Bekaa Dairy Products Pty Ltd trading as Ultimate Dairies v Sepak Industries... [2020] NSWSC 473 | Case summary

Ground 5: The Court erred in failing to find that Top Fit had suffered damages in the amount of $61,419.00.

Counsel for Bekaa said that grounds 4 and 5 were dependent on the success of ground 1. It is convenient, therefore, to deal with these grounds together.
The Fox report was dated 15 June 2018. The author was said to be M Hucknall, and Mr Chris Fox was said to have reviewed the report.
The report was connected with an email sent by Mr Hucknall to Bekaa on 15 June 2018. That email estimated the cost of two options to upgrade the Regen heat exchanger to deliver the 5000 litres per hour required. The first option was estimated to cost $39,000 and the second $21,450. There was a qualification in these terms: Due to the time give to Flexigen to prepare this costing we could only provide an estimate of the order of 30% accuracy. We would be happy to refine this to a fixed/turnkey offer (i.e. firm figure) should there be desire however we would need additional time as well.
In its cross-claim Bekka sought to obtain the cost of option 1.
At the Local Court hearing, the report was objected to by Sepak on a number of grounds. First, it was submitted that the report was served outside the time given by the Court for the filing of expert evidence including being filed outside the deadline under a guillotine order. Secondly, it was submitted there was no acknowledgment of the expert witness Code of Conduct with respect to the report. Thirdly, Mr Fox's expertise was challenged. Fourthly, the report was said not to comply with r 31.27 Uniform Civil Procedure Rules 2005 (NSW) in that facts and assumptions were not set out, nor were reasons for the conclusions given.
The argument about the admissibility of the report extended over 28 pages of transcript. At the conclusion of the argument the Magistrate said this: HIS HONOUR; Look, I have to indicate now that we need to be able to move forward and with great disappointment, no doubt to you Mr Blackman, but I am not prepared to allow this material in. Really, we have gone through the Uniform Civil Procedure Rules; we do not need to repeat it all again now. But I think the point that was at its strongest to me was in fact that High Court decision in 2011 where it states very clearly in para 42: "A failure to demonstrate an opinion expressed by a witness is based on the witness specialised knowledge, based on training, study, or experience is a matter that goes to the admissibility of the evidence, not its weight." I could go back on further matters but we do not need to. I have to make that very clear, and that is no doubt very disappointing to the people you are working with. But sorry, I am just not prepared to allow it in. (The High Court decision was Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588; [2011] HCA 21.)
At the hearing of the appeal, Bekaa submitted in its written submissions that the Magistrate erred in excluding the report for four reasons: (a) The report was not prepared for the purposes of litigation and was, accordingly, not required by r 31.23(2) or (3) UCPR, or otherwise, to acknowledge the Expert Witness Code of Conduct; (b) The report otherwise complied with the requirements of an expert report prescribed by r 31.27; (c) Mr Fox had adequately acknowledged the Expert Witness Code of Conduct; and (d) in the light of those matters, and on the basis that Sepak was on notice of the contents of the report since at least 29 January 2018, the court erred in excluding it.
In Welker & Ors v Rinehart & Anor (No 6) [2012] NSWSC 160, Ball J at [38] summarised six criteria from the judgment of Heydon JA (as his Honour then was) in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 at [85] with respect to expert evidence: • it must be agreed or demonstrated that there is a field of "specialised knowledge"; • there must be an identified aspect of that field in which the witness demonstrates that by reason of specified training, study or experience, the witness has become an expert; • the opinion proffered must be "wholly or substantially based on the witness's expert knowledge"; • so far as the opinion is based on facts "observed" by the expert they must be identified and admissibly proved by the expert, and so far as the opinion is based on "assumed" or "accepted" facts, they must be identified and proved in some other way; • it must be established that the facts on which the opinion is based form a proper foundation for it; and • the opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached: that is, the expert's evidence must explain how the field of "specialised knowledge" in which the witness is expert by reason of "training, study or experience", and on which the opinion is "wholly or substantially based", applies to the facts assumed or observed so as to produce the opinion propounded.
In my opinion, the Magistrate was correct to reject the report of Mr Fox although, in the light of the extensive arguments put to him, his reasons were economical. However, it is clear from the passage in his Honour's judgment set out at [15] above that the report was rejected because his Honour did not consider that the opinion expressed was based on the witness's specialised knowledge. His Honour could have reached that view for either or both of two reasons. It may have been because Mr Fox did not have expertise in the relevant area or, if he did have the expertise, the opinion expressed was not based on that expertise.
In my opinion, whichever was the basis, his Honour was correct.
In relation to Mr Fox's expertise, nothing in the brief description of his background suggests that he had expertise in providing an opinion about a milk pasteurisation machine. The report simply said this about him: Project Manager/Energy and Sustainability services lead. Chris has over 14 years experience in food beverage process engineering and project management. Chris has also been working in the energy and sustainability area for well over 10 years.
Subsequent to the Magistrate's decision refusing admission of the report into evidence, Mr Fox was cross-examined because of a further report he had prepared in response to an expert opinion on behalf of Sepak. He said that he had never installed or commissioned a milk pasteurisation machine, and he said that the vast majority of companies for which he had worked were in the brewing industry.
Mr Cornish of counsel for Bekaa submitted that there was no evidence to suggest that there is a unique science of milk pasteurisation as compared to brewing, so that it could not be said that Mr Fox did not have the relevant expertise. However, it was Bekaa who was putting forward Mr Fox as an expert who could opine about milk pasteurisation. There was a clear onus on it to establish what the area of expertise was, and to show that Mr Fox had specialised knowledge of that area. The only evidence of Mr Fox's expertise at the time his report was tendered was what was contained in the very brief summary of his experience in the report (set out at [20] above).
Mr Hucknall, who was said to be the author of the report, was said to have, a degree in aerospace engineering with eight years' experience in mechanical engineering, hot water and more specifically co and tri- generation. He has a strong focus on implementation and commissioning as well as troubleshooting and control tuning. He has lead (sic) over 30 co/tri-generation installations and has been involved in a number of complex re-commissioning and modification exercises over the years.
It is not clear what part of the report had Mr Fox's input. In circumstances where the expertise of both authors of the report was doubtful, it was important that the report identify clearly who provided the conclusions so that the link could be seen between the opinion expressed and the specialised knowledge: Dasreef at [42].
The opinion expressed in the report was this: The heating plant was installed in such a way as to limit the overall capacity to approximately 30% of its rated output. With the modifications in place, it is our opinion that the heating plant is now able to transfer 376kW of heat. This is however untested due to the fact that the heat exchanger on the pasteuriser is not able to take all of this heat. The regen on the pasteuriser is designed for a finished product temperature of 38°C which is below the nominated 42°C referenced in the SEPAK quotation (Appendix E) and Ultimate Dairies requirement of 45°C. Further information is required from the manufacturer to determine if the current design of both the pasteuriser and heating plant is sufficient to provide 5000l/hr of pasteurised milk at 45°C.
The report does not comply with the provisions of r 31.27 because facts and/or assumptions upon which the opinion is based are not set out, nor is the reasoning of the author of the report set out. The issue in the case was whether the pasteurisation machine achieved an output of 5000 litres per hour. The report simply records an observation that the equipment was unable to maintain sufficient pasteurisation temperature when producing more than 2000 l/hr of product. No records from the machine were referred to nor put in evidence in that regard.
In that way, there is a failure to demonstrate that any opinion expressed is based on Mr Fox's specialised knowledge which was not, in any event, proved.
There are additional reasons on the basis of which the Magistrate could have found that the report was inadmissible, from the arguments put to him but not dealt with by him in his reasons.
First, Bekaa had been ordered to file expert evidence by 27 November 2018. It did not do so. An extension was granted to 15 January 2019 but with a guillotine order attached. Bekaa failed to file Mr Fox's report by 15 January. The matter was relisted on 24 January 2019 and Bekaa sought leave to serve three affidavits, presumably the affidavits of Katie Chedid, Jamie Chedid and George Chedid all sworn on 27 January 2019. No application was made for leave to serve any expert evidence nor Mr Fox's report in particular. The report was served, therefore, without leave having been given to do so.
Rule 31.28 provides that a report not served in accordance with the rule (and here, that means, not served in accordance with directions made) is not admissible without the leave of the court. Subrule (4) provides that leave is not to be given unless the court is satisfied that there are exceptional circumstances. Bekaa did not put forward anything to the Magistrate nor on this appeal to suggest that there were exceptional circumstances.
Whilst I do not overlook the fact that these were Local Court proceedings involving claims on either side of less than $50,000, nor do I overlook the provisions of ss 56 and 58 of the Civil Procedure Act 2005 (NSW), compliance with court orders, and in particular guillotine orders, is not to be thought of as optional. Where a guillotine order is made, a party requires the leave of the court to rely on the pleading or evidence concerned. A failure to comply with a guillotine order needs an explanation for the failure: Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27 at [103]. Mr Cornish accepted that no explanation had been given for what he described as the "clearly egregious delay" in the circumstances.
Secondly, Mr Fox at no stage acknowledged that his report had been prepared in accordance with the Expert Witness Code. Bekaa initially submitted that the report was not prepared for the purposes of litigation and did not, therefore, need to comply because of the terms of s 31.23(2) and (3). However, that submission was abandoned at the hearing of the appeal.
This report was prepared some three weeks after the proceedings commenced. If it was sought to be relied upon as an expert report, the expert was required to comply with the Code of Conduct. Significantly, Mr Fox swore an affidavit apparently on 1 March 2019 where he said he had been provided with a copy of the Expert Witness Code and agreed to be bound by it. He then went on to annex another report which he prepared on 28 February 2019. He said nothing in that affidavit about his principal report which is the subject of this ground of appeal.
In Hodder Rook & Associates Pty Ltd v Genworth Financial Mortgage Insurance Pty Ltd [2011] NSWCA 279, Young JA (Beazley JA and Handley AJA agreeing) set out at [57] three principles which the trial judge in that case employed to reject expert evidence in circumstances where the expert had not read the Code of Conduct and adopted it before preparing the report. The third such principle was this: In preparing reports without having agreed to be bound by the code of conduct, there is a real risk that the expert will have committed to a particular form of opinion which an ex post facto adoption of the code cannot cure.
Justice Young said of this at [63]: Principle iii enunciated by the primary judge has some validity, but it must not be elevated into a general rule. Each case must be considered on its merits. The Court may consider that the assumed "real risk" is non-existent or minor. If so, in the case where an expert makes an initial report without having the Code in mind and then is shown the Code and swears that in fact he or she did abide by it and now affirms the original report, the evidence should be admitted. Again, if the court can see that he or she is not just rubber stamping the original report, the later report should be admitted into evidence.
In Welker & Ors v Rinehart & Anor (No 6) [2012] NSWSC 160, Ball J said at [35]: In my opinion, it follows from what Young JA [in Hodder Rook] said that it is necessary to consider all the circumstances of the case in order to determine whether the objectives sought to be secured by UCPR r 31.23 have been affected by the non-compliance. Those circumstances include the nature of the instructions that were actually given to the expert, the expert's prior familiarity with the code, the extent to which the report on its face appears to comply with the code and the evidence subsequently given by the expert concerning the question whether he or she complied with the code at the time and whether his or her opinions have been affected by non-provision of it. It is for the party seeking to lead the evidence to satisfy the court that the non-compliance with UCPR r 31.23 has not affected the objectives of the rule, or that there are other reasons which justify a departure from it.
It is significant in this regard that the report was prepared on 15 June 2018, the orders for the service of expert evidence were made in late 2018 and January 2019, the hearing was in May and July 2019, and yet nothing was done to ensure that Mr Fox explained that he had prepared or approved the report in accordance with the Code of Conduct. This was said by Bekaa to be an oversight. Although counsel for Bekaa offered to call Mr Fox to give evidence concerning his adoption of the Code for this report, the Magistrate and counsel then appear to have focused on other aspects concerned with the expert report, and Mr Fox was not called to give that evidence.
The end result is that, although having the opportunity to do so in his affidavit of 1 March 2019, Mr Fox did not say that he had prepared his report of 15 June 2018 in accordance with the Code, and he has not subsequently done so. Since I have found for other reasons that the report was correctly rejected, nothing flows from any failure (if there was a failure) of the Magistrate to permit Mr Fox to give that evidence ex post facto about his compliance with the Code.
Finally, the report can scarcely be seen as an independent report by an expert seeking to assist the court. The document was prepared in circumstances where the company for whom Mr Hucknall and Mr Fox worked was providing a quotation to solve the problems Bekaa claimed to be having with the machine. The report was clearly prepared in circumstances where Mr Fox was seeking to be given a contract to rectify what was perceived to be the problems with the machine.
It follows that the report of Mr Hucknall and Mr Fox was correctly rejected.
Although Mr Cornish said that success on grounds 4 and 5 was dependent on success on ground 1, I will say something about other submissions made in relation to these grounds.
Bekka submitted that the intent of ground 4 was to contend that the Court ought to have found a variation of the contract to provide for pasteurised milk output of 5000 litres per hour at 92°, rather than 85° as was specified in the initial written contract. Bekaa submitted that the Court's rejection of the Fox report was material to its rejection of Bekaa's case in this regard.
Bekka submitted that the Magistrate failed to direct himself properly to the question of whether the pasteuriser did in fact possess the requisite capacity, although it accepted that the Magistrate did consider certain evidence which addressed the issue of capacity at 92° output.
In his judgment the Magistrate said this regarding the evidence of the flow rate: The defence to this claim is - one issue put to the claim is that it fails to meet the flow rate of 5000 litres per hour, and that claim is repeated, obviously, in the cross-claim. I think we all agree that it is really reference to a singular breach. The plaintiffs primary position was that the defendant has not made out that the claim - the onus is on them to prove that the claim has been - and that the cross-claim - that the claim has been made out and that the cross-claim should be dismissed. Obviously there is a request for me to find for the plaintiff, and I do so, as I have said, find for the plaintiff. I agree with Mr Hemsworth when he talks about the high mark in some ways of the defendant's claim is the affidavit of Jamie Chedid. There are references at paras 9, 11, 23 and 30 to the various litres per hour; 4000, 4000, 2500 and 400 respectively. As to Katie Chedid's evidence, paras 22 and 27 also talk about the 2500 litres per hour. I think George was cross-examined on that and he said, really, because people - about the flow rates, that people had told him that. What is fundamental to this case is that both Jamie and Katie Chedid have really not put on any evidence that would support these allegations about flow rates. There was a notice issued to produce and on 9 October there was also a request to - the data recording printouts, and these printouts would - and I agree with the plaintiff, that these printouts would have told us what the flow rates were. The defendant did not produce any of these documents. It was actually George saying it was - no, in Jamie's response, at p 315 of the Court book, there was a reference to "just recently", another issue, and, again, that malfunctioning - the timing of that was unusual but, in any event, we still, I think, all agree that there was a good 12 months where there would have been opportunity for data recording printouts. Again I repeat that reference to the golden opportunity, that I agree with that. I think it was pretty clear, and I made reference to this on an earlier occasion, that it was pretty clear that there is - this matter was always heading by way of legal - there was legal concern, I thought, pretty swiftly in this matter. We talk about a dispute from 14 February in the letter and it made it very clear then that, "If you don't get the response within a certain time, there will be - it will need to step up a gear", that they would be forced to issue legal proceedings. The defendant was clearly on notice and commonsense - I agree with Mr Hemsworth - would tell us that you keep your records. On 21 May 2018, the dispute certainly went up a gear and still, put in cross-examination to Jamie Chedid, he did not think to produce one printout. We have already talked about George's affidavit; I will not repeat that. Then there was the reference on the PVC screen, that screen to tell what the flow rate was, and then again there was that reference, "You're on notice with the dispute". You could perhaps take a photo every day, I think, was what was put to me, and that would prove that there were no photos taken; that was in the transcript on 10 May also, the PV column line. "You could have taken hundreds of these photos. There was nothing put in affidavit". Then there were the food ordering sheets. Again, I thought that was very well argued and submitted to me. Mrs Chedid said that they were filled out by Jamie, but, despite knowing there was all this legal concern, they did not decide to put on any evidence about that, which really was - I accept the plaintiffs (sic) submission that it really was the whole crux of the evidence. The whole crux of this case could have been settled by that production. Other points that I thought were also important were that issue around the balance tank - again, there was another option, "if we knew about the balance tank". Mr Curly's evidence, again, makes reference at p 186 of the Court book, but in his para 98, that "I've seen no documentation on the flow rate". He talks again, at para 100, in the absence of documentation - it was perfectly appropriate that Mr Hemsworth would bring to my attention that Mr Fox had said, "No comment" in relation to that. At some point yesterday, Mr Hemsworth also said to me that this defence and cross-claim begins and ends right here; there was no documentation to determine and the onus was clearly on the defendant to prove that and the defendant really just was not in a position to prove its case.
The evidence amply supported the Magistrate's conclusions. Sepak's expert, Mr Malcolm Curley, said in his report at paragraph 131 that he did not observe anything which showed that the flow rate was below 5000l/h. In addition, there was a failure by Bekaa to produce relevant documents notwithstanding a notice to produce issued on 9 October 2018. The reason given for the non-production of documents was that the paperless data recorder malfunctioned. That was said to have happened "recently" prior to Mr Jamie Chedid swearing his affidavit of 27 January 2019.
Mr Chedid gave this evidence in cross-examination: Q. Other than you just saying it in your affidavit, you have not put on any documents to support those allegations have you? A. No, I haven't. Q. The reason you haven't put on any documents to support it is because you don't have any documents to support your case do you? A. That's not - that's not true, no. Q. I put it to you that if you had them, you'd use them? A. I can bring them in. Q. No. I'm putting to you that if you had them, you would've used them? A. I don't believe that, sorry. Q. I'll take you to paragraph 15 of your affidavit. At paragraph 15, you refer to a malfunctioning paperless data recorder, correct? A. Correct, correct. Q. You say just recently this is an issue that's come about? A. Correct. Q. So going by the date of this affidavit being the 27 January 2019, that the data recorded malfunction was reasonably close to that date? A. I'd say yes. Q. Would you say within a month? A. I don't - I can't give you an exact time or date, but it's malfunctioning. That's all - I know I can't use it. I can't use it to download anything if I needed to. Q. I'm just asking you the timeframe. I wasn't asking you what the consequences of it was. Now, if I can take you to page 118 of the bundle? A. Yes. Q. This document is called a "Notice to produce for inspection" and it was provided to your solicitor. Did your solicitor give you a copy of it? A. I can't recall. Q. The document asked for one group of documents, you can see it at the very bottom of the page? A. Yes, I can see. Q. "SPC5000, milk pasteurised data recorder printouts for each month from 1 December 2017 to present"? A. Correct. Q. Did your solicitor ask you to produce those documents? A. Yes, he did. Q. You agree with me that you, through your solicitor, told my client that you had no documents to produce? A. I couldn't. Yes, I couldn't produce them, no. Q. The significance of these documents are they would show, without a shadow of a doubt, what the flow rate of the pasteurisation machine would be wouldn't they? A. Correct. Q. You say the machine's malfunctioning, don't you? A. Yes, they were the - it's one of the screens. There's two screens; one was malfunctioning. Both show a data - both show a flow on both screens. … Q. I've just took (sic) you through various paragraphs of your affidavit where you made an allegation of 2,500 litres per hour and an allegation of 4,500 litres per hour. Do you agree with that? A. I do. Q. The proposition I'm putting to you is the documents that we've requested from you would prove, without a shadow of a doubt, that that pasteuriser was doing 4,000 litres per hour and, or 2,500 litres per hour as you allege? A. Yes, it's in the engineering report. Q. Just answer my question. A. Sorry. Q. The documents that we're asking you to produce which prove, without a shadow of a doubt, your allegation that the pasteurisation machine was doing 4,000 litres an hour and, or 2,500 litres an hour A. Correct, yes, they will show it, yes. Q. It would, wouldn't it? A. Yes. … Q. You've already agreed that the data recorder malfunctioned fairly recently, to the date you swore your affidavit. Do you agree with that? A. I do agree, yes. Q. You swore your affidavit on the 27 January 2019, you agree with that? A. Yes, I do, yes. Q. The pasteuriser was commissioned at your premises in approximately December 2017? A. Correct. Q. So based on those dates the data recorder was working perfectly well from December 2017 through to the time it malfunctioned, which was reasonably close to 27 January 2019 when you swore your affidavit? A. It was malfunctioning. Yeah, the screen wasn't working, correct. Q. That's not the question I asked you. A. Okay. Q. The data recorder was working from the time of commissioning, which was about December 2017, through to the date that it started malfunctioning which was close to when you swore your affidavit on 27 January 2019. Do you agree with that? A. Or on - on or about, yes, I - yeah. Q. So based on those two propositions, the data recorder was working perfectly well for at least one year? A. As in downloading or the screen? Q. The data recorder was working perfectly well for at least one year? A. Yeah, approximately I'd say, yep. Q. Can I take you to page 276 of the bundle, please? A. Yes. Yes. Q. Are you familiar with this document? A. Yes. Q. The fourth paragraph - well, first of all it's titled "Letter of demand for outstanding money." The date of it is 14 January 2018, do you agree with that? A. Yes. Q. You would agree that as at 14 February 2018, there was a dispute between your company and my client as to the payment of money? A. Correct. Q. As we agreed, it's your case that the flow rate wasn't being achieved, isn't it? A. That's what I'd seen, yes. Q. I'll take you to the fourth paragraph first, and my client says: "Accordingly, I advise that if payment in the sum of $37,943.77 is not received within seven days, I will be forced to initiate legal proceedings against you to recover the debt." Do you agree that it says that? A. Yes, I do. Q. So you're on notice from at least 14 February 2018 that there were legal proceedings looming, weren't you? A. Correct. Correct, yeah. (emphasis added)
Although, somewhat inconsistently with his other evidence, he said that he had documents and could bring the documents in to support his case, the significance of this evidence was that the data recorder was working for at least a year during which it was alleged that the pasteuriser was not meeting the 5000 litres per hour output.
Mr Chedid gave evidence that there was a second screen called a PLC screen. Unlike the data recorder, this screen was not malfunctioning. Bekaa only put into evidence one photograph of that screen taken when the pasteuriser was not in production. He gave this evidence: Q. I'm going to rephrase that. I withdraw that. The only photo that you have put on of the PLC machine in this entire case is the one that we're open and looking at right now on page 322? A. Yeah, yes. Q. And you could've taken hundreds of these photos to prove your allegation that this machine doesn't achieve 5,000 litres per hour couldn't you? A. Yes. Q. You could've taken one every day? A. I did. Q. Couldn't you? A. I did, yes. Q. You haven't put any of them into your affidavit have you? A. No, no. Q. No? A. No, no, no. Q. The reason you haven't put any of them attached to your affidavit is because I'm putting to you that the photos don't support your case? A. No, that's not true. Q. You had a golden way of proving your case by simply turning the machine on every day, taking a photo of the PLC machine, and recording the flow rate, simple? A. I did, yeah. I did. Q. You haven't because you haven't put it on, have you? A. No, I did. Q. No. A. Yeah, it's not on the affidavit, correct. Q. It's not on the affidavit. A. Correct. Q. And it's the same proposition of the data recorder that here you are being faced with being sued for $39,000, you're making an allegation that the flow rate doesn't achieve 5,000 litres. You've got the very means of proving your case by taking a photo of this PLC recorder and you have not put those photos into evidence have you? A. No.
There was evidence that spreadsheets were prepared at the end of each day showing how much yoghurt was produced, and that in turn would show how many litres of milk were used in the production. Those spreadsheets were not put into evidence as Mr Chedid admitted in cross-examination as follows: Q. So I'm putting to you that at the end of each day, within your record keeping at your business, you would have a sheet that would tell me how many kilograms of yoghurt that you produced. A. Correct. Q. And from that I would know how many litres of milk--- A. Correct. Q. ---was used in the production. A. Correct, correct. Q. Despite having one of those spreadsheets for every day of production since this pasteuriser was installed at your premises, you have chosen not to put one of those spreadsheets into evidence in these proceedings, haven't you? A. No. Q. The reason is if they came into evidence we would be able to have a look at your production, and get a idea about how many litres of milk were being used each day, wouldn't we? A. Yes, but that's not the issue. Q. No, that's the question. A. Yes, that's right. Q. Yes, we would. A. Yes. Q. And from working out the amount of litres of milk that were used each day, we would get an idea of many litres of milk were being processed each hour, wouldn't we? A. I'd say so, yes. Q. Then because the whole crux of this case is about how many litres per hour this machine actually does, we would actually be able to start to drill down and figure out exactly how many litres per hour the machine was producing, wouldn't we? A. Correct. Q. But you haven't put that evidence on, have you? A. No, I haven't.
When Mr Curley's evidence concerning his observations of the flow rate are considered, together with the failure of Bekaa to produce the documents identified in the cross-examination of Mr Chedid, the Magistrate was not in error in reaching the conclusion that Bekaa failed to prove that the machine did not meet the promised output.
The claim for damages in ground 5 was based on the higher of the two figures quoted in the report of Mr Hucknall of 15 June 2018. In the circumstances where Mr Fox's report was correctly rejected, and where the Magistrate was correct to find that the plaintiff had not proved the breach of the agreement, the issue of damages does not arise. It must be noted, however, that no justification is shown for choosing the more expensive of the two options quoted by Mr Hucknall. Further, those figures were qualified by the statement in Mr Hucknall's quote set out at [12] above.
Even if the other grounds had been successful, it could not have been found on the balance of probabilities that the measure of damages was the amount claimed.
I would reject grounds 1, 4 and 5.

Ground 7: The court further erred in failing to determine that the Interest Rate amounted to a penalty

The issue of the interest rate amounting to a penalty appears to have arisen because Bekaa sought to argue the point when it had not been pleaded. The Magistrate's determination of this issue was as follows: I just want to turn to Mr Hemsworth's submissions on the penalty interest points, clearly just reminding me that you cannot take people by surprise, and then brings to my attention r 14.14, "The plaintiff must plead specifically any matter that, if not pleaded specifically, may take the defendant by surprise". He argued, I thought, very well, this morning that it should have been pleaded. He took me to the decision of Aon and I thought that paragraph was pretty impressive, para 103, the fact that an explanation had not been offered for the delay in raising the ..(not transcribable).. was regarded as relevant ..(not transcribable).. where a discretion is sought to be exercised in favour of one party and to the disadvantage of another, an explanation will be called for" and, as he says -I will not read out that whole paragraph but, as he says, that explanation would be required, really, by way of affidavit form or a notice of motion with an affidavit. He then talked about that it has to be factored in, in terms of the time, letters, damages suffered, you look at what he knew at the time of the contract, that it all has to be factored in, plus the opportunity cost and the rate itself, 36% per annum, was often - it is in range, it is what ..(not transcribable).. the market is charging; and the critical issues, "What did the plaintiff know when it entered into it?". I must say I was impressed by all of that. It was made also very clear, at para 112 in that decision of Aon: "A party has the right to bring - parties have choices as to what claims are to be made and how they are to be framed but limits will be placed upon their ability to effect changes to their pleadings, particularly if litigation is advanced. That is why, in seeking the just resolution of the dispute, reference is made to the parties having a sufficient opportunity to identify the issues they seek to agitate." I thought that was a very good paragraph to read out to me. In this case I also accept Mr Hemsworth's submissions that litigation - it was at the doorstop of the proceedings, the defence filed on 20 June 2018 and they never amended their defence and they, basically, should have - and therefore they should not be allowed to do so now. I will not go through the decision of Arab because I am satisfied, as I have said earlier, that the matter has not been - that 3% is justified and therefore the penalty clause, the financial clause itself, is not inappropriate under the circumstances.
Bekaa submitted at the hearing of the appeal that: (a) the entitlement to interest in accordance with the interest clause was always in issue between the parties by virtue of the denial in the defence of paragraph 12 of the statement of claim. Bekaa submitted further that the solicitors acting for Sepka had never sought particulars of the basis for the denial. In that way the matter of interest was said to be a live issue; (b) the proposition that the interest term constituted a penalty was explicitly raised in the statement of facts and issues in dispute; (c) the case was conducted by Bekaa on the basis that the interest term amounting to a penalty was part of its defence; (d) despite taking objection to the issue being raised, the issue of penalty was fully argued by both sides in the course of the 5 days of hearing from March to July 2019; (e) interest of 3% per month is prima facie a penalty, and that the matters relied on by Sepak as precluding the existence of the requisite disproportionality did not serve as an adequate evidentiary basis for a conclusion that Sepak had discharged its evidentiary onus on this matter.
The agreement between the parties provided in clause 7.1: PAYMENT: $30,000 Deposit with order, progressive payments of $8,000 per month due end of month immediately after the deposit payment month. A Finance charge of 3% per month, which is calculated daily, will be charged to any overdue payment.
The amounts of $30,000 and $8,000 in that clause had originally read $40,000 and $10,000 respectively. The reduction in those amounts was agreed after a negotiation. It is significant also that other changes were made to the contract presented to Bekaa by Sepak.
The issue before the Magistrate arose in this way. Paragraph 12 of the statement of claim said this: 12. The plaintiff claims the following; 12.1 $39,817.89; 12.2 Interest at the rate of 3% per month; and 12.3 Costs. As can be seen, that was the claim being made by Sepak. It did not need to be a numbered paragraph because it was not pleading material facts.
Nevertheless, the defence filed by Bekaa pleaded at paragraph 9: 9. The defendant denies that the plaintiff is entitled as claimed in paragraph 12 of the Claim. Nowhere in the defence was the issue of a penalty raised.
On 26 February 2019, one week before the trial commenced, Bekaa filed a document entitled "Case summary" in which the following appeared: 10. Sepak has also issued an invoice in the sum of $831.27 (invoice $831.27) relating to its claim for interest on the balance owing the amount of 3% per month (or 36% per annum) calculated daily Top-Fit [Bekaa] says that the clause within the Contract that Sepak relies on is void at law and unenforceable.
No application was made by Bekaa at the outset of the trial to amend its defence to plead a penalty.
Rule 14.14 UCPR relevantly provides: 14.14 General rule as to matters to be pleaded specifically (cf SCR Part 15, rule 13; DCR Part 9, rule 9) … (2) In a defence or subsequent pleading, a party must plead specifically any matter - (a) that, if not pleaded specifically, may take the opposite party by surprise, or (b) that the party alleges makes any claim, defence or other case of the opposite party not maintainable, or (c) that raises matters of fact not arising out of the preceding pleading.
There is no basis for the assertion that the denial of paragraph 12 of the statement of claim by paragraph 9 of the defence identified the issue associated with penalty interest. Any reasonable person would only understand the denial as being a denial that Bekaa owed Sepak the amount claimed. The suggestion that somehow it was Sepak's fault for not having requested particulars of the denial is without any merit.
The paragraph contained in the "Case summary" does not identify an issue concerned with penalty. It simply asserts that the clause in the agreement was void and unenforceable. That statement is confusing because the clause is principally concerned with the amount of the instalment payments and the amount of the deposit. Even if, however, that is a reference only to the finance charge of 3% per month, no basis is identified for the assertion that the clause is void and unenforceable. Certainly, no reference is made to 3% amounting to a penalty.
In his opening, counsel for Bekaa said that a claim would be made that the 3% charge was a penalty. It was said that the penalty had been identified two days after the "Case summary" was served. Counsel for Sepak objected to penalty being an issue in the case on the basis that it was not pleaded. He said that if that issue was to run there would be a lot of evidence his client would need to put on to test if it was reasonable pre-estimate of the loss. Although the objection was taken, no application was made to amend.
Counsel for Bekaa submitted on the appeal that there had been significant evidence placed before the Court so that it could inform itself of relevant matters arising on the penalty case. I was taken to a portion of the transcript where the principal witness for Sepak was giving evidence. He was cross-examined and the following exchanges occurred: Q. I've gone a little side-tracked, your Honour. So I will go back slightly. In terms of your costings. I'm not going to ask you about your profit. You've already answered that question but in terms of financing the production of the milk pasteuriser, that is the fabrication, would you spend capital or would you say, take an overdraft? A. I use my capital from my own personal accounts. Q. So you would have - if I have understood your evidence you would have, effectively, the liquid cash to fund. You wouldn't be borrowing to fund it to produce? A. I said I used my capital to fund the project. … Q. And in terms of someone who doesn't pay their bills would you personally chase that? Would you send the email? A. I don't always personally chose (sic) that. My accounts people do that first. Q. Okay. So you would direct your accounts person to send a follow-up letter for example? A. We give them courtesy calls. Q. Courtesy calls. A. Quite a few - quite a few of them. Usually. Q. Sorry, I didn't want to cut you off. A. No. That's it. Quite a few calls. Q. And so in terms of the costs to you of chasing an invoice it's the cost of the admin time. Is that correct? A. Sorry? In terms of? Q. In terms of the cost to you to chase up an invoice it's the cost of paying the employee. Is that correct? HEMSWORTH; Well, I object. OBJECTION HIS HONOUR: Why is that? HEMSWORTH: Your Honour, my friend wants to run his penalty case. BLACKMAN: Sorry, your Honour. If he's going to raise this the witness can't be in the room. HIS HONOUR; No. I think that's only fair that the witness needs to. Q. Excuse me, Mr Kong. You'll just need to go outside for a moment. So, thank you. IN THE ABSENCE OF THE WITNESS HEMSWORTH: Your Honour, as I alluded to in the opening my friend wants to now run a penalty case and to the extent that I said it's the first I've heard of it, if it was brought to our attention two days ago I acknowledge that but be that as it may there's absolutely no way that we could put on evidence in that time to prepare for it. Now, what my friend wants to do now is to try and reverse engineer his claim and start asking questions of my client and then try to adduce evidence from my client on the run without him having the benefit of putting on evidence and going through properly what the genuine pre-estimate of damage is, which is the test for a penalty. HIS HONOUR; All right. What do you say about that Mr Blackman? BLACKMAN: Well, your Honour, my friend says he had no notice of this until last week. HIS HONOUR; So does that mean you agree? That you actually are trying to run this line now? BLACKMAN; Your Honour, the witness has answered the question. Your Honour, as I understood it, hadn't ruled that I couldn't pursue this line. It is denied in the defence that they're entitled to 3% of interest per month. The local court is not a court of strict pleadings. When this issue was raised last week we clarified the issue. I don't see why we're not entitled to run this point to the extent of the questioning. My friend has permitted the line of questioning until the very last question. The evidence is already before, your Honour. HIS HONOUR; Well, is that all the evidence? BLACKMAN: That is my last question on this point. HIS HONOUR: You can live with it if it's the last question? HEMSWORTH: Yes, your Honour.
That passage shows that as soon as it became clear that counsel for Bekaa was cross-examining Sepak's witness on issues to deal with penalty, objection was taken in line with the objection that had been taken at the opening. Bekaa still made no application to amend.
In my opinion, if the issue of penalty was to be raised, it needed to have been pleaded and notified at a sufficiently early stage to allow Sepak to obtain whatever evidence it needed in relation to the matter. I do not consider that identifying the issue some three business days prior to the start of the trial was adequate notice. Even in the absence of an application to amend, no explanation was given about why the matter had not been raised at an earlier time: Aon at [103] and [112].
In that regard, what Sackville AJA said in Arab Bank Australia Ltd v Sayde Developments Pty Ltd (2016) 93 NSWLR 231; [2016] NSWCA 328 at [8] is pertinent: …In recent times, cases involving the penalty doctrine have been conducted by reference to extensive expert evidence designed to enable the court to determine whether or not there was a justifiable commercial rationale for the imposition of the detriment alleged to be a penalty. It is therefore not surprising that in the present case the parties considered it necessary to rely on expert reports to support their respective contentions.
In Arab Bank, McDougall J (with whom Gleeson JA agreed and Sackville AJA agreed with added reasons) surveyed the High Court's approach to the question of contractual penalties. His Honour held that in Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; [2005] HCA 71 the High Court accepted that Lord Dunedin's speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 set out the principles in relation to penalties in contractual stipulations and that those principles expressed the law in Australia. Similarly, in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30, the High Court followed those principles.
The relevant part of Lord Dunedin's speech (at 86-87) is as follows: 2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage … 3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach … 4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are: (a) It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach … (b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid … (c) There is a presumption (but no more) that it is penalty when "a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage".
Justice McDougall then summarised the propositions emerging from the judgments of those forming the majority in Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28: (1) Lord Dunedin's propositions were not "rules of law", but "distillations of principle" (Gageler J at [143]; compare Kiefel J at [32] and Keane J at [260]). (2) The essence of a penalty is that it is a collateral stipulation, the (or a predominant) purpose of which is to punish the borrower for breach, and thus to compel performance (Kiefel J at [29]; Gageler J at [127], [159], [166]; Keane J at [254], [259], [273]). (3) One way of testing whether the impugned stipulation is penal - intended to punish - is to inquire whether the sum that it stipulates to be payable on breach (as I have indicated, the equitable origins and continuing equitable operation of the principle have no present relevance) is to ask whether the stipulated sum is extravagant or out of all proportion to, or unconscionable in comparison with, the maximum amount of damage that might be anticipated to follow from the breach (Kiefel J at [29], [54]; Gageler J at [158] to [162]; Keane J at [221]). (4) "Damage" in this sense is not limited to damages recoverable upon breach of contract, but may extend to damage, or losses, caused by the impairment of other legitimate commercial interests that were intended to be protected by the stipulation (Kiefel J at [33], [42] to [47]; Gageler J at [145], [160] to [162]; Keane J at [216], [283]). (5) The analysis is to be made at the time, and taking into account the circumstances applicable, when the contract was made; not at the time of breach; the analysis is prospective, not retrospective (or as is said in some judgments, is ex ante, not ex post) (Kiefel J at [62]; Gageler J at [169]). (6) Mere disproportion between the stipulated sum and the possible damage is not enough to indicate "penalty"; the disproportion must be such that it is unconscionable for the lender to rely on the stipulation (Kiefel J at [54], Gageler J at [164]; Keane J at [221], [240, [279]).
Even if the issue of penalty ought to have been permitted to be aired, Bekaa led no evidence to justify its assertion that the finance charge of 3% per month amounted to a penalty. Although it submitted that a court was in a position to judge the matter for itself, in reliance on what was said by Bergin J (as her Honour then was) in Capital Securitisation Limited v Jammal [2007] NSWSC 1073 at [98], the position in the present matter does not seem to me to be nearly so clear. A finance charge of 3% per month does not leap out as being obviously a penalty. As McDougall J said in Arab Bank at [74]: Mere disproportion between the stipulated sum and the possible damage is not enough to indicate "penalty"; the disproportion must be such that it is unconscionable for the lender to rely on the stipulation (Kiefel J at [54], Gageler J at [164]; Keane J at [221], [240, [279]).
Two other matters should be mentioned. The first is that it is clear that Bekaa bore the evidentiary and persuasive onus on the matter: Paciocco at [167]. Secondly, because the matter must be determined at the time the contract was made, it is significant that this was a contract made between two commercial enterprises where the customer sought and obtained variations to other aspects of the contract, including amounts payable under the very clause now challenged. In that regard, in Arab Bank, Sackville AJA said at [7]: The present case is a very good example of a contractual arrangement that should not attract the penalty doctrine. A corporation, apparently perfectly capable of acting in its own interests, borrows a large amount of money from a bank to assist with a commercial undertaking. The borrower agrees to pay additional interest in the event of default, for the period the default continues. There is no suggestion that the borrower has been misled or subjected to improper or unfair tactics.
In my opinion, the Magistrate was correct to reject Bekaa's arguments on penalty.
I would reject these grounds of appeal.

Bekaa Dairy Products Pty Ltd trading as Ultimate Dairies v Sepak Industries Pty Ltd

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