Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2003] VSC 27

Supreme Court of Victoria|2003-02-20|Before: GILLARD J.

GROUP PROCEEDING - Part 4A Supreme Court Act 1986. Gas supply - Negligent interruption by gas producer - Prolonged stoppage affecting 1.4 million gas customers and others. Proceeding by three groups: Industrial/Business users - Domestic users - Workers stood down by employers. Duty of care to avoid purely economic loss - Principles - Consideration of salient features. Duty of care to avoid property damage. Relevance of Economic evidence. Damages - Proof of - Causation.

ESSENTIAL SERVICES COMMISSION (formerly the OFFICE of the REGULATOR-GENERAL)

TRANSMISSION PIPELINES AUSTRALIA (ASSETS) PTY LIMITED (ACN 079 136 413)

WESTERN UNDERGROUND GAS STORAGE PTY LTD (ACN 079 089 311)

INDEPENDENT INSURANCE COMPANY LIMITED (ACN 066 748 927)

CHIYODA FIRE AND MARINE INSURANCE COMPANY (EUROPE) LIMITED

COMPAGNIE INTERNATIONALE D'ASSURANCES ET DE REASSURANCE SA

CGU INSURANCE LIMITED (ACN 004 478 371) (formerly COMMERCIAL UNION ASSURANCE COMPANY OF AUSTRALIA LIMITED (ACN 004 478 371)

RELIANCE NATIONAL INSURANCE COMPANY (EUROPE) LIMITED

GENERAL ACCIDENT FIRE AND LIFE ASSURANCE CORPORATION PLC

This is a proceeding instituted by writ, in which the two plaintiffs, on their own behalf and representing the interests of others, seek compensation from the defendants for damage and losses incurred as a result of the interruption and, ultimately, the cessation of the gas supply, consequent upon an explosion at the gas processing plant controlled and operated by the defendants, on 25 September 1998. The gas supply was restored to customers on or about 6 October 1998.

As a result of the lack of gas, customers suffered damage to materials and plant and they and others suffered substantial economic loss.

This is a group proceeding pursuant to Part 4A of the Supreme Court Act 1986. The legislation giving this Court the jurisdiction to hear a group proceeding recently withstood a challenge to its validity. See Mobil Oil Australia Pty Ltd v Victoria.[1]

The group proceeding enables a plaintiff to bring a proceeding on behalf of many claimants against the same person. See s.33C(1).

The first plaintiff, Johnson Tiles Pty Ltd ("Johnson Tiles"), has conducted the business of manufacturing glazed ceramic wall and floor tiles in the State of Victoria from about 1962. Since about 1971, it has utilised various kilns and dryers in the course of its business, which used natural gas for heating and drying.

The proceeding is concerned with three groups of claimants and Johnson Tiles is a member of, and represents members of, a group called "Business Users". The "Business Users" are defined in the statement of claim as, "persons including corporations (but excluding the defendants) who on 25 September 1998 were gas users for the purpose of operating a business (including a manufacturing business) and who suffered damage to property and/or pecuniary loss as a result of the interruption or cessation of the supply of gas", on and after 25 September 1998.

Four other members of the group gave evidence in the proceeding, namely, Regency Hotels Pty Ltd ("Regency Hotels"), which operated, at the relevant time, Rockman's Regency in Melbourne; Barrett Burston Malting Co Pty Ltd ("Barrett Burston"), which produced malt from barley at a number of plants in Victoria, including one at Richmond; Nando's Australia Pty Ltd ("Nando's"), which operated a restaurant take-away business specialising in grilled chicken, one of its outlets being in Brighton; and Wilke & Company Pty Ltd ("Wilke"), which conducted a commercial printing plant in Clayton. Each of the said members claimed it suffered loss as a result of the gas stoppage.

The second plaintiff, Gregory Alan Dean ("Mr Dean"), resided at 9 Holly Street, East Preston with his family. On 25 September 1998, he was employed at Galvanising Industries Pty Ltd. On 26 September 1998, his employer, Galvanising Industries Pty Ltd, shut down its plant because of the lack of gas and as a result, he was stood down for nearly two weeks.

Mr Dean and his family used gas for a hot water service and cooking appliances.

The gas supply to his home was stopped on 26 September 1998. He purchased an electric kettle, an electric steamer and a large electric urn to provide hot water. His daughter suffered from a condition which necessitated regular bathing, hence the need for the large urn.

He is a domestic user and a member of the second group in the proceeding. "Domestic Users" are defined by the statement of claim as, "persons who on 25 September 1998 were gas users for domestic purposes and who suffered damage to property and/or pecuniary loss as a result of the September stoppage".

Other members of the group gave evidence. Mr Iain MacLennan resided with his family at a residence in Blackburn. When the gas supply was restored, his gas hot water service failed, necessitating its replacement. The other member was Ms Marion Chesterfield, an elderly woman suffering from poor eyesight who was unable to cook some items of food. These became unfit for consumption and had to be thrown out. She also purchased various electrical cooking and heating appliances. Each claims losses due to the gas stoppage.

The third group is identified as stood-down workers. Mr Dean is a member of that group and brings the proceeding on behalf of members of that group. "Stood-down" workers are defined as "persons who were stood-down from their employment as a result of the September stoppage and suffered pecuniary loss as a consequence".

In addition, another member of that group gave evidence. Ms Lynette Barbara Gladwin, who was employed by Toyota Motor Corporation Limited as a packer, was stood down on Monday 28 September 1998 and re-commenced her employment on 6 October 1998. She claims lost wages.

The first defendant, Esso Australia Pty Ltd ("Esso Australia"), was a subsidiary of the second defendant, Esso Australia Resources Pty Ltd ("Esso"). The latter, on 25 September 1998, produced natural gas at the Longford plant in East Gippsland, some 220 kilometres east of Melbourne. It is a subsidiary of Exxon Mobil Corporation, incorporated in the United States of America. In partnership with an Australian company, part of the BHP group, it extracted natural gas from wells in the Bass Strait. The gas was transported by pipe to a gas processing plant situated at Longford, which was managed and controlled by Esso.

In this judgment, Esso/BHPP is the joint venture entity and Esso the gas producer.

Since about 1969, Esso and its joint venture partner have sold the processed gas to the Gas and Fuel Corporation of Victoria and later, to its successor, Gascor, a statutory corporation established by the Gas Industry Act 1994 ("GIA") - see s.13.

Since about 1969, Esso/BHPP have been the sole suppliers of natural gas to the Gas and Fuel Corporation of Victoria and its successor, Gascor. On 25 September 1998, Esso managed the gas processing plant and Esso/BHPP supplied the natural gas to Gascor. The most recent gas supply agreement ("GSA") is dated 20 November 1996, and the parties are Esso Australia Resources Ltd and BHP Petroleum (Bass Strait) Pty Ltd as sellers and Gascor as buyer.

Gascor on-sold the natural gas to gas retailers, who in turn sold it to the gas customers as agents for Gascor. It is the gas customers, divided into three groups, represented by two plaintiffs, who bring this proceeding.

The supply of gas by Esso/BHPP to Gascor and the on-selling to gas customers are all subject to separate contracts. The retail contracts with each customer precludes the customer from suing the retail distributor except in limited circumstances, namely, proof of fault of the gas retailer. The gas stoppage was not caused by any act or omission of the gas retailer. Hence, the claims are brought against the defendants in common law negligence. I will refer to Esso as the party operating and managing the processing plant and the party who was responsible for the stoppage of the gas supply from the plant.

The defendants joined a number of third parties who, in turn, joined a number of fourth parties.

This group proceeding is concerned with common issues of fact and law arising between the two plaintiffs, and the groups they represent, and the two defendants. The third and fourth party proceedings are not being heard with the main proceeding. However, the third and fourth parties attended and participated in the hearing by reason of orders made that the findings made in this part of the proceeding shall bind the third parties and also the fourth parties in the other proceedings.

The third parties can be divided into two groups.

The first to sixteenth third parties can be described as "State Entities". They comprise the various State Entities involved in the supply and distribution of the gas which was supplied by Esso/BHPP and, in addition, the Office of the Regulator-General, the former Treasurer of Victoria, the Hon Mr Stockdale, and the State of Victoria.

The seventeenth to twenty-sixth third parties comprise companies responsible for the transmission and retail sale of gas. They are described as the "Retailers".

There are 24 fourth parties and they comprise insurers and persons involved in the insurance of various third parties. They are described as the "Insurers".

A similar representative proceeding was instituted in the Federal Court of Australia in September 1998. 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).

I ordered that the cross-vested Federal Court proceeding be stayed. The proceeding in this Court has been progressed, using where possible, documents prepared for the Federal Court proceeding. The parties and their legal representatives, with some gentle persuasion by the Court, expeditiously and pragmatically prepared the case for trial, which proceeded with the minimum of fuss and, despite the volume of paper, relatively quickly and in a manageable fashion. The parties and their legal representatives are to be congratulated on their cooperation, management of voluminous documents and their presentation.

On 25 September 1998, Esso/BHPP supplied to Gascor, from Esso's Longford processing plant, 98% of the total natural gas used in the State of Victoria. The gas was sold to customers throughout this State and used by them in domestic and business situations.

In 1965, natural gas was first discovered in Bass Strait and in 1969, companies controlled by Exxon Mobil Corporation and the Broken Hill Proprietary Company Ltd commenced production as a joint venture from Bass Strait. The gas was processed in the plant at Longford in East Gippsland by Esso.

Initially, there was one gas processing plant and on 25 September 1998, there were three gas processing plants.

Save for an interruption to supply between 1.00 a.m. on Thursday 11 and midday on Friday 12 June 1998, the supply of gas from the Longford plant had never been interrupted.

This interruption had different consequences for gas customers. A few large business users had to stop their use of gas for about 36 hours but the bulk of customers were not interrupted.

On Friday 25 September 1998, at about 12.26 p.m., a series of explosions and a fire occurred at the Longford plant. As a result, gas plant No. 1, the oldest plant, was substantially damaged. It was shut down. The other two plants were shut down also. The gas supply was stopped at the plant that day.

By midnight on 26 September 1998, the gas supplies to domestic users and most businesses ceased. Gas to some essential services was maintained. The gas supply was re-commenced for some businesses on 5 October 1988 and by 8 October 1998, all consumers were receiving their normal supply of gas.

The diminution in supply and, ultimately, the cessation of the supply of gas, caused considerable inconvenience to the consumers of gas in this State and also caused loss and damage to a substantial number.

Business users were deprived of the supply of gas, which meant that plants and equipment had to be shut down with the result that materials were damaged or destroyed or had to be disposed of, and plant and equipment was damaged. In addition, businesses suffered losses, including lost profits, and incurred expenses.

Domestic users suffered the inconvenience of not having hot water for bathing and washing. They could not use gas fired cooking appliances. Some domestic users purchased electrical equipment such as kettles, urns, cookers and microwave ovens to overcome the lack of gas. Some had to dispose of food, which deteriorated to the point of being unfit for human consumption. Some experienced damage to gas hot water heaters when the supply was reconnected.

Some of the stood-down workers suffered loss of income and also suffered the inconvenience of taking part of their annual leave entitlements at short notice.

The two plaintiffs bring this proceeding on their own behalf and on behalf of the three groups to recover compensation for the damage suffered as a result of the lack of gas between 25 September and 8 October 1998.

A group proceeding is available where seven or more persons have claims against the same person; and the claims of those persons are in respect of, or arise out of, the same, similar or related circumstances; and the claims of the persons give rise to a substantial common question of law or fact. See s.33C of the Supreme Court Act 1986. The object of a group proceeding procedure is to enable a proceeding to be brought by a substantial number of victims of an alleged wrong committed by the same wrongdoer, thereby pooling resources and ensuring the Court's resources are used efficiently and expeditiously. It has been recognised that an individual may be deterred from taking on a large financially secure party and the group proceeding legislation is aimed at enabling individuals to band together to bring a proceeding. The guiding principle of Part 4A, is justice. See s.33ZF.

In my opinion, it is important that the Court conducts group proceeding litigation in a practical manner and ensures that as many questions of law and fact having a degree of commonality are decided. Once the group proceeding is completed and if an individual claim is to proceed, the individual litigant has the benefit of findings of law or fact to assist him in obtaining relief. It follows that a group proceeding is not concerned with the complete cause of action of a claimant, in the sense that all elements of the cause of action and issues raised are determined in the proceeding. The Court considers and determines the common questions of law and fact.

As a result, in this proceeding, the Court is concerned with certain common issues.

An Order was made, that the following issues be decided in the proceeding:

1. Did the defendants owe a duty to exercise reasonable skill and care in designing, installing, operating and maintaining the Longford Plant to avoid -

(ii) economic loss resulting from damage to property of; and/or

(iii) economic loss which did not result from damage to property of -

leaving aside any fact relevant to the issues which are peculiar to the said plaintiff or a particular group member?

2. Did the defendants owe a duty to exercise reasonable skill and care in designing, installing, operating and maintaining the Longford Plant to avoid -

(ii) economic loss resulting from damage to property of; and/or

(iii) economic loss which did not result from damage to property of -

domestic users leaving aside any fact relevant to the issues which are peculiar to a particular group member?

3. Did the defendants owe a duty to exercise reasonable skill and care in designing, installing, operating and maintaining the Longford Plant to avoid stood down workers losing wages or annual leave entitlements as a result of being stood down from their employment by reason of the September stoppage, leaving aside any fact relevant to the issues which are peculiar to the second plaintiff or a particular group member?

4. Was the interruption to the gas supply from the Longford Plant on or after 25 September 1998 caused by the negligence of the defendants, their employees and/or agents?

5. Did the first and second plaintiffs and any group members who give 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)?

6. If the defendants or either of them breached any duty of care to the plaintiffs and any group members who suffered damage from the interruption or cessation of the supply, was the negligence a cause of the damage suffered by -

(i) the first plaintiff and/or the business user group members who are permitted to give evidence as sample group members;

(ii) the second plaintiff and/or the domestic user group members who are permitted to give evidence as sample group members;

(iii) the second plaintiff and/or any stood down worker group members who are permitted to give evidence as sample group members -

or was the chain of causation broken by the act or omission of someone other than the defendants, leaving aside any fact relevant to the issues which are peculiar to any plaintiff or a particular group member?

What caused the explosion on 25 September 1998 and ultimate shut down of the plant, was the subject of a Royal Commission. In addition, criminal charges were brought against Esso Australia Pty Ltd which resulted in convictions. The Royal Commission considered the question of fault and the criminal proceeding raised issues of negligence by Esso.

With some encouragement from the Bench, the defendants amended their defence, the effect of which was to make admissions in respect of the issue of negligence.[2]

Paragraph 17 of the fourth further amended statement of claim alleged -

"17. In the operation and control of the Longford plant the defendants breached the duties of care referred to in paragraph 16 (and each of them)."

The defendants did not deny the breach of duties although they denied they owed any duties of care. The defendants have admitted the breach of duties, if a duty to take care is proven.[3]

In a letter forwarded to the Court signed by the solicitors acting for the defendants, the Court was informed that the purpose and effect of the amendments was that if the duty of care alleged in paragraph 16 of the statement of claim was found to exist, the defendants admit they breached such duty of care and that such breach of duty of care caused the interruption to the production of natural gas at Longford (as opposed to the supply of natural gas to the plaintiffs and group members) from the time of the explosion until approximately 2.00 p.m. on 4 October 1998. Further, the parties have agreed that the effect of these amendments will not be to limit in any way the ability of Esso to argue that the duties alleged did not arise or the plaintiffs to argue that Esso owed the duties alleged. Further, whilst the explosion was in gas plant No. 1 of the Longford plant, it was accepted by the defendants that it was a foreseeable consequence of the explosion that it could, and in fact did, lead to the interruption of the supply of natural gas from all three gas plants at Longford to the tailgate.

It follows that the answer to question 4 is, "yes".

It is noted that the defendants admitted that there was an interruption to production of natural gas at Longford but do not admit that their actions or omissions interrupted the supply of natural gas to the plaintiffs and any group members.

The defendants pleaded that the damage suffered by the cessation of gas by any plaintiff or any member of the groups was not caused by the said negligence and further asserted that the chain of causation was broken by the actions and the conduct of others.[4] However, at trial, the defendants did not seek to adduce evidence or argue that the chain of causation of damage was broken and accordingly, the issue raised in the latter part of question 6 was no longer a live issue.

On 25 September 1998, did the defendants owe a duty of care to the plaintiffs or any member of the groups they represented?

This was the main issue in the proceeding. In order to answer the question, it is necessary to differentiate between the various kinds of damage. There is no suggestion, in this proceeding, that either plaintiff or any person they represented suffered any physical injury. The damage claimed in this proceeding is either property damage (including consequential economic loss), or what is described as purely economic loss.

Sometimes it is difficult to draw a distinction between property damage and purely economic loss. By way of example, if food was purchased to be cooked and sold in a restaurant, but goes bad before it is cooked because of lack of gas, is that property damage or is that economic loss? What about the person who purchases it for consumption and it goes bad? Does he/she suffer property damage or economic loss?

The pleadings identify the types of damage alleged to have been suffered as a result of the cessation of the gas supply.

(i) gas customers who suffered damage to their property as a result of the cessation of the supply;

(ii) financial loss consequential upon property damage;

(iii) gas customers who suffered pecuniary loss as a result of the cessation of the supply;

(iv) persons who suffered financial loss as a result of being stood down in their employment caused by the employer, the gas customer, not being able to operate the business because of the cessation of the supply.

The latter two categories are purely economic loss.

It will be necessary to identify the particular losses suffered by the plaintiffs and group members.

Most of the facts set out hereafter are not in dispute. It will be necessary when considering particular issues to further consider some of the facts.

In the 1960s, oil and gas exploration was conducted in Bass Strait, a strip of water some 275 kilometres wide between the State of Victoria in south-east mainland Australia and the island State of Tasmania situated to the south.

The exploration was successful and negotiations commenced between the companies developing wells in Bass Strait and the State of Victoria for the supply of natural gas to residents in this State.

The arm of the Victorian Government was the Gas and Fuel Corporation of Victoria ("Gas and Fuel"). The Corporation was established by the Gas and Fuel Corporation Act 1950 and is a body corporate.

Prior to 1950, a number of bodies were responsible for the supply of gas to consumers in this State. The gas was manufactured and stored in gasometers. Two of the objects of the 1950 legislation were for Gas and Fuel to produce gas from brown coal and sell the product and to take over the private gas suppliers.

It was the duty of Gas and Fuel to encourage and promote the use of gas. See s.23(b) of the Gas and Fuel Corporation Act 1958. Section 28 provided that it was not compulsory for the Corporation "to supply gas and the Corporation shall not be liable to any penalty or damages for not supplying gas under any contract if the failure to supply the same arises through accident or any unavoidable cause".

It is noted that any immunity from liability was based upon failure due to accident or any unavoidable cause.

Section 28 was subject to the Gas Regulation Act 1958, which imposed a duty on an undertaker, which included Gas and Fuel, to supply gas to any person demanding it (subject to distance and facilities requirements - s.6) and in respect of private consumers, on uniform terms (s.7(1)). These provisions, or similar, are found in all legislation dealing with the gas industry in this State.

On and after 1958, there were entities in this State which produced and/or supplied gas for use. Their activities were regulated by the Gas Regulation Act 1958. The main producer and seller was Gas and Fuel.

Natural gas was first discovered in Bass Strait in 1965. In 1965, Esso and a company in the BHP Group, Haematitite Explorations Pty Ltd, entered into a joint venture to extract the natural gas from the reserves in Bass Strait.

By 1969, the joint venture was extracting crude oil and gas from Bass Strait. Esso, on behalf of the joint venture, operated the facilities to produce oil and gas and by 25 September 1998, the facilities comprised 21 off-shore platforms, a network of off-shore and on-shore pipelines, crude oil and gas processing facilities located at Longford and an LPG plant on Westernport Bay.

As at 25 September 1998, gas was recovered from reservoirs in Bass Strait and transported to the Longford plant via a network of under-sea and on-shore pipelines from the platforms in Bass Strait. Three separate gas pipelines originate from each of the three off-shore platforms. The pipelines come onto shore, in respect of two of the platforms, some 55 kilometres from the Longford plant and the other gas line comes in at a point approximately 18 kilometres from the Longford plant. The on-shore gas pipelines terminate at the inlet to the Longford plant.

At the point of entry into the Longford plant, the gas pipelines contain a liquid phase and a gaseous phase.

The purpose of the Longford plant was to process gas and unstabilised crude oil to produce natural gas (predominantly methane), a mixed liquefied petroleum gas product (predominantly ethane, propane and butane; ie, LPG) and stabilised crude oil.

Pursuant to agreements between the joint venture partners, Esso operated and managed the plant at Longford. For the purposes of the operation, the first defendant, Esso Australia Pty Ltd, provides services to Esso pursuant to a service agreement.

The gas produced at the Longford plant was sold and delivered at a point adjacent to the gas metering station located outside the Longford plant and known as the tailgate. At that point, the title to the gas was transferred to Gas and Fuel and later, Gascor.

In 1969, when the facility at Longford was established, there was one gas processing plant, later called GP1. It was a refrigerated lean oil absorption plant. It commenced operation in March 1969. Later, two additional gas processing plants were installed. GP2 and GP3 were cryogenic turbo-expander plants and they commenced operation in March 1976 and February 1983 respectively. GP2 and GP3 used a different technology to GP1 to process the gas.

The object of the gas plants was to recover the hydrocarbon liquids, remove impurities and separate methane from components such as the mixed LPG product.

The cryogenic process used in the GP2 and GP3 installations do not use absorption oil. Instead, a series of expansions and liquid separations followed by recompressions are used to remove the ethane and heavier components. Some sections of this cryogenic process are designed to operate at a very low temperature, well below the temperatures found in GP1.

By an agreement dated 15 March 1969 between the joint venture parties Esso/BHPP and Gas and Fuel, the former agreed to supply and Gas and Fuel agreed to purchase natural gas extracted from Bass Strait.

Gas and Fuel distributed and sold the gas to domestic, commercial and industrial consumers in the State of Victoria.

The parties entered into an agreement, on 1 January 1974, called the Amalgamated Agreement, which dealt with a number of matters concerning contracts referred to in the first agreement, and it is unnecessary to consider that agreement.

The parties entered into a new agreement for the purchase and supply of gas dated 1 January 1975.

On 20 November 1996, the parties entered into another gas sales agreement ("GSA") which replaced the 1975 agreement. By this time, Gascor, a body corporate created by the GIA 1994, had taken over from Gas and Fuel and it was the other contracting party.

The gas supply agreements contained terms, inter alia -

* which imposed obligations on Esso to ensure security of supply of gas to Gas and Fuel/Gascor;

* which obliged Gas and Fuel/Gascor to purchase gas from the joint venture;

* which limited and restricted the extent to which Gas and Fuel/Gascor could purchase natural gas from any other supplier.

It will be necessary to analyse the rights and obligations of the parties.

A decision was taken by the government of the day, to privatise the distribution and sale of natural gas in this State. This led to the passing of the GIA. The Act had a number of purposes. One was to restructure the gas industry and another was to establish two body corporates, the Gas Transmission Corporation and Gascor. The Gas and Fuel Corporation Act was repealed by Act No. 31/1995. Gascor took over many of the Gas and Fuel's operations. Gascor had many functions. It was authorised to operate pipelines for the distribution of gas, to provide undertakings, inter alia, for the storage of gas, to explore for gas and to supply, market and trade in gas. See s.15(1).

The Act also established another body called the Victorian Energy Networks Corporation ("VENCorp"), which is a body corporate whose main purpose was to oversee the distribution and sale of gas in this State.

This restructuring of the industry was the beginning of the privatisation of it.

The joint venture parties and Gascor entered into the GSA dated 20 November 1996, aware of the planned sell-off of parts of the industry.

By 25 September 1998, Esso was supplying at the Longford tailgate all, or nearly all, of the gas requirements of gas consumers in this State. It is admitted by the defendants that during the period from 15 March 1969 to 8 October 1998, there were no substantial alternative sources of supply of gas in this State in the event of a gas stoppage from Longford. They also admit that no substantial alternative sources of supply of gas were in fact developed and connected to the gas system during that period, nor could alternative supplies of gas be connected to the gas system during that period without substantial development and construction of infrastructure.

As at 25 September 1998, Esso processed the gas at Longford and supplied the product at the "tailgate" to Gascor pursuant to the GSA dated 20 November 1996.

Gascor supplied the gas to gas retailers who in turn sold the gas to the customer. There were contracts in relation to each step in the supply chain. The retailers sold the gas as agents for Gascor.

On Friday 25 September 1998, at about 12.26 p.m., a vessel in the gas processing plant No. 1 at Longford failed and released vapours and liquid, followed shortly by explosions and a fire, resulting in the death of two employees and injury to eight others.

Esso personnel implemented an emergency shut-down of GP1 followed very promptly by a full shut-down of GP2 and GP3, each of which then ceased producing processed gas. GP2 and GP3 were undamaged as a result of the incident. Before GP2 and GP3 could be restarted, it was necessary to isolate or confirm the isolation of them from any damage to pipework and equipment and to provide a secure and safe pathway for the disposal of natural gas liquids generated by those two plants.

Production of gas at the tailgate ceased at about 12.45 p.m. on 25 September 1998.

By 3.00 p.m. on 25 September 1998, industry was warned of an impending lack of gas. Some businesses were required to reduce their gas consumption and some were required to terminate. By the evening of Saturday 26 September 1998, commercial/industrial gas customers were obliged to terminate all use of gas and on the following day, domestic users were obliged to terminate their use of gas.

There was a substantial quantity of gas in the pipelines from Longford to the gas customer, including a looped section, and there was also a storage system at Dandenong, which meant that there was gas available estimated at about 1-2 days' supply. However it was important to keep gas within the system to maintain the pressures in the transmission and distribution lines in order to avoid a dangerous situation occurring.

The defendants admitted that they did not have sufficient mechanisms or procedures to isolate GP2 and GP3 from GP1 so as to ensure that GP2 and GP3 could continue to produce gas following the explosion in GP1.

On 4 October 1998, GP3 was restarted and produced gas which was supplied to the tailgate at Longford. Gas was made available to the gas customers on or about 6 October 1998.

The great majority of domestic customers were able to use the gas immediately. However, some commercial/industrial gas customers, having taken steps to convert to LPG during the stoppage, were delayed by having to re-convert their equipment back to natural gas, and other commercial/industrial businesses which required heating for production were delayed because of the necessity to slowly heat plant, equipment and materials.

As at 30 June 1998, there were 1,373,053 domestic gas customers and 43,161 commercial/industrial customers. These figures were known to Esso. One can assume that as at 25 September 1998, there were at least that number of gas consumers in this State. Despite the substantial difference between the number of domestic and number of commercial/industrial customers, the latter group used the greater percentage of gas supplied. For the financial year 1997-1998, the latter group consumed 100 petajoules and the domestic group consumed 80 petajoules.

Esso Australia Pty Ltd was charged with 11 offences contrary to sections of the Occupational Health and Safety Act 1985. The trial came on before judge and jury in this Court, it was convicted and on 5 March 2001, was fined a total aggregate of $2 million. The charges all related to Esso failing as an employer to provide the necessary safe working environment for its employees. The certificate of conviction is evidence of the conviction pursuant to s.87(1) of the Evidence Act 1958. Esso did not appeal the conviction.

Mr Middleton QC, on behalf of Esso, submitted that in the light of the admissions made by Esso as to the issue of negligence, the fact of convictions of various criminal offences and the penalty were irrelevant to any issue in the proceeding.

The circumstances of the events leading to the gas stoppage on 25 September 1998 as admitted by the defendants, the pleadings and the conviction of offences concerning negligence, in my view, are relevant to the gravity of the negligent act which led to the stoppage of the gas supply. In so far as that is a factor which can be taken into account in considering the question of duty of care to avoid purely economic loss, those facts lead to the conclusion that the negligent act was not trivial, mere inadvertence, momentary inattention or a trifling act. In this regard, I refer to observations made by judges in this area of the law referring to the catastrophic and enormous consequences flowing from what might be called careless inadvertence. See, by way of example, Caltex Oil (Australia) Pty Ltd v The Dredge "Willemstad" ("the Caltex case").[5]

The cessation of the gas supply to the gas consumers in this State numbering in the order of 1.4 million caused substantial inconvenience, interruption to businesses, lost production and income and the acquisition of plant, equipment and appliances relying on other fuel sources, mainly electricity and LPG.

This was not the first incident that had interrupted the gas supply. Between 1969, when natural gas was first supplied to Victorian consumers, until the early morning of Thursday 11 June 1998, there had never been any interruption to the supply of natural gas due to failure of supply. There had been interruptions of small duration due to interference with distribution pipelines affecting customers in small areas.

The evidence established that Gas and Fuel, with the full knowledge and acquiescence of Esso, promoted natural gas as an excellent fuel, a clean fuel, a cheap fuel, delivered by pipe to the customer and a dependable and reliable fuel supply. It was a fuel promoted as reliable. History had reinforced those facts, and I am satisfied that by 25 September 1998, the two plaintiffs and the various group members, who were called as witnesses, relied upon the supply as reliable and dependent. History entitled them to come to that conclusion. There had not been an interruption to the supply of substance. However, the June incident was a reminder that it could be interrupted.

Some time during Wednesday 10 June 1998, flow of gas into the Longford plant was reduced due to an ice problem, resulting in reduced delivery into the transmission pipeline at Longford. VENCorp was informed late on the night of 10 June that Esso was not able to supply the nominated amount of gas for the following day and were declaring a force majeure under the terms of the GSA with Gascor.

At about 12.45 a.m. on Thursday 11 June, VENCorp directed the gas retailers and other gas industry participants to curtail supply to all customers listed in tables 1 to 6 inclusive of the Tariff Load Curtailment Tables. At 2.30 a.m., the customers listed in tables 7 and 8 were also curtailed.

At about 5.00 a.m., a press release was issued stating that certain major users of gas had their supplies curtailed and appealing to gas customers in Victoria not to use gas heaters and to restrict use of gas to a minimum.

Johnson Tiles was one business that had to stop its use of gas early on the morning of Thursday 11 June. It appears that Toyota Motor Corporation also had to stop use of gas and apparently, some other large industrial users of gas had to stop using the supply.

At 11.00 a.m. on Friday 12 June 1998, gas restrictions were lifted and thereafter, all gas customers were able to use gas.

The incident received substantial publicity in the two Victorian newspapers for Thursday, Friday and Saturday of that week, and it was reported in the media that some industrial users were extremely annoyed by the stoppage, that some workers were stood down without pay and that some gas customers were thinking of taking legal proceedings against Esso. Save for a comparatively few large industrial gas users, who were obliged to stop using gas, the other gas customers were able to use the supply.

The Plaintiffs and Group Members who gave Evidence

Johnson Tiles manufactured glazed ceramic floor and wall tiles and has done so in this State since 1962. It is part of a worldwide group of companies making tiles. The holding company is the English company, Norcross Plc.

In 1996, the main and only manufacturing plant in this State was at Bayswater. By 1998, the company was manufacturing 600,000 m2 floor tiles and 1.6 million m2 wall tiles, per annum.

The manufacturing plant at Bayswater comprised a number of main production plants. As at September 1998, the company operated five kilns using natural gas.

Because of the nature of the claims made by Johnson Tiles, it is only necessary to refer to two kilns.

In the "C" plant, a Drayton tunnel kiln was used to fire glazed tiles. The tiles were conveyed through a tunnel kiln in a series of trolleys and the heat was produced by natural gas firing burners. In September 1998, the kiln was operated continuously seven days per week, although over the weekend, it was operated at reduced capacity.

The other kiln is the Welko floor tile kiln. It commenced operation in 1985 and produced 200 x 200mm and 300 x 300mm glazed floor tiles. After a tile is produced by pressing and drying, they are conveyed through a dipping line and fired in the Welko kiln. They are placed on ceramic rollers which are mechanically rotated. The Welko kiln, which is approximately 70 metres in length, is heated by gas fired burners. The tiles pass along the kiln through zones at lower temperatures, eventually reaching the firing zones of the kiln where temperatures are approximately 1,1900C. After passing through the high fire zones, the tiles pass through zones where they are cooled. In September 1998, the plant operated five days a week from 7.00 a.m. on Monday until 7.00 a.m. on the following Saturday, when it was put into weekend mode. The temperature was reduced during the weekend.

Johnson Tiles was told some time mid-afternoon on Friday 25 September that there was a gas emergency. It was requested to cease using gas. Permission was granted to use a reduced gas supply and both the Drayton kiln and Welko kiln were later placed on weekend mode.

Around 5.00 p.m. on Saturday 26 September, Energy 21, the retail supplier of gas, instructed Johnson Tiles to cease using gas and by 10.00 p.m. on that night, both the Drayton and Welko kilns were turned off.

On the night of Friday 25 September, production was stopped in the Drayton kiln. There were 227mm2 of unfired tiles in the high fire zone. Each of the trolleys containing tiles take about 17 hours to travel through the kiln and when the kiln was turned down to weekend mode, there were some four cars in the high fire zones. As a result, the tiles were not properly finished and were disposed of.

Johnson Tiles claims the manufacturing cost of those tiles, calculated at $2,065.70.

The Welko kiln was put into weekend mode on the morning of 26 September and its "parked" temperature was 1,0000C.

When the kiln was turned off that night at about 10.00 p.m., it was subjected to a rapid cooling and eventually to ambient temperature over the following days. When the gas supply resumed on 6 October, the kiln was fired and gradually heated over the following days until Monday 12 October at 7.00 a.m., when its fire zones were at operating temperatures around 1,1900C, and production commenced.

It is the contention of Johnson Tiles that the rapid cooling and the gradual heating up of the kiln caused damage to the roof of the kiln and roller blocks in certain zones.

The kiln roof comprised insulating ceramic bricks which were hung from the ceiling. The roller blocks were made of similar material and these supported the mechanically driven ceramic rollers.

At the Christmas shut-down, in 1998-1999, Johnson Tiles replaced many roof bricks and roller blocks.

Johnson Tiles claim the cost of 730 roof bricks, 200 roller bricks, steel for the roof hanger rods supporting the roof bricks, labour costs, and the cost of fibres and blankets used as insulating material over the top of the hanging roof bricks.

Johnson Tiles also claims the costs involved in keeping a mixture of slurry, which was used in the manufacture of tiles, in a molten state during the period when production ceased. In order to prevent the slurry from solidifying, it was necessary to keep mixing it and this involved labour and electricity costs.

In addition, Johnson Tiles claims the costs involved in the shutting down and starting up of the kilns, comprising gas, electricity and labour costs, and also loss of profits due to lost sales and loss of the value of tiles not produced. Finally, a claim is made for the additional labour costs involved in working some weekends, in order to make up lost production to maintain inventory levels.

The Johnson Tiles' claims were hotly contested. It will be necessary to consider in some detail the events at Johnson Tiles' factory over 25 and 26 September 1998, what steps were taken to turn off the kilns and the maintenance history of the Welko kiln.

Regency Hotels operated a hotel business known as Rockman's Regency, including a restaurant, at Exhibition Street in Melbourne. In September 1998, the hotel comprised 185 guest rooms and 21 serviced apartments. In addition, there was a restaurant with a seating capacity of 110, bar lounge area, and room service. There was also a swimming pool and gymnasium complex in the hotel.

The weekend of 26 September 1998 was a big weekend in Melbourne. The Saturday was the AFL Grand Final, which attracts many visitors to the city.

As at 25 September 1998, the plant and equipment critical to the operation of the hotel were run on natural gas. The hot water and heating equipment used gas and most of the cooking equipment was gas-operated.

During the afternoon of Friday 25 September, the hotel was instructed to turn off its gas supply. This was done.

At approximately midday on 6 October 1998, the gas supply was turned on.

As a result of the gas stoppage, an electric hot water system was installed, which became operational on 3 October 1998.

Regency Hotels claims the cost of installation of the electric hot water system, including certain electrical work. In addition, it claims losses suffered because of the inability to provide full restaurant services and also loss of custom. Whilst the hotel was fully booked on the grand final weekend, it is said that the following Monday, business fell away significantly because of the gas stoppage and lack of services.

Barrett Burston produces malt from barley at a number of plants in this State, including one at Richmond. It also manufacturers malt in other States.

It claims losses arising out of problems encountered at the Richmond plant when production had to cease as a result of the gas being turned off at 5.00 p.m. on 25 September 1998.

Barley, upon arrival at the Richmond plant, is cleaned and malt is produced through three stages. The first stage is steeping, when barley is immersed in water for about 24 to 30 hours. The second stage is germination, which takes place in boxes or drums that rotate. In this process, the embryo grows and respires over a period of four days, ending up as "green" malt.

The third stage is kilning, when the green malt is dried in brick kilns. This process takes about 19 hours, at which point the malt is cleaned for sale.

The kiln stage uses large quantities of natural gas.

The entire malting process takes about six days. At any one time, there are hundreds of tonnes of grain in the production process at the Richmond plant.

When the gas heating was turned off, there were many tonnes of barley going through the process, which had to be disposed of as it was unfit for use. There were hundreds of tonnes of grain from each of the stages of process at the Richmond plant that were destroyed.

Barrett Burston turned on the gas supply at 1.48 a.m. on 5 October 1998.

It claims the value of the malt thrown out, the profit it would have earned if it had sold the malt and various expenses incurred.

The next business user was Nando's Australia Pty Ltd, which operated a restaurant takeaway business in Church Street, Middle Brighton. Its business specialises in grilled chicken.

Nando's Brighton commenced in about April 1998, and the cooking equipment at the restaurant and the hot water service used natural gas.

On Saturday 26 September 1998, the gas supply to the restaurant was turned off.

Steps were then taken to convert the equipment at the restaurant to LPG gas. This was done by 4 October 1998, when Nando's resumed trading.

As a result of the interruption to the gas supply, Nando's claims that it suffered loss, namely, the cost of conversion to LPG, the cost of the LPG, loss of profits because of failure to sell its chickens, and in addition, a claim for stock that became unfit for consumption and was disposed of.

The final business user who gave evidence was Wilke & Company Pty Ltd (in liquidation), which is a member of the PMP Communications Group. As at September 1998, Wilke operated a commercial printing plant in Clayton. There were, in September 1998, six heat set printers which operated 24 hours a day. Most printing jobs require a turn around time which is critical.

The heat set technology used at the plant involved the application of heat from gas burners onto the printing paper within a baking oven.

At about 6.00 p.m. on Friday 25 September 1998, the natural gas supply to the Clayton plant was turned off.

A decision was immediately made to convert the Clayton plant from natural gas to liquid petroleum gas so that printing could recommence.

Steps were immediately put in place, the plant was converted and it became operational in early October 1998.

On 6 October 1998, natural gas was supplied to Wilke & Co but it was necessary to convert the plant back to natural gas. This took some 24 hours and because of printing schedules, was not done until late October.

Wilke claims the cost of the conversion, including materials, labour and LPG, and in addition, expenses involved in engaging other printers to print magazines on its behalf at some additional cost.

The second plaintiff, Gregory Alan Dean, gave evidence not only as a domestic user but also as a stood down worker.

He and his wife lived in East Preston with their 14 year old daughter, Danielle. They rented the property. It was connected to a natural gas supply which was used for heating, the hot water service and cooking. As a result of the gas stoppage, his wife purchased an electric kettle, an electric steamer to cook vegetables, and an electric urn to supply hot water.

Their daughter suffers from a disease which requires constant showers and baths. In addition, it is necessary for her to eat vegetables. Hence the need to purchase both the electric steamer and the electric urn.

Mr Dean claims the costs associated with the purchase of the various items, totalling approximately $140.

In February 1994, he and his wife purchased a property at 14 Maple Street, Blackburn. It had a 135 litre Rheem gas storage hot water service. At 25 September 1998, gas was supplied to their home by Energy 21 and was used for heating, the hot water service and cooking. As a result of the gas interruption, he was required to turn off the gas supply to his home on Sunday 27 September.

On 8 October 1998, he recommenced using gas. He turned on the hot water service and hot water was available that day. On the following day, the water was cold and upon investigation, it was ascertained that the hot water unit was leaking and had to be replaced. The replacement cost for the new hot water service was $1,085. At the time, it was approximately nine years old.

He claims compensation for the damage to the hot water service.

The final domestic user to give evidence was Ms Marion Chesterfield, who resides in Essendon. She is presently aged 79 years and is legally blind. She lives alone and is house bound. During September 1998, she ordered her food supplies, which were delivered by employees of supermarkets and a butcher. All her household appliances were gas, as was her hot water service. The gas was turned off from Sunday 27 September 1998 and she was unable to cook her food. The meat and vegetables, which had been delivered during the preceding week to 26 September, had to be thrown out because they were unfit for consumption. She was able to give some meat to neighbours.

Her standing order for meat was delivered the following Thursday after 27 September and again, some of it had to be thrown out.

At a glance

Court

Decision date

Before

Source

Judgment (1749 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (29)