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.