn on 18 October 2007, which overcame a number of objections to admissibility. 253 Mr Masters performed checks on a number of Downer's calculations and satisfied himself of the reasonableness of the two methods used by Downer to quantify its claim to the losses suffered. 254 The Sural parties did not put forward expert quantum evidence to challenge the Downer evidence given by Mr Masters and supported by the evidence given by Messrs Antoniazzi and Barona. Sural's criticisms of the Method 1 calculation The 'unstated premise' 255 Sural contended that there existed a 'critical unstated premise' underlying the Method 1 calculations which Mr Masters failed to identify and critically analyse. 256 Simply put the unstated premise was said to be that the revised tender cost estimate in relation to stringing, after making allowance for lost time and costs for reasons not related to the supply of conductor, would have equated to the actual costs incurred in the stringing operation, had there been no breach of contract. That is, that Mr Barona's revised tender estimate in relation to stringing would really have been a close to realistic expectation of the cost to Downer even had there been no problems with the Sural drums. 257 Mr Barona acknowledged that the tender estimates in relation to stringing that he had prepared over the past 15 years as Contracts Manager for Downer had been accurate to within about 15%, when compared to the actual costs of stringing carried out by Downer. This acknowledgement was identified by Sural in final submissions as a criticism of the reliability of the tender estimate figures in relation to stringing. Hence Sural asserted that Mr Barona's revised tender estimate was not a measure of Downer's costs had there been no breach. 258 I do not accept that the 15% variability renders the revised estimate figures in relation to stringing unreliable. The tender estimate was calculated by Mr Barona for the purpose of enabling Downer to bid an appropriate price for the Project. The revised tender estimate was calculated by Mr Barona for internal purposes to cope with the changes in the job description, and was a task that was carried out before there was any litigation. 259 Mr Barona had had substantial experience in providing tender estimates. He had also consulted with fellow employees in the process of preparing his calculations. 260 Mr Barona's cross-examination notably proceeded on the basis that his estimate was generally accurate [T 452.40]. He had deposed that there were many variables in such transmission line projects, with the area of greatest variability [in relation to tendered costs versus actual costs], being the costs involved with foundation construction due to the unknown underground conditions. On the other hand, Mr Barona's evidence was that the stringing part of the estimate was less variable. 261 Mr Masters was satisfied that Mr Barona's tender estimate stringing costs were appropriate (Mr Masters' 18 October 2007 affidavit at [16]). Costs of the entire stringing operation Treating further with Sural's claim that a critical shortcoming of Method 1 was that it compared the estimated costs of the entire stringing operation with the actual costs of the entire stringing operation. 262 A stringing operation involved multiple stages, including (among others) the transport of materials to site, the establishment of draw wire, the run out of conductor and OPGW, the use of a tensioner and the installation of other components. 263 Sural contended that since the only stage that was affected by the problems with the Sural drums was the run out of conductor, the focus of the quantification analysis should have only been on the actual costs (labour, plant and equipment) of this Project that related only to the running out of the conductor. Sural relied upon Mr Masters acceptance that the amount of time it took for conductor to be run out did not have an impact upon the amount of time it took to set up the conductor drums and winches on the sites along the line route, or any other steps in the stringing process. 264 This alleged shortcoming may be dismissed out of hand. Sural has failed to adequately address the uncontradicted evidence of Mr Antoniazzi and Mr Masters of the adverse 'ripple effects' that would occur, in that the difficulties with the run out of the conductor would mean an overall slowing down of the stringing process due to flow-on effects from the run out delay. Both Mr Masters [T 684.50 to 685.35] and Mr Antoniazzi [T 731.52 to 733.6] gave evidence that the effect of the difficulties and delay in the run out of the conductor was that it took longer to string the whole line, since stringing was a "critical path" activity that involved an ordered process. For example, certain steps such as the 'fixing' in place of the conductor [after it had been strung up] were delayed since the deployment of the initial draw wire, stringing the conductor and tensioning of the conductor had required to be carried out first. 265 Although Sural was strictly correct in pointing out that the run out of the conductor was a distinct part of the process and that any delay in this task did not technically affect the time taken to complete the other parts of the stringing process (confirmed by Masters [T680]), the obvious fact was that Downer still had to pay the employees engaged for all parts of the process: delay in any part of the process meant that Downer was obliged continue to pay relevant labour costs until the Project was complete. Challenges to the costs of additional labour and plant 266 Sural submitted that there were fundamental deficiencies with Method 1 in so far as it purported to calculate the cost of additional labour and plant said to be incurred as a result of the supply of conductor on wooden drums. Sural also challenged certain of the additional materials and miscellaneous costs claimed by Downer. It is appropriate to next deal with these issues. Additional labour costs 267 Sural contended that the additional labour costs claimed by Downer were fixed costs that would have been incurred in any event, whether or not there had been problems with the run out of the Sural drums. I reject this contention. Mr Antoniazzi gave evidence that Downer still had to pay their personnel for the extended time required to complete the Project due to the delays in the stringing process. The Downer personnel (both wage and salary) were retained on a per project basis, and hence their labour expenses were required to be paid until the completion of the Project. The effect of the delay meant that Downer was obliged to continue to pay its staff in circumstances where it would have otherwise been able to: i. utilise the staff for other productive work (and not had to employ others to undertake that other work); ii. encourage them to run down their leave entitlements; or iii. not made any payment to the staff at all ('let go' or taken leave without pay) [T 729-30]. 268 During his cross-examination, Mr Slattery put to Mr Masters that he had no basis for saying that the apparent overrun costs for the entire stringing project were attributable to any alleged defect in the conductor run out [t 684.50]. Mr Masters did not agree and explained [at T 685:1-35] that the stringing process was much like a production process, and on his experience with the 37 transmission lines with which he had previously been involved, a contractor did not have an infinite number of stringing sheaves to put one on every tower in the transmission line: similarly there are limited quantities of other equipment such as tensioners and winches [so that a stringing team would basically have perhaps two sets of winches, and enough stringing sheaves for maybe two to three sections of the proposed transmission line]. The sheaves had to stay on the tower until the stringing for that section was completed before being redeployed, and the sag and tension also needed to be adjusted to the client's specifications. Hence any delay on any one part of that process in a particular section, was going to affect the next section and the processes involved [T 685:31]. The indisputable result was that overall, it took longer to string the whole line, because this was a critical path activity. Mr Antoniazzi similarly described the stringing as a cyclic process in that the same activities and equipment needed to be used again as the stringing team progressed onto the next section of the line. 269 The explanations provided by Mr Masters and Mr Antoniazzi are accepted as inherently plausible and reasonable. 270 Sural sought to place reliance on NRMA Ltd v Morgan (1999) 31 ACSR 435 for the proposition that internal costs [such as the salaries of full-time permanent employees] which payment would have been made in any event, are not recoverable. However it is evident that the company in issue, NRMA, structured its wages and salaries of its personnel in a very different way to Downer. It cannot be said that Downer would have paid by way of salaries and wages, what it in fact paid over the same period had the problems not arisen. Furthermore, the delay experienced during the run out meant that the employees were required to spend additional time fixing and coping with the run out problems, and hence additional moneys were required to be paid by Downer (at least for the waged employees) being moneys that would not have been paid had the job had not taken so much longer than estimated. In Downer's situation, most of the salaried employees and all of the waged employees, were employed on a project specific basis [T 835:35]. I accept that not all of the employment contracts were produced by Downer in response to the Notice to Produce served by Sural during these proceedings [as late as 19 October 2007] given the limited time frame for response. However I am satisfied that all of the waged personnel were expressly retained on a per project basis and that on the balance of probabilities, the vast majority of the salaried personnel for which costs are claimed by Downer, had contracts terminable with 1 month's notice [or with no notice but with pay in lieu of notice]. Additional plant costs 271 Sural speculated as to the possibility that the additional plant costs were fixed costs that would have been incurred in any event despite the run out delays. Moreover, Sural pointed to the evidence of Mr Antoniazzi that the actual job costs calculated by Downer included equipment that was owned by Downer [T 733.25-28]. Sural did not adduce any evidence to challenge the evidence of Mr Barona as to his revised tender estimate in relation to plant costs during the stringing process. There was no evidence challenging the rates given for each of the pieces of machinery. The tender estimate and project cost report are business records and the Court is entitled to proceed on the basis that they are prima facie accurate unless proven otherwise. I accept that the tender estimate and project cost report detailing the plant costs fairly represent Downer's plant costs. The inference to be drawn is that they were real costs that were taken into account in the tender estimate created before the commencement of any litigation [T 845.37]. Additional materials and miscellaneous costs 272 The remaining costs in dispute are discussed below. Replacement Olex conductor 273 There was no dispute between the parties that 7 drums of Olex conductor was purchased for $115.901.10 [that is, at $16,557.30 per drum] as evidenced by the Olex invoice [Exhibit MM1 tab 5]. 274 Further, there is no dispute between the parties that 3 of these drums were used in the Project. This is evidenced in the document prepared by Mr Antoniazzi headed "Summary of OLEX Drum Run-out" at Tab 2F of Exhibit MM1 and was assumed by Mr Masters to be correct [T 701:21-35]. However Downer contends that Sural has ignored Mr Rantucci's uncontradicted evidence that a total of 6 drums of Olex conductor were used on 15, 17 and 19 July 2004 (Mr Rantucci's affidavit of 1 July 2005 at [54]). I accept Mr Rantucci's evidence in this respect. Downer is entitled to recover the costs of 6 of the steel drums purchased from Olex. 275 Downer also contends that the Court should infer that the seventh drum was used to satisfy (in part) its agreement to supply Western Power with an additional two drums of conductor on steel drums [some reference to which is seen at PX 937 and PX 978]. The limited evidence before the Court on this matter does not permit this inference to be drawn. Downer head office staff costs and travel costs 276 The parties are in agreement as to the amount owing to Downer in respect of travel costs. The travel costs total $24,631.82. It was conceded by Downer that its head office staff costs were not recoverable because they constituted the internal labour costs of Downer personnel who would have been paid by Downer whether or not the Project was undertaken. Forgone planned revenue from the resale of steel drums (item 15) 277 Downer claims $357,000 in respect of foregone planned revenue from the sale of empty steel drums. Mr Antoniazzi (19 October 2007 affidavit at [46] and in cross-examination at T 739:9-54) gave evidence that there exists a market for second-hand steel drums; that he received a real offer at $1,000 per drum [the cost price of new steel reels being apparently around $3,000]. Mr Antoniazzi gave evidence that the usual practice, based on his involvement in other projects, was for the second-hand purchaser to come to the site and collect the used drums. 278 Mr Masters similarly gave evidence of his experience in the sale of steel drums in his affidavit. His experience had been that a company similar to Downer would purchase the conductor supplied on steel returnable drums and once the conductor had been used, the empty drums were returned to the conductor manufacturer for re-use (rather than sold second-hand in the open market). Mr Masters evidence was qualified by the fact that he has never had to sell steel drums on the open market [T 703:20]. 279 In the situation of Downer, the return of any drums to Sural (for value) in Italy was not possible since the contract had stipulated "non-returnable steel drums". 280 The evidence of Mr Masters and Mr Antoniazzi in regards to the market re-sale value of any steel drums left a deal to be desired. They did not purport to be experienced in selling second-hand steel drums in the market. The oral quote that Mr Antoniazzi obtained for the steel drums is insufficient to prove their re-sale value or that there was a ready market for the second-hand drums. The fact that the planned revenue from the re-sale of steel drums may have been factored into Mr Barona's tender estimate for the Project [suggesting that their anticipated re-sale value was realistic] does not overcome the defect in the necessary proof of the re-sale value in a second-hand market. 281 Furthermore, although neither party appears to have drawn the Court's attention to the relevant portion of the faxed letter dated 14 October 2003 from Downer to Sural [PX 1171], Mr Antoniazzi said "Lastly, Downer has foregone the benefit of the substantial re-sale value of the steel reels, which in this instance would amount in the order of USD 400 to USD 700 each." Hence this would seem to have been an altogether other answer to the claim for foregone planned revenue from the re-sale of steel drums. Additional traffic control on Brand Highway (WA) due to extended duration in July 2004 282 Sural contended that the traffic control costs represented internal labour costs. However Mr Antoniazzi, whose evidence on this matter is accepted as reliable, gave evidence that the traffic control was undertaken by a third party contractor, Altus Traffic (see Mr Antoniazzi's 19 October 2007 affidavit at [48]). Sural is liable to pay Downer's additional traffic control costs due to the extended duration of the Project in July 2004. Sural's alternative calculations 283 Sural advanced the proposition that Mr Barona's affidavit actually demonstrated that the time required for running out the conductor was not longer than expected under what was estimated for the stringing process. 284 As Downer submitted this analysis requires to be rejected for the following reasons: i. The analysis is not supported by any evidence from any witness called by Sural, nor was it put to any Downer witness. ii. In truth the job cost report showed an overrun of millions of dollars and the project took months longer than anticipated (152 days instead of 79 days). Sural's analysis does not explain how the proposition for which it contends is consistent with the reality of the situation. iii. Sural's analysis fails to recognise basic realities about daily activity: for example, it fails to recognise that during the allocated 10-hour working day, there is not only change over of drums, but also travel time (which can be more than 100km from camp to stringing site), lunch and crib breaks, tool box meetings etc. iv. Sural's analysis results in a number that is far removed from the usual run-out speeds that were identified in the evidence of Messrs Hendrick [1 July 2005 affidavit at [18]], Chigioni [23 June 2005 at [38], [52]] and Rantucci [1 July 2005 at [23]]. v. Sural's approach involves calculating a notional run-out rate from Mr Barona's original and revised tender estimates. It is then asserted that "it is plain that the estimates of Mr Barona are broadly in line with the run out rates achieved". That is wrong in the following ways: Mr Barona did not estimate run out rates – he estimated times. Indeed Mr Barona cautioned against precisely the extrapolation of run out rates that Sural's lawyers have undertaken: T 452.30. Also, Sural's submission asserts comparability of run out rates, but does not state what Downer's run out rates were or factor in the delays from stoppages due to tangling, conductor damage, tail feed, etc). Finally most importantly, it takes no mathematical analysis at all to see that if the comparison is between Mr Barona's estimate and reality, Mr Barona estimated the stringing process to take 79 days, while it took 152 days in fact. This was due in large part to the problems with the Sural drums during run out. Allowance for Exigencies / vicissitudes 285 In the letter of instruction addressed to Mr Masters dated 14 June 2006 [Schedule 2 to Mr Masters report of 26 July 2006], Downer stated that its amended cross-claim was quantified at an updated amount of $3,473,572. In the proceedings before the Court, the amount of the claim had been reduced to approximately $2.7 million, which is said to reflect directly upon what further amount of discount, if any, should be given by the Court for exigencies [T 837:50]. 286 The task of determining damages is ultimately no more than a decision of fact. The numerous stages involved in the obtaining, shipping, transporting and deploying of the drums of conductor should not be underestimated. At a number of the disparate stages involved, there may have been certain variables that were not explored in the evidence presented. The determination of the appropriate damages award is not a matter of scientific accuracy. My impression from all of the evidence is that it is appropriate to reduce the overall amount advanced by Downer [after making adjustments for the heads of damage which have been disallowed] by 5%, even taking into account Downer's proposition that its claim before this Court had already been discounted for exigencies. Short minutes of order 287 The parties are to bring in short minutes of order to reflect the up to date calculations necessary to give effect to these reasons. On the same occasion, costs may be argued. ************* 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.