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

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

2. 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.

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

8. 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]

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

15. 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.

18. 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.

21. 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.

24. 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.

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

30. 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.

33. 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".

36. 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.

39. 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".

42. 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.

45. 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.

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

51. 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.

54. 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.

57. 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.

60. 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.

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

66. 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.

69. The third parties can be divided into two groups.

72. 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.

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

78. 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".

82. 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).

85. 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.

89. 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.

92. 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.

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

98. 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.

101. 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.

104. 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.

107. 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.

110. 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.

113. 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.

116. 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.

119. 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.

122. 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.

126. 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.

129. 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.

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

135. 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?

159. 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.

162. 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]

165. 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)."

172. 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]

175. 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.

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

181. 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.

184. 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.

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

191. 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.

194. 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?

197. 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.

206. The latter two categories are purely economic loss.

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

213. 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.

216. 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.

219. 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.

222. 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.

225. 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.

228. 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".

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

234. 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.

237. 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.

240. 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.

243. 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.

246. 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.

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

252. 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.

255. 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.

258. 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.

261. 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.

264. 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.

267. 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.

270. 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.

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

276. 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.

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

282. 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.

285. 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.

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

294. 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).

297. 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.

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

303. 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.

306. 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.

309. 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.

312. 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.

315. 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.

318. 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.

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

324. 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.

327. 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.

330. 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.

333. 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.

336. 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.

339. 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.

342. 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.

345. 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.

348. 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]

351. 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.

354. 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.

357. 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.

360. 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.

363. 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.

366. 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.

369. 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.

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

375. 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

380. 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.

383. 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.

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

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

392. 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.

395. 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.

398. 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.

401. 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.

404. 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.

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

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

413. 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.

416. 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.

419. 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.

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

425. 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.

428. 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.

431. 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.

434. 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.

438. 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.

441. 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.

444. 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.

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

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

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

456. 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.

460. 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.

463. 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.

466. 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.

469. 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.

472. The kiln stage uses large quantities of natural gas.

475. 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.

478. 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.

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

484. 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.

488. 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.

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

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

497. 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.

503. 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.

507. 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.

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

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

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

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

522. 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.

525. 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.

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

532. 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.

535. 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.

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

545. 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.

548. 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.

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

555. 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.

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

561. She purchased frozen ready made meals after the gas interruption and purchased a microwave oven as well as an electric kettle, electric grill and electric heater. She claims the costs of these items, together with the value of the food thrown away.

568. The second plaintiff, Mr Dean, was a member of this group. Since about 1977, he had been employed as a labourer with Galvanising Industries Pty Ltd. It carries on business in Albert Street, Preston. His duties were to jig wrought iron gates and posts to prepare them for galvanising. He had been employed full time, working day shift, five days per week, with some overtime.

571. At 3.00 p.m. on Friday 25 September 1998, the managers of Galvanising Industries called a meeting. The workers were told that they would be stood down because the factory was closing due to the gas stoppage. The workers were told at the meeting that they could either use their annual leave entitlements or lose wages.

574. Mr Dean was stood down between 26 September and 5 October 1998.

577. He was stood down pursuant to clause 4.6 of the Metal, Engineering and Associated Industries Award 1998.

580. At the time, Mr Dean had an annual leave entitlement and he chose to use the ten days of that entitlement rather than lose wages. Had he not been stood down and used his leave, he would have taken his holidays in the Christmas period of 1998.

583. He claims a loss brought about by being stood down for a period of ten days and being required to take annual leave without proper notice.

587. The final stood down worker who gave evidence was Lynette Barbara Gladwin of Sunshine, who, in September 1998, was employed by Toyota Motor Corporation Australia Limited as a packer. She was in full time employment, working a five day week.

590. She finished her shift on Friday 25 September at 3.30 p.m. On the following Monday, she attended a meeting and was told that production would cease for an indefinite period because of the lack of gas. She was stood down between 28 September and 5 October 1998 pursuant to Clause 6(d)(i) of the Toyota Vehicle Industry Award 1998.

593. As a result of being stood down, she lost net wages of $398.76 and she claims that amount.

596. The claims made by Johnson Tiles, especially in respect to the alleged damage to the Welko kiln, the damaged tiles that had to be thrown away, and the alleged loss of profits because of loss of production, were vigorously contested by the defendants and the State Entity third parties. It will be necessary to re-visit the facts and to consider some of them in more detail in respect to the claims.

History of gas supply, statutory and contractual regimes.

600. This proceeding is concerned with the negligent conduct of Esso causing damage to a gas plant, which resulted in it and the two other plants being closed down. Gas production was stopped. Esso ceased to deliver gas to Gascor. Gascor was unable to supply gas to its retailers, who, in turn, were unable to deliver gas to the customer. Prima facie, each party in the supply chain was in breach of its contract to supply gas. The failure to supply the customer caused some of them property and pecuniary losses.

603. The contract, whether it be express or implied between the retailer and the gas user, contained terms which exonerated the retailer from any liability for the stoppage unless there was fault on its part.

606. None was suggested. The customers did not sue the retailers.

609. At 25 September 1998, Esso sold the gas to Gascor pursuant to the GSA; the gas was transmitted by Gas Transmission Corporation; Gascor, through a variety of wholly owned subsidiary companies, distributed the gas to a number of gas retailers, pursuant to a contract, who sold the gas as agents for Gascor to gas users, pursuant to a contract. The contracts between Esso, Gascor and the retailers were written, and the contracts between retailer and customer were either written or implied, the latter containing terms and conditions imposed by a Gas Customer Services Code of December 1997.

612. It is clear throughout that gas customers depended and did rely upon a secure and reliable natural gas supply and as the years passed without incident, their level of assurance correspondingly increased.

615. In addition to the contracts between the various parties, the gas industry was regulated by statute.

618. In my opinion, the history of the supply and the statutory regime and contractual chain are matters of importance to the determination of whether there was a duty of care, as at 25 September 1998, to the gas customers to avoid purely economic loss.

621. The statutory history can be divided into three periods. First, the period 1950 to 1969, when natural gas was first supplied to the customer. Secondly, the period from 1969 to 1994, when privatisation of the gas industry commenced, and post-1994 to 25 September 1998.

624. It was in 1950 that the State of Victoria assumed the role of controlling, operating and regulating the gas industry in this State. Parliament passed the Gas and Fuel Corporation Act 1950. It established "a public authority of the State to be known as the Gas and Fuel Corporation of Victoria ... " - see s.6(1)(a). The objects of the Act were to establish the public authority and to ratify the purchase by the State of the assets, including the business of two private gas producing companies.

627. The Act established the Corporation as a limited company and the members of the company were the State of Victoria and the members of the two private gas companies. The State of Victoria subscribed for four million ordinary shares in the corporation and the shareholders in the two private companies were allotted preference shares.

630. Gas and Fuel, as a public authority, was a trading and service corporation established for the benefit of the community and traded in the public interest. The Corporation was controlled by the government of the day. The control was through the State as the only ordinary shareholder in the company and having the majority of the directors of the company. In addition, there were certain statutory provisions which gave the government a measure of control over the Corporation. The combination of the rights as shareholder, having a majority of directors, and the various powers, gave the government, through a responsible minister, control over the Corporation.

633. By reason of the articles of association, the State was the only entity entitled to hold the ordinary shares and it was defined as meaning "the State of Victoria acting by the Minister for the time being responsible for the administration of the Gas and Fuel Corporation Act." The articles could only be altered with the consent of the Governor-in-Council. See Article 25. The board of directors comprised a chairman appointed by the Governor-in-Council and an equal number of other directors, half of which number was to be appointed by the Governor-in-Council and the other half appointed by the preference shareholders. See Article 66. The directors' remuneration was to be fixed by the Governor-in-Council. The managing director was to be appointed by the board with the approval of the Governor-in-Council. See Article 89.

636. The Government of Victoria guaranteed debentures (see s.13), and the Treasurer of Victoria was authorised to provide moneys for the administration expenses of the Corporation (see s.22). The accounts of the Corporation were to be jointly audited by the Auditor-General and auditors appointed by the Corporation. See s.23. The Corporation, under s.24, was required to prepare accounts and reports of its operations each year and the Treasurer was obliged to lay before both Houses of Parliament, copies of the documents.

639. It was the duty of the Corporation, whenever it thought proper and whenever required by the Minister, to enquire into and report to the Governor-in-Council as to the steps which should be taken to secure the co-ordination or unification of gas, fuel and allied undertakings in Victoria and to generally secure the safe, economical and effective supply of gas and fuel in Victoria. It was obliged to encourage and promote the use of gas. See s.26. Any disputes which arose between the Corporation and the SEC of Victoria or between the Corporation and any government department or local authority were to be determined by the Governor-in-Council. See ss.27 and 37.

642. Although Gas and Fuel was a separate statutory body and distinct from any government department, the reality was that the Gas and Fuel was controlled by the government of the day. Bearing in mind that it was providing an essential service to the members of the community, this was not surprising and the government of the day ensured that the Gas and Fuel did operate, trade and supply a service for the benefit of the community as a whole.

645. In the 1960s, with the discovery of natural gas, the Gas and Fuel was the authority which dealt with the parties who developed the gas fields. Esso/BHPP developed the gas fields, established the pipelines to its processing plant, extracted the gas, Esso processed it and they sold it to Gas and Fuel pursuant to the GSA of 1969. The government of the day was involved in the development and implementation of the natural gas industry. Gas and Fuel kept the government informed during the negotiations.

648. Legislation to implement the new natural gas industry was passed. Gas and Fuel was involved in the statutory scheme. No doubt it had much input into the legislation. It negotiated with Esso/BHPP. The legislation and the contractual relationship marched side by side. Whilst the legislation dealt with all aspects of distribution, supply, quality and sale of gas after Esso supplied it, the legislation impacted on the contract. The contractual arrangements and the legislation covered the field of production and supply eventually to the customer.

651. The supply of gas by Gas and Fuel to customers was compulsory by reason of the Gas Regulation Act 1933. But it had limited liability in the event of non-supply. Section 31 of the Act provided -

"31. Notwithstanding anything in this Act or in any contract but subject to the Gas Regulation Act 1933 it shall not be 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." (Emphases added).

655. The Gas Regulation Act 1933 dealt with the supply of gas, the obligations in relation to same, and safety and other matters.

658. Section 5 did place a duty on a gas supplier to supply gas to owners or occupiers of certain premises on demand. Section 14 dealt with the quality of the gas that had to be supplied.

661. Section 33 gave emergency powers to the Governor-in-Council to regulate or prohibit the supply or use of gas.

664. Section 33(10) exempted the Crown or any responsible Minister of the Crown, or any officer or person acting in the execution of the emergency provisions, from any liability.

667. By reason of s.28 of the Gas and Fuel Corporation Act 1950, subject to such terms as Parliament might provide, the Corporation was authorised to acquire the gas undertakings of other companies. By 1958, it had purchased the businesses of a number of gas undertakers.

670. Both the 1933 and 1950 Acts were amended from time to time. However, the provisions concerning obligation to supply, promotion of the use of gas, limited liability for non-supply and emergency powers to stop the supply, remained in much the same form throughout. It is convenient to consider the provisions of the Act as at 22 June 1988 (see reprint No. 4).

673. Section 22 of the Act provided that the objects, powers and duties of Gas and Fuel were set out in the Act subject to the Memorandum of Association, attached in the Schedule. There was no specific object, power or duty imposed in the Memorandum concerning supply of gas.

676. Nevertheless, it was part of Gas and Fuel's duty to enquire into and report to the Governor-in-Council, from time to time, as to steps which, in its opinion, should be taken, inter alia, to generally secure a safe, economical and effective supply of gas. See s.23(a). Whilst it is correct that the sub-section is concerned with inquiry and reporting, it is implicit that the Corporation was to ensure a safe, economical and effective supply of gas. It always had that duty - see 1950 Act, s.26.

679. It had a statutory duty to encourage and promote the use of gas - see s.23(b).

682. Part V dealt with gas supply. Section 67 gave Gas and Fuel the exclusive right to transmit and supply gas in Victoria, subject to the Governor-in-Council authorising any other person to transmit and supply gas.

685. Section 69 dealt with the obligation to supply gas on demand.

688. Section 69(a) obliged Gas and Fuel to supply gas to any person who demanded the supply, subject to the premises being within a certain distance from a gas main and, secondly, the person not being indebted to it. That obligation was subject to s.70, which excused Gas and Fuel supplying gas until there were adequate facilities.

691. Section 28 limited Gas and Fuel's liability. It was subject to Part V. Section 28(1) provided -

"28(1) Except as expressly provided by Part V, the Corporation is not bound to transport or supply gas."

695. It is clear that Part V required the Corporation to supply gas. However, its failure to do so was limited by s.28(2), which provided -

"28(2) Notwithstanding anything in this or in any other Act or in any contract the Corporation shall not be liable to any penalty or damages for failing to transport or supply gas if the failure to transport or supply the gas arises out of any accident or cause beyond the control of the Corporation."

700. It follows that it was obliged to supply gas, but it was not liable for any damages for failing to do so except on proof of fault on its part.

703. Section 89 dealt with emergencies and the provisions were similar to the provisions in the Gas Regulation Act of 1933.

706. Section 95 gave an immunity from suit to any person complying with the proclamation.

709. The Act did not deal with any obligations on Esso as the producer of the gas. The Act dealt with the obligations of Gas and Fuel as, inter alia, a seller of gas and its liability for failure to supply was limited to proof that it was at fault.

712. Although there is no reference to any obligations on Esso, as a gas producer, the legislation did recognise the contractual arrangements between Esso/BHPP and Gas and Fuel prior to the commencement of the Gas Franchisers Act 1970. See s.102. The section provided that the coming into operation of Part V of the Act and a repeal of s.7 of the Gas Franchisers Act did not vary any rights under the GSA.

715. In summary, there was a clear obligation on Gas and Fuel to supply gas on demand which, in my view, amounts to an obligation to secure the supply, but its liability for any damage for failure to supply was limited to fault on its part.

718. As at 1988, Gas and Fuel was still a company operating in exactly the same way as it had since 1950 and controlled by the government of the day, through its status as a shareholder and its appointment of the majority of directors and the various provisions of the Act.

721. It is now necessary to go back in time and trace the history of the supply of natural gas.

724. The gas produced at the Longford plant was sold and delivered at the tailgate at Longford.

727. In order to put in place the arrangements for the supply of natural gas to Victorian consumers, a number of Acts were enacted.

730. The Victorian Pipelines Commission Act 1966 established the Victorian Pipelines Commission.

733. Subject to the direction and control of a Minister, the Commission was to provide pipelines for the transport of gas in Victoria. See s.11. The Commission was prohibited from supplying gas by retail to any person in any area then being served by Gas and Fuel or in any other area where any other entity was authorised to supply gas, without the consent of the Corporation. See s.11(5).

736. The Commission was to provide a network of pipes to carry the natural gas. It was financed, controlled and regulated by the government - see ss.11 et seq.

739. It is necessary to go back in time to note the negotiations involving Esso and the Victorian government.

742. There is no doubt that the arrival of natural gas revolutionised the production and use of gas in this State. The joint venture partners invested considerable funds in exploration and installation of the various facilities necessary for the extraction of gas and oil, the transport by pipeline to a processing plant and the establishment of the plant at Longford.

745. Not surprisingly, there were many discussions held between Esso/BHPP and Gas and Fuel prior to the operation of the processing plant and the supply of gas.

748. The government was involved in discussions. In February 1966, discussions took place between Esso/BHPP and the Director of Finance in the State Government, and a proposal was put by the joint venture that it would establish and own the gas pipeline for delivery of the gas and the processing plants to the point where the gas would be sold within Victoria.

751. Assurances were sought by Gas and Fuel from Esso/BHPP as to reliability of supply.

754. At a meeting held on 20 July 1965 between representatives of the parties, Esso sought from the Corporation information of the past five years of sales to the various customers, divided up into residential, commercial, small and large industrial, and consumer tariffs and estimated market growth. This information was promised and supplied.

757. A representative of Gas and Fuel asked about the security of offshore pipelines and whether Esso had in mind constructing a single or multiple pipeline from the wells to shore. Esso replied that although a single pipeline was the cheapest, Esso would look into multiple pipelines "for security reasons, particularly for providing adequate security for public supplies".

760. At a meeting held in November 1965 between the parties, the question arose as to the price for natural gas to enable Esso/BHPP to recover its capital cost. Thereafter, discussions took place between the joint venture and Gas and Fuel as to the cost and pricing of the gas.

763. In a document prepared and revised in October 1966, and forwarded to the Premier of Victoria, Esso wrote -

"Accordingly the producers and the Corporation (acting also on behalf of other Victorian gas distribution companies) entered into negotiations on the understanding that the development and sale of natural gas from this field (Bass Strait) could be of great benefit to the general public, the State of Victoria, the Commonwealth, the gas distribution companies and the producers".

770. This document, which was called an aide-memoire, then dealt with security of supply.

773. The purpose of the document was to provide the Premier of Victoria "with a brief review of the background leading to the respective natural gas price offers made by the Gas and Fuel Corporation on the one part and BHP and Esso on the other part."

776. The thrust of the aide-memoire was to highlight the differences between the negotiating parties, Esso/BHPP no doubt being fully aware that the final decisions would lie with the government.

779. It was noted that it was estimated that the Barracouta gas reserves were adequate to provide 20 years' supply to the Melbourne metropolitan area. The document went on to state -

"The producers are co-operating with the Corporation in providing to a consultant of their choosing data and information which will permit an independent appraisal to be made of the size of the Barracouta natural gas reserves. In addition, the producers are providing that consultant with its plans for the development of the Barracouta field. The purpose for which this information is being given is to provide the assurance desired by the Corporation regarding adequacy of reserves and long-term security of supply."

786. It was clear that the public had a substantial interest in the outcome of the establishment of the natural gas industry in this State, a fact no doubt appreciated by all parties, including the State.

"I am very conscious of the wonderful and far reaching prospects which natural gas holds for the people of Victoria, and indeed the whole of Australia. My colleagues in BHP, and our associates in the Esso organisation, share my enthusiasm for this prospect. Furthermore, we are fully aware of our responsibility in relation to the establishment of the natural gas industry in Australia and that the benefits to be derived must be equitably shared between all elements of the community."

793. On 16 March 1967, the joint venture sent to a number of gas undertakers, including Gas and Fuel, the terms and conditions under which it would deliver gas. The gas was to be delivered ex Esso/BHPP's treatment plant and during the first three years, gas would be supplied at a certain quantity. The letter of intent went on to deal with the situation where the producer was unable to provide the gas as required, and it referred to negotiating an adjustment of the price or some other method to indemnify for any additional cost "but without prejudice to the rights of the buyer or buyers to recover damages for breach of contract".

796. Security of supply was dealt with and Esso/BHPP promised that its plant and equipment, including the processing plant, shall conform to the highest industry standards "and shall in all ways be adequate to ensure a full and continuous supply of gas as provided for herein." There was also an indication that adequate standby equipment would be available, "necessary for the maintenance of continuous supply of gas".

799. It was put forward that the parties would agree that the contract would be subject to a force majeure clause. The contract period was 20 years.

802. The letter of intent was agreed by the parties.

805. On 15 March 1969, Esso/BHPP entered into an agreement with Gas and Fuel pursuant to which it sold, and the Corporation purchased, natural gas.

808. The gas was marketed as a safe, clean and relatively cheap energy source. It was the expectation of both Esso/BHPP and Gas and Fuel and other gas undertakers, that the supply would be continuous, not interrupted and that the consumer could rely upon a reliable and secure source of supply.

811. The GSA 1969 specified the quantities to be supplied and also provided for variations of the quantities.

814. Esso/BHPP, pursuant to clause 4.1, was obliged to deliver a quantity of gas required by Gas and Fuel each day, up to the maximum daily quantity. Gas and Fuel was obliged, at least 10 days prior to the first day of each month, to notify Esso/BHPP of the quantity of gas to be provided.

817. According to clause 4.5, if Esso/BHPP was unable to deliver the gas, unless due to circumstances constituting force majeure, it was obliged to indemnify Gas and Fuel for any additional cost incurred by it in meeting the deficiency, without prejudice to any right Gas and Fuel may have had to recover damages or any other remedy it "may have as a result of the inability of sellers to meet their delivery obligations".

820. Clause 10.1 dealt with the delivery of the gas which became the responsibility of Gas and Fuel at the point of delivery, and Esso/BHPP had no responsibility with respect to the gas thereafter. However, the clause went on to provide that it did not in any way effect any remedies available to Gas and Fuel for recovery of loss or damage sustained by reason of inherent defect in the gas delivered.

823. Article XVI provided for security of supply. Esso/BHPP agreed that the design, production and operation of its equipment and plant were "in all ways ... adequate to ensure a full and continuous supply of gas as provided for herein" - see clause 16.1.

826. Esso/BHPP also agreed that in the event of failure from a source of supply in Bass Strait, it would have another supply to deliver a minimum amount of gas. See clause 16.2.

829. Article XX dealt with force majeure. It was agreed that a failure by a party to the contract to observe the obligations is not deemed to be a breach of the contract "if the failure was caused by force majeure" - see clause 20.1. However, a party was not entitled to the protection of that sub-clause to the extent that the failure of performance was caused by, inter alia, the negligence of it - see clause 20.2(a).

832. Clause 20.3 defined force majeure. The definition included any act of God, industrial disturbances, fires, and "explosions, breakages of or accidents to machinery or lines of pipe, hydrate obstructions of lines of pipe".

835. However, it would not be a force majeure incident unless "the event or cause is outside the reasonable control of the party and could not have been avoided or overcome by the exercise of reasonable care and due diligence" - see clause 20.3.

838. There was nothing in the provisions of the contract which exempted Esso/BHPP from any liability to Gas and Fuel for breach of the contract to supply the agreed quantity of gas save for force majeure.

* that it was to supply gas to a certain quantity;

* that the only excuse for breach of contract not to supply gas would be because of an incident defined as a force majeure, but then only if the incident was an event or cause outside the reasonable control of the joint venture parties and could not have been avoided by the exercise of reasonable care and due diligence.

* that if Esso/BHPP was unable to deliver the gas quantity each day, it was obliged to indemnify Gas and Fuel for any additional cost to make up the deficiency, and the latter was entitled to recover damages as a result of Esso/BHPP's inability to meet the delivery obligations.

848. At that time, the Gas and Fuel Corporation and three other gas companies sold the gas as retailers to gas users.

851. The Gas Act 1969 came into operation on 2 February 1970.

854. It repealed the Gas Regulation Act 1958 (formerly 1933) and dealt with many of the matters that were dealt with by that Act.

857. It covered, providing gas to any person who demanded it subject to compliance with conditions, supply of gas to private customers on uniform terms, and the quality of gas, and limited the supplier's liability for stoppage to proof of fault. The emergency powers were the same as previous legislation. It was an offence to refuse to supply gas.

860. The Gas Act 1969 did not change the then existing obligations of Gas and Fuel to supply gas.

863. The next Act was the Gas Franchises Act 1970 which commenced on 22 December 1970. The Act granted exclusive rights to supply gas in a particular area to Gas and Fuel and a gas company called the Colonial Gas Association Limited.

866. Gas and Fuel had exclusive franchise areas in 14 country areas and the greater portion of the metropolitan area, and Colonial Gas had five country franchise areas and parts of the metropolitan area.

869. The contractual arrangements involving Esso/BHPP, Gas and Fuel and Colonial Gas were referred to in s.7, which provided -

"7. The provisions of this Act shall not vary the rights of Esso Exploration and Production Australia Inc. and Hematite Petroleum Pty Ltd for the supply of gas accruing under the terms and conditions of Agreement entered into jointly by them with the Corporation and Colonial Gas respectively before the commencement of this Act."

873. In 1971, the Gas and Fuel Corporation (Pipelines) Act was enacted and commenced on 4 May 1971. It repealed the Victorian Pipelines Commission Act 1966, and Gas and Fuel became the successor in law of that Commission. The powers and functions exercised and the duties and obligations imposed upon the Commission were transferred to Gas and Fuel. All of the Commission's property vested in it.

876. The practical effect of the Act was that Gas and Fuel owned and operated the pipelines in Victoria for the carriage of natural gas from the Longford plant.

879. The Gas and Fuel Corporation Act 1958 was amended from time to time.

882. The Gas and Fuel Corporation Act 1975 substituted a new section for 28 dealing with obligation to supply and limitation of liability.

885. The effect of the section was the same as the past. Gas and Fuel was obliged to supply gas on demand.

888. That provision remained in the same form until 1987, when the Gas and Fuel Corporation (Amendment) Act 1987 was passed, which repealed the Gas Act and inserted into the Gas and Fuel Corporation Act, Part V, which dealt with the obligation to supply gas. The provisions are to the same effect as the provisions in the Gas Act.

891. In 1975, Esso/BHPP and Gas and Fuel executed a new agreement. It was dated 1 January 1975.

894. Earlier the parties entered into a new agreement on 1 January 1974, called the Amalgamated Agreement, which concerned replacing a number of agreements between the parties.

897. What prompted the new agreement of 1975, according to Recital V, was that Gas and Fuel required quantities of gas in excess of the quantities and for a longer period than provided in the Amalgamated Agreement, and Esso/BHPP was prepared to agree to this subject to new pricing formulae and other terms.

900. The contract was deemed to commence on 1 January 1975 and was to remain in force until the quantity of gas dedicated by Esso/BHPP pursuant to the terms had been delivered to Gas and Fuel. The initial amount was 50 billion therms of gas and it was contemplated that the period would be many years. In fact, it was some 21 years later that another agreement was executed.

903. Article IV concerned the quantity of gas, and Esso/BHPP agreed during the currency of the contract to sell and deliver to Gas and Fuel certain quantities of gas calculated on a daily maximum quantity. The contract provided for contingencies such as the inability of Gas and Fuel to take its full supply of gas and also the obligation on each party to inform the other as to the supply and demand.

906. Gas and Fuel agreed to use its best endeavours to ensure the highest practical gas sales in its franchise areas. See clause 4.6.

909. The agreement also provided for raising and reducing the quantities.

912. Article V set out the delivery obligations and again, like the 1969 contract, Esso/BHPP were to indemnify Gas and Fuel for any additional costs by reason of the failure to deliver the proper quantity unless there was a force majeure incident, but without prejudice to the right of Gas and Fuel to recover damages because of the inability to supply.

915. There were provisions concerning quality and pressure of delivery and price.

918. Article XVII dealt with security of supply. The provisions are similar to the provisions in the 1969 contract. An obligation was placed on Esso/BHPP to have adequate facilities "to ensure a full and continuous supply of gas as provided for herein".

921. Article XXI dealt with force majeure and again, similar provisions to the earlier contract.

924. There was no provision in the 1975 contract, or indeed the 1969 contract, which limited the damages that may be recovered by Gas and Fuel in relation to the failure to supply the gas. In particular, there was no provision differentiating between different types of losses, namely, physical damage compared with purely economic loss, nor was there any provision purporting to limit in any way Esso/BHPP's liability to any third party, assuming of course that could be enforced. It is to be noted that the agreement was executed before the High Court decision in the Caltex case.

927. It could not be said in 1975, in the absence of any contract, that the law did not recognise a duty of care to avoid pecuniary loss in certain circumstances. Clearly the law did in relation to negligent misstatements, as in the case of Hedley Byrne v Heller ("the Hedley Byrne case").[6] In addition, there was the House of Lords decision of Morrison S.S. Co Ltd v Greystoke Castle (Cargo Owners).[7] At the very least, this case was some authority for the proposition that where there was a duty on the part of a transporter to avoid damage to goods, there was also a duty to avoid pecuniary loss.

930. In 1975, Esso/BHPP sold the gas to Gas and Fuel and it sold the gas to the consumers. At that stage, there were only two contracts in the supply chain, namely, Esso/BHPP and Gas and Fuel, and the latter and the customer.

933. In the early 1990s, the Government made a decision to privatise the gas industry in this State. As a result, it was necessary to establish other entities for the purposes of transmission and distribution of gas, the retail sale of gas and the dissolution of the Gas and Fuel Corporation. The then statutory regime obliged Gas and Fuel to sell gas to those who demanded it, there was a duty to supply gas, Gas and Fuel was liable to a customer for any failure to supply gas which was not due to accident or cause beyond the control of the Corporation, and the Governor-in-Council had power by proclamation to make regulations prohibiting the supply of gas in emergency circumstances. Under the contractual regime, Esso/BHPP was obliged to supply gas; its failure to do so would expose it to a breach of contract claim by Gas and Fuel. It was relieved from any such breach if caused by a force majeure incident. Otherwise, it was liable to Gas and Fuel for any damage suffered by it.

936. In order to give effect to privatisation, a number of Acts of Parliament were passed.

939. In 1994, the GIA was passed and it came into operation during the period 20 December to 31 December 1994.

942. According to s.1, the purposes of the Act were to restructure the gas industry, to establish two body corporates concerned with the transmission and distribution of natural gas, and to provide for the technical regulation of the gas industry and the transfer of property rights and liabilities from Gas and Fuel to other statutory bodies.

945. Gas and Fuel was wound up by the Gas and Fuel Corporation (Repeal) Act 1995.

948. The GIA established the Gas Transmission Corporation ("GTC"), a body corporate whose function was, inter alia, to operate pipelines for the conveyance of gas through transmission pipelines and also to provide an undertaking for the storage of gas. It was not authorised to trade in gas. See s.12.

951. The Act established a body corporate, Gascor, and its functions included operating pipelines for the distribution of gas through distribution pipelines and undertaking the storage of gas. Its functions were also to supply and market gas and incidental services and to trade in gas. See s.15(1).

954. The GTC transported the gas from Longford to Dandenong through transmission pipelines and from Dandenong, Gascor distributed the gas ultimately to users.

957. Gascor was permitted to trade under the name of Gas and Fuel. See s.16.

960. Under s.32, Gascor, with the approval in writing of a Minister of the Crown, could fix tariffs and the terms and conditions in respect to the distribution and supply of gas to customers. Section 32(3) gave Gascor the power to charge different tariffs and impose different terms and conditions, in respect of different classes of customers, but a domestic user was entitled to receive the gas on the same terms as any other domestic customer - see s.32(4).

963. Under s.32(6), Gascor could enter into the contract, in writing, with any person, for the supply of gas on any particular terms. However, the terms and conditions were to be in addition to and could not conflict with any other terms or conditions set out in the Act and the Regulations. See s.32(7). Section 35 restricted Gascor from disconnecting the supply because of the failure to pay by a customer.

966. Section 38 dealt with the obligation on Gascor to supply gas on demand and the provisions of that section were similar to the provisions in the previous Acts. Section 38(1) provided -

(a) demands supply; and

(b) occupies or owns premises abutting on a street if the premises are not more than 20 metres from the Gascor main which was laid ... ; and

(c) is not indebted to Gascor at the time of demanding supply."

973. That obligation was subject to adequate facilities to ensure that the supply was maintained without affecting the supply to other customers and the conformity of any gas fittings with regulations.

976. Unlike earlier Acts, there was no statutory limitation on liability in the absence of fault. The omission was corrected by the Gas and Fuel Corporation (Repeal) Act 1995 which inserted s.38(5) that provided -

"(5) Despite anything to the contrary in this or any other Act or in any contract, Gascor is not liable to any penalty or damages for failing to supply gas if the failure arises out of any accident or cause beyond the control of Gascor."

980. GTC had the exclusive right to convey gas through transmission pipelines and Gascor had the exclusive right to convey gas through distribution pipelines. See s.39.

983. Section 41 provided that GTC was not bound to convey gas through transmission pipelines but was obliged to do so to enable Gascor to meets its obligations under the Act. Section 41(3) is important and it provided -

"(3) This section does not impose a liability on GTC in favour of any person other than Gascor."

987. The sub-section was replaced by the Gas Industry (Amendment) Act 1998 - s.11, now s.33, in the GIA.

990. The effect of the amendment was that a gas transmission company and a gas distribution company was not liable for failing to make a pipeline available for withdrawal of gas (GTC) and failing to convey gas (Gascor), if the failure was beyond the control of the company. The limitation is similar to the limitation in respect of the failure to supply.

993. Later, s.38(1), which dealt with Gascor's obligation to supply gas, and s.38(5), which dealt with liability for failure to supply, were amended and replaced by s.32 by the Gas Industry (Amendment) Act 1997. It came into operation on 1 July 1997 and s.32 provided -

"(1) Despite anything to the contrary in this or any other Act or in any contract, the gas retailer is not liable to any penalty or damages for failing to supply gas if the failure arises out of any accident or cause beyond the control of the gas retailer.

(2) A gas retailer may enter into an agreement with a person varying or excluding the operation of sub-s.(1) and, to the extent of that agreement, that sub-section does not apply."

998. A subpoena was served upon the gas retailers to produce any contract with a customer in which sub-s.(1) had been excluded or varied and no contract was produced. As at 25 September 1998, there was no agreement with a gas customer varying or excluding the operation of s.32(1) of the Act.

1001. Section 32(1) dealt with failure to supply. It did not provide for damage caused by defective gas. Section 32(3) made it clear that the Legislature was not giving any exemption of liability to any gas retailer for damage arising out of the supply of gas. It provided -

"(3) Nothing in sub-section (1) or (2) affects the liability of a gas company under the Gas Safety Act 1997."

1005. The GIA went on to provide in Part 4 for gas quality and installation of meters, and Part 5 dealt with pipelines and ownership.

1008. Part 7 dealt with the transfer of property, including property from the old Corporation to GTC, and also transfer of its property to Gascor.

1011. Section 93 dealt with emergency powers. If an officer of GTC or Gascor formed the opinion that the conveyance of gas in an emergency might endanger life or property, the officer was empowered to enter any land or premises to ensure the security and, if necessary, to stop the conveyance of gas through the pipeline. See s.93(1) and (2). Section 93(3) provided -

"A gas company (GTC or Gascor) is not liable to any penalty or damages for failing to convey or supply gas if the failure arises out of any accident or cause beyond the control of the gas company."

1015. This partial exemption is in the same terms as s.32(1).

1018. Under Schedule 4, certain property, rights and liabilities were transferred from Gas and Fuel to Gascor and included many agreements entered into for the supply of gas between 15 March 1969 and 28 October 1993.

1021. Schedule 4 identifies a number of agreements, contracts and documents between Esso/BHPP and other parties. All told, there are 17 categories of documents. The bulk of the documents involve agreements, contracts and arrangements between Esso/BHPP and Gas and Fuel. The list shows there were many contracts and arrangements between various parties in relation to the processing, distribution and supply of natural gas in this State.

1024. By 1994, there was a detailed contractual regime between Esso/BHPP and Gas and Fuel (Gascor), and a detailed statutory scheme relating to the natural gas industry in this State and its various facets.

1027. The Gas and Fuel Corporation (Repeal) Act 1995, which came into operation on 21 June 1995, wound up the Gas and Fuel Corporation of Victoria. However, some sections were deemed to have come into operation on 20 December 1994, which was the date when most of the GIA came into operation.

1030. As a result of Gas and Fuel ceasing to exist, Gascor was the contracting party with Esso/BHPP for the supply and purchase of natural gas, Gas Transmission Corporation was responsible for the pipeline transmitting the gas to Dandenong from Longford, Gascor was responsible for distribution and it sold the gas to the gas users. These were the changes that took place through the GIA in December 1994.

1033. In addition, the 1995 Act inserted Part 6 into the GIA, which enacted provisions similar to the provisions in previous legislation concerning emergency situations. The wording of ss.62F, 62G, 62H, 62I and 62L are in similar terms to the previous legislation. The Governor-in-Council, if the opinion was formed, that the available supply was less than sufficient for the reasonable requirements of the community, could, by proclamation, declare Part 6 to apply. Once made, a Minister could give directions to ensure the necessary and safe supply of gas, and there was an immunity from suit for anything done in execution of the emergency powers - see s.62L.

1036. It was in this statutory background, with knowledge of privatisation and that other entities were to be involved in the supply chain, that Esso/BHPP and Gascor entered into another GSA on 20 November 1996.

1039. The agreement replaced the agreement dated 1 January 1975. The contract period is to 31 December 2009 or the date by which the quantity of gas required is reduced to zero, which ever occurs first - see clause 7.1.

1042. The parties agreed in clause 4.1 that each of the joint venture partners agreed to sell to Gascor and deliver, to the point of delivery, gas pursuant to the contract. The contract provided for the quantities, variation of same, timing of reductions and increases and other matters relating to supply. There was an obligation to provide a certain amount per day and an obligation to take a certain amount per day and this depended upon various formulae.

1045. The contract provided for the price and a price determination.

1051. Under clause 13(1)(b), Gascor was to bear the costs and all risks associated with the gas after the point of delivery.

1054. Clause 14 dealt with the source and security of supply. The gas could be supplied by Esso/BHPP from a source other than the Gippsland basin, and there was a requirement that Esso/BHPP's facilities would be so constructed that in the event of failure to supply from one source of supply in the Gippsland basin, the joint venturers must be able to supply, in any hour, at least one-twenty fourth of its proportionate share of 50% of the then effective maximum daily quantity.

"Each seller must deliver gas to buyer at the point of delivery."

1064. Clause 20 dealt with force majeure, which was defined. According to clause 20.5, neither party was liable for any breach of the agreement "to the extent that such failure is caused by any delay, interruption, loss or damage caused by the Force Majeure."

1067. Force Majeure was defined as "any event or circumstance not within the control of that party and which by the exercise of a standard of care and diligence consistent with that of a reasonable and prudent operator, which standard includes good engineering and operating practices, that party is not able to prevent or overcome including, without limiting the generality of the foregoing" and thereafter, are set out a variety of incidents.

1070. There is no suggestion a force majeure incident caused the September stoppage.

1073. Clause 23 dealt with default by any party under the agreement and set out a procedure that was to be followed. Clause 23.4 dealt with the failure to deliver gas.

1076. Relevantly, clause 23.4(a) provided ... "if a seller fails to deliver under the contract any quantity of gas which by the terms of the contract it is obliged to deliver", Gascor could purchase gas from another source.

"(iii) That seller must pay to buyer, within 15 days after receipt of the statement from buyer, the amount (subject to clauses 23.4(b)(iii) and 23.5) of direct damages suffered by a buyer as a result of that seller's default (including, without limitation, equipment repair, shut down and start up costs and the costs of recovery of gas from storage and placing up to an equivalent quantity of gas in storage (excluding the cost of purchasing such gas), if any."

1084. Clause 23.4(b) placed a cap on the damages, and in respect of clause 23.4(a)(iii), it was limited to $1 per GJ of undelivered gas, less the quantity of alternate gas used, less any other amount paid, if any, under another clause.

1087. Clause 23.5 was concerned with damages and consequential loss and it provided -

"Subject to clause 23.4(a)(iv) (which dealt with wilful failure to supply) and, to the extent that any amount expressly included in clauses 23.4(a)(i) (which dealt with obtaining gas from an alternative source) or (ii) (which dealt with transportation costs) would otherwise be excluded by clause 23.5, clauses 23.4(a)(i) and (ii) but without limiting clause 23.4(b), if any default gives a party a right to damages, such damages will be limited to damages for direct and foreseeable loss attributable to such default and no party will be liable to any other party for any loss of profit or anticipated profit, business interruption, indirect loss, consequential loss or loss of use suffered by a party or any other person." (Emphasis added).

1091. It can be seen that Gascor would not be able to recover for any loss of profits or any other loss due to business interruption. The sub-clause purports to exclude liability to a third person. Plainly, it cannot do so where the person is not a party to the agreement, except in special circumstances, and in my opinion, on the evidence, could not bind any gas customer who purchased gas from a retailer. However, it is noted that as between the contracting parties, they agreed. The limiting of liability in this GSA was something which had not been agreed in the past. By 1996, the law in Australia recognised recovery of purely economic loss in cases other than negligent misrepresentation.

1094. Going back in time, the Office of the Regulator-General was established by the Office of the Regulator-General Act 1994. This Office was to promote and safeguard competition and fair and efficient market conduct or, in the absence of a competitive market, to promote the simulation of competitive market conduct and to prevent the misuse of monopoly power. Its function was to perform such functions as are conferred on it by relevant legislation under which a regulated industry operates.

1097. The gas industry did become a regulated industry from 11 December 1997. However, the participation of the Office in the gas industry prior to 25 September 1998 was limited to dealing with distribution and retail functions concerning supply to gas customers. It did not cover production or processing of gas or transmission at that stage.

1100. Hence, prior to 25 September 1998, the Regulator-General played only a small part in the regulation of the industry.

1103. The GIA was further amended in 1997 by the Gas Industry (Amendment) Act 1997, which came into operation between 3 June 1997 and 1 July 1997.

1106. This Act was a further step in the restructuring and reform of the gas industry. It provided for the appointment of administrators for the restructuring of Gascor and GTC. The administrators managed the two bodies. They were subject to the directions of the government - see s.17I. It provided for the assignment, by Gascor or any joint venture party, of any rights and obligations under the GSA dated 20 November 1996.

1109. Part 14 was inserted into the Act and it dealt with gas safety. Division 1 established the Office of Gas Safety whose objectives were, inter alia, to ensure the safety of gas supply, transmission and distribution. One of its functions was to issue guidelines specifying minimum safety standards for, inter alia, gas installations, gas transmission, distribution and supply.

1112. Section 137 obliged Gascor and GTC to manage and operate its pipeline, installation facilities and services to provide for the safety of the public and customers and to minimise the risks to safety of, interruptions to the supply of gas and the reinstatement of an interrupted gas supply.

1115. Another important Act was the Gas Industry (Further Amendment) Act 1997, which came into operation between 9 and 11 December 1997. This Act also made provision for the restructure and reform of the gas industry (see s.1) and was another step in the privatisation process.

1118. The Act established another body corporate called the Victorian Energy Networks Corporation ("VENCorp"). VENCorp is a public authority, does not represent the Crown and had a variety of functions. It was to specify security standards for the gas transmission system, control the security of the gas transmission system, control the operation of the gas transmission system and monitor and review its capacity. It had the important function of co-ordinating the interaction of gas production, gas storage, transmission pipelines and gas distribution and supply facilities "for the purpose of ensuring a secure and sufficient gas transmission system". See s.16C(1).

1121. It was not intended that VENCorp should trade in gas but it did have the power, if it was permitted to do so, under what were called MSO rules made under s.48M. In fact, rules were made but did not come into operation until after 25 September 1998, namely, February 1999.

1124. VENCorp was also permitted to trade in gas in an emergency - see s.16C(2).

1127. Under s.16H, it was empowered to give directions in writing to a market participant for the purposes of facilitating the reliability of the supply of gas and the security of the gas transmission system or gas distribution system. It was also empowered to give directions in the interest of public safety. A "market participant" was a person registered under the MSO rules or nominated under s.5B. There is no evidence that Esso/BHPP was, prior to 25 September 1998, but the power is there.

1130. Section 48A empowered the Governor-in-Council, by Order published in the Government Gazette, to regulate, amongst other things, tariffs for the sale of gas to customers, other than non-franchise customers, and also charges for transmission and distribution of gas and other goods and services. It was possible to fix the price for the supply of gas to the user. Sections 35 and 36 of the Office of the Regulator-General Act 1994 applied to an order under that section as if it was a determination made by the ORG under that Act, so that the ORG had the power with respect to the regulation of tariffs and charges.

1133. Division 2 of Part 4A dealt with licensing of gas distribution companies and gas retailers. By reason of s.48B, it was an offence to distribute or retail gas without a licence and the ORG was responsible for the issue of a licence.

1136. By reason of s.8A, for the purposes of the Office of the Regulator-General Act 1994, Parts 4A and 4B of the Gas Industry (Further Amendment) Act 1997 was stated to be relevant legislation and the gas industry was a regulated industry.

1139. The Government was exercising control of prices, charges and tariffs in relation to the gas supply chain. The ORG was controlling the licensing of gas distributors and retailers.

1142. The amending Act also substituted Part 3 in the principal Act, which dealt with transmission and distribution of gas. Section 32 dealt with the liability of a gas retailer for failing to supply gas. I have set it out above.

1145. During the period 1950 to 25 September 1998, no statutory provision dealt with the gas producers' liability for failing to supply gas.

1148. Section 48M of the GIA dealt with the obligations of the gas retailer and empowered it to give notice of the tariffs and terms and conditions upon which the gas retailer was prepared to sell gas to customers. Wide powers were given to the gas retailer to enter into any contract with a customer for sale of gas at such rate and upon such terms and conditions as may be specified in the contract. See s.48M(5).

1151. Section 48N dealt with the market participants and system operation rules (MSO rules), but these did not come into operation until February 1999. These rules regulated the operation of the market for gas, the activities of market participants, the operation of the gas transmission system and certain specified objectives, including prices based on commercial and market forces.

1154. There were other provisions giving effect to the privatisation process.

1157. The position as at 25 September 1998 was as follows -

1160. Pursuant to the GSA dated 20 November 1996, Esso/BHPP sold gas to Gascor. The gas was transmitted by pipelines from Longford to Dandenong. The entities responsible were, originally, the Gas Transmission Corporation and after 11 December 1997, Transmission Pipelines Australia Pty Ltd.

1163. Gascor carried out the distribution and retail functions.

1166. At that stage, there were franchise areas in which certain entities were granted exclusive rights to transmit, distribute and sell gas.

1169. Gascor's customer base was divided into three defined areas and Gascor's system of gas distribution pipelines was similarly divided into three defined areas. The defined areas for sale and distribution were similar but not identical.

1172. In 1996, Gascor prepared for its disaggregation into a number of separate businesses as part of the privatisation process.

1175. By 25 September 1998, Gascor, in fact, was a shell but owned a number of companies. In effect, it became a wholesaler of gas.

1178. This occurred on 11 December 1997 and by then, Gascor did not have any operational control of any pipelines, valves or other distribution equipment.

1181. The pipeline system and other assets within each distribution area were allocated to three new asset owning companies, namely, Westar (Assets) Pty Ltd, Multinet Gas (Assets) Pty Ltd and Stratus Networks (Assets) Pty Ltd. Each of these companies leased the assets transferred to them to the distributor in their area.

1184. The distribution functions of Gascor were transferred to three new distributors by reference to the three defined areas, namely, Westar Pty Ltd, Multinet Gas Pty Ltd and Stratus Networks Pty Ltd. As noted, each of those companies leased the assets from the three operators of the pipeline system and each distributor was aligned with the pipeline system and other assets owner.

1187. The retail functions of Gascor were transferred to three new gas retailers - Energy 21 Pty Ltd, Kinetik Energy Pty Ltd and Ikon Energy Pty Ltd - and each had its own defined area.

1190. At that stage, each retailer was to act as agent for Gascor selling gas to customers within its allocated area. The result was that each agent sold the gas for and on behalf of Gascor.

1193. At that time, each retailer was aligned with the distributor and the owner of the pipeline system and assets, which can be illustrated by the following -

1197. The geographical areas in respect to retailer, distributor and owner overlapped to some extent and it is unnecessary to further explore that.

1200. As a result of the changes as from 11 December 1997, Gascor's role in the industry diminished. The retailers in fact assumed responsibility for meeting Gascor's obligations to its customers within their franchise areas, and undertook to use reasonable endeavours to obtain gas from another source, if Gascor was unable to obtain a supply from Esso/BHPP, and to indemnify Gascor for any breach of the contract to supply gas to a Gascor customer.

1203. To complete the history, the gas retail and distribution businesses were privatised in 1999.

1206. Gascor entered into agreements with its retailers and they were appointed, by agreements dated 11 December 1997, to act as Gascor's exclusive agent to sell gas to Gascor's customers in the area covered by each retail licence. The agency agreement was replaced by agreements made in August 1998.

1209. The agreements provided that the agent must indemnify Gascor against any loss, damage et cetera, for any breach of the agreement, and, in particular, for any claim made by a Gascor customer against Gascor in respect of any breach or non-performance of the sales contract or any obligation to supply gas.

1212. There were also force majeure clauses similar to the clauses in other agreements.

1215. Clause 15.5 dealt with any default by Gascor under the agreement which gave the agents a right to damages and "such damages will be limited to damages for direct and foreseeable loss attributable to such default and Gascor will not be liable to the agent for any loss of profit or anticipated profit, business interruption, indirect loss, consequential loss or loss of use suffered by the agent or any other person except to the extent that Gascor has obtained compensation from the sellers or insurance proceeds". (Emphasis added).

1218. Gascor entered into some 17 contracts with various parties between 20 December 1996 and 14 August 1998 dealing with transporting gas, metering services, measurement and agency agreements with the retailers.

1221. The evidence revealed that some gas customers had written contracts negotiated with a gas retailer whereas others did not. They had an implied agreement, the terms of which were set out in the Gas Customer Service Code which came into operation on 11 December 1997.

1224. The written contract between Johnson Tiles and Gascor is dated 30 June 1996. The contract provided for the seller, Gascor, to supply gas to Johnson Tiles for use at the latter's premises from a date, namely, 1 June 1996, until terminated in accordance with the agreement. See clause 1. The price was specified.

1227. A maximum hourly quantity (MHQ) was specified by Johnson Tiles and according to clause 4, it was not permitted to take in excess of that MHQ.

1230. There was a force majeure clause which applied if the failure to comply with the contract was for "any cause beyond the reasonable control of a party" - see clause 15(1).

1233. Clause 16 is important and dealt with emergencies. Relevantly, it provided -

"16(1) Where an emergency occurs which, in the opinion of Seller, might endanger life, property, or the safety or proper operation of the supply system, Seller may, in its sole discretion, discontinue or reduce delivery of Gas to Buyers' Premises, or require Buyer to cease or reduce use of Gas until the emergency has ended and Buyer agrees to comply with such request."

1238. An excessive demand on the system or reduced supply could interrupt the gas supply to Johnson Tiles. Clause 16(2) provided that Gascor would not be liable for any loss or damage arising from the inability to deliver the gas under that clause.

1241. Another clause of importance was clause 18. It dealt with termination of the agreement. On and after 1 December 1996, which was some five months after the contract was entered into, the contract could be terminated on the giving of six months' notice by either party.

1244. Clause 16 underlined the fact that the supply of gas was not guaranteed as uninterruptable, and there was the risk that the supply could be interrupted. Further, the evidence established, and I find, that no gas customer, including Johnson Tiles, could have proceeded on the basis that there was no possibility of the gas supply being interrupted. There was no guarantee of an uninterrupted supply. Further, Johnson Tiles was at risk that the contract could be terminated without cause although the risk realistically was negligible. Gascor was in the business of selling gas and Johnson Tiles was a big consumer customer.

1247. Clause 14 dealt with liabilities and provided -

14(1) Seller will not be liable either in contract or in tort for any loss or damage of any kind in respect of the gas or any equipment supplied, whether arising from or connected with any act or omission of Seller, unless the Buyer establishes that the loss or damage as between the parties is caused by the negligence of Seller.

14(2) Each party will indemnify the other from all claims, demands, actions and proceedings whatsoever which may be made or brought by any person arising out of or in any way caused or connected with or attributable to the gas supplied to the extent to which the indemnifying party is found to be responsible for such loss or damage."

1254. Clause 13 concerned conditions and warranties relating to quality and clause 15 was the force majeure clause.

1257. The limitation of liability was in similar terms to s.32 of the GIA.

1260. I accept the evidence of Norman Morrish, the engineer employed by Johnson Tiles who negotiated the agreement, that he did not and was not able to negotiate clauses 14, 15 and 16. He did negotiate the terms concerning prices and quantity. Whilst he stated that he did not read the terms and conditions, he was aware that there were clauses contained in the agreement which relieved the retailer from the obligation to supply. He knew the gas could be cut off in an emergency and he also knew there was a six month termination provision. He stated that he thought the gas was a reliable supply.

1263. Whether or not any person within Johnson Tiles read the provisions of the gas agreement and had a knowledge or appreciation of the terms concerning interruption and liability, is not to the point. Johnson Tiles executed the agreement and each page of it was initialled by its employee. It is bound by its terms.

1266. Johnson Tiles, on 25 September 1998, was aware of the possible interruption to supply, which had occurred on 10 June 1998, and it was subject to a contract which provided for interruption in certain circumstances. Further, there was always the possibility that the gas retailer may terminate the agreement, although that possibility must be considered extremely remote.

1269. It was aware of the limitation of liability.

1272. Johnson Tiles had knowledge of the risk and it was a commercial decision for it as to what steps it took, if any, to minimise the effect of the risk. As things turned out, its insurance cover did not respond to the losses suffered in the September stoppage. This was due to inadvertence. Johnson Tiles, by 25 September 1998, was in a position to evaluate the effect of any gas interruption on it and to make an assessment of what measures could and should be taken to minimise the effect.

1275. Barrett Burston had an express written contract with Gas and Fuel dated 18 August 1994.

1278. The agreement was for an initial period of two years from 1 October 1993, but according to clause 16, either party could terminate the agreement on six months' written notice after the first 18 months of the contract.

1281. Clause 18(1) exempted Gas and Fuel from all liability, in contract or tort, for any loss or damage of any kind whatsoever in respect to the gas. However, this provision was subject to sub-clause 2, and if Barrett Burston established that the loss or damage arose as a consequence of the negligence of Gas and Fuel, then the latter would be liable. However, Gas and Fuel's liability did not include "pecuniary, economic or consequential loss or damage", notwithstanding that it arose out of the negligence of Gas and Fuel.

1284. Clause 19 dealt with the force majeure incident, but like all other agreements, the party was not entitled to the benefit of the incident if the failure was caused by the negligence of the party.

1287. Clause 20 dealt with emergencies. It gave wide powers to Gas and Fuel. It relevantly provided -

"Notwithstanding anything contained herein, Buyer shall at any time at the request of Seller's duly authorised officer curtail or discontinue the use of Gas as may be considered necessary by Seller because of a situation of emergency whether it be by reason of any exceptional circumstances, actual or threatened shortage of Gas, or in the interests of public health, welfare or safety and Seller" will not be liable for any damage as a result.

1291. Barrett Burston was in the same position as Johnson Tiles. There was a risk of interruption because of emergency, there was a risk, which again I think was extremely remote, that the agreement would be terminated, and any recovery of loss due to gas interruption was restricted to proof of negligence. More importantly, any damages were restricted to damages other than purely economic loss or consequential damage.

1294. Barrett Burston was bound by the agreement. It was at risk. The evidence revealed that it insured against the losses caused by the gas stoppage and made a claim for a sum in excess of M$2.

1297. The two commercial gas customers, Nando's and Regency Hotels, did not have any written contract with the gas retailer. The three individuals, Mr Gregory Dean, Mrs Marianne Chesterfield and Mr Iain MacLennan, also did not have express written contracts. Each used gas and accordingly, there was an implied contract between each of them and Gascor, as the retailer. Implied into each agreement was the Gas Customer Service Code. It contained certain terms.

1300. The Code was developed by a department of government and the Office of the Regulator-General, and after wide consultation, it was published in the Victorian Government Gazette on 11 December 1997.

1303. The intention of the Code was to provide essential requirements and basic standards for adoption in the Victorian gas industry and to promote standards for gas customer service. The Code set minimum conditions under which a gas retailer in Victoria could sell and supply reticulated gas to a customer.

1306. Section 48M of the GIA dealt with the obligations of the gas retailer. The gas retailer could give notice of tariffs and the terms and conditions upon which the gas retailer proposed to sell gas to customers. It could give notice of different tariffs to a class of customer. Section 48M(3) provides for the effect on publication -

"(3) The tariffs and terms and conditions of which notice has been given by a gas retailer have effect from the day of the publication of the notice in the Government Gazette and are binding on the gas retailer and the customers (being customers other than non-franchise customers) to whom they apply."

"(4) A gas retailer is deemed to have entered into a contract with a customer, other than a non-franchise customer, on the tariffs and terms and conditions published under sub-s.(3)."

1314. Upon the publication of the Victorian Gas Customer Service Code on 11 December 1997, the Code bound the gas retailer and their customers. The deemed contract was subject to an express agreement of the parties - see s.48M(5). Section 48M(6) protected a domestic gas user from disconnection for failing to pay the account until certain procedures were adopted.

"This Code sets minimum conditions under which a supplier may supply and sell reticulated natural gas to a customer. This Code sets out the rights and obligations of a supplier and its customers and the Code's terms and conditions serve as the terms and conditions of the contract for the supply and sale of reticulated natural gas between a supplier and its customers unless the customer and supplier negotiate alternative terms and conditions in accordance with clause 1.3.2."

1321. The Code deals with gas connection and supply standards, quality of gas and the safety of the supply.

1324. Clause 3.4 dealt with reliability of the gas supply and clause 3.4.1 provided -

"Subject to this section, a supplier or distributor shall provide a reliable supply to a customer in accordance with the distribution standards."

1328. Clause 3.4.2 dealt with the right to interrupt the supply, and power was given to the supplier or distributor to interrupt the supply for maintenance or repair, for installation of a new supply, and in an emergency, which was defined by clause 1.4.13 as meaning "an emergency due to the actual or imminent occurrence of an event which in any way endangers or threatens to endanger the safety or health of any person or which destroys or damages, or threatens to destroy or damage, any property."

1331. The Code dealt with billing and methods of payment, refundable advances, supply disconnection and reconnection.

1334. Clause 5.1.3 authorised the retailer to disconnect or interrupt a supply in the case of an emergency and clause 5.1.4 dealt with disconnection for health and safety reasons.

1337. It was noted in Appendix A of the Code that the customer and the supplier may also be bound by provisions of other Acts and Regulations, and reference was made to the GIA, the Orders in Council, including a gas tariff Order, gas third party access code, and also market and system operation rules. Licences were also referred to concerning gas distributors and gas retailers.

1340. The Code did not provide for liability or limiting heads of damage.

1343. However, the retail contracts were subject to the provisions of s.32(1) of the GIA, to which I have already referred. That is, a gas retailer was not liable for failing to supply gas if the failure was beyond the control of a retailer. I also refer to s.62L, which gave an immunity from action where the Governor-in-Council made a proclamation declaring Part 6A of the Act was to apply in the case of non-availability of supply of gas. These are the gas supply emergency provisions. Section 93 also applied which gave emergency power to any employee of a gas company taking emergency steps in relation to the conveyance of gas. Section 93(3) exempted the gas company from liability if the failure arose out of any accident or cause beyond the control of the company.

1346. All these provisions applied to the retail contract at the relevant date, namely, 25 September 1998.

1349. In addition to the Code, there is also a Gas Distribution System Code, which a licensee had to comply with, and the purpose of that was to cover matters such as installation and maintenance of connections, metering et cetera. The distribution system is the pipeline and network of pipelines and equipment.

1352. The legislation commencing in 1950 made no reference to Esso/BHPP's rights or obligations. There were passing references to agreements involving Esso/BHPP. However, amendments to the GIA by the Gas Industry (Amendment) Act 1998 dealt with Esso/BHPP. Parts IIIA and IVA regulate anti-competitive conduct of "a significant producer". Reference to the definition in s.3 of the terms "significant producer" and the "Victorian Gas Market" makes it clear that the Parts deal with Esso/BHPP. The substance of Part IIIA is that it prohibits anti-competitive conduct, which is defined in s.40. Section 41 prohibits a significant producer from engaging in anti-competitive conduct. Further, the anti-competitive laws provided in the Act are in addition to any other law regulating anti-competitive conduct. Section 42 of the Act empowers the ORG to authorise any conduct of a significant producer that would otherwise constitute a contravention.

1355. Esso/BHPP has been an important participant in the natural gas industry in this State. It was responsible for installation of the necessary plant and equipment to extract the gas, to convey it to a gas processing plant and to process the gas for supply to the statutory public authority.

1358. The extensive and detailed legislation dealing with the gas industry in this State, commencing in the year 1950, has not sought to regulate the activities of Esso/BHPP. The latter's relationship with the suppliers of gas to gas customers is covered by contract. The GSAs have been confidential to the parties, but one of the parties was a public authority which was effectively controlled and supervised by the government of the day.

1361. Only recently has the legislation specifically referred to Esso/BHPP, and that was in the context of anti-competitive behaviour, although there have been references in the past to various contracts involving Esso/BHPP.

1364. No legislation has dealt with the obligation of Esso/BHPP to supply natural gas and the Legislature has left that to the province of contract. On the other hand, the legislation has throughout dealt with the obligation of Gas and Fuel, and later Gascor, to provide gas to the public, and it is clear from the various legislation that the rights and interests of the gas customer have been considered and taken into account by the Parliament.

1367. There is no contract between Esso and a gas customer. Between Esso/BHPP and the customer is a chain of contracts. Each contract in the chain deals with liability for breach, and each places some limitation on liability of the supplier. The express retail contracts could hardly be described as the product of freedom of contract. The gas customer was not in a position to refuse the terms and was, in effect, obliged to accept them in full or go without. However, the retailer's right to bargain to protect its interest was countenanced by the Legislature and more recently, it is arguable that the Legislature would permit a complete exemption from liability. See s.32(2) of the GIA.

1370. The GSA 1996, unlike the earlier contracts, provided Esso with limited liability and excluded some heads of damage concerning loss of profits and indirect losses. Gascor, for its part, agreed to these terms. There were many detailed agreements between various parties, and the Legislature from time to time referred to them.

1373. Gas and Fuel and Gascor were public authorities controlled by the government of the day. The history of the legislation and the contractual arrangements demonstrate a close relationship between the government and the public authorities. The legislation commencing in 1950 has been extensive and detailed and, more recently, covered all facets of the gas industry. Legislation has protected retailers from liability in the absence of fault. Up to 8 June 1998, the Legislature imposed a statutory obligation on the retailer to supply gas on demand - see s.6 of the Gas Regulation Act 1958 and s.38 of the GIA.

1376. By the Gas Industry (Amendment) Act 1998, the statutory obligation was removed. The Legislature has passed the authority to the ORG - see s.48GA. The ORG has imposed the obligation under the Code - see clause 3.4.1. However, the retailer is not liable, by reason of s.32(2) of the Act, for failure to supply if the failure was due to something beyond its control. In addition, under s.32(2) of the Act, it would be open to the parties to exclude the operation of that provision, and it is arguable that the parties could agree to no liability.

1379. The foregoing history of the gas industry, the statutory regimes and the contractual relationships can be summarised -

* Prior to 1950, the production and sale of gas in this State were in the hands of private undertakers, and was subject to regulation and supervision, by reason of the Gas Regulation Act of 1933 which dealt with supply to customers, on the same terms as any other customer within the same category; safety, quality and emergency powers to, inter alia, stop the supply.

* In 1950, the State of Victoria took over the gas industry, producing and selling gas. It created a public authority to produce and supply the essential service in the interest of the community, which it effectively owned, controlled and supervised.

* Parliament legislated concerning, inter alia, production and supply, ensuring that the public interest was protected, in that any person meeting the criteria could demand a supply of gas and on the same terms as any other customer within the same category.

* Parliament enacted limited liability for failure to supply by the retailer to the customer.

* With the advent of natural gas, legislation was passed to regulate the distribution and supply, and the public authority, the Gas and Fuel Corporation, negotiated contracts with the gas producer for the supply of adequate quantities of gas to meet the demand.

* The new legislation was in similar terms to past legislation to ensure that this essential service was provided in the public interest to ensure supply on similar terms, and there was limited liability in respect of failure to supply by a retailer.

* The contractual arrangements between the gas producer, Esso/BHPP and Gas and Fuel provided for the supply of gas, security of supply, and later contracts dealt with limitation of liability for failure to supply.

* The statutory and contractual regimes obliged the various parties in the supply line to provide sufficient gas for the expected demand.

* Since the proposal for privatising the industry, there are various contracts in the supply chain which have dealt with liability and in some instances have limited liability; the legislation has also dealt with liability between the retailer and customer.

* The State has not, through legislation, sought to deal with Esso's liability to supply, but this question has been left to contract and the government's control and supervision of Gas and Fuel, and later Gascor, would have enabled it to know the contractual arrangements between Esso/BHPP and Gas and Fuel, and Gascor. No attempt was made in any legislation to deal with the liability of the producer.

* As at 25 September 1998, there were contracts between each party in the supply chain, from the gas producer ultimately through to the customer.

* The industry has been controlled and regulated by the State since at least 1950, and gas customers have contracted to purchase gas pursuant to contracts and statutory provisions, which had an effect upon their right to recover compensation for loss due to gas stoppage.

1395. This proceeding is not concerned with each element of proof resting on the plaintiffs and group members to prove their respective causes of action. The issues of quantification of damages and contributory negligence are not for decision in this part of the proceeding.

1398. However, the issue of damages is relevant to three questions.

1401. First, the plaintiffs and the group members have to prove each suffered some damage to establish the cause of action in common law negligence.

1404. It is trite law that a cause of action in common law negligence is not established unless the plaintiff proves that he suffered some material damage. Nominal damages will not suffice.

"Negligence alone does not give a cause of action; damage alone does not give a cause of action: the two must co-exist."[8]

1408. Secondly, it is necessary to identify the damage suffered, dividing it into property damage, economic loss consequential upon property damage and purely economic loss, in order to determine whether there was a duty of care owed by Esso to any of the plaintiffs or group members. See questions 1, 2 and 3.

1411. Thirdly, that if there was a duty of care, was the admitted negligence a cause of any damage suffered by the plaintiffs or group members? (Causation issue.) See questions 5 and 6.

1414. The latter part of question 6 dealing with a plea of novus actus, is no longer a live issue.

1417. It is necessary to now consider the claims made by each plaintiff and group member who gave evidence in this proceeding.

1422. The issue concerning the damage allegedly suffered by the first plaintiff, Johnson Tiles, was unnecessarily complicated, involved much evidence and was inordinately time consuming. Insufficient thought was given by Johnson Tiles and the plaintiffs' legal representatives to identifying the true nature of the alleged damage, and much of the proof was left to experts who were not given all the relevant facts and were not instructed as to the real issues or the relevant legal principles. Johnson Tiles instructed its solicitors to institute this proceeding on Monday 28 September 1998, that is, within three days of the gas explosion and during the early days of the stoppage. I have no doubt that management at Johnson Tiles were incensed by the stoppage, especially coming so soon on the heels of the June interruption. Claims were made that the stoppage caused substantial damage to one of the kilns and that the company suffered substantial loss of income from lost sales and loss of goodwill because of the inability to provide a product when ordered. An expert, Michael Charles Walton, was engaged to give evidence on whether the gas stoppage caused any and what damage to the Welko kiln roof and to make an assessment of the amount of the damage. Unfortunately, he was given very little information on the history of the kiln roof problems prior to 25 September 1998 and as a result, his evidence was substantially flawed. I do not criticise Mr Walton. He did his best with inadequate information.

1425. Johnson Tiles replaced 732 roof bricks and a substantial number of roller blocks in the Christmas shutdown of 1998. It was its case that the two gas stoppages in 1998 were the cause of the replacement. However, the evidence clearly showed that the roof brick problem had been a problem for a period of at least 12 months prior to 25 September 1998 and Mr Walton frankly admitted that on further reflection, the true nature of the damage, if any, was the exacerbation of the deterioration of the roof bricks brought about by thermal cycling ie. heating and cooling, especially abrupt and quick cooling.

1428. The other expert called by Johnson Tiles, Michael James Humphris, an accountant, was called to give evidence as to the alleged lost sales and goodwill and quantification of the alleged loss of profits. He produced a large report addressing those questions without being apprised of the legal principles. He examined a huge number of accounting records in an endeavour to determine whether there were any lost sales and any loss of profit.

1431. Whether or not Johnson Tiles suffered lost sales as a result of the gas stoppage is a question of fact. The best evidence would be direct evidence as to that fact. Mr Humphris was engaged to carry out a detailed investigation and examination of the company accounts to determine whether or not there were lost sales. Quantification was not an issue in this part of the proceeding. In an endeavour to prove the fact of lost sales resulting in lost profit, he found it necessary to go down the path of quantification to establish the first step.

1434. The result was that both experts presented reports which did not address the real issues and, not surprisingly, the experts called by Esso sought to challenge the plaintiffs' experts on their reports. The result was chasing many rabbits down the wrong burrows.

1437. Whether or not there was damage to the kiln is a question of fact. Whether or not Johnson Tiles lost sales was also a question of fact. It is unfortunate that more thought and consideration was not given to identifying the real heads of damage and the evidence to prove them. In the end, there were long cross-examinations and much evidence, which were not of much assistance in determining the issues at this stage.

1440. The Court asked a number of questions of these experts in order to bring the parties to the real issues. One consequence was that late in the plaintiffs' case, an additional witness was called to prove that a business in Adelaide did cancel orders during and after the gas stoppage.

1443. During the hearing, in an attempt to narrow the issues, the Court required plaintiffs' counsel to give particulars of the damages claimed by Johnson Tiles resulting from the gas stoppage.

1446. The amended statement of claim and the particulars provided identify the following heads of damage claimed by Johnson Tiles -

(i) Wasted manufacturing cost of 227m2 of unfired tiles that were in the high fire zone of the Drayton kiln at the time when it was turned down to weekend mode on 25 September 1998 and were thrown away, calculated at $9.10 per m2 - $2,065.70.

(ii) Repairs to the Welko kiln involving materials and labour costs. It is alleged that in the course of repairing the kiln in the December 1998 shut down, Johnson Tiles incurred costs for labour and materials of which it claims 35% attributable to the September stoppage:

(a) Cost of 730 roof bricks - $32,286.00 x 35% = $11,300.10;

(b) Cost of 200 roller bricks - $5,493.-00 x 35% = $1,922.55;

(c) Cost of steel for roof hanging rods - $140.50 x 35% = $49.12

and associated labour costs supplied by Cooke's Engineering Pty Ltd for the moulding of the roof hanger rods - $3,504.00 x 35% = $1,226.40;

(d) Cost of fibres and blanket - $1,740.00 x 35% = $609.00;

(e) Labour supplied by John Rafferty Consultant - $8,000;

(f) Cost of supplying employees of Johnson Tiles to assist - $8,756.79;

(iii) Claim for the costs of labour and electricity to agitate the slurry in vessels in the slip house from solidifying during the stoppage which would have resulted in the loss of value of the slurry and damage to the vessels:

Cost of electricity - $5,401.00

Labour costs - $(unquantified)

1452. The above three heads of alleged damage are put as property damage resulting from the gas stoppage. The first two items were disputed. The costs incurred in item (iii), save for quantum, were not disputed but it was contended it was purely economic loss.

1455. In addition, Johnson Tiles claimed economic loss, namely -

(iv) The cost of gas, electricity and labour costs incurred during the process of shutting down and starting up the kilns being cost of gas consumed in shut down and start up, cost of electricity consumed in operating kiln fans, labour costs incurred in shutting down and starting up kilns, and the cost of plumber to purge gas lines - $61,558.36

(v) Claim in the alternative, namely, the loss in value of approximately 99,000m2 of tiles which were not produced during the gas shut down, alternatively, the costs incurred of maintaining the manufacturing plant and monitoring it leading to the recommencement of production.

(vi) Loss of gross profits due to lost sales - $303,010.

(vii) The costs incurred for additional production during the period 12 October to 27 November 1998 to increase inventory resulting in additional costs; labour costs were incurred at overtime rates.

1461. Items (iv), (v) and (vii) were not disputed as heads of damage. Quantum is irrelevant to this part of the proceeding. Item (vi) was hotly contested.

1464. On Friday 25 September 1998, Johnson Tiles operated a number of kilns. This proceeding is concerned with two kilns, namely, the Drayton kiln and the Welko kiln. The claim concerning the Drayton kiln is in respect of a number of tiles which were left in the high fire zone and suffered damage after the gas was stopped. The claim in relation to the Welko kiln is different, namely, that the gas stoppage caused damage to the roof bricks and rollers.

1467. At 3.00 p.m. on Friday 25 September 1998, Johnson Tiles was instructed by its gas retailer, Energy 21, to reduce its gas usage.

1470. Mr McKinna, the manufacturing director, was concerned that if there was an abrupt reduction of heat in the kilns, especially the Welko kiln, damage would be suffered. The kiln had been in service for many years, was showing signs of marked wear and tear, and there had been a long running problem with the roof bricks. He sought and obtained permission to reduce the gas consumption to what would be used in weekend mode, which was about 15% of the normal gas usage. The evidence revealed that Mr McKinna was annoyed about having to cut production and was particularly concerned about any damage that may be done to the Welko kiln by the abrupt reduction of heat. Although Mr McKinna was of the view that Johnson Tiles reduced its gas consumption by approximately 85%, the evidence reveals that the consumption was reduced to about 45% during that Friday evening.

1473. Mr McKinna told the plant managers to stop production and turn the kilns down to weekend mode. The feeding lines into the kilns were stopped as soon as was practicable and production ceased over the period from 3.00 p.m. to 9.00 p.m.

1476. The Drayton kiln and the Welko kiln were put into weekend shut down mode, the latter during early Saturday morning. At that stage, the Drayton kiln was used seven days per week, although production was reduced during the weekends. The Welko kiln was operated five days per week and was put into weekend mode during the night shift on Friday night, ie. about 7.00 a.m. on Saturday morning. The operating temperature in the Welko kiln was reduced over a period of time from 1,1800 Celsius down to 1,0000 Celsius at intervals of 500 Celsius, which took about two hours. The kiln was normally parked at 1,0000 Celsius.

1479. Miss Bald, the operator of the Welko kiln during the course of the night shift, namely, 11.00 p.m. to 7.00 a.m., reduced the temperature in the Welko kiln to about 8500 Celsius and replaced a considerable number of ceramic rollers. This was usually done every two weeks. She parked the Welko kiln at 1,0000 Celsius when she completed her shift the following morning.

1482. At about 5.00 p.m. on Saturday 26 September 1998, Mr McKinna was told to cease all gas usage.

1485. There is some dispute as to what instructions he gave to various people on that evening, but I find that he did give instructions to cease gas usage and between 6.00 p.m. to 7.30 p.m., the Drayton kiln was turned off.

1488. At about 10.00 p.m., instruction was given by either Mr McKinna or Mr Smith to turn off the Welko kiln and John Francis, who was the technical services engineer for two of the plants, attended at the premises, switched off one kiln and on instructions, also turned off the Welko kiln at about 10.30 p.m. In turning down the Welko kiln, he did not do a controlled shut down because the instruction was specific to turn off the gas. This resulted in cooling from 1,0000C to ambient temperature over the following days.

1491. Johnson Tiles was permitted to use gas on 6 October 1998 and the kilns were gradually heated over the following days. Production recommenced on Monday 12 October 1998. In my opinion, Johnson Tiles could not have commenced production any earlier than the 7.00 a.m. shift on Monday 12 October 1998. The result was that Johnson Tiles was unable to operate the Drayton kiln over the weekend of 26 and 27 September and was unable to operate the kilns for a 14 day period between 28 September 1998 and 7.00 a.m. on 12 October 1998.

1494. Turning to the claims made, the first concerns the tiles damaged in the Drayton kiln. The tiles took approximately 17 to 19 hours to pass through the kiln. When production ceased prematurely in the Drayton kiln on 25 September, some tiles were left in the high fire zone for too long, were damaged and had to be thrown out.

1497. I find that 227m2 tiles were destroyed as a result of the production line being stopped, following the gas being reduced.

1500. However, an issue arose as to whether the tiles were damaged because of the gas stoppage or because of an error made by the operator.

1503. The principles that guide a court in determining whether a particular act or omission was a cause of damage has been the subject of many cases and discussions by academics. The principles were discussed by the High Court in March v Stramare.[9] The leading judgment was delivered by Mason CJ, with whom Gaudron and Toohey JJ agreed.

"The common law tradition is that what was the cause of a particular occurrence is a question of fact which `must be determined by applying common sense to the facts of each particular case', in the words of Lord Reid: Stapley [1953] AC at p.681."

1510. His Honour also considered the "but for" test and concluded that although it may have its part to play, it is not a definitive test and must be applied with caution. It was also recognised that considerations of policy and value judgment necessarily enter into the determination.

1513. The principles were discussed in the later High Court cases of Bennett v Minister of Community Welfare[10] and Medlin v State Government Insurance Commission.[11]

1516. In Medlin, at p.6, Deane, Dawson, Toohey and Gaudron JJ summarised the principles -

"For the purposes of the law of negligence, the question whether a requisite causal connexion exists between a particular breach of duty and particular loss or damage is essentially one of fact to be solved, on the probabilities, as a matter of commonsense and experience.[12] And that remains so in a case such as the present, where the question of the existence of the requisite causal connexion is complicated by the intervention of some act or decision of the plaintiff or a third party which constitutes a more immediate cause of the loss or damage. In such a case, the `but for' test, while retaining an important role as a negative criterion which will commonly (but not always) exclude causation if not satisfied, is inadequate as a comprehensive positive test.[13] If, in such a case, it can be seen that the necessary causal connexion would exist if the intervening act or decision be disregarded, the question of causation may often be conveniently expressed in terms of whether the intrusion of that act or decision has had the effect of breaking the chain of causation which would otherwise have existed between the reach of duty and the particular loss or damage. The ultimate question must, however, always be whether, notwithstanding the intervention of the subsequent decision, the defendant's wrongful act or omission is, as between the plaintiff and the defendant and as matter of commonsense and experience, properly to be seen as having caused the relevant loss or damage. Indeed, in some cases, it may be potentially misleading to pose the question of causation in terms of whether an intervening act or decision has interrupted or broken a chain of causation which would otherwise have existed. An example of such a case is where the negligent act or omission was itself a direct or indirect contributing cause of the intervening actor's decision. It will be seen that, on the plaintiff's evidence, the present was such a case. Nor can the question of causation of damage in a negligence action be automatically answered by classification of operative causes as `pre-eminent' or `subsidiary'. Regardless of such classification, two or more distinct causes, without any one of which the particular damage would not have been sustained, can each satisfy the law of negligence's commonsense test of causation.[14] This can be most obviously so in a case where a `subsidiary' cause operates both directly as a cause of the particular damage and indirectly as a contributing component of a `pre-eminent' cause." (Emphasis added).

1520. Tiles were placed on cars which were then put into the Drayton kiln. During the production run, the tiles travel through the kiln, and then cars carrying ballast are conveyed through the kiln, in order to keep the temperature constant, as the last remaining tiles are processed. When the feed line of tiles into the kiln was stopped at about 3.30 p.m. on 25 September, ballast cars were fed into the kiln, and the kiln was actually turned down to weekend mode at approximately 10.00 p.m. on that evening. It was thought at that time that each of the cars carrying tiles had been conveyed through each of the firing zones. However, four cars were in the high fire zone kiln at the time and were overlooked. As a result, the tiles were damaged.

1523. Mr McKinna frankly conceded that the error was made by the operator in overlooking the four cars and that the controlled shut down could have been delayed to enable them to pass through.

1526. Applying the principles stated by the High Court, in my view, the gas stoppage was not a cause of the loss; the loss was caused by the operator overlooking the last cars. The evidence revealed that permission was given to Johnson Tiles to reduce its gas usage and it is clear from the evidence that the production run could have been properly completed before putting the kiln into weekend mode.

"An operator made a decision at that time and said, `I believe I have got the cars far enough through to fire them correctly' and then we started turning the kiln down. We were progressively turning the kiln down as the cars went through."

1533. Earlier in his evidence, he was asked the following questions and gave the following answers -

"Now, do I understand that that was an operator's error; in other words, the operator could have permitted those four to go right through before turning it down to weekend mode?---Yes, Your Honour.

1538. I do not accept the evidence of Mr McKinna in re-examination when he said that the operator could not have avoided the mistake. Careful operation would have revealed the missing cars.

1541. I interpolate to observe that the operator was not called to give evidence, and all the evidence on this issue was hearsay. It was not objected to.

1544. I am satisfied that the direction to reduce the gas supply on Friday 25 September was not a cause of the damage to the tiles. The Drayton kiln was put into weekend mode. The operator's error was the cause of the damage. It follows that Johnson Tiles is not entitled to recover the damage resulting from the tiles being spoiled in the kiln and ultimately having to be discarded.

1548. The Welko kiln was used to produce floor tiles. It was a second-hand kiln imported from England and installed in 1988. It was approximately 80 metres long, about 2.6 metres wide and had an internal cavity about one metre high by just over two metres wide. The walls and roof of the internal cavity was composed of thousands of lightweight insulating bricks. They were high alumina bricks. They were called JM-26 grade lightweight refractory bricks and were designed to withstand heat up to 1,2000C.

1551. The kiln was manufactured by an Italian company.

1554. Tiles were fed into the kiln and moved through the kiln on rollers. The rollers were of ceramic material, installed in blocks and turned by mechanical means.

1557. The temperature through the kiln varies, slowly increasing from the start of the kiln where the tiles enter a low pre-heating zone, through a high pre-heating zone, a firing zone, followed by a rapid cooling zone and a later cooling section.

1560. The kiln is divided into 37 zones or sections.

1563. The correct temperature is important for the manufacture of a tile. Temperatures within the zones are controlled separately.

1566. The hottest zones in the kiln are the firing zones, where temperatures are between 1,1000C and 1,2000C. The firing zones are zones 17 to 22.

1569. The kiln has an external steel sheet casing. Inside the shell, the kiln is lined with heat resistant refractory bricks and ceramic wall blankets. The kiln comprises multi-layered walls and floors constructed from ceramic fibre boards and insulating fire brick.

1572. The materials are designed to give an interior which can tolerate the production temperatures, but have low thermal mass and relatively low thermal conductivity to provide fuel efficiency.

1575. The ceramic rollers are comprised of dense aluminium ceramic tubes, which traverse the width of the kiln and are regularly spaced. At each end are roller blocks. The roller bricks are manufactured from similar insulating fire brick grade-26 material, as are the bricks used for the wall and ceiling lining.

1578. As the claim relates to the roof and roller block bricks, it is unnecessary to consider the wall bricks, though they are of similar grade and quality.

1581. The original roof of the Welko prior to 1993 consisted of a row of insulating fire bricks, grade-26, called RI-26 bricks, all cemented together and suspended on a stainless steel rod from the top of the outer casing of the kiln. The row of bricks was fixed to a rod and to one another. This design is no longer used. The new style roof is called a hanging roof and is constructed of numerous rows of blocks which are made of two slabs cemented together, free hanging from the ceiling and installed side by side.

1584. A roof block is manufactured by taking two grade-26 slabs and sandwiching a stainless steel plate at the top between the slabs to form a hanger, and the blocks are cemented together. They had a depth from top to bottom of between 250 to 300mm, a width of 230mm and when joined together, were 130mm thick.

1587. Most of the blocks were originally 300mm long, that is, in depth, when hung, but later were replaced by 250mm bricks. Where 250mm bricks were installed next to 300mm bricks, the former were adjusted with the stainless steel support so that the ceiling was uniform.

1590. In 1993, with the assistance of the Italian company Tecoma, some of the zones in the Welko kiln were replaced with the new style roof hanging bricks. The zones in question were 6, 7, 18 and 19, and in the following Christmas 1994 shutdown, zones 13 to 17 were changed over to the new design.

1593. The refractory bricks are designed for use at high operating temperatures and are designed to withstand the cycling between hot and cold as the bricks undergo heating and cooling. This results in a cycle of expansion and contraction. The roof bricks are hung from the ceiling of the kiln, touching the adjoining roof brick. In the heating cycle, the bricks expand and eventually touch each other. There were expansion joints at the end of each row to enable the expansion to be taken up without creating excessive mechanical stress.

1596. The bricks suffer some wear and tear over time and after repeated exposure to high temperatures and repeated cyclings through hot and cool temperatures, numerous micro cracks form in the bricks. After a long time, those micro cracks join together, causing a brick to finally fracture at a point where they meet. Each time the Welko kiln is shut down and later reheated, the brick work suffers some damage of that kind. An abrupt reduction in temperature of more than 1000C is likely to exacerbate the deterioration of the brick.

1599. Hence, the manner of shut down and start up of the kiln has an effect on the damage to the brick and on the longevity of the roof bricks.

1602. These refractory bricks are designed to withstand the heating and cooling cycle but over a period of time, will gradually deteriorate and eventually, the brick will crumble and may break away, requiring replacement. The life of a roof brick is many years, depending very much upon the use.

1605. As a general rule, Johnson Tiles had a shut down over the Christmas/January break each year when the Welko kiln was turned off in a controlled way, ie. by stepping down the temperature, and allowing it to cool to ambient temperature. Repairs would be carried out on the interior of the kiln.

1608. Mr John Rafferty, an engineer, who conducts a business installing and commissioning kilns and ceramic equipment, and repairing and maintaining kilns, had been engaged from 1990 to perform repairs and maintenance on Johnson Tiles' kilns, including the Welko kiln.

1611. Whilst the general rule was to effect a complete shut down at the Christmas break, in the years between 1990 to 1998, the Welko kiln was closed down for repair and maintenance on other occasions.

1614. It is vital to shut down the kiln in a controlled way, which means stepping down the temperature gradually until a point is reached when the heating is substantially reduced, permitting the kiln to cool to ambient temperature over a period of days. The heating up process takes about four or five days and is a step by step process of increasing the temperature. This is to ensure minimal damage by thermal cycling.

1617. In the year 1998, the Welko kiln was subjected to two uncontrolled shut downs. Both shut downs were contrary to good kiln practice and subjected the roof bricks to considerable stresses by reason of the sharp reduction in temperature. The first was for about 32 hours in June 1998 and the second was the prolonged stoppage commencing on 26 September.

1620. Mr John Rafferty had a very good knowledge and understanding of the Welko kiln. He had been involved in annual repair works from 1990.

1623. He expressed the opinion that the inspection of the Welko kiln during the 1998 Christmas shut down showed far more extensive damage to the bricks in the roof of the kiln than he would have expected to have occurred in the absence of a particular incident or cause. He observed extensive damage to the roof bricks, and sections which had been replaced since 1993 had a large number of damaged bricks in them. During the course of doing the repairs, he observed that the whole of the roof was fragile and many bricks fractured as they were performing the work. As a result, it was necessary to completely replace zones 11 and 12, and 18 to 22, and to replace three rows within zone 17.

1626. His expression of opinion was not objected to. However, I find it of no assistance. He last looked at the inside of the kiln in September 1997 and then it was apparent that some works had to be done to the roof in the Christmas shutdown of 1998. By Christmas 1998, the evidence established that there was a significant problem with the roof of the kiln, which pre-dated both stoppages in 1998. The problem was of such a magnitude that assistance was requested from both the parent company and the Italian manufacturer. He did not take into account the pre-existing problem. The Court is not assisted by his assessment when viewed in light of the history of the kiln.

1629. Mr Alan McKinna was the manufacturing director and was not a kiln expert. He had been employed by Johnson Tiles since February 1992 and in the following years, acquired a considerable amount of general knowledge concerning kilns and their operation.

1632. At the Christmas 1998 shut down, he inspected the damage to the kiln and took a video of the inside.

1635. He had previously inspected damage to the kiln in prior years, and he observed that the scale and severity of the damage was far more severe at the Christmas 1998 shut down than he had observed during previous shut down periods. Again, in the light of the history of the kiln, especially since September 1997, I derive no assistance from the evidence.

1638. Johnson Tiles claims the cost of the 730 roof bricks replaced at the Christmas 1998 shut down, the cost of 200 roller bricks replaced, the cost of steel for the roof hanger rods, labour costs concerned with the moulding of the roof hanger rods, and the cost of internal fibres and blankets.

1641. The claim is 35% of the total cost involved because it is asserted, based on Mr Walton's opinion, that the damage observed at the Christmas 1998 shut down was caused by two incidents, namely, the June 1998 incident and the gas stoppage in September 1998. It is said that the June incident caused 65% of the damage done and the balance of 35% was due to the September stoppage.

1644. From 1988, the Welko kiln was from time to time operated seven days per week, three shifts per day. From the beginning of 1998, the kiln was operated five days per week, three shifts per day, with it being put into weekend shut down mode on the night shift on Friday night, ending at 7.00 a.m. on Saturday, when it was parked at a lower temperature. It was then slowly re-heated early on the following Monday morning for the shift commencing at 7.00 a.m. that day.

1647. On Thursday 11 June 1998, at 12.45 a.m., when Johnson Tiles had to shut off the gas immediately, the kiln was operating at approximately 1,1800C. It was off by 1.20 a.m.

1650. The evidence was to the effect that it was most likely the rapid shut down of the kiln would have caused some damage to the refractory bricks.

1653. On Friday 12 June at 11.00 a.m., Johnson Tiles was permitted to use the gas supply and the kiln was reheated.

1656. The September incident resulted in the Welko kiln being put into weekend mode by 7.00 a.m. on Saturday 26 September. The temperature was at about 1,0000C. By 10.30 p.m. that night, the Welko kiln was turned off from about that temperature and permitted to cool to ambient temperature. Steps were taken to retain the heat within the kiln by closing down fans and generally closing the kiln from outside air.

1659. At the Christmas 1998 shut down, Mr Norman Morrish, who was the engineering manager, was involved in co-ordinating the repair work on the Welko kiln. During the course of the works, he entered the kiln in zone 20 and observed many bricks had broken off about 100mm from the hot face, many were badly cracked, many roof bricks looked in good condition but on removal, the adjacent bricks broke away and he observed this happen for most of the zones 18 to 22, plus part of zone 17.

1662. As I have said, Mr Walton was called as an expert by the plaintiffs on the issue of damage to the kiln. By training, he was a metallurgical engineer and had had some experience with copper smelters and other similar type smelting equipment in various places throughout the word, but his experience with kilns was indeed limited. He had been involved in assessing damage to a tile kiln at Bendigo for Eureka Tiles in relation to an insurance claim. He did have some experience in the area of refractory products.

1665. Mr Walton prepared a statement in respect to the Federal Court proceeding and was then asked to make a statement for this proceeding. The latter was after he had read the reports from Esso's experts. He was asked to express an opinion as to the cause of damage to the kiln, observed at the Christmas 1998 shut down, and to give his opinion as to the likely quantity of damage caused by the September 1998 stoppage. He concluded that the damage repaired at that shut down was caused 65% by the June stoppage and 35% by the September stoppage. The conclusion was not supported by the evidence.

1668. I am critical that a proper evaluation of the evidence of problems with the roof of the kiln experienced prior to September 1998 was not made. Mr Walton was not told of most of the facts concerning the problems with the kiln roof which commenced around about September of 1997. The thrust of Mr Walton's evidence was to support the conclusion that the June and September stoppages caused the damage which was seen at the Christmas 1998 shut down.

1671. Mr Walton was endeavouring to justify Johnson Tiles' claims, with a result that the experts called by Esso in relation to this claim also concentrated on whether or not the two stoppages caused the damage.

1674. However, it was clear, and it must have been very obvious to Johnson Tiles, that the problem with the roof bricks breaking was a pre-existing problem which occurred over some 12 months, was one of considerable magnitude and on no view, standing back from the evidence and posing the question what was the cause of the roof brick fracture problem, could it be said that it was caused by the June and September stoppages. As a result, much time, energy and expense was incurred on what was not really the issue. After a lengthy cross-examination, in answer to a question put by the Court, Mr Walton frankly conceded that the real damage suffered, if any, was an exacerbation of the deterioration of the roof bricks by a rapid thermal cycle in both the June and September stoppages.

1677. In my opinion, that was clearly the issue. It was unfortunate it was not identified as the real issue before the trial began.

1680. That conclusion is borne out by a number of factual matters.

1683. First, Johnson Tiles was experiencing substantial problems with the roof of the kiln prior to 26 September 1998, and indeed prior to 11 June 1998. From about September 1997 to September 1998, roof bricks were periodically breaking, and from about the beginning of 1998, approximately every week, a brick failed. The failure of a brick resulted in an interruption to the production of tiles because the brick broke away and fell on the ceramic rollers transporting the tiles through the kiln. This was a source of great concern to the company prior to September 1998. The breakages were unusual. They usually occurred about 100mm in from the hot face, occurred in a number of zones but principally in the high fire zones, and more surprisingly, occurred when the kiln was operating at maximum temperatures in the fire zone, namely 1,1500C to 1,1800C. One may have thought that at that time, because the bricks had expanded to the maximum, they would be compressed against each other. The bricks did not fall when the temperature was reduced, either for weekend mode or when the temperature was reduced to about 8500C to enable the ceramic rollers to be replaced each fortnight.

1686. Secondly, and even more importantly, a decision was made by Johnson Tiles, prior to 26 September 1998, to replace approximately 730 roof bricks in the kiln and orders were placed for those roof bricks. It was expected that the roof bricks would be changed over in the Christmas 1998 shut down. This was in accordance with a decision made earlier to continue to replace the roof bricks with the new hanging roof, which had been first installed in other zones in 1993.

1689. Thirdly, there is no direct evidence that the September stoppage actually caused any damage to the kiln roof and roller blocks, and the issue is further complicated by the fact that after the start up of production on 12 October 1998, only one additional roof brick problem was experienced until the Christmas shut down. In an endeavour to overcome the problems, an investigation occurred mid-year and operating changes were implemented prior to the September stoppage.

1692. Between September 1997 and about the beginning of September 1998, a roof brick fell about every week. The problem worsened from January 1998. It was in January 1998 that production was reduced from seven days to five and the kiln parked over the weekend at a reduced temperature. When a brick fell, it caused what was described as a kiln crash. It was necessary for the operator to slow down or stop production to enable the broken brick to be removed because it interfered with the passage of the tiles through the kiln. This was a matter of enormous concern to Johnson Tiles.

1695. When the kiln commenced the five day week cycle at the beginning of 1998, the kiln operators devised a procedure for weekend mode based upon practices which had been used previously. The issue of the parking temperature for the weekend was then reconsidered. As a result, Grace Chiew, a technician, by a memo dated 31 March 1998, implemented a revised shut down procedure for weekends. At this time, some of the roof bricks had fallen in the zones other than the high fire zones. The procedure required burners to be turned off progressively and once the last tiles had reached zone 23, ie. the rapid cooling zone, the set point in the high fire zones was brought down to 9000C and the kiln was parked over the weekend at that temperature. Despite these changes, the roof brick problem continued, averaging about one fractured roof brick per week.

1698. In June 1998, bricks were falling not only from the high fire zone but also from the cooling zone. Johnson Tiles sought help not only from its English parent company but also the manufacturer of the bricks. At that stage, the kiln was turned down each weekend to a maximum temperature of 9000C. Also, every two weeks, it was turned down to approximately 8000C to replace the rollers.

1701. Investigations showed that the problem was not a defect in manufacture of the roof bricks.

1704. Mr Raffaele Alboni of Welko Industrial Italy, came to Australia in July 1998 to look into the two main problems, namely, the roof bricks falling and damage to the rollers. He was of the view that the roof brick problem was probably due to a number of reasons. First, thermal expansion of the brick. The temperature of the face of the brick was different to the temperature within the brick, and if the temperature change is rapid, then the brick will develop cracks. He advised that in order to avoid the problem, the refractory must have sufficient time to change temperature and size slowly and in a uniform way. He pointed out that the kiln is a continuous kiln and is designed to work without stopping. To reduce the temperature every five days is an inadvisable operation and hence, cooling and warming would have to be carried out carefully. He advised that the weekend shut down should be at a temperature of 1,0000C. Also, he advised that the drop in temperature be modified by no more than 500C every 30 minutes, step by step, until that temperature was reached. He thought that there may have been other secondary reasons which contributed to the problem, namely, the firing pressure which he considered was too high; he was concerned about the bricks having a depth of 300mm instead of 250mm; and he raised the question of a lack of expansion joints at the end of the rows of bricks where they met the side walls.

1707. His recommendations were adopted and on 6 August 1998, Grace Chiew issued another memo on the weekend shut down procedure. Point 6 provided -

"6. Keep monitoring the progress of the tiles through the kiln and once the last tile has reached zone 23, reduce the set point in zones 17 to 22 down to 1,1000C and turn off the dampers in zones 24 and 27. Allow the temperatures to reach 1,1000C in about half an hour and reduce the set point further to 1,0500C allowing it to settle in half an hour before parking it at 1,0000C for the weekend."

1711. She noted that for roller changes on the weekends, it was necessary to bring the parking temperature down to 8500C to 9000C before commencing the roller change, to minimise roller breakages due to thermal shock.

1714. After the new procedure was implemented, there were no other roof brick fractures prior to 25 September, and after the production was recommenced on Monday 10 October 1998, there was only one other reported roof brick breakage which occurred on 21 October 1998 in zone 29.

1717. Three experts were called to give evidence concerning the effect of the gas stoppage on the Welko kiln and whether it did cause any damage to the roof of the kiln and the rollers.

1720. As I have already stated, Mr Walton was called by the plaintiffs and he opined the view that the two incidents in June and September 1998 caused the damage to the roof bricks, observed during the Christmas shutdown. He went on to assess what, in his opinion, was the percentage of the damage to the roof which could be attributed to the June and September 1998 incidents.

1723. Esso called Professor Charles Christopher Sorrell, the Professor of Ceramic Engineering at the University of New South Wales.

1726. He opined the view that a single thermal shock could not result in thermal shock failure of the roof refractories.

1729. He said that the longstanding problem with the brick failures could not be attributed to the shut down in September 1998, and that the failures resulted from two defective kiln design problems, which resulted in spawling due to pinching. In his opinion, there were two driving forces that acted in conjunction to cause the accelerated failure of the roof bricks, namely, thermal fatigue, brought about with the implementation of the weekend cool downs, and the reduction of temperature for the fortnightly roller change. Secondly, that the expansion joints were inadequate, thereby resulting in a mechanical force concentrating the stress thereby accelerating the rate of deterioration and crack growth. He further pointed out that in the past, the kiln had been heated to temperatures greater than 1,2000C and this also exacerbated the deterioration.

1732. The other expert called by Esso was Roderick James Kilborn, who was an energy management consultant residing in Queensland and who has been in the field of combustion and heat insulation technology since 1953.

1735. He commenced a cadetship, covering all aspects of gas utilisation, with the Gas and Fuel back in 1953 and thereafter, was involved with gas combustion equipment for industrial and commercial customers. Since 1980, he has been involved in consultancy work relating to kilns and furnaces. I have no doubt he was a man very much experienced in the area of kilns, their design and operation. He was of the opinion that inadequate expansion joints were the primary cause of the damage to the roof bricks.

1738. In reaching his conclusion, he roamed through a considerable body of documentary evidence. He pointed to observations made in documents in the custody of Johnson Tiles, suggesting that there may have been inadequate expansion joints. However, there was no direct evidence of any observations made, at the relevant time, that the joints were inadequate. Mr Rafferty, who had considerable experience in the maintenance of the kiln over many years, gave evidence, which I accept, that the expansion joints were not inadequate. By the time Mr Kilborn was in a position to check the width of expansion, which was in January 2001, much of the roof in the high fire zone had been replaced. What measurements were taken in January 2001 did not demonstrate inadequate expansion joints. He, like Professor Sorrell, relied somewhat heavily on a diagram prepared by Mr Morrish, of the roof, which tended to demonstrate that the roof bricks were rebated for some 75 to 100mm on their sides when they reached the side wall and that the upper part of the roof brick, which was then over the top of the size of the wall, was unrestrained in any way. This diagram proved to be inaccurate and provided a false basis for any conclusion as to the expansion in bricks being restrained at the wall at a distance of about 75mm from the hot face, with the result that it fractured at a point about 100mm in from the hot face.

1741. In my opinion, and nobody in the end suggested to the contrary, the incidents in June and September 1998 were not a cause of the roof brick problem. The problem had pre-dated the stoppages and on the evidence before the Court, was probably due to the method used in bringing the kiln to the weekend mode, resulting in the temperature in the kiln being reduced too quickly to 9000C, and also exacerbated by the temperature in the kiln being cooled to 8500C every fortnight to replace the rollers. One other fact that should be added at this point is that after the roof bricks were replaced at the 1998 Christmas shut down, no roof bricks fell thereafter to the present. Given that the expansion joints were adequate during that relevant period, one must look to causes other than expansion creating a mechanical stress because of alleged inadequate expansion joints.

1744. In my opinion, taking into account the pre-existing roof brick problem, the real issue is whether the September stoppage caused any damage to the roof bricks and roller blocks in the kiln.

1747. The three experts all agreed that the thermal cycling, namely, the cooling down and increasing the temperature of the refractory linings, did cause wear and tear to them, thereby accelerating their ultimate demise. Each major shutdown, the weekend shutdown and the fact that each two weeks the temperature was brought down even lower in order to enable the rollers to be changed, all contributed to the deterioration process.

1750. The heating and cooling of roof bricks set up thermal stresses and also mechanical stresses in the roof bricks. With the passage of time, the bricks gradually develop cracks and ultimately, they fail. The large and rapid changes to the temperature aggravated the deterioration. Mr Walton gave evidence that in his opinion, the change of temperature in the kiln when it was turned off on the evening of 26 September 1998 and the reheating of the kiln from 6 October 1998, even though the latter was controlled, would have accelerated the deterioration within the roof bricks and roller blocks and accordingly, there was some damage as a result of the September stoppage. He was also of the opinion that the June stoppage, which was more sudden than the September stoppage, would have also caused damage to the roof bricks and also the roller bricks because of thermal fatigue.

1753. The issue at this stage is whether or not the stoppage did cause any damage to the roof bricks and roller blocks. It is not an issue as to the amount of damage and quantification.

1756. Mr Walton stated that in the absence of the two incidents of uncontrolled shut downs of the kiln in June and September 1998, he would have expected deterioration of the same type as was evident in December 1998, but of significantly smaller scale and severity. I accept that there was some acceleration of the deterioration but in my view, Mr Walton's statement that the deterioration would have been significantly smaller and less severe is not supported by the evidence.

1759. He attributed 10 to 15% to be due to the normal deterioration as a result of the operation of the kiln during the period since December 1997, and then went on to state that, in combination, the two incidents would have been responsible for approximately 85 to 90% of the damage to the roof of the kiln. He therefore concluded that of the damage not attributable to wear and tear, 35% was due to the September incident and approximately 65% to the June incident. In arriving at that conclusion, Mr Walton did not rely upon any established formula but devised his own and in my view, on the totality of the evidence, is pure speculation. On the balance of probabilities, I would not be prepared to reach that conclusion. However, it is unnecessary for me to determine that issue at this stage of the proceeding.

1762. Professor Sorrell was of the opinion that the roof brick problem experienced prior to June 1998 was attributable to the regular heating and cooling of the kiln, especially so after 1 January 1998, when it was cooled down each weekend. He stated that the problem was brought about because the temperatures of the weekend shut down were too low, and he was also of the opinion that the roof problem was caused by inadequate expansion joints. He inspected the kiln in January 2001 and measurements were taken. The measurements revealed that the expansion joints were adequate. Indeed, this is borne out by the trouble free use of the kiln from January 1999 to the present. Trouble free in the sense that there have been no real problems with the roof bricks since then. As I have stated, Mr Rafferty did have a very good knowledge of the interior of the kiln and gave evidence, which I accept, that the expansion joints were adequate.

1765. There is no evidence that in September 1998, the expansion joints were inadequate. Whilst the issue was raised during the investigation in 1998 by the Italian technician, nobody in fact made an inspection of the expansion joints. They were not measured and there was no evidence that they were inadequate. The nature of the damage did suggest some mechanical stresses being applied but in my view, it does not establish that the expansion joints were inadequate. I accept Mr Rafferty's evidence that they were not inadequate.

1768. Professor Sorrell accepted that the heating and cooling of roof bricks gradually caused them to deteriorate and they did have a life span which varied according to operation and use. He did concede that the fact of rapid cooling and gradual re-heating in the September stoppage would have accelerated to some degree the deterioration of the bricks, but he stated that the expansion and contraction, taking into account the type of brick and what it was designed to do, would have had an infinitesimal effect upon the deterioration. That may be so, but as he stated, as did the other experts, gradually but surely, over the life of the brick, it develops cracks from the hot face into the brick and eventually, all of these "infinitesimal" effects come together to cause the brick to fail.

1771. The question was put to Mr Kilborn, and he said that the rapid cooling and then subsequent heating up of the bricks in the stoppage would not have accelerated their deterioration. I reject his opinion. It is inconsistent with the view that he expressed that over the life of a brick, thermal fatigue gradually but surely weakens the brick, leading to its ultimate failure.

1774. I am satisfied on the totality of the evidence that the stoppage in September 1998, resulting in a rapid cooling down of the roof bricks and their gradual reheating in October, would have accelerated their deterioration, ultimately leading to their failure. This would have, in the ordinary course of events, necessitated their replacement earlier rather than later and in my view, that constitutes damage to the bricks.

1777. Johnson Tiles replaced some 730 roof bricks and 200 roller blocks in the 1998 Christmas shutdown. It claims that 35% of the actual cost was due to the September stoppage. I do not accept Mr Walton's evidence on that issue. Given the history, the fracture problem of roof bricks pre-dated the September stoppage. Whilst I accept that the stoppage would have had some effect, the evidence from Professor Sorrell and Mr Kilborn leads to the conclusion that the deterioration was small. That brings me to the question whether the gas stoppage was a cause of the roof and roller block repairs claimed by Johnson Tiles. This was also a hotly contested issue at trial. It was the contention of the defendants and third parties that the gas stoppage did not cause any loss to Johnson Tiles because a decision had in fact already been made, prior to that stoppage, to replace the 730 roof bricks and roller bricks, because of the roof brick problem and the decision to gradually replace the blocks.

1780. The evidence clearly established that since 1993, progressively, roof bricks had been replaced by adopting a different design for the roof, namely, hanging roof bricks, and the roller blocks which hold the actual rollers were being progressively replaced by Welko roller blocks of stronger and denser materials to withstand the wear and tear of the rollers turning inside the block.

1783. By 25 September 1998, a decision had already been made to replace some 730 roof bricks and some 200 roller blocks. Orders had been placed to purchase those products. A decision was made that the roof and roller blocks would be replaced in the Christmas 1998 shut down. This was partly due to the decision to gradually change the roof bricks to the new style and also due to the roof brick problem which was affecting the bricks in the roof over at least 11 months.

1786. In September 1997, there was a shut down of the Welko kiln because of lack of production, and some repair and maintenance works were carried out, which would have been carried out at the Christmas 1997 shut down. Broken roof bricks in zones 17 and 18 were replaced and damaged roller blocks were replaced in a number of places along the kiln. In a report dated 9 October 1997, Mr Stapelfeldt stated that the roof in zones 10, 11 and 12 are the only sections that still have the old style of bricks and will need to be replaced in Christmas 1998.

1789. In late August/September 1998, Mr Stapelfeldt received a quotation from Welko for the supply of vault fire bricks with dimensions of 250x250x130mm and he calculated the number of bricks which would be required for the Christmas 1998 shut down. On 3 September 1998, he ordered 768 roof bricks for the Welko kiln roof.

1792. In a letter dated 3 September 1998 to Welko, Mr Stapelfeldt concluded -

"Can you please have these ready for shipping as soon as possible because they are required for our Christmas shut down."

1796. The cost was some $32,756 and it is clear that Johnson Tiles would not wish to order, and have in stock, a substantial number of roof bricks, unless they were needed. In my opinion, the roof bricks were required for the Christmas shut down.

1799. Also purchased prior to 25 September were 200 Welko roller blocks at a cost of US$2,762.

1802. Further, the evidence revealed that as early as 1993, the decision was made to replace the roof bricks with a hanging type roof and it is clear that the decision made to install new roof bricks, up to 765, was part of that modification; but also it was clear that there were a number of bricks which had broken in the roof, requiring replacement prior to the placement of the order. The roof was in a state of disrepair.

1805. Applying the principles concerning causation, the but for test, when applied, leads to the conclusion that the September stoppage was not a cause of the costs incurred at the Christmas shut down. It would not have mattered whether the gas stoppage occurred in September 1998 or not, the decision had already been made to replace the roof bricks and roller blocks. The severe damage seen in January 1999 was the aftermath of the roof problem. It was a problem prior to the gas stoppage it caused damage to the roof and a decision was made to replace the roof prior to the stoppage. The damage which occurred as a result of the stoppage, was further deterioration of an already defective and damaged roof. The further deterioration was small, to a roof which was to be replaced. I am not persuaded by Johnson Tiles that the gas stoppage was a cause of the works performed during the Christmas shutdown.

1808. Accordingly, Johnson Tiles is not entitled to recover any compensation for the expenses incurred during the Christmas shutdown of 1998/early January 1999.

1812. In order to manufacture tiles, raw materials are mixed together in huge tanks. The material in the tanks must be kept agitated and if not, the mix solidifies. It would be extremely hard to remove and may cause damage to the tanks. The tanks are made of steel, have a diameter of about eight to nine metres and are seven metres high. When the gas was stopped, resulting in the stoppage of production, it was necessary to keep the raw material in a liquid form. In order to keep it in a liquid form over the following two weeks, it was necessary to use electricity to agitate the slurry and labour expenses were incurred. The agitation of the slurry is part of the normal production run. The gas stoppage resulted in the batches of slurry being agitated for a longer period than would have been the position if the gas had not been stopped and production continued.

1815. I am satisfied that Johnson Tiles did suffer damage as a result. The damage would comprise the costs of the increased electricity and labour costs.

1818. The next question is, what type of damage is it? Clearly, it was financial but it was submitted that cost incurred to avoid property damage was to be treated as property damage.

1821. There is no doubt that if the slurry had solidified, then it would be damaged to the point where it would have to be thrown out and there would be an expense involved in removing it from the vessels. There would also have been a risk that there would have been damage to the containers. This would be property damage - see Spartan Steel and Alloys Ltd v Martin and Co (Contractors) Ltd ("the Spartan Steel case").[15] In that case, the electricity supply powered the machinery. When it ceased, the machine stopped and the materials in the machine were damaged and had to be thrown away. This was property damage.

1824. Here, the stoppage of gas did not pose any risk to the slurry. Agitation continued unabated. The additional agitation meant the costs increased.

1827. In Junior Books Ltd v Veitchi Ltd,[16] Lord Brandon of Oakbrook referred to two examples where the principles of Donoghue v Stevenson permitted recovery for purely economic loss. His first reference was to the decision in the Hedley Byrne case. He then went on to say this -

"Secondly, there may be a type of case where a person, who has a cause of action based on Donoghue v Stevenson reasonably incurs pecuniary loss in order to prevent or mitigate imminent danger of damage to the persons or property exposed to that danger: see the dissenting judgment of Laskin J in the Canadian Supreme Court case of Rivtow Marine Ltd v Washington Iron Works referred to with approval in the speech of Lord Wilberforce in Anns v Merton Londonborough Council [1977] UKHL 4; [1978] AC 728 at 760. I also refer to the decision of Bower v Paramount Builders [1975] NZHC 2; [1975] 2 NZLR 546." (Emphasis added).

1831. In Anns v Merton London Borough Council ("Anns' case")[17], Lord Wilberforce classified the subsequent damage to the house as physical. This was in a case where some years after the erection of the building, structural movements occurred, resulting in cracks to the walls and the floors. What his Lordship said was obiter. The law in Australia categorises such losses as purely economic. See Bryan v Maloney.[18] Further, Lord Brandon stated that "there may be" such a principle, and his Lordship referred to a dissenting judgment in support of his tentative proposition.

1834. In my opinion, the law in this country does not classify as property damage, the financial expenses incurred to avoid damage to property or person. That is not to say that such expenses could not be recovered. See observations of Finkelstein J in Dovuro v Wilkins.[19] See also observations of Lord Roche in Morrison Steamship Co Ltd v Greystoke Castle (Cargo Owners).[20]

1837. Further, I accept Esso's submission that the gas stoppage did not interrupt the agitation of the slurry. The agitation is in the course of the manufacturing process and irrespective of whether the gas was on or off, did not impact upon the agitation. The effect was that the agitation continued for a longer period. There was no question of any damage to property.

1840. In my opinion, the expenses involved in continuing the agitation were financial and the loss was purely economic.

1843. I am satisfied that the gas stoppage was a cause of the additional expense. I reject the submission suggesting that the gas stoppage was not a cause of the additional expense.

Costs incurred in shutting down and starting up the kilns

1847. Gas, electricity and labour costs were incurred during the process of shutting down and starting up the kiln and in my opinion, Johnson Tiles incurred those expenses by reason of the stoppage of gas, leading to the non-production of products. The losses are purely economic.

Loss of value of tiles or expenses incurred during shut down of production

1851. By reason of the gas stoppage, production ceased for just over two weeks, which meant that Johnson Tiles was unable to manufacture approximately 99,000m2 of tiles. Whilst the plant was remaining idle, Johnson Tiles incurred expenses, mainly the fixed expenses of maintaining a factory and administration.

1854. In my opinion, the evidence does lead to the conclusion that in that period, there were expenses incurred and Johnson Tiles would be entitled to recover some of those expenses because of the lost production. My present view is that the loss is not the value of the tiles that were not produced, but the expenses of maintaining the factory labour force and administration would be recoverable. This is economic loss. However, I do not have to come to a definite view at this stage on the question.

1858. This should have been an easy head of damage to prove if in fact Johnson Tiles lost profits due to lost sales. Evidence of one lost sale because of lack of stock due to the gas stoppage would have sufficed.

1861. Johnson Tiles sold a large range of tiles, was one of two manufacturers in Australia, and one of its significant selling points was that it could meet an order promptly, usually within a period of ten working days after the order was placed. This is to be compared with the situation in respect of imported tiles. If the tiles were not in stock, then the period of delivery could be months. Johnson Tiles built up goodwill throughout the market place on prompt delivery and many ordered goods from them.

1864. Bearing in mind that it is not an issue in the present proceeding to quantify such loss, one would have expected that it would have been fairly simple to establish at least one lost sale which would have had a consequential financial loss to Johnson Tiles. Unfortunately, insufficient thought and consideration was given to this aspect of the case. Initially, in order to prove this part of the case, it was left to a chartered accountant to examine many of the books of account of Johnson Tiles and other records to arrive at some figure for alleged lost sales. There was no direct evidence of lost sales. It was said in evidence that there were no records because when an order was cancelled, the computer wiped out all trace of cancelled orders. On any view of the evidence, there were other direct sources which could assist to prove at least one lost sale.

1867. Instead, Mr Humphris was left to examine all the records and to determine whether there were lost sales by the movements of stock and by comparing two periods of trading, pre and post the September gas stoppage. He opined the view that there must have been lost sales based on the comparison and he calculated a sum representing the losses. The difficulty with the exercise is that the expert must have all the relevant facts. Mr Humphris did not. One important fact not known to Mr Humphris was the steps taken by Johnson Tiles in October-November 1998 to work weekends to make up the lost production.

1870. One thing is clear. For two weeks, Johnson Tiles was unable to produce tiles. If it had been producing tiles in that period, it would have made some 99,000m2 of tiles. The evidence established that production runs were determined by the sales and manufacturing staff for a period of at least two weeks, and more like four weeks. It would not have been difficult to have determined what tiles should have been made in that two week period, to determine from the records what effect that had upon the stocks of those particular tiles, and whether it was necessary, in order to meet a demand, to make those tiles with a consequential effect upon stocks of other tiles. By tracing through that exercise and considering the sales of the various types of tiles, it would not have been difficult to determine what effect the lack of production had upon sales for the following six months. By adopting a step by step process of what actually did happen, one could gain information as to whether or not there were lost sales and lost profits. Consideration could have been given to the stock levels in the period of six months after the stoppage and the impact of the stoppage on the level of stocks. In my opinion, the exercise could have been done. Evidence was given of lost records concerning the October production. This proceeding was commenced on 28 September 1998 by Johnson Tiles. Persons involved in the production run could have provided information. I reject the submission that the exercise could not have been done. Imprecise as it may have been, it was a better foundation for evidence of lost sales that Mr Humphris attempts to determine the fact from the records, especially when he did not have all the facts bearing on the production and trading over the periods pre and post September 1998.

1873. It is clear from the evidence that from time to time, Johnson Tiles, in the past, was not able to meet orders because it had not planned for a particular type of stock. No doubt on occasions in the past, back orders had been cancelled because of that fact and the failure to deliver promptly. Mr Humphris did not seek to determine what would have been the position if the gas stoppage had not occurred and then compare it with what in fact happened. I do not criticise Mr Humphris. He was not properly instructed as to the principles of law which apply in this area.

1876. In determining damages, there are two questions, namely, whether a particular head of loss has been caused and the calculation of the amount of compensation attributable to that particular head of loss.

1879. The latter question, namely, the calculation of compensation, is determined by the application of the well established principle of law stated by Lord Blackburn in Livingstone v Rawyards Coal Co.[21] His Lordship defined the measure of damages as -

"That sum of money which will put the party that 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."

1883. The principle of law has been consistently referred to with approval and been followed in Australia in many cases. See Evans v Balog[22] and Butler v Egg and Egg Pulp Marketing Board.[23]

1886. In practical terms, in order to determine the amount of damages in money's worth, where the claim is based on financial loss suffered or incurred, one starts with the model of what would have been the position if the tort had not been committed and compares it with what in fact happened See Hill v Van Erp.[24]

1889. Mr Humphris did not go down that path and stated so when asked by the Court. Not only did he not go down that path, he did not consider that as an appropriate method. If that approach had been adopted, it would have been the basis for an assessment of the damages, but more importantly, would have identified whether in fact any orders were lost. It appears customers were approached during pre-trial investigation to provide evidence of lost sales, but at the beginning of the trial, Johnson Tiles did not intend to call any customer to prove a lost sale.

1892. I agree with Mr Collins SC for the plaintiffs that there are different methods of proof but the comparison between the hypothetical and actual is a well-tried and appropriate method.

1895. Has Johnson Tiles proven, on the balance of probabilities, that as a result of lost production because of the gas stoppage, it suffered financial loss due to lost sales?

1898. In JLW v Tsiloglou,[25] Brooking J summarised the principles concerning the fact of damage and assessment. A plaintiff must not only prove the fact of loss but must call necessary evidence as to the amount. When it comes to a question of amount, it must be proved with some degree of certainty. As his Honour said, at p.241 -

"Where precise evidence is obtainable, the court naturally expects to have it; where it is not, the court must do the best it can."

1902. This is a case in which Johnson Tiles claims financial loss due to the gas stoppage. It is not a case where the matter is left to the opinion and judgment of the Court, acting at large as one would in a jury case where the damages are general. See Ted Brown Quarries v General Quarries.[26]

1905. Brooking J stated the principles at p.245, when he said -

"It is clear, as I said much earlier in these reasons, that the plaintiff cannot recover substantial as opposed to nominal damages unless he proved both the fact and the amount of damage." (Emphasis added).

1909. In the present case, which is in the field of common law negligence, damage is the gist of the cause of action, and unless Johnson Tiles proves the fact of damage and that it was more than nominal, it would not be entitled to any damages at all.

1912. In my opinion, the existence of damage is essential to the cause of action and it must be shown with some degree of certainty. As I stated a number of times in the course of the hearing, if Johnson Tiles suffered a loss of any sale due to the gas stoppage, then it should not have been difficult to prove that by direct evidence. Instead, evidence was called from an expert that the accounts and financial documents lead to that conclusion. In the absence of direct evidence, it is necessary to closely scrutinise the evidence to see whether it does establish the fact.

1915. Many days were spent on this issue. Eventually, late in the case, a witness statement was produced from Mr Dino Piro, an employee of Sunbeam Tiles in Adelaide. Prior to him giving evidence, Mr Humphris gave evidence and was cross-examined for some days on his report.

1918. When Mr Humphris gave evidence, there was no direct evidence that any orders had been cancelled post 25 September 1998, because of inability to supply the stock, or that there were lost sales. The evidence given by the Johnson Tiles employees was that the ordering system was on a computer, and there was no record kept of any orders that had been cancelled or any orders that were refused because of lack of stock. No evidence was called which identified what stock would have been made in the two week period. There was some evidence that Johnson Tiles maintained a stock of goods to meet orders for four to six weeks. There was also evidence that there was panic buying of tiles in the latter part of September/early October, which substantially reduced stock levels.

1921. Mr Humphris sought to determine what losses Johnson Tiles suffered as a result of the gas stoppage and sought to determine the compensation. He had no direct evidence, nor did the Court have any direct evidence, that any orders were cancelled or that any orders were lost. Nevertheless, he prepared a report and concluded that there were lost sales. He prepared two reports. The first report, which was filed in the Federal Court proceeding, assessed the loss at some $800,000, but after reading a report of Mr Maxsted, who was retained by the defendants, he produced a second report which claimed a loss of not less than $303,000.

1924. Mr Humphris considered the trading for a period of 17 months prior to 28 September 1998 and then compared it with the trading for a 17 month period to February 2000. He reached the conclusion that the prior period of trading would have been achieved in the following year but for the interruption. His comparison revealed that the total loss of sales was $1,895,000. He observed that this represented a marked decline in sales subsequent to the September 1998 gas shut down. He stated that from February 2000, the sales returned to the levels reached in the 1998 calendar year.

1927. He determined the gross profit margin, which he calculated at 15.99% based on a weighted average of the previous 36 months, and reached an overall loss of not less than $303,010.

1930. Not surprisingly, he was extensively cross-examined and in particular, as to events which would have had an effect upon the trading in both the pre and the post 27 September 1998 periods. These were factual matters, many of which he had no knowledge of and which, in my opinion, would have had an effect on the trading during the relevant periods. Failing to take them into account makes the comparison an uncertain basis for any conclusion.

1933. In a court proceeding in which a financial loss is claimed, the Court expects the best evidence to be placed before it. The approach of Mr Humphris was not appropriate in the circumstances to determine whether or not there were lost sales and to value those lost sales. It is not part of my function to assess the damages. Mr Maxsted disagreed with Mr Humphris' conclusion. He identified a number of factors, all of which bore upon trading before and after 28 September. He confirmed that to establish lost sales by reference to comparing trading periods, is fraught with uncertainty. He stated that in the circumstances of this case, it would not be possible to draw the inference that sales were lost.

1936. In evaluating the evidence, it is necessary to bear in mind that the writ was issued in the Federal Court on 28 September 1998, some three days after the gas interruption, and during the following months, the financial director, Mr Pappas, obtained legal advice from the plaintiffs' solicitors. During this period, claims for financial loss were made.

1939. Further, some evidence was given, confined to a question of credibility, of a statement from the then State manager for New South Wales of Johnson Tiles, Mrs Kim Wild, in which she listed a number of customers who allegedly cancelled orders. No customer, distributor or employee of Johnson Tiles gave any evidence of any lost sale involving a New South Wales customer.

1942. In the end, the evidence came down to Mr Dino Piro.

1945. I accept Mr Piro as a witness of truth. However, like most people, he suffered from fading memory and there were very few documents produced which would in any way assist his memory.

1951. His evidence, which I accept, was that some orders which had been placed were cancelled, because Johnson Tiles was unable to supply the tiles within the time required during the latter part of 1998 and early 1999. He also stated that throughout the months following the gas stoppage, Sunbeam used alternative products on projects for which Johnson Tiles products would have been used. Also, because of the lack of supply, bathroom displays using Johnson Tiles products, which Sunbeam had established in its showroom, were dismantled.

1954. He could not recall the volume of tiles in orders which were cancelled, was unable to give evidence as to their value, cannot recall any particular orders, and cannot recall when these orders were actually cancelled. Further, he does not know the type of tile that was cancelled. In addition, he was unable to produce any documentary evidence in support of his oral evidence.

1957. Although Mr Piro was unable to produce any documents relating to sales during 1998-1999, Esso tendered in evidence bundles of invoices and consignment notes relating to orders placed by Sunbeam and delivered by Johnson Tiles. Prior to 25 September 1998, delays between order and delivery varied from two weeks to four to six weeks, and there were a number in excess of six weeks. The post September 1998 trading showed, between 25 September 1998 and December 1999, some 269 orders delivered within two weeks, 61 delivered within four weeks, 41 delivered within four to six weeks and 41 delivered in excess of six weeks from date of order. It was submitted by Esso that this showed that Mr Piro's evidence, based as it was on memory, was inconsistent with the evidence he gave that Sunbeam Tiles were concerned about prompt delivery. I note the criticism, but in the end, I have to make some assessment of the accuracy of the evidence given by Mr Pirot.

1960. The evidence on the issue of lost sales was unsatisfactory. Esso submitted that if the Court accepted the evidence of Mr Piro, where was the proof that the particular orders cancelled post gas stoppage were cancelled because of lack of stock due to the gas stoppage? There was some evidence that on occasions in the past, quantities of stock were unavailable. Mr Collins SC submitted to the Court that even though there may have been more appropriate steps taken to place the evidence before the Court as to lost sales, the Court should look at the totality of the evidence given. He submitted that some of the evidence of Mr Humphris supported the conclusion that there were lost sales due to the gas stoppage. He emphasised that the evidence concerning the lack of inventory during the relevant period, in particular, the substantial increase in the number of back orders during the period, supported the conclusion. In addition, he pointed out that Mr Maxsted was of the view that there may have been some lost sales.

1963. In this part of the proceeding, the Court does not have to quantify the loss. Taking into account the totality of the evidence, I find that some orders of Johnson Tiles were cancelled during the period following the September gas stoppage because of lack of stock. I also find that the gas stoppage was a cause of the unavailable stock, and the exercise by Mr Humphris does provide some support for the conclusion that Johnson Tiles suffered some financial loss as a consequence. I am satisfied that the lost sales would have produced a gross profit and hence, Johnson Tiles suffered some compensable loss.

1970. In order to recover the lost production, Johnson Tiles manufactured tiles working additional shifts on Saturday 17 October 1998 in the floor tile manufacturing plant and employees worked on the following Saturdays: 24 and 31 October, and 7, 14 and 21 November 1998. The employees were paid at overtime rates, partly at time and a half and partly at double time. I accept the evidence that these Saturdays were worked to enable the lost production to be made up. There were six days of production.

1973. I find that the expenses would not have been incurred but for the gas stoppage and that the loss suffered was purely economic.

1977. On the afternoon of 25 September 1998, the gas supply was turned off at Rockman's Regency and was not turned on until 6 October 1998.

1980. I am satisfied that Regency Hotels suffered pecuniary loss as a result of the gas stoppage. I do not quantify the loss at this stage, but I am satisfied that each of the following heads of damage have been proven, and that expense was incurred and loss was suffered as a result of the gas stoppage -

(i) Supply and installation of ten electric hot water services;

(ii) three-phase electricity supply and install;

(iii) advertising cost to attract custom when the hotel and restaurant businesses were suffering from reduced restaurant services and lack of hot water;

(iv) value of gift vouchers to encourage business;

(v) hire of barbecue equipment and gas bottles and the cost of LPG;

(vi) cost of sign writing on external windows to advertise substitute services;

(vii) removal of signage;

(viii) cost of printing of revised menu;

(ix) fall in occupancy rate after the weekend of 26 and 27 September 1998;

(x) cancellation of functions.

1986. The above damages claimed are purely economic loss. The hotel still has the electric hot water service which has not been used since 1998. It would only be used in circumstances where the gas-fired hot water service was unavailable. It is a back-up service.

1990. 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.

1993. 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.

1996. 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").[27]

1999. Any expenses incurred in respect of the lost production would also be recoverable as consequential upon physical damage.

2002. 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.

2008. The consequential losses included the transport and tipping fees for the rejected barley and malt.

2011. 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.

2015. On Saturday 26 September 1998, the gas supplied to the Middle Brighton outlet was turned off and was not reconnected until 6 October 1998.

2018. The evidence established that some of the stock had to be destroyed because it could not be cooked in time. In my opinion, that is property damage. See the Spartan Steel and Muirhead cases, supra.

2021. The evidence established that Nando's converted some of its equipment to LPG, incurred the cost of LPG bottled gas and lost profits because of the inability to supply cooked food due to the interference with the gas supply. Nando's also incurred an expense converting the cooking equipment back to natural gas.

2024. As against its losses, the saving of natural gas would have to be taken into account.

2027. All the claims, save for the discarded stock, are purely economic loss.

2031. Wilke & Company operated a commercial printing plant in Clayton, operating 24 hours a day, and at 6.00 p.m. on Friday 26 September 1998, the gas supply to the plant was turned off and was reconnected on 6 October 1998.

2034. Wilke supplied and installed LPG equipment to operate their plant and claimed the cost of supply and installation and the cost of reconverting the equipment back to natural gas. In addition, there was the cost of the LPG which was used, less the savings in respect of natural gas not used. In addition, Wilke made arrangements to have printing jobs done by other printing companies and as a result, substantial expenses were incurred over and above the normal cost of production.

2037. I am satisfied that Wilke did incur the said expenses and I am satisfied that Wilke suffered compensable losses. All the losses claimed are purely economic loss.

2042. Mr Dean resided with his wife and daughter, Danielle, in rented premises in Preston. The daughter suffers from a disease which requires her to bathe frequently each day. Their home heating, hot water and cooking used natural gas. As a result of the stoppage, Mr Dean purchased an electric kettle, an electric steamer to cook vegetables and an electric urn to provide a larger quantity of hot water for the daughter.

2045. I find that but for the stoppage of the gas supply, Mr Dean would not have spent the money on an electric kettle, steamer and urn and hence, has incurred that pecuniary expense as a result of the gas stoppage. Such loss is purely economic.

2049. On 25 September 1998, Mr MacLennan resided with his wife and children at their home in Blackburn. His wife and children were absent on holidays. The property was purchased in February 1994 and it had a Rheem gas storage hot water service. Mr MacLennan was instructed to turn off the gas supply on Sunday 27 September. The gas was turned back on on 8 October. By this time, his wife and children had returned.

2052. The plumber who installed the Rheem 135 litre hot water service gave evidence that he installed the service in May 1989. He expressed the view that the hot water service was too small for the size of home and expected use. The home had three showers.

2055. By September 1998, the hot water service had been operating for nine years and five months. The average life expectancy of this type of unit was four to nine years.

2058. On 8 October, the gas was turned on at Mr MacLennan's home and hot water was available. On the following morning, Mr MacLennan had a shower and the water was cold. He inspected the water service and it was leaking. He called a plumber, the service was inspected and it had to be replaced.

2061. The Rheem hot water unit was disposed of without being examined by any person.

2064. The plumber who removed it was not called as a witness. The lack of any evidence concerning the state of the unit after it developed a leak makes the task of proving the connection of the gas stoppage with the failure fraught with difficulty.

2067. Such units usually fail because, as the unit ages, the enamel which protects the steel vessel inside deteriorates and eventually wears away. The water is then brought into contact with the steel outer vessel and it commences to rust. Eventually, a small leak will occur through rusting, often around welds and seams, and then the unit fails. It can take some time for the pin prick hole, which usually is the commencement of the leak, to eventually reach a size where the water runs out of the cylinder.

2070. The Professor of Mechanical and Manufacturing Engineering at the University of New South Wales, Graham Morrison, gave evidence for the plaintiffs as to the likely cause of the failure of the unit. At the outset, it was accepted that after a period of some nine years, the unit was approaching the end of its operating life.

2073. He gave evidence, which I accept, that when a service is rusted and approaching failure, it is vulnerable to damage. For example, he said a knock or a significant and rapid change in water pressure or atmospheric pressure may be enough to accelerate the failure of it.

2076. As the outer steel rusts, a pin hole may develop and there will be a weep. Sometimes that pin hole may be blocked because of the corrosion. He was of the opinion that the cause of the failure was because it is a pressure vessel, and pressure that was set up when the unit was heated from an ambient temperature to the recommended setting, which is about 700C, created the additional pressure which, in his opinion, caused the failure. He could not say when the penetration through the steel began. Indeed, it may have been leaking for some period before. Whilst his theory has a superficial attraction, it suffers from the fact that in normal working mode, the vessel is subjected to many pressures in the course of a day. Each time cold water enters the vessel and heating begins, the pressure inside the vessel changes. If all the hot water is used, the service heats for a long period with the pressure ever changing. The unit is fitted with a pressure valve to accommodate the pressure changes.

2079. A scientist and gas technology expert, Grant Pearson, was called by the defendants. It was his opinion that the cessation of the gas supply could not accelerate the failure or deterioration of the hot water service. He was of the opinion that the normal wear and tear resulted in the unit reaching a point where it was about to fail at the end of its working life. He was of the view that a hot water unit lasts somewhere around nine years and one would have to be extremely fortunate if it went beyond nine years.

2082. After Professor Morrison had given evidence, Mr Pearson carried out a number of experiments on a Rheem unit of the same type to determine the pressures whilst heating and cooling. He stated that drawing off water and heating in the normal use would produce pressure and in his opinion, Professor Morrison was wrong that the increase in the pressure brought about by the starting up of the hot water service after a period of some ten days non-use, caused the failure.

2085. The mere fact that something occurs after a particular incident may be some evidence that the incident was the cause. However, one has to proceed with extreme caution in applying that reasoning because there could be other reasons for the failure other than the incident. That is the issue here. The plaintiffs assert that the hot water service failed because the unit was not heated for a period of some ten days, followed by a start up from ambient temperature. The contention of Esso is that the unit had reached the end of its working life and it failed, as one would expect, when it had reached that point, and the fact of the gas stoppage was irrelevant to that failure.

2088. Professor Morrison conceded that in the absence of examining the unit, it was not possible to say how long the pin hole had been there; the unit may have been weeping for some period prior to its ultimate failure.

2091. In the absence of direct evidence as to the cause of the failure, the Court asked to draw the inference based upon a theory that the cause of the failure was the lack of use over ten days, followed by the reheating causing pressure within the vessel. Sometimes it is a fine line between speculation or conjecture and true inference. One thing is certain, the tribunal of fact is not permitted to guess. The plaintiffs carry the burden of proof.

2094. In Richard Evans and Co Ltd v Astley,[28] Lord Robson said in relation to drawing an inference -

"You need only circumstances raising a more probable inference in favour of what is alleged ... Where direct proof is not available it is enough if the circumstances appearing in the evidence give rise to a reasonable and definite inference; and it must do more than give rise to conflicting inferences of equal degree of probability so that the choice between them is a mere matter of conjecture."

2098. The Court is faced with conflicting evidence. Professor Morrison put forward his theory. Mr Pearson, a man of considerable experience in the field of gas hot water services, disagreed and opined the view that the cessation of gas supply could not accelerate the failure of the deterioration. As he stated, ordinary operating conditions of the hot water service would constitute more extreme conditions than a heat up from ambient temperatures. I am not satisfied on the balance of probabilities that the plaintiff has proven that the gas stoppage and the subsequent heating up caused the failure of the hot water service. To reach that conclusion, in my view, would be, in light of all the evidence, pure speculation and conjecture.

2105. Ms Chesterfield is 79 years of age, legally blind and lives alone. She is housebound. Prior to the gas stoppage in September 1998, she ordered her food over the telephone and it was delivered. She placed orders with local supermarkets and her local butcher.

2108. Prior to the gas stoppage, she had an all gas household. The gas was shut off for about two weeks from 27 September. She was unable to prepare her meals.

2111. Some of her meat and vegetables became unfit for human consumption and had to be thrown out.

2114. Later, she purchased a microwave, electric kettle, grill and electric heater.

2117. I am satisfied that as a result of the gas stoppage, Ms Chesterfield incurred expenses for the purchase of these electrical items and also suffered loss by reason of the fact that some of the meat and vegetables had to be thrown away.

2120. In my opinion, the cost of purchasing the electrical items was purely economic loss. The spoilt food was property damage. See Muirhead's case, supra.

2125. Mr Dean, since 1977, was employed as a labourer with Galvanising Industries Pty Ltd at Preston. He worked full time, working a day shift from 7.00 a.m. to 3.30 p.m., and on occasions, worked overtime.

2128. On Friday 25 September 1998, he attended a meeting at work, was told that there was a gas problem, and was told to ring on Monday morning to see if there was to be any work. He was given the option of using annual leave or losing wages.

2131. He was stood down between 26 September and 5 October. When he got back to work on 6 October, a diesel generator had been installed and he was able to work.

2134. He chose to take accrued annual leave entitlements rather than losing wages. Normally, he took his holidays with his family during the Christmas period. Instead, he took his annual leave early. He did not suffer any economic loss as a result of being stood down. He suffered inconvenience.

2138. Ms Gladwin was employed at the Port Melbourne plant of Toyota Motor Corporation Australia Limited. She was working full time with an average of four hours' overtime per week. She was employed as a packer.

2141. She completed her usual afternoon shift on 25 September and arrived at work on Monday 28 September 1998 to be informed that there was no work for her. She was stood down. She was told to ring Toyota to ascertain when production would recommence. She was stood down between 28 September and 5 October 1998. She lost net wages of $398.76.

2144. Ms Gladwin was stood down pursuant to clause 41 of the Toyota Australia Vehicle Industry Award 1998. The defendants accept that she was properly and lawfully stood down.

2147. I am satisfied that Ms Gladwin, as a result of the gas stoppage, suffered a pecuniary loss of her wages while she was stood down.

2151. It is clear that the damages suffered as a result of the gas stoppage by the plaintiffs and other group members can be divided into property damage, economic loss consequential upon property damage and damage which was purely economic.

1. Johnson Tiles - did not suffer any property damage but suffered economic loss.

3. Barrett Burston - suffered property damage, economic loss consequential upon property damage and economic loss.

4. Nando's Australia - suffered property damage, economic loss consequential upon property damage and economic loss.

6. Mr Dean - as a domestic user, incurred financial expenses.

8. Ms Chesterfield - suffered property damage and incurred financial expenses.

9. Mr Dean - as a stood down worker, did not suffer any loss.

2169. The modern law of the tort of negligence goes back to Donoghue v Stevenson ("Donoghue's case"),[29] although its genesis can be traced back to cases in the 19th Century.

2172. The decision in Donoghue's case was probably the most important decision in England and Australia of the 20th Century. It has had an enormous impact on the development of the law of common law negligence. Not only did it establish that a manufacturer owed a duty of care to the consumer of its product, but it laid down a general formula which has been extensively used in the development of the law of negligence ever since. Just as importantly, it removed the tort of negligence from existing precedents. It unshackled the law of negligence from the restrictions of the past, giving it the opportunity to develop into new areas of compensation for negligent acts.

2175. The facts in Donoghue's case are well known but are worth repeating.

2178. The plaintiff and a friend entered a café at Paisley in Scotland. The friend purchased a bottle of ginger beer which had been manufactured by the defendant. The occupier of the café poured some of the ginger beer into a tumbler and the plaintiff drank the contents. Her friend then proceeded to pour the remainder into a tumbler when a snail, which was in a state of decomposition, floated out of the bottle. It was alleged that as a result of the nauseating sight of the snail and the impurities in the ginger beer which the plaintiff had consumed, the plaintiff suffered from shock and severe stomach problems.

2181. There was no contract between the plaintiff and the manufacturer or shop proprietor who sold the bottle of drink. No doubt there were a series of contracts between manufacturer, retailer and purchaser. The plaintiff succeeded.

2184. The case is famous for the statement by Lord Atkin, who established a two-step formula to determine whether or not there was a duty of care owed in novel circumstances. It involved proof of the following -

(i) Would a reasonable person, in the shoes of the alleged wrongdoer, having knowledge of all relevant circumstances, have reasonably foreseen that his actions or omissions would be likely to injure the victim?;

(ii) That there was a relationship of proximity between the victim and the wrongdoer, that is, that the victim was a person so closely and directly affected by the alleged wrongdoer's act or omission, that the latter ought reasonably to have had the victim in contemplation when he as a reasonable person, should have been directing his mind to the acts and omissions which are called in question.

2190. This formula is of general application and has been applied in cases other than manufacturer's liability. But it is not a complete and universal formula. As Professor Fleming said, "No-one has ever succeeded in capturing in any precise formula" a comprehensive test for determining whether there was a duty of care.[30]

2193. Lord Atkin emphasised that not every person who suffers injury as a result of negligent conduct was entitled to compensation. He said, supra, at p.580 -

"The liability for negligence, whether you style it such or treat it as in other systems as a species of `culpa' is no doubt based upon a general public sentiment of moral wrong doing for which the offender must pay. But acts or omissions which any moral code would censure cannot in a practical world be treated so as to give a right to every person injured by them to demand relief. In this way rules of law arise which limit the range of complainants and the extent of their remedy." (Emphasis added). See also Sullivan v Moody.[31]

2197. The Atkinian formula has been used to determine in a novel set of circumstances, whether or not there was a duty of care. However, as has been emphasised many times, the law has evolved on a case by case basis. The law proceeds "incrementally and by analogy with established categories" - per Brennan J in Sutherland Shire Council v Heyman.[32]

2200. The point was made by Lord MacMillan in Donoghue's case, supra, at p.619, when his Lordship said -

"What, then, are the circumstances which give rise to this duty to take care? In the daily contacts of social and business life human beings are thrown into, or place themselves in, an infinite variety of relations with their fellows; and the law can refer only to the standards of the reasonable man in order to determine whether any particular relation gives rise to a duty to take care as between those who stand in that relation to each other. The grounds of actions may be as various and manifold as human errancy; and the conception of legal responsibility may develop in adaptation to altering social conditions and standards. The criterion of judgment must adjust and adapt itself to the changing circumstances of life. The categories of negligence are never closed." (Emphasis added).

2204. Some four years after Donoghue's case was decided, the Privy Council considered this new area of law in a case which involved a claim in contract against a retailer and a claim in tort against the manufacturer. The case was Grant v Australian Knitting Mills Limited ("Grant's case").[33] Dr Grant contracted dermatitis as a result of wearing a woollen garment which he purchased from retailers. The garment was defective owing to the presence of excess sulphites which were negligently left in the under garment after manufacture. He sued the retailer in contract, and the manufacturer in tort. The Privy Council found in his favour in both causes of action.

2207. Lord Wright made it clear, at p.104, that the contractual relationships were irrelevant to the question of whether there was a duty of care owed. After referring to the statement of principle by Lord Atkin in Donoghue's case, his Lordship said -

"It is obvious that the principles thus laid down involve a duty based on the simple facts detailed above, a duty quite unaffected by any contracts dealing with the thing, for instance, of sale by maker to retailer, and again by retailer to consumer or to the consumer's friend."

2211. His Lordship, at p.105, underlined the point when he said -

"It is immaterial that the appellant has a claim in contract against the retailers, because that is a quite independent cause of action, based on different considerations, even though the damage may be the same. Equally irrelevant is any question of liability between the retailers and the manufacturers on the contract of sale between them. The tort liability is independent of any question of contract." (Emphasis added).

2215. These observations were made in the context of a claim for damages for personal injury.

2218. In the present case, Esso relies upon the contractual regimes between the various parties in the supply chain excluding a duty of care in respect to purely economic loss. Contractual regimes are relevant where the claim is for purely economic loss.

2221. The Atkinian formula has been applied to establish duties of care in novel situations. But a duty of care was found to exist only in cases where the damage suffered was in the nature of personal injury or property damage, and economic loss was restricted to the loss consequential upon personal injury or property damage.

2224. Prior to and after _Donoghue'_s case, the law recognised particular relationships which established a duty of care by the very fact of the relationship.

2227. Once the law recognised that a particular relationship imposed a duty of care, then it was unnecessary thereafter to have recourse to the Atkinian formula. The latter applied to a novel situation. Examples of well established relationships are employer-employee, see Jury v Commissioner for Railways (NSW);[34] schoolmaster and pupil, see Richards v State of Victoria;[35] road user to other road users; and occupiers and entrants.

2230. In the 1980s, the High Court of Australia closely analysed the Atkinian formula and, in particular, the concept of proximity, and concluded that proximity played an important controlling role in the application of the formula to novel situations. The results of the analyses were summarised by the Court in the case of Cook v Cook.[36]

2233. In that case, the plaintiff was a passenger in a motor vehicle being driven by an unlicensed driver. The question arose as to whether there was a duty of care owed by the driver to the passenger and the standard expected in the circumstances.

2236. At p.381, Mason, Wilson, Deane and Dawson JJ said -

"For our part, we accept that a relevant duty of care will arise under the common law of negligence only in a case where the requirement of a relationship of proximity between the plaintiff and the defendant is satisfied; see, generally, Jaensch v Coffey; Sutherland Shire Council v Heyman; Stevens v Brodribb Sawmilling Co Pty Ltd. As an overriding control of the test of reasonable foreseeability, that requirement of proximity of relationship can be traced to the judgments of Lord Esher MR and A.L. Smith LJ in Le Lievre v Gould; see Donoghue v Stevenson. It constitutes the general determinant of the categories of case in which the common law of negligence recognises the existence of a duty to take reasonable care to avoid a reasonably foreseeable and real risk of injury to another." (Emphasis added).

2240. In a number of cases, Deane J analysed the "element of proximity".

2243. In Sutherland Shire Council v Heyman,[37] Deane J summarised the principles at p.497. He said -

"The requirement of proximity is directed to the relationship between the parties insofar as it is relevant to the allegedly negligent act or omission of the defendant and the loss or injury sustained by the plaintiff. It involves the notion of nearness or closeness and embraces physical proximity (in the sense of space and time) between the personal property of the plaintiff and the personal property of the defendant, circumstantial proximity such as an overriding relationship of employer and employee or of a professional man and his client and what may (perhaps loosely) be referred to as causal proximity in the sense of the closeness or directness of the causal connection or relationship between the particular act or course of conduct and the loss or injury sustained. It may reflect an assumption by one party of a responsibility to take care to avoid or prevent injury, loss or damage to the personal property of another or reliance by one party upon such care being taken by the other in circumstances where the other party knew or ought to have known of that reliance. Both the identity and the relative importance of the factors which are determinative of an issue of proximity are likely to vary in different categories of case." (Emphasis added).

"On the other hand, the identification of the content of that requirement in such an area should not be either ostensibly or actually divorced from notions of what is `fair and reasonable' ... or from the considerations of public policy which underlie and enlighten the existence and content of the requirement."

2251. In Alcock v Chief Constable of South Yorkshire,[38] Lord Oliver stated the following -

"In any event, there is in many cases, as for instance cases of direct physical injury in a highway accident, an almost necessary coalescence of the twin elements of foreseeability and proximity the one flowing from the other. Where such convergence is not self-evident, the question of proximity requires separate consideration. In deciding it the court is referenced to no defined criteria and the decision necessary reflects to some extent the court concepts of what policy - or perhaps common sense - requires." (Emphases added).

2255. The law has developed to the point where there are categories of negligence cases in which the courts have identified the relevant factors to consider in determining whether there is a duty of care; by way of example, nervous shock cases. Tracing the history of claims for nervous shock shows an approach and identification of the matters to be considered. This area of the law has progressed from no liability to liability limited to observation of the wrongful act and harm, to hearing the wrongful act and, ultimately, to a point where presence at the wrongful act is no longer required. See consideration of the history of the law in Pratt v Pratt[39] and compare it with the recent High Court decision of Tame v New South Wales.[40]

2258. It is clear that there is no universal formula which will provide the answer to the question whether there is or is not a duty of care. But further, there are categories of negligence cases which have their own particular salient features to consider and apply. Claims for purely economic loss are no exception. Unfortunately, the law concerning such claims has become complex and within this category, there are sub-categories, each depending upon their own particular features. The quest is to identify which are the salient features to consider in a particular class of case.

2261. The point is underlined by what the High Court said in Sullivan v Moodie, supra, at p.579 -

"Different classes of case give rise to different problems in determining the existence and nature or scope, of a duty of care. [The Court then stated a number of examples.] ... The relevant problem will then become the focus of attention in a judicial evaluation of the factors which tend for or against a conclusion, to be arrived at as a matter of principle."

2265. The Court quoted with approval what Lord Diplock said in Dorset Yacht Co Ltd v Home Office,[41] where his Lordship said -

" ... The judicial development of the law of negligence rightly proceeds by seeking first to identify the relevant characteristics that are common to the kinds of conduct and relationship between the parties which are involved in the case for decision and the kinds of conduct and relationships which have been held in previous decisions of the court to give rise to a duty of care."

2269. Up to 1964, the law was clear. In the absence of any special relationship between the wrongdoer and victim, such as a contractual one or an obligation arising out of a fiduciary relationship, the law denied a duty of care to any person who suffered purely economic loss as a result of the wrongful negligent conduct of another. See Candler v Crane, Christmas & Co ("the Candler case").[42]

2272. In 1964, the House of Lords in the Hedley Byrne case held that a person may recover purely economic loss from a person making a negligent misstatement, which the plaintiff relied upon.

2275. A summary of the law up to 1964 is to be found in the judgment of Gibbs J in the Caltex case, supra, at pp.543 et seq.

2278. The decision only partially opened the purely economic loss door and in England, the law has developed very cautiously and very much in the straight jacket of the principles established in the Hedley Byrne case, ie. proof, assumption of responsibility and reliance. Australian law has also cautiously evolved in this field but the door has been opened a little wider than in England. See the Caltex case and Perre v Apand Pty Ltd ("Perre's case").[43]

2281. As a general proposition, the application of the Atkinian formula to personal injury and property damage cases is more likely to produce a duty of care than in a case where the claim is purely economic loss. If one is to talk in terms of a bias, one may say that in personal injury and property damage cases, there is a bias towards finding a duty of care, whereas in purely economic loss cases, the bias is to the contrary.

2284. In the area of purely economic loss, the courts have proceeded with caution - Perre's case at para 93 per McHugh J.

2287. Purely economic loss cases are in a category of their own. There are sub-categories. The factors relevant to the issue of duty of care differ from sub-category to sub-category. One has to proceed with caution when considering whether the factors relevant to a physical damage case apply to purely economic loss cases.

2290. It is now necessary to consider the law concerning duty of care in purely economic loss cases and property damage cases.

2294. Prior to 1964, the law was clear. In the absence of a contractual, statutory or fiduciary relationship imposing a duty to take care to avoid economic loss, there was no duty of care owed to avoid purely economic loss. This was made clear in Candler, supra. As was stated in that case, the Atkinian formula was confined to physical injury and property damage.

2297. The case is important for a number of reasons. First, the forceful dissent by Denning LJ, which was subsequently upheld in the Hedley Byrne case, supra. Secondly, Cohen LJ quoted at length, the judgment of Chief Judge Cardozo CJ in the American case of Ultramares Corporation v Touche ("the Ultramares case").[44] The facts in both the English and American case were similar, namely, the negligent preparation of accounts relied upon by the plaintiff to invest in a company. The loss was purely economic. One of the reasons for denying liability, stated by Chief Judge Cardozo at pp.179-80, was -

"If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class. The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences."

2301. The policy factor bound up in the words "liability in an indeterminate amount for an indeterminate time to an indeterminate class" has been referred to in a number of cases in both English and Australian law, but save for some consideration in Perre's case, there has been no real analysis of the factor. It is noted that it is stated in a context of what may be described as a minor act of negligence.

2304. Australian law followed the English decisions and in Revesz v The Commonwealth,[45] a plaintiff was denied recovery because the claim was for purely economic loss.

"But, however formulated, the general refusal to protect economic interest against negligent invasion is based on grounds of policy and cannot be realistically explained by saying that such damage is unforeseeable or does not flow directly from the defendant's breach of duty. The real reason is to be found in the disinclination to saddle an individual with liability of inordinate magnitude for some perhaps quite trivial lapse. ... The denial of liability in these cases has nothing to do with the scope of the imputed foresight, but is based on an overriding policy of delimiting the scope of legal responsibility for negligence."[46] (Emphases added).

2311. In 1964, the House of Lords decided the Hedley Byrne case_._

2314. In that case, a bank, upon request, provided a reference concerning one of its customers, which was negligently prepared, knowing that it would be relied upon by another, to his possible detriment. It was held that there was a duty of care owed, but the bank was held not responsible because it had given the reference subject to an express disclaimer. The change in the law occurred in a case of negligent misstatements relied upon by another to his detriment causing economic loss. The House of Lords overruled the Candler case, supra.

2317. The decision established that a duty of care in a negligent misstatement case exists to avoid purely economic loss if -

(i) the advice is required for a purpose which is known to the adviser when the advice is given;

(ii) the plaintiff relied upon the statement made by the defendant;

(iii) the adviser knows the advice will be communicated to the plaintiff either specifically or as a member of an ascertainable class in order to be used for the purpose;

(iv) that the adviser, expressly or impliedly, undertook the responsibility of exercising reasonable care in making the statement;

(v) it is expressly or impliedly known that the advice is likely to be acted upon without independent enquiry;

(vi) that the plaintiff, in reliance upon the statement, suffered loss.

See Lord Oliver in Caparo Industries Plc v Dickman.[47]

2324. It was emphasised that the duty of care arose out of a particular special relationship between the parties.

2327. English law has recognised a duty of care to avoid purely economic loss, in cases other than negligent misstatement, where the facts fall squarely within the principles established in Hedley Byrne, namely, reliance, assumption of responsibility and special relationship. English law has also added a third limb to the Atkinian principle, namely, that a duty of care will only arise if it is "fair, just and reasonable" to impose such a duty. See Caparo Industries Plc v Dickman, supra, at pp.617-8. The additional element was first authoritatively established by the House of Lords in Governors of Peabody Donation Fund v Sir Lindsay Parkinson and Co Ltd.[48]

2330. The third limb is part of an overall test in England which applies generally, ie. including a physical damage case.

2333. The advances English courts have made beyond negligent misstatement have been limited, and in using the twin concepts of reliability and assumption of responsibility, sometimes have had to stretch them to the limits. See White v Jones.[49]

2336. Australian law, despite the efforts by Kirby J in Perre's case, has held that the three stage approach of English law does not represent the law in Australia. See Sullivan v Moody, supra.

"The question as to what is fair, and just and reasonable is capable of being misunderstood as an invitation to formulate policy rather than to search for principle."

2343. Although, as will emerge from a consideration of the cases, policy does play its part in determining whether there is a duty of care to avoid purely economic loss, the High Court has emphasised that the law of tort develops by application of principles of law and not upon some discretionary decision-making process.

2346. In Sullivan v Moody, supra, at p.579, the Court said -

"The concept of policy in this context, is often ill-defined. There are policies at work in the law which can be identified and applied to novel problems, but the law of tort develops by reference to principles, which must be capable of general application, not discretionary decision-making in individual cases." (Emphasis added).

2350. The High Court recognised a duty of care to avoid purely economic loss in a case which was not a negligent misstatement case. The decision is Caltex case, supra_._ On any view, it was a controversial decision at the time and extended the law in this area. It was thought at the time to have been a very brave decision and was not followed both in the House of Lords and the Privy Council. The reasoning was rejected by the Supreme Court of Canada.

2353. Despite the criticisms, McHugh J in _Perre'_s case, supra, at paragraph 113, said -

"But I think that the decision was plainly right."

"The only criticism that I have of the reasoning in Caltex is that it imposed too narrow a test for determining to whom a duty was owed."

2361. In the Caltex case, a dredge fractured an oil pipeline laid in the bed of a bay, which connected an oil refinery on one shore with an oil terminal on another shore. The plaintiff supplied crude oil for processing and the refined product was delivered through the pipeline to the terminal. The damage to the pipeline was caused by the negligent navigation of the dredge. The owner of the refined oil incurred expense in transporting refined oil from the refinery to its terminal while the pipeline could not be used. It was held by the Court that the owner was entitled to recover the purely economic loss suffered.

2364. It was clear that the members of the Court were aware of the substantial step they were taking in the evolution of the law by finding a duty of care. They stated that the general law was against finding such a duty of care.

"In my opinion it is still right to say that as a general rule damages are not recoverable for economic loss which is not consequential upon injury to the plaintiff's personal property. The fact that the loss was foreseeable is not enough to make it recoverable. However, there are exceptional cases in which the defendant has knowledge or means of knowledge that the plaintiff individually, and not merely as a member of an unascertained class, would be likely to suffer economic loss as a consequence of his negligence, and owes the plaintiff a duty to take care not to cause him such damage by his negligent act." (Emphasis added).

2371. The factors that led the Court to find a duty of care were that the risk of loss was reasonably foreseeable, there was no question of indeterminate liability, the dredge operator owed a duty to the owner of the pipeline to avoid damage to it, the owner of the fuel could not have taken any steps to avoid the risk of the costs involved in transporting the fuel, and the dredge operator knew or should have known that causing damage to the pipelines by lack of care would effect the owner of the fuel in the way that it did.

2374. In Hill v Van Erp, supra, at p.175, Dawson J said -

"And in Caltex Oil (Australia) Pty Ltd v The Dredge Willemstad this court held that, although as a general rule damages are not recoverable for pure economic loss even where it is foreseeable, damages are recoverable where the defendant has the knowledge or means of knowledge that a particular person, not merely as a member of an unascertained class, would be likely to suffer economic loss as a consequence of his negligence. Again, the particular relationship between the parties was held to give rise to a duty of care. Of note is the statement of Stephen J that there was a need for `some control mechanism based upon notions of proximity between tortious act and resultant detriment'." (Emphasis added).

2378. The High Court has recognised a duty of care to avoid purely economic loss in a number of different relationships. It has recognised that these cases are in a category of their own and have their own special features, which have to be considered and weighed prior to determining whether or not a duty of care arises. It has emphasised the notion of proximity in this area.

2381. In San Sebastian Pty Ltd v The Minister,[50] the majority of the Court said -

"The notion of proximity, because it limits the loss that would otherwise be recoverable if foreseeability were used as an exclusive criterion of the duty of care, is of vital importance when the plaintiff's claim is for pure economic loss. When the economic loss results from negligent misstatement, the element of reliance plays a prominent part in the ascertainment of a relationship of proximity between the plaintiff and the defendant, and therefore in the ascertainment of a duty of care. But when the economic loss results from a negligent act or omission outside the realm of negligent misstatement, the element of reliance may not be present. It is in this sphere that the absence of reliance as a factor creates an additional difficulty in deciding whether a sufficient relationship of proximity exists to enable the plaintiff to recover economic loss." (Emphasis added).

2385. A consideration of the cases enables one to compile a list of relevant matters in determining the question of duty of care. However, one has to proceed with caution, as some of the matters are not necessarily relevant to a particular claim for purely economic loss and others may be relevant but may be accorded different weight depending upon the circumstances. Of course, the list is not exhaustive and other matters may be considered relevant in a particular case.

2388. In Perre's case, the members of the Court identified a number of relevant matters.

2391. What is the correct approach to the question has been put in doubt, especially as in a more recent case, the High Court has expressed the opinion that the concept of proximity gives little practical guidance in determining a duty of care in cases that are not analogous to cases in which a duty has been established.

2394. In Sullivan v Moody¸ supra, at p.578, the Court said, after referring to "proximity" -

"Notwithstanding the centrality of that concept, for more than a century, in this area of discourse, and despite some later decisions in this Court which emphasise that centrality, it gives little practical guidance in determining whether a duty of care exists in cases that are not analogous to cases in which a duty has been established. It expresses the nature of what is in issue, and in that respect gives focus to the inquiry, but as an explanation of a process of reasoning leading to a conclusion its utility is limited."

2398. I note that their Honours say that it has some benefit, in that it focuses the inquiry and if I might say so, also tends to identify a relevant issue. For a trial judge at the coal face, it is important to have a step by step exercise to determine the question of duty of care. Such an exercise does identify and focus the relevant issues.

2401. The late Professor Fleming, in his 9th edition, published in 1998, summarised the law in this area at p.202 as follows -

"In light of more than three decades' experience with the problem of pure economic loss since Hedley Byrne relaxed the categorical exclusionary rule, the following generalisations may be tentatively ventured:

1. No simple formula will fit the various situations. (One important variation is that between cases within and without the matrix of a contract; and another is between situations with a potential of effecting only single individuals and others effecting multitudes.)

2. In particular, there is no presumptive rule of liability, as there is for physical injury caused by active negligent conduct. Quite to the contrary: rather than asking "Why Not?", we should be asking "Why?"

3. Nor has proximity, a catchword which has gained some prominence in this context, proved a useful guide for inclusion or exclusion; it represents the best, here as elsewhere a conclusion reached on grounds of legal policy which ought to be specifically and clearly articulated.

4. In order to qualify for recovery, a claim must at least pass the following hurdles:

(a) the defendant's duty must not be `indeterminate in amount, time and class'.

(b) Where the plaintiff had reasonably available alternative means for self-protection, for example by contracting with the defendant or a third party, and deterrence would not otherwise go by default, tort intervention will be withheld.

5. While reliance is undoubtedly a necessary cause or qualification in a claim for misrepresentation, it is not an indispensable element in other situations."

2413. The learned author's observation at point 3 concerning proximity emphasises that proximity in the past has been used as an umbrella covering factors of legal policy and the learned author states that they ought to be specifically and clearly articulated. I respectfully agree. The matters referred to at point 4 also raise matters of policy.

2416. In my opinion, the proper approach is to consider the Atkinian formula and a third step, namely, the consideration of relevant factors or salient features of this particular category of negligence which bear on the question of duty of care. The proximity element is to be confined to what Lord Atkin contemplated and the questions of policy left in the third step of the reasoning process. In the end, it does not really matter where those factors are considered but in my view, it is helpful for the trial judge to follow a three-step exercise to determine whether there is a duty of care to avoid purely economic loss in a novel situation.

2419. The factors which will be considered are those which are used in other purely economic loss cases and by adopting that approach, the law may advance by a process of analogy from other cases, in the incremental way favoured by Brennan CJ and some members of the High Court. But as I have said, care must be taken when weighing the factors.

2422. I refer to what Kirby J said in Perre's case and respectfully adopt it as the proper approach to determine a duty of care to avoid purely economic loss. His Honour said at paragraph 282 -

"A threefold approach or methodology of reasoning is required. Even if foreseeability and proximity are first established, there is no escaping the evaluation of the competing arguments of policy for and against the attachment of legal liability in the particular case. It cannot be escaped by formulating so-called new `principles' of universal operation. To do this would be to show that we have learned nothing from the successive rejections of early judicial attempts to express the criteria for the existence of a duty of care in terms of universally applicable rules devoid of policy choices."

2426. In my view, the three step methodology of reasoning is -

(i) Reasonable foreseeability of injury;

(ii) whether there is a relationship of proximity; and

(iii) identification and consideration of competing salient features for and against the finding of a duty of care.

2432. That approach has been adopted in the cases. In Marc Rich and Co v Bishop Rock Ltd,[51] Lord Steyn, speaking for the majority, adopted that methodology.

2435. His Lordship, at p.236, after referring to the incremental approach and that there were no cases which, on any realistic view, were analogous to the case the House was concerned with, said -

"The present case can only be decided on the basis of an intense and particular focus on all its distinctive features, and then applying established legal principles to it."

2439. The approach of Callinan J in Perre's case was to identify and weigh the various salient features in determining whether there was a duty of care.

2442. The High Court recently in Sullivan v Moody, supra, supported the approach. See pp.579-80.

2445. In my opinion, proximity should be confined to the sense in which Lord Atkin stated it in Donoghue's case.

2448. In Perre's case, Kirby J said at paragraph 281 -

"In so far as proximity was being pressed into meaning more than `nearness and closeness' or `neighbourhood' in the legal sense, it was being asked to fulfil a purpose which it was not historically designed to perform. Proximity was incapable of fulfilling, unaided, the function of demonstrating the existence or absence of a duty of care. If, on the other hand, proximity were to be confined to its original historical purposes as a measure of `nearness and closeness' between the parties in dispute, it could yet provide a meaningful gateway in addition to reasonable foreseeability of harm, to afford the starting point for the allocation of a legal duty of care or exemption from its burden. Then, it would remain necessary (as the court came to do in Hill v Van Erp) to weigh candidly the competing policy considerations relevant to the imposition of a legal duty of care."

2452. The foregoing is in accordance with the views of Professor Fleming and cases of the highest authority, and although there may be some controversy as to what level one should consider the competing salient features, the end result should be the same, irrespective of the point at which they are considered.

2455. Since 1964, the boundary of the duty of care to avoid purely economic loss has been continuously extended, or to adopt the phraseology in America, the orbit of the duty of care has been extended. That appears to me the real issue in the present proceeding. Should the law recognise a duty of care to avoid purely economic loss in the circumstances of this case?

2458. In considering the three-step process, failure to prove the first two elements would negate a duty of care. However, the finding of reasonable foreseeability and proximity would not establish a duty of care unless the salient features, after proper consideration, were in favour of a duty of care. This must be so because the general rule is against finding a duty of care to prevent purely economic loss.[52] The bias is against it.[53]

2461. The cases establish the following relevant salient features -

* Reliance by plaintiff and undertaking of responsibility by defendant;

* a regime of contracts between various parties in a supply chain;

* a statutory regime regulating the supply of a service;

* whether the imposition of a duty of care would impose liability "in an indeterminate amount or an indeterminate time to an indeterminate class";[54]

* whether a finding of a duty of care would be inconsistent with community standards in relation to what is ordinarily legitimate in the pursuit of personal advantage;[55]

* the knowledge of the tortfeasor of an ascertainable class of persons likely to suffer harm if the tortfeasor was negligent;[56]

* whether the claimants are vulnerable persons unable to protect themselves from harm;[57]

* whether a duty would impair the legitimate pursuit by the tortfeasor of its own commercial interest.[58]

2472. As I have already stated, one has to carefully apply these salient features; some may not be relevant and some of little weight in the present case. I agree with what Professor Stapleton said in her article, "Duty of Care Factors: a Selection from the Judicial Menus" in Cain and Stapleton, The Law of Obligations; Essays in Celebration of John Fleming, at p.88 -

"While the listing of these judicial menus of sound factors relevant to the duty issue help unmask the substantive determinations being made by judges in this field, they cannot operate as some sort of mechanical guide as to how a novel case would be decided in the future ... At the end of the day, even if judges agree on the relevant factors to be weighed in the individual case, different judges may well place different weight on competing factors and do so quite reasonably."

Quoted with approval by Callinan J in Perre's case at paragraph 404. His Honour went on to say at paragraph 405 -

"And it must be accepted that this is an area of the law in which the court should move incrementally and very cautiously indeed. It is not yet possible to identify a bright line of demarcation between those cases of pure economic loss in which damages are recoverable and those in which they are not." (Emphasis added).

2478. In considering the salient features, I bear in mind the observations made by McHugh J in Crimmins v Stevedoring Committee,[59] and the need for careful analysis and weighing of factors. Many judges have said, "the law is still developing".

2482. In the present case, no plaintiff or group member has suffered personal injury. Neither plaintiff has suffered property damage, but some of the group members who gave evidence suffered property damage.

2485. In my opinion, whether or not Esso owed a duty of care to any party who suffered property damage, depends upon the application of the Atkinian formula.

2488. This involves the questions of reasonable foreseeability of injury and proximity.

2491. The test of reasonable foreseeability concentrates on the knowledge that the defendant had or ought to have had of the victim and the potential for harm. It is an objective test. If the risk of harm is real and not far fetched, the more likely this element will be established.

2494. In the recent decision of the High Court in Tame v New South Wales, supra, the members of the Court emphasised the importance of the reasonableness of the foresight. At p.1352, Gleeson CJ said -

"A necessary, although not sufficient, condition of the existence of the legal duty of care is reasonable foreseeability of the kind of injury that has been suffered by the person to whom the duty is owed. More than 150 years ago Pollock CB said that a person `is not ... expected to anticipate and guard against that which no reasonable man would expect to occur'. ... It is important that `reasonable foreseeability' should be understood and applied with due regard to the consideration that, in the context of an issue as to duty of care, it is bound up with the question of whether it is reasonable to require a person to have in contemplation the risk of injury that has eventuated." (Emphasis added).

See also the observations of McHugh J at pp.1363 et seq.

2499. It has often been said that reasonable foreseeability with the benefit of hindsight is a test easily satisfied. That may be so in some cases, but the hindsight is ignored. What is foreseen should be reasonably foreseen by the negligent actor at the time he is contemplating his actions.

2502. What is meant by proximity was discussed by Lord Atkin at p.581 in Donoghue's case, where he said, after referring to what A.L. Smith LJ said in Heaven v Pender -

"I think that this sufficiently states the truth if proximity be not confined to mere physical proximity, but be used, as I think it was intended, to extend to such close and direct relations that the act complained of directly affects a person whom the person alleged to be bound to take care would know would be directly affected by his careless act."

2506. It is not confined to proximity in the sense of physical closeness. It is concerned with a close and direct relationship. But it goes wider than that, as Deane J has stated.

2509. It was clear that proximity was established in Donoghue's case. The manufacturer made an article with the intention that it be consumed by a member of the public. It clearly contemplated and intended that that consumer should receive the product in the same condition as it left the manufacturer. It did not matter how it got to the consumer, how many hands it passed through and how many contracts there were between the manufacturer and the consumer. The manufacturer was in the business of making a product to be used by a consumer.

2512. The concept was further considered in Grant's case, supra.

"If the term `proximity' is to be applied at all, it can only be in the sense that the want of care and the injury are in essence directly and intimately connected; though there may be intervening transactions of sale and purchase, and intervening handling between these two events, the events are themselves unaffected by what happened between them; `proximity' can only properly be used to exclude any element of remoteness, or of some interfering complication between the want of care and the injury, and like `privity' may mislead by introducing alien ideas."

2519. As a general proposition, where a manufacturer produces an article which is intended by the manufacturer, and contemplated by it and the consumer, to be provided to a consumer in the same condition as it left the manufacturer, there is a direct and close relationship between the manufacturer and the consumer and proximity is established.

2522. A case which has some similarity to the present because it involved the provision of electricity, which was used to conduct a business and which was cut off, is the English Court of Appeal decision of Spartan Steel, supra. The defendant's employees were digging up a road when they negligently damaged an electric cable which the defendants knew was the direct supply from the Electricity Board's power station to the plaintiff's factory. The plaintiffs were without electricity for a period of time. The power was cut off in the middle of a production run, and the plaintiff had to pour the molten metal out of their furnaces to prevent the metal solidifying and damaging the furnace. As a result, they suffered the loss in value of the metal, and the profit from the sale of the metal. The plaintiffs could have also completed four further melts during the power cut and claimed the loss of profit.

2525. The duty of care was admitted in that case. On proper analysis, what was admitted was a duty to avoid property damage. Economic loss not consequent upon property damage was not recoverable.

2528. The plaintiffs were entitled to recover the cost of the melt thrown away, because it was property damage, and also the profit on that lost sale. However, they were not entitled to recover the loss of profit from four melts which could have been produced but for the negligent interruption to the electricity supply.

2531. In my opinion, whether or not there is a duty of care owed by Esso to the plaintiffs and gas users who suffered property damage, depends upon the application of the Atkinian formula, namely, reasonable foreseeability of harm and the establishment of a proximate relationship.

2534. The facts in the present case are similar to the Donoghue and Grant cases, namely, manufacture of goods sold through a supply chain to the intended user. In both cases, a duty to avoid injury was recognised.

2539. Whilst the law has readily found duties of care to avoid property or physical damage, it has been most reluctant to recognise a duty of care to avoid a loss which is purely economic loss.

2542. Save for one case, the number of claimants in cases where a court recognised a duty of care is usually numbered one and at most two or three. In Perre's case, the High Court held that there was a duty of care in circumstances where the claimants numbered five. In the present case, the number of claimants may be in the order of tens of thousands.

2545. The reluctance of the Court to allow recovery for purely economic loss has been influenced by a number of factors. There has been a concern that claims may have no boundaries and an act of negligence may permeate into many and diverse areas. The negligent sinking of a fishing vessel would affect the profits of the owners and the income of the crew, the wholesale fish merchant, maybe the fish retailers and even extend to the restaurant owners. It could go as far as affecting the business of a manufacturer of products using fish oils. It is that fear of the loss spreading far and wide, virtually without limit, that has much influenced the slow progress of the law in this area. Another matter of concern is the massive burden thrown on the tortfeasor who may go out of business resulting in adverse economic repercussions for the community. An example would be the financial destruction of a public utility performing an essential public service such as transport or the supply of energy such as electricity or gas. Clearly, members of the public have an interest in the survival and success of a public utility. Indeed, the present case amply demonstrates the reliance of the community on the supply of gas and the substantial adverse financial impact resulting from a prolonged stoppage of the supply.

2548. Another concern is the overwhelming effect on the judicial system of a very large number of claims. There may be problems of meeting claims, especially where the claimants' state of mind is an element in the cause of action. For example, the investor who alleges he relied upon negligently prepared accounts when making an investment; easy to assert, difficult to refute.

2551. This case is different to previous cases. The number of claimants for compensation could be very large.

2554. The approach of the courts to claims for economic loss in the field of tort is different to a claim for property damage or personal injury.

2557. Gibbs J said in the Caltex case, supra, at p.552 -

"There are sound reasons of policy why economic loss should not be treated in exactly the same way as material loss."

2561. Lord Pearce in Hedley Byrne, supra, at p.536, said -

"How wide the sphere of the duty of care in negligence is to be laid depends ultimately upon the courts' assessment and the demands of society for protection from the carelessness of others. Economic protection has lagged behind protection in physical matters where there is injury to person or property. It may be that the size and the width of the range of possible claims has acted as a deterrent to extension of economic protection."

2565. The courts in the past have drawn a line; not always on logical or just grounds, but usually for pragmatic reasons of policy.

2568. In C_andlewood Navigation Corporation v Mitsui Ltd,_[60] the Privy Council said -

"Their Lordships consider that some limit or control mechanism has to be imposed upon the liability of a wrongdoer towards those who have suffered economic damage in consequence of his negligence. The need for such a limit has been repeatedly asserted in the cases from Cattle's case, LR 10 QB 453, to Caltex[1976] HCA 65; , 136 CLR 529, and their Lordships are not aware that a view to the contrary has ever been judicially expressed."

2572. In the end result, this case is concerned with drawing the boundary line of the duty of care. Should it be substantially moved? The case concerns the determination of what the Americans call, the orbit of the duty of care to avoid purely economic loss.

2575. Whether or not there was, at the relevant time, a duty of care resting on Esso to avoid purely economic loss, is a question of law. See Jaensch v Coffey, supra, at p.581, per Deane J.

2578. The relevant time to determine whether a duty existed is immediately prior to the happening of the alleged negligent act. See Perre's case, supra, at paragraphs 140 and 336-7.

2581. It follows that the relevant time is immediately prior to the happening of the explosion, which occurred on 25 September 1998.

2584. The plaintiffs pleaded the alleged duty of care as follows -

"The defendants owed a duty of care when operating and controlling the plant" to do certain things at the plant "so as to avoid causing loss and damage to" the plaintiffs and group members.[61]

2588. The plaintiffs asserted that Esso was negligent.[62]

2591. Esso admitted that it was negligent in the operation and control of the plant which resulted in the explosion and the stoppage of the gas supply.

2594. It was contended by the plaintiffs that a duty was owed by Esso to the plaintiffs and the group members, to take reasonable care not to interrupt the supply of natural gas to the gas users.

2597. The question in respect to purely economic loss is -

Did Esso owe a duty of care to the plaintiffs and the various group members who were gas customers and to the stood down workers who were employed by gas customers not to interrupt the supply of natural gas, to avoid causing them purely economic loss?

2601. I propose to determine the question of duty of care by considering three matters, namely, reasonably foreseeability of risk of harm, proximity and the salient features which are relevant to the issue.

2605. As at 25 September 1998, would a reasonable person in the shoes of Esso, knowing what Esso did and what it should have known, concerning the supply of natural gas to users in this State, have reasonably foreseen that if it negligently stopped the gas supply, gas users and others would be likely to suffer economic loss as a result?

2608. This is a question of law and is to be determined objectively but with a subjective element. The latter being the actual knowledge of Esso. Objectively in the sense that the question is answered by placing the reasonable corporation in the shoes of Esso as at 25 September 1998, taking into account its knowledge and what it ought to have known.

"Foreseeability here predicates the foresight of a reasonable man. The reasonable man is not here anyone on the Clapham omnibus. He is a man who notionally stood in the shoes of the defendant and had such knowledge, and capacity for care and foresight, as that defendant actually had and in addition such as a reasonable man in that position is expected to have. He is, in the words of Lord Wright in Bourhill v Young, `a reasonable hypothetical observer'. He is not a seer who can fortetell future occurrences that are quite unlikely according to the natural and ordinary course of events. Happenings that were fortuitous, in the sense that no reasonable man would have thought of them as within the range of possible consequences, cannot be said to have been reasonably foreseeable. And knowledge after the event, when it is easy to be wise, cannot shew that the event was foreseeable." Per Windeyer J in Mount Isa Mines Ltd v Pusey.[63] (Emphasis added).

See also Glasgow Corporation v Muir.[64]

2613. Further, it is not necessary for a plaintiff to show that the precise manner in which the damage was sustained was foreseeable. It is sufficient that the damage to a class of persons, of which the plaintiff was one, might reasonably have been foreseen as a consequence.

2616. In Chapman v Hearse,[65] the High Court said at p.115 -

"But one thing is certain and that is in order to establish the prior existence of a duty of care with respect to a plaintiff subsequently injured as the result of a sequence of events following a defendant's carelessness it is not necessary for the plaintiff to show that the precise manner in which his injuries were sustained was reasonably foreseeable; it is sufficient if it appears that injury to a class of persons of which he was one might reasonably have been foreseen as a consequence."

2620. Windeyer J in Mount Isa Mines Ltd v Pusey, supra, at p.402, summarised the position when he said -

"Foreseeability does not mean foresight of a particular course of events causing the harm. Nor does it suppose foresight of the particular harm which occurred, but only of some harm of a like kind." (Emphasis added).