Di & Li Australia Pty Ltd v Jin Dun Pty Ltd

Di & Li Australia Pty Ltd v Jin Dun Pty Ltd - [2014] VCAT 349 - VCAT 2014 case summary — Zoe

The underground works include five underground fuel storage tanks. These tanks supply fuel to a number of petroleum bowsers, which ultimately deliver fuel to the Tenant's customers. It is common ground that after October 2010, an unexpected quantity of water entered three of those five tanks as a result of defects in or associated with the tanks. According to the Tenant, this resulted in damage to the fuel delivery equipment and vehicles owned by its customers. Consequently, the Tenant claims that it has suffered significant loss and damage from October 2010 and continuing, in the nature of loss of profits, loss of goodwill, liability in respect of damaged vehicles and other costs associated with the repair of the fuel tanks and associated equipment. The total amount claimed by the Tenant is $1,194,585.
Numerous folders of documents were produced during the course of the hearing which chronicles many of the factual events leading to the isolation or temporary isolation of the defective fuel tanks and attempts made by the Tenant and Landlord to rectify those fuel tanks. Initially, it was believed that the water ingress arose as a result of a breach in the tank lining. This belief was founded upon an opinion expressed by the Joined Party, following an investigation by it of the problems experienced at the Premises. Ultimately, that proved to be inaccurate, with further technical investigation revealing that the problems related to defective or worn O-Rings and associated pipework. Regrettably, the initial diagnosis led the parties down a certain path of rectification which proved fruitless and ultimately wasted considerable time and effort. Consequently, and as a result of that erroneous diagnosis, the Landlord and Tenant each claimed against the Joined Party. Those claims were settled prior to the first day of hearing. As a result, orders were made by consent on the first day of hearing that the claims made against the Joined Party be dismissed.
Given the consent orders dismissing the claims against the Joined party, much of the documents that were to be relied upon, including much of the technical expert evidence, no longer became materially relevant as the issues were primarily confined to an assessment of damages.

[5]

The Landlord concedes that it is liable, under s 52 of the Retail Leases Act 2003, to keep the underground fuel tanks in such repair as is commensurate with their condition as at the commencement of the Lease. However, the Landlord disputes that the Tenant is entitled to the loss and damage claimed by it. The Landlord contends that notwithstanding disruption to the Tenant's business as a result of repair work to the fuel tanks, it has not suffered (or proven that it has suffered) the loss and damage claimed by it. It further contends that its liability (if any) only extends to losses incurred and proven up until 31 August 2012, being the date that the Lease was renewed. After that date, it claims that any defects in the fuel tanks were patently obvious and it therefore had no obligation to effect repairs under s 52 of the Retail Leases Act 2003, given that its obligation to repair was limited to repairing to a condition commensurate with the condition of the fuel tanks as at the date of renewal.
It further contends that the Tenant is partly to blame for any loss and damage it has suffered. In particular, the Landlord submits that it was incumbent upon the Tenant, as part of its ordinary business operations, to regularly check the fuel tanks for water content as it is (and was) common knowledge that condensation would always collect at the bottom fuel tanks. It contends that prudent operators of fuel stations must always check all fuel tanks on a weekly basis to ascertain the level of water (which is heavier than petroleum) sitting at the bottom of the tanks, so as to avoid any water being drawn into the fuel turbine turrets (which sit approximately 150 mm above the bottom of the fuel tanks). According to the Landlord, had the Tenant regularly undertaken that task, as recommended by the applicable Australian Standard (AS 4897-2008), it would have averted contaminated fuel entering the fuel dispensing equipment and ultimately causing damage to customers' vehicles.

[26]

Mr McKay submitted that in enacting s 52 in combination with s 94 of the Act, Parliament has evinced a clear intention to lay down a compulsory and uniform standard of maintenance for all retail leases in Victoria. He argued that the legislature has affected a compromise between the competing interests of landlord and tenant; and it is not open to the parties to a particular lease to alter that compromise by forming a contradictory agreement. Mr McKay submitted that the combined effect of Clause 6.4 and 1.1 are plainly contradictory to the intent of s 52 of the Act and are, therefore, void to the extent of that inconsistency.
In my view, s 52 does not prohibit the parties from agreeing to extend the Landlord's obligations to repair or maintain its installations. The situation might be different if s 52 was expressed as a provision limiting a landlord's obligation to maintain plant and equipment to a condition consistent with its condition when the lease was entered into. However, the provision does not expressly limit a landlord's obligations but rather, imposes what I consider to be a minimum obligation on a landlord.
There is nothing inconsistent or contrary to s 52 for the parties to increase that obligation and in the present case, it made eminent sense for the Landlord to continue to have that obligation upon renewal, given that it held the reversionary interest in the plant and equipment. Further, it is not the case that s 52 is devoid of any limitation. In particular, sub-section (3) sets out various circumstances which limit its operation. Those circumstances do not include limiting the comparator to the commencement of the Lease. In my opinion, it was open for Parliament to have limited the operation of s 52(2) of the Act to the current term by stating words to the effect that a lease is not to include a term which requires the landlord to maintain plant and equipment, other than in a condition commensurate with the condition of the plant and equipment at the commencement of the lease. However, the section is not expressed in such prohibitory terms, nor is it expressed to indicate any intention on the part of the legislature to 'cover the field' in respect of a landlord's repair liability.
Consequently, I do not accept that the combination of Clauses 6.4 and 1.1 are rendered void by virtue of s 94 of the Act. That being the case, I will assess the Tenant's claim for loss of profit from FY2010, which includes its claim for loss of profit extending into the second term of the Lease.

[27]

The Tenant relied upon the expert evidence of Mr David Chin, forensic accountant, to substantiate its claim for loss of profits and loss of goodwill. Mr Chin produced three reports which he adopted as his evidence in the proceeding. The three versions of the reports reflect differing instructions and source documents provided to Mr Chin, which caused him to refine and amend his initial report. In particular, Mr Chin's first report relied upon documents which are headed Product Sales Analysis ('the PSA's'). Those documents provided data as to the quantity of the particular type of petroleum on hand at the conclusion of the month, the quantity of petroleum sold in the month, the cost of petroleum sold and the profit margin on sales. The same figures are provided for confectionery and other categories of goods for sale by the Tenant. However the PSA's were incomplete, with sixteen of the monthly PSA's missing. As a consequence, Mr Chin reconstructed missing data by looking at the total yearly sales figures contained in the Tenant's financial statements.
Mr Chin's first report was superseded on 19 September 2013 with his second report. In that report, Mr Chin tried to fill the gaps left by the missing PSA's with data from another set of documents referred to as the daily books, and with PSA's that were belatedly retrieved from the Tenant's computer system.
As highlighted by Mr McKay, there were discrepancies between the data recorded in the internal documents furnished by the Tenant, compared with the data recorded in the financial statements forming part of its tax returns lodged with the Australian Taxation Office. He submitted that in 2009, the revenue recorded in the internal documents exceeded the revenue recorded in the Financial Statements by $69,899. In 2010, the difference was $7,425. In 2011, the difference was $57,077 and in 2012, the difference was $349,013.
During cross-examination, Mr Chin was unable to provide any definitive explanation as to why such a discrepancy existed. Mr McKay also pointed to differences in the documents recording product costs. He submitted that from 2009 until 2012, the product costs recorded in Mr Chin's first report totalled $26,340,542. However, the Cost of Sales recorded in Mr Chin's second report totalled $26,831,475. Moreover, he argued that the sets of figures contradicted those contained in the financial statements lodged with the ATO ('the Financial Statements'). Again, neither the Tenant nor Mr Chin was able to provide any satisfactory explanation as to how such a discrepancy occurred.
Further documents were belatedly produced by the Tenant during the hearing of the proceeding. These documents were referred to as monthly statements. It was said that these monthly statements were used by the Tenant's accountant to prepare the Financial Statements used in the preparation of the Tenant's tax returns. However, the data set out in the monthly statements was, again, inconsistent with the data in the Financial Statements. There was no satisfactory explanation as to why this was so.
On 30 September 2013, the Tenant tendered a third report of Mr Chin which he again adopted as his evidence in the proceeding. This report recalculated the Tenant's claim up to FY2012 using the Sales and Cost of Sales figures contained in the Financial Statements. However, as the 2013 tax return was yet to be completed, Mr Chin was unable to use Financial Statements in respect of that year. Consequently, the 2013 financial year was reconstructed using Business Activity Statements and PSA's. Again, this was not without incident as the sales figures in the PSA's for the March quarter differed from the figures in the Business Activity Statements by approximately $120,000. Mr Chin was unable to satisfactorily explain this discrepancy, although he suggested that it might have been due to a timing issue.
As I have already indicated, the Landlord's defence rests partly on the ground that the Tenant has failed to provide sufficient evidence to enable the Tribunal to quantify the loss claimed. Mr McKay referred to the High Court judgment in The Commonwealth v Amann Aviation Pty Ltd,[8] as authority for the proposition that the plaintiff in a claim for contractual damages must prove both the fact and the amount of any loss it has suffered.
Mr McKay also referred to the judgment of Brooking J in JLW (Vic) Pty Ltd v Tsiloglou,[9] where his Honour, referring to FAI General Insurance Co Ltd v RAIA Insurance Brokers Ltd,[10] stated:

[30]

Mr McKay submitted that Mr Chin had assessed loss simply on gross profit figures and failed to have regard to the overheads connected with the business and the effect on the overall profitability of the business. He argued that this methodology was not sustainable as a matter of law. He referred me to Bacchus Corp Pty Ltd v Grapes of Australia Management Ltd,[12] where Habersberger J found that net profit figures should be used to quantify a loss of business profits claim arising from a breach of contract. He submitted that the best result open to the Tenant was to have a loss of profit claim assessed on the basis of the calculations supplied by the Landlord's forensic accountant, Mr Michael Rosner. Mr Rosner also prepared an expert report which he adopted as his evidence in the proceeding.
In Mr Rosner's supplementary report dated 29 September 2013, he calculates the Tenant's projected net profit based on the assumption that the Tenant's FY2010 net profit of $13,443 was maintained over the period from FY2011 to FY2013. Mr Rosner then makes a direct comparison between projected profits of $13,443 for each of the financial years 2011, 2012 and 2013 with the net losses sustained by the Tenant over the same period. This calculation yields a difference to actual figure of $288,929. In other words, had the Tenant been able to maintain a net profit of $13,443 for the financial years 2011, 2012 2013, it would have been $288,929 better off than what actually occurred.
In my view, the calculations made by Mr Rosner are too simplistic and not justified simply on the basis that there are discrepancies with internal documents produced by the Tenant, compared with data furnished to the ATO. Further, I do not accept that Mr Chin's methodology ignores overheads or is based solely on gross profits.[13]
Mr Chin has calculated projected net profit and loss based on two scenarios. The first scenario assumes that there is no growth. Therefore, his calculations assume that in the financial years 2010, 2011, 2012 and 2013 gross sales or revenue would have remained static at $8,208,017. Mr Chin then calculated the gross profit margin for the financial years 2010 to 2013 based on actual data sourced from the Financial Statements for the financial years 2010, 2011 and 2012 and a combination of Business Activity Statements and PSA's for FY2013.[14] Using that data, he calculated that the gross profit margin ('the GPM') for the financial years 2010 to 2013 were as follows:

[33]

From the Gross Profit revenue figures, actual expenditure was then deducted. The amount of expenditure for the financial years 2010, 2011 and 2012 was derived from the Financial Statements lodged with the ATO. The expenditure for FY2013 was an estimate made by Mr Chin based partly on averaging the previous five years of overhead expenses and adjusting that figure for rent indexation and depreciation. The projected net profit was then compared with the actual net profit over the same years in order to calculate the difference between the actual profit or loss and the projected profit or loss, had Sales continued at $8,208,017 up to and including FY2013 ('the Difference to Actual').
Essentially, there are three grounds of criticism raised by Mr Rosner against the methodology adopted by Mr Chin. First, he casts doubt on the 'actuals' data used by Mr Chin, given the discrepancies between the PSA's, Monthly Statements and Financial Statements. As I have already indicated, I am of the view that the Financial Statements used in conjunction with the Business Activity Statements represent the best evidence of revenue and expenditure. Therefore, I reject that criticism.
Second, he suggests that the methodology used by Mr Chin is based on gross profits, rather than net profits. In that regard, he criticises the use of actual expenditure recorded in the Financial Statements because it cannot be assumed that this expenditure is static and unaffected by revenue. In response, Mr Chin opines that the Financial Statements show little fluctuation in the expenditure incurred by the Tenant prior to 2010 to the period after 2010. Mr Chin therefore concludes that the expenditure (which does not include the Cost of Sales) remains relatively fixed, irrespective of revenue generated by sales. Indeed, he observes that the fluctuation from year to year is less than 10% and in some years the expenditure is higher than other years, even though sales were less. In my view, the use of actual expenditure figures is appropriate. In that respect, I accept that the fluctuation in expenditure from year to year is not significant and unlikely to be materially linked or proportional to Gross Sales revenue.
Third, Mr Rosner disagrees with the percentages of GPM used by Mr Chin in his calculations. According to Mr Rosner, the projected GPM for the financial years 2011, 2012 and 2013 should be the same GPM as calculated for the model year of 2010. He gave the following evidence:

[35]

In response, Mr Chin said that it was not appropriate to simply extrapolate the GPM of 2010 into future years because many factors influence the GPM from year to year. For example, the profit margin on fuel may fluctuate from year to year. Consequently, he opined that the most accurate depiction of the projected GPM is to use the actual Cost of Sales figures as stated in the Financial Statements, even though sales may have declined as a result of the contamination. In other words, he did not believe that the actual GPM calculated for the financial years 2011, 2012 and 2013 and based on actual Sales and Cost of Sales figures would alter significantly if there was no disruption to the Tenant's business.
In my view, Mr Chin's evidence on this point is more compelling. In particular, it is likely that the Tenant's profit margin would fluctuate given the vicissitudes of the retail fuel market. That being the case, it would be unrealistic to maintain the same percentage of GPM from year to year.
During the course of the hearing, the expert witnesses gave their evidence concurrently, in addition to giving evidence in the traditional manner. While the experts gave their evidence concurrently, Mr Rosner criticised the use of the PSA's as a reliable source of data for calculating Sales in FY2013.[18] He said that given the discrepancies between the PSA's, the Monthly Statements and the Financial Statements, he had reservations as to their accuracy. Mr Chin responded by indicating that the PSA's were the best documents available to him, given that the Business Activity Statements had only been prepared for the first three quarters of that financial year.
During re-examination of Mr Chin, Mr Stirling suggested that another method of calculating the gross Sales for FY2013 was to add the total sales recorded in the three Business Activity Statements, dividing that figure by nine (the number of months covered by those BAS)[19] and then multiplying that figure by twelve, in order to extrapolate the nine months of data recorded in the Business Activity Statements into a full financial year. Mr Chin agreed that this was an acceptable alternative method of calculating the Sales for the FY2013. During re-examination, Mr Rosner conceded that the methodology suggested by Mr Stirling was an appropriate way to deal with any discrepancy between the PSA's and the BAS.
In my opinion, the methodology suggested by Mr Stirling and supported by both Mr Chin and to some extent, Mr Rosner, is the most reliable way to determine the aggregate Sales for FY2013. That methodology reduces the net loss for 2013, which was initially recorded as ($204,129) in Mr Chin's most recent report down to ($177,226), calculated as follows:
- (a) Sales recorded in first three BAS ($3,672,497) x 12 = $4,896,663

[47]

Mr McKay submitted that the Tenant must prove its losses were caused by the Landlord's breach of the Lease and not by some other intervening cause. He argued that a significant part of the loss suffered by the Tenant was not caused by the Landlord's failure to maintain the plant and equipment but because the Tenant failed to stock its highest selling product, unleaded petroleum, at all times after the water ingress issues manifested. He submitted that prior to the water ingress problems arising; unleaded petroleum sales comprised 70% of the Tenant's sales of petroleum products (excluding diesel and LPG).
According to Mr McKay, the Tenant's inventory showed that Unleaded 91 petroleum was not being sold for substantial periods of time throughout the period of the water ingress. In his closing submissions, he stated that Unleaded 91 petroleum was not sold for 317 days up until the Tribunal reserved its decision, which occurred approximately 1064 days after the water ingress problems began. Mr McKay submitted that the failure to sell unleaded petroleum therefore continued for 30% of the time that the water ingress problems were present. Mr McKay argued that Unleaded 91 petroleum could have been sold from the unaffected Tank 5, or such other tanks that were operational from time to time and that it was relatively inexpensive to change over the tanks to effect that outcome.
In my view, the difficulty with the argument advanced by Mr McKay is that although it may be possible, with the benefit of hindsight, to map out a procedure for swapping tanks so as to minimise disruption to the sale of Unleaded 91 petroleum, in reality the circumstances in which the Tenant found itself made that procedure either impracticable or too difficult to reasonably adopt. This point is made clear when one examines the history of this dispute. In particular, there are five tanks which store fuel:
- (a) Tank 1, which has a capacity of 24,000 litres only stores diesel fuel. It has never had any problems relating to water ingress.
- (b) Tank 2, which has a capacity of 30,000 litres, was originally only used as a storage tank for Unleaded 91 petroleum. It did not have any fuel lines connected to it.
- (c) Tank 3, which has a capacity of 55,000 litres, stored Unleaded 91 petroleum for supply to the Tenant's customers.
- (d) Tank 4, which has a capacity of 53,000 litres, stored Ultimate 98 unleaded petroleum for supply to the Tenant's customers.
- (e) Tank 5, which has a capacity of 30,000 litres, stored Premium 95 unleaded petroleum.
According to QiQi Wang, the manager of the Tenant's business, in late October or early November 2010, several customers complained about their vehicles being damaged after purchasing contaminated Unleaded 91 petroleum. At that time, Tank 3 was the only tank servicing the Unleaded 91 fuel bowsers. The Tenant immediately stopped selling Unleaded 91 petroleum. Soon after, Ms Wang informed Mr Fei, the representative of the Landlord, by telephone that there had been reports of water in Tank 3. She told Mr Fei that he would need to repair it. According to Ms Wang, she did not hear from Mr Fei so on 5 November 2010, she retained Leighton O'Brien Field Services Pty Ltd ('Leighton O'Brien') to remove the water and contaminated petroleum from Tank 3. Investigations were subsequently carried out by Leighton O'Brien, following which it recommended, in its report dated 24 November 2010, that:

[52]

Although the letter stated that the Tenant was unable to operate its business, this was, in fact, incorrect as fuel other than Unleaded 91 petroleum was still being sold. Nevertheless, the urgency of the situation was certainly highlighted in the above correspondence. According to Ms Wang, sometime in January 2011, Mr Fei told her that a repair person could not repair Tank 3 because of its capacity. On 17 March 2011, Leighton O'Brien reported that Tank 3 had to be decommissioned. According to Ms Wang, soon after that recommendation was made, Mr Fei told her that fuel lines would be connected to Tank 2, to enable that tank to service the Unleaded 91 fuel bowsers.
On 24 March 2011, Leighton O'Brien transferred the Unleaded 91 petroleum from Tank 3 and Tank 2 into Tank 5 (which had up until that point stored Premium 95 unleaded petroleum). On 26 May 2011, Footco Solutions attended the Premises to undertake Tank conversion contract services on Tank 5, so that the Tenant could sell Unleaded 91 petroleum from that tank. This meant, however, that Tank 5 was no longer available to store Premium 95 unleaded petroleum.
Although a significant period of time was lost between November 2010 and May 2011 before Tank 5 was eventually utilised to sell Unleaded 91 petroleum; that delay is explicable by the fact that ongoing investigations were being conducted on Tank 3, with a view to diagnosing the cause of water ingress into that tank. In my view, it was reasonable for the Tenant to await further advice as to the future of Tank 3 before sacrificing its sale of Premium 95 unleaded petroleum in order to sell Unleaded 91 petroleum. I do not regard that delay as a failure to mitigate or that it was the cause of the Tenant's loss over that period of time.
Despite Mr Fei having raised the issue of undertaking work to commission Tank 2 as an operating tank, that work was not completed by the Landlord until June 2011. According to Ms Wang, the Tenant had started selling Unleaded 91 petroleum from Tank 2 from about 8 June 2011. However, in late October or early November 2011, water was also discovered in Tank 2. Further investigations continued and repairs were undertaken which ultimately resulted in the use of Tank 2 resuming after June 2012. However, further water was subsequently discovered in that tank in August 2012. Consequently, no Unleaded 91 petroleum was sourced from that tank from September 2012.
Tank 4 stored Ultimate 98 unleaded petroleum. In October 2011, water was discovered in that tank. This was reported to the Landlord on 12 October 2011. However, it was not until 20 February 2012 that the Landlord advised the Tenant that the tank was fit for purpose. However, as a result of the water contamination, the water meters were damaged. Further works were then carried out until the tank and associated equipment were eventually repaired. The Tenant recommenced selling Ultimate 98 unleaded petroleum from that tank after December 2012.
In my view, the evidence of Ms Wang demonstrates that the circumstances which befell upon the Tenant made it extremely difficult, if not impossible, to simply swap tanks in order to maximise the sale of Unleaded 91 petroleum and thereby minimise the loss occasioned by it. In that sense, it is common ground that during the period November 2010 until the commencement of this proceeding, at least one or more of the fuel tanks were not operating. In Tuncel v Renown Plate Co Pty Ltd[22] the Full Court of the Victorian Supreme Court discussed the concept of mitigation and accepted the three rules formulated in McGregor on Damages (12th edition) as follows:

[67]

An updated list of all claims allegedly paid by BP was provided to the Tenant under cover of email dated 11 September 2013. The aggregate amount allegedly paid to customers is $146,997.01. That list provides the date that the third-party claims were received, the amount claimed, a description of the incident, which in every case was described as water, the name of third party customer and the amount paid.
There is no evidence before me that any amount has been paid by the Tenant in response to the demand made by BP, nor is there any evidence that BP has commenced any proceeding against the Tenant. In addition, there is no evidence from any representative of BP verifying that the list of claims allegedly paid by BP is accurate or that it constitutes a business record or other document from BP.
Mr McKay submits that the failure to adduce evidence from BP verifying the claims allegedly made against it is fatal to the Tenant's claim under this head of damage. Mr McKay submits that to the extent that BP was under some legal obligation to compensate customers, the nature and scope of this obligation was not the subject of evidence. He contends that this becomes important when one considers the contractual basis upon which the Tenant asserts that it has incurred a liability to BP. Mr McKay further submitted that it is unclear whether the payments made by BP, if made, were part of a voluntary public relations exercise designed to maintain BP's brand, or were made to discharge a legal obligation owed by BP to the customer. Mr McKay argued that when a legal document requires a person to indemnify another person against 'claims' of a particular type, the word 'claims' does not encompass a voluntary payment by that second person. It refers to claims of legal liability. Consequently, he contends that the Tenant has not proven that it has incurred any liability to reimburse BP for the alleged customer payments.
Mr Stirling argued that it is of no consequence whether the Tenant is liable to BP under the agreement between it and BP because it has a right to claim damages against the Landlord at common law in any event. Mr Stirling contends that the essential elements of the claim are made out; namely:
- (a) there has been a breach of the Lease by the Landlord;
- (b) that breach of the Lease has directly caused contamination to customer vehicles;
- (c) the customer would have relevant legal claims as against both the Tenant as the supplier of the fuel product and as against BP, which is the brand owner of the service station; and
- (d) the vehicles have been rectified by BP and its cost.
Mr Stirling submitted that there is no legal defence open to the Landlord to resist the BP claim.
I accept that a mere liability is a loss that can give rise to recovery, even if the damage consequent upon a breach has been paid by a third party.[25] However, the difficulty with the claim is that there is no direct evidence establishing that BP has made any payment to the customers of the Tenant or that it or the Tenant has any contingent liability. The evidence is indirect and is in the form of a schedule emailed to the Tenant by Mr Smale of BP. Regrettably, no person from BP gave evidence to prove that document. Moreover, there is no evidence as to what repairs were actually carried out to the customers' vehicles and whether those repairs were justified. Similarly, it is not known whether the amounts allegedly paid to the customers were commensurate with the reasonable cost of repair or, as submitted by Mr McKay, simply ex gratia payments made to protect the BP brand. Therefore, I am not satisfied that, on the balance of probabilities, the amount allegedly claimed by BP represents an accurate record of the cost to repair vehicles damaged by contaminated fuel sourced from the Tenant's premises.

[96]

There is no evidence from Ms Wang that she personally undertook any water paste dipping. She said that Alan Wang (no relation), the manager of another BP store affiliated with the Tenant's business, had carried out the water paste dipping and that he had prepared a set of hand written dipping records. Initially, she said that the hand written dipping records were the records recorded in a red folder entitled Fuel Dips. This document was tendered in evidence ('the Daily Dipping Records').[30] However, she later said that the Daily Dipping Records were in fact daily dipping records prepared by her staff members. Indeed, it appears that the Daily Dipping Records prepared by her staff members simply relate to daily fuel levels, rather than measuring the level of water in each tank. Ms Wang then said that a different set of records had been created by Alan Wang. Those records were also produced in evidence.[31] They commence in July 2011 and are in a slightly different format to the Daily Dipping Records. Those records are also entitled Daily Fuel Dips but include an additional column entitled Fuel Condition. In some instances, notations were marked next to particular dates under the column Fuel Condition. According to Mr Stirling, these notations indicated that certain of the tanks had failed. Regrettably, Ms Wang was unable to elaborate further on the meaning to be attributed to the notations. In fact, she conceded that she did not see Mr Wang conduct any water paste dipping or that she had discussed the results of the dipping with him.
Regrettably, Mr Wang was not called to give evidence in the proceeding. Apparently, he was unable to be located, although, according to Mr McKay, it subsequently transpired that the Tenant's legal representatives had been communicating with him. Moreover, the dipping records allegedly prepared by Mr Wang did not specifically state the precise water level each day. This factor weighs against a finding that the records produced in evidence were indicative of water paste dipping having taken place on a regular basis.
During cross-examination, Ms Wang conceded that her staff had prepared the Daily Dipping Records during the night shift and that Mr Wang had attended the premises each day in the afternoon to conduct his own dipping records. However, when comparing the two dipping records, each record states the same amount of fuel. This is curious, given that one would assume that fuel sales during the course of the day would deplete the amount of fuel in the tanks from when they were measured at night by staff members to when they were measured in the following afternoon by Mr Wang. Ms Wang was unable to explain how the quantity of fuel recorded in both dipping records was the same if the data was collated at different times or days.
In my view, the evidence of Ms Wang that there was regular water paste testing is questionable. Indeed, she conceded that she had been in China during the second half of 2011 and in those circumstances; I question the reliability of her evidence concerning this issue. The second set of dipping records does not, in my view, confirm that water paste dipping was conducted by the Tenant on a regular basis. Given the importance of this particular issue, it is curious that Mr Wang was not called to give evidence and verify that he undertook regular water paste dipping. Therefore, as it presently stands, no witness called to give evidence was able to say that they actually witnessed water paste dipping ever having taken place over the relevant period. In my opinion, had water paste dipping taken place on a regular basis, the consequential damage caused to customer's vehicles would have been avoided.
Given the above, I find that it is more than likely that although staff members of the Tenant undertook regular fuel dipping, specific water paste dipping did not occur on a regular basis. Having regard to the evidence of Mr Wilde, I consider this to be an essential component in the operation of the Tenant's business and should have been undertaken at least once a week prior to the first customer complaint and daily thereafter.

[113]

Consequently, I am of the view that it is unlikely that there was a significant and sudden inundation of water into Tank 2. It is more likely than not that the inundation of water into Tank 2 occurred gradually, with the effect that its impact was not recognised through the daily fuel dipping records. Hence, the need to conduct regular water paste dipping, so as to accurately monitor the rising level of water in the fuel tanks. Regrettably this was not done during the period between Mr Li leaving the business and prior to the Tenant receiving the first of the customer complaints; and in all likelihood, not done with any regularity even after the customer complaints were first received.
That being the case, I find that the failure to undertake water paste dipping on a regular basis is an intervening act that broke the chain of causation between the Landlord's failure to maintain the tanks and the damage caused to customers' vehicles.
Although, the defects in the fuel tanks constituted an essential condition of the loss, this did not, of itself, constitute the primary cause of that loss.[33] In particular, the evidence of Mr Wilde was that it was common for water to collect at the bottom of the fuel tanks. That was why the turbine turrets were set approximately 150 mm above the bottom of the tanks. That is also why the applicable Australian Standard requires regular water paste dipping in order to monitor the water levels. In that sense, the risk of water being drawn up into the turbine turret and then ultimately reaching the end user is a risk that always exists, notwithstanding the fact that the defects in the fuel tanks increased the propensity for water to be introduced into the fuel tanks. However, it was not, in my view, the cause of the damage to customers' motor vehicles. That was caused by a failure on the part of the Tenant to properly monitor water levels in the tanks in accordance with the applicable Australian Standard. In Medlin v State Government Insurance Commission,[34] the joint judgment of Deane, Dawson, Gaudron and Toohey JJ discussed the relevant principles of causation. Although that case concerned a claim in negligence, the commentary stated below is equally applicable to the law of contract, in the context of this case:

At a glance

Court

Decision date

Before

Source

Judgment (142 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (3)

Di & Li Australia Pty Ltd v Jin Dun Pty Ltd (Retail Tenancies) [2014] VCAT 349 (31 March 2014)