Major Engineering Pty Ltd v Helios Electroheat Pty Ltd [2006] VSCA 107

3 As the learned judge said in his reasons, the specifications produced by HDH stated that Major was to be responsible for a complete turnkey project that included concept drawings, design, fabrication, "checkout" at Major's factory, shipping to Hawker, installation and final checkout, and operator and maintenance training "in house". Although Major had the technical ability to produce the heating elements that were to be used to heat the solution in the baths, it sub-contracted their design and manufacture to Helios, which specialised in that work.

4 Thus, between May and 30 July 2001 Hiep Nguyen ("Nguyen"), an electrical engineer in the employ of Major, discussed with Geoffrey Ernest Wishart ("Wishart"), the project manager at Helios, the possibility of Helios designing and supplying the necessary heating elements for the salt baths. In the result, on 30 July 2001, Nguyen faxed to Wishart a formal request ('the Nguyen fax") for the supply price of heating elements for the two salt baths that were to be produced in accordance with the attached drawings. Nguyen's drawings set out the dimensions of the salt baths and the heating units and contained notations that specified, in relation to the large salt bath, that the total kilowatt output of the units was to be 120 kw such as to heat and maintain the solution at a temperature of 550oC. A like specification was made in respect of the small salt bath. It should be noted, however, that the documentation so provided by Nguyen to Wishart did not reproduce that part of the HDH specification that called for the element to have sufficient heat output to raise, within 2.5 hours or less, the temperature of the solution to the requisite heat level which, as I have said, was specified in the Nguyen fax at 550oC (and in the HDH specification at 535oC). At the time of the discussions, Major proposed that the heating elements would be required to raise the temperature of the solution in the baths to 550oC from a temperature that was sufficiently high for the salt content to be in a molten state. But at the time of the commissioning of the units, this requirement had altered to one where the units were required to generate sufficient heat at the outset to convert the salt from a crystal to a molten state and then maintain the temperature of the solution at 550oC.

5 It was common ground that Helios knew that it was its responsibility to provide heating units, the several component parts of which would have heat tolerance levels that could withstand an operating temperature of 550oC. There was no suggestion by it that it lacked the information to enable it to supply units that would meet these requirements.

6 On 9 August 2001 Wishart sent to Nguyen a final quotation for the manufacture and supply of the heating units, each of which was to consist of bundles of tubular elements. The quotation noted, amongst other matters, that, in relation to the large salt bath, the total load required was 120 kw and that the units were to be "fitted into welded tube housing and final termination by client". In other words, Helios confirmed that the six heating elements for the large salt bath would be placed in casings that were to be provided by Major and that Major would also be responsible for producing the connecting link to the casings. In response, on 9 August 2001, Major placed an order with Helios for the supply of six tubular element bundles for the large salt bath, and five such units for the small salt bath, in accordance with the specifications contained in the Helios fax of 8 August 2001.[2]

7 In the result, Helios designed, manufactured and supplied to Major 11 tubular heating element bundles. For present purposes, only a general description of the units is necessary. Each bundle of elements for the large salt bath consisted of 12 straight length element rods. The rods were held in a circular bundle arrangement by a metal support structure that consisted of a central guiding rod sitting at the centre of the assembly and several metal discs spaced along its length, each such disc having 12 holes through which the rods passed. Each rod consisted of a central alloy wire element coil, which was "mineral insulated" and metal sheathed and then pressed into a tubular shape.[3] The mineral that was provided for insulation purposes was Magnesium Oxide (MgO) in powder form and the metal sheath was Incoloy 800.

8 The element bundles were designed to be housed inside metal casings that were to be immersed in the salt solution along the bottom of each salt bath. As has been noted, Major was responsible for constructing the casings, a task that it had sub-contracted to a third party. It was also responsible for inserting the element bundles into the casings and then sealing them by welding metal caps onto their ends.

2001 failure of elements

9 Following their manufacture, Helios tested each unit and satisfied itself that it accorded with the specifications and its quality assurance program. The units were then delivered to Major in three batches in late August 2001, over a period of three weeks, and were subjected to further tests at its premises. Upon Major being satisfied that they operated properly, the baths and the assembled elements were taken to the premises of HDH in early October 2001 for installation and commissioning. The commissioning procedure took approximately one week, following which the process of melting the crystal salt in the bath commenced. The salt was in granular form and was melted during a gradual process that involved adding small quantities of salt at a time. Salt has low thermal conductivity and, therefore, had to be melted in stages to prevent boiling and decomposition when it came into direct contact with the elements. When the salt had been melted into molten form, both salt baths were kept at 400oC - "running idle" - and, at that stage, Gerrard Cardozo ("Cardozo), an electrical engineer, who was employed by Major and who was its project manager for the salt baths, was satisfied that the units were operating properly.

10 Not long thereafter, however, it was found that two of the elements had exceeded their respective electrical current tolerance - had "tripped their protection" - and, by 19 October 2001, five elements had failed. Major decided to test the elements in order to determine the cause of the failures. This required their removal from the molten salt baths, the temperature of which was in excess of 400oC. In order to remove the units a special purpose winch system had to be built by Major and it also had to purchase special protective uniforms for its employees who assisted in the removal of the units. The task involved numerous people at any given time, and was time consuming and dangerous.

11 It was found that four out of the five element bundles that had failed had traces of solidified salt present within the casings that housed the elements. Cardozo concluded that salt had somehow penetrated into the element tube and, in some of them, impregnated the insulation material at the lead out end. The fifth of the failed elements did not have traces of solidified salt, but one of its element rods had blown out. I will deal later with the possible causes of failure and the attribution of responsibility for this as between Major and Helios, but for the present it is sufficient to note that there was then no unanimity of view amongst the parties as to the cause of failure. It seems apparent, however, that, for one reason or another, the elements were overheating, possibly due to contamination that resulted from penetration of salt and the presence of foreign matter during the manufacturing process.

12 It seems clear enough that both parties did their best to isolate and to deal with the cause of the failure. Thus, for example, Major upgraded its welding procedure in an attempt to eliminate the ingress of salt into the casings. Notwithstanding such efforts, the elements continued to fail in operation and, by 5 November 2001, Major had removed a further five elements, some of which had been previously removed and apparently repaired and tested by Helios. According to Cardozo, he did not observe any traces of salt on any of the elements that failed after the implementation of the improved welding techniques by Major. Be that as it may, there was no clear answer at the time why the elements failed. During this period the baths were "running idle" at temperatures of around 400oC. Importantly, at that temperature, they could not be used in production by HDH. Between November 2001 and February 2002 there were further attempts by Major and Helios to find a solution to the element failures, but they were not successful. Eventually, on 8 March 2002, Cardozo informed Helios of Major's dissatisfaction with the elements and, not long thereafter, it decided to replace them with elements of its own design. The replacement elements built by Major were housed in the same casings that had been built for the Helios elements and, at the date of the trial, were operating in those casings, apparently without relevant problems.

Proceedings

13 On 16 April 2002 Helios made a demand for payment for the elements built by it and for the repair work carried out in relation to them. In response, by letter dated 17 April 2002, Major "terminated" the contract on the basis that the goods were not fit for the stipulated purpose. On 22 May 2002 Helios issued proceedings in the Magistrates' Court seeking payment for the units and repair work in an amount that came to almost $22,000. In its amended defence and counter-claim of 29 April 2004, Major alleged that the elements supplied by Helios were not fit for the required purpose, were not of merchantable quality and were in breach of terms implied into the agreement by ss.19(a) and 90, and ss.19(b) and 89 of the Goods Act 1958. Its ultimate case was that, irrespective of what caused the breakdown of the units in 2001, they never would have operated satisfactorily at the specified operating environment because, at that temperature level, a number of the components parts would have exceeded their respective temperature tolerances. It counter-claimed for damages in excess of $160,000. In the result, the proceedings were transferred, by consent, to the County Court.

Decision of trial judge

14 After a trial that lasted eight sitting days, in a reserved judgment that was, commendably, delivered seven days after the conclusion of the hearing, his Honour found that it was an implied term of the agreement between the parties that the elements would be fit for the purpose for which they were supplied, namely, that which was set out in Major's specifications that were provided to Helios in the Nguyen fax. It will be recalled that the specifications required, amongst other matters, that the power output of the units for the large salt bath be 120 kw and that the units would operate in an environment where the temperature of the salt solution would be 550oC. The learned judge also considered that it was an implied term of the agreement that the elements would be of merchantable quality "in accordance with the specifications provided by Major to Helios". But his Honour concluded that the units were fit for the purpose and that, "based on the [above-mentioned] specifications", they were of merchantable quality. Accordingly, as has been noted, his Honour gave judgment for Helios in the amount referred to, and dismissed Major's counter-claim.

15 It seems that the basis for his Honour's conclusion was his acceptance of Wishart's evidence that the elements failed (in 2001) due to a number of factors, none of which was within the control of Helios - more particularly, contamination of the elements by foreign substances during the manufacturing process performed by Major or its sub-contractors and/or because of ingress of salt when some of the casings leaked due to inadequate welding by Major, causing elements to overheat beyond their expected range. The expert called by Helios, Michael Charles Walton ("Walton"), who prepared four reports[4] that were tendered in evidence, essentially confirmed what Wishart had said. His Honour was also of the view that Major, as the designer of the salt baths, and a company that was able to manufacture heating elements, should have told Helios (but failed to do so) that the elements would be subject to temperatures of up to 1000oC when the solution was being brought up to 550oC, or maintained at that temperature. His Honour also noted that Major failed to pass on to Helios the HDH specifications and in particular the requirement that the elements should have the capacity to raise the temperature of the molten salt from 460 oC to 535 oC in 2.5 hours without adversely affecting the elements or the salt.

16 Major's principal case at the trial was that, whatever may have been the cause of the breakdown of the units in 2001, the heating elements were not fit for the relevant purpose and were not of merchantable quality given that they were incapable of operating without breakdown in the specified environment because, in that context, the temperature tolerance of a number of their component parts would be exceeded. Evidence to that effect, which was essentially not contradicted by Helios, was given by two highly qualified experts called by Major - Robert Sydney Aughton ("Aughton")[5] and Dr Donald Peter Naudé ("Naudé").[6] Consequently, Major argued, Helios was not entitled to its claim and was liable to Major on its counter-claim. In his reasons for judgment, however, his Honour did not address Major's principal contention or the critical evidence of Aughton and Naudé. The learned judge effectively said no more than that he preferred the evidence of Wishart and Walton (the latter being described by his Honour as "an impressive and reliable witness") and, essentially on the basis of that evidence, concluded that Helios had satisfied its contractual requirements.

17 Mr Dreyfus, for Major, submitted, as I have indicated, that his Honour's decision was vitiated by the failure to provide adequate reasons for the conclusion that there was no breach of the terms that his Honour found were implied into the agreement between the parties. In particular, it was said, his Honour did not deal in his reasons with Major's principal case that was put through the evidence of Aughton and Naudé, which was essentially uncontradicted, and his Honour also did not explain why he either rejected their evidence or otherwise effectively disregarded it.

18 It is clear enough that, ordinarily, failure by a judge to explain adequately the reasoning process that has led to the ultimate conclusion constitutes an error of law and vitiates the decision, although whether the reasons are adequate will depend on all the circumstances.[7] It is also apparent from the authorities that such error is not confined to failure to set out sufficiently the actual process of reasoning that makes it plain to the parties, and to an appellate court, how the judge arrived at the impugned conclusion. Even where the judge's reasons are logically structured, in the sense that they make it apparent how the judge reasoned to the impugned conclusion, the reasons may nevertheless be considered inadequate if they fail to deal with a key element of a party's case or to explain why critical evidence has been effectively rejected.[8] For example, where parties have advanced competing reasons and analyses in respect of critical aspects of the case, as will often be the situation where the dispute involves expert evidence and technical matters, the reasons should address the claims that have been put forward and explain why one case is preferred over the other[9] or why critical points have been resolved in the way that they have.[10] This is but an instance of the rule that the basis of the decision must be apparent.

19 In the present case, regrettably, his Honour did not address or explain why he rejected, as he must have done, Major's principal case. The learned judge seems to have concentrated only on the cause of the failures of the elements in 2001 and concluded, as has been noted, that because those failures were the result of matters beyond Helios' control the goods produced by it were fit for the relevant purpose. But even if one accepted the correctness of the conclusion that the early failures were not the fault of Helios, by itself, that does not address or deal with the reasons given by Aughton and Naudé as to why the elements were not fit for the relevant purpose.

20 Critically, I think, the learned judge did not provide a rational and analytical explanation[11] of the basis for his preference of the evidence of Wishart and Walton and why he disregarded the Aughton/Naudé evidence. It may be assumed for present purposes that when his Honour said that, in coming to his conclusion, he considered "a number of expert reports tendered by both parties", he did not overlook the Aughton/Naudé material. But if his Honour considered their reports, it is plain that he did not act on their contents and the necessary inference must be that he rejected the material. The real problem, however, lies not in the fact that this evidence was rejected, but in the failure by his Honour to explain why he adopted that course. This is particularly so bearing in mind that the evidence was effectively unchallenged. For all the Court knows, his Honour may have misunderstood the evidence. If that is unlikely, as I think it is given his Honour's experience, then, as I have said, he must have rejected it for reasons that cannot now be examined or analysed. It is not sufficient, in a case such as the present, for the trial judge merely to say that he or she prefers the evidence of one expert to that of another. Perhaps less explanation is warranted in the case where two witnesses give opposing versions of their recollection of an event and the resolution of that conflict is to be determined by reference to the question of credibility. But in a case such as this, where there was no issue of credit and the acceptance or rejection of the evidence involved an intellectual exercise, the judge's preference for the evidence of one expert over that of another should be explained, a fortiori, where the judge decides to reject the evidence of a critical expert that is essentially uncontradicted. This does not mean that the reasons for the rejection have to be lengthy, but they must be sufficient to enable an objective reader to understand why that course was adopted in order to determine whether it was based on flawed reasoning by the judge. As I have said, I think that his Honour failed to discharge that obligation, thereby impermissibly depriving the parties and the appellate court from assessing the correctness or otherwise of the ultimate conclusion.

21 I consider that his Honour's failure to deal with Major's principal case going to the question whether the heating elements breached the implied terms, and to explain the basis on which he rejected the evidence of Aughton and Naudé, constitutes such a breach of the obligation to provide adequate reasons as to vitiate the decision. It follows that, in my view, for this reason alone, his Honour's decision should be set aside.

Findings against evidence

22 There is another reason why I think that his Honour's decision cannot stand. In my view, for the reasons that I give below, I consider that his Honour's conclusion was against the evidence, or the weight of it. Given that this appeal is not limited to a question of law[12] and, in the circumstances, this Court is in as good a position as the trial judge to decide the matter, we should proceed to correct the error[13] and finally determine this aspect of the case. The resolution of the issues here do not turn on questions of credibility of witnesses but involve, as I have noted, an intellectual exercise of determining which of the competing technical evidence, most of which was presented in the form of expert reports and statements, should be preferred. There is nothing in the material that shows that the learned trial judge enjoyed an advantage over the appellate court in analysing such evidence and drawing inferences from it.[14] And a determination of the matter by this Court will obviate the need for the parties to incur yet another expensive trial given that, as Ashley J.A. observed during the hearing of the appeal, the amount at stake has been dwarfed by the legal fees.

23 As I have already indicated, on the issue of whether the elements were fit for the purpose in question, the relevant evidence was all one way. For the purpose of resolving Helios' claim, one can put aside the evidence relating to the causes of the failures in 2001 when the salt baths were operating at approximately 400oC because the unchallenged evidence of Aughton and Naudé was that the elements could not operate at the stated electrical power output and maintain the salt solution at a temperature of 550oC. The witnesses demonstrated that the units, operating with a power load of 20 kw per element bundle, would necessarily fail because the temperature tolerance of many of the components that constituted the unit would be exceeded. This was amply demonstrated by the table that formed part of Aughton's expert report of 31 March 2004, to which reference has already been made.[15]

24 As has been noted, the correctness of this evidence was not contradicted. Rather, what was principally said for Helios below, and repeated before us, was that the Aughton/Naudé opinions were based on the premise that the units would be required to operate at full power all the time, whereas the reality was that this would be required only for some of the period. It was also said that the specifications provided by Major to Helios did not state that the units would have to operate at full power all the time at a temperature of 550oC or the period over which the temperature had to be raised to that level. But the short answer to this claim, as Mr Dreyfus correctly said, is that the specifications stipulated that each of the units be capable of operating at 20 kw, in other words, at full power, in a temperature environment of 550oC, if required. The fact that no operating time limit was stipulated in the specification, it was pointed out by Major, works against Helios' response because it makes plain that there were no limitations as to the period during which the unit had to be capable of operating at the nominated electric power output. Thus, in order to meet the stipulated purpose, the units had to be capable of operating at full power in a salt bath that had a temperature of 550oC and the uncontradicted evidence was, as I have said, that they were not capable of performing that function. At the very least, the units would have to operate at full power at the given temperature environment at least for some time and the evidence was that they were simply not capable of doing so (because in that environment the temperature tolerance of some of the component parts of the elements would be exceeded).

25 It was also said for Helios that his Honour was entitled to reject Naudé's evidence, and that we should do likewise, because his calculations were made on five stated assumptions that were not made out and, therefore, his evidence was relevantly unsupported and should be rejected. It is not necessary to set out the five assumptions in detail. It is sufficient to note that the first assumption - that the electrical heat input to the elements is 20 kw at a bath temperature of 550 oC - does no more than reflect Major's specification of 30 July 2001. The remaining four assumptions relate to matters of a technical nature that were within the sphere of Naudé's expertise, as to which he was not challenged, and, it seems, they were not in issue between the parties. Thus, he was entitled to make all the five assumptions on which his evidence was premised.[16] Moreover, there was no objection to the admission of Naudé's opinion into evidence and it is now too late for Helios to contend that it was worthless because the assumptions had not been made out.[17]

26 I mention for completeness that Walton said in his evidence that even if the units could not operate at the stated temperature environment at full power, temperature controls could have been installed by Major so as to reduce the power when the elements reached a certain temperature, thereby removing the risk of their breakdown. It may be accepted, for present purposes, that such temperature controls could have been installed by Major, but that does not detract from its entitlement under the contract to receive from Helios heating elements that would operate as specified.

27 Thus, I consider that his Honour erred in concluding on the evidence that the heating elements were fit for the relevant purpose and were of merchantable quality. In my view, having regard to the evidence, I consider that Helios has failed to establish that the heating units that it supplied to Major were fit for the specified purpose or of merchantable quality, so that its claim for payment in relation to them should fail. Even if Major had accepted the heating elements, at the time of delivery they were worthless and it is therefore not obliged to pay the purchase price claimed.

Counter-claim

28 I now turn to Major's counter-claim for damages, being its costs of repairing the failed heating elements in 2001. At one stage, it was suggested by Mr Dreyfus, as I understand him, that the parties had effectively agreed that if Helios failed to establish that the elements were fit for the relevant purpose, Major would be entitled to judgment on its counter-claim in the sum of $30,000. But the transcript makes it plain, I think, that the parties only agreed that if Major succeeded in establishing that it was entitled to damages on its counter-claim the amount would be $30,000. In other words, the agreement between the parties in this respect did not go beyond settling the quantum, should the entitlement be made out. In the end, I think Mr Dreyfus accepted this position.

29 As has been mentioned, the damages that Major sought by its counter-claim were essentially the wasted repair costs it incurred in respect of the heating units that failed in 2001. In order to establish entitlement to such damages, Major had to show that the breach of contract by Helios was a cause of that loss.[18] The breach on which Major relevantly relied was the failure by Helios to produce heating units that were fit for the particular purpose and of merchantable quality, more particularly, failure by it to build units with component parts that could withstand the operating temperature of the solution in the baths. But the evidence did not establish that such a breach was a cause of the breakdowns in 2001 and thus, causative of the wasted expenditure on repairs. The evidence of Aughton and Naudé, on which Major heavily relied, did not demonstrate that the elements failed in 2001 for that reason. In a sense, that is unsurprising given that their evidence dealt with the situation where the temperature of the solution was 550oC whereas in 2001, when the units failed, the temperature of the solution was in the order of 400oC, and Aughton and Naudé were not asked to consider whether there would necessarily be a breakdown of the elements at that temperature.

30 Moreover, I consider that it was open to his Honour to find, as I have mentioned, that the early failure of the heating units was due to a number of factors which were not within the control of Helios. I have mentioned these matters earlier in my reasons.[19] It was said for Major, however, that the evidence did not support such findings, particularly in relation to contamination. It was claimed that even Helios' principal witness, Walton, said that gross overheating was the likely cause of the failures. It was also put that his evidence on contamination was confusing and unconvincing. In that context, counsel pointed to Walton's concession in cross-examination that several of the materials that he said were contaminants were not of that character. Moreover, said Mr Dreyfuss, Michael Wright Wadsley ("Wadsley"), who was better qualified to give scientific evidence about contamination of materials than Walton, concluded that the contaminants identified by Walton were likely to have been present during the manufacturing process by Helios, or were associated with materials in the salt baths. Major argued that, in any event, after it improved its welding techniques, salt was not observed in the casings. Counsel also criticised the evidence of Wishart, which supported that of Walton on this issue, on the ground that he never identified the contents and source of the contaminants he claimed that he saw.

31 Notwithstanding these and other criticisms of the Helios material, I consider that there was evidence on which his Honour could properly find that the breakdowns were caused by circumstances that did not amount to breach by Helios. For example, Cardozo's reports of 28 November 2001 and 4 June 2002 which deal, amongst other things, with matters pertaining to the failure of the elements, state that traces of salt, albeit in very small quantities, were found in the elements and he seems to have accepted that this was due, at least on the early occasions, to Major's inadequate welding of the casings. The reports also speak of visual evidence of damage, apparently caused by ceramic fibre paper that had been inserted by Major (and which was later removed from the units). There was also a significant amount of evidence from Wishart of carbon and salt contamination in the elements. Furthermore, the reports of Raymond Charles Osterberg ("Osterberg"), an electrical engineer, dated 3 March 2004 and 21 March 2004, that were prepared for Major and tendered in evidence, accepted that smoke and salt contaminated the units at the time of the initial failures. And, although it might be accepted for present purposes that, as Wadsley said, not all the material that Walton identified as contaminants were in that category, a significant number of them were. It is true that there was evidence of overheating which was said to have resulted in, or contributed to, the breakdowns, but it seems that the overheating was caused by the presence of contaminants in the units rather than by the component parts exceeding their respective heat tolerances at the temperature of 400 C. There was also evidence that the cause of the failures was largely, if not wholly, attributable to faulty work by Major. This was the thrust of the evidence of Wishart and Walton. Moreover, Osterberg said in his report of 3 March 2004 that the root cause of the insulation breakdown was salt contamination of the element tube, which was the consequence

of failure by Major to provide a contamination free environment for the open ended elements.

32 I mention for completeness that, even if it is arguable that some of the failures that occurred in 2001 were caused by defects in the units for which Helios was responsible, so that Major might be entitled to recoup its repair costs attributable to those faults, there was no attempt before us, or below, to show that any particular portion of the agreed $30,000 reflected the repair costs that related to particular failures for which Helios was arguably responsible. That is unsurprising given that, as I have explained, Major adopted a broad brush approach to its case on the counter-claim, claiming that it was entitled to recoup the repair costs in respect of the 2001 breakdowns because the units would have failed in any event.

33 In the circumstances, I consider that his Honour's orders that there be judgment for Helios and that Major pay its costs of the claim and counter-claim should be set aside. I would also set aside his Honour's certifications in paragraphs 4 to 7 of the order and, subject to hearing the parties, I would make no order as to costs of the trial or the appeal.

At a glance

Court

Decision date

Before

Source

Judgment (9 paragraphs)

Parties