Macrocom v City West

5168/2000 Macrocom Pty Ltd v City West Centre Pty Ltd JUDGMENT 1 Master: This is the hearing of the assessment of damages following a determination by Windeyer J on 9 May 2001 of the defendant's liability for damages. The plaintiff seeks damages for conversion of telecommunication equipment that is set out in the further amended summons filed on 9 April 2001. The background facts 2 The defendant is the owner of property known as 55 Pyrmont Bridge Road, Pyrmont. This is a purpose-built building constructed on the property for high-technology communication purposes and in particular for use as a telecommunications hub. On the roof of the building are various satellite dishes and other transmitting and receiving equipment. The floor below the roof space was leased to various lessees to install their communication equipment that connected to the satellite dishes and antennas on the roof. 3 One of the tenants was a company Planetel Pty Ltd (Planetel). That company took a lease for a period of seven years commencing on 1 February 2000. Planetel was a company, which was an Internet Service Provider, and it had arranged to purchase and install its equipment by purchase from the plaintiff. 4 The plaintiff is a wholesale telecommunications carrier and this apparently involves the transmission of trunk bulk capacity for carriers, Internet Service Providers and large corporations. During 1999 and early 2000 it had entered into a series of leased communication service agreements with Planetel. Under the agreements the plaintiff was to provide to Planetel domestic and inter-linked international communications services. These services were provided at the Pyrmont Bridge Road premises, by using microwave links between the plaintiff's premises and Planetel's premises in Sydney, Melbourne and Brisbane under a leased service contract and by provision of the international satellite services in Sydney, Melbourne and Brisbane under a capital based lease agreement. Between March and September 2000 the plaintiff installed at the premises various transmission and satellite equipment. Planetel purchased the equipment on installation. 5 In April 2000 the Plaintiff and Optus Networks Pty Ltd had entered into a satellite services agreement under which Optus agreed to provide Intelsat transponder capacity by use of a geostationary satellite at 180 degrees east. Planetel commenced operations as an Internet service provider using the satellite link and the equipment sold to it by the Plaintiff. 6 On 3 October 2000 Planetel went into administration and ultimately liquidation on 24 November 2000. That has led to a determination of the agreements between the Plaintiff and Planetel and also a determination of Planetel's lease of the property at 55 Pyrmont Bridge Road, Pyrmont. On 27 November 2000 Planetel's administrator sold the telecommunications equipment including the satellite dish to the Plaintiff. It was intended by the Plaintiff to take over the capacity that it had previously leased to Planetel in order to make it available to some other interested purchaser. The Plaintiff was under substantial commercial pressure to do so as it was liable for payment under its agreement with Optus to use the satellite for carriage of the appropriate traffic. 7 The plaintiff initially commenced negotiations with the defendant to lease the area which was formerly occupied by Planetel. On 11 December 2000 the defendant offered to lease the area to the plaintiff and thus give access to the equipment for $120,000 a year. This the plaintiff rejected as in it's belief an appropriate market rent was $20,000 a year. Following the unsuccessful negotiations, the defendant on 14 December 2000 denied the Plaintiff access to collect the equipment and the satellite dish that it thought it had purchased from the administrator of Planetel. This led to the commencement of these proceedings on 22 December 2000. 8 The proceedings were heard on 9 April 2001 and judgment was given on 9 May 2001. His Honour held that the satellite dish was a fixture and accordingly under the terms of lease was owned by the defendant. He also found that the plaintiff owned the balance of the equipment, which I have referred to as the telecommunications equipment. In these circumstances the plaintiff's claim is a claim for conversion of the telecommunications equipment alone. 9 At about the time of the commencement of the proceedings the plaintiff also took steps to see whether there was some means whereby it could access the satellite in the absence of the telecommunications equipment and the satellite dish. It had, as well as purchasing assets in Sydney, purchased assets from the administrator of Planetel, which were located in Brisbane, and they included a suitable satellite dish at the premises in Brisbane. That was configured as a receive only dish and the plaintiff did not have the equipment necessary for bi-directional communication through the satellite. If it had access to the equipment that was in Sydney it could have configured the Brisbane satellite in a suitable manner for both transmit and receive. That would have made possible the use of the satellite in January 2001 and with this prospect in mind the plaintiff had begun negotiations with the local agents for the leasing of the area previously occupied by Planetel in Brisbane. 10 The plaintiff inquired about spare transmitting equipment elsewhere and found none suitable. Eventually on 1 March, the plaintiff's negotiations with the agents were terminated, as it had no equipment to install in the Brisbane premises. 11 This proposal to use the satellite dish previously used by Planetel in Brisbane also involved discussions with a company Verestar (later known as USEI) that operated the connection in America to the Internet. Previously Planetel's arrangements with that company had put in place all necessary equipment to download and upload traffic in America from the satellite. That company of course was also in a difficult commercial situation as it was receiving income from Planetel prior to commencement of the administration and had expended substantial funds on equipment. 12 The negotiations led to the possibility of an agreement between the two companies for the possible sharing of the revenue in order to offset losses each was suffering as a result of the liquidation of Planetel. As a result of negotiations between Verestar and Intelstat it and the Plaintiff were released from their liability in respect of the use of the satellite and this ultimately was achieved on the 31 August 2001. Thus their liabilities for ongoing payments were terminated. Apparently some other company took up the capacity. 13 There is no claim for loss in value of the telecommunications equipment. It has now been sold by the plaintiff. The basis of the plaintiff's claim in damages 14 It is to be noted that no claim is made for the loss in value of the goods which were converted by the defendant. The goods were returned several days after 10 May 2001. Under the orders of Windeyer J the equipment had to be retained by the plaintiff for 28 days. The equipment could be used by it during that period. The goods were in fact sold by the plaintiff sometime after mid 2002. 15 Flow Communications limited (Flow Communications) was an associated company of the plaintiff. They shared a common holding company. Flow Communications is an Internet Service Provider specialising in the carriage of broadband Internet services to business customers. In December 2000 there were discussions between Mr Lee who is the General Manager (engineering and operations) of Flow Communications and Mr Blundell of the plaintiff as to whether Flow Communications could utilise the capacity that was now not being used by Planetel. Flow Communications Internet Service Provider business was expanding and this gave them the opportunity at that time to take up the extra capacity. 16 The plaintiff's claim for damages is an economic loss claim being the loss of the ability to sell to Flow Communications the unused capacity. There are calculations based upon what capacity was used by Flow Communications between 14 December 2000 and August 2001 which were applied to a price which was said to be market price in December 2000 to arrive at a figure of $892,306.69. From that there is deducted costs of establishing the technology at the Brisbane premises in the sum of $40,450 and an additional lease charge in Brisbane to accommodate the equipment of $2000. It was necessary of course to utilise Verestar in the USA with an appropriate agreement between the plaintiff and Verestar in place for the download of the traffic. Applying a percentage spread of income between the two organisations it was claimed that the plaintiff would have received 52.5 percent of the income. This led to a claim of $445,124.77. 17 There are a number of logical steps involving factual matters in the plaintiff's case. In summary they are:-

1. The plaintiff was able to arrange access to the satellite dish which was located in Brisbane. 2. If the plaintiff had possession of the converted telecommunications equipment they could reconfigure the Brisbane satellite dish to transmit and receive at a moderate cost of $42,500. 3. The agreement with Verestar which was necessary for the proposal was a practical reality and could be put in place. 18 The plaintiff did not put its case as one of a loss of chance but if that was its correct characterisation then they suggested that they had a 90 percent chance of achieving the sale of the capacity to Flow Communications. The defendant in submissions did not suggest that it was a loss of a chance case. 19 The defendant raised a number of matters going to the defence and the quantum of the claim advanced by the plaintiff. On the defence of the claim the following main matters emerged:

1. Causation: It was said that there was no need for the plaintiff to reconfigure the Brisbane satellite dish as it could have been used on a receive only basis. 2. The damages were too remote. 3. The plaintiff failed to mitigate its loss by taking up the offer of the Pymont Bridge Road premises at the price offered by the defendant. 20 In respect of the quantum of the plaintiff's claim the defendant raised the following main matters.

1. Any loss should not apply after the period from when the goods were returned in May 2001. 2. The actual loss that would have been suffered in the period from January to May 2001 was quite small in contrast to the period after May and up until August. 3. The way the claim was calculated was wrong in principle. The claim for June, July and August amounted to $660,000 but as was demonstrated by the contractual arrangements which Flow Communications adopted in February 2001 throughput actually only cost Flow Communications in the order of $130,000. There are also said to be allowances for use of redundancy services not taken into account in the calculation. The order in which the court should deal with the various issues 21 In his essay on the reduction of damages awards reproduced in "Essays on Damages" edited by P.D. Finn, the Honourable Mr Justice K.R. Handley noted:- "Logically it seems to me a court assessing damages should determine the issues in the following order - first, causation, then remoteness, then mitigation and finally contributory negligence." 22 He noted that McGregor took a different view in respect of contributory negligence. I think His Honour's comments are logical particularly in this case where contributory negligence is not an issue. 23 There is a matter on which the parties are sharply divided and that is the question of whether the Brisbane satellite dish could be used on a receive only basis is a matter going to causation or mitigation of damages. 24 From a practical point of view the only importance of this in this case is in respect of the burden of proof. If it is a matter of causation it would be for the plaintiff to disprove but if mitigation the burden would be on the defendant. In order to decide this it is necessary to look a little more carefully at the nature of the plaintiff's claim. 25 The plaintiff's claim is that as a result of the conversion of the telecommunications equipment it lost an opportunity to sell a bi-directional 45 megabit satellite service. The opportunity was for a sale to a particular company, namely, its sister company, Flow Communications. Although it was suggested in early evidence that it was in a position to sell that capacity to other potential customers no evidence was ultimately adduced of there being a general market (and a market price) for that service. Accordingly, the plaintiff's claim is limited to the loss of the particular sale to the particular purchaser. This was made plain in the opening and in the conduct of the plaintiff's case. 26 The defendant suggested that it was a matter of causation because the plaintiff had the capacity to sell two things, namely, a receive capacity and a transmit capacity. All that had been taken away by the conversion was the transmit capacity. Thus, the defendant's submission was that the plaintiff had to prove that it could not sell the receive capacity. 27 However, this submission ignores the nature of the plaintiff's claim which was only its inability to sell a combined service. In my view the matter is not one of causation but mitigation. That this is so is reflected in the factual situation which existed as evidenced by the following basic facts:-

(a) Macrocom was in the business of a wholesale trunk carrier. (b) It had previously helped Planetel equip itself with the necessary equipment so that it could sell the Planetel bulk capacity. (c) It had now reacquired the equipment so that it could do the same again with another purchaser. (d) It was not an internet service provider. Such a provider may well have had the technical expertise and access to equipment which may have allowed it to have used a receive only service. Macrocom had neither. 28 I turn now to the factual matters upon which the plaintiff's claim depends. The ability of the plaintiff to arrange access to the satellite dish in Brisbane 29 The plaintiff had purchased this satellite dish from the liquidator of Planetel and all that was needed was a lease of the premises. It seems clear on the evidence that the plaintiff had reached a satisfactory stage of negotiations with the agents and had an offer of the relevant space so that if it decided to proceed and use the satellite in Brisbane it could do so. The offer of space was not proceeded with after it became apparent to the plaintiff that it was not going to get the equipment and thus the whole proposal could not proceed. However, if during the latter part of December or early January a decision was made to proceed, the occupation of the space could have occurred without delay. The ability of the plaintiff to reconfigure the satellite in Brisbane 30 The evidence before me demonstrates that the plaintiff would have been able to reconfigure the satellite in Brisbane without any difficulty to transmit and receive at a cost of $42,500. I am satisfied that it would be likely to have been able to do so by mid January 2001. The agreement with Verestar 31 It seems clear that if Macrocom was to be able to sell a bi-directional service to Flow Communications the infrastructure and commercial agreements to handle the USA end of the link would have to be in place. As the proposal was always considered a short term solution from a practical perspective this meant that an agreement would have to be reached with Verestar. 32 In December 2000 Mr Blundell started negotiations with Verestar to come to some mutual arrangement. In early January 2001 there were discussions on possible revenue sharing which were then reflected in an email of 8 January 2001 from Mr Blundell to Verestar in these terms: "Re our telephone conversation on possible revenue sharing, it will probably take us several more days to put together a formal proposal. Flows current usage, on ad-hoc arrangements are apparently running at US$20,000 per month, but expanding quickly. As agreed we will put together some revenue projections to send to you along with a proposed agreement. Essentially I would propose something along the following lines: A formal proposal with revenue projections and the revenue sharing arrangement and the duties and responsibilities of each party. EG o USEI provides the Internet access o Flow provides the customers and customer access at the Australian end. o Revenue split 47.5% to USEI and 52.5% to Flow. (This would reflect the relative transponder cost to each party..) We would provide Verestar with a copy of each contract as it was signed. Grateful your comments on the above as an equitable deal?" 33 Subsequent discussions between Mr Blundell and Mr Murphy of Verestar indicated an acceptance of the principles but further implementation, including calculations of revenue projections, was not progressed until, inter alia, the equipment was obtained. 34 In my view, although not the subject of a contract, it was very probable that the companies would come to an appropriate agreement. 35 This is particularly so as both companies had an economic interest in cutting their losses as a result of the Planetel failure. Although they were both trying to rid themselves of the satellite capacity they had a joint interest in some short term arrangement until that event occurred. The damage is too remote 36 The principles on which consequential losses are recoverable in cases of conversion were the subject of some submissions before me. The defendant in particular referred to the case of National Australia Bank Limited v Nemur Varity Pty Ltd (2002) 4VR 252. That was a case which concerned the conversion of cheques by the bank following upon fraudulent endorsements by an intermediary. The case was decided by Phillip JA and Batt JA on the question of causation. However, Batt JA also went on to decide it on the basis of remoteness in case he was wrong on causation. All members of the court dealt with the question of remoteness in respect of conversion and thus it is a useful discussion even though obiter. 37 Batt JA in a reasoned consideration of all the authorities concluded at paragraph 64:- "Thus some more stringent test of remoteness than reasonable foreseeability is required for the strict liability tort of conversion. The obvious candidate seems to me that stated in France v Gaudet, namely, express notice or special knowledge" 38 His Honour was there referring to what he had earlier described as a considered obiter dictum of the Court of Queen's Bench in the following terms:- "It is not necessary to determine whether notice is or is not necessary in trover, in order to enable a plaintiff to recover special damage which cannot form part of the actual present value of the things converted, as in the case of the withholding of the tools of a man's trade, in which the damage arising from the deprivation of his property is not, and apparently cannot be fixed at the time of the conversion of the tools. In that case, however, we are inclined to think that either express notice must be given, or arise out of the circumstances of the case. This point was not determined in Bodley v Reynolds ; but we think that there must have been evidence of knowledge on the part of the defendant that in the nature of things inconvenience beyond the loss of the tools must have been occasioned to the plaintiff." 39 Callaway JA did not decide the matter on the question of remoteness but he did consider it. At paragraph 9 he said the following:- "I agree with Batt, J.A. that, putting statute and equity to one side, the duties of a bank to its customer with respect to cheques and telegraphic transfers lie in contract and not in tort. The relationship is too complex, and affected by settled commercial expectations, to be subverted by negligence. I also agree with his Honour that the measure of damages for consequential loss in conversion is not reasonable foreseeability. Liability in conversion is strict: like liability for breach of contract, which is also strict, it lies at the opposite end of the spectrum from deceit and is quite unlike negligence. The ordinary measure is the value of the chattel and consequential damages require some knowledge (or express notice) on the part of the defendant of facts whereby additional loss of the relevant kind is likely to result. To put the point another way, the consequential loss must be of a kind that should have been within the contemplation of the defendant as a likely consequence having regard to the defendant's knowledge (or express notice) of the facts. There is, to that extent, a closer analogy with damages for breach of contract than with damages for negligence. The dicta in France v. Gaudet were well founded." 40 In a footnote Callaway JA pointed out that one of the differences brought about as a result of the finding is that knowledge or notice is at the time of conversion. He indicated that the use of the expression "likely" was used in the same way as Lord Reid used it in C Czarnikow Ltd v Koufos (1969) 1AC 350 at 385F. Lord Reid's comments were in these terms:- In cases like Hadley v Baxendale 9 Exch. 341 or the present case it is not enough that in fact the plaintiff's loss was directly caused by the defendant's breach of contract. It clearly was so caused in both. The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contact to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation." 41 See also his comments at 382-3 and 388. 42 Phillips JA referred to the question at paragraph 4 in these terms:- "Thus, while I concur in the conclusion reached by Mr. Justice Batt and in the disposition of the appeal which he proposes, I do so because, for the reasons given by his Honour, the loss which is now under challenge was not in my opinion caused by the Bank. Certainly, as at present advised I incline generally to the views taken by Batt, J.A. with respect to remoteness of damage, and in particular his opinion that reasonable foreseeability is not the appropriate test in the case of conversion. If, however, the true test depends rather more upon notice or knowledge (as his Honour opines), it may be that the formulation of the test as propounded by Mr. Justice Callaway will turn out to be more durable than the actual words used in France v. Gaudet . But because I see no need to decide the matter of remoteness on this occasion, I say no more about it, reserving any final decision on it until a case arises in which it must be resolved." 43 I was also referred to Eagan v State Transport Authority (1982) 31 SASR 481. It was submitted that the case was authority for the proposition that a defendant's "special knowledge" that its intention or conversion of the plaintiff's goods would paralyse the plaintiff's ability to re-establish itself in business is ground for exemplary damages on top of the damages for consequential already awarded. It was submitted that such knowledge is not a pre-condition to an award of the consequential loss. 44 I do not find the case helpful as it assumes that foreseeability is the appropriate test and it contains no discussion of the principles. It does not seem to support the submissions. 45 Like Phillips JA, I prefer the formulation advanced by Callaway JA in the National Australia Bank v Nemur Varity case. Accordingly, what I have to consider is whether the consequential loss was of a kind that should have been within the contemplation of the defendant having regard to the facts it knew as of December 2000. 46 However, before moving to these facts, I draw attention to what was said by McHugh JA (as he then was) in Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 regarding the meaning of "loss of a kind". Alexander was concerned with breach of contract arising from an audit that had been conducted negligently and did not involve conversion. However, His Honour's discussion is of considerable assistance in this case. His Honour said, at 365-366: "...there has been a tendency to play down the distinction between reasonable foreseeability and reasonable contemplation as semantic only. However, I think that the difference is a real one which results in a significant narrowing of liability. The word "contemplation" seems to be used in koufos in the sense of "thoughtful consideration" or perhaps "having in view in the future". It emphasises that, if the parties has thought about the matter, they would really have considered that the result had at least a "serious possibility" of occurring. The actual decisions in Hadley v Baxendale bear out the proposition that the contemplation test limits the area of potential liability. .An important matter in ascertaining whether the loss or damage is too remote is the extent to which the parties may be taken to have contemplated the events giving rise to that loss or damage. The parties need not contemplate the degree or extent of the loss or damage suffered: Wroth v Tyler [1974] Ch 30 at 61-62; H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd at 813 and South Coast Basalt Pty Ltd v R W Miller and Co Pty Ltd [1981] 1 NSWLR 356 at 364. Nor need they contemplate the precise details of the events giving rise to the loss. It is sufficient that they contemplate the kind or type of loss or damage suffered. The most difficult question in determining the relevant kind of damage concerns the level of classification of the damage which the parties must have contemplated. Clearly the level must not be so high that the parties are required to contemplate the very loss in question or the precise manner of its occurrence. Nor must it be so low that any loss or damage, no matter how unusual in nature or occurrence, would fall within the classification. In the field of tort a similar problem arises. The courts are required to determine whether the damage suffered is of a kind which the defendant should reasonably have foreseen. In Rowe v McCartney [1976] 2 NSWLR 72, a case of tort, Samuels JA said (at 89) that: "... all one can do in seeking to decide whether a particular harm is of a kind that was foreseeable, is to endeavour to draw a line between the broadest of categories, on the one hand, which would reintroduce liability for direct consequences, and the narrowest, on the other, which would promote uncertainty and provide distinctions of a disreputable nicety."

His Honour went on to say that in drawing the line it was necessary to remember that the purpose of the exercise is to set a limit to the consequences for which a negligent defendant ought to pay. A similar approach is required in categorising the kind of loss or damage in the contract field.

Helpful guidance as to the proper level of characterisation is to be found in some of the decided cases. Thus in tort, injury by shock is a different kind of damage from injury by a blow: Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (at 426). In Rowe v McCartney this Court held that mental illness as the result of irrational guilt feelings and with only a "tenuous connection" with the negligence of the defendant driver was damage different in kind from mental illness arising from an ordinary car accident. In Doughty v Turner Manufacturing Co Ltd [1964] 1 QB 518, the English Court of Appeal held that injury resulting from an eruption after an unexpected chemical reaction of a molten liquid was damage different in kind from injury due to the splashing of the liquid. In the field of contract it has been held that profit from a specially lucrative contract is not of the same kind as the loss of general business profits: Victoria Laundry (Windsor) Ltd v Newman Industries Ltd .

It seems clear from these authorities that the parties must contemplate both the general nature of the loss or damage and the general manner of its occurrence: cf Chitty on Contracts , 25th ed (1983) at 934-935." 47 In this case, the actual consequential loss was the loss of the opportunity to sell a bi-directional 45 megabit satellite service. As is apparent from the discussion above, the defendant need not have contemplated this precise loss but rather the kind of loss suffered and then it must have considered that that loss had a serious possibility of occurring. I turn now to a consideration of the facts as they were known to the defendant. 48 It is apparent that from the facsimile of 5 December 2000 from Mr Blundell to Mr Bilboa of the defendant that the plaintiff had made known to the defendant that it wished to use the satellite dish and the other equipment to continue to provide services for themselves and other customers. For that purpose it sought to reach a mutually agreeable arrangement to rent the roof space formerly used by Planetel from the defendant. During negotiations in a letter of 11 December 2000 it also pointed out to the defendant that if an agreement was not reached about leasing the property the plaintiff would wish to quickly remove the satellite and microwave equipment. On 15 December 2000, the day after access to remove the equipment was denied by the defendant, the plaintiff wrote seeking recovery of its property and equipment. It said that in the event that removal was not permitted proceedings would be taken and the defendant was informed that the cost of renting satellite space for access by the equipment that they were holding exceeded $10,000 per day and that they were suffering additional damage for loss of business. 49 Although strictly speaking the information conveyed on 15 December 2000 was after the act of conversion it is in fact so closely associated with that act that I would think it appropriate to have regard to what was conveyed on that occasion. 50 The defendant certainly knew that the plaintiff's business involved the use of satellite communications. It also knew that the business included the use of that service by the plaintiff and also its customers. It is also plain that the business using the equipment was intended to be carried on elsewhere if an appropriate lease could not be obtained. It must have been obvious to the defendant that converting the equipment would prevent the plaintiff from being able to access the satellite. On the facts it knew this would interfere with the plaintiff's business and prevent it providing that satellite access to its customers. 51 Precisely for what purpose the plaintiff or its customers were using the satellite access was not known to the defendant. For example, it would have no knowledge as to whether the services were being used by the plaintiff in the business of an internet service provider (which they were not) or some other business. It would not have known that the general business of the plaintiff was the wholesale of this capacity conveyed by the satellite. But as noted above, it was not necessary for the defendant to know the precise nature of the quantum of the consequential loss but only the kind of loss. An example of the kind of loss it did know about was that the cost of renting access on the satellite was $10,000 per day. But that is not the kind of loss for which the plaintiff sues. 52 The defendant knew that it would be interrupting the use by the plaintiff and its customers of a satellite service and that the provision of that service was a business of the plaintiff. As is apparent from Victoria Laundry loss of business in respect of contracts reasonably to be expected is recoverable but not some particularly lucrative contract. As will be apparent from the discussion later such a lucrative contract is not involved in this case. Accordingly, the loss is not too remote. Mitigation of damages 53 There are now two matters to be dealt with under the heading of mitigation of damages. They are:- (a) The plaintiff could have used the receive capabilities of the satellite in order to offset its costs. (b) The failure to take up the offer of the Pyrmont Bridge Road premises at the price offered by the defendant. The plaintiff could have used the receive capabilities of the satellite in order to offset its costs. 54 The ability to use the receive capability of the satellite according to the defendant was an opportunity open to the plaintiff which if it had been prudent it should have investigated and put into place. 55 It is apparent from the evidence that once it became clear that the plaintiff was not about to receive back the telecommunication equipment in the short term that Flow Communications went ahead in February 2001 to put in place other arrangements to satisfy its increasing demand. These were by various contracts, often on a yearly basis, in order to obtain better rates. There does not seem to have been any consideration before this decision was made as to whether Flow Communications might have used the receive capacity of the satellite using the satellite dish in Brisbane. The possibility of doing so was raised by the defendant's expert, Mr Craig Allen, in his evidence. He suggested that the transmit capacity of an amount up to 10 mega-bits per second which was available on the satellite could have been obtained by purchasing such capacity from an Internet Service Provider in Australia such as Connect or Primus at a fee of about $11,000 a month. 56 The response of Mr David Lee to this suggestion by Mr Allen, was that if the plaintiff had offered Flow Communications access to a 45 mega-bit pipe on a receive only basis he would not have been interested in utilising such a service as, in his view, it would have lacked the inherent reliability which bi-directional satellite link had owing to its ability to fully utilise BGP (Border Gateway Protocol) to implement redundancy across multiple links. He said that in the absence of that fundamental characteristic Flow Communications would not have jeopardised the integrity of its service to its customers by exposing its customers to an inherently unreliable service, namely, a service without a proper redundancy capability. 57 This then raised the fundamental difference between the two experts, Mr Allen and Mr Lee as to whether or not the appropriate level of redundancy could be obtained utilising a receive only satellite by using an appropriate border gateway protocol (BGP). 58 It is apparent that this difference involves understanding many basic and even advanced concepts of the structure of the Internet, the concept of redundancy and how it is obtained. Both witnesses referred to the technicalities but I find, at least in setting the scene for those reading this judgment, Mr Allen's description as quite useful and I will adopt it in the following explanation:-

59 The Internet can be visualised as a large net or spider web. A visual representation of this concept was annexed and marked "A" to the affidavit of Mr Allen of 23 April 2003.

60 One can access the Internet at any point; and traffic may take any route available to get from point A to point B. At each intersection in the net there is a choice of routes available. The number of possible routes multiplies with each intersection that is passed, so that there are hundreds of routes that data could take to its destination once it emerges from any private network onto the Internet.

61 At each of the intersections on the net in annexure "A" is a device that directs traffic according to the configuration with which is it programmed. The device is called a router. He referred to the definition of "router" in Webopedia.com, which is: "A device that forwards data packets along networks. A router is connected to at least two networks, commonly two LANs [Local Area Networks] or WANs [Wide Area Networks] or a LAN and its ISP [Internet Service Provider]'s network. Routers are located at gateways, the places where two or more networks connect. Routers use headers and forwarding tables to determine the best path for forwarding the packets, and they use protocols such as ICMP [Internet Control Message Protocol] to communicate with each other and configure the best route between any two hosts . ..."

62 Each router has its own Internet protocol address ("IP address"), functionally much like a telephone number, that is in the form of a sequence of 12 digits with several dots in the middle-say, 203.102.137.041.

63 Typically routers are programmed to detect what links are available or unavailable, and to direct traffic accordingly. Sometimes preferred routes are unavailable because links in the Internet (other routers, or parts of the Internet between routers) are not functioning, or "down". Thus the loss of individual links on the Internet does not mean that traffic cannot get through to its destination.

64 That is one of the chief strengths of the Internet: it has inbuilt redundancy, so that the failure of one or a number of links will not prevent communications from getting through. Redundancy and Border Gateway Protocol ("BGP")

65 Further, it is commercially desirable to build redundancy into any network so that if one route of communication breaks down there are other routes available and the communication still gets to its intended destination. Such redundancy is a fundamental characteristic of the Internet and the World Wide Web, and a fundamental characteristic of business practice in providing quality access to the Internet (by Internet Service Providers, or ISPs).

66 This was apparently a policy that operated at Macrocom/Flow Communications.

67 Border Gateway Protocol is a protocol pursuant to which routers are configured to redirect traffic via a different connection when the preferred connection is not available. It requires therefore that a number of alternative routes be available for the same traffic. In the case of a carrier or an ISP that effectively requires that the carrier or ISP has the right to travel via the various routes.

68 A usual way to implement BGP is to enter into mutual arrangements with other ISPs, by which each allows the other to use its connections when the other's connections are not functioning.

69 At the commencement of the hearing before me with the consent of the parties I directed the experts to meet together to see if they could resolve some or all of their differences. This resulted in them producing an agreement which is recorded in Exhibit 1. The agreement which is relevant to this aspect is as follows:- "Usability of Receive Only Satellite Service There are three (and may be more) possible methods for using a receive-only satellite data path in an ISP environment. These are: (a) Static routing (b) Multi-Hop BGP (c) UDLR (Uni-directional Link Routing, a term used by Cisco). All three implementations are more complex to implement than "standard" BGP, ie, BGP between two independent networks on a single bi-directional link." 70 It is apparent from the evidence that static routing which is the first of the alternatives and which was the basis for Mr Lee's objection, does not have the ability to provide redundancy in the network. In this case it would be a receive only satellite service. When evidence was resumed the debate centred around whether it would have been possible for either the plaintiff or Flow Communications to have used BGP Multi-Hop along with a connection to an Internet Service Provider to cover the transmission requirement to the USA and whether this would achieve the appropriate level of redundancy. 71 Mr Lee's position was that Flow Communications did not use BGP Multi-Hop and relied instead upon earlier protocols of BGP which were for use with bi-directional links. Strangely, Mr Thomas Amos, a director of Flow Communications and the Managing Director and Chief Executive of the holding company, of the plaintiff and Flow Communications seemed proud to suggest to the Court that Flow Communications had the capacity for BGP 4 which is another name for BGP Multi-Hop. 72 One of the documents which Mr Allen showed to Mr Lee in the conclave to which I have referred was an article called "Simplex made Simple" which was written by Mr Geoff Huston in March 2000 in which the author discussed the use of simplex satellite configurations following experiments in 1989 by Telstra and Teleglobe. It is apparent from the article that there are even advantages in using a Simplex satellite transmission service such as overcoming congestion and being more cost effective. The ultimate conclusion was that the trials to which he was referring indicated that the performance of this type of configuration is acceptable within the context of the Internet and provides an acceptable circuit platform for Internet use. It is apparent that Mr Lee's views are substantially based upon matters which were suggested to him by technical people who work under his direction. It became apparent to me that the level of expertise of Mr Allen is certainly higher in respect of these issues than Mr Lee's personal knowledge. In these circumstances it seems clear that it would have been possible to have made appropriate arrangements at some modest cost in order to still utilise the receive only capability of the satellite without the necessity to have possession of the telecommunications equipment that had been converted. 73 However, that is not the end of the matter so far as mitigation is concerned. It is necessary for the defendant to be able to show that there was in fact either a particular customer who would have been able to utilise that service or a market for that service. 74 On the latter matter the defendant tendered no evidence which would suggest there was a market for the type of service proposed. 75 This leaves the proposal that a receive only service should have been supplied to Flowcom Communications at a moderate cost of $11,000 per month plus the cost of any necessary equipment. 76 The plaintiff's response to this covered the following areas:- (a) The appropriate mitigatory steps were the commencement of the proceedings for the recovery of the equipment. (b) Notwithstanding the ability to use the receive only capacity Flow Communications on reasonable grounds did not wish to utilise such a service. The appropriate mitigatory steps were the commencement of the proceedings for the recovery of the equipment. 77 It was submitted that the primary mitigation steps which the plaintiff should have taken were those that it did in fact take, namely, the commencement of the proceedings to recover the equipment. I do not see this as a valid point because even if it had done this if another means of mitigation is available which would produce income to cut down the losses that were also sought in the proceedings steps should be taken to reduce such losses. Notwithstanding the ability to use the receive only capacity Flow Communications on reasonable grounds did not wish to utilise such a service. 78 It is plain that any decision of Flow Communications to take the receive only service would be made by Mr Lee given his position in the company. Even though Mr Lee conceded that multi-hop could be used, he gave evidence indicating that he was not in favour of using it. The particular points were:-

1. It was not the company's policy. 2. It was unreliable. 3. It was not standardised amongst ISPs. 4. It was complex to configure. 5. He preferred not to use a satellite as the main access point to the internet on a receive only basis. 79 The standard of conduct which a plaintiff must attain when assessing what steps should have been taken by him to mitigate for loss was expressed by Lord Macmillan in Banco de Portugal v Waterlow (1932 AC 452 at 506 in these terms:- "I confess I am not disposed to regard with much sympathy the criticism. which Messrs Waterlow have directed at the Bank's action. Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticize the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken." 80 Another formulation of it is that from Dunkirk Colliery Co v Lever (1878) 9 ChD 20 at 25 where Lord Justice James said that a plaintiff is not "under any obligation to do anything other than in the ordinary course of business". It was not the company's policy 81 This of itself is not a sufficient reason for a reasonable decision not to use it. The reasons behind the company's policy may, however, give an appropriate basis. It was unreliable 82 The evidence contained in exhibit 7 which is the article to which I have referred indicates that the reliability was in the order of 99.98 percent and was above market rates or expectations. It was not standardised amongst ISPs. 83 Mr Lee gave evidence that not all internet service providers have implemented BGP multi-hop. According to his evidence most of them use standard BGP on bi-directional networks. He gave evidence that in fact a lot of ISP providers do not allow multi-hop and BGP. Given that it was necessary for redundancy purposes for Flow Communications to negotiate commercial agreements with other ISPs in order to provide redundancy this would be a reason for Flow Communications itself not to adopt a multi-hop BGP. 84 In respect of this evidence given by Mr Lee, Mr Allen suggested that the only parties that would have had to have supported the BGP multi-hop feature was the Australian and the US end. He said it was not necessary for the intermediate parties to be used for access between those two points to support it. This may be so but there is no evidence as to whether or not Verestar would be capable of or willing to support BGP multi-hop. It was complex to configure 85 There is no doubt that it is complex to configure and requires a particular expertise. However, having regard to Mr Allen's evidence I am not satisfied that this was a particular problem. It may well have been that Flow Communications did not have the expertise and would have had to have obtained it in order the use the multi-hop BGP. It is clear, of course, in this context that Macrocom, the plaintiff, did not have a router or any technical expertise in relation to routers. However, that it is not of consequence as Mr Lee fairly conceded that one should look at both companies as a group in terms of expertise. He preferred not to use a satellite as the main access point to the internet on a receive only basis 86 Although Mr Lee expressed a preference not to use the satellite as the main access point this does not appear to be a complete sticking point with him. 87 Given the article from Mr Hopkins it is apparent that BGP multi-hop is a later variant of standard protocols which allow redundancy. There is evidence of some reluctance on the part of Flow Communications and also the plaintiff to the use of such a feature for reasons which may have some validity. In the circumstances it would seem to me that it is not unreasonable for Flow Communications to have declined to use the feature notwithstanding that technically it is possible. The problem is that it is not totally within the control of Flow Communications but depends obviously on agreement with Verestar to adopt that protocol. 88 In these circumstances I do not see that there has been a failure to mitigate in this regard. Taking up the offer of the Pyrmont Bridge Road premises at the price offered by the defendant 89 It was submitted that the plaintiff could have continued negotiations with City West for access to both company's equipment at City West's premises. It would then have been in a position to provide service immediately at a price of $10,000 a month. 90 Although it was suggested in evidence that the plaintiff would not wish to deal on principle with the defendant because of its actions in retaining the property, it seems that the original reason why it would not deal with the defendant was that the plaintiff thought that the price on offer was uneconomical. 91 There is ample authority for the proposition that the door to mitigation may be opened by the party in breach itself. See MacGregor on Damages 16th Ed para 228. This is not to say that there may be cases where as a matter of fact it would be unreasonable to expect the plaintiff to consider dealing with the wrongdoer and particularly is this so in the case of contracts of service.

92 The difficulty here is the timing. There were negotiations for a lease but these were unsuccessful due to the disagreement as to price. Such disagreement was fairly spectacular in terms of the difference in the positions adopted by the parties. There then followed a refusal to give possession of the goods and the plaintiff commenced litigation to recover them. It is suggested by the defendant that the plaintiff, who was then already engaged in litigation with the defendant, ought to have approached the defendant to do a commercial deal and accept the rent originally proposed. It is notable that there is no evidence of any offer by the defendant after litigation commenced to make available the premises for lease. 93 The present situation is not unlike the case of Strutt v Whitnall (1975) 1 WLR 870. In that case a buyer of land, suing his seller after conveyance because he was unable to obtain vacant possession on account of a tenant refusing to leave, was not required in mitigation of damage to accept the offer of the seller to repurchase the land at the contract price. Submitting to the undoing of the contract and giving up his remedy in damages entirely was not called for however capricious the election to retain that remedy might be. In the present case in the commercial context of the plaintiff suing the defendant for recovery of its equipment, any subsequent attempt to lease the premises would have to deal with the resolution of the litigation and use of the equipment which was now being denied to the plaintiff. It was far from a situation of taking a step "in the ordinary course of business". To succeed it may well have needed to have abandoned the litigation in which it was substantially successful. There was, of course, no evidence from Mr Boulos that after the litigation had commenced he would still be prepared to lease the premises and equipment to the plaintiff. In these circumstances I do not see that there was any obligation on the plaintiff to attempt to accept the original offer for a lease which had, in fact, been rejected prior to the conversion. Damages 94 Earlier in paragraph 16 I have set out the basis upon which the claim for damages was propounded. 95 The claim is based upon a calculation of the usage by Flow Communications from January through to August to which a price they would have agreed to in December was applied. That price was 6.6 cents per megabit. It can be seen that the total usage has been based upon that particular price which was used as the starting point. Having regard to the market rates at the stage it was determined, namely, December 2000 it was not an unreasonable price. However, there are a number of factors which emerged in the evidence which clearly would have had some effect on damages. 96 It is apparent that there was a substantial increase in the capacity for such traffic during 2001 and certainly by May after the opening of the Southern Cross cable there was an excess of capacity. 97 Another matter which was raised in cross-examination was whether or not it was likely that the plaintiff and Flow Communications would have entered into what was in effect a fixed price contract from January until August. Mr Lee certainly did not suggest the companies would have entered into a 12 month contract and he baulked at saying precisely what type of contract they would have entered into. Mr Blundell thought it would be short term. This is important because one of the underlying background matters was the terms of the agreement to be reached between Macrocom and Verestar. 98 It will be recalled that at the same time as the present proposals were being floated for Flow Communications to use the capacity, Macrocom and Verestar were also negotiating to release themselves from the satellite. Although it was in both company's commercial interests to earn income in the short term until they achieved that objective it seems highly unlikely to me that Macrocom would have entered into a long term relationship with Flow Communications given the hope that the problem may have been able to have been solved in another manner. In the circumstances I am satisfied that any agreement that would have been reached between Macrocom and Flow Communications would have been for a short period probably renewable on some short term basis such as monthly. 99 In these circumstances once one got to May 2000 there would be the circumstances of substantially lesser prices being available to Flow Communications with the prospect of a termination of the satellite service still in contemplation. 100 The equipment was returned on 10 May 2001 and that would normally put an end to the period in respect of which damages could be obtained. It is clear that the satellite dish was no longer available for use in Brisbane but that does not affect the matter. In addition the agreement with Flow Communications could be promptly terminated and more economic arrangements put in place by Flow Communications. I think the appropriate result should be that the plaintiff would only be entitled to damages up until a month after the time the equipment was returned. 101 For these reasons I will allow the claim for damages at the rate of 6.6 cents per MB fixed in December 2000 but only in respect of the actual traffic which was in place for the period from January until 10 June. The relevant traffic in that period based on Mr Lee's figures and Mr Allen's work on them was approximately 3,424,200 MB multiplying this figure by 6.6 cents (3,424,200 x 0.066) gives a usage charge of $225,997.20. Adding to this figure access fees in the sum of $20,000 gives a total of $245,997.20. This figure must then be discounted to allow for Verestar's share, i.e. 52.5 percent of $245,997 which is $129,148. Subtracting from this figure the plaintiff's costs of setting up in Brisbane, which I accept as submitted by the plaintiff to be $40,500.00, gives a total sum of $86,548.53. 102 After checking my calculations the parties should bring in short minutes. **********

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