Johnson Tiles Pty Ltd (Barrett Burston Malting Co Pty Ltd) v Esso Australia Pty Ltd [2003] VSC 211

6. On 25 September 1998, an explosion occurred at a natural gas treatment plant managed, supervised and operated by the defendants, Esso Australia Pty Ltd and Esso Australia Resources Pty Ltd ("Esso") at Longford. As a result of the explosion, the gas supply was severely curtailed on that day and by 26 September 1998 the gas supply to most of the gas customers was terminated.

9. Barrett Burston operated four plants in this State, manufacturing malt from barley. From about 5.00 p.m. on 25 September 1998, Barrett Burston was unable to continue its business because of the cessation of the gas supply. The gas supply was restored at about 1.48 a.m. on 5 October 1998. As a result of the gas stoppage, Barrett Burston suffered damage.

12. On 28 September 1998, a group proceeding was instituted in the Federal Court of Australia. On 17 May 2001, Merkel J transferred the proceeding to this court pursuant to s.5(4) of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth).

15. A separate proceeding in this court was commenced on 26 April 2001. I ordered a stay of the cross-vested Federal Court proceeding, and the proceeding in this court was the subject of a trial of a number of common questions of fact and law.

18. On 20 February 2003, I published my reasons. See Johnson Tiles Pty Ltd and Ors v Esso Australia Pty Ltd & Anor [2002] VSC 27.

21. The group proceeding considered and determined issues of the duty of care owed by Esso to gas customers and others, negligence, whether the two plaintiffs and any group members who gave evidence suffered some loss as a result of the interruption of the gas supply, and whether the negligence was the cause of any damage suffered by the various gas customers due to lack of supply.

24. The determination of the group questions established the following -

(i) that Esso owed a duty of care to some gas customers to avoid property damage;

(ii) that the interruption to the gas supply from the Esso Longford plant was caused by the negligence of the defendants, their employees and their agents;

(iii) that some claimants who gave evidence in the proceeding suffered compensable loss as a result of the interruption to the gas supply;

(iv) that the negligence of Esso was a cause of the damage suffered;

(v) that the business user gas customers were entitled to recover damages for property damage caused by the gas stoppage and any consequential economic loss.

30. The court held that Esso did not owe a duty of care to avoid purely economic loss.

34. Barrett Burston was not a party to the proceeding. Evidence was called on its behalf and the court determined that it suffered compensable loss. Another claimant, Nando's Australia Pty Ltd ("Nando's") also gave evidence at the trial in the group proceeding and the court held that it too suffered compensable loss.

37. The group proceeding did not decide issues of quantum and contributory negligence, and question 6 was couched in terms which left for a further hearing any issue concerning causation which was relevant to any issues peculiar to a particular group member. It follows that any claimant not a party to the proceeding had to bring its own claim for compensation. Two parties have to date, and an advertisement will be published to invite others to make claims. The two claimants are Nando's and Barrett Burston.

40. Section 33R of the Supreme Court Act 1986 provides -

"33R(1) In giving directions under s.33Q, the court may permit an individual group member to take part in the proceeding for the purpose of determining a question that relates only to the claim of that member.

(2) In such a case, the individual group member, and not the plaintiff, is liable for costs associated with the determination of the question."

47. On 16 June 2003, I made an order pursuant to that section permitting Nando's to take part in the proceeding as an individual group member. Evidence was adduced on its behalf which was not contested and I informed the parties I was prepared to make an order in Nandos' favour, subject to the question of damages in the nature of interest pursuant to the Act.

50. As a result of the cessation of the gas supply, barley that was in the process of being manufactured into malt was stopped in the production run, was spoiled and had to be disposed of. Barrett Burston claimed four heads of damage. They were the cost of the spoiled barley, the external costs of disposing of it, the internal costs of removing the spoiled barley from the production line and loss of profit in the disposed product.

53. Consistent with the findings in the group proceeding, Barrett Burston was entitled to recover compensation for any property damage suffered as a result of the negligent conduct of Esso, and any consequential economic loss flowing from that property damage. The economic loss amount claimed is $72,801.

56. Barrett Burston adduced evidence by means of witness statements from a number of witnesses which supported its four heads of claim. Esso and the other parties did not contest any of the factual matters, none of the witnesses were cross-examined, and the parties agreed on the quantification of the damage attributed to each head claimed.

59. The only area of dispute between the parties related to the claim for loss of profit consequent upon the property damage.

62. Having considered the evidence adduced by Barrett Burston, I am satisfied that Barrett Burston has established its case in respect of the first three heads of damage claimed. It is entitled to the following damages -

66. The fourth head of damage is the loss of profit which would have been made on the spoiled barley which had to be disposed of. All told there were about 3,398 tonnes of spoiled barley. A small amount was sold and the loss was calculated at $791,465. There were cartage and tip fees involved in transporting and disposing of the spoiled barley and those costs were calculated at $208,384. The internal costs comprised Barrett Burston employees removing and disposing of the spoiled barley in the various plants. These costs, which were mainly labour costs, were calculated at $28,500.

69. As I have stated, Esso and the other parties who appeared did not contest any of these claims.

72. The dispute concerned the consequential loss suffered by reason of the fact that the barley was spoiled and had to be disposed of, and accordingly could not be sold for profit.

75. The Esso argument is simply put. Barrett Burston is entitled to economic loss consequent upon property damage but is not entitled to purely economic loss. Accordingly, it is clear that it is not entitled to recover damages for any loss of profits from its inability to produce malt during the period when the gas supply was unavailable, or any expenses incurred during that period. I agree. The evidence revealed that the barley going through the production process was earmarked for specific contracts which had been entered into prior to 1 April 1998. The malt year was from 1 April 1998 to 31 March 1999. The majority of contracts for the supply of malt were entered into prior to 31 March 1998 for production in the following 12 months. Eighty per cent of Barrett Burston's total production was the subject of contracts made prior to the commencement of the malt year. The balance of the production was sold on the open market. Barrett Burston conducted its plants seven days a week, 24 hours per day, for most of the year. When Barrett Burston resumed production in October 1998 the first production runs were used to fulfil the contracts which had been unsatisfied by reason of the gas stoppage.

78. Esso submitted that since the barley that had to be disposed of was allocated to particular contracts, and the fact that when the gas supply and production resumed, the first contracts met were in fact the ones which were to be fulfilled by the production which had been interrupted, no damage was suffered by Barrett Burston because the particular contracts had been met. That is, Barrett Burston did not suffer any loss in respect of the contractual arrangements for that malt year. Esso submitted that the true characterisation of the loss was that Barrett Burston had less malt available to sell on the open market as part of its 20 per cent production which had not been earmarked for forward contracts. It was submitted that that loss was purely economic loss, namely, the lost opportunity to derive income from the additional malt which should have been available for the market sales. It followed, therefore, that the loss was purely economic loss, and accordingly Barrett Burston was not entitled to any loss of profit consequent upon property damage.

82. At paragraphs 141-149 of my reasons for judgment, I discussed Barrett Burston's manufacturing business. The evidence adduced at trial related to the Richmond plant. There were three other plants operating at the relevant time in this State.

85. There were two issues in the group proceeding trial concerning damages. The first is raised by question 5 which was in these terms -

"5. Did the first and second plaintiffs and any group members who gave evidence as sample group members, suffer some loss as a result of the interruption or cessation of the gas supply on or after 25 September 1998 (unquantified)?"

"Barrett Burston Malting Co Pty Ltd and Nando's Australia Pty Ltd suffered compensable loss; the plaintiffs and other group members who gave evidence did not suffer compensable loss."

93. The final question raised the issue of causation and it was noted that any issues relevant to a particular group member were to be left for future consideration. The court answered the causation issue raised as follows -

"Save that Esso's negligence was a cause of damage suffered by Barrett Burston Malting Co Pty Ltd and Nando's Australia Pty Ltd, no."

97. My reasons, at paragraphs 620-627, deal with Barrett Burston's claim. It is convenient to repeat what I said -

"3. Barrett Burston The gas supply to Barret Burston's factory at Richmond was turned off on the afternoon of 25 September 1998 and was not turned back on until the early morning of 5 October 1998. As a result of the cessation of production on that day, the barley, which was going through the plant being processed to produce malt, was disposed of before it went rotten. Barrett Burston lost the value of the malt in the production process and is entitled to recover the value of that barley. In my opinion, that would be property damage. See the Spartan Steel case and Muirhead v Industrial Tank Specialities ("Muirhead's case").[1] Any expenses incurred in respect of the lost production would also be recoverable as consequential upon physical damage. Barrett Burston also claims the loss of profit it would have received on the sale of the damaged batch that was thrown away. See the Spartan Steel and Muirhead cases, supra. It is entitled to the profit. The evidence, which I accept, established on the balance of probabilities that the discarded malt would have been sold on the spot market and at a profit. Quantification is another issue. I am satisfied it lost profit. The consequential losses included the transport and tipping fees for the rejected barley and malt. In addition, Barrett Burston lost the profit it would have made on the sale of malt it would have produced during the period of the gas stoppage. I am satisfied that it would have suffered some loss of profit due to lost production. This is purely economic loss."

101. In reaching my conclusions in relation to the loss of profit which would have been received on the sale of the damaged batch, I proceeded on the assumption that there would have been a loss component of an economic nature, because of the inability to sell that batch. In that regard, I relied upon Spartan Steel and Alloys Ltd v Martin & Co (Contractors) Ltd[2] and Muirhead v Industrial Tank Specialties.[3]

104. In my opinion, my findings did not foreclose any argument by Esso that the loss of profit was not recoverable because it was not consequential to the property damage and hence was purely economic loss. Esso submits that the true characterisation of the loss was purely economic loss, because the loss was suffered not in relation to meeting contractual obligations but because of the inability to sell the barley on the open market, that is, the 20 per cent.

107. The claimant's counsel, Mr David Collins SC, who appeared with Mr K. Lyons, submitted that on a true analysis, the loss was economic loss consequential upon the property damage suffered by Barrett Burston.

Property Damage, Consequential Loss or Purely Economic Loss?

111. The parties informed the court that there was no direct authority on the point. The issue is complicated because of the finding by the court that Esso did not owe a duty of care to avoid purely economic loss. If a duty of care to avoid economic loss had been established, then clearly Barrett Burston would be entitled to recover the loss.

114. In order to determine the issue between the parties, it is necessary to go back to basic principles.

117. Before doing that, it is appropriate to consider the Spartan Steel case, supra. The facts can be briefly stated. The plaintiffs had a factory in Birmingham where they manufactured stainless steel using electricity supplied by the Electricity Board. In June 1969, contractors employed by the defendant were working on a road near the plaintiffs' factory and in the course of the works the cable supplying electricity to the plaintiffs' factory was damaged and the supply was shut down. At that time, the factory was working continuously 24 hours a day and the electric power was shut off for about 14 and a half hours.

120. When the power was shut off, molten metal in an arc furnace was damaged. The physical damage was assessed at £368. If the particular melt had been properly completed the plaintiffs would have made a profit of about £400. In addition, whilst the power was cut off, the plaintiffs were unable to manufacture four more melts and by reason of their inability to do so lost a profit of £1,767.

123. At trial, the contest was solely confined to damages. The trial judge held that the defendants had to pay for all losses, including the economic loss.

126. Lord Denning MR, at p.39, referred to the principle that "the law provides for deserving cases" and held that if there has been a negligent termination of an electricity supply which causes actual physical damage to person or property the physical damage can be recovered "and also any economic loss truly consequential on the material damage". In regard to that proposition, His Lordship referred to British Celanese Ltd v A.H. Hunt (Capacitators) Ltd[4] and S.C.M. (United Kingdom) Ltd v W.J. Whittall and Son Ltd.[5] Lord Denning held that the plaintiffs were entitled to damages for property damage and economic loss flowing from the damage but not loss of profits on the lost production. Edmund Davies LJ dissented on the ground that in his opinion a duty of care was owed in those circumstances to avoid purely economic loss. He would have allowed all the heads of claim.

129. Lawton LJ agreed in the result with Lord Denning MR and stated at p.47 -

"In my judgment the answer to this question is that such financial damage cannot be recovered save when it is the immediate consequence of a breach of duty to safeguard the plaintiff from that kind of loss." (Emphasis added).

133. In British Celanese Ltd v A.H. Hunt (Capacitators) Ltd, supra, Lawton J dealt with the situation of an escape of metal foil from a factory onto an electricity sub-station causing power failure to the plaintiff's factory. In relation to the question of recovery of damages, his Lordship said, at 965 -

"Through the cutting off of electricity the plaintiff's production line is said to have become clogged. Some of the machines had to be cleaned and as a direct consequence of the clogging, production and profits were lost. I can see no difference in principle between this case, raising as it does an allegation of physical injury with consequential loss of profits, and the ordinary accident case in which a plaintiff alleges he has suffered some physical injury whereby he has lost earnings." (Emphasis added).

137. In S.C.M. (United Kingdom) Ltd v W.J. Whittall and Son Ltd, supra, the court was concerned with the negligent interruption of an electricity supply to a factory.

140. Lord Denning MR, at p.341, stated the principle as follows -

"It is well settled that when a defendant by his negligence causes physical damage to the person or property of the plaintiff, in such circumstances that the plaintiff is entitled to compensation for the physical damage, then he can claim, in addition, for economic loss consequent on it." (Emphasis added).

144. Lord Denning MR, after considering the cases, went on to say this, at p.346 -

"In this case I think the contractors are liable for the material damage done to the factory-owners and the loss of profit truly consequent thereon: but not for any other economic loss."

148. The effect of the cases was summarised by the late Professor Fleming in the 9th edition of his work The Law of Torts.

"It has long been established practice to allow recovery not only for the cost of repairing physical damage to personal or tangible property, but also for `consequential loss of earnings or profits resulting from such damage during rehabilitation or repair'."

155. The learned author referred to power blackouts and at p.198-9 he said -

"Other illustrations of the principle limiting recovery to persons with a proprietary or possessive interest in a damaged chattel comes from the problem of negligent damage to power cables supplying nearby businesses. Here an additional factor is the spectre of incalculable commercial losses. English cases eventually settled on a distinction between loss of profits from two different causes. In the case of physical damage to the plant or material itself, as when molten metal solidified as a result of the power failure, the plaintiff might recover not only the cost of melting it by other means, but also the expected profit of that particular melt as economic loss consequential on physical damage; not however expected profit on other melts foregone prior to restoration of power." (Emphasis added).

159. In my opinion, the principle of law is clear. The cases establish that a victim of negligence may claim compensation for the physical damage suffered and any economic loss consequent upon the physical damage. The economic loss must be directly consequential upon that physical damage. The general rule concerning quantification of damages is that stated by Lord Blackburn in Livingstone v Rawyards Coal Co[6] where his Lordship defined the measure of damages as -

"That sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation."

163. The statement of principle has been often cited with approval since it was first stated, and is the established law in Australia. See Butler v Egg and Egg Pulp Marketing Board[7] and Todorovic v Waller.[8] Its application involves a comparison of the hypothetical situation if the tort had not occurred, with what in fact happened.

166. If the gas stoppage had not occurred, Barrett Burston would have continued production, and would have specifically met the contractual obligations for which malt had been allocated in the period from 25 September 1998 to 5 October 1998. It would have continued thereafter to produce malt to meet all of its contracts in that malt year, and then continued production and sold the surplus malt on the open market.

169. As a result of the gas stoppage, production ceased, and the barley in the production line was thrown out. That barley, which was to be manufactured into malt, was to satisfy particular contracts which were specified during that period. The contracts could not be fulfilled during that period. The malt that was allocated was thrown away and hence could not be used to derive profit in relation to those contracts. When production resumed, a different supply of barley was used to produce malt to satisfy those particular contracts.

172. In my opinion, Barrett Burston suffered material loss and consequential loss of profit as a result. It is not to the point that the contracts were met thereafter. The material had been destroyed, Barrett Burston suffered property damage, and was unable to obtain a profit on that spoilt barley.

175. In my opinion, the loss of profit claimed in respect to the spoilt barley was truly consequential upon that property damage. It is not to the point that subsequent production satisfied the particular contract.

178. Barrett Burston adduced evidence as to the quantum of this loss, which was evidently determined by averaging profits that would have arisen on the sale of the excess malt on the open market. However, when the court raised the question of the quantification of loss in relation to particular contracts, all parties agreed that that sum would be no less than the amount quantified in the evidence based upon lost sales on the open market.

181. That is a method of quantification put forward by Barrett Burston and not contested by the parties. Which ever method is used, the same result is produced. Esso and the other parties did not seek to argue anything to the contrary. Barrett Burston is entitled the loss of profit. My conclusion can be rationalised by a simple route. The barley was spoilt by the gas stoppage. Barrett Burston suffered property damage. The property damaged could not be used to derive a profit by sale. The economic loss is a direct consequence of the damage to the property. Barrett Burston in fact suffered the loss.

184. In my opinion, Barrett Burston is entitled to recover that loss of profit. It was a loss of profit which was directly consequential upon the physical damage, namely, the physical damage to the barley that had to be thrown away and that barley could not be used to produce any profit. Barrett Burston is entitled to recover that amount to put it in the same position it would have been in if the tort had not occurred.

188. In my opinion, Barrett Burston has established each of the four heads of damage claimed by it, and is entitled to judgment in the sum of $1,101,150 together with damages in the nature of interest pursuant to s.60 of the Supreme Court Act 1986. The determination of the interest depends upon a number of factors.

191. I will hear counsel on the form of the judgment and the questions of interest and costs.

[1] [1985] EWCA Civ 16; [1986] QB 507.

[2] [1972] EWCA Civ 3; [1973] 1 QB 27.

[3] [1985] EWCA Civ 16; [1986] QB 507.

[4] [1969] 1 WLR 959.

[5] [1971] 1 QB 337.

[6] (1880) 5 App Cas 25 at 39.

[7] [1966] HCA 38; (1966) 114 CLR 185 at 191.

[8] [1981] HCA 72; (1981) 150 CLR 402 at 412.