North East Equity Pty Ltd v Proud Nominees Pty Ltd [2008] FCA 1189 | Case summary

North East Equity Pty Ltd v Proud Nominees Pty Ltd [2008] FCA 1189 | Case summary | Zoe

1......... CONTRACTUAL NEGOTIATIONS........................................................................... [6] 2......... MR TANA'S JULY 2002 NOTES.............................................................................. [12] 3......... PROUD MACHINERY'S LETTER OF 29 JULY 2002.............................................. [14] 4......... MR WEBSTER'S MEMORANDUM OF 1 AUGUST 2002....................................... [31] 5......... MR TANA VISITS BELGUIM TO ASSESS BRUYNOOGHE.................................. [39] 6......... PROUD MACHINERY'S LETTER OF 30 SEPTEMBER 2002................................. [45] 7......... PROUD MACHINERY'S LETTER OF 8 OCTOBER 2002 & THE AMENDMENTS OF 14 & 18 OCTOBER 2002............................................................................................................................ [49] 8......... CONTRACT FOR THE SUPPLY OF THE NEW LINE............................................ [59] 9......... IDENTIFICATION OF CONTRACTUAL TERMS................................................... [70] 9.1...... Principles.......................................................................................................... [70] 9.2...... What was the term or representation concerning a production level of 18.75 tonnes per hour at final pack out (sub-pars (a) and (g))?................................................................................ [73] 9.3...... Could Proud Machinery and Mr Proud rely on a 'split shift' argument?.............. [88] 9.4...... What was the term or representation concerning the requirement that the core temperature of packed carrots not exceed 5°C? (sub-pars (c) and (h))............................................................ [92] 9.5...... Was there a term or representation concerning intermixing? (sub-par (f))............ [96] 10....... IDENTIFICATION OF REPRESENTATIONS........................................................ [100] 10.1.... Principles........................................................................................................ [104] 10.2.... Consideration of alleged written representations............................................... [110] (i)....... Was a representation made that the new line would fulfil North East Equity's desire to pack 150 tonnes of carrots over an 8 hour working day?........................ [110] (ii)...... Was a representation made that nine hydro-cooling tanks would allow one of those tanks for each length or size grade and provide the opportunity to have a spare tank? [112] (iii)..... Was a representation made that the hydro-cooling tanks would be capable of producing constant product output?.................................................................. [114] (iv)..... Was a representation made that the new line would provide quality length sizing for three separate lengths?.............................................................................. [116] (v)...... Was a representation made that the new line would be capable of controlling the temperature of the carrots?................................................................................... [117] (vi)..... Was a representation made that the new line would greatly reduce damage to the carrots and wastage?........................................................................................... [118] (vii).... Was a representation made that the new line would increase production while reducing the man hours required to achieve that production, compared to the existing Sumich line?.......................................................................................................... [119] 10.3.... Were representations made based on the contractual terms in sub-pars (c) and (h)?[120] 10.4.... Consideration of alleged oral representations................................................... [123] (viii)... Did Mr Proud repeat orally the various written representations alleged? [124] (ix)..... Was an oral representation made that Proud Machinery and Mr Proud possessed sufficient knowledge, skill and experience to design, procure and install the new plant? [125] (x)...... Was an oral representation made that the new plant would utilise electric power more efficiently than the existing Sumich line?......................................... [130] (xi)..... Was an oral representation made that the new plant would comfortably handle a capacity of 150 tonnes per day packed out in cartons, and in doing so it would be operating as 'idle'?.......................................................................................................... [137] 11....... DELETION OF THE HANDLINE............................................................................ [142] 12....... THE DESIGN OF THE REFRIGERATION SYSTEM............................................. [143] 13....... THE EFFECT OF THE REPRESENTATIONS........................................................ [146] 14....... THE NEW PLANT IS INSTALLED......................................................................... [149] 14.1.... Key components of the new line...................................................................... [150] 14.2.... The touch screen............................................................................................ [151] 14.3.... Ms Mirosevich's role in operating the new line................................................. [156] 14.4.... Mr Correia's role in operating the new line...................................................... [168] 15....... THE WEIGHT OF CARROTS IN THE BINS.......................................................... [176] 16....... MR TANA'S ROLE IN PLANNING CARROT PRODUCTION............................ [182] 17....... CARROT FARM PRODUCTION PROBLEMS...................................................... [187] 17.1.... Carrot quality in 2003..................................................................................... [194] 17.2.... Carrot blight at Lancelin.................................................................................. [203] 17.3.... The market for carrots.................................................................................... [210] 17.4.... The 2002 decision to buy the new line, the 2003 change in the carrot market and North East Equity's claim for economic loss............................................................................................ [222] 18....... THE PROBLEMS CONTINUE................................................................................ [233] 19....... MR WEBSTER'S 20 AUGUST 2003 MEMORANDUM TO MR TANA................ [238] 20....... MR TANA'S LETTER OF 12 SEPTEMBER 2003 TO MR PROUD....................... [241] 21....... THE TEST IN MID-NOVEMBER 2003................................................................... [257] 21.1.... Production on 17 and 18 November 2003...................................................... [259] 21.2.... The meeting on 17 or 18 November 2003....................................................... [283] 21.3.... The aftermath of the 17 or 18 November meeting............................................ [297] 22....... THE EXPERT EVIDENCE ON THE OPERATION OF THE PLANT..................... [304] 22.1.... Defining 'working day', 'operating hour' and removal of 18% rejects............... [306] 22.2.... The 5°C requirement and the chilling tanks...................................................... [318] 23....... LENGTH GRADERS................................................................................................ [325] 24....... CAPACITY............................................................................................................... [331] 25....... APPROACH TO REPRESENTATION CLAIMS GENERALLY............................. [343] 26....... SUMMARY OF FINDINGS ON CONTRACTUAL TERMS PLEADED AND REPRESENTATIONS UNDER ss 52 AND 53(c) OF THE TRADE PRACTICES ACT.............................. [345] 27....... DID NORTH EAST EQUITY HAVE TITLE TO SUE FOR DAMAGES FOR BREACH OF CONTRACT?.................................................................................................................................. [347] 28....... THE CLAIM IN NEGLIGENCE............................................................................... [366] 29....... DAMAGES............................................................................................................... [372] 29.1.... General conclusions........................................................................................ [372] 29.2.... The flume elevators......................................................................................... [373] 29.3.... Damages for disruption................................................................................... [378] 29.4.... The 5°C requirement...................................................................................... [381] 29.5.... Damages on a 'no transaction' basis................................................................ [385] 30....... CONCLUSION........................................................................................................ [396]

REASONS FOR JUDGMENT 1 Nicola Tana has had a number of successes in various business enterprises with which he has been associated. He is the managing director of North East Equity Pty Limited, and he has effectively controlled the company since he established it. In September 1998 North East Equity purchased a carrot processing plant at Mandogalup Road, Wattleup, which is south of Fremantle in Western Australia. The plant had previously been operated by the Sumich group, but that group had gone into receivership. However, after the purchase, North East Equity continued to sell some carrots and other produce under the Sumich brand name. 2 In 2002 Mr Tana negotiated with his then friend, David Proud, to replace some of the less sophisticated Sumich plant with a more modern processing plant. Mr Proud was the principal of a business called Proud Machinery, which operated under the trading name of Proud Nominees Pty Limited. I will refer sometimes to both Proud Machinery and Mr Proud simply as 'Proud'. The negotiations took many months. 3 In October 2002 North East Equity agreed with Proud Machinery to pay it $3 million to purchase and install new equipment for the carrots processing plant. The new equipment was installed in March 2003. Since then Mr Tana and Mr Proud have disagreed about whether the new plant and equipment were satisfactory. 4 North East Equity claimed many millions of dollars in damages and economic loss based on loss of carrots sales, breach of contract, contraventions of s 52 of the Trade Practices Act 1974 (Cth) and negligent misstatement, although in final address an alternative claim was also made in the order of $1 million. North East Equity also claimed that Proud Machinery and Mr Proud had represented that the plant and equipment would perform at the standards set in the contract, which was the basis of its claims of contraventions of s 52 of the Trade Practices Act and in negligence. There were many disputes as to whether the new plant, as finally installed by Proud Machinery, operated either to the contractual or represented standards, and how any loss of North East Equity should be assessed. 5 A further complicating factor is that, after entry into the contract with Proud Machinery, North East Equity financed the acquisition of plant and equipment by entering into a master lease with the Bank of Western Australia Limited, under which the bank took an assignment of all of North East Equity's rights under the contract with Proud Machinery. That raised an issue whether North East Equity could sue Proud Machinery for breach of contract.

[1]

CONTRACTUAL NEGOTIATIONS 6 As Mr Tana said, his discussions with Mr Proud '… were very informal'. Mr Tana asked for a plant that could process and pack 150 tonnes in an 8 hour working day. Mr Tana explained that the purpose of the 8 hour day was to condense his packing operations into a one-day shift, and thus avoid paying his workers penalty rates. Mr Tana said that he told Mr Proud that he needed to achieve a minimum temperature of 5°C for the cores of the carrots when they were packed. 7 Mr Tana also asked that the plant have the ability to grade, automatically or mechanically, the carrots into various sizes, in order to replace the then-present process where this grading was done manually. Carrots can be graded by sorting them according to their width (or girth) and their length. Ultimately, as part of the contract, North East Equity's staff specified to Proud Nominees five widths and three lengths into which the carrots should be able to be graded by the new plant. 8 Mr Tana and Mr Proud agreed that the new plant would result in an increase in the efficiency of North East Equity's labour usage, compared with the existing Sumich plant. 9 In the course of their discussions, Mr Tana told Mr Proud that the principal source of carrots for the Wattleup plant would be an existing farm at Guilderton. Guilderton was about one hour's drive north of Perth. Mr Tana explained that it was his intention to establish a larger farm, to replace the majority of the suppliers of the Wattleup plant. This new farm was to be at Lancelin, about 180 km north of Wattleup, and further up the Western Australian coast from Guilderton. Mr Tana's long-term plan was to have both his growing and packing operation on the premises at Lancelin. But, he needed an interim plant at Wattleup until he brought the Lancelin operation into production. A new processing and packing plant would be built at Lancelin. 10 Mr Proud told Mr Tana that he had recently been involved in supplying a Queensland carrot producer, Kalfresh, with a new automated carrot processing line. Mr Tana sent North East Equity's maintenance manager, John Webster, to Queensland to inspect Kalfresh's plant prior to deciding to purchase the new plant from Proud Machinery. Mr Tana also travelled to Belgium to speak with the manufacturer of some of the proposed new plant and inspected three factories there to observe similar equipment in operation. North East Equity claimed that Proud represented that there would be savings on power costs based on Kalfresh's experience. 11 The new plant was installed in early March 2003. After that, the parties became engaged in disputes about its performance, which I will come to later in these reasons.

[2]

MR TANA'S JULY 2002 NOTES 12 In July 2002 Mr Tana prepared a document headed 'DAVID [PROUD] INITIAL NOTES'. During the pre-contractual negotiations in July 2002 Mr Tana handed Mr Proud a copy of that note. Mr Tana could not recall doing this, but I am satisfied that he did. Relevantly, he wrote (and I have inserted the items in square brackets): 'PRODUCTION EXPECTATION 1. FINISHED PACKED PRODUCT 150 TONNES/DAY INCLUDING PREPACK (AVE 10T/DAY) ALL CLASSES 2. CARROTS TO HAVE MAX 18% REJECT 3. 150T/DAY IN 8 HOUR WORKING SHIFT 4. SUBJECT TO 182 GROSS TONNE (22.75T/hr) FEED 5. UTILIZING OUR PACKAGING, STRAPPING, TAPING AND PALLETIZING 6. PACKED CORE TEMPERATURE OF CARROTS MAX 5°C 7. MUST MAKE CHANGES TO ACHIEVE ABOVE AT PM [PROUD MACHINERY] UNLESS CAUSED BY NEE [NORTH EAST EQUITY]. PAYMENT TERMS 1. NEE ENTERS INTO AN AGREEMENT WHEREBY P[ROUD] MACH[INERY] CHARGES $233K FOR THE PROJECT COORD[INATION], MANAGEMENT AND SUPERVISION OF MANUFACTURE AND INSTALLATION OF EQUIP[MENT]. BRUNOGH [sic] AND GILLENKIRSCH [sic] CHARGES $3m FOR SUPPLY & INSTALLATION OF P/[RODUCTION]LINE PLUS ONION CLIPPER … INSTALLATION 1. COMMENCE MANUFACTURE ON SITE JANUARY … 3. COMMISSION DATE FRIDAY 28TH FEBRUARY 4. FULL PRODUCTION ON 3RD MARCH 5. $5,000/DAY PENALTY ON CONTRACT IF NOT OPERATIONAL 3RD MARCH GENERAL 1. MIRA [MIROSOVICH, THE PRODUCTION/SHED MANAGER AT WATTLEUP] AND/OR JOHN [WEBSTER, THE MAINTENANCE MANAGER AT WATTLEUP] TO ADELAIDE OR BELGIUM FOR TRAINING ON SYSTEM 2. JOHN [WEBSTER] AVAILABLE FOR GENERAL ASSISTANCE BUT NO EXPECTED … 4. MATERIAL TO BE SPECIFIED e.g. SIZES, THICKNESS, MOTOR RATINGS etc (ALL MOTORS TO BE 25% OVER SPECIFIED). …' 13 Mr Proud said that Mr Tana's note formed the basis for the preparation of the agreement to supply the new plant and equipment. The references in the note to 'Brunogh [sic] and Gillenkirsch [sic]' were intended to refer to manufacturers of equipment intended to be used in the new production line. These were a Belgium company, Bruynooghe, which manufactured the grading and associated equipment which sorted carrots into various sizes by width (or girth) and length, and Gillenkirch, a German manufacturer of packing equipment.

[3]

PROUD MACHINERY'S LETTER OF 29 JULY 2002 14 By the time Mr Tana provided the handwritten note to Mr Proud, much discussion had already taken place between them. Shortly after Mr Tana's note was provided, Mr Proud wrote to Mr Tana on 29 July 2002. The letter commenced by saying: 'The following is an outline of the system which I believe will fulfil your desire to pack 150 tonnes of carrots over an eight hour working day.' 15 Mr Proud then described 22 items which were to be included in the proposed system. First, the existing plant's equipment for receiving and polishing the carrots was to be retained. 16 That existing equipment operated in the following way. When carrots were brought to the plant, they were contained in large wooden crates. There is a significant issue as to the weight of carrots contained in those crates, which, depending on which account is correct, varied between 400, 410 and 450 kg. A forklift truck would pick up two of these crates at a time and move them to the tipping station. The forklift would raise the crates up to a level where they sat on a platform on the tipping station. After the forklift tines were withdrawn, the crates would be held in place on the platform. The platform would then tip, so that the carrots contained in the crates would spill into hoppers or large bins. From there, they were conveyed mechanically, on conveyor lines, to inspection or grading tables. At this point the carrots were visually assessed as they moved along a conveyor belt. Carrots that looked damaged or unsuitable would then be removed. Thus, sometimes when the carrots were tipped into the receiving hopper, they might have become broken or chipped by contact with some sharp edge or other carrots. Such carrots are not attractive to consumers, who prefer produce which appears to be in good condition. The rejected carrots, however, are able to be used commercially, for example, in commercial production of composite foods or in juice. 17 Obviously, the greater the accuracy at which unsuitable carrots are removed at this point, the more efficient the further processing will be. The subsequent stages of the processing plant will not have to deal with carrots that, ultimately, will not be packed at the end of the processing. 18 After the carrots passed along the conveyor belt across the inspection or grading stations, they then proceeded into brush washers. These machines used water and brushes which rotated and washed the carrots. Dirt and other residue, including root hair, were scrubbed off, so that the skin of the carrot appeared to be clean and fresh-looking. 19 Mr Proud's letter then proposed that a new stainless steel wet receiving hopper would be installed after the old brush polishers. This would spread the carrots more evenly. They would then be conveyed onto one of two flume elevators. These would carry the carrots upwards on their way to automatic grading. As the carrots passed upward on the flumes, they would be sprayed with water to rinse them. At the top of the elevator, two infeed vibrators would be positioned to spread the carrots evenly across the conveying belt, which was two metres wide. The vibrators were intended to be positioned to minimise the chance that any carrots might fall off the elevated platforms to which they had been carried. 20 Next, the diameter (or girth) sizers or graders would grade the carrots into five separate diameters. The diameters could be set by the operator of the equipment adjusting a hand wheel which was equipped with a gauge. As the carrots passed over the diameter graders, they would fall through holes in the conveying belt that were wider than the width of the carrots. After the carrots fell through such holes, they were received onto other conveyor belts. The smallest carrots would fall through first, followed by progressively larger ones. The lower conveyor belts ran horizontally away from the diameter grader. Mr Proud said that the diameter graders would be accessible from a suitable platform and stairway, and would be serviced by a centralised lubrication unit. He said that there would be automatic lubrication systems as well. He said that the output for Mr Tana's expected production would allow for the graders to operate at the lower end of their available speed '… which will reflect in the quality and service of each of these units'. 21 The five lower or 'exit' conveyors would carry, respectively, five streams of graded carrots ranging from smallest to largest. The smallest and the extra large carrots would be taken by their two conveyors directly to a receiving water tank. The small/medium, medium and large carrots would be transferred to three stainless length graders. These would run horizontally to the exit conveyors. The letter of 29 July 2002 said that the length graders '… have the ability to split these diameters into two selections which will then transfer into the desired chiller tank'. The letter said that, in order to control the transfer of selected sizes to the correct water tanks, 24 pneumatic gates would be positioned at appropriate locations. The gates would be activated from the main control panel for the whole system. 22 In the letter, Mr Proud recommended that nine receiving water or chiller tanks be installed. The receiving tanks would each hold up to 10 tonnes of a particular grade of carrots. Mr Proud wrote that those '… will give you one tank for each of the selected diameter and length grade and one extra tank for the purpose of receiving any grade which exceeds the ten tonne capacity allowed. This will also give you an opportunity to have a spare tank in the case of a pump malfunctioning or for cleaning purposes as it is possible to drain any tank without interfering with the others'. For example, the smallest diameter carrots would have been conveyed from the initial exit conveyor underneath the commencement of the diameter grader directly to a receiving tank. That tank would be full of chilled water intended to cool the carrots' core temperature to the 5°C referred to in Mr Tana's note. 23 The receiving tanks could be emptied by the plant operator causing air to agitate the carrots from below, and water to flow out of the tank into an intra-lock exit conveyor. The exit conveyor would allow the chilled carrots, which had been carried out of the receiving tank, to be conveyed to the packing stations. And, the exit conveyor also drained the water propelling the chilled carrots out of the receiving tanks into the return water tank. A water compensation tank would also be installed to hold any water that could not be used immediately. Next, water which had been recycled through the return water tank was pumped through a drum filter to remove debris. Then the chiller tank would receive the filtered water. Chilling coils were placed inside that tank which would lower the water to the desired temperature. Mr Proud wrote that he was proposing to make further enquiries with Mr Webster about North East Equity's refrigeration requirements. Mr Proud said he would then be able to evaluate the existing refrigeration plant and what changes might be proposed. 24 Mr Proud said that the exit conveyors and gate system proposed would enable the operator to select any size and diameter of carrot to be sent to a particular packing site. He said that he had allowed for a one-bin filling station which would have the ability to receive any size selected. Delivery belts would control the flow of the chilled carrots to the intended packing station. 25 The letter gave the following description of the automatic control system which it proposed would be used by the plant operator: 'Item 16 Automatic Control System One central PLC [Programmable Logic Control] will control the whole system using a 12.1 touch screen for full access of all perimeters of the line. A graphical operator interface results in a user friendly operation. This system is a stand alone unit which can be connected to your main office. A modem is installed to assist in program changes or troubleshooting. Brief description of the control system During the filling of the water tank the system activates the water pumps and the blowers to spread the product evenly. The water being pumped escapes into the Return Tank at a rate which is controlled through a PT100 Temperature Sensor. The temperature of the tank is controlled through this PT100 sensor which ensures that we efficiently chill the received produce to its desired packing temperature. When we select a desired grade to a packing position the pumps and blower are activated in an appropriate manner to obtain a constant product output. A PID Control Loop calculates the speed of the pump and the blower motor to ensure this controlled feed. It is also possible to bypass the program and in this way the operator can take over the machine in a manual mode and this has a password protection to ensure security.' 26 The Wattleup plant used three carton filling stations, consisting of a combination of the Newtec weighing and Gillenkirch packing machines. Mr Proud proposed that there be two additional Newtec/Gillenkirch carton filling stations, to make a total offive. The way these carton filling stations worked was that the weighing machine would be set to measure either 10 or 20 kg quantities of carrots. The desired quantity would then be packed into an appropriate 10 or 20 kg carton by the Gillenkirch packing machine. Before the carrots went to the weighing machine, they would be conveyed over a final grading table. At that point, they would be inspected for quality. The persons at the grading table would pick up and throw into designated tubes, first, Class 2 carrots and, secondly, any damaged carrots which had not been removed at the initial grading. Class 2 carrots were ones that either had escaped notice in the initial grading, or subsequently had become damaged as they passed along the various parts of the processing. Thus, carrots may have chipped or been damaged when they fell as they passed through the diameter or length grader holes or as they were mixed about in the process of being received into or taken out of the chilling tanks. The persons performing visual inspections at the final grading tables would remove these imperfect carrots from those destined for the carton filling stations. Mr Proud suggested that the existing tanks in the old system be repositioned to receive, by conveyor belts, the carrots that were rejected at the final inspection tables. 27 The 29 July 2002 letter also noted that the weighing and packaging equipment used in the existing prepack line could be included in the new design. Mr Proud suggested that he might be able to increase the productivity of the prepack line with new equipment. The prepack line was used to weigh automatically and then pack very small carrots into plastic bags of, say 0.5, 1 or 2 kg, each for display for sale in supermarkets. Small and small/medium carrots would be conveyed for prepacking from a chilling tank to a conveyor with a grading table. From there, the sorted carrots would be conveyed to where they were weighed and packed into plastic bags, and then to cartons whence they would be carried along the final conveyor. 28 In addition, Mr Proud had incorporated Mr Tana's proposal that the existing hand-packing line be retained and incorporated into the new plant. This line conveyed particular classes of carrots which were hand-packed in smaller quantities. For example, the handline could process carrots that required closer than usual inspection, and those of which a small volume had been received. 29 Next, all of the packed cartons were conveyed to two robots located at the end of the various lines, which automatically removed the cartons from the lines and stacked them onto pallets ready to be moved into the cool room by a forklift. 30 At the conclusion of the letter, before noting that he was still trying to calculate the cost, Mr Proud wrote: 'Please consider this proposal as I believe that thru [sic] its implementation your company will profit from the following: Quality of sizing length & diameter Controlled temperature for packing Greatly reduced amount of crop being damaged and wasted Reduction of fork lifts required to run the existing operation Ability to pack out over an 8 hour day Only require bins for the infeed of the line Maintenance and down time will be minimised Increase of production whilst reducing the man hours required.'

[4]

MR WEBSTER'S MEMORANDUM OF 1 AUGUST 2002 31 Mr Tana sought Mr Webster's input on the proposal and the then drawings of the suggested plant layout. On 1 August 2002 Mr Webster provided Mr Tana with a list of matters for consideration. He pointed out that an 8 hour shift was, in reality, only 7 hours of work, after taking account of the employees' rest breaks and an amount of inefficiency in an ordinary working day. He then gave a worked example to show that, in 7 hours, the five packing machines could process 7,350 cartons of 20 kg each, equivalent to 147 tonnes. He had based this on each of the Gillenkirch packing machines being able to process three and a half 20 kg boxes per minute consistently over the whole of the seven effective working hours of an 8 hour shift. 32 Mr Webster wrote that this level of output would occur as long as the brush washers could keep up with the present 14-15 tonnes per hour to produce what he called 'a good polished carrot'. Importantly, he said that, at 15 tonnes per hour for such a quality, the brush washers could only produce 105 tonnes over 7 hours, and continued: 'This means prior to shift start we would need 3 hrs at 15TPH to fill all tanks ready to get a total of 150 tonnes (9 tanks can hold 90 tonnes), so in effect becomes a 10 hour day. ? hrs.' 33 Mr Webster observed that the 150 tonne target should be achievable because the prepack line's production was not included in the above figures. He noted that one of the drawings then being considered showed five inspection tables, one at each box filler, and observed that probably only three were required. He suggested that one inspection table could be used for two box fillers, so that only three inspection tables would be required between the five box fillers. He commented that, because sizing should not be a problem for both girth and length, it would be possible to grade for Class 2 medium and large carrots at the inspection tables located prior to the box fillers. He said that the Class 2 carrots could then be able to be stored in the two old surplus Wyma (brand) wet tanks until they were packed later in the day. 34 Mr Webster wrote that he had had discussions with Ms Mirosevich and they had estimated that no more than 32 people would be needed to operate the new automated plant (leaving out the handline and prepack line). He gave an example of a 10 hour day in which the forklift and grading (at the inspection tables located immediately after the wet hopper) would start at 6.00am so that 45-50 tonnes could be accumulated in tanks by about 9.00am. The shift of workers operating at that section of the plant could finish at 2.00pm and a new team could arrive to do 3 hours more work until 5.00pm and then clean up for an hour. Thus, the second shift would do 4 hours per day. Mr Webster continued by observing that the pack out lines would be able to operate from 9.00am to 5.00pm for shifts of between seven and six effective working hours, or a 38 hour working week. 35 These observations to Mr Tana by his two principal employees responsible for the operation of the existing plant are of considerable significance. Mr Webster was commenting on both the quality of carrot and the capacity of the existing brush washing machines which were to be used as the initial feed for the new plant and equipment. Those machines could not supply 150 tonnes worth of good polished carrots in 8 hours. If they were worked continuously for 8 hours and produced the maximum that Mr Webster suggested of 15 tonnes per hour, they could only produce 120 tonnes in an 8 hour shift. 36 Both Mr Tana and Mr Proud understood that the brush washers could operate to process about 22.75 tonnes per hour, but that this would affect the quality of the carrots. I accept Mr Proud's evidence that, in 2002, he discussed with Mr Tana that, at that speed of processing, the carrots would be insufficiently polished and would retain some hairs and green matter. As Mr Tana said: 'The amount of polishing required is a quality issue that was not part of the brief to Proud anyway.' 37 However, Mr Proud would have been conscious of the efficient operation and capacity of the brush washers and the need to operate them in a way to maintain the quality of his customer's (i.e. North East Equity's) product. Mr Tana was aware of the consequence of increasing the speed of the brush washers beyond Mr Webster's suggested 15 tonnes per hour. Mr Tana said in re-examination: '… the function of the brush washer, it is to polish the carrots and that is a choice that we make in terms of the quantum of polishing that happens. We can accelerate the process and in so doing brush off less of the epidermal layer or we can slow the process down.' 38 Thus, it was clear to Mr Tana that, to achieve his objective of 150 tonnes in an 8 hour shift, he would have to have his work force operating on split shifts as Mr Webster's memorandum had discussed. In that way, it would be possible for the work force, efficiently managed, to have the individual workers paid only for 8 hour or shorter shifts, but they would not all work during the same 8 hours in any one day. Indeed, as the expert evidence made clear, split shifts in the food packaging and processing industry are common. I am satisfied that Mr Tana was, at all times, fully cognisant of this fact. Moreover, I find that Mr Tana was aware, and believed that Mr Proud was aware, that the workforce at Wattleup took lunch breaks and two 'smoko' or rest breaks during the course of their 8 hour shifts, so that an 8 hour shift did not translate into 8 hours of work, but rather into 7 hours, as Mr Webster's memorandum illustrated.

[5]

MR TANA VISITS BELGUIM TO ASSESS BRUYNOOGHE 39 Around July or August 2002 Mr Tana went to Belgium and was met by Bruynooghe's export manager, Marc Seldeslachts and taken by him to its head office and factory. Mr Proud had arranged for Mr Tana to make the visit. Before the visit, Mr Tana had an understanding of what Bruynooghe's processing system involved through his discussions with Mr Proud, his understanding of the drawings that Mr Proud had supplied showing possible configurations of the new processing line, and a video of the new Kalfresh plant operating which Mr Proud had shown him. Mr Tana understood that Bruynooghe's system of processing involved tank systems with water movement of the carrots, and that this feature would be an integral part of the upgrade which Mr Proud was proposing. By then, he was aware that the likely cost involved was between $2-3 million. Mr Tana understood that Bruynooghe's system involved initial grading of both the girth and length of the carrots together with a hydro-cooling system using chilled water to cool the carrots. While he was at Bruynooghe's head office, he met its managing director or owner, Stefan Parrein. He was given a presentation of the various parts of the system and was impressed by both what was presented and the presenters. 40 Messrs Parrein and Seldeslachts showed Mr Tana a DVD demonstrating the tank system and carrot movement. They explained to him what the DVD was demonstrating. He was then taken to observe three Bruynooghe plants in operation at various factories, one of which he considered to be similar to that which Mr Proud was proposing. Mr Tana enquired of the Bruynooghe personnel about a number of matters, including the tonnage which the graders could process per hour. He formed the view that Bruynooghe were capable of manufacturing the components, and he was comfortable with both their responses and his observations of the equipment in operation. 41 Prior to organising this visit, Mr Proud had shown Mr Tana a DVD of the Kalfresh plant with the Bruynooghe system in operation. While he was at Bruynooghe's offices he was shown drawings of the then current version of the design for the Wattleup plant. He said that he discussed the drawings in general terms with Messrs Parrein and Seldeslachts. They told him that they represented the system that was going to be provided for Mr Tana's job in Australia. 42 However, Mr Tana said in his evidence that he had not gone to Belgium to understand technical specific matters about the Bruynooghe line. He said that he did not ask them about the drawings or any aspect of them because he recognised the items and '… [s]o there was nothing for me to ask them in that'. He said that he had no concerns and was comfortable with what he had seen in Belgium and therefore did not raise any matters with Mr Proud. He noticed that, in Belgium, carrots were not graded after they had gone through the hydro-cooler tanks, apart from removing rejects. He said that he had not noticed any length grading occurring in the Belgium operations that he had been shown. 43 In his written evidence, Mr Tana went as far as claiming that he had no prior knowledge of the Bruynooghe tank system and '[a]ll of my knowledge came from [Mr] Proud's representations to me'. He said this in responding to Mr Webster's evidence that Mr Tana had rung him from Belgium sounding very excited and had said: 'It looks like this could be the way to go'. In cross-examination Mr Tana accepted the accuracy of Mr Webster's account. He sought to explain his written response to it as relating to his initial discussions with Mr Proud. I reject Mr Tana's evidence seeking to minimise his investigations, knowledge and understanding of the Bruynooghe system. As he said in cross-examination: '… I had availed myself of knowledge by going to see the system itself, by having sent John Webster by [sic] Queensland to view the system.' 44 Mr Tana said that he was taken to a plant in Belgium with a similar operation to that he was contemplating for Wattleup. He claimed not to recall whether he saw a length grader at a plant in Belgium. I infer that, in Belgium, Mr Tana ensured for himself by his discussions with Bruynooghe and his inspections, how each important part of the equipment described in Proud Machinery's letter of 29 July would operate. That is why he was so enthusiastic when speaking from Belgium with Mr Webster. I also find that Mr Tana observed in operation Bruynooghe length graders of the kind later installed in his new line.

[6]

PROUD MACHINERY'S LETTER OF 30 SEPTEMBER 2002 45 The negotiations culminated in late September 2002. On 30 September 2002, Mr Proud sent a letter to Mr Tana which began by referring to 'the following responses to your list of requests'. Mr Proud indicated that he would like to discuss them promptly. The only document in evidence that could amount to such a list appears to be the initial handwritten notes of Mr Tana, to which I have referred. It is likely (and I find) that Mr Proud's letter was addressing these. The letter stated: 'Production expectations Proud Machinery agrees that the line will have the capacity to process 22.8 gross tonnes of carrots per operating hour with a maximum of 18% rejects. This calculates to 18.75 tonnes/hr final packout on the pallet. Utilizing all of the packaging and palletizing equipment which is shown in the final layout. I have used the following as a basis of our calculations. Pre pack Line Pre pack consists of a 2012/2G45 and 2009/G45 which have the ability to pack a conservative 50 units / min or 3000 packs/hr. 50% @ 500 gms = 750 kg per hour 25% @ 1000 gms = 750 kg per hour 25% @ 1250 gms = 937 kg per hour Total production per hour 2.437 tonnes per hour. Maximum allowance for daily production 12.5 tonne. Five Gillenkirch CBF3000 carton fillers will achieve the following: 150 Cartons/hr each = 750 Cartons @ 20kg = 15 tonnes/hr 180 Cartons/hr each = 900 Cartons @ 20kg = 18 tonnes/hr 240 Cartons/hr each = 1200 Cartons @ 20 kg = 24 tonnes/hr Hand Line The relocated hand line will also allow you to pack any low volume sizes or carrots which require closer inspection. Min 20 Cartons/hr each packer = 60 Cartons @ 20kg = 1.2 tonnes/hr Conclusion By using these calculations and several combinations of the same we are able to achieve the desired pack out of 18.75 tonnes per hour. Temperature of pack out After discussions with Gary North, I am able to advise you that he would be comfortable in working with your refrigeration technicians in the supply and installation of the required equipment. Gary North has advised me that he will guarantee a maximum 5 degree celcius core temperature for your carrots and will be contacting John Webster for further technical discussions.' 46 The letter then referred to commencing assembly on the site early in January and required that North East Equity would make the site available for commencement of the installation on 2 February 2003. Proud Machinery agreed to a penalty of $5,000 per day if the line were not operational by 7 March 2003, up to a maximum limit of $50,000. Mr Proud wrote that he would be in contact with Amaroo, a company in South Australia, which was building another processing plant at Renmark using equipment supplied by Proud Machinery to arrange training for Mr Webster and Ms Mirosevich when the new system was commissioned at Renmark. The letter continued by stating that Proud Machinery was responsible for all contractors on the installation, excluding power supply to the line, plumbing work and water supply. North East Equity would be responsible for the sea freight for up to 10 x 40 foot containers. Proud Machinery agreed to accept letters of credit for Newtec and Gillenkirch equipment and was negotiating with Bruynooghe for similar conditions. The irrevocable letter of credit would be claused to provide for a payment of 50% on shipping, 40% on delivery and 10% on commissioning. The letter continued: 'The refrigeration is supplied require a 20% deposit and will discuss with you directly the balance of payment but have indicated that no furthur would be required prior to delivery. Proud Machinery will also be invoicing North East Equity for the project management and co ordination of the equipment an amount of $233,000.00 over 5 equal monthly payments of $46,600.00 commencing October 2002.' [sic] 47 On 1 October 2002 North East Equity issued a purchase order signed by Mr Webster to Proud Machinery in the following terms: 'This Purchase Order is in a response from a letter from Proud Machinery dated 30/9/02 that N.E.E./Sumich and PROUD MACHINERY are at an agreed position to start production of new machinery from Newtek, Gillenkirch and Broonoogh [sic] (Handline & pre-pack to still be agreed)' 48 On the same day, one of Mr Proud's companies, Steventon Lodge Holdings Pty Ltd, invoiced North East Equity $46,600 plus $4,660 GST (a total of $51,260) for 'Sourcing, project management, coordination and supervision for new carrot packing and distribution line installed by Bruynooghe of Belgium and Gillenkirch of Germany'.

[7]

PROUD MACHINERY'S LETTER OF 8 OCTOBER 2002 & THE AMENDMENTS OF 14 & 18 OCTOBER 2002 49 Next, on 8 October 2002, Mr Proud wrote to Mr Tana referring to 'Revision S' of the drawings. The letter commenced by stating: 'Proud Machinery would like to confirm the terms and conditions of your contract to purchase the items listed in the attached schedule and included in drawing No SUM-000-Revision S.' The attached schedule listed 45 items of equipment and services. It identified the supplier in each case, except for refrigeration which was to be advised. The letter said: 'All ancillary equipment will be controlled through the main control board for easy start up and shut down of the line. The clients must supply a modem connection to the Bruynooghe control board which will allow for fast and efficient factory back up.' 50 The letter reiterated the terms of the penalty clause and that Proud Machinery would be responsible for ensuring that all contractors and employees of Proud Machinery performing duties for it on site were covered by appropriate Workcover and Public Liability Insurance. Proud Machinery also had the right to make minor alterations to the layout of the line, so that the produce could be handled more gently and efficiently. It continued: 'Production expectations Proud Machinery agrees that the line will have the capacity to process 22.8 gross tonnes of carrots per operating hour with a maximum of 18% rejects. This calculates to 18.75 tonnes/hr final packout. Total Investment Value $3,000,000.00 plus GST' 51 The letter specified a similar payment schedule to the earlier letters, except that all payments were now to be by transferable and irrevocable letter of credit in favour of Proud Machinery. The letter stipulated that all equipment would remain the property of Proud Machinery until final payment was made. It was signed by both Mr Tana and Mr Proud on behalf of their respective companies. In addition to the schedule of equipment and services, there was a schedule which identified different lengths and girths of carrots to be graded by the equipment and the tank to which they were to be sent, once graded, by the conveying equipment. 52 On 14 October 2002 an amendment was made to that schedule by North East Equity, and the amended schedule was faxed to Proud Machinery. The final requirements for the production line were then set out as follows: DROP # SIZE GIRTH LENGTH TANK # ADDITIONAL COMMENTS A1 WASTE ALL UP TO 100MM WASTE A2 SMALL 24-28MM 100-140MM 1 500GM PREPACK 140+MM 2 1KG PREPACK A3 SMALL/ 29-35MM 100-140MM 1 TANK 1 & 2 MEDIUM 141-170MM 3 INTERCHANGEABLE 170+MM 5 PREMIUM SMALL/ MEDIUM A4 MEDIUM 36-43MM 100-150MM 1 or 3 PREMIUM MEDIUM 151-180MM 4 180+MM 5 A5 LARGE 44-54MM 100-170MM 6 PREMIUM LARGE 171-220MM 7 220+MM 8 A6 EXTRA 54+MM 8 LARGE SPARE 9 SPARE AS BACK UP TO ABOVE

53 On 18 October 2002 Mr Proud wrote a further letter to Mr Tana which they both signed. The letter noted that, among other things, any alterations made by Proud Machinery to the layout of the line must not impact on its efficiency. It said that the contract price was fixed. Proud Machinery also transmitted some drawings at the same time as this letter. The drawings depicted an alternative configuration adding a sixth box filler, if that were required. They showed the dimensions of the grading tables located immediately before the carrots were conveyed to the box fillers. These depicted three persons standing at the grading tables, which were 3 metres in length, and showed chutes for the graders to throw Class 2 and reject carrots. 54 In a number of respects, I found Mr Tana to be an unsatisfactory witness. One instance of this was his evidence concerning his visit to the Bruynooghe factory in Belgium. In March 2001 Mr Tana wrote to Mr Proud complaining about the operation of the Gillenkirch packing units installed at Wattleup, and stating that he placed a large emphasis on manufacturer advice, '… as we expect that their equipment will do what it is meant to do'. He admitted in evidence that he did place a large emphasis on manufacturer advice. He took the trouble to visit Bruynooghe and to go on a tour of three different plants showing Bruynooghe's equipment in operation. Bruynooghe was the manufacturer of an integral part of the system that he was considering purchasing. It had the proposed drawings of the new plant available for discussion with Mr Tana when he visited. Yet, in his evidence, Mr Tana sought to convey that his dealings with Bruynooghe in Belgium were unimportant, notwithstanding that he was, at that time, contemplating a substantial investment of over $2 million in new plant. Originally, in his witness statement he said: 'I did not go back to David Proud with any concerns because I assumed that he had taken all of my requirements and the changes that would be necessary because of those requirements into account when the Sumich [Wattleup] system was designed.' 55 In cross-examination Mr Tana agreed that this statement could be read as suggesting that he did have concerns, but had not mentioned them to Mr Proud. He claimed that he had no concerns about how Bruynooghe's systems applied to what was proposed at Wattleup. In addition, because of his perception of shortcomings in equipment that had been supplied by Mr Proud in the past, Mr Tana asserted that he had reservations during the course of negotiations for the new Wattleup plant about Mr Proud's business dealings. This was notwithstanding that he and Mr Proud were friends at that time, socialised together and would have dinner with their respective wives when visiting one another. Indeed, they had gone on an overseas trip together with their wives. He claimed that he regarded Mr Proud as a salesman. He asserted in his witness statement: 'Given the problems experienced in the past, the size of the financial commitment and the central importance of the packing lines to the Sumich [Wattleup] business, I was cautious about Proud's ability to meet NEE's requirements. That is why the requirements were specifically documented…' (emphasis added) 56 Mr Tana admitted that, except for the handwritten notes that he gave Mr Proud in July 2002, he had not documented his requirements and instead had simply relied on Mr Proud's documents. When he was taken to his handwritten notes during the course of cross-examination, Mr Tana had no recollection of sending them, or the circumstances in which he gave them to Mr Proud. He said that those notes represented his requirements '[a]s at that day', but that the discussions continued '… and the requirements were confirmed and finalised [in] a letter from David [Proud]'. Mr Tana accepted that the notes may have been given to Mr Proud during the course of their meeting during 2002, and that they did not represent his overall requirements. He then gave this evidence: 'Do you say that at some point after this document was created your requirements changed? --- My requirements never changed. My requirements were still these but there was still a requirement for my operational personnel to fill in and that was a subsequent meeting or a meeting prior and that will have to come out with evidence from Mira [Mirosevich]. She sat in the office and they started to talk about sizing, about streams of carrots. That formed part of the contract as well.' (emphasis added) 57 The requirement for the operational personnel to which Mr Tana referred was specified in the two schedules, the first attached to Proud Machinery's letter of 8 October 2002, and the second in the facsimile with the amended requirements sent by North East Equity on 14 October 2002. 58 Ms Mirosevich had been involved in the specification to Proud Machinery of how the carrots were to be graded and the tanks to which they were to be sent. This was a task she undertook with Mr Webster and Frank Chew, then the sales manager of North East Equity's carrot business. These specifications were originally supplied to Proud Machinery and included in Mr Proud's letter of 8 October 2002. Subsequently, the amendment made on 14 October 2002 was sent by North East Equity to Proud Machinery. In cross-examination Ms Mirosevich sought to assert, instead, that Mr Proud decided which tanks were to be used for what produce. Ultimately, she conceded that she had agreed to provide Proud Machinery and Mr Proud with the final specification of 14 October 2002. She sought also to distance herself from her involvement in considering the proposed designs of the plant before it was made, but I think this was because she was given tasks by Mr Tana which were beyond her abilities. I do not accept her evidence that suggested she had little involvement in those matters. It was important for her, as the production manager, to be substantively involved in this design and specification work, and I find that she was.

[8]

CONTRACT FOR THE SUPPLY OF THE NEW LINE 59 It was common ground that a contract was made in writing on 18 October 2002 between North East Equity and Proud Machinery, comprised of the letter from Proud Machinery dated 30 September 2002, North East Equity's purchase order dated 1 October 2002, Proud Machinery's letter of 8 October 2002, and that this was varied by Proud Machinery's letter of 18 October 2002, together with the sheet specifying the tanks to which graded carrots were to be sent, faxed by North East Equity on 14 October 2002. 60 North East Equity alleged that the contract was a contract for the sale of goods within the meaning of one of the Sale of Goods Act 1895 of Western Australia or South Australia, but it did not identify which Act applied. Both Acts were written on the template devised by Sir Mackenzie Chalmers in 1893. The proper law of the contract for the supply of the new plant is the system of law by reference to which the contract was made, or that with which the transaction has its closest and most real connection: Bonython v The Commonwealth (1950) 81 CLR 486 at 498 per Lord Simonds. Their Lordships stated there that (Bonython 81 CLR at 498): '[W]hat is the proper law of the contract, and therefore what is the substance of the obligation created by it, it is a factor and sometimes a decisive one that a particular place is chosen for performance.' 61 Here, the contract for the supply and installation of the new plant and equipment had to be substantially performed in Western Australia. The only connection with the law of South Australia was the location of Proud Machinery's head office there. A condition of the letters of credit was payment of 40% of the purchase price for the particular goods upon delivery to Perth. Effectively, performance of the contract had to occur either in Western Australia, or overseas in the various parts of the world from which Proud Machinery was sourcing supplies of items of plant and equipment to be installed. 62 The substantial obligation created by the contract was for Proud Machinery to supply and install, at Wattleup in Western Australia, the plant and equipment for which it was charging $3 million. That obligation, together with a consideration of the whole of the circumstances, leads to the conclusion that the proper law of the contract was the law of Western Australia. The transaction had its closest and most real connection with that State. Accordingly, I find that the Sale of Goods Act 1895 (WA) applied to contract. 63 North East Equity pleaded that the contract contained conditions implied by s 14(i) of the Sale of Goods Act based on representations said to have been made by Mr Proud to Mr Tana during the pre-contractual negotiations. Relevantly, s 14(i) provides: '14. Implied conditions as to quality or fitness Subject to the provisions of this Act, and of any statute in that behalf, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale, except as follows: (i) Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required, so as to show that the buyer relies on the seller's skill or judgment, and the goods are of a description which it is in the course of the seller's business to supply (whether he be the manufacturer or not), there is an implied condition that the goods shall be reasonably fit for such purpose: Provided that in the case of a contract for the sale of a specified article under its patent or other trade name, there is no implied condition as to its fitness for any particular purpose.' 64 I am of opinion that nothing turns on whether the contract for the supply of the new line was, on its true characterisation, a contract for the sale of goods or a contract for work and materials. In the former case, s 14(i) of the Sale of Goods Act ordinarily would operate to imply a condition that the goods be reasonably fit for the purpose for which they were required, as made known by the purchaser. In the absence of special circumstances, a contract to do work and supply materials will carry with it two implied warranties: first, that the materials are of good quality and free from latent defects; and secondly, that the materials are reasonably fit for their intended purpose: Helicopter Sales (Australia) Pty Limited v Rotor-Work Pty Limited (1974) 132 CLR 1 at 6 per Menzies J, at 8 per Stephen J, Barwick CJ agreeing with their Honours at 4 and Mason J agreed with Stephen J at 15; Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454. I am of opinion that because, not only was Proud Machinery to supply the goods, it was also to erect and install them, the contract was not merely a contract for the sale of goods, but was in substance a contract for the provision of work and materials: cf Hewett v Court (1983) 149 CLR 639 at 646-647 per Gibbs CJ, 650 per Murphy J, 655 per Wilson and Dawson JJ, 662 per Deane J. As Gibbs CJ noted, the distinction between a contract for the sale of goods and one for the provision of work and materials is frequently a fine one and the tests for distinguishing them are unsatisfactory and imprecise: Hewett 149 CLR at 646; see too Sutton KCT, Sales and Consumer Law (4th ed, Lawbook Co, 1995) at [2.42]-[2.43]; Benjamin's Sale of Goods (7th ed, Sweet & Maxwell, 2006) at [1-041]-[1-043]. 65 It follows that, whether the contract is properly characterised as a contract for the sale of goods or for the supply of work and materials, there was an implied condition that what was to be supplied (goods or work and materials) would be reasonably fit for the purposes for which the buyer (North East Equity) indicated they were required and that it relied on the seller's (Proud Machinery's) skill or judgment. 66 North East Equity alleged that the new plant and equipment were goods of a description that was in the course of Proud Machinery's business to supply. There is no question that that is correct. North East Equity also alleged that it relied on Proud Machinery's skill or judgment because it had made known, through Mr Tana's discussions with Mr Proud, expressly or by implication, the purposes for which the new production line was required. Those purposes for which the new line was to be reasonably fit were in the same terms as some of the representations pleaded independently by North East Equity in aid of its case under s 52 of the Trade Practices Act (with which I will deal with later), namely: (a) The capacity to process and pack in excess of 150 tonnes of carrots in an 8 hour working day (being equivalent to 18.75 tonnes per hour). (b) The ability to process farm fresh carrots at field temperatures. (c) The core temperature of packed carrots to be not more than 5°C. (d) The ability to sort and grade carrots into eight distinct streams of size and length grades. (e) An increase in efficiency of labour usage compared to the existing Sumich line. (f) The ability to process and pack carrots from more than one source without intermixing carrots from other different sources. 67 North East Equity also alleged that the contract contained the following express terms, and that Proud Nominees had made identical representations arising from the correspondence and conversations between the parties. Those additional terms and representations were, namely, that the new production line would: (g) have the capacity to process 22.8 gross tonnes of carrots per operating hour with a maximum of 18% rejects, equal to 18.75 tonnes per hour final pack out on the pallet; (h) achieve a guaranteed maximum of 5°C core temperature for North East Equity's carrots. 68 Mr Proud readily acknowledged that, in the discussions leading up to the formation of the contract, Mr Tana had asked him, or he understood North East Equity wanted him, to provide a system that could achieve each of the terms and purposes in sub-pars (a)-(e). I am satisfied that Proud Machinery was aware of each of those five terms or factors as a purpose for which the new line was required by North East Equity. Additionally, the circumstances in which Mr Tana and Mr Proud were discussing these matters would have conveyed to a reasonable person in Mr Proud's position that Mr Tana and North East Equity were relying on Proud Machinery's and Mr Proud's skill or judgment in the selection of appropriate plant and machinery to achieve those purposes. Mr Tana had told Mr Proud to evaluate the existing line by visiting it at the time of preparing a quotation for what was required. I am satisfied that Mr Proud (and hence Proud Machinery) appreciated, and a reasonable person in his position would have appreciated, that North East Equity (through Mr Tana) was relying on Proud's skill or judgment in recommending plant and equipment, and on those who might install it, to achieve each of the five purposes in sub-pars (a)-(e) that Mr Tana and Mr Proud had discussed. 69 However, the purpose specified in sub-par (a) changed, as the discussions evolved, from 150 tonnes in an 8 hour working day to 18.75 tonnes per operating hour, as will appear below. And, there is a dispute about whether there were terms or representations to the effect in sub-pars (f), (g) and (h) above. Consequently, there are also issues of how sub-pars (a) and (c) are to be understood.

9.1 Principles 70 No contract is made in a vacuum. In order to construe the terms of the contract, the Court seeks to place itself in the matrix of mutually known facts forming the background in which the parties contracted. Additionally, where terms are alleged to have been made orally, it is necessary to identify what, if any, oral terms were agreed. In Watson v Foxman (1995) 49 NSWLR 315 at 318-319 McLelland CJ in Eq explained that, where a party alleged in civil proceedings that conduct of another was misleading or deceptive, or likely to mislead or deceive, ordinarily it was necessary for that party to prove to the reasonable satisfaction of the Court first, what the alleged conduct was, and secondly, the circumstances which rendered it misleading. He continued, in terms, which in my opinion are apposite to the identification of oral terms of a contract agreed to have been made in the course of negotiations, as follows: 'Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.' 71 McLelland CJ in Eq said that each element of the cause of action had to be proved to the reasonable satisfaction of the Court: Watson 49 NSWLR at 319; see also s 140 of the Evidence Act 1995 (Cth) and CEPU v ACCC (2007) 162 FCR 466 at 479-482 [29]-[39] per Weinberg, Bennett JJ and myself. 72 The process of construction of a contract is undertaken objectively. In Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at 179 [40], Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ said: 'It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.' (citations omitted) And in CEPU 162 FCR at 510 [164]-[165] Weinberg, Bennett and I said: ' In the construction of a contract, the court places itself in the commercial matrix in which the parties were at the time that the contract was made. This is so that the court can construe correctly both the express terms used by the parties and those which are included by implication in order to give effect to their presumed intention. In Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 76 ALJR 436; 186 ALR 289 at [10], Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ said that it was appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question in a contract were used and, from those circumstances, to discern the objective which the parties had in view. They applied what Lord Wilberforce had said, namely that an appreciation of the commercial purpose of the contract "... presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating" (Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 at 995-996). And, in Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at [11] approving Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1) [1998] 1 WLR 896 at 912, Gleeson CJ, Gummow and Hayne JJ said that interpretation of a written contract involved ... the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.' See also International Air Transport Association v Ansett Australia Holdings Limited (2008) 242 ALR 47 at 51-52 [8] per Gleeson CJ, at 63 [53] per Gummow, Hayne, Heydon, Crennan and Kiefel JJ.

9.2 What was the term or representation concerning a production level of 18.75 tonnes per hour at final pack out (sub-pars (a) and (g))? 73 In the letter of 30 September 2002 the parties expressly adverted to the capacity of the line to process 22.8 gross tonnes of carrots per operating hour, with a maximum of 18% rejects. The letter expressly said that this equated to 18.75 tonnes per hour at final pack out on the pallet (i.e. after the robots located at the end of the last conveyor). Moreover, that letter also referred to the packing capacities per hour of various components of the proposed new production line, namely the prepack line, the five Gillenkirch carton fillers and the handline. The letter expressed the conclusion that, by using those calculations and several combinations of them, the desired pack out of 18.75 tonnes per hour would be achieved. 74 While the parties had discussed, in their earlier negotiations, 150 tonnes being produced in an 8 hour working shift on one day, I find that the letter of 30 September 2002 made clear that the particular performance Proud Machinery and Mr Proud were warranting would be achieved by the proposed configuration of the new line (which would include the handline and the prepack line production). And, in the subsequent letter of 8 October 2002, signed by both Mr Tana and Mr Proud, the same warranty was given using the figure of 18.75 tonnes per hour at final pack out. 75 Mathematically, 18.75 tonnes per hour multiplies to 150 tonnes for 8 hours. However, the parties had identified specifically that the capacity of the plant was to be measured by a pack out rate of 18.75 tonnes per hour. How North East Equity proposed to run the plant, and how many continuous hours it proposed to have, were matters for it to determine. The production expert evidence, which I accept and discuss later in these reasons, demonstrated that the existing brush washers could process 22.8 tonnes per hour. The experts did not address the issue of the resulting quality of carrot processed at that speed. However, it was unlikely that the brush washers would process 22.8 tonnes per hour in any event, because most of the 18% rejects should have been removed at the grading tables located immediately before them. Mr Webster's memorandum of 1 August 2002 showed that because the existing brush washers, which were to be incorporated into the new line, could not process more than 14-15 tonnes per hour if a good quality were to be maintained, he and Mr Tana were aware that it was impossible, even if the whole plant operated continuously for an 8 hour day, to process more than 120 tonnes of good quality carrots. And, as that memorandum also showed, the plant did not operate for 8 hours continuously. Rather, in an 8 hour day, it operated for about 7 hours after allowing for lunch, smoking or tea breaks and other usual inefficiencies. I do not accept Mr Tana's evidence to the extent that it differed from Mr Webster's account of how the plant operated in practice. Mr Webster worked there full-time when he wrote the memorandum, whereas Mr Tana visited the plant often, but was not there continuously throughout the day. 76 I am satisfied that a reasonable person in the position of the parties would have understood the term 'per operating hour' in the contractual letters as referring to the actual time in which the plant was operating. I find that Mr Tana also had that understanding. Thus, in an 8 hour shift, Mr Tana understood that there were about 7 operating hours which would result in about 131.25 tonnes of packed product based on the rate of 18.75 tonnes per operating hour. And, after he deleted the handline, the stipulated result of an 8 hour day's production (with 7 operating hours) would be 122.85 tonnes (at 17.55 tonnes per hour). 77 I am satisfied that Mr Tana was fully aware of this limitation in his work force's operating hours when he decided that North East Equity would contract with Proud Nominees for the new line. I am also satisfied that a reasonable person in the position of the parties would have appreciated that Proud Nominees was representing and warranting that the packing machines could operate, initially, at the 18.75 tonnes per hour (and, after deletion of the handline, at 17.55 tonnes per hour), but that for good quality carrots, this output level could only be achieved by building up a store of carrots which had been processed through the brush washer operating at a slower speed. And, they would have appreciated that, when the letters of 30 September and 8 October 2002 referred to the capacity of the line to process 22.8 gross tonnes of carrots per operating hour, they must have had in mind the overall operation of the plant in a commercially efficient manner that would result, at the time of pack out, in a net output of 18.75 tonnes of good quality carrots. Both knew the quality limitations on the brush washers which prevented them feeding more than 15 tonnes per hour into the grading and chilling tank system, as Mr Webster's memorandum to Mr Tana of 1 August 2002 demonstrated. Equally, both knew that the existing brush washers had the capacity to process carrots at 22.8 tonnes per hour if North East Equity wished to use them at that speed, and so sacrifice quality. 78 Both parties knew that the existing brush washer equipment was to be employed in the new plant. They knew that the supply of carrots to a packing machine and packing lines out of the proposed tank system could come at a greater rate than 15 tonnes per hour. Thus, in the letter of 30 September 2002, Mr Proud identified maximum production capacities of 2.437 tonnes per hour for the prepack line, 24 tonnes per hour for the five Gillenkirch machines using 20 kg cartons, and 1.2 tonnes per hour for the handline, again using 20 kg cartons. The total of that production capacity was 27.637 tonnes per hour, far greater than the 18.75 tonnes per hour at final pack out, or 22.8 gross tonnes per operating hour. 79 Mr Tana and Mr Proud were experienced in how production plants in the food processing industry operated. Split shifts were common in that industry, as David Harris, an expert witness called by North East Equity, made clear. The parties also understood that the grading of the carrots was likely to lead to a faster build up of larger numbers of particular sizes of some carrots, principally the small/medium and medium ones, than other proposed gradings would produce. Those carrots, once they had been processed through the brush washers, and across the flumes and various graders would take some time to cool to a core temperature of 5°C in the chilling tanks. From there, they would have to be moved to pack them out in the last stages of the new line. The parties' common knowledge was that the initial input of carrots from the farm could not pass through the brush washers at more than 15 tonnes per hour, if quality was to be maintained. And they knew that, if the packing machines worked to their maximum capacities of up to 27.6 tonnes per hour, before the packing operation could commence on any given day, it would be necessary for a considerable volume of carrots to be processed through the brush washers and the graders, to then be stored and chilled in the tanks. 80 A reasonable person in the position of the parties would have understood, from the discussions and the background of mutually known facts, that it was necessary for the chilling tanks to accumulate carrots over a period of time before packing could commence, and that thereafter a flow of carrots had to be provided to the packing equipment. All of the production experts, Mr Harris, Gerd Gillenkirch and Oscar Manteca, in giving concurrent evidence, discussed a split shift arrangement as one which would be expected for the efficient operation of the new plant, just as Mr Webster had done in the memorandum to Mr Tana. Mr Harris said: '... you can have what I would call overlapping shifts that processing would start and then sometime two hours later, may be two to three hours later, packing operators would start and that's quite a normal thing to happen in the food industry as such.' 81 Mr Webster's memorandum to Mr Tana had made clear that the pack out lines would work an 8 hour day from about 9.00am, but the forklift and grading staff could also work no more than an 8 hour day from 6.00am, being replaced by some other staff on a 4 hour shift from about 2.00pm. 82 That memorandum was important. It showed how Mr Tana must have appreciated how the system would work. If the quality of the carrots were to be maintained, Mr Webster's memorandum indicated that there would not be a continuous feed of 22.8 tonnes of carrots for every hour of the day, resulting in 18.75 tonnes at final pack out. This was because, at that rate, the existing brush washers would not provide carrots at the same level of quality which North East Equity was then producing. Mr Tana's interest was in maximising production, maintaining quality and minimising his labour costs. Mr Webster's memorandum indicated a commonsense means of achieving those goals with the new plant. The figures that the letters of 30 September and 8 October 2002 discussed were average figures which combined the outputs of various parts of the plant over the course of an operating day, in which workers in different areas of operation would not themselves be working more than 8 hours at a time. Thus, when one came to calculating the operating costs of running the plant, it would be realistic to use an 8 hour working day, because the various shifts that employees in the different parts of the plant would be working were either 8 hours or 4 hours. 83 The letter of 30 September 2002 showed that, if 15 tonnes per hour were packed by the five Gillenkirch packing machines, and if the handline (with 1.2 tonnes per hour) and prepack line (with 2.437 tonnes per hour) were operated, then 18.637 tonnes per hour would be produced, slightly below the 18.75 tonnes. But even on those figures, the initial feed from the brush washer section of the line could not have supplied 18.637 tonnes in an hour, if good quality carrots were to be achieved. In that event, it was necessary to accumulate a supply in the chilling tanks for a period before there would be enough chilled carrots for a sufficient flow to the packing machines, in order to allow them to process more than 15 tonnes per hour. This was the very point that Mr Webster had made in his memorandum of 1 August 2002. On the other hand, for the reasons I give below when dealing with the expert production evidence, the brush washers were capable of running at the higher speed of 22.8 tonnes per hour. But, then the quality of the carrots would be affected. Proud Machinery was not responsible for the speeds at which the existing brushers would be used. North East Equity had required those machines to be retained and used. They had the capacity to run faster or slower, depending on the quality that North East Equity wanted. 84 With this background in mind, a reasonable person in the position of the parties would have appreciated that the figure of 18.75 tonnes per hour final pack out on the pallet, could only be achieved for good quality carrots in an efficiently run plant using a split shift for its work force. The letters of 30 September and 8 October 2002 stated that '… the line will have the capacity to process 22.8 gross tonnes of carrots per operating hour with a maximum of 18% rejects. This calculates to 18.75 tonnes/hr final packout on the pallet' (my emphasis). The parties both understood that the calculations were to produce the overall end result of 18.75 tonnes per hour packed out on the pallet. And, they understood that capacity and quality were not the same. This was because of the limitation of the capacities of the brush washers to process more than 15 tonnes per hour, and maintain suitable quality. It was possible to use the processing method envisaged in Mr Webster's memorandum of 1 August to achieve the overall result in the two letters, with the consequential cost savings resulting from a split shift and, if quality were to be maintained, an initial hourly input of less than 22.8 tonnes. A split shift could be used for both the 22.8 tonnes of initial input, and Mr Webster's sensible suggestion of the lesser initial input of 15 tonnes per hour. 85 The letters of 30 September and 8 October 2002 must be read in the context in which the parties had negotiated, consistently with their awareness of the quality limitation of the brush washers to process 15 tonnes per hour. I am comfortably satisfied that a reasonable person in the position of the parties would have understood the references in the letters of 30 September and 8 October 2002 to 22.8 gross tonnes and 18.75 tonnes (or 17.55 after the handline was deleted) per operating hour at final pack out, as specifying the end result of an efficient use of labour, including procedures along the lines referred to in Mr Webster's memorandum of 1 August 2002. 86 Mr Tana desired to have a new plant which could produce a range of sizes so that he could satisfy the markets into which North East Equity was selling in 2002 (when there was no quality problem with carrots). It would be inconsistent for him to have discussed with Mr Proud making a $3 million investment, if he intended to use the existing brush washers in a manner which would produce poor quality carrots before these were introduced into the sophisticated new equipment. 87 I am not satisfied that North East Equity has established its pleaded allegations that Proud Nominees entered into a contract which included a term or represented that the new line would have '… the capacity to process and pack in excess of 150 tonnes of carrots in an 8 hour working day (being equivalent to 18.75 tonnes per hour)' (sub-par (a)) in the sense of a continuous day. Nor am I satisfied that the alleged term or representation in sub-par (g) existed in that sense. Rather, I find that, at the time of entry into the contract, there was a term or a representation that the new line would have the capacity to process and pack at a rate of production per operating hour of 18.75 tonnes in terms of final pack out on the pallet. This later reduced to 17.55 tonnes, once Mr Tana deleted the handline.

9.3 Could Proud Machinery and Mr Proud rely on a 'split shift' argument? 88 North East Equity claimed that the use of split shifts was a new issue which was not pleaded or put as part of the written or oral evidence of Mr Tana, Mr Proud, Ms Mirosevich, or her assistant, Joe Correia. However, Mr Tana asserted that the new line began after the brush washers and that that portion had to have the capacity to produce the various agreed final package tonnages. That is, if I were to accept Mr Tana's evidence, the time which was taken to get the carrots to the point of exit from the brush washers should be ignored. That period was addressed by Mr Webster's 1 August 2002 memorandum to Mr Tana. Mr Tana gave evidence that he understood that Mr Webster's memorandum involved people working separately, on differing shifts, over a 38 hour week; i.e. on a split shift without anyone working overtime. He discussed this with Mr Webster but claimed that he did not want such a result. Mr Tana gave no explanation why he did not want it. 89 I do not accept that Mr Tana would have insisted on scarifying the quality of the carrots in 2002 when a sensible and commercial means of operating the plant was put forward in Mr Webster's memorandum. Mr Tana's assertion made no sense, except to bolster a claim in these proceedings. I reject it. 90 Mr Webster also pointed out that, in an 8 hour day the workers had lunch and 'smoko' breaks which, with inefficiencies, meant that they worked productively for 7 hours. Mr Tana asserted that if one lost 12.5% of production 'just like that, you're very inefficient'. In re-examination he asserted that there was no need for a second 'smoko' break in an 8 hour shift. Given that the temperature in the shed could exceed 35°C, and that, unlike Mr Tana, Mr Webster actually worked inside the shed, I reject Mr Tana's evidence. 91 This cross-examination and re-examination fairly raised the issue of what an 'operating hour' was (if it had not been raised earlier). But, in any event, that is a question of construction. This did not require specific pleading. Given what Mr Webster's 1 August 2002 memorandum said about the capacity of the brush washers to produce a good quality carrot, and the commonsense of the staff having breaks during an 8 hour shift, I am satisfied that the questions of what an 'operating hour' was, and what an 8 hour working day was, were always issues. Indeed, 18.75 tonnes per operating hour, if a working day's production occurred in 7 operating hours, was equivalent to 131.25 tonnes in an 8 hour shift, not 150 tonnes (which was equivalent to 8 operating hours' production at 18.75 tonnes per hour). And, in a later letter dated 8 May 2004 to Mr Proud, Mr Tana wrote: 'We are still working on an output expectation of 125 tonnes finished product in an 8 hour day (excluding prepack and handline)'. The letter then discussed how the split shift which North East Equity was then using was not able to process carrots quickly enough without, making any complaint that this was outside the 8 hour day. I am satisfied that Mr Tana and North East Equity intended, at all relevant times in 2002, to run split shifts as Mr Webster's 1 August 2002 memorandum contemplated.

9.5 Was there a term or representation concerning intermixing? (sub-par (f)) 96 North East Equity also asserted that a sixth purpose was that in the alleged term and representation in sub-par (f), namely that the new plant was to have the ability to process and pack carrots from more than one source without intermixing carrots from different sources. Mr Proud denied that this was a requirement or a purpose which he and Mr Tana discussed. 97 I am not satisfied that such a requirement was discussed. Obviously, if carrots from different growers were to be segregated, it would be necessary for all of the carrots from one grower to have been processed past the first section of the line (tipping hopper and brush washers) before fresh carrots could be introduced from another source. The configuration of the proposed new line was detailed in the various drawings in evidence. These made clear that no segregation was possible unless carrots introduced from one source had been cleared out of either the whole production line, or those tanks into which processing was to take place of carrots from the second source. In any event, it would only be possible to segregate them by operating the plant in a way that allowed the carrots from the first source in the part of the line before the chilling tanks to clear before introducing those from the second source, because the second source carrots could then be directed to a separate empty tank. 98 There was no evidence that this could not be done. Of course, carrots from two different sources could not be introduced simultaneously at the commencement of the line if they were to be segregated. Segregation could occur only if carrots from one source were processed into chilling tanks before carrots from another were introduced at the commencement of the line, and directed toward different chilling tanks to those from the first source. If that were done, each supply could be packed from the different tanks and directed to different packing stations. 99 I am not satisfied that Mr Tana and Mr Proud discussed the concept of concurrent processing of carrots from difference sources before they had been directed separately into chilling tanks. Such a requirement was not in Mr Tana's list of production expectations, nor was it in any other document.

10.1 Principles 104 During the course of pre-contractual negotiations, many things are said or written which convey, expressly or impliedly, one or more representations about matters under consideration by the parties. In Codelfa Construction Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337 at 352 Mason J, in his seminal judgment, said: 'It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.' 105 His Honour said that the reason that the actual intentions of the parties were not taken into account in determining construction to be given to a contractual provision was: '… for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.' 106 Here, of course, there was no written contract complete in itself. But the policy reasons lying behind the parol evidence rule and the objective theory of contract are recognitions of the tendency of parties to negotiations to attribute to some particular matter a significance that did not exist at the time of the conclusion of the contract. In an evolving negotiation ultimately leading to the conclusion of the contract, different positions are taken with respect to different subject matters. To attribute significance in the final expression of the parties' contractual relationship to something said earlier may create an unreal and inaccurate appreciation of the subject matter of the relationship actually entered into at the later time. Of course, many things are said and written to induce the entry of a person into a contract. Even the common law recognised that misrepresentations, innocent, negligent or fraudulent, provided grounds in particular circumstances entitling parties to relief from the consequences of entry into a contract. 107 Any statement or representation made during pre-contractual negotiations is apt to be misconstrued if taken out of context, or treated as if it were a contractual term simply because it was said or written. Negotiations to arrive at a contract are not themselves part of the contract. Sometimes, however, they may set the scene in which the contract is to be understood; on other occasions they may contain, or be the source of contractual terms. But, it is often not realistic to treat a pre-contractual statement in isolation as if it were made outside the context of an evolving negotiation, which the parties recognise is a process. That process will culminate when they finalise matters in a contract. 108 In a commercial setting between experienced business people, the express words of the contract, even if contained in exchanges of correspondence, will often be an authoritative guide as to the matters on which each party relied in entering the contract. They will know that often events will have moved on from earlier communications. Courts will be mindful that representations made early in a negotiation process, can be potent and can continue to influence a party's understanding of what is being discussed, or what becomes the subject-matter of a contract. Nonetheless, courts must also be realistic about how negotiations progress; they are not static and when the context evolves, so does the understanding of each party as to what, at the later point of time, is being discussed. Gibbs CJ noted in Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 199 (in a passage approved by Gleeson CJ, Gaudron, McHugh, Gummow, Kirby, Hayne and Callinan JJ in Campomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45 at 85 [102]) that s 52 of the Trade Practices Act did not impose burdens which operated for the benefit of persons who failed to take reasonable care of their own interests. Gibbs CJ was discussing representations made to the public, as opposed to particular individuals. However, the judgment in Campomar 202 CLR at 83-84 [98]-[100] also discussed the need to consider all of the circumstances of the particular case. And, as McLelland CJ in Eq in Watson 49 NSWLR at 318-319 noted, recollections of pre-contractual conversations relied on as the source of an allegedly misleading or deceive representation can be affected by later events and the lapse of time. 109 Additionally, it is important to be mindful of the particular relations between the parties. Here, two experienced commercial men were discussing a proposed transaction over many months. The discussions involved a considerable degree of planning and reworking in the course of arriving at a final, evolved concept. That concept was the subject of their contract. It is important, in that context, to evaluate what effect any representation conveyed at an earlier point in the negotiations, had at the time of entry into the contract, and how, at that time, any such representation was understood. Also, as Gibbs CJ identified in Puxu 149 CLR at 199, it is important to evaluate whether, at the time the contract was made, the representee had taken reasonable care to protect his or her own interests. The context, including subsequent events, statements or writings which cast a different light upon an earlier representation may be all important in determining whether it continued to have any operative effect or the effect alleged.

10.3 Were representations made based on the contractual terms in sub-pars (c) and (h)? 120 The two further representations alleged to arise from the letter of 30 September 2002 must be considered against the background of the negotiations at that time and the mutually known facts. The letter of 30 September 2002 said that Mr North advised Mr Proud that he, Mr North, would guarantee a maximum 5°C core temperature for the carrots. I have found that statement became a contractual term. This is because it amounted to a promise of performance of the refrigeration tanks. 121 On the other hand, viewed as a representation, the wording of the letter makes clear that Mr Proud was passing on what Mr North had told him. Mr Tana knew that Mr Proud was not an expert in that field. The ordinary and natural meaning of the repetition of Mr North's guarantee in the letter of 30 September 2002 did not involve Proud Machinery itself representing that it, as opposed to Mr North, was providing any guarantee of that level of performance. However, shortly after that, when the contract was made, Proud Machinery promised North East Equity that the maximum core temperature of carrots at the time of final pack out would be 5°C. I find that, at that time, Proud conveyed a representation to the same effect. Mr Tana understood that what Proud was conveying was based on Mr North's assurance. 122 Often when a person passes on what another has said, he or she gives his or her own imprimatur to the original statement. Thus, at common law, a person who passes on a rumour or statement made by another is treated as having the same responsibility as the source. And, in cases involving s 52 of the Trade Practices Act, the representor's conduct must be considered as a whole: Butcher v Lachlan Elder Realty Pty Limited (2004) 218 CLR 592 at 605 [38]-[40] per Gleeson CJ, Hayne and Heydon JJ. Once the contract was made, what Mr North had said, which Proud passed on to North East Equity, assumed a different character because Proud Machinery then accepted responsibility for achieving that level of performance.

(ix) Was an oral representation made that Proud Machinery and Mr Proud possessed sufficient knowledge, skill and experience to design, procure and install the new plant? 125 North East Equity did not deal with Proud Machinery as the designer of the proposed new line. First, the parties agreed that Proud Machinery would be paid $233,000 '… for the project management and co ordination of the equipment'. This was initially recorded in the letter of 30 September 2002. Ultimately, they agreed that this sum would be paid to Mr Proud's nominee, Steventon Lodge Holdings Pty Ltd. Next, Mr Webster wrote on North East Equity's purchase order of 1 October 2002 that the parties were in '… an agreed position to start production of [n]ew machinery' from Newtec, Bruynooghe and Gillenkirch. Then, Proud Machinery wrote in its letter of 8 October 2002 that it '… would like to confirm the terms and conditions of your contract to purchase the items listed in the attached schedule and included in drawing No SUM-000-Revision S'. The letter reserved to Proud Machinery '… the right to make minor alterations to the layout of the line in the event by changing the layout the produce will be handled more gently and efficiently'. The schedule listed each item of equipment and its supplier's name. 126 On the basis of my findings in relation to the implied contractual warranties, I am satisfied that Proud Machinery and Mr Proud represented that they had sufficient knowledge, skill and experience to procure and supervise the installation of the new line. Mr Proud was, to Mr Tana's knowledge, an agent for various equipment manufacturers. As Mr Tana said in evidence, he would describe Mr Proud as a salesman. He agreed that he did not deal with Mr Proud as an engineer. He said that he classified a lot of what Mr Proud told him 'as salesman talk'. Mr Tana had been buying plant and machinery for North East Equity from Proud Machinery through Mr Proud for a number of years. I am satisfied that Mr Tana knew that Proud Machinery and Mr Proud were distributing and selling complex products made and designed by others. 127 Mr Tana had had an experience in the past with Mr Proud involving a Campesato diameter grader, which had been installed in the old Sumich line at Wattleup. Mr Tana said that that experience caused him concern as to Mr Proud's reliability in selecting suitable equipment. That concern, coupled with Mr Tana's own understanding of Mr Proud's role as an equipment distributor and vendor, made it inherently unlikely that Mr Tana would have understood Proud Machinery to be representing to him that it had sufficient knowledge, skill and experience to design the new plant and equipment. 128 While Mr Proud might have been able to recommend particular equipment and manufacturers for the purposes of including these in the new line, I do not accept that Mr Tana believed or that Proud Machinery or Mr Proud represented to him that Proud Machinery or Mr Proud had any expertise in the design of that equipment or the line. That is why Mr Tana wished to see for himself the Bruynooghe factory and equipment of the type which was proposed. He already knew of the performance of the Newtec and Gillenkirch weighing and packing machines because they were installed and operating on the old line. 129 Moreover, Mr Tana saw at the Bruynooghe factory that it was preparing detailed plans and engineering drawings for at least so much of the proposed new plant as would be supplied by it. The proposed configurations of the technical equipment was schematically presented to North East Equity and Mr Tana by Proud Machinery using its draftsman, Brendan Grogan, as the discussions progressed from time to time. However, I am comfortably satisfied that Mr Tana did not understand Proud Machinery or Mr Proud to be representing that it or he was capable of designing, or would in fact design, the new plant and equipment or the line itself. I am not satisfied that such a representation was made by Proud Machinery or Mr Proud.

(x) Was an oral representation made that the new plant would utilise electric power more efficiently than the existing Sumich line? 130 Mr Tana claimed that Mr Proud told him, during the negotiations in 2002, that Kalfresh had saved on power costs after it had installed the new plant. From this, Mr Tana claimed that he inferred that North East Equity would be saving on its total power bill after the new plant was installed, as compared to what it spent beforehand. Mr Tana said that the issue of electricity was not a major issue in his decision to go ahead. He gave vague and unsatisfactory evidence that, sometime in late 2002, Mr Proud provided him with a dollar figure in the vicinity of $16,000 in relation to Kalfresh's consumption of electricity. He assumed that it was a per month figure, but did not recall whether Mr Proud had mentioned anything about per month. His evidence continued: 'So let me understand this. You're saying, if I've got it right, sometime in 2002 Mr Proud made reference to electricity consumption by Kalfresh at their operation, you have a figure in [y]our head of [$]16,000, you think that's what he said, he didn't say per month, you've assumed per month? --- Yes. But your evidence is you didn't ask or clarify with him what he meant? --- I didn't make a big deal of it, no, sir.' 131 Although Mr Webster wrote a memorandum to Mr Tana in late November 2003 which set out a recollection of such a conversation, in his oral evidence, he did not recall a conversation to that effect until he was shown the memorandum. Mr Webster's memorandum was not a contemporaneous note but rather was written just before a significant test of the new plant was to occur, and after months of complaints by North East Equity. The memorandum concluded with Mr Webster's observation that he was not sure whether Mr Proud knew what the power costs were at the time of the alleged conversation, or if Mr Tana had provided Mr Proud with that information. I am not satisfied that Mr Webster's memorandum accurately recorded anything said by Mr Proud over a year beforehand. 132 On his return from Queensland, Mr Webster reported to Mr Tana that Kalfresh had informed him that its electricity costs were running below budget. Mr Tana recalled that during the negotiations in 2002, Mr Webster had told him that Kalfresh was making a saving on electricity. Mr Tana did not ask Mr Webster to investigate the question of Kalfresh's power consumption, nor did he ask Mr Webster about that topic on his return from his inspection of the Kalfresh plant. Mr Tana said that although the cost of electricity was a factor in his decision to go ahead with the contract, he would have gone ahead anyway with the decision to install the new plant. And, he said that had he known that there would not be a saving he would not have acted differently. 133 Mr Proud denied that he told either Mr Tana or Mr Webster during the negotiations in 2002 that there would be significant reductions in power costs if the new plant were installed, compared to those incurred in running the then existing plant. I accept Mr Proud's denial. 134 In late September 2002 Mr Proud was negotiating with Mr North about the terms on which Mr North would install the refrigeration and associated equipment for the new plant. Mr North had supplied the refrigeration equipment for the Kalfresh plant. He emailed Mr Proud that Kalfresh had budgeted about $16,000 per month for electrical costs to run its plant, but was currently paying about $12,000 per month. Mr Proud said in his oral evidence that he forwarded this email on to Mr Tana. Mr Tana was not asked about his being sent the email, nor was he recalled to deny Mr Proud's suggestion. 135 I am satisfied that Mr Proud did not tell Mr Tana that he (or North East -Equity) would be spending less on electricity than he (or it) currently was. I find that Mr Proud simply told Mr Tana that Kalfresh was spending less for electricity on its new plant than it had budgeted to spend. I find that Mr Tana did not ask anyone about the electricity consumption of the proposed plant before he entered into the contract with Proud Machinery. 136 I am not therefore satisfied that Proud Nominees or Mr Proud made any representation or contractual promise that the new plant would utilise electric power more efficiently than the existing one at Wattleup, or that North East Equity would save money on its power costs. I am not satisfied that Mr Tana relied on anything communicated by Proud Nominees or Mr Proud in relation to the new plant's power or electricity consumption, usage or costs as a factor in his decision to enter into the contract or install the new plant.

(xi) Was an oral representation made that the new plant would comfortably handle a capacity of 150 tonnes per day packed out in cartons, and in doing so it would be operating as 'idle'? 137 Understanding the contractual terms and representations concerning the pack out capacity of the new plant in the way that I have explained, I find that Mr Proud made a representation to Mr Tana during the negotiations that the new plant would comfortably handle the capacity of 18.75 (or 17.55 after the deletion of the handline) tonnes per operating hour packed out in cartons, and that in doing so it would be operating 'at idle'. By the words 'at idle' Mr Proud conveyed that the Gillenkirch machines could pack at a faster rate. So much was conveyed in the letter 30 September 2002. 138 Mr Tana gave evidence in chief concerning his discussions with Mr Proud on which he and, through him North East Equity, relied to establish the making of the representations alleged: 'You told me what you said to him and it was that you wanted 150 tons processed in an eight hour day - packed out in an eight hour day, what did he say to that? Could it be done? Did he answer you at all? --- He had no hesitation in saying that he'll [look] at it, it should be able to be done, he didn't specifically say that I could do it on the spot, no. Right and did he come back to you though and say it could be done, or did he - - -? --- Yes, he did, both verbally and in writing. In terms of what it would do it at, was this at full capacity, or something less than this? --- Capacity was never discussed. I suppose it would be fair to say that I assumed that anything that's given to me as a piece of equipment, or as a line, would not be given to me on the basis that it's - pardon my French - but flogged to death and run at 100 per cent. Right, did he use the words 'operating at idle', use the words? --- He used the words verbally to me, yes he did. When did he use those words to you, the words 'operating at idle'? --- To the best of my recollection some time in late '01. Late '01, before the contract was made? --- Wrong, I take that back, late '02. Was this before or after the contract was made? --- Before the contract was entered.' (emphasis added) 139 The examination in chief, although not objected to, was leading. It did not elicit a response in terms of the alleged representation. Mr Tana's evidence that capacity 'was never discussed' in the passage cited above is revealing. Unsurprisingly, Mr Tana was not cross-examined on this evidence. Significantly, he wrote to Mr Proud on 18 December 2003 saying: 'My intention was as follows: Contracted volume for 8 hours "idling" 125 tonne (as per your comments) Expected volume 8 hours "cranked up" 140 tonne (approx with loss of quality)' And, months later on 8 May 2004 Mr Tana again wrote to Mr Proud saying that he was: '… still working on an output expectation of 125 tonnes finished product in an 8 hour day (excluding prepack and handline).' 140 If the five Gillenkirch packers processed 18 tonnes per hour for 7 hours, that would produce a total of 126 tonnes, on the basis that 20 kg cartons were packed. That very figure was one of those provided in the letter of 30 September 2002 which formed part of the contract. 141 I am not satisfied that any representation was made that the new plant would comfortably handle a capacity of 150 tonnes per day packed out in cartons and in doing so would be operating at 'idle'.

[12]

THE DESIGN OF THE REFRIGERATION SYSTEM 143 Mr North had been requested by Mr Proud to provide a quotation for the refrigeration requirements of the new line in late September 2002. Earlier, Mr Proud had worked with Mr North to provide the refrigeration system for the Kalfresh plant. Then, Mr North had been responsible for the design of both the refrigeration system of the Kalfresh plant and its control software. The Kalfresh plant also had nine cooling tanks. Mr North thought Kalfresh processed about four to six product groups. However, the cooling tanks in that plant were located inside an insulated room maintained at about 12° to 15°C by air conditioning. 144 Mr North was aware, at the time he was asked to provide a quotation for the Wattleup plant, that between 20 and 25 tonnes per hour would be discharged by the system of nine cooling tanks system. He travelled to Wattleup to discuss the job in order to prepare a quotation. By 27 September 2002 Mr North had the then current drawing on which he had to provide a quote. He initially suggested to Mr Webster locating the chilling tanks in the insulated juicing shed at the Wattleup site. He thought that commonsense suggested that, in the middle of summer, an insulated shed would be far cooler than a tin shed. But, Mr Webster told him that that was too hard to do, logistically. Mr North recalled seeing provision for insulation in the main shed in one drawing, but that did not proceed. 145 Ultimately, Mr North designed the refrigeration components for the Wattleup site based on an ambient temperature of 38°C and no insulation in the shed. He said (and I accept) that it was industry practice to design refrigeration systems based on average and not extreme temperature so that there would be occasions on which the ambient temperature of 38°C would be exceeded and then the refrigeration equipment might not be able to operate at the desired capacity. Mr North designed the Wattleup system to deliver sufficient chilled water at 1°-2°C from the compensation tank into the chilling tanks. He understood, from discussions with Mr Proud, that control logic software for the system would be provided by Bruynooghe.

14.1 Key components of the new line 150 The key components of the new line operated as follows: (1) Washing and polishing Carrots arrived from the farms in wooden crates. The carrots had been pre-washed at the farms but were not graded for size or selected for quality. Different soil and weather conditions produced different quality carrots. Some crates were introduced immediately into the line. Other crates were stored in the cool rooms over night and pre-chilled before they were introduced into the line. The first section of the line retained the equipment that previously had been at the Wattleup plant, namely two wet hoppers into which the crates were tipped by forklifts. Normally two crates were tipped by the forklift into the wet hoppers at once, delivering between about 800 to 900 kg of carrots (depending on whatever weight of carrots was in the crates). The wet hoppers fed the carrots onto roller grass removers and then onto a conveyor system to two elevators which conveyed the carrots onto two pre-inspection tables. At those tables operators removed stones and reject (i.e. broken, misshaped, cracked or green) carrots to prevent them from being fed into the next stage, being the brush polishers. The carrots then proceeded into Wyma brush polishers where they were polished. (2) Flume elevators After polishing, the carrots moved onto one of a pair of Bruynooghe flume elevators which lifted them up to the diameter or girth graders. Water was sprayed onto the carrots as they ascended on small protrusions on the elevators. (3) Diameter graders At the top of the flume elevators were two infeed vibrators which spread the carrots out before they dropped through appropriate sized rollers of the two diameter graders. Those machines could grade the carrots into six streams of diameter sizes namely: waste, small, small/medium, medium, large and extra large. The capacity of the diameter graders was not affected by the quality of the carrots. Their speed could be adjusted by an inverter. The waste removed by the graders was delivered into crates or bins. (4) Length graders Next, each of the streams of small, small/medium, medium and large carrots was delivered to the length graders. The extra large carrots were delivered to a tank. The four length graders were capable of grading the carrots into three lengths. Those graders could be adjusted to select different lengths. As noted above, in a joint report the three experts stated that the sizing of carrots by the length graders was not always correctly done. They agreed that consistent sizing to the same length was not possible because of the natural variations in the shapes of the carrots. And, they also agreed that the contractual documents did not indicate or specify any quality requirements for the length sizing by these graders. During 2003, North East Equity caused the length graders to be used only as conveyors, without permitting carrots to be sized by length. (5) The chiller tanks system After the carrots were processed by the length graders (or conveyed over them) they were delivered to the nine chiller tanks by gates positioned on eight conveyors located under the length graders. Each size of carrot could be placed in one or more of the chiller tanks where they were held prior to being moved onto conveyors for packing. Because the carrots were heavier than water they sank to the bottom of the chiller tanks. The chiller tanks were about 9.5 m long, 1 m wide and 2 m high. On the southern side of the tanks was a refrigeration tank housing refrigeration coils supplied by Mr North's company. The refrigeration coils chilled water delivered from a filter located on the top of the refrigeration tank. The water was then returned to the water compensation tank on the western side of the tank system. That tank contained submersible water pumps which pumped the chilled water into the chiller tanks. The submersible pumps were controlled by an inverter. The submersible pumps delivered sufficient chilled water to chill the carrots in response to a signal from a temperature sensor located in the chiller tank. In each of the chiller tanks there was an air blower, a submersible pump and temperature sensors. The air blower had two functions. First, during the filling cycle it spread the carrots over the length of the tank as it was being filled. Thus, as the experts explained in their joint evidence, the carrots did not accumulate in a mound immediately under the end of the conveyor from which they were delivered into the tank. However, the air blower used air at the ambient temperature in the shed and thus that air had the effect of warming the chilled water through which it passed. The operator of the chiller tanks used the air blower to lift the carrots from the floor of the tank to the water's surface in order to remove them to be packed. All those functions of the chiller tanks and associated equipment could be controlled manually or automatically by the operator manning the touch screen. After the carrots were removed from the tanks, the pumps were activated to deliver chilled water back into the tanks by a signal from an ultrasonic sensor located above the exit conveyor. (6) The exit conveyors Each of the nine chiller tanks had an exit conveyor which removed carrots and fed them onto one of four distribution belts positioned underneath the exit conveyors. Additionally, the two tanks furthest to the south in the shed received small, and small/medium carrots from the graders. The packing sections were fed by five distribution belts or conveyors. First, the prepack line was fed by a belt which ran from the two southern tanks. That belt conveyed carrots to a grading table positioned immediately before the Newtec multi-head weighers that packed the prepacked bags. A second belt delivered carrots to one of the pairs of dual inspection tables which fed two Newtec multi-head weighers that operated with two Gillenkirch automatic carton fillers. (This belt could also be reversed to deliver carrots to the area where the handline was to have been built.) A third belt delivered carrots to the other pair of dual inspection tables feeding the Newtec/Gillenkirch weighing and packing machines. A fourth belt delivered carrots to a single inspection table feeding a single Newtec multi-head weighing machine that operated with a single Gillenkirch automatic carton filler. (This was machine No 4.) A fifth belt delivered carrots in bulk (i.e not packaged) directly into the wooden delivery crates for transport to customers such as Woolworths. (7) The weighing and packing stage The Newtec multi-head weighers on the prepack line were capable of packaging carrots into 0.5 or 1 kg bags and one of them could also package 5 kg bags. Cartons on the prepack section of the line had to be filled manually and were then placed on a conveyor for delivery to one of the two stacking robots. The other Newtec weighing machines could be set to weigh carrots appropriately for deposit into either 10 kg or 20 kg cartons which were packed by the Gillenkirch packing machines. Operators positioned manually the empty cartons on infeed conveyors which fed the Gillenkirch automatic filling stations. After the cartons had been automatically filled by one of the other filling stations they were also placed on a conveyor and delivered to one of the two robots. Before the cartons reached the robots, an operator had to supervise the carton taper (or strapping process) and the vibration station. The robots were programmed to lift and stack the full cartons onto pallets.

14.2 The touch screen 151 The touch screen displayed different A4-sized pictures of the line and its various components. When a button on the screen was touched, that brought up another window or page which allowed the adjustment of settings, conveyor speeds and the like. It was possible to access and view particular parts and components of the production line in order to control them. Each machine could be turned on or off and its operation could be adjusted by touching the page on the screen that related to that machine. It was possible to control the graders, chilling tanks and packing processes through the use of the touch screen. The screen thus gave the operator control over all aspects of the machinery used in the operation of the new line. And, the operator could use the control provided by the touch screen either manually to direct the particular task, or automatically to change the operation of an individual component or a number of components on the line. 152 Bruynooghe's representatives had decided to install the touch screen, which controlled the operation of the new plant, including the graders, chilling tanks, exit conveyors and packing operations in the main office at the Wattleup packing shed. The windows in that office looked out towards the tank system over the length graders. But that location of the touch screen was some distance away from the tanks. The cable originally supplied by Bruynooghe connecting the touch screen to various components in the line was not long enough to locate the touch screen in a position overlooking the tanks, so Mr Vermuelen located it in the office instead. Later, after a number of complaints, the touch screen was moved from the office to a position on a platform which overlooked the tanks themselves. 153 The installation was completed on 5 March 2003. However, on 6 March 2003 North East Equity staff began to encounter a number of problems when trying to operate the new plant. Mr Webster sent a fax to Mr Proud shortly after midday identifying 12 issues, including the need to train staff fully on the new system. He required Mr Vermuelen and any other people with expertise in the operation of the new machinery to remain at Wattleup to train staff. 154 One of Proud Machinery's employees, Adam Hunter, was present during the installation process. He was a qualified electrician. He thought the new line ran quite well the first time it was used although, in his view, a number of slight adjustments needed to be made. He was trained by Mr Vermuelen in the operation of the tank system, including the touch screen. Mr Hunter said in evidence that any child who was competent in using a computer game would be able to understand how to use the touch screen (i.e. the various functions it could perform). 155 In addition, he said (and I accept) that the operator of the touch screen had to engage in a skilled 'juggling exercise'. This involved appreciating the amounts of carrots being graded, their graded volumes, the number accumulated in the nine chilling tanks and how long they should be left there to cool the carrots, discharging chilled carrots to the packing machines and '… then moving on to filling another tank and repeating the process over and over'. He said that: '… the operator really needs to know the larger amount of the carrots coming through the line as far as your smalls, your mediums, your larges, what tank to put them in, to get that tank - and get that tank emptied whilst filling another tank to allow that tank to cool down to empty that one, while refilling the other tank. And that's what I mean by juggling. And you mean it involves skill? --- Yes. You wouldn't describe it as being a simply automated process then, would you? --- No. Not at all? --- No.' Once the touch screen was moved to a position above the chilling tanks, the operator could simply look down to assess the quantity of carrots in the water. Before that, the operator had to walk to the tanks, assess the position and then return to the touch screen or speak to other staff who could report on this issue.

14.3 Ms Mirosevich's role in operating the new line 156 In early March 2003, Mr Hunter and Mr Vermeulen trained Ms Mirosevich, Mr Webster and a Proud Machinery technician, Ralph Gibson, in the use of the touch screen. Ms Mirosevich was the manager of the Wattleup plant. She controlled the labour force. The touch screen training took about half a day. Mr Vermuelen went through each page on the touch screen and described the functions of each block on the screen itself. 157 Mr Hunter said that Mr Webster had no difficulty picking up how to operate the touch screen. Mr Hunter acted in a role of interpreting for Ms Mirosevich during the training. Mr Vermuelen spoke with an accent. Ms Mirosevich spoke with a thick Croatian accent. Mr Hunter sought to explain to her in English, a second time, what Mr Vermuelen had said. However, Ms Mirosevich appeared to Mr Hunter to be confused during her training, and to have had little comprehension of how to use the touch screen at the end of the training period. He also concluded that Ms Mirosevich had no knowledge of mechanical maintenance. I accept Mr Hunter's evidence that Ms Mirosevich was involved in the process of training, as described by Mr Hunter. I reject Ms Mirosevich's evidence that she simply stood at the back of the room during the training session. 158 Moreover, by this time, Ms Mirosevich had already spent a week in Belgium at the Bruynooghe factory and other locations. Mr Tana had sent her there in early 2003 to learn how to operate the new equipment. 159 Mr Tana knew that Ms Mirosevich had had no computer training or, indeed, any management training. Yet, he chose her to be trained at Bruynooghe's factory. She said, and I find, that Mr Tana promised her that she would be the '… princess in the shed' as a reward for her previous hard work. 160 Ms Mirosevich had no capacity to deal with computers or computerised equipment. Even at the time of the hearing she did not know how to operate a computer and was not then interested to learn. Although she denied being afraid of technology, she had no wish or desire to learn how to use a computer or the internet prior to her retirement. Her attitude was, as she told me: 'I have operators to use the touch screen, my job is not to use the touch screen'. However, this was the crucial and focal point of the operation of the new plant. Ms Mirosevich gave the following evidence regarding what she learnt in Belgium about using the touch screen: 'Did you go through the various settings and controls or did you just learn to stop and start? --- Stop and start, give the carrots to the line. That's all that what I learn. So, did you learnt no more than that? --- No.' 161 I accept that this encapsulated the extent of the knowledge she obtained: i.e. how to turn the machines on and off and to 'divert [the carrots] to the belt' using the touch screen. However, I am satisfied that proper attempts were made at the Bruynooghe factory to train Ms Mirosevich on how to use the touch screen and to operate equipment similar to that which was to be installed at Wattleup, so as to achieve all of their technical capacities. I do not accept her evidence that she spent a week at the Bruynooghe factory and other factories in Belgium without, as she asserted, being shown and trained how to operate the technically complicated aspects of the plant. She had been chosen by Mr Tana to be in charge of the new line. I do not accept that Bruynooghe did not attempt to instruct her fully as to how to operate both the touch screen and the type of equipment which was to be installed at Wattleup. 162 After she returned from Belgium, Ms Mirosevich did not train, or require training for, any of her staff in the operation of the new line or the touch screen at any time. Unfortunately, that was because she did not acquire any relevant understanding of the importance of those matters. She said: '.... I train people how to grade the produce. I'm operation. I'm production. I train people. For machinery, John Webster will train how to operate machinery. All right. But since 2004, Mr Webster hasn't been there. There hasn't been any training, has there? --- I have still many signed people operating machine what they were there before John Webster left.' (emphasis added) 163 Ms Mirosevich had asserted in her witness statement that she had primarily taught herself how to operate the plant including the touch screen, and she repeated in the witness box that she was self taught. She complained that Mr Webster had said that he was too busy to teach her how to run the system. However, in cross-examination she claimed that, at some time after early March 2003, she learnt from Mr Webster some of the capacity of the touch screen. She also said that she asked the electrician, Hin Tan, who took over some of Mr Webster's responsibilities after he left, to teach her how to adjust the system manually, and that Mr Webster and Mr Proud had refused to help her do this. I find that Ms Mirosevich was conscious of her failure to learn how to operate the new line, and sought to blame others for that. Apart from her seeking help from Mr Tan, I do not accept that evidence. 164 Ms Mirosevich's incompetence in understanding how the touch screen and other parts of the plant operated and could be controlled by the computer equipment, led to constant manual adjustments of the different items. That resulted in the machinery not working as it should have. And, the operation of the new line lacked the overall intelligent control which a competent controller would have brought to the system. This was evident when a test was conducted on 17 or 18 November 2003, with which I will deal below. The various representatives of the manufacturers were present on that occasion and recalibrated all their machinery to operate as it had been specified. The plant then performed in a generally satisfactory manner (making allowances for the performance of the flume elevators, and the intralock convertors). 165 Overall, I did not find Ms Mirosevich to be a reliable witness. I do not intend by saying this to criticise Ms Mirosevich personally, or to suggest that she was dishonest. Rather, she was concerned that she should not be blamed for any problems North East Equity experienced from the operation of the new line. It was not her fault that she had been given a task that was beyond her. She did not appreciate her own incompetence to be in charge of the operation of the new plant. This led her to rationalise in her own mind that she had no part in any shortcomings in identifying requirements of North East Equity for the design of the new plant or the deficiencies in its operation. 166 Because of her inability to understand the importance and significance of the touch screen to the overall operation of the new line, Ms Mirosevich was unable to convey to Mr Tana, and he did not himself appreciate, the need to have a competent person running the operations who could use properly the touch screen. It was vital that there be someone who actually understood how to operate the machinery and who could use that knowledge to conceptualise the appropriate inputs into the touch screen so that the plant would operate efficiently and usefully to grade and process the volumes of carrots available at any particular time. 167 Mr Tana described himself as computer illiterate. He did not have any understanding of the need to employ in the plant a person who could operate the computer and its touch screen competently. He, too, did not understand the significance of the touch screen or the need for constant monitoring of the various parts of the new plant to inform decisions about the use of the touch screen to control the processing operations. Instead of employing someone else who had that technical competence, Mr Tana relied on Ms Mirosevich in an area where both of them were out of their depth because of their inability to work with computers or to understand the changes in management skills needed to operate the new line as compared to the old one. It is hardly surprising, then, that when the equipment was installed and the Bruynooghe and other technicians left, the operation of the plant became less than satisfactory.

14.4 Mr Correia's role in operating the new line 168 Jose Correia was the assistant production manager at the Wattleup plant. He said that he had been doing basically the same things in his job at the Sumich plant at Wattleup since 1980 with the exception of about eighteen months, when he left to run his own business, but later returned. Mr Correia had said that his basic function was to check the carrots before they went to the packing line to determine their temperature and quality so as to see how they should be graded for packing and to oversee the rest of the operation. That was also substantively the function that he performed prior to the introduction of the new line. 169 I formed the view that Mr Correia was basically an honest person. But, he was not always reliable as a witness. He was defensive about his role in giving evidence because he had not been able to absorb how to run the complex new plant. Because he was responsible to Ms Mirosevich, he did what she told him. Mr Correia denied that he was resistant to change or to doing things differently, particularly in adjusting to the introduction of the automated plant. However, I am satisfied that he found it very difficult to adjust to the different way in which the new line operated. 170 Mr Correia was aware that Ms Mirosevich had gone to Belgium to be trained just before the new line began operating, but he received no training at all from her. Although he recalled being present with Mr Vermeulen and Mr Webster when the plant was being commissioned, Mr Correia did not recall any occasion when Mr Vermeulen taught him and Ms Mirosevich how to operate the touch screen and other aspects of the Bruynooghe equipment. Mr Webster had also been trained by the Gillenkirch personnel on how to operate its equipment when the new plant was being commissioned. 171 Mr Webster said that no one had been designated as the operator of the touch screen when it was installed. He volunteered to run the system for a week, provided that he had some assistance from the production staff. Mr Webster said that Mr Correia provided him with this assistance, and he trained Mr Correia, who then became the focus of running the system. Mr Correia said that he had been trained to operate the chilling tanks by Mr Webster for a couple of days. He claimed that Mr Webster did not train him on all of the touch screen's operations. I accept Mr Webster's evidence and prefer it to Mr Correia's. 172 Tony Schubring had first attended the Wattleup plant when he was still working at Kalfresh. This was probably during 2004. He was then the floor manager of Kalfresh plant responsible for managing the operations of its plant and equipment in the packing shed. Mr Schubring's principal responsibility at this time was to monitor Kalfresh's plant's output from its nine Bruynooghe chilling tanks together with that plant's polishing and grading of carrots. He later attended at the Wattleup plant in early 2006 when he was employed by one of Mr Proud's companies. 173 Mr Schubring observed that Mr Correia never seemed to be present at the touch screen. Mr Correia understood that a supervisor in his position had to control the flow of carrots through the line, and do so by using the touch screen. He disagreed with Mr Schubring's advice to him that the operator should be at the touch screen all the time. Mr Correia knew that he could make adjustments to the operation of the machinery controlled by the touch screen. However, he did so only when he saw the need to make them. His approach was to be reactive to problems after they occurred and not proactive by seeking to avoid them. Mr Correia was only at the touch screen when he thought there was something to do there. He claimed that he was there for about 70 percent of the time, but I have no confidence that that estimate is correct. 174 Mr Correia said that he only calibrated the equipment on the line when he thought there was a problem. He claimed that he had never been told to do so on a daily basis. Initially, he had to ring Mr Vermeulen in Belgium to ask him how to do that task. He also did what he was told in keeping records, and Mr Proud's complex schedule was made up largely from the records Mr Correia had kept. Mr Correia's resistance both to learning how to operate the new equipment (including the touch screen) and changing his routine was demonstrated in early 2006 when Mr Schubring again came to Wattleup. Mr Correia did not spend much time with Mr Schubring even though he appreciated that the purpose of Mr Schubring's visit was to help North East Equity's personnel to operate the machinery properly. 175 Mr Schubring told him that the pumps should not be run continuously to remove carrots from the tanks, as Mr Correia had been doing up to then. And, he told Mr Correia that the air blowers in the chilling tanks should be turned off once the tank was full. That was because the air was pumped into the tanks at ambient or higher temperatures and therefore heated the chilled water. Indeed, Mr North took measurements in about 2004, recording that, when pumped into the tanks, the air had a temperature of up to 65°C. At such a temperature the air would transfer its heat to the cooler water causing it to heat up (as well as increasing the costs of power consumption, first, for chilling and, secondly, for unnecessary air pumping). Mr Correia said no-one had told him that before, but I accept Mr Webster's evidence that in early 2003 he had told Mr Correia the same thing. I do not accept Mr Correia's evidence. I prefer Mr Schubring and Mr Webster's evidence where it conflicts with Mr Correia's. And, I accept Mr Schubring's evidence about his observations of the operations and personnel on his visits to Wattleup. The consequence of this inappropriate use of the pumps was that it affected the ability of the chilling tanks to cool carrots to a core temperature of 5°C or less, and slowed production. In my opinion this was a cause of carrots being packed with a core temperature more than 5°C.

[15]

THE WEIGHT OF CARROTS IN THE BINS 176 Mr Tana and Mr Proud gave conflicting accounts of the weight of carrots in the crates or bins tipped into the wet hopper, depending on the time at which they made their various witness statements and how they perceived that suited their cases. It would have been a simple matter to have measured that weight, but neither side did this objectively. Neither Mr Tana nor Mr Proud was a reliable witness on this matter. 177 Each changed his evidence to adopt the other's position when they understood the purport of Mr Proud's schedule. Both men were dealing with matters at a level of generality. By the time of the litigation each was defensive of his own position and argumentative about it. I am not satisfied that either retained a reliable recollection of the detail of their discussions and considerations in 2002. The contemporaneous written material, the objective matrix of mutually known facts and commonsense, are, in general, a better guide for reaching findings of what was said or conveyed between Mr Tana and Mr Proud. Nonetheless, I have also used the less sure guide of impression in arriving at my conclusions about their evidence generally. 178 In his first witness statement Mr Proud had said that the weight of the carrots in those bins was 410 kg. On the other hand, Mr Tana, in his initial witness statement had said that the carrots in the bins weighed approximately 450 kg. Mr Proud used this latter figure as the hypothesis on which his schedule was based. The hypothesis involved deducting the weight of the rejected carrots from the posited 450 kg weight of carrots in the tipped bins. In his evidence in chief, Mr Tana said that he wished to amend the figure of 450 kg to between 400-425 kg. He did this to demonstrate that Mr Proud's analysis was incorrect. He agreed in cross-examination that as soon as he saw that Mr Proud's schedule had a heading indicating that the weight of the carrots in the bins was 450 kg, he realised that it could have the effect of undermining his case that the new plant could not produce over a 140 tonnes of packed carrots per day (leaving aside any production from the handline). This also went to the claim for economic loss based on a loss of sales. Mr Tana agreed that, by the time he made his first witness statement, he had used the crates or bins in the business for a long time and had many years of experience with them. Ms Mirosevich had said that the bins contained 410 kg of carrots. 179 An objective means of determining which weight was correct appeared in a letter that Mr Proud wrote on 23 July 2003 to Mr Tana about a test done on 15 July 2003 and Ms Mirosevich's notes of the test. In the table below I have calculated the weight of carrots in the bins based on Ms Mirosevich's notes of this test. These recorded that 372 bins were tipped into the wet hoppers. Ms Mirosevich noted that 39 bins were filled with rejects from the grading tables located before the brush washers and a further 20 bins of rejects (including waste) were filled from the grading tables at the weighing and packing machines. Thus a total of 313 bins were processed, resulting in a recorded pack out of 126,684 kg, or 404.74 kg per bin. This pack out included 18.64 tonnes of Class 2 and 18.08 tonnes of 10 kg cartons. Using 404.74 kg per bin, the 59 bins of rejects (23.9 tonnes) amounted to about 15.9% of those delivered and the carrots originally in the 372 bins weighed about 150.5 tonnes. Production test of 15 July 2003 Total number of bins tipped into wet hoppers 372 bins Reject bins from grading tables before brush washers 39 bins Reject/waste bins from grading tables at weighing/packing machines 20 bins Less total number of reject/waste bins 59 bins Total bins packed 313 bins

[16]

MR TANA'S ROLE IN PLANNING CARROT PRODUCTION 182 In his written evidence Mr Tana said that North East Equity did not grow carrots speculatively. He said that, as far as possible, he aimed to avoid growing any carrots that could not be processed, packed and sold. He said that carrot production was always very dependent on sales expectation and packing capability. Mr Tana personally decided the growing and planting program of each of North East Equity's carrot farms. Initially it operated a 700 acre farm at Guilderton, some distance north of Perth. That farm supplied 60% to 70% of carrots processed at Wattleup by 2002. In addition, a number of other farms owned or operated by North East Equity or Mr Tana, as well as by independent farmers, supplied carrots to Wattleup for packaging. 183 In around 2001 or 2002, North East Equity purchased a farm at Lancelin of about 4,500 acres about 180 km north of Wattleup. Mr Tana then had the long term aim of expanding his operations. At this time, a North East Equity's sales and net profit from its vegetable business were significantly increasing. Carrot production from the Wattleup plant was the primary source of that increase. However, the purchase coincided with what turned out to be the peak in the local export market for carrots. 184 Mr Tana worked with North East Equity's farm manager to determine carrot plantings at the farms to meet production targets in time for harvest. Carrots could be grown on the farms throughout the year. The farm manager used a computer program for planting and growing carrots. In summer, carrots took about 16 weeks to grow, whereas in winter they took between 20 and 26 weeks. Certain varieties of carrots were faster growing than others. Mr Tana would write down the amount of carrots that he wished to have grown and the time in which he required them to be ready for delivery to the Wattleup plant for processing. This involved planning for up to half a year before the carrots were ready to be harvested. Thus, if carrots were planted in the beginning of winter, he would expect those carrots to come to market about 20 to 26 weeks later, depending on exactly when in the seasonal cycle they were planted. 185 The computer program worked by indicating that, if carrots were planted at a particular time, they would be ready for harvest at a fixed time thereafter. Mr Tana gave his farm manager the production targets he wished for each of the 52 weeks of the year by indicating the times at which he wished to have specific quantities of carrots ready for sale. The program would then work backwards to calculate the time at which those carrots should be planted. 186 Thus, by March 2003 or beforehand, Mr Tana had already given directions for planting of carrots that would be harvested 4-6 months afterwards. In other words, Mr Tana had assessed the likely market months in advance of when the carrots arrived at the Wattleup plant for processing. In this way he decided and pre-planned the quantity of carrots which the plant would process many months before the carrots were delivered for packing. This planning and its associated time scale for the later harvest is significant in assessing Mr Tana's evidence that, but for its claimed problems with the new line, North East Equity would have produced more carrots, and profits from their sales, and thus it suffered economic loss.

[17]

CARROT FARM PRODUCTION PROBLEMS 187 By early 2003 the Guilderton farm was experiencing problems with the quality of its crop. These difficulties had commenced at least by the time the new plant was installed. Mr Tana said that there were a number of diseases at the Guilderton farm which resulted in carrots which were not consistently of good enough quality to meet the standard of Class 1, although he said that some good carrots were still produced there. 188 Moreover, there were other difficulties with the Guilderton farm. Mr Tana explained the decision to close it down was made because it was an aged farm, run down and the soil had been pushed too hard. He said: 'We needed to relocate.' Hence, I infer that this was an important factor in the decision to purchase the Lancelin farm. Another factor was, of course, the opportunity it presented as a much larger farm to expand North East Equity's carrot production. In my opinion the quality problems with the Guilderton farm continued, even if the diseases were addressed, up to the time that it ceased production in June 2005. 189 Coincidentally, when North East Equity sought to use the resource of the Lancelin farm, it experienced carrot blight. Mr Tana said that the blight afflicted the crop there during 2004 and 2005. The problems with both farms appear to have been evident in terms of their effect on the operation of the new line. North East Equity's expert accountant, Martin Langridge, concluded that in the period between May 2003 and June 2005 the volume of carrots packed showed a downward trend. Extrapolating figures from the bar charts prepared by Mr Langridge depicting carrot volumes packed, the following very approximate comparisons emerge: Month 2002 2003 2004 2005 Volume packed (million kg) Volume packed (million kg) Volume packed (million kg) Volume packed (million kg) January 2.35 2.8 1.45 1.35 May 2.35 1.35 1.85 1.2 June 1.75 1.30 2.2 1 August 2.6 1.30 2.1 September 2.25 2.25 2.45 October 3.05 3.00 2.15 November 2.75 2.5 2.45 December 2.25 1.9 1.75

190 These figures show some reduction over time. Significantly the radical drops in May 2003 and 2005 as against the corresponding figures for 2002 and 2004 would appear to reflect the difficulties at the farms. The figure for May 2003 of about 1 million kg fewer carrots packed than for the preceding year could not have been related to any problem with the new line since Mr Tana would have caused those carrots to have planted in January 2003, well before the line was installed. Likewise, the figures for June and August 2003 reflect production problems. 191 Significantly, the figures for September, October and November 2003 show similar volumes packed at the peak time for sales, as in the previous year. Yet, the evidence summarised in Mr Proud's schedule in those three months of 2003 showed that the overall reject rate was very high. And, about 70% of all carrots which arrived at the grading tables immediately before the weighing and packing machines at that time were Class 2. Hence, I infer that Mr Tana had caused more carrots to be grown than in the previous year's corresponding period, but what was harvested was of an inferior quality. 192 Mr Langridge prepared a chart which showed the weighted average price per kilogram for export sales was about 80˘ per kg in mid-2003 but fell to about 70˘ per kg in late 2003. By mid-2004 the price was between about 67˘ and 69˘ per kg rising to stay around 72˘ per kg from late 2004 to mid-2005. It is not necessary to make a precise finding about these prices. It suffices that the chart showed that the returns from export sales had substantially reduced after mid-2003 from what they had been before. 193 Mr Langridge also analysed North East Equity's sales figures for the 2004 and 2005 financial years. He used actual data from its financial records to calculate export sales and some local sales. He hypothesised that some local sales were rejects. He prepared calculations (excluding assumed rejects) of average local sales prices per kilogram for the 2004 and 2005 financial years of 48.64˘ and 43.36˘. He did not have data for May and June 2003 local sales. Thus, both local and export average sales prices per kilogram fell over the period.

17.1 Carrot quality in 2003 194 In his 20 August 2003 memorandum to Mr Tana, Mr Webster wrote that the 'quality of carrots' was a problem. (I will return to this memorandum later in these reasons.) In evidence, which I accept, Mr Webster explained that the quality of the carrot to which he was referring was that the more carrots that had to be graded out, the longer the process of production became, and that was a major issue to him. Mr Webster said that he meant that there were more rejects and Class 2 carrots being taken out than ought to have been the case, had they been of a Class 1 quality, when the process would have been a lot easier. 195 Mr Proud, in his written evidence, stated that in 2003 and early 2004 the proportion of Class 2 carrots that he observed '… was far too high. It was up to 70%'. Mr Tana admitted this in his written responsive evidence, saying: 'I repeat that having up to 70% class 2 was a temporary aberration and has not been the norm.' In his written evidence in chief, Mr Tana had asserted that, on average since 1998, there were 20% Class 2 carrots. I do not accept that evidence in relation to the period after the new line was installed. 196 During most of 2003, the quality of produce delivered to Wattleup for processing was very different and of a significantly lesser quality to that of a year earlier. On 3 November 2003 Mr Tana wrote to Mr Proud saying that all carrots that day had been processed as Class 2 '… because your system has no flexibility to take out 30% Class 1'. Of course, the system was not intended to remove Class 1 carrots, nor was it supposed to process so many low quality carrots. As Mr Tana said in evidence, he was '… not in the business to sell grade 2s' (i.e. Class 2). 197 The specifications and negotiations for the new plant in 2002 had nominated a maximum of 18% rejects for removal. Mr Tana and North East Equity did not specify or suggest in 2002 that 30% of the produce be capable of being removed, let alone that percentage after removal of rejects. The negotiations and the contract contemplated that Class 1 carrots would be packed while Class 2 and some rejects would be removed at the grading tables immediately before the weighing and packing machines. The 18.75 or 17.55 tonnes per operating hour at final pack out that was the subject of negotiations in 2002 referred to Class 1 carrots that had been processed from an input of 22.8 tonnes, the balance being class 2 and rejects (including waste). 198 The facsimile transmission of Proud Machinery's letter of 18 October 2002, which formed part of the contract, was accompanied with drawings. One of those drawings depicted a table 3 m long and 1.75 m wide, with six persons grading, three on either side. In the middle of conveyor belts running the length of the tables were six chutes for either waste or Class 2 carrots. The grading personnel threw carrots into the appropriate chute. The final design of the tables was changed by reducing the number of chutes from six to five. Although North East Equity did not plead any case involving the particular configuration of these grading tables, it complained that, as installed, they were only capable of fitting two persons, rather than three, on each side. Hence it contended the tables could not meet the requirement of being able to remove 18% rejects. However, I accept Mr Proud's evidence that he had observed three people grading on each side of the tables on his visits and that the tables could fit that number of persons. 199 But, in any event, Proud Machinery had submitted drawings of the tables for North East Equity's consideration and approval before proceeding to install them. North East Equity knew how close together individuals performing grading work could and should be placed. And it knew how quickly the actual Newtec and Gillenkirch weighing and packing machines in the old line operated and how fast individuals grading had to work to keep up with those machines. Mr Tana and Mr Webster, at least, had been looking at proposed designs and commenting on dimensions during the months leading up to and after the contract. Indeed on 3 September 2002 Mr Tana wrote a fax to Mr Webster of his '… initial thoughts on layout'. He wrote: 'Where will we fit 2-3 persons levelling carrots after [Gillenkirch]?'. This showed that he was conscious of how many people needed to be accommodated at various parts of the line. 200 The three production experts concluded that the plant was capable of removing about 25% of the carrots presented at the final grading tables (including rejects). Mr Tana's complaints by November 2003 were based on the aberrant nature of the carrots being grown by the farms. Those carrots were of much lower quality than either party had contemplated in the negotiations in 2002. 201 However, I am satisfied that most of the carrots produced at this time, in the order of 70%, were of a class or grade 2 standard. The diseases and other problems at Guilderton did not affect the volume of carrots produced, so that quantities stipulated in Mr Tana's growing schedule were still delivered for processing at Wattleup. However, these factors did affect the quality of what was produced. 202 I am not satisfied that the size or capacity of the grading tables, as installed immediately prior to the weighing and packing machines, caused any breach of contract or departure from a representation by Proud Machinery or Mr Proud. I am not satisfied that those tables were not adequate to enable a sufficient and appropriate amount of rejects and Class 2 carrots to be removed. I find that the tables, as designed and installed, were approved by North East Equity as appropriate for the grading work it required to be done on them before their design was finalised. More grading came to be done at these tables in 2003 and afterwards due to the significant deterioration in the quality of the carrots as delivered from the farms.

17.2 Carrot blight at Lancelin 203 The carrot blight reduced production from the Lancelin farm by 50% from that planned. Mr Tana initially claimed this lasted only for about 3 months. In cross-examination he volunteered that it had lasted from late 2004 to December 2005, when he said 'it had virtually vanished'. Tellingly he said: '… only our records would be able to reveal the exact figures'. No such records were put into evidence, although Mr Tana said they were at the Lancelin farm. In 2005, North East Equity was growing carrots at Lancelin on 1,200 of its 4,300 acres. The blight affected the leaves of the carrots, which resulted in them not growing as large as normal. Initially Mr Tana said in evidence that the effect of the blight on the Lancelin crop could be explained in this way: 'We were still getting the volume out but the only difference was that the carrots were not of 100% grade one quality, they were a much lesser quality.' (emphasis added) 204 However, earlier, in his written evidence he asserted that in 2004 North East Equity was planting fewer carrots because of the limitations in the line. I reject that evidence. At that time, Mr Tana had planned to phase out production from the Guilderton farm entirely. He knew that there were production problems at both farms. I do not believe that Mr Tana reduced planting or production. To the contrary, he sought to maximise production so that North East Equity could harvest a crop that was of as great a quantity and as good a quality as possible to send to market. 205 Moreover, a decision to cut or not increase carrot production at the farms during 2003 and afterwards because of claimed difficulties with the new line is improbable. First, any decision had to be made four to six months before harvest and delivery to the new line for processing. Secondly, in the context of production-related problems being experienced at the Guilderton and Lancelin farms, I do not accept that Mr Tana was doing anything except seeking to obtain the maximum crop possible. Thirdly, any difficulty in the operating of the new line was likely to be addressed during the four to six months intervening period. Fourthly, the quality problems meant that North East Equity was only bringing to market a composite grade of, at best, about 30% of its harvest as Class 1. Fifthly, North East Equity adduced no contemporaneous records or other evidence beyond Mr Tana's self-serving assertions of planting decisions or demand forecasts that could corroborate this claim. The impacts of market forces on carrot prices, crop quality and sales, strongly told against a suggestion that North East Equity would have produced any more carrots than it actually did. In addition, work was necessary to prepare more acreage on the Lancelin farm to grow carrots and to insulate those acres, if possible, from being affected by blight. 206 By 2005, Mr Tana said that he was in the process of switching the focus of his horticultural operations, including the production of carrots through (among others) North East Equity, from almost 100% export to about 50% export with the rest diverted to the local market in both Western Australia and the eastern states. No doubt, this plan resulted from the impact that competition from China and the appreciation of the Australian dollar had had on North East Equity's exports. Mr Tana said that he perceived China as the major source of competition for the export market for carrots. He told a newspaper reporter in April 2005: · the percentage of exports from the overall production of his business was down to about 75% at the time; · the Western Australian vegetable industry, including carrot growing, had gone through what he described as a 'major, major correction' as a result of increased competition in export markets and the high Australian dollar over the preceding two years. By then he had also taken a decision to move North East Equity's processing operations to the Lancelin site; and · Mr Tana proposed to convert what he described as the new large-scale, highly mechanised carrot farming and packing operation at Lancelin to organic production; 207 Although he initially sought to suggest that these comments, published in April 2005 in a newspaper article, were to do with cauliflower, Mr Tana ultimately conceded that they were to do with carrots which formed 90% to 95% of the business of Sumich about which he was speaking. This was another instance leading to my overall impression that I should be cautious about accepting Mr Tana's uncorroborated evidence or its accuracy. 208 Mr Tana asserted that the problems at the Guilderton farm lasted between 6-12 months after March 2003. North East Equity produced no records to support Mr Tana's assertions as to when production difficulties began and ceased at either Guilderton or Lancelin. The only evidence of their duration was Mr Tana's uncorroborated assertions, which I do not accept fully explained these problems. In a number of instances in his evidence, Mr Tana exaggerated substantially difficulties or problems, which he claimed North East Equity had, for the purposes of improving its case. I am not prepared to accept his uncorroborated assertions or to draw inferences favourable to North East Equity's case based on them. 209 As at November 2003 Mr Tana's contemporaneous correspondence demonstrated (and I find) that the production problems at Guilderton had resulted in as much as 70% of the carrots delivered regularly for processing were Class 2. This was combined with the small amount of Class 1 carrots to make a 'composite' grade at this time. The decision to process this composite grade had nothing to do with any defect in the operation of the new line at any time. I am comfortably satisfied that the problems with the Guilderton farm were far from being resolved in late 2003. Indeed, I am not satisfied that those quality problems were ever resolved at any time prior to that farm's closure in June 2005. I am not satisfied that the quality of produce from the Guilderton farm was ever restored to a Class 1 standard.

17.3 The market for carrots 210 Mr Tana's written evidence included material to support North East Equity's claim for economic loss. He estimated that, based on Australian Bureau of Statistics figures, in the period between 2001 and 2003 North East Equity was producing approximately 50% of the fresh produce supplied to the export market from Western Australia. The figures related to fruit and vegetables in general, not just carrots. He said that carrots comprised about 95% of North East Equity's total fresh produce sales. He swore that North East Equity: '… is not able to command a premium price for the packed carrots processed through the Proud line because of its poor packed quality. Therefore, [North East Equity] sales are now driven more by the volume we produce rather than the quality of the product. … [C]arrots packed through the Proud line are of an inferior merchantable quality to those packed at Lancelin.' 211 These paragraphs were calculated to lead to the inference that the plant installed by Proud Machinery had caused the decline in quality to which they referred. I am satisfied that Mr Tana was well aware, when he gave that evidence, that this was not the true position at all. 212 Next, Mr Tana asserted in his written evidence that since 2003 there had not been a noticeable impact on North East Equity's business due to currency fluctuation, in particular the appreciation of the Australian dollar against major currencies used to pay for exports in the markets to which it was selling. However, Mr Langridge's report showed that the weighted average price per kilogram received in Australian dollars by North East Equity fell from approximately 81˘ at the end of July 2003 down to 71˘ at the end of October 2003, falling as low as 67˘ in the middle of 2004. 213 Mr Tana had said that during the period between January 2003 to June 2004 the carrot market was not good because of, first, competition from China and, secondly, a spike in the exchange rate for the Australian dollar. He explained the spike was in the Australian dollar appreciating against the US dollar. 214 During the period between 1998-1999 and 2004-2005 carrot exports from Australia rose from about 50,000 tonnes, worth $30 million in 1998-1999, to a peak just short of 70,000 tonnes, worth a little over $40 million in 2001-2002. Exports fell back in terms of volume to about 65,000 in 2002-2003 but increased in value to about $42.5 million. However, in 2003-2004 there were falls in volume to about 52,000 tonnes and revenue to about $36 million. The decline continued in 2004-2005 to about 50,000 tonnes and about $34 million in revenue. These figures appeared in the 2005 annual report of the Department of Agriculture of Western Australia. The report noted that Western Australia produced 88% of Australia's carrot exports. It remarked that there had been reduced export returns for Australia during the above period and that there was then a continued expansion of vegetable exports from China which was causing rationalisation in production here. 215 Frank Chew was North East Equity's export or marketing manager from 1998 until he ceased employment in early 2007. During that period he ultimately also became the general manager of operations at Wattleup but North East Equity gave no explanation why he was not called to give evidence. I infer that his evidence would not have assisted North East Equity's case. 216 Gary Kift had been North East Equity's company secretary since 1989 and was its financial controller. Mr Kift was a professional accountant. He prepared North East Equity's tax returns and after they were finalised by its tax agents he signed a number of them in his capacity as public officer. Mr Kift explained that the profit and loss statements in North East Equity's tax returns for the financial years 2000 to 2006 contained the following total results for its vegetable business which I have summarised in the table below. He explained, as did Mr Tana, that the accounts in other sections recorded results from various other activities of North East Equity apart from the vegetable business. 217 North East Equity led no evidence to explain or break down the sources or amounts of its actual income or expenses in any of these years relating to carrot sales or its carrot business. Neither of the expert accountants, Mr Langridge and Mr Holmes, examined this data in the tax returns to segregate which parts of the figures related solely to carrot production. Mr Holmes reported that he was not able to access North East Equity's data to extract this information. Mr Langridge pointed out that the sales figures (total, export and local) shown in the tax return data did not disclose the volume of sales or the exact proportion which related to sales of carrots. He was not sure that the figures were able to be useful in that form. However, Mr Tana said about 95% of North East Equity's fresh produce sales were carrots. 218 Indeed, Mr Langridge said in his first report that he had examined monthly profit and loss statements for the carrot shed operations of North East Equity for the period May 2003 to June 2005. His figures for the financial years 2004 and 2005 were very different to those in the tax returns, and I have included those in the table. 219 I find that the substantial part of North East Equity's business was its dealings in carrots, with only minor contributions of not more than 5% to 10% from other vegetable dealings. Its tax returns revealed the following, and I have included comparable figures from Mr Landridge's report: Financial Total Sales Income Gross Profit Net Operating Profit Year Tax Return Mr Langridge's Report Tax Return Mr Langridge's Report Tax Return Mr Langridge's Report 1999/2000 $29.09m $9.27m $5.37m 2000/2001 $44.26m $11.33m $7.36m 2001/2002 $47.21m $13.00m $7.69m 2002/2003 $42.7m $11.93m $5.37m 2003/2004 $33.15m $22.07m $9.25m $5.00m $3.24m $1.17m 2004/2005 $28.34m $21.73m $6.77m $4.80m $2.56m $1.94m 2005/2006 $26.06m $5.07m $2.56m

17.4 The 2002 decision to buy the new line, the 2003 change in the carrot market and North East Equity's claim for economic loss 222 In late 2001, North East Equity exported about 90% of the carrots which it processed through the old Wattleup plant. Its export market was in Japan, Taiwan, Hong Kong, sometimes the Philippines, South East Asia and sometimes across to the United Kingdom. At this time Mr Tana (late 2001) began speaking with Mr Proud about the possibility of installing the new plant and equipment. I find that Mr Tana had a very positive view of the market at this time based on the success of his company's export sales. However, the market changed in 2003, after the new line had been installed. 223 The impacts of competition from Chinese carrots with the appreciating Australian dollar continued well past mid-2004. But by August 2003, Mr Tana recognised that the carrot market was '… going through a very tough period … with China carrots flooding into all Asia ports'. The change in the market was also reflected in Mr Tana's fax to Mr Proud of 14 September 2003 when he said: 'When we contracted to buy your machinery, carrot prices were $16-18 [per carton] …They are now $13-15 …' 224 In mid-November 2003, Mr Tana launched a new brand name 'Jack Rabbit', for carrots he intended to grow at the Lancelin farm. Mr Tana, said in a newspaper interview at that time, that he planned to have an additional packing operation at Lancelin. 225 On 18 December 2003, Mr Tana wrote to Mr Proud asserting that North East Equity had missed the opportunity to maximise the volume of carrots from August to November '… due to the continual problems experience[d] with the line and other factors'. 226 The claim that the new line affected the volume of carrots was simply false. Mr Tana did not reduce his plantings or the amount he always intended would be delivered to the Wattleup plant for processing. The only impacts on production at the farm and output at the plant were caused by the difficulties experienced at the farms and the changes in the market. Mr Tana sought to make Proud Machinery, Mr Proud and the new line his scapegoats for the commercial difficulties he was experiencing in his business from factors for which they had no responsibility. I accept that there were several sources of justified irritations and some shortcomings in the way the new line operated and that some of Mr Tana's sense of grievance was fairly directed. But the problems with North East Equity's farms and export markets meant that its investment in the new plant was not the commercial success that Mr Tana had wanted; not because of any substantive deficiency in the performance new line, but because the market price had come down, competition had increased and the quality and volume of farm production of its carrots had deteriorated very significantly. 227 Mr Langridge was the expert forensic accountant engaged by North East Equity to quantify its claim for economic loss. Both Mr Langridge and Peter Holmes, Proud Machinery's and Mr Proud's expert forensic accountant, in a joint report noted that Mr Langridge had constructed a model to forecast economic loss claimed by North East Equity which had the following fundamental assumptions affecting sales revenue: · there was sufficient availability of carrots to be processed by the new line; · all of the carrots claimed in the model were able to be processed and packed could have been sold both into the local and export markets; · the additional carrot volumes and grades of carrots that could otherwise have been sold into those markets would be sold in proportion to the actual volume sold in each market and in the same product mix; · that the market prices adopted in the model could have equally been achieved for those volumes and that there was no impact from competitors reacting to the supply of the additional volumes now assumed; · the monthly sales volumes incorporated seasonal variations and an assumed reject rate of 10%. 228 The experts agreed that they offered no opinion about the reasonableness of those assumptions. First, the quality and quantity of the carrots produced in 2003-2005 were severely affected by the matters which I have discussed above. There were up to 70% Class 2 carrots produced because of the production difficulties of the Guilderton farm leading to its ultimate closure in 2005. The blight affected the produce from the Lancelin farm. There was no evidence to support Mr Tana's assertions that the farms could or would have produced more carrots and that some unspecific sales opportunities were lost. I do not accept those assertions. Secondly, it is immediately apparent that the assumed reject rate of 10% was quite different from the known facts. Given the falsification of the assumptions, there is no basis upon which the model constructed by Mr Langridge can be of assistance. That is not a reflection on him. The assumptions that he was asked to make had no semblance to the reality of North East Equity's actual position. As North East Equity's final written submissions recognised the first, second and fourth of those assumptions were supported only by Mr Tana's assertions, as was much of the third. 229 And, the competition from Chinese carrots had caused what Mr Tana had said in April 2005 was 'a major, major correction' in the Australian carrot growing industry (T 86). This correction was reflected in the substantial decline in North East Equity's sales revenues and net profit between 2002-2003 and 2005-2006. 230 North East Equity claimed about $4.85 million damages as its economic loss during the period from 1 May 2003 to 7 July 2005 based on the above assumptions which it gave to Mr Langridge. I am not satisfied that there was a sufficient basis to render the above assumptions given to Mr Langridge reasonable. Indeed, in my opinion, on the evidence, they were without foundation. 231 I have accepted that, in some respects, the new line fell short of its warranted or represented performance. For the reasons I give below in assessing damages, these matters were not substantial or of a kind which had any substantive adverse impact on the actual operation of the new line. But I do not accept that these matters caused any economic loss to North East Equity or the loss of any chance to earn more profit than it in fact did. 232 I am not satisfied that North East Equity lost any sales at all or any market opportunity to sell any more carrots than it actually produced and sold. Nor am I satisfied that North East Equity was financially worse off because of any deficiency in the operation of the new line.

[18]

THE PROBLEMS CONTINUE 233 Over the course of the weeks and months after its installation, Mr Webster prepared a number of lists of problems which were being experienced in the operation and commissioning of the new plant. He sent these lists to Proud Machinery. Mr Tana also made numerous oral and written complaints to Proud Machinery and Mr Proud. Many of the problems were teething problems which were addressed promptly and resolved, however a number of the problems were of a more fundamental nature. 234 By 18 March 2003 Mr Tana was expressing considerable concern to Mr Proud that a number of 'disasters' existed with the operation of the new line. Mr Proud was also upset, at that stage, about the way the line was operating. He arranged for Mr Gillenkirch to fly urgently from Canada via Germany to Perth to arrive on 21 March 2003. Mr Proud also sought assistance from Bruynooghe in relocating the touch screen. He said that he was working towards resolving the then difficulties in his letter of the same date. 235 There were problems with the equipment as supplied. Thus in his letter to Bruynooghe of 18 March 2003, Mr Proud stated that he was '… personally totally disappointed and frustrated with the amount of problems and rework that we have been left to deal with on our own'. In a postscript to that letter he said: 'Installing the Length Grader for the smalls on the feed from the large carrots was the final insult to the client.' Bruynooghe had installed the length graders so that carrots with large girths, after being graded on the width grader, were deposited on a length grader intended to segregate the smaller sized carrots. 236 I am satisfied that the new line was not fully operational within 10 business days of 7 March 2003. Thus, North East Equity was entitled to retain the $50,000 maximum sum of liquidated damages provided in the contract. 237 By 28 March 2003 Mr Webster wrote to Mr Proud saying that, due to the continuing problems that were being experienced, North East Equity had decided that: 'We will provide a person or persons for training and information dedicated to being the controller. This person is in the "driving seat" and will be the only person to make any changes to the buffer tanks.' This appears to have been an acceptance that, despite whatever training Ms Mirosevich had received in Belgium and at Wattleup, neither she nor Mr Webster was acting as the 'controller' in deciding how to operate the overall machinery. In my view, this was a fundamental problem in North East Equity's organisation and contributed significantly to the difficulties that were experienced.

[19]

MR WEBSTER'S 20 AUGUST 2003 MEMORANDUM TO MR TANA 238 On 20 August 2003 Mr Webster wrote a memorandum responding to a request by Mr Tana. He reported on the major issues North East Equity then had with Proud Machinery, and considered the position, particularly if it ceased to do business with Proud Machinery. One issue was the relocation of the touch screen from the office to the position above the chilling tanks. Mr Webster also noted that, while mechanical damage to the carrots had been '… significantly reduced, the farms are still a problem'. That referred to damage occurring to carrots during the harvesting and delivery process and resulting in considerable quantities of already damaged carrots being fed into the line for processing. Mr Webster described the management problems that were affecting the efficient operation of the plant as follows: '7. The other major issue is of course whether we can maintain a consistent packout tonnage over the 8-hour period; (problems are below) that affect it. a. Quality of carrot b. Consistent feed from tanks i.e. an efficient operator driving the system. c. Stoppages on line, no accumulation. d. Better management of lines, i.e. too many changeovers of variety cartons - too much time lost. (Never retrieve lost time) e. Why do we never use No: 4 machine? Seems ludicrous that we run 5 & 6, 7 & 8 flat out, No. 4 sitting there doing nothing, that's around 20 Tonnes over 8 hours. I think its [sic] to reduce labour costs, someone must have done the calculation!' (emphasis in original) 239 Mr Tana accepted in his evidence that those matters were concerns. The first problem was the significant change in quality of the carrots delivered to Wattleup for processing. This referred to problems then being experienced with the farms supplying the plant, particularly Guilderton. As I have found, about 70% of carrots supplied at this time were Class 2. In addition, Mr Webster identified the problems with North East Equity's management of the new line as his second, third and fourth concerns. In cross-examination, Mr Tana was unable to answer Mr Webster's question about why machine No 4 was not used, other than by asserting that it was used, and he was unable to specify how or when it was used. I accept the accuracy of Mr Webster's contemporaneous observations including his observation that one of the Newtec/Gillenkirch packing stations (machine No 4) was rarely used. 240 The ability for the plant to process carrots into differently graded sizes at an even rate of output depended upon there being some consistency in the size of carrots. If eight different streams would be graded at 17.55 tonnes per hour on average between the eight streams, it would be necessary to have an input of about two tonnes of each of the eight grades of carrots, after allowing for rejects. The evidence, however, established that there were certain predominant sizes of carrots, mainly medium and small/medium ones.

[20]

MR TANA'S LETTER OF 12 SEPTEMBER 2003 TO MR PROUD 241 On 12 September 2003 Mr Tana wrote to Mr Proud discussing a number of deficiencies that he claimed were apparent in the operation of the new plant. The letter is notable. First, Mr Tana made no complaint about the split shift operation commencing at 6.00am which he described in this letter. I infer that this was because it was always his understanding that the new line, which he and Mr Proud discussed in 2002, would operate with a split shift, as Mr Webster's memorandum of 1 August 2002 had indicated. Secondly, the letter described the length sizers (which were in use) as being: '… moderately capable and like all other pieces of machinery have their capacity. When put under pressure (approx 6-8 tonne) they do not size well at all due to several reasons: a) Piggy backing; b) Carrots pushing each other; c) Carrots crossways. … [W]hen we process 18-20 tonne per hour and say 30-50% are medium there is no way this unit can do even an adequate job.' 242 Thirdly, Mr Tana noted his assumption that, at the initial grading tables, near the wet hoppers, 8% of the carrots were removed as rejects, with a further 2% removed at the grading tables near the weighing and packing machines. In addition, he said another 15% of the carrots removed at the latter grading tables were Class 2. In the 12 September letter Mr Tana asserted that he had assumed '… a 10% reject rate which for us is normal (sometimes it does go as high as 25% but [this is] abnormal)'. 243 Fourthly, Mr Tana identified the six sizes which were being packed as prepack short, small, small/medium, medium, large short and large. He wrote: 'Let us assume a carrot size split as follows: Reject 8% (first take 8%, second take 2%) [sic] Prepack 5% Small 10% Small/medium 15% Medium 40% Large short 11% Large 11% 100% Now based on the above percentages please tell me how we are to operate given that carrots need to stay in the tank 10 minutes plus before we can use them as they are entering the tanks at between 17°-30°C.' 244 In cross-examination, Mr Tana gave another measurement of the quantity of rejects in the operation of plant. He sought to rely on a distinction between 'rejects' and 'waste', saying that 'rejects' were 'not waste in total'. However, he also acknowledged that 'rejects is a combination of waste and rejects'. In the discussions Mr Tana had with Mr Proud, and as used generally in the evidence, I am satisfied that the expression 'rejects' included waste. This is because neither rejected carrots nor unusable waste were intended to be packed at the end of the line. North East Equity did have other uses for some of the rejected material. But what happened to it after it had been removed from the line was of no concern in the present proceedings. 245 Mr Tana acknowledged that North East Equity kept no record of the weight of rejects. In evidence in chief he claimed that the specification of 18% rejects for the performance of the new line was to be measured only in respect of the carrots that had passed through the brush washers. This would have meant that the commencing tonnage for measuring the ultimate pack out rate consisted of carrots that had already been culled at the initial grading table. 246 However, despite all his asserted dissatisfaction with the performance of the new line, Mr Tana had never caused any measurement to be taken of the amount or weight of carrots which entered the brush washers (i.e. after the chilling of rejects and waste at the initial grading tables). That is, he had never obtained a measurement of the initial tonnage in order to make good his claim that the new line was deficient in meeting the specified 18.75 or 17.55 tonnes per hour final pack out. Mr Tana justified this omission in the following evidence: 'There was no need to do it because when we talk about rejects we're only talking about rejects from the point at which they're tipped into the wet hopper until they're packed out? --- In the context of the line, yes, sir. So there's no distinction for that purpose between what happens at the first grading table and what happens at the second grading tables? --- There is a distinction sir, but no numerical distinction. There's no numerical distinction because what you've said yesterday is to your construction as to how to measure 18 per cent rejects, was simply creative thinking on your part? --- Not at all. If it had been important you would have carried out some sort of measure, wouldn't you? --- We do on a daily basis by knowing how many bins come through, thereabouts, and it was always two to one: two before the line and one approximately during the line. Where are these measures? --- They're not formal documents as I said. You didn't measure, you told us that, you didn't measure at any stage? --- I recall - I do recall Mira on certain days taking that measurement upon my request. Whether they're recorded or not she would tell me at the end of the day so many came here, so many came there and on average it always averaged between two to one if not three to one.' (emphasis added) 247 An average of two to one is, of course, different from three to one. Moreover, the measure of 8% and 2% rejects, referred to in Mr Tana's 12 September letter is four to one. I have no confidence in Mr Tana's evidence as to the general performance of the line. I am satisfied that Mr Tana was conscious of a significant deterioration in the quality of the produce delivered for processing to the Wattleup plant from early 2003. This was because of the production difficulties which led him to decide to close the Guilderton farm in June 2005. As a result, significantly more rejects, waste and Class 2 carrots were delivered and had to be removed or processed after the new line was installed than before. I am satisfied that from about March 2003 and thereafter the quality of carrots grown had substantively deteriorated and that substantially more than 18% rejects were included in the carrots delivered from the farm for processing at Wattleup. 248 Indeed, Mr Harris, North East Equity's expert, assessed the line, between August and October 2005, after the Guilderton farm had closed. He had been asked to assume that the final grading tables had to be capable of removing 18% rejects and 20% Class 2 carrots: i.e. 38% of all carrots processed through the line up to that point. That assumption did not reflect any pleaded contractual term or representation. However, if 18% rejects were presented at the last grading tables, then applying one of Mr Tana's varying ratios would suggest that 2, 3 or 4 times that quantity of rejects had been removed at the grading tables prior to the brush washers. The differences in these measures are significant as the table below shows: (Figures are in tonnes) Ratio 2:1 Ratio 3:1 Ratio 4:1 (a) Carrots delivered ((d) + (e)) 198 224 250 (b) Carrots removed at initial grading tables 52 78 104 (c) Carrots removed at grading tables immediately before weighing and packing machines 26 26 26 (d) Total carrots removed 78 104 130 (e) Assumed net pack out 120 120 120 (f) Carrots removed as percentage of carrots delivered 39% 46% 52%

249 Assuming, for example, a final pack out of 120 tonnes in a day, then, using Mr Tana's starting point, that amount would comprise 82% of the carrots which had emerged from the brush washers. Thus, about 146 tonnes had emerged from the brush washers, of which approximately 26 tonnes (18% of 146) were classified as rejects at the final grading tables (assuming little or no waste had been segregated by the diameter or length graders). There was no evidence about how much waste was removed by these machines. 250 As the above table demonstrates, if one of Mr Tana's ratios were correct, then 52 or 78 or 104 tonnes must have been removed as rejects at the initial grading tables prior to the brush washers. Even if the ratio of rejects were two to one, then 78 tonnes (the final 26 tonnes and an initial cull of 52 tonnes) or 39% out of 198 tonnes delivered were rejects. If it were four to one, 52% of the total carrots delivered were rejects. (If three to one, the total proportion rejected would be 46% or 104 tonnes.) And the task of removing so many rejects at the initial grading tables would involve substantial work and time. That is, there would have been more people working for a longer period at the initial grading tables which would have increased both labour costs and the time of the shifts, regardless of how efficiently the new plant operated. That would have negated one of Mr Tana's principal reasons for the investment. These considerations reinforce my findings that, first, the efficient economic operation of the new line was substantially affected by the substantive deterioration in quality of carrots delivered from the farms from about March 2003 and, secondly, the specification of 18% rejects was in respect of the whole line (i.e. including the initial grading tables). 251 In making the second finding, I have not overlooked Mr Proud's evidence, which North East Equity relied on as supporting its case, in relation to the starting point for measuring the 18% rejects. In his written evidence, Mr Proud referred on three separate occasions to the agreed initial tonnage (182 tonnes per 8 hour working shift or 22.75 tonnes per operating hour) being fed into the new line commencing after the brush washers. In cross-examination Mr Proud said that this was wrong. I do not consider that Mr Proud was always reliable in his evidence. On this point, the contemporaneous documents are a surer guide to what the parties agreed and discussed than their recollections four or five years later. Those recollections have been coloured by the subsequent history of the dispute and the desires of both witnesses to justify in their own minds, what they thought they had done. Their evidence was prone to being assertive and unreliable: see too Watson 49 NSWLR at 318-319. 252 While North East Equity was entitled to rely on these statements by Mr Proud as admissions against interest, I do not consider them to be reliable. They made no commercial sense, since neither party measured the weight at that point, or had any objective means of calculating this. The new equipment had to work with what was to be retained, including the initial part of the plant. A mix of production targets was discussed in 2002. The key inputs were the initial quantity of carrots delivered and the pack out tonnage per hour. As I have found above, it made no sense for the parties to measure or consider the production of the new equipment in isolation. Ultimately, in 2002 Mr Tana agreed with Mr Proud that Proud Machinery would provide new equipment to be combined with some old for the plant, working as a whole, which could pack out 18.75 tonnes per operating hour (or 17.55 tonnes without the handline) with a maximum of 18% total rejects. The new equipment, obviously, had to have the capacity to operate in a way which enabled the final pack out rate to be achieved. But, as Mr Webster's 1 August 2002 memorandum showed, the overall capacity of the line, consisting of both the old and new equipment, was what mattered. The new equipment could not process more than the amount of carrots fed into it from the old system's brush washers. I do not accept Mr Proud's written evidence on the starting point for measuring the 18% rejects. 253 In any event, I must approach the identification of the terms and the construction of the agreement objectively, rather than from the subjective points of view of the parties. For the reasons I have given, I am satisfied - based on the mutually known facts, the evidence of discussions and contemporaneous written material - that the parties agreed that the 18% rejects related to the processing operation as a whole, commencing from the point where the carrots were tipped into the wet hoppers. And, given the nature of the negotiations and the parties here, it is appropriate to assess whether any representation complained of was made by Proud Machinery or Mr Proud on the same basis. 254 North East Equity specified that the system be able to grade the carrots into eight different sizes. But North East Equity never informed Proud that any particular quantity or quality of each size of carrot was to be processed through the plant. It would have been obvious to Mr Tana that significant variations in the quantity and quality of differently sized carrots would impact the production capacity and efficiency of the plant. There were five packing machines, but only three sizes could be packed simultaneously. This was because North East Equity had specified that there be only three conveyors from the chilling tanks to deliver carrots to three grading tables. Two of those tables served two weighing and packing machines each and one table served only one set of weighing and packing machines. The prepack line would allow a further size to be packed. 255 I am satisfied from Mr Tana's handwritten facsimile of 14 September 2003 that he and Mr Proud discussed the 12 September letter the next day. Mr Proud made many handwritten annotations on his copy of the 12 September letter which I infer he used as his basis of discussion with Mr Tana. For example, Mr Proud noted his response to a complaint Mr Tana had made about a build up of mounds of carrots where they were dropped into the chilling tanks by the conveyor from the length graders. Mr Tana had asserted that if more than five or six tonnes were in a tank, the carrots could not be moved by water pressure from their entry point. He complained that this led to carrots spilling into adjoining tanks which could undo the earlier grading. Mr Proud wrote a note that the tanks could be completely filled and the operator had to adjust the timer on the air pumps to spread the carrots evenly. Mr Gillenkirch's evidence confirmed that this was how the system should have been operated. 256 Mr Tana's comments about the tanks revealed that his staff were not monitoring any build up of carrots in the chilling tanks, nor were they adjusting settings or the operation of the equipment as and when needed. That is, as I find, North East Equity was not operating the equipment properly.

21.1 Production on 17 and 18 November 2003 259 Mr Proud's schedule summarised North East Equity's records of the number of bins tipped, the weight of total carrots packed out, their temperatures at the final grading tables, and operational problems for each day. Other than the issue of the assumed initial weight of 450 kg per bin and the associated calculations, there was no dispute as to the accuracy of the information in Mr Proud's schedule. 260 On 17 November 2003 North East Equity's records showed that 453 bins were tipped into the wet hoppers at the commencement of the line, resulting in approximately 131 tonnes of packed cartons. That meant that 183.5 tonnes (at 405 kg per bin, as I have found) were tipped into the wet hoppers resulting in 52.5 tonnes or 29% rejects. Mr Proud's schedule recorded that there were problems with a motor relay which tripped out nine times for one of the dual weighing packing machine stations, a robot was unable to cope with the weight of cartons, a flume was blocked with carrots, resulting in10 minutes stoppage time, the carton sizes had to be changed because the robot was unable to stack all the different cartons, and one of the gates for delivering carrots lost a nut clamp. 261 The same records showed (assuming 405 kg per bin) that on 18 November, 386 bins (or 156.33 tonnes) were tipped into the wet hoppers, resulting in a total production pack out of 132 tonnes with 24.33 tonnes, or 15.6% rejects. Mr Proud's schedule also recorded that a brush washer broke down around 3.15pm. It noted that the motor relay, this time, tripped out five times, a water spray pipe on an output belt was splashing water, the flumes blocked with a 20 minute stoppage of the line, and fresh carrots were processed after lunch but were too hot to pack because the temperature of the water in the chilling tanks was too high. Production had to be stopped for 35 minutes because the carrot temperature varied from 6-12°. 262 The schedule showed the temperatures of the carrots which Mr Correia had measured at the packing stations for these two days as follows: Date Time Exit temp Exit temp Exit temp Large Medium S[mall]/M[edium] Monday 17 November 2003 am N/A 2°-5° 4°-7° 12.00 [noon] 3°-4° 3°-6° 4°-6° Tuesday 18 November 2003 am - 3°-4° 3°-4° 12.00 [noon] 6°-12° 6°-10° 5°-8° pm 5°-6° 5°-7° 4°-6°

263 On the day of the test, each of the suppliers (Messrs Gillenkirch, Vermeulen and North) had adjusted their machinery to the settings which they regarded as appropriate to test the capacity and functioning of the line. However, by this time, North East Equity had modified the operation of the length graders so that they no longer did any grading and they simply conveyed carrots to the chilling tanks. Thus, only five different grades of girth were processed in the test and there capable of being was no separate automatic grading for length. 264 Mr Tana made some handwritten notes of processing which commenced with 453 bins being tipped into the brush washers. This figure accords with the records for 17 November 2003. Both Mr Tana and Mr Proud recalled that, on the day of the test, production stopped early. In his witness statement, Mr Proud asserted that the meetings took place on 17 November and a productivity test of the line took place the next day. He confirmed this in his evidence. 265 It is difficult to determine from any contemporaneous record whether the test occurred on 17 or 18 November. It would have taken some time for those attending the meeting to make their way to Balcatta. Both Mr Tana and Mr Proud agreed that that production finished earlier than usual on the day of the test. Significantly less bins were processed on 18 November. No witness said that any stoppage had occurred on the day of the test due to carrot temperatures being too high. And, Mr Tana's contemporaneous notes do not suggest that this was an issue in the meeting. It would have been an obvious and immediate source of discussion (and vociferous complaint by Mr Tana) if production had stopped while the test was proceeding, particularly if the chilling system were not functioning. Indeed, Mr North said that he did not recall a lot of discussion about the chilling tanks at the time of the test. And, on 19 November he sent a fax to Mr Tana noting that he had changed the computer program to control the times when the refrigeration plant automatically began and ceased operation. Mr North indicated that this might alter the cost of power. 266 And, although the ultimate packed production was similar on both days, the quantity of rejects was substantially greater on 17 November. In addition, during the hearing, both parties focused their examination of the evidence principally upon 18 November as being the day of the test. The contemporaneous records show that, on each day, the sizing crew stopped work at 5.10pm. That may be because they were employed and thus paid up to that time, even though the work had ceased earlier. 267 Mr Gillenkirch said that the test was on 18 November and stopped after about 6 hours because there were no more carrots from the farm. He said a meeting took place in Mr Tana's office after the test on 18 November. I accept Mr Gillenkirch's evidence generally, although for reasons I explain below, I am not sure that he is correct about the day of the test. He was an impressive witness. Mr North also said that the meeting occurred on the same day as the test. 268 Mr Tana said that on the test day only a composite of Class 1 and 2 carrots was graded and packed, rather than the two classes being packed separately. He asserted that this 'composite' was 'Class 1 on paper'. He claimed that North East Equity was selling, as Class 1, a composite grade of carrots that included Class 2 carrots and gave evidence that '… I suppose we could fudge a little bit in marketing'. I understood him to suggest by that answer that he was prepared to deceive his customers as to the quality of carrot which he was selling to them. Mr Proud also said that a composite class went through that day. The table below summarises the packing records for 18 November 2003: Packing records for 18 November 2003 Cartons Tonnes % of final pack out Class 1 (10 kg cartons) 1573 15.73 11.9% Class 1 (20 kg cartons) 4281 85.62 64.9% Class 2 (20 kg cartons) 1028 20.56 15.6% Prepack - 9.958 7.6% Total pack out 131.868 100%

269 Those packing records showed that, of the 132 tonnes packed, most of the carrots were recorded as being packed as Class 1, of which about 15.7 tonnes were packed into 10 kg cartons, with the balance packed into 20 kg cartons. About 20.6 tonnes of Class 2 carrots were packed in 20 kg cartons (15.6% of the final pack out of the five weighing and packing machines). In addition, about 10 tonnes were packed in the prepack line. Those records made a clear distinction between Class 1 and Class 2 carrots. Earlier in his evidence Mr Tana had acknowledged that those records actually identified several brands as Class 2 and others as Class 1. Mr Tana's preparedness to 'fudge' did not reflect favourably on his integrity or reliability. I find that any difficulties in quality were not due to deficiencies with the new plant and equipment, but rather, were caused by Mr Tana's farms, for example, the high level of rejects on 17 November showed. 270 As I have found, the production difficulties that North East Equity was experiencing in 2003 resulted in a significant deterioration in the quality of the carrots delivered for processing at Wattleup. When Mr Tana and Mr Proud referred to the 'composite' class on the test day, I find they were referring to the very substantial proportion of carrots - in the order of about 70% of the total carrots delivered (as I have found) - presented at the final grading tables which were actually Class 2 standard, but were processed as if they were Class 1. And, Mr Tana said that November was a peak period for North East Equity to process packed carrots, so it is safe to infer that the quantity delivered for processing on 17 and 18 November was planned four to six months beforehand to meet peak demand. 271 Mr Gillenkirch said that he observed that both Class 1 and Class 2 carrots were run through the production lines and Class 2 carrots were graded out at the grading tables near the packing machines. Mr Gillenkirch was principally concerned, at the time, to observe how his equipment performed, rather than to assess precisely the quality of the produce as graded. No doubt, as part of Mr Tana's 'fudge', the better-looking Class 2 carrots were packed into the Class 1 cartons. But, I consider Mr Gillenkirch to be most likely to be reliable about how his own equipment was operated. I accept his evidence, and I prefer it to Mr Tana's and Mr Proud's evidence, to the extent they may differ as to the classes of carrots packed on the day of the test. 272 The three experts agreed that the Gillenkirch carton fillers could pack between 240 and 300 kg cartons of 20 kg each per hour (i.e. between 4.8 and 6 tonnes per hour) and between 280 and 340 kg cartons of 10 kg each per hour (i.e. between 2.8 and 3.4 tonnes per hour). A B C D E F No of machines Type of carton packed Minimum hourly capacity per machine Minimum tonnage packed per hour (A x C) Recorded packed out tonnage (18/11/03) Maximum time to meet recorded pack out (E / D) 5.53 hours 4 20 kg cartons 4.8 tonnes 19.2 106.18 (5 hours, 32 mins) 5.61 hours 1 10 kg cartons 2.8 tonnes 2.8 15.73 (5 hours, 37 mins)

273 As set out in the table above, assuming that the lower rates of each of those figures were packed on the day, if four of the packing machines packed the 20 kg cartons continuously, they would have processed about 19.2 tonnes per hour and would have completed the whole packing of the 106 tonnes in about 5˝ hours. Likewise if one packing machine were packing the 10 kg cartons it also would have taken about 5˝ hours to pack the 15.7 tonnes. 274 Mr Tana accepted that the test showed that the capacity of the Newtec/Gillenkirch packing machines was satisfactory. But in evidence he asserted that there was no grading apart from removing objects and that all carrots were pre-chilled. That was not correct. At least 236 of the 386 bins processed on 18 November had been left outside the cool rooms or had been processed fresh on delivery from the farms, according to Mr Correia's contemporaneous notes i.e. over 60% of the carrots processed on 18 November were processed at ambient temperature, and had not been pre-chilled. There is little evidence as to the pre-chilling, if any, on 17 November, and I infer that a similar amount of farm fresh carrots were processed then. 275 I am satisfied that Mr Tana's acceptance that the Gillenkirch machines performed to their capacity demonstrated that they packed at least at the rates identified by the experts and thus, the time for the packing operation would have been no more than about 5˝ to 6 hours. That of course, leaves out of account the time required to process the carrots up to the time of packing. If the packing operation commenced at about 9.00am, it would have been completed around 3.00pm and have left time for the meetings to occur later on 17 or 18 November. I am satisfied that all the carrots available for processing on the day of the test were processed and packed by about 3.00pm that day, even though the crew may have been paid for a full shift (i.e. to stay until 5.10pm) to clean up or perform other duties. However, I have some doubt that the test occurred on 18 November, or if it did, that the meeting occurred after the end of the day's production if the contemporaneous records of problems with the chilling tank temperatures were correct. 276 A production stoppage for 35 minutes because the carrots emerging from the chilling tanks were too hot would have been a very significant issue in the meeting, considering North East Equity's complaint that the new line did not work. Instead, the meeting proceeded without any suggestion that a significant incident had occurred while they were all there. It is likely that those attending the meeting left on 18 November before this incident occurred, and, they had seen the whole of the previous day's production. Moreover, it is likely that the temperature problem was caused by an operator error or some other obvious (to those present) cause which was not inherent in the new line. While I accept that the meeting which Mr Tana noted occurred on 18 November, I am uncertain whether the test occurred on the previous day, or on the same day, but those attending left for Balcatta before the stoppage. In the end, it is not necessary to make a finding choosing between 17 and 18 November as the day of the test. This is because, on whichever day it was, the test had proceeded without any significant problem concerning the chilling of the carrots up to when the attendees left for Balcatta. 277 During the course of each day (17 and 18 November), the plant had packed a total of just more than 130 tonnes. On 18 November about 10 tonnes had been packed by the prepack line and the rest by the new line. The reason that less than 140 tonnes (or 17.55 tonnes in an 8 hour shift) were processed was that some time after 1.00pm there were no more carrots available to feed into the wet hopper at the commencement of the line. 278 One consequence of the test was that whatever weight the attendees believed the bins contained, it was clear to everyone present that the line could process, at least 17.55 tonnes per hour at final pack out. The packing operation, using the split shift had taken less than six hours to pack out about 130 tonnes. And, on 18 November with 405 kg in the bins, then there were about 15.6% rejects in total. 279 Mr Tana recorded in his handwritten notes of the meeting of 18 November 2003 that it was agreed that the final 'grading stations need [an] output of net 3 ton[nes per] hour allowing for up to 30% [Class] 2 & rejects'. In other words, first, Class 1 carrots were being graded separately from Class 2 and, secondly, if 18% rejects were to be removed at this point then only 12% Class 2 carrots could be graded there. The Class 2 carrots were commercially more valuable than rejects. It would have been more important to allow for these to be graded than rejects. The note reinforces the implausibility that all the 18% rejects were ever contemplated to come out at the final grading tables. And at a rate of three tonnes net per hour, the five weighing and packing machines would process 15 tonnes of Class 1 per hour and in addition Class 2 and rejects. Similarly on 8 May 2004 Mr Tana wrote to Mr Proud referring to 'a choking point' at the final grading tables saying: '… even if the carrots are good quality and can be chilled there will still be a requirement to extract approximately 5% of waste and 15-20% of class 2.' (emphasis added) 280 Mr Tana was then aware that the carrots were not of good quality and that this caused the line to be used with produce quite different from that originally intended. Yet Mr Tana asserted that the purpose of the November 2003 test was to assess the box packing section of the line and that all other parts of the line were compromised to ensure that the maximum amount of carrots were fed to the box packing machines. I reject this evidence. If that were the case, there would have been no need for Mr Vermeulen, as a representative of Bruynooghe, or for Mr North to have been present. They could not have contributed to the simple question of whether the Newtec and Gillenkirch machines were capable of processing 17.55 tonnes per hour. Moreover, that assertion was inconsistent with Mr Tana's conduct immediately after the test during the meeting between him and Messrs Proud, Gillenkirch, Webster, Vermeulen, North and Hunter. 281 The test was performed to ascertain whether the new line, as a whole, would perform in accordance with the contractual specifications, and had the capacity to process 17.55 tonnes per hour at final pack out (being the reduced output after the removal of the handline). 282 By November 2003 both Mr Tana and Mr Proud had had their fill of one another. There had been constant negotiations, complaints and attendances at the Wattleup plant over the proceeding months. I find that the purpose of the test on 17 or 18 November 2003 was to assess the overall operation of the plant to see whether, in substance, it met the contractual or represented requirements, after making allowances for the fact that the length graders were no longer being operated, and the number of classes graded thus had reduced from eight to five.

21.2 The meeting on 17 or 18 November 2003 283 After the test, a meeting was held on 18 November at North East Equity's offices at Balcatta, away from the site of the plant itself. Mr Tana confirmed to Mr Proud that he was satisfied with the day's production. Mr Tana said that if four problems were fixed then he would accept the installation of the new plant and would pay Proud Machinery the $50,000 that had been withheld. The four problems were the flume elevators, the operation of the interlock conveyor belts, the overloading of elevators leading to the packing stations, the provision of Gillenkirch manuals and Bruynooghe software. Although he used the word 'software' in his evidence I am satisfied that his contemporaneous handwritten note accurately recorded that Bruynooghe was to provide a CD-rom of the programs for the systems. Mr Tana's difficulty with computers led him to be confused in describing what this issue was, although later by early March 2004, he wanted to have the ability to change the software. I accept Mr Proud's evidence that he did not agree to provide software. 284 Mr Tana's handwritten notes recorded a number of other matters. At the meeting he required that the problems with the flume elevators be addressed. The two flumes were supplied with water by a tank with submersible pumps. The flumes were located after the wet hopper and initial grading tables and fed the width or girth graders. Sometime after the new line had been installed, North East Equity had caused chilled water to be fed into the flume pumps to commence the process of cooling the carrots. The water flowed down two moveable chutes containing the flume elevators. The water washed over or rinsed the carrots as they moved up the flume elevators. 285 The flume elevators carried the carrots on metal cleats or shelves. Initially, the cleats had sharp edges which chipped or damaged many carrots and quite a few fell off them onto the floor. Mr Webster and others made some adjustments to the cleats which improved their efficiency and reduced the number of sharp edges. 286 Mr Proud said that the pumps for the flumes were blocking because loose weed and root hair got into them after carrots were transferred from the initial grading tables onto the flumes. Mr Vermeulen said he would speak with Bruynooghe's Mr Parrein about the flumes. Shortly afterwards, Bruynooghe recommended to Mr Proud that two new pumps should be used to replace the existing ones. Proud Machinery installed the new pumps and some filters but they proved insufficient and the problems persisted. 287 Mr Tana's second requirement was for the intralock conveyor belts to be fixed. These linked the chilling tanks and the next grading stations. Mr Proud agreed to arrange the installation of invertors on the intralocks. The inverters controlled the speed of the conveyors. Soon afterwards, that work was done and this problem was resolved. I am satisfied that the new plant, as originally supplied, had been deficient until this rectification was undertaken. Thirdly, the motors in some of the elevators were overloading causing some elevators to trip out, and that problem needed to be rectified. 288 Fourthly, Mr Tana wanted operating manuals for the Gillenkirch equipment. Mr Proud and Mr Gillenkirch arranged for that to occur and this problem was resolved. Also, Mr Tana wanted Proud Machinery or Bruynooghe to provide North East Equity with a CD-rom with the program for the Bruynooghe equipment. Proud Machinery caused a copy of the program for the Bruynooghe equipment to be provided to North East Equity although it did not provide the password needed to give access to it. In its letter of 16 May 2004 Proud Machinery asserted that it would provide the password when all claims and issues had been attended to. That step did not occur. In my opinion the non-provision of that password was not a breach of any contract or representation made by Proud Machinery or Mr Proud. I am not satisfied that the failure to provide the password was a failure by Proud Machinery to adhere to a pleaded contractual term or representation. 289 Mr Tana's notes of the meeting of 18 November also recorded that Mr Webster was to address the issues of communication between the grading operators and the overall control of the plant. Additionally, the notes recorded that Ms Mirosevich was to attend to improving management control. North East Equity's personnel were also to institute a cleaning schedule for the various parts of the equipment that accumulated debris which might affect their efficient operation of the plant. 290 Mr Gillenkirch gave unchallenged evidence, which I accept, that during the meeting of 18 November 2003 Mr Tana did a calculation of the costs savings North East Equity had made with the new line. He said that his production costs had decreased from $1.20 per carton to between 86˘ and 90˘ per carton. Obviously, savings of that magnitude were significant and beneficial for North East Equity. I am satisfied that in this important meeting Mr Tana did not overstate the saving North East Equity had made in its production costs. 291 In counsel's final address, North East Equity adopted the saving of 30˘ per carton, at the bottom of Mr Tana's range, to argue a recalculation for its latest economic loss claim at $1.3 million. It submitted that the annual labour savings were $586,500 (using 1.955 million cartons). If 86˘ were the new cost per carton, the saving was $6,647,000. These figures demonstrate that the new line was far from being a financial or business catastrophe for North East Equity. 292 Mr North said that Mr Gillenkirch had said at the meeting held on 18 November 2003, or in a discussion with Mr North, Mr Proud and Mr Vermeulen immediately afterwards that he, Mr Gillenkirch, would not do any of the things which Mr Tana requested. Mr Gillenkirch denied having said that. As Mr Gillenkirch said, his attitude was that if he agreed with someone to make something, he stood behind the promise. He was not willing to risk his and his company's commercial representation by not following up promises made in business. I accept Mr Gillenkirch's evidence. 293 Mr Gillenkirch said that the problem with the flumes was that the pumps were blocking with leaves and debris from the brush washers and polishers. He said that Bruynooghe was being asked by Mr Tana at the meeting to fix these blockages. It may be that Mr North mistook something that Mr Vermeulen had said for something said by Mr Gillenkirch. Bruynooghe did not agree to fix without payment any equipment that it had originally provided. Mr North was giving a recollection of a meeting or discussion over four years beforehand at which persons with different accents were present. He made no contemporaneous note and was not involved in the subject matter. I think it likely that he was confused as to who made the statement even though he was not cross-examined about this matter. 294 On 19 November 2003, Mr Tana wrote another letter of complaint to Mr Proud copying it to Mr Gillenkirch, Bruynooghe and Mr North. He stated that on the previous day they had had '… a productive day albeit expensive for me, given the concessions I made'. He said that they identified two critical areas that had to be addressed quickly and others that needed to be addressed but were not as critical. The critical areas were the Gillenkirch feed (namely the intralock and inverter problem) and the flume elevators. He was complaining that a flume had blocked, causing carrots to spill onto the floor. 295 I find that at a meeting later on 18 November with only Mr Proud and Mr Gillenkirch, Mr Tana proposed that if the identified four items (namely problems with the flume elevators, the intralock converters, the motors tripping out and the provision of the Gillenkirch manuals and the Bruynooghe CD-rom) were rectified, he would accept the plant as then installed, and pay to Proud Machinery the $50,000 he had retained as liquidated damages. Mr Proud agreed to attend to these matters. In addition, Mr Tana agreed that he would pay Gillenkirch another €10,000 for two cross-belts to process the Class 2 carrots. I find that Mr Tana was prepared to arrive at this agreement on 18 November because the four matters that he required to be rectified were the only substantive problems with the operation of the new line in accordance with what he believed Proud Machinery and Mr Proud had contracted (or promised or represented) would be achieved. While he considered that he had made some compromises, he did so, no doubt, based on his belief that the new line had given the Wattleup plant significant efficiencies and savings, including on labour costs. 296 However, the flume elevators problem was not fixed and this agreement was not completed. No settlement of the dispute occurred.

21.3 The aftermath of the 17 or 18 November meeting 297 I am satisfied that in the meetings on 18 November, after the test run occurred, Mr Tana and Mr Proud arrived at a conditional resolution of the matters which were unsatisfactory in the performance of the line, having regard to what the test run had showed. 298 Although no ultimate resolution of the difficulties occurred, I am satisfied that the substantive points regarded by Mr Tana as necessary to resolve North East Equity's complaints about the capacity and operation of the new line in November 2003, were in substance, the four set out above. The problems with the intralock conveyors and elevators to the packing machines were addressed, and the manuals and software were supplied (absent the password). However, the flume elevators continued to be problematic. 299 Mr Proud accepted that the flumes had not operated satisfactorily since their installation, as he wrote to Mr Tana on 6 January 2004. Mr Vermeulen had agreed to discuss what could be done with his head office in the 18 November meeting. Their first proposed solution, the substitution of the pumps and new filters, did not work. Subsequently, Mr Tana corresponded directly with Bruynooghe. It ultimately designed a new elevator system which would cost €51,000 plus freight, to provide and Proud Machinery offered to install it at no cost. Mr Tana, understandably, was not prepared to pay that sum. Bruynooghe were not prepared to supply the equipment without charge, and Mr Proud was not prepared to bear the cost. Thus, the flume elevators were not rectified. 300 But, in the end, the flumes did not operate satisfactorily particularly because the new pumps also kept blocking. The original flumes were not reasonably fit to meet the standard of operation required of them by the contractual warranty and the representation of efficiency, which equipment of that kind ought to have had when installed. 301 Matters dragged on but never resolved. Later in 2 March 2004 Mr Tana wrote to Mr Proud following their discussion earlier that day. He said that North East Equity wanted to obtain the ability to alter Bruynooghe's software and Mr Tana claimed that this was part of the contract with Proud Machinery. I have found that there was no such contractual term or representation. Mr Tana also raised an issue concerning the refrigeration system in that letter. He wrote: 'The problem with the refrigeration was discussed with Gary North last week and whilst the corrective process is not a large expense it needs to be addressed as at present chilled coil water is mixing with overflow water from the carrot tanks. This has the effect of mixing 1°C water with 7-10°C water giving a 4-5°C plus water temperature. Until our issues are resolved we will not instruct Gary to make any changes as it would prejudice our position.' (emphasis added). 302 Mr Tana did not cause North East Equity to undertake any corrective process. Importantly, there was no evidence that any issue about the operation of the chilling tanks, or their ability to ensure that carrots would be packed at 5°C or less, was raised at the time of the test or in the meeting of 18 November. And this matter was not referred to in Mr Tana's handwritten notes of the meeting even though Mr North was present. I am not satisfied that the refrigeration system did not operate in accordance with its contractual and represented capacity. 303 No complaint about the refrigeration was made or addressed during the test and meetings on 17 and 18 November 2003 when all the suppliers were present to ensure correction operation of the new line. As I have noted, while the contemporaneous records show that a refrigeration problem occurred on 18 November, causing processing to stop, this did not result in the meeting dealing with any issue arising from any stoppage. I infer that this was because its cause was an operator-related, not inherent, problem.

22.1 Defining 'working day', 'operating hour' and removal of 18% rejects 306 I have found that, in consequence of the removal of the handline, the contract required the plant to process 17.55 tonnes per operating hour based and that this could be on a split shift system. The '8 hour working day' measurement in Mr Proud's letter of 29 July 2002 had been changed in the later contractual letters, initially to 18.75 tonnes, and, then when the handline was removed, to 17.55 tonnes per operating hour. Mr Harris was asked by North East Equity to assume that 'an 8 hour working day' was one in which all processing and packing machinery was manned and operated continuously. He used the 8 hours as a fixed period for the whole operation and applied this assumption to assessing capacity per operating hour. During the concurrent evidence, as I have noted above, Mr Harris explained that a split shift was normal in the food industry. 307 Mr Gillenkirch opined that the measurement of capacity had to be while the plant was actually operating. That meant one would exclude the start-up, shut down and cleaning procedures of the plant, which would be outside the time needed to measure its capacity to produce a particular tonnage in an operating hour. In my opinion, that is a commonsense and correct view to take. Thus, the pack out rate per hour, under normal operating conditions, had to be calculated based on when the plant actually operated. This did not include time spent preparing it and closing it down. It did not matter to North East Equity whether a split or continuous shift was used, so long as the overall labour used for the production of the tonnage worked so as to produce the agreed tonnage in an overall operating hour. 308 Mr Gillenkirch explained that the essential feature of North East Equity's system was its ability to accumulate carrots while they were cooled in the chilling hoppers. If one started packing too early, there would be insufficient supply to keep up the production rate. 309 The experts agreed that the first section of the line (which they identified as including the washing, polishing, diameter and length grading sections) had the capacity to deliver between about 23 and 24 tonnes per hour into the chilling tanks. They did not consider Mr Webster's view (in his 1 August 2002 memorandum) that the brush washers could process 'a good polished carrot' at 15 tonnes per hour. Messrs Gillenkirch and Manteca had said in their joint report that the capacity of the receiving and polishing section of the line was between 20 and 24 tonnes per hour depending on the quality and condition of the carrots. 310 The two views are not inconsistent. As I have found, Mr Tana and Mr Proud discussed in 2002 the effect on quality if the brush washers were operated at or towards their full capacity. Mr Webster was concerned with quality being lost if the brush washers operated faster than at 15 tonnes per hour. Both he and Mr Tana were aware that the brush washers could be operated at a higher rate but that this would result in the carrots having a lesser quality. The experts were discussing the actual capacity of this equipment, to operate at a given rate per hour, not the preferable rate at which it should be operated. 311 Before preparing the joint reports Mr Harris had concluded that, if the plant were operated continuously in one concurrent shift of 8 hours, its maximum capacity (if run at 100% efficiency) was about 71 tonnes per hour. If the shift were increased to 10 hours (at 100% efficiency) he said the maximum capacity was 89 tonnes. He said that normally such plants would run at about 70-80% efficiency, rather than the 100% he had assumed in his calculations. Mr Harris visited the plant between in August and October 2005 on four separate occasions. He said that there were three limiting factors for the pack out tonnage: (1) The design and configuration of the grading tables immediately prior to the Newtec/Gillenkirch weighing and packing machines, which he concluded 'severely limits the gross feed rate to box packing to a maximum of 5 tonnes per hour'. (2) If eight product groups were produced simultaneously, then nine chilling tanks were not enough to enable processing to continue uninterrupted over a sustained processing run. (3) The packing combinations limited flexibility. 312 Mr Harris expressed the view that all the equipment, with the exception of final grading tables, could operate individually at a capacity of 17.55 tonnes per hour. Mr Harris took the view that, ultimately, with the plant configured as he saw it, normal production of eight products could be expected to be 60-70 tonnes pack out in 10 hours. 313 In expressing those key limiting factors, Mr Harris had assumed that the final grading tables had to have the capacity to remove 18% waste. I have found that that was not the contractual requirement, and that the waste could (and ordinarily would) be removed as early in the line as possible. And Mr Harris prepared his report on the assumption that 20% of the gross feed to the grading tables immediately before the packing machines would consist of Class 2, with a further 18% rejects. Again, I am not satisfied that the parties agreed or negotiated on the basis that 38% of the carrots conveyed to those grading tables would be removed there from what was to be packed. 314 In their joint report, the three experts agreed that the installed maximum capacity of the grading tables, prior to the weighing and packing machines, was between 4-5 tonnes per hour per table for large carrots, 4 tonnes per hour for medium carrots and 3-4 tonnes per hour for small carrots. They therefore agreed that the total maximum capacity of the five inspection tables before the weighing and packing machines was between 20-25 tonnes per hour if they were all operating at a maximum capacity on large carrots. It follows that, if all five tables were operating on maximum capacity on a maximum of three classes of carrots at any one time, they could pack between 15 and 25 tonnes per hour as Mr Proud's letter of 30 September 2002 stated. That was because North East Equity had specified that there would be only three conveyors from the chilling tanks to the weighing and packing machines. 315 The packing section of the line thus had the capacity to pack 17.55 tonnes per hour. Of course, if only small carrots were fed into it, it would only pack 15 tonnes per hour. This was also stated in the 30 September 2002 letter. But the contract did not require it to pack any particular size at this rate. Commonsense and the mutually known facts meant that both parties were aware that the carrots delivered for packing would not be of an homogenous size or quality. Thus in specifying capacities the parties were providing for an average or typical situation but not for every possible permutation. 316 The experts agreed that the capacity of the final grading tables was sufficient to remove no more than 25% of the total carrots delivered to those tables as either Class 2, waste or rejects. They said that this could be done with three people present at those tables. They agreed that up to 20% Class 2 carrots would be removed at this point. The experts also agreed that the flow of production (i.e. carrots) at grading tables was affected by the number of people at the particular tables, the variety and quality of carrots, and the different sizes of carrots that could occur during daily production. They noted that there was no information in the written contractual documents as to the acceptable quality of carrots that could be packed. They agreed that a packing line such as that installed at Wattleup, should be assessed by calculating its average capacity over the whole line as being approximately 80% of the individual capacities at each packing machine. 317 Importantly, they agreed that the management of production was important and could be a key point for the efficiency of the plant. They also agreed that the quality of the packing machines, the adjustment of the settings, the management of the line and the quality of the carrots affected the efficiency of the line.

22.2 The 5°C requirement and the chilling tanks 318 Mr Harris had not addressed the performance of the chilled water and the refrigeration systems in his reports. He had assumed that the chilled water had a temperature of 2°C. He estimated that the time required to chill carrots introduced into the line at 28°C to less than 5°C, was 30 minutes for small/medium carrots and 45 minutes for large carrots. His view was that it was necessary to hold all the carrots in the chilling tanks for 30 minutes after the last one had entered, before any discharge to the packing stations could commence. Mr Gillenkirch said that for the carrots in classes with smaller volumes, once about 2 hours worth of supply had accumulated in the chilling tanks, packing from those tanks could begin while they still received further carrots of the same size from the graders. 319 During the concurrent evidence, Mr Harris qualified his view that 45 minutes was an appropriate time. He said that it could be 40 minutes and his own trials with larger carrots came out to approximately 38-40 minutes. His experiment did not measure the actual processing operation at the Wattleup plant on any day on which he was present. He had constructed a predictive model which established a relationship between the temperature of the carrot before it went into the water, and the time that it would take to cool to 5°C. The model had a mathematical curve that showed that the nearer the temperature was to 5°C, the harder it was progressively to reduce that temperature further. He said that the model showed that if the ambient temperature were reduced from 28°C to 20°C, it took about 5 minutes less time to cool the carrot to 5°C. 320 Mr Gillenkirch said that the times in which carrots would chill had to be based on their diameter, not their length. He asked Mr Harris whether he could agree with that, but Mr Harris said he did not have enough information to answer. Mr Harris said he could not be predictive between lengths and could only speak about weight and temperatures. However, he thought Mr Gillenkirch was putting to him a reasonable assumption. 321 Mr Harris worked on the premise that the 5°C was a quality parameter. Based on Mr Stammers' measurements, he said that it was possible for a carrot to go from one end of the chilling tank to the other and exit in about 5 minutes. Mr Stammers had been instructed by Mr Gillenkirch to make observations and record results on a visit to the Wattleup line in September 2006 for the purpose of assisting in the preparation of his expert evidence. Mr Stammers was a fitter and turner by trade. He had performed a test using a marked carrot. He dropped it four times into chilling tank No 5 where the length grader deposited closest to the exit point. The length graders deposited carrots closer to the exit to the packing conveyors on tank No 5 than for any other tank. The tank was being emptied at the time and the marked carrot took between 3.5 and 5.5 minutes to leave the tank. Mr Stammers also observed that some large carrots had been in a chilling tank for 30 minutes but their temperature was 6-7°C. Mr Harris had not measured final temperature at pack out although he did measure some temperatures of carrots actually in the tanks. 322 Mr Gillenkirch said that the last carrot that came into one of the chilling tanks from the graders would not be the first carrot to be pumped out when that tank was being emptied to the packing conveyors. None of the experts had actually measured whether the carrots on the Wattleup line, if processed in a continuous fashion (i.e. put into a chilling tank which was at the same time being emptied onto the packing conveyor) emerged onto the conveyor at 5°C or less. Mr Harris worked on the assumption that it was possible for the carrots, after being deposited from the length graders, to pass through the chilling tank onto the exit conveyors before they had been chilled to 5°C. 323 Mr Manteca explained that after the carrots were dropped into the chilling tanks from the length graders, air was bubbled into the tanks to prevent the carrots accumulating into a mound and to disperse them inside the tanks. Chilled water was pumped into the tanks in order to keep the temperature even. In agreeing with Mr Harris, Mr Manteca said that it was possible that, once the gates opened to the packing conveyors, a new carrot could enter a chilling tank from the length graders and could move easily from the entry point to the exit point in less time than was needed to cool it down. Mr Gillenkirch then explained that carrots in the lower volume sizes would be accumulating over the course of at least two hours. He said that if there were 5,000 kg in a tank, then (after Mr Harris had corrected him) the risk that the last carrot in the tank would be the first out was one in about 30,000. He said that most carrot packing houses in Europe worked in the way the Wattleup plant did. Even if the tank were 50-60% full, he thought the risk was very low, although theoretically possible, that a carrot would emerge from the chilling tanks before its core temperature had cooled to 5°C or less. 324 I accept Mr Gillenkirch's evidence that the risk was relatively low that, after a considerable period of accumulation of the lower volume sizes, a carrot recently introduced into a chilling tank would come out before it had chilled to 5°C. This risk was more likely to occur in the tank in which Mr Stammers did his experiment, but that did not make the new line, as a whole, deficient. That tank could be managed so as to minimise the risk. None of the experts measured whether this in fact was occurring in the operation of North East Equity's plant. However, Mr Gillenkirch's experience with the ordinary operation of such plants satisfied me that, in terms of fitness for purpose, the system was reasonably capable of processing carrots at 5°C or less, even if there were a small risk that a few carrots in the smaller volume sizes might slip through without having been chilled to 5°C. Overall, such a risk was unlikely to affect the quality of the out turn in any material way.

[23]

LENGTH GRADERS 325 Mr Tana said that, before 2002, the Wattleup plant had a mechanical length grader. He was not sure whether it had been part of the original Sumich equipment, or if he had bought it. He said this machine operated differently to the Bruynooghe ones. It used a sliding motion to move the carrots. The Bruynooghe length graders moved the carrots down a corrugated surface by vibration causing them to bounce. As I have found above, he was aware from his visit to Belgium in August 2002 of how the Bruynooghe equipment as proposed for Wattleup, including length graders, operated. 326 Mr Proud asserted in his witness statement that length graders were inherently inaccurate. Mr Harris corresponded with Mr Parrein of Bruynooghe after they had undertaken a joint inspection of the new line in late October 2005. Mr Parrein wrote that: '[T]he accuracy of mechanical length grading will always be poor (same experience with other customers). [T]he easiest and best improvement will be a better spreading of the carrots at the infeed section.' 327 Although Mr Proud's description of length graders as being 'inherently inaccurate' is graphic, it is consistent with the expert evidence. Their conclusion that the shape of the carrots impeded consistent grading would have been apparent to Mr Tana on his visit to Belgium when he saw a system in operation similar to that described in Proud Machinery's letter of 29 July. That is, the length graders supplied to North East Equity worked as well as one could expect given that the carrots had different shapes, girths and sizes. 328 The experts agreed that length graders as a class could not consistently size carrots to the same length because of the shape of carrots. They also agreed that the contractual documents did not provide any information or specification for the quality requirements of the length graders. Mr Tana knew that some carrots he grew (Nantes/Stefano) were more tubular than conical, while others (Sakata/Mojo) were more conical. 329 I have approached Mr Tana's evidence with caution for the reasons I have given above. He was a skilled and astute businessman. He examined business propositions with care. I am satisfied that Mr Tana was aware of the nature and practical operation of the length sizers that Proud Machinery suggested before deciding to enter into the contract. I am not satisfied that he was misled. 330 Mr Gillenkirch said that the length sizing machines were of a standard acceptable in the industry at the time they were supplied. I accept that evidence.

[24]

CAPACITY 331 During the period between early August and late September 2002, Mr Tana, together with Ms Mirosevich and Mr Webster, carefully examined each draft of the schematic drawing of the then current layout proposed for the new line. For example, Mr Tana examined them to understand how many times carrots would drop as they were conveyed to the point of packing. He did this to consider the potential for damage due to the drops. He told Mr Webster to check with Ms Mirosevich if more than three varieties would be packed at any one time and to get her to confirm that what was proposed was acceptable. 332 Mr Tana appreciated, before the contract was entered into, that in addition to carrots sent onto the prepack line, only three conveyors would carry graded carrots to the weighing and packing machines at any one time. Thus, at most only four particular graded sizes could be packed simultaneously. Mr Harris identified an assumption that there were eight product groups and that all eight were to be simultaneously graded, one each into one of the nine chilling tanks. He also assumed, for one scenario he considered, that the premium product group comprised 40% of the total product mix. 333 Mr Harris noted that there was no reference to product mix in the contract. And there is no evidence that any particular product mix was provided or identified by North East Equity to Proud Machinery or Mr Proud prior to the contract. However, the contractual and represented requirement was that the line would have the ability to sort and grade carrots into eight distinct streams of length and size. A reasonable person in the position of the parties would have understood that the pack out rate would be related to the quantity and variety of sizes of carrots delivered for processing and the selection of sizing by North East Equity. If, for example, there were only one tonne of carrots of a particular size in a delivery of, say, 150 tonnes, then reserving a chilling tank for that small quantity would affect the rate at which the balance of the 150 tonnes would be graded and processed. It would take all day to process the one tonne into its designated chilling tank. That would obviously reduce the efficiency of the whole process. And, if there were two or three similar small quantities of particular sizes, each using its own chilling tank, the impact on reducing the rate of processing would be greater. 334 The ability of the new line to achieve particular results was dependent not only on the machinery supplied but also upon the nature of what was delivered by it for processing. North East Equity specified which tanks it wished to receive what types of carrots in its fax of 14 October 2002. It had changed that specification slightly from the version attached to Proud Machinery's letter of 8 October 2002 by adding to chilling tank No 1 the capacity to receive premium medium size carrots, as well as 500 gm small carrots for the prepack line. It did not seek advice from or inform Mr Proud or Proud Machinery about that selection. The selection was made by Ms Mirosevich, Mr Chew and Mr Webster for North East Equity using design drawings for the new line, including the position of the tanks in relation to the graders. 335 It was obvious, as a matter of commonsense, that if the input of carrots to the new line did not accumulate enough carrots in the tanks to keep a constant flow from three tanks once the packing operation began, then, the maximum daily output would be affected. Thus, originally, tank numbers 1 and 2 had been designated solely to supply the prepack line, but North East Equity altered the specification to allow tank No 1 to be used to increase the number of tanks which could supply the three main packing lines. 336 Likewise, if North East Equity packed 10 kg cartons, then the ultimate hourly pack out rate would be significantly less than if it packed 20 kg cartons. This again was common knowledge of the parties and commonsense. The handling for 10 kg cartons was twice that required for the 20 kg ones to pack the same quantity of carrots. First, North East Equity employees had to assemble cartons, whether 10 kg or 20 kg, for use by the Gillenkirch packing machines. The weighing, packing and strapping machines and the stacking robots had to perform twice as many actions if 10 kg cartons were used. The smaller cartons required double the number of actions in the operation of the parts of new line where they were used. Mr Proud's letter of 30 September 2002 used 20 kg cartons as examples of how the tonnage per operating hour could be achieved. 337 The new plant had a number of centrally important features. First, there were nine tanks, one for each stream of graded carrots, with one spare. And, there were three conveyors to the five packing machines. Thus, the contents of only three tanks could be processed at any one time. Secondly, if there was not a relatively consistent mix of the eight different sizes in the supply of carrots fed into the commencement of the line, the operator of the plant would need to make adjustments in the production process to ensure continuity of supply to the weighing and packing machines. Thus, if North East Equity decided to process less than eight different sizes, more than one tank could be used to chill certain sizes. 338 It was up to North East Equity to determine the mix of sizes of carrots it fed into the new line. Thus, as a matter of commonsense, when Mr Tana and Mr Proud discussed the capacity of the new plant to process a number of tonnes per hour, each must have had understood that consistency of the size and quality carrots introduced at the commencement of the production process, affected the capacity of the plant to pack out particular numbers of carrots. And, a reasonable person in their position would have understood this. If the carrots were predominantly, as appeared to have been the case, small and small/medium, eight different lengths and grades would accumulate in the tanks at significantly differing rates. That would require the person controlling the production process to have a keen eye on how quickly the receiving tanks were filling up. Once more than one tank was full (there being a spare tank) it would be necessary to stop the input of the line so as to clear up to three of the full tanks by commencing the packing process. Thus, the selection of the sizes of carrots to be processed, using the girth and length graders would have a critical impact on how output would occur. 339 It was obvious to the parties, at the time of the contract, that Proud Machinery and Mr Proud had no control over the sizes of the carrots grown on the farms and delivered for processing. That input, and the selection of the grades for processing, were critical inputs beyond the control of Proud Machinery and Mr Proud. Both parties must have understood this at the time of the negotiations. The capacity or ability of the plant to grade and process carrots at a particular rate per hour was one thing. However, I do not think either party understood that what each of Proud Machinery and Mr Proud was being asked to do was to guarantee that, whatever the variety or combination of inputs in carrot size or length, there would or could be a minimum constancy of output. 340 There were only three conveyors to the five packing machines. Thus, only three tanks could be emptied at any one time. North East Equity had specified that there be only three tanks emptied to the three sets of grading tables in addition to the prepack line. The operation of the conveyors depended on what carrots were ready for processing from the chilling tanks. What went into the chilling tanks depended upon what had been delivered from the farms. If the produce delivered were relatively homogenous so that the chilling tanks would accumulate produce at a constant rate, then one might be able to infer that a constant output would be delivered. But, if the input from the farms were significantly varied, so that, say 50% of the carrots to be processed were of one kind and the rest were distributed unevenly over the other seven different possible grades, then it would be obvious that the rate of production per hour at the packing machines would be affected. The predominant carrots would fill up the one or two tanks to which they could be sent at a far quicker rate than the other seven varieties which would occupy the remaining seven chilling tanks. 341 This reinforces the commonsense of Mr Webster's memorandum to Mr Tana of 1 August 2002, that it would be necessary to build up, in a split shift, a supply in the chilling tanks before the packing side of the line began operation. And this was also reflected in North East Equity's change to the specifications for tank No 1 in the fax of 14 October 2002. 342 North East Equity conflated the different capacities of the plant into a cognate specification. Thus, it claimed that Proud Machinery contracted to, or represented that it would, supply a plant which not only could perform each of the separate functions but could do all of them together, in effect, in any combination. This conflation was reflected in the instructions and assumptions which it gave to Mr Harris. I am of opinion that the conflation is unwarranted and does not reflect accurately what the parties discussed in 2002 or the terms of the contract and representations.

[26]

SUMMARY OF FINDINGS ON CONTRACTUAL TERMS PLEADED AND REPRESENTATIONS UNDER ss 52 AND 53(c) OF THE TRADE PRACTICES ACT 345 I summarise below the contractual terms and representations which I have found Proud Machinery made to North East Equity and my findings on them. In analysing whether the new line, as installed, conformed with the purposes and terms referred to in 66-(e) above, I have had regard to the implication that the new line would be reasonably fit for those purposes (Helicopter Sales 132 CLR at 4, 6, 8, 15: see [64]-[66] above). (1) Pack out rate per hour I have not found that terms or representations were made exactly corresponding to those pleaded and set out at 66 and 67 above. Rather I have found (at [87] above) that, at the time of entry into the contract, the processing capacity was contained in a term and representation that: the new line would have the capacity to process and pack at a rate of production per operating hour of 18.75 tonnes final pack out on the pallet (later reduced to 17.55 tonnes). For the reasons given above, I am not satisfied that this was incorrect or misleading or deceptive. The new line had that capacity. And, by operating a split shift, the new line had the capacity to achieve a pack out in excess of 150 or, later (after the handline was deleted), 140.4 tonnes in eight working hours. (2) Temperature I have found that terms and representations were made which corresponded to those pleaded and set out at 66, (c) and 67 and 102 and (v), namely that the new line would, first, be designed so as to be reasonably fit to achieve: (b) the ability to process farm fresh carrots at field temperatures; (c) the core temperature of packed carrots to be not more than 5°C; and secondly, (h) achieve a guaranteed maximum of 5°C core temperature for North East Equity's carrots; (iii) have hydro-cooling tanks capable of producing constant product output; and (v) be capable of controlling the temperature of the carrots. I have found that I am not satisfied that the new line did not have these capacities if operated correctly. (3) Grading I have found terms and representations were made that corresponded to those pleaded and set out at 66 and [102] (ii) and (iv), namely that the new line would, first, be designed so as to be reasonably fit to achieve: (d) the ability to sort and grade carrots into eight distinct streams of size and length grades; and secondly, (ii) have nine hydro-cooling tanks which would allow one of those tanks for each length or size grade and provide the opportunity to have a spare tank; and (iv) provide quality length sizing for three separate lengths. I have found that I am not satisfied that the length graders (there being no complaint about the width or girth graders) were not reasonably fit for the purpose of providing quality length sizing in accordance with what both parties understood were their inherent limitations. I am not satisfied that the new line was not reasonably fit for the purpose of having the ability to sort and grade carrots into eight different streams of length and size. I am satisfied that the hydro cooling tanks conformed with representation (ii). (4) Efficiency I have found that terms and representations were made that corresponded to those pleaded and set out at 66 and 102, namely that the new line would first, be designed so as to be reasonably fit to: (e) achieve an increase in efficiency of labour usage compared to the existing Sumich line; and secondly, (vii) increase production while reducing the man hours required to achieve that production compared to the existing at the Wattleup plant line. I am satisfied that these were correct. As Mr Tana admitted in the meeting of 18 November 2003, labour costs per carton had reduced by 25% or more. (5) Reduction in damage to carrots I have found that a representation was made that corresponded to that pleaded and set out in 102 namely that the new line would greatly reduce damage to carrots and wastage. I am not satisfied that this was incorrect, misleading or deceptive. In any event there were no records of waste or damage to carrots so as to enable any finding to be made as to the position before or after the new line was installed. And, the quality of carrots delivered for processing after the new line was installed was very different from, and worse than, their earlier quality. North East Equity has not established that this representation was not met. 346 North East Equity also pleaded that the representations were made by Proud Machinery and Mr Proud: (a) as to the performance characteristics, uses or benefits of the new line and because they were incorrect there were contraventions of s 53(c) of the Trade Practices Act; (b) as to future matters, thus engaging s 51A of the Trade Practices Act. On the findings I have made, it is not necessary to consider these claims.

[27]

DID NORTH EAST EQUITY HAVE TITLE TO SUE FOR DAMAGES FOR BREACH OF CONTRACT? 347 Proud Machinery and Mr Proud argued that the contractual measure of damages was not appropriate or available to North East Equity because it had assigned all of its contractual rights to the Bank of Western Australia Ltd in November 2002. North East Equity had entered a master lease agreement with the bank in August 2002. The master lease agreement contemplated that in the future North East Equity would seek to lease goods from the bank and set out the general terms which would apply once goods were nominated and acquired by North East Equity. On 19 November 2002 the bank and North East Equity sent to Proud Machinery a 'novation notice to and acknowledgment from supplier'. This recited that North East Equity had: (1) 'novate[d]' to the bank all of its rights under the contract that it had with Proud Machinery relating to the construction of the new line under which the bank would receive title to it and become its owner (cl 1); (2) 'assign[ed] to [the bank] the [new line] and all of its rights in relation to the [new line]' (cl 2). 348 The notice recited that, by Proud Machinery accepting it, the bank was not obliged to pay Proud Machinery, and North East Equity remained liable for any payments due, but once the payments were made, the bank '… will acquire title to the [new line] as it is constructed and will be the sole owner of the [new line], whether or not [North East Equity] makes any payments under the Contract' (cll (a) and (b)). 349 Proud Machinery executed its acknowledgment and agreement to the terms in the notice on 3 December 2002 and recorded that it agreed to the terms of the novated contract. Subsequently on 16 December 2002 North East Equity and the bank executed a construction purchase and lease agreement for the new line. This recited that North East Equity had entered into a contract with Proud Machinery for the construction of the new line, and the contract (presumably meaning the notice signed by Proud Machinery on 3 December 2002) provided for title to the new line to pass progressively upon payment by the bank. 350 North East Equity argued that the assignment to the bank of the new line '… and all of its rights in relation to the [new line]' was not an assignment of its rights under the contract between it and Proud Machinery. 351 The right to sue for breach of the contract to supply work and materials (and equally, for the sale of goods) because the new line did not meet the standard set by contractual terms must be a right 'in relation to' the new line. It would be a very odd result if the bank, as the owner of the new line, could not sue Proud Machinery under this assignment for breach of the contract to sell or supply the work and materials, if, for example, the new line as installed, was incapable of packing even one carrot. 352 North East Equity argued that the assignment was only of its interest and proprietary rights in the new line. But it did not suggest why the rights which the assignment gave the bank were limited to ones arising outside of the contract between North East Equity and Proud Machinery. The contract was then executory and had not been breached in late 2002. 353 In addition, s 20 of the Property Law Act 1969 (WA) provided: '20. Assignment of debts and choses in action (1) Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee, or other person from whom the assignor would have been entitled to receive or claim that debt or chose in action, is effectual in law (subject to equities having priority over the right of the assignee), to pass and transfer from the date of the notice - (a) the legal right to that debt or chose in action; (b) all legal and other remedies for the debt or chose in action; and (c) the power to give a good discharge for the debt or chose in action, without the concurrence of the assignor. (2) Where the debtor, trustee, or other person liable in respect of the debt or chose in action referred to in subsection (1) has notice - (a) that the assignment so referred to is disputed by the assignor, or any person claiming under him; or (b) of any other opposing or conflicting claims, to the debt or chose in action, he may, if he thinks fit, either call upon the persons making claim thereto to interplead concerning the debt or chose in action, or pay the debt or other chose in action into court, under the provisions of the Trustees Act 1962. (3) For the purposes of this section "any debt or other legal chose in action" includes a part of any debt or other legal chose in action.' 354 That section is derived from s 25(6) of the Judicature Act 1873 (UK): see Meagher Gummow and Lehane's Equity: Doctrines & Remedies (4th ed, Butterworths, 2002) [6-030], where at [6-480] the learned authors referred to the decision of Lord Alverstone CJ, Darling and Channell JJ in Torkington v Magee [1902] 2 KB 427 as an instance of a valid assignment of a chose in action. In Torkington [1902] 2 KB at 431-432 the Divisional Court held that an assignment of the benefit of an executory contract, of which there was no breach at the time, was validly made under the analogue of s 20. Their Lordships held that the right to sue for damages for a later breach by the obligor could be exercised directly by the assignee without suing in the assignor's name: Torkington [1902] 2 KB at 432. 355 As a matter of ordinary English, the assignment by North East Equity of 'all of its rights in relation to' the new line was plenary. The expression 'in relation to' is of wide and general import (cp its width when used in a statute: Fountain v Alexander (1982) 150 CLR 615 at 629 per Mason J). And, in Loxton v Moir (1914) 18 CLR 360 at 379 Rich J said: 'The phrase "chose in action" is used in different senses, but its primary sense is that of a right enforceable by an action. It may also be used to describe the right of action itself, when considered as part of the property of the person entitled to sue. A right to sue for a sum of money is a chose in action, and it is a proprietary right.' 356 I am of opinion that the chose in action, being the entitlement to sue the vendor of the new line for breach of contract, was intended to be assigned by the language of the notice of 3 December 2002, to which North East Equity, Proud Nominees and the bank were parties. 357 Next, North East Equity relied on cl 1.15(g) of the construction purchase and lease agreement it entered into with the bank on 16 December 2002. That provided that North East Equity, at its own expense, would take any action required by the bank '… in order to enforce performance of the contract by the supplier or to protect our interest in the goods'. North East Equity argued that this contemplated that it would retain its rights under the contract including the right to sue for breach. I reject that argument. 358 First, the assignment occurred and Proud Machinery became party to the notice some 13 days before the construction purchase and lease agreement was made. The latter agreement cannot affect the construction of the earlier notice which had an additional party, Proud Machinery. 359 Secondly, in any event cl 1.15(g) was consistent with the plenary construction of the earlier assignment. It provided for North East Equity, as assignor, to make its name available, were that necessary, to enforce performance of the contract. That would only be where rights had not been passed to the bank by the earlier assignment. Since the bank was paying for the purchase and installation of the new line, it is not apparent, as a matter of commercial commonsense why it would leave causes of action for breach of contract by the vendor in the hands of the bank's customer. The bank would be conscious of the risk to it of its customer (North East Equity) becoming insolvent. If that occurred, the bank would have purchased, and would own the new line, but could only prove in its customer's insolvency for the damages needed to bring the new line into conformity with the contract. That would work commercial inconvenience and is not a commercially sensible construction in absence of clear words: Zhu v Treasurer of NSW (2004) 218 CLR 530 at 559 [82] per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ. 360 Thirdly, cl 1.15(g) protected the interests of the bank where, for some legal or other reason, it could not sue (e.g. in respect of a claim for unliquidated damages which accrued before the assignment). Fourthly, the protection of the bank's interest in the goods referred to in cl 1.15(g) is not a right of North East Equity 'in relation to' the new line as contemplated in the notice; it is a distinct right of the bank. 361 North East Equity also argued that the assignment was of a bare right to damages. It was not; the assignment was of a legal chose in action for the reasons I have given. 362 In Beaton v Moore Acceptance Corporation Pty Ltd (1959) 104 CLR 107, Dixon CJ, Taylor and Windeyer JJ considered a case involving a purchaser who had entered into a contract with a vendor for the sale of goods, being a bulldozer. Before that contract was completed, the purchaser entered into a hire purchase contract with a financier, and the financier in turn entered into a contract with the original vendor to acquire the bulldozer from it so as to make it available to the purchaser. The bulldozer was defective when delivered to the purchaser. Dixon CJ, Taylor and Windeyer JJ said that the purchaser's claim against the original vendor was for breach of a contract '… which, by common consent, was superseded by the hire purchase agreement in question and which, therefore, was never carried into effect': Beaton 104 CLR at 118; see too Hellyer Drilling Co v MacDonald Hamilton & Co Pty Ltd (1983) 51 ALR 177 at 181 per Fitzgerald J. 363 North East Equity relied on TC Industrial Plant Pty Ltd v Robert's Queensland Pty Ltd (1963) 180 CLR 130 where a purchaser under a hire purchase agreement was held to be entitled to recover damages for breach of contract against both the vendor of the equipment and the financier who let it on hire purchase. However, the reason for this was that such a right was expressly created by s 7A(1) of the Hire-purchase Agreement Acts 1933-1946 (Qld): see TC Industrial 180 CLR at 136 where the relevant section is set out. 364 Rights to sue for the tort of negligent misrepresentation (Poulton v The Commonwealth (1953) 89 CLR 540 at 602 per Williams, Webb and Kitto JJ) and for loss or damage under s 82 of the Trade Practices Act in respect of a contravention of s 52 are not assignable: Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 236 ALR 720 at 732-734 [51]-[57] per myself; BHP Coal Pty Ltd v O & K Orenstein & Koppel AG [2008] QSC 141 at [76] per McMurdo J. Those rights remained with North East Equity. 365 The assignment was made as a contract. Each of North East Equity and Proud Machinery agreed with the bank in December 2002 that all North East Equity's rights in relation to the new line would be either assigned by it to, or taken as being enforceable directly by, the bank. Under that agreement, North East Equity's contractual rights against Proud Machinery passed to the bank in accordance with, or were superseded by, the terms of the notice executed by Proud Machinery on 3 December 2002: Beaton 104 CLR at 118. Accordingly, I am of opinion that North East Equity had no title to sue Proud Machinery for breach of contract.

[28]

THE CLAIM IN NEGLIGENCE 366 North East Equity pleaded that Proud Machinery and Mr Proud owed it a duty '… in designing, procuring and installing the [n]ew [l]ine to exercise reasonable care and skill so as to avoid [North East Equity] suffering loss and damage by any act or omission on the part of [Mr] Proud or Proud Machinery'. I have found that Proud Machinery and Mr Proud did not design the new line. 367 Nonetheless the contract contained an implied promise that Proud Machinery would exercise reasonable care and skill in the performance of its services, including the selection of goods or work and materials that were reasonably fit for the purposes for which North East Equity had (expressly or by implication) indicated they were required: Astley v Austrust Ltd (1999) 197 CLR 1 at 21-22 [46]-[47] per Gleeson CJ, McHugh, Gummow and Hayne JJ; Helicopter Sales 132 CLR 1. 368 In the relationship between North East Equity and Proud Machinery, that implied promise was parallel and concurrent with a co-extensive duty in tort on the part of Proud Machinery and Mr Proud to exercise the same reasonable skill and care: Astley 197 CLR at 23 [46]-[48] per Gleeson CJ, McHugh, Gummow and Hayne JJ. 369 The pleading of Proud Machinery's and Mr Proud's alleged negligence and the way in which North East Equity argued this claim reflected, in substance, its complaints of failures in the design, procurement and installation of the new line, which gave rise to the shortcomings in its operation as installed. The duty of care in this matter arose because and in the context of the contractual relationship. Proud Machinery had parallel and concurrent obligations in tort and contract to exercise reasonable care and skill in performing professional tasks owed to North East Equity under the contract. Mr Proud had a parallel and congruent obligation in tort: Astley 197 CLR at 23 [48]. There is no circumstance pleaded in the present case which would justify extending those obligations in tort beyond a parallel and concurrent liability of Proud Machinery and Mr Proud, co-extensive with the contractual obligations of Proud Machinery to exercise reasonable skill and care. 370 The contract was negotiated at arms length between two experienced and capable business people, Mr Tana and Mr Proud. Its express and implied terms reflected the commercial relationship agreed on by the parties for the procurement and installation of the new line. That relationship is a commonplace in commerce; a vendor who is the distributor of plant and equipment and a purchaser who, after negotiating with the vendor, agrees on terms for the purchase and installation of the equipment. The common law and statutory obligations (such as in Part V of the Trade Practices Act and the Sales of Goods Act) which govern such a relationship do not need extension or modification on the facts of this matter or merely because one party was unhappy, after the event, with the result arrived at by the performance of the contract. 371 On the basis of my findings in respect of the contractual terms and representations, the claim in negligence, must also fail.

29.2 The flume elevators 373 The agreement reached in the meeting on 18 November 2003 recognised that the flume elevators were not operating to the standard which they ought to have achieved. I am of opinion that, as Mr Proud admitted, the problem with the flumes was never remedied. Bruynooghe quoted €51,000 plus freight to replace them with a system that Mr Tana would have accepted, if he had not had to pay for this, as he explained in his letter to Mr Proud of 8 January 2004. This price provides a reliable measure of the quantum of damages required to put North East Equity in the position that it would have been in, had the flume elevators not been defective. True it is that the original flume elevators worked, albeit not as well as they should have, and were retained. Mr Tana gave evidence that North East Equity's packaging operations were to be conducted from the Lancelin farm pack house from late October 2007, with the exception of the prepack line of 10 kg cartons for small/medium carrots. 374 The problems with the flume elevators caused them to stop sometimes, which held up production for brief periods. On other occasions, carrots fell off the flume elevators, particularly in the first few months. These occasions caused disruption and irritation to North East Equity. There was no precise evidence of how long or how often these delays occurred, but I am satisfied that they were more than trivial. North East Equity, however, did not prove that it had to pay staff overtime or otherwise suffered financial loss on any particular occasion because of delays caused by the flume elevators. There is no evidence that, even though production was interrupted, it was not completed during ordinary working hours. 375 Moreover, while Mr Tana no doubt was annoyed by being asked to pay for the replacement flumes, had he done so by early 2004, when it was clear that Proud Machinery and Bruynooghe would not, this problem would have been resolved. I am not persuaded that it was reasonable for North East Equity not to have replaced them by June 2004 if there were production difficulties of any substance caused by the flume elevators: Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 at 658 per Gibbs CJ, at 668 per Wilson, Deane and Dawson JJ, at 673-674 per Brennan J. Accordingly, I am of opinion that the general damages for this problem should be awarded only for the period to June 2004 when the new flumes should have been installed, had a decision to replace them been made within a reasonable time. 376 It was not reasonably foreseeable, at the time the contract was entered into, that North East Equity would continue to operate a defective flume system which disrupted its business by affecting the orderly and efficient operation of the new line. Any damage it suffered beyond the time when what needed to be done became clear and that Proud Machinery would not replace the flume elevators, was not within the reasonable contemplation of the parties as flowing from the breach: Burns 161 CLR at 668 per Wilson, Deane and Dawson JJ. 377 I am of opinion that the cost of replacing the flume elevators was €51,000. There is no evidence of the freight or installation costs but, doing the best I can from reviewing the general costs of installing the new line I consider that an allowance of €9,000 should be made, making a total of €60,000.

29.4 The 5°C requirement 381 As I have found, I am not satisfied that North East Equity has established that, if the new line were competently operated, it could not achieve an outcome of 17.55 tonnes per operating hour at final pack out, with a maximum of 18% rejects, and with carrots at no more than 5°C. 382 There was no evidence of any loss of sales or other economic loss suffered by North East Equity, including any claim relating to carrots being packed at a core temperature greater than 5°C. If I were wrong in my finding that no breach has been established of the contractual terms and representations that the core temperature of carrots would not exceed 5°C, then the question of quantification of North East Equity's damages for this breach would arise. 383 The situation has some similarity to assessing damages where building work is defective. Recently, Finkelstein and Gordon JJ said that, speaking generally in cases of work done or not done, or damage caused to property in breach of contract, there are two bases for assessing damages: first, the cost of reinstatement, or secondly, the diminution of the value of the property due to the breach. They held that the correct measure is '… whatever is reasonable for the wronged party to recover': Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (2008) 166 FCR 494 at 503 [29]. I examined the authorities and concluded that the principle applicable based on Bellgrove v Eldridge (1954) 90 CLR 613 was (Bowen Investments 166 FCR at 524 [98]): '… that the building owner was entitled to recover the cost of rectification provided that the rectification proposed was both necessary, to bring about conformity with the contract, and a reasonable course to adopt. "Reasonableness", in that context, can be seen to be what the owner could require having regard to the terms of the contract and the nature of the departure from them in the performance proffered by the other party. That is, of course, a factual enquiry.' 384 The new line was a working asset used by North East Equity in its business from March 2003 to at least October 2007. On the hypothesis that I ought to have found that the new line was defective because it did not always pack out carrots with a core temperature of 5°C or less, such an event had no pecuniary consequence. And, the carrots were still packed chilled but perhaps not as low as exactly 5°C or less. The performance offered by the new line as installed was not productive of any relevant determent to North East Equity. It saw no need to reinstate, supplement or replace the refrigeration system. And it suffered no commercial detriment as a result. I am of opinion that North East Equity has not established that the cost of bringing the new line into conformity with the contractual term or representation relating to the 5°C requirement would be reasonable to award as damages: see Bowen Investments 166 FCR at 503 [29], 522 [93].

29.5 Damages on a 'no transaction' basis 385 In final address, counsel for North East Equity suggested that its reliance damages should be calculated on the basis set out below. It argued that it would not have entered into the contract and subsequent lease agreement with the bank, had it not acted in reliance on Proud Machinery's and Mr Proud's misleading representations, or if they had not been negligent. North East Equity's methodology used a number of approximations in claiming that it had suffered a loss of $1,300,000. In the calculations below, I have attempted to remove those approximations so that the result, using North East Equity's methodology, can be compared with other calculations, which I explain below. (Negative values are in parenthesis) Exact calculation North East Equity's approximation in its submissions (a) Total cost to North East Equity of new line $ (4,328,230) $ (4,328,230) (Based on North East Equity making all lease payments to the bank for 5 years to 30 May 2008. This figure was agreed by the parties.) (b) Add the current value of the new line $ 960,000 $ 1,000,000 (Based on Mr Gregson's evidence that at May 2007 the new line had an auction value of between $640,000 to $960,000.) (c) Add North East Equity's savings on labour costs: $ 1,987,200 $ 2,000,000 · based on a period of 4 years; · assuming savings per carton reduced by 30˘ to 90˘ per carton for 1,955,000 cartons p.a. (based on Mr Langridge's analysis that 23,000,000 kg p.a. were produced); · 0.30 x 1,955,000 = $586,500 p.a. labour savings; · subtract from this figure additional power costs of $89,700 p.a. that North East Equity claimed were incurred; · net saving of $586,500 - $89,700 = $496,800 p.a. (approximated by North East Equity to a net saving of $500,000 p.a.), or a total net saving of $1,987,200 (approximately $2 million) over 4 years. (e) Net expenditure by North East Equity $ (1,381,030) $ (1,328,230) approx $1.3 million

388 If such a small loss were incurred, it would not accord with commonsense for North East Equity not to have gone ahead with acquiring the new line. In assessing what Mr Tana (as the controlling mind of North East Equity) would have done, it is important to exclude from consideration the subsequent impacts of the fall in the market and the production problems with the farms. Mr Tana was optimistic in 2002 that demand for carrots would increase, so that the labour savings he expected would have been greater, the more carrots were processed. A reasonable business person in the position of Mr Tana and, I infer he too, would have replaced the inefficient old plant with the more efficient new line which gave the actual savings referred to above with the prospect of even greater ones in light of the expectation of greater demand and the significant reduction in future labour costs: Gull v Saunders & Stuart (1913) 17 CLR 82 at 89 per Barton ACJ, Gavan Duffy and Rich JJ approving British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways of London Co Ltd [1912] AC 673: cf at 689-691 per Viscount Haldane LC esp at 691 where the Lord Chancellor referred to replacing obsolete machines with up to date ones. 389 There is a further difficulty with North East Equity's analysis because it relied, as the value of the new line, on the figure of $960,000 given by Jonathan Gregson. Mr Gregson had no formal qualifications as a valuer, but was a very experienced auctioneer. He had no experience in selling equipment of the kind in new line, other than selling other equipment belonging to North East Equity. First, Mr Gregson gave that figure in respect of the new line as at May 2007, not at the time of its acquisition or installation four years earlier. The figure affords no proper basis on which to compare the amount paid in early 2003 with the true value at that time of what was acquired: HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 at 656-659 [34]-[40] per Gleeson CJ, McHugh, Gummow, Kirby and Heydon JJ. Secondly, Mr Gregson was not able to offer an opinion in his expert report on the new line's value when it was acquired, saying only that this assessment was 'difficult'. He had tried to enquire of Mr Proud and Bruynooghe about a value which he could consider for his report, but desisted after he learned of their involvement in the proceedings. Nor did another equipment dealer of whom he enquired give him any assistance in placing a value on the new line. 390 Here, the subsequent fall in the carrot market may have been an independent or extrinsic cause affecting Mr Gregson's perception in 2007 of what the new line might then realise at auction based on his experience with selling North East Equity's equipment subsequent to early 2003: HTW Valuers 217 CLR at 659 [40]. If the market for carrots were higher, rather than lower, a processing plant offering substantial savings in labour costs would be likely to be more attractive to potential purchasers. Instead, by 2007 the market falls had driven some of North East Equity's competitors out of business. 391 This analysis shows that, even if North East Equity had proved that Proud Machinery and/or Mr Proud had contravened ss 52 and or 53(c) of the Trade Practices Act and/or been negligent in one, or even all, of the respects it had alleged, it would not have established that the contravention(s) or breach(es) of duty had caused it to suffer any loss or damage. This is because, first, there is no evidence that the new line, as installed, was worth less than was paid for it (except, perhaps the €60,000 I have found it would have cost to replace the flume elevators and $10,000 for the disruption caused) and, secondly, even if it were, that difference was greater than the savings North East Equity achieved by operating the new line. 392 I do not accept that Mr Gregson's appraisal of the auction price realisable for the new line in May 2007 provides any reasonable basis on which to arrive at its value in March 2003 when it was brand new. A willing but not anxious purchaser, and a willing but not anxious vendor, would agree on a different and substantially higher price for brand new plant and equipment than for plant and equipment which had been used to process about four years worth of production at the levels shown on the evidence. The wear and tear of four years' use would create a substantial difference between the value when new (even if it were less than the price paid to Proud Machinery) and the value of the plant and equipment as seen by Mr Gregson. 393 If the new line, in March 2003, were worth even half of the price payable to Proud Machinery of $3,000,000 (excluding the sum due to Steventon Lodge) then, using North East Equity's methodology for assessing its damages, it would not have suffered any loss: (a) Total cost to North East Equity of new line $ (4,328,230) (b) Add the current value of the new line $ 1,500,000 (Assuming equal to half of price payable to Proud Machinery.) (c) Add back North East Equity's savings on labour costs: $ 2,875,000 · based on a period of 5 years; · assuming savings per carton reduced by 34˘ to 86˘ per carton, resulting in labour savings of $664,700 p.a. as shown above; · subtract from this figure additional power costs of $89,700 p.a. that North East Equity claimed were incurred; · net saving of $664,700 - $89,700 = $575,000 p.a. or a total of $2,875,000 over 5 years (d) Net gain by North East Equity $ 46,770

North East Equity Pty Ltd v Proud Nominees Pty Ltd

At a glance

Court

Decision date

Before

Source

Judgment (99 paragraphs)

Parties

Legislation Cited (4)

Cases Cited (28)

Cited By (6)