Plaintiff v Defendant

Supreme Court of Victoria|2012-06-28|Before: ROBSON J

CONTRACT - Preliminary questions - Agreement to build a recycling waste recycling plant - Dispute as to terms - Determination of contractual terms - Whether implied terms of merchantable quality in respect of machinery manufactured to the purchaser's design - Determination of alleged misleading representations.

QUANTUM MERUIT - Claim where contract also pleaded - Whether open to make quantum meruit claim.

For the plaintiff and the defendants to counterclaim

For the defendant and the plaintiff to the counterclaim

**1 This case arises out of the construction of a waste recycling plant at Coolaroo, north of Melbourne. The plant separated recyclable household waste into its components, such as glass, paper and metal cans. The plant was owned and operated by the defendant, SKM. It has since burnt down.

2 SKM operated a waste recycling plant in Thornbury. SKM was conducted by Mr Joe Italiano and his two sons, Robert and Anthony Italiano. In 2003, SKM had succeeded in obtaining from the City of Burandoora a significant contract for the recycling of domestic recyclable waste. SKM did not have sufficient capacity at its Thornbury plant to recycle this waste. To fulfil that contract, SKM acquired the site at Coolaroo to build and operate a recycling plant.

3 The plaintiff, ICA, carries on business manufacturing and installing conveying platforms. ICA has a manufacturing plant in Bendigo, which is managed by Mr Donald Erskine. The company is owned by Mr Erskine and his staff. ICA is one of the largest manufacturers of conveying systems in Australia and has supplied conveyors to customers such as mining companies, tobacco businesses and Coca Cola.

4 In 2003, SKM retained ICA to manufacture and install conveyors and other components of the recycling plant at Coolaroo. The recycling plant at Coolaroo was made up of conveying platforms and systems and other equipment that separates the recyclable products. The conveying platforms and systems constitute a significant part of the recycling plant.

5 Between September 2003 and 2006, under various separate contracts, ICA supplied and installed conveying platforms and other plant and equipment at the Coolaroo plant.

6 In May 2007, ICA instituted proceedings against SKM in the Magistrates' Court at Bendigo for $52,392.64 said to be owing in relation to work on what is called in that proceeding the C2 incline elevator. SKM disputed the debt and counterclaimed for some $3,955,627.08, alleging breach of contract by ICA, and also alleging misleading and deceptive conduct by ICA in breach of s 52 of the Trade Practices Act 1974. The matter was uplifted to the Supreme Court of Victoria. There, ICA amended its claim to seek $820,117.20 as debts owing.

7 The claims and counterclaims in this matter are extensive. SKM claims that in the order of fifty contractual terms have been breached. ICA in turn claims moneys due under many different invoices. Multiple court books have been filed and expert witness reports tendered. The technical issues in the matter are not simple. The parties estimated the matter would run ten days, a less than reasonable estimate. It soon became apparent to me that to properly hear the matter considerably more than ten days would be required. I considered that it might be more expeditious to resolve the multiple contractual issues as preliminary questions. I made Orders accordingly, included as annexure 1 to this judgment.

8 One of the main contractual issues between the parties is whether ICA was retained to design the recycling plant and whether ICA agreed to achieve certain performance characteristics of the plant as a whole. That is, whether ICA agreed with SKM to design and build a plant that could achieve a certain quantity and rate of output. SKM claims ICA was under a contractual obligation to do so. ICA deny that claim and says that it was only retained to build certain items of plant to be installed in a plant designed by SKM.

9 In summary, I have upheld the contracts relied on by ICA to make out its claims against SKM. I have not found that ICA was retained to design the plant, nor that it had agreed to design and construct it to achieve the output claimed by SKM. Due to the large number of contractual issues I have been asked to decide, it is not possible to include a summary of them all here. I refer to them in detail below.**

10 The trial of the preliminary issues took place over thirteen days. The court book comprised five folders. The following persons gave evidence.

**11 (a) Donald James Erskine, managing director of ICA.[1]

(b) Shane Byleveld, project manager employed by ICA since 1998.[2]

(c) Clinton Robert Miller, from 1 May 2001 to 9 February 2007 contracted by ICA as a design draftsman: witness statement of 20 June 2011.[3]

(d) Jason Mathew Downing, since 2003 employed by ICA as an electrical design engineer.[4]

(e) Shane David Normoyle, from 1996 to 2003 worked with ICA as an A Grade Electrician and 2003 to 2008 as a Site Installation Electrician.[5]

(f) Rodney Baldock, employed by ICA as general supervisor from 1997 to 2004, in 2004 promoted to production planning, sales and general administration of a division of ICA.[6]

(g) Bruce Robert Granger, general manager of ICA, at time of ICA work in 2003-2006 held position of Senior Project Manager.[7]**

**12 (a) Robert Italiano, in the period relevant to the dispute held the position of administration and business manager of SKM.[8]

(b) Anthony Italiano, in the period relevant to the dispute ensured the plant was operating and maintained the plant.[9]

(c) Richard Collins, employed by ICA between 1997 and 2010, started as a boilermaker, promoted to a leading hand and then to supervisor.[10]

(d) Anthony Ian Metcalf, employed by ICA from 1993 to 2010 as a boiler maker.[11]**

(a) ICA's amended statement of claim of 21 December 2009[12] (ICA claim);

(b) SKM amended defence of 5 March 2010 to ICA ASC[13] (SKM defence);

(d) ICA defence of 19 February 2010 to SKM FACC[15] (ICA defence);

(e) Erskine defence of 19 February 2010 to SKM FACC[16] (Erskine defence).

14 There are also further and better particulars of various pleadings.**

(a) ICA's outline of closing submissions of 4 November 2011;[17]

(b) ICA's summary of final submissions of 8 November 2011.

(a) SKM outline of submissions, including: [18]

(i) Summary of legal issues to be determined SKM counterclaim;

**17 SKM is a family owned company under the control of Mr Joe Italiano. He is assisted in his business by his two sons Mr Roberto Italiano and Mr Anthony Italiano. Robert attends to financial and business matters. Anthony attends to mechanical and technical matters. The company carries on business separating recyclable waste into its component parts. The recyclable waste is essentially obtained from household bins provided to each home by local councils.

18 Recyclable waste generally consists of co-mingled glass and plastic bottles, aluminium and metal cans, cardboard and paper. The plant that carries out the separating is called a recycling plant. SKM owned and operated such a plant in Thornbury.

19 Some time prior to May 2003, SKM obtained a new contract to process recyclable waste. In order to process this waste, SKM decided it needed a new recycling plant. A site was found at Coolaroo, north of Melbourne. The site had an existing building into which the new plant would be installed.

20 Generally speaking, the plant functioned by putting the co-mingled recyclable waste on a series of conveyors. At various stages along the series of conveyors types of waste were removed by hand, or by some sort of machinery. The recyclable waste also contains non-recyclable products such as household rubbish including items such as old prams and toys. In the plant to be built at Coolaroo non-recyclable waste was to be removed by hand as it travelled along a conveyor. Other recyclable waste such as tin cans would be removed by the conveyor passing under a magnet that attracted the cans. As the co-mingled waste travelled along a series of conveyors it would be further separated and placed in bins or such like.**

**21 Before turning to the contract issues between the parties, it is useful to describe the Coolaroo project in a little more detail. I propose to use the description provided by Mr Erskine,[19] with reference to contemporaneous documents, as I have no reason to doubt what they record.

22 ICA was retained to manufacture and install conveyors and other components of the Coolaroo plant. The Coolaroo project was divided into stages. SKM specified and supplied all the sorting equipment and a number of other items incorporated into the plant. As a general observation, ICA supplied and installed most, but not all, of the conveyors and platforms, and SKM supplied the equipment which performed the role of sorting and separating the co-mingled product into its different types, and the balers (which were located at the end of the different product lines and would compact material after it had been separated). ICA also built the disc screens that separated paper from the co-mingled product.**

**23 Although I am addressing contractual issues, it is necessary to provide some detail of the equipment used in the plant including the conveyors supplied by ICA. A conveyor consists of the following essential components:

(a) a moving belt of any width or length which rotates around two ends, often referred to as the head drum (or pulley) and the tail drum; and

(b) a motor/gearbox which drives/rotates the head drum which, in turn, drives the belt.

24 The tail drum is usually adjustable to provide the appropriate amount of tension on the belt to create friction on the head drum.

25 The motors that ICA supply for the conveyors are electric. They range in size (motor horse power) depending on requirements. The motor is connected to a motor control station (switchboard) and mains power. The motor control station has motor overload protection which is adjustable, depending on motor power.

26 Belts are made of various types of materials. For the Coolaroo project, most belts were made from rubber with a polyester type carcase. The belts require replacement periodically.

27 On its return from the head drum, the belt is carried on a number of support rollers, which are often approximately 50mm in diameter, and are spaced at varying intervals to support the belt on its return to the tail drum. For heavy duty applications, a chain-guided belt using sprockets to transmit torque/pull to the belt might be used instead of pulleys. Only one of these was used in the SKM project.

28 To operate properly, a belt must 'track' in a straight line continuously. A belt can 'track off' the head drum if the conveyor pulleys are incorrectly adjusted or go out of alignment. In poorly maintained situations, produce can build up on rollers and cause the belt to run off line. Tracking can be adjusted by:

29 Conveyors can be flat or inclined, depending on the position of the head and tail drum. Inclined conveyors often have a cleated belt for elevating (carrying) materials.

30 Belts can be flat or can be troughed, depending on the type of material and process requirements. Flat belt conveyors usually have skirts which provide a seal between the vertical side guard and the belt. These need to be regularly checked, adjusted and maintained to prevent spillage and leaking of material. Troughed conveyors usually do not have side guards.

31 When adjusted correctly, scrapers remove material that has stuck to the belt in order to prevent a build-up of foreign matter which can affect belt tracking, which in turn can damage the belt. Scraper blades can be made of metal or plastic and are consumable items.

32 Conveyors will also have guards and safety barriers to stop personnel from being injured. They are usually located at a point where a person could be caught or injured by moving components.**

**33 Stage 1 involved the building of a material processing line to process recycled product other than paper and cardboard, i.e. plastics, glass, aluminium and steel cans. ICA performed the stage 1 works from August to mid-October 2003.

34 The design layout for the stage 1 works is set out in drawing number 24620 Revision 4.[20] Stage 1 used one in-feed line (process line). Product delivered by recycled waste collection vehicles was dumped onto the floor of the plant and would then be placed onto the in-feed line at the first conveyor (in-ground conveyor) by a tractor or front-end loader (i.e. manual input). The weight, volume and bulk density of the feed material was affected by the mix of product. SKM provided ICA with details of loads, volume and percentages of light product and heavy product on 1 July 2003[21] and 29 July 2003.[22]

35 Product placed onto the in-ground conveyor was then conveyed to an elevator conveyor that took the product up to a platform where a primary sorting of the product was to be done by four people stationed there (two on each side of the conveyor) whose job it was to remove foreign objects from the waste stream such as ropes, large items and general rubbish. Foreign objects were to be dropped into chutes. It was important that this primary sorting removed the majority of those foreign objects at this stage of the process because otherwise, if such objects continued down the line, it could reduce the efficiency of the later sorting processes.

36 After primary sorting, the product went under a magnetic conveyor (supplied by SKM) for the removal of ferrous metal objects. The metal objects, such as metal cans, dropped into a chute and then into a steel baler (i.e. a compactor). The steel baler was supplied by SKM.

37 The product then went onto a disc screen conveyor which removed fine material. From the disc screen conveyor, product went through the 'classifier' (supplied by SKM), which is a unit which removed light product (e.g. aluminium cans and plastic) from glass product (which is heavier).

38 The remaining product then passed over a bounce conveyor (supplied by SKM) to separate paper from the plastic product.[23] Plastic product then passed a quality control station, where any foreign product still remaining was manually removed from the plastic screen by hand. The plastic material was then delivered to a plastic baler unit (supplied by SKM).

39 The remaining heavy product was conveyed along a conveyor referred to as a glass sorting line where three types of glass (clear, green and brown) were manually separated and placed into chutes. Any remaining product continued on as general rubbish to a collection bin.**

40 For stage 1, ICA provided the individual conveyors and support structure (including platforms) to deliver product to the SKM-supplied sorting equipment. ICA supplied approximately 12 conveyors for stage 1, along with associated electrical equipment and controllers, safety equipment (such as emergency stop switches) and operating manuals. ICA did not supply equipment, such as classifiers, to actually sort product on the stage 1 line. The only handling equipment supplied was the individual conveyors to connect the SKM-supplied sorting equipment. The conveyor widths and locations were nominated by Robert Italiano in his email dated 28 July 2003.[24]

**41 The major sorting equipment supplied by SKM for stage 1 was:

(a) a magnetic separation conveyor to remove metal objects;

(b) the classifier unit referred to above to separate light product from heavy items, such as glass;

(d) a bounce conveyor for removing paper from plastic beverage waste; and

(e) a number of balers which compacted product at the end of a product line.

42 All other materials were removed by manual sorting personnel. These supplied items and personnel determined the quality and volume of product sorted.**

**43 Stage 2 of the project involved the processing of co-mingled product, for the removal of paper, cardboard and foreign objects, before the remaining product passed to stage 1 for further processing. This was called stages 2 and 3. For convenience I will refer to stages 2 and 3 as merely stage 2. Drawing 24622 dated 11 November 2003 shows the layout plans for stage 2.[25] Mr Erskine instructed ICA personnel to design the plant based on 30 tonne input to ensure there was enough capacity. ICA performed stage 2 works from November 2003 to early March 2004.

44 Mr Erskine explained the process performed by stage 2 in his witness statement as follows.[26] At the end of the incline belt, the product was then split into two lines by a moveable splitter (the moveable splitter allowed adjustment so that more or less product could be directed to each of the two sorting lines). The lines were split/duplicated so that a sufficient number of manual sorters could have physical access to the product to perform manual sorting.

45 In the first part of the line, ten sorters sorting per line (20 people) would manually remove general waste from the line and drop it down chutes, where it would be conveyed to a collection bin.

46 The remaining recyclable waste product then continued along and over a coarse disc screen which separated out newspaper and cardboard (which continued along the line). Plastic, glass, metal, aluminium and smaller paper items would fall through the first disc screen and drop onto a second fine disc screen which removed further paper items. Beverage products such as glass, plastic, aluminium and metal cans were then conveyed to a point where they could be manually re-inserted into the stage 1 system.

47 The product that passed over the coarse and fine disc screens, mostly paper and cardboard, would then be conveyed along two sorting lines, one above the other, with eight manual sorters on the upper deck and eight on the lower deck (16 people on each of the two lines) who would sort product to manually remove cardboard and any remaining foreign items that were mixed with the paper.

48 Paper product would then continue through and be combined from the two lines as mixed paper before entering the baling unit, which produced large bales of compressed paper. Originally, Robert Italiano's concept had been to separate paper into two grades, coarse and fine paper, but the system he designed and ordered joined two paper lines up to produce mixed paper, which was baled.**

**49 For stage 2, ICA supplied the following equipment:

(a) approximately 17 conveyors and support/platforms;

(b) the moveable splitter (which split the single line into two sorting lines referred to above);

(d) associated electrical equipment and controllers, safety equipment and maintenance/operations manuals.**

50 For stage 2, SKM supplied the paper baler and the design for the disc screens.

51 ICA contends that in addition to the stage 1 and stage 2 works, ICA performed the additional works that are the subject of its claim. These are discussed in detail below.

**52 In May 2003, SKM contacted ICA to provide conveyors for the new plant. The exact nature of what ICA was retained for is one of the main issues I need to resolve.

53 The parties agree that the first meeting between them was held at SKM's Thornbury office in May 2003. There is considerable dispute as to what transpired at this first meeting.

54 Subsequently, ICA was asked to provide a quotation for the supply of equipment for the plant. Again the exact nature of what ICA was requested to do is a matter in issue between the parties. There is no dispute, however, that the plant was to have two sections. One section was to separate out glass and plastic. It was called the bottle line. The second, was to separate out paper and cardboard. That was called the paper line. Ultimately, the plant was to operate with paper being separated out first before the feed travelled on to the bottle line. As events transpired, the sections were built in two stages. Stage one, the bottle line, was built first and then the paper line and connecting conveyor to stage one was built, this being stage 2.

55 The two main witnesses as to the negotiations between ICA and SKM are Mr Erskine and Robert Italiano. Their recollections of the negotiations differ considerably. For reasons that I explain below, I consider that Mr Erskine's recollections are the more reliable. I will, however, set out the substance of the evidence in chief of both Mr Erskine and Mr Robert Italiano.**

Mr Erskine's evidence on the formation of the stage 1 and stage 2 contracts

**56 Mr Erskine, in his witness statement, gave the following evidence of the initial contact with SKM and negotiations leading up to the contracts:

57 On or around 14 May 2003, Mr Erskine received a telephone call from Robert Italiano inquiring as to whether ICA made conveying equipment and whether ICA would be interested in tendering for a project requiring a number of conveyors. A meeting was organised.**

58 Mr Erskine attended SKM's premises in Thornbury on or about 17 May 2003 and met with Robert Italiano, Anthony Italiano and their father Joe Italiano. They discussed the equipment required for a recycling plant and ICA's ability to manufacture the conveying components for such a plant. Robert Italiano did most of the talking for SKM. Robert said that they had their design for the plant that they had in mind, that the design was being drafted, and that these drawings would be provided to ICA following their inspection of ICA's Bendigo facility. Joe Italiano told Mr Erskine that strict confidentiality had to be observed, to which Mr Erskine agreed. This meeting concluded on the basis that the Italianos would visit the ICA workshop in Bendigo to determine for themselves ICA's suitability to manufacture the equipment they required. There was no discussion with regard to location, volumes or type of product at this meeting.

**59 On 28 May 2003, Anthony, Robert and Joe Italiano attended ICA's premises at Howard Street, Epsom (Bendigo) at approximately 10.00 am. Following a full inspection of the manufacturing facilities, a meeting was convened in the ICA boardroom. Mr Bruce Granger (senior project manager) and Mr Clinton Miller (draftsman) from ICA attended this meeting.

60 Joe Italiano told ICA that SKM had won a major contract to process product that had been collected from the kerbside by, Mr Erskine believes, Cleanaway, for a northern suburbs municipality, and that SKM had sourced a green fill site, being the ex-Smorgon's steel premises at Maffra Street, Coolaroo.

61 Robert Italiano said that the design work, including the length and width of the conveyors, and their location, had been completed and that these conveyors were to form the interconnection for the delivery of product between the various processes. ICA was told that SKM would source and supply the various sorting components required for the plant. Mr Erskine does not recall being given any details about those components at this meeting.

62 Robert Italiano said that his idea was that SKM would manage the project and be responsible for the plant layout, the process control, the sorting equipment, the throughput of the recyclable product and the determination of manning levels. He said that SKM would prepare the detailed drawings of the individual conveyors, which ICA would then manufacture and install, along with the associated support structure, platforms and walkways, electrical control and wiring. Robert said that as he was responsible for the design, he would approve ICA's drawings. All the other equipment (i.e. sorting equipment), which was being provided by SKM, would be installed by SKM. Robert said that ICA would be provided with detailed layout drawings, showing elevations and locations, early the following week. Discussion also took place regarding the possibility of ICA providing extra drafting services to help speed up the project.**

**63 On Monday 2 June 2003, ICA received, via email, a number of drawings from Anthony Italiano. These drawings showed the main dimensions, including width, length and elevation of each conveyor, but were, according to Mr Erskine, no where near comprehensive enough to allow ICA to quote for the manufacture of the individual conveyors.

64 The next morning, on 3 June 2003, Mr Erskine telephoned Anthony and expressed his concern that there was not enough information in the drawings he had provided for ICA to give a quotation. Mr Erskine was told that further drawings would be sent to ICA once they had been received from SKM's drafting service. A second batch of drawings was received by ICA on Wednesday 4 June 2003.[27]

65 The additional drawings provided by SKM were very sketchy and did not provide the detail Mr Erskine expected or required in order to quote, so he organised a meeting with SKM. A meeting was held at SKM's Thornbury premises on or about Friday 6 June 2003. In attendance at this meeting were Anthony, Robert and Joe Italiano, Mr Erskine and Clinton Miller. Mr Erskine offered to second Mr Miller to SKM to provide drafting services so that SKM could properly document the proposed project design and ICA could then provide a quote. Robert agreed with this suggestion and said that he would direct Mr Miller on the design. Mr Erskine said that if ICA was successful in winning the project, then these drawing costs would be amortised within the project and if ICA did not win the project, then ICA would be paid for hours expended for producing the drawings at a rate of $58 per hour. Mr Erskine's recollection is that Robert seemed happy with that arrangement.

66 From this point on, Robert was ICA's main point of contact with SKM. Robert was in regular contact with Mr Miller in developing the concept and the design. Some preliminary drawings were provided by Mr Miller to Robert on 20 and 23 June 2003.[28]**

**67 On 1 July 2003, Anthony Italiano provided by email details of the product mix, volume and density of the proposed plant.[29] A meeting was held on or about 8 July 2003 at SKM's premises at Thornbury. Those present were Robert and Anthony Italiano, Mr Miller and Mr Erskine. Mr Erskine requested specific details on the general layout and manning levels of the plant. This was necessary because ICA needed, for the purposes of providing a quote, to know where personnel were to be located within the plant so that ICA could provide for platforms and access (stairs, etc) to their work stations. At the meeting, Robert indicated where personnel were to be located. (The locations and manning levels were then included in the next layout drawings.)

68 An email records that on 9 July 2003, Mr Miller sent Robert a PDF of the Coolaroo recycling plant, telling him that they would bring some section drawings and a full size layout to the meeting on the following day.[30]**

**69 Using the information that had been provided to ICA by SKM, Mr Erskine prepared a quotation on 10 July 2003 (quotation number 1628) which was given to SKM the same day at a meeting at Thornbury.[31] This quotation outlined and covered all the points that had been raised by Robert Italiano up until this time and was based on layout drawing number 24620.[32] In the quotation, the various stages had been separated with individual pricing for each stage. The total price for stage 1 was $1,171,853.46, stage 2 was $1,351,751.34 and the price for a future stage was $451,590.78, giving an overall package for stages 1, 2 and the future stage of $2,975,194 excluding GST. Specific exclusions within this quotation were item seven, liquidated damages; item eight, any retention; and item nine, any conditions unknown to ICA at the time of quotation.

70 Included in the quotation was a clause to the effect that any additional guarding which may be required due to the final application of the equipment was not included. Mr Erskine said that this type of clause is usual in installations because additional guarding which is required at the interface between the various components of equipment is usually fabricated and installed after the equipment is in place at site.**

**71 On 10 July 2003, Bruce Granger, Mr Miller and Mr Erskine met with Robert and Anthony Italiano at Thornbury to discuss the 10 July 2003 quotation. According to Mr Erskine, at this meeting Robert became quite agitated. He said that the prices quoted were way above his budget and that they had only been able to secure a leasing finance from the bank for a much smaller amount. He then went through each item in the quotation, making comments such as 'that's ridiculous', and 'there's no way I'm paying for that'. They then discussed taking items of equipment out of the quotation or doing a re-design to simplify the project to reduce the cost. The layout was changed and items such as the second glass line were taken out, however Mr Erskine says that provision had to be made to provide for its future inclusion.[33]

72 After this meeting, Mr Miller prepared a new layout drawing. Mr Erskine then prepared a further quotation (quotation number 1628 Revision B, dated 21 July 2003) based on the discussions of 10 July 2003 and layout drawing number 24620 Revision 3.[34] Mr Erskine emailed it to SKM on the afternoon of 11 July 2003. This quotation related specifically to the stage 1 glass line and outlined individual costing for each item, including the future stage.

73 The same day, Robert Italiano telephoned Mr Erskine. According to Mr Erskine, Robert was still agitated and said that Mr Erskine had not carried out his instructions, that the quotation was unacceptable, and that he required further reduction. Robert requested the removal of all items not relating to the direct supply of the item of equipment, such as maintenance, warranty, documentation and project management. Robert stated that ICA was competing directly with SKM manufacturing the equipment themselves and that he wanted a 'bare bones' price based on supply for individual items of equipment. He said that SKM would take over and run the plant as soon as it was ready to run, and any extra work required to optimise the plant would be done on a cost plus basis under instruction from himself or Anthony Italiano. Robert also instructed Mr Erskine to concentrate on stage 1 and said that the remaining stages of the project would be considered by SKM at a later date.

74 On 22 July 2003, Mr Erskine prepared another quotation and emailed it to Robert Italiano.[35] This quotation was a base price 'bare bones' quotation, further reduced to $934,762.89 excluding GST and was based on items of supply and installation only. Further drawings showing the simplified version of plant were produced by Mr Miller under instruction from Robert and were provided by ICA to SKM on 23 July 2003.[36]

75 On 28 July 2003, Robert Italiano provided conveyor width details to Mr Miller and instructed ICA to make the glass sorting line (i.e. the stage 1 line) as close to the factory wall as possible to allow the platform to accept another glass sorting line at a future stage if required. He also resized the conveyor width to 1200mm to further reduce the price of the quotation.[37]

76 On 29 July 2003, Robert Italiano provided Mr Miller with details of the brick wall for the plant, and details of volumes and the densities of the products making up the mixed product (glass, plastic, aluminium and liquid paperboard).[38]

77 On 29 July 2003, Jason Downing of ICA requested details of the kilowatt rating for each of the balers and details of the main switchboard and location from Robert Italiano.[39]

78 On 29 July 2003, Mr Miller and Robert Italiano corresponded on the location of equipment.[40]

79 On 31 July 2003, Mr Downing sought details on the classifiers, electro-magnet and transfer belt from Robert Italiano.[41] Mr Erskine said that Robert provided details for the classifier the same afternoon.[42]**

**80 On 1 August 2003, Robert and Anthony Italiano travelled to Bendigo to inspect the prototype conveyor that had been manufactured by ICA at SKM's request, prior to an order being placed, so that SKM could be satisfied that the conveyor design and construction and the materials used were to their satisfaction.

81 On inspection, they praised the prototype and approved it without any modifications. This conveyor design was then used on stages 1 and 2.

82 After the inspection, a meeting was held between Mr Erskine, Mr Shane Byleveld, Mr Miller, and Anthony and Robert Italiano.

83 Shane Byleveld was the project engineer assigned to the project. He was responsible for co-ordinating the manufacture of equipment at ICA's workshop in Bendigo, its delivery to site, and installation. Mr Byleveld was based in Bendigo but would go out to Coolaroo as required by the project activities, sometimes on a weekly basis and sometimes daily (for example, during commissioning). Mr Byleveld reported to Mr Bruce Granger and also kept Mr Erskine informed of progress on the project.

84 At the meeting on 1 August 2003, Robert Italiano gave ICA final details for the throughput, manning levels and equipment supply. Robert said that the throughput for the stage 1 system was to be 10 tonne per hour, and that the product coming from the stage 2 system would be a further 10 tonne per hour being distributed to the additional glass line to be built at a future date. As it was an additional stage 1 glass line was not built by ICA.

85 Mr Miller prepared further drawings relating to items discussed at the 1 August 2003 meeting, including a revised version of drawing number 24620, which he provided to Mr Erskine.[43]**

**86 Mr Erskine then prepared quotation 1628 Revision 4 dated 6 August 2003 for Stage 1 which was sent to Robert Italiano on that day.[44] Drawing number 24620 was attached to the quotation.[45]

87 Robert Italiano requested that Mr Erskine provide two versions of this quotation, one showing itemised pricing, the other showing only the total price. Mr Erskine understood that the second version, showing only the total price, was for the Italiano's bank.

88 Quotation 1628 Revision 4 allowed for extra items of equipment that Robert Italiano now required for Stage 1. It described each individual item to be supplied, together with the width, length and type of conveyor and equipment.

89 The quotation also set out a list of exclusions. One exclusion (number 11) noted that ICA assumed that all SKM-supplied items would be provided fully assembled and fit for purpose, and that should extra work be required to modify equipment supplied by others to fit into the system, then this would be via agreed variation as required.

90 The final quoted price for stage 1 was $742,620 plus GST. This reflected the extra equipment added by Robert Italiano at the last minute and reductions that were brought about by reducing the scope of supply and providing for a manufacture and supply contract.

91 Mr Erskine said that it is important to appreciate that there were no specification or efficiency requirements. He said this would not have been appropriate given the scope, and Robert Italiano's design, of the project.

92 The final go ahead for the stage 1 works was given by payment of the deposit.[46] The invoice was paid in two parts - $148,524 on 12 August 2003 and $14,852.40 on 14 October 2003.

93 Other than the payment of the deposit, SKM did not provide an order placement or written confirmation, nor did they provide any specification or efficiency requirement.

94 Robert Italiano had promised during the meeting on 10 July 2003 and 1 September 2003 that a specification would be written, detailing the requirements of the project, including terms and conditions, however this was never produced.**

**95 The 6 August 2003 quotation noted that ICA would need access to the site commencing on the fourth week of August to begin installation work.[47] It also noted that ICA was confident of having product run through the system by 15 September 2003 provided there were no major changes and the supplied components were available and ready for installation when required.

96 ICA performed the stage 1 works referred to in the 6 August 2003 quotation from August to October 2003. Mr Byleveld was the project engineer. Mr Erskine instructed him and other employees on the project - Mr Downing, Mr Shane Normoyle, Mr Rodney Baldock and Mr Richard Collins - to do everything possible to ensure the work was completed in a timely manner.

97 All ICA-supplied equipment was installed and ready to run on 3 October 2003, and stage 1 was completed and ready for operation in mid-October 2003. This was done despite the fact that:

(a) A large section of floor area for the glass collection had not been completed by SKM and was not ready for ICA's work to begin there. SKM had not organised for the laying of the concrete in this area and the seven day curing time before the concrete could accept any load.

(b) Some SKM-supplied equipment - compaction equipment and delivery conveyors supplied by SKM - was delivered to site late.[48]

98 Production commenced between 14 - 16 October 2003. Due to the late arrival of SKM supplied equipment, commissioning phase activities in making adjustments, corrections and modifications were carried out during normal operation.

99 The plant system was heavily dependent on having proper manning levels for manual sorting in particular. When production first began and testing and commissioning activities were still taking place, ICA site personnel manned the unmanned stations so that the system could be properly tested. This testing and commissioning phase went on for about a week - Mr Erskine was in attendance for about half the week - after which SKM took over the running and manning of the line.

100 From Mr Erskine's observations of the early stage production (he was on site about every second day in mid to late October), when the system was correctly manned and the manual in-feed was loaded by an experienced operator, the stage 1 project operated satisfactorily. Joe Italiano, on several occasions, pointed out to Robert Italiano, in discussions at site that Mr Erskine and others were present at, that when he was operating the front-end loader in a controlled manner, then the limited staff was achieving the production rates and in fact on one extended period had doubled SKM's throughput target.[49]

101 Stage 1 was completed and handed over to SKM by 30 October 2003. SKM assumed full responsibility for all maintenance and running of stage 1 lines from this date. ICA personnel remained on the site until July 2004. The number of personnel varied, depending on the work requirements as requested by both Anthony Italiano and Robert Italiano. All hours worked by ICA personnel were recorded on time sheets and were charged at a rate of $54 for ordinary time, $65 for time and a half and $78 for double time, plus $100 a day for accommodation, meal allowance, travel expenses and living away from home allowance.

102 From the commencement of operation of stage 1 in mid-October 2003 until ICA left the site in July 2004, it was Mr Erskine's observation that the plant (i.e. stage 1 and stage 2 lines) was substantially overloaded with product because of the maximum speeds and volumes that were set on the equipment by SKM in order to reduce the large amount of product being held in the yard.[50]

103 Because SKM's management were having great difficulty in sourcing suitable staff to man the equipment, ICA's personnel were used as stand-ins during this period. The cost for this labour was part of the extra site costs. Mr Erskine refers to disputed invoice number 113005 dated 16 June 2004.[51]**

**104 The process for the stage 2 works was progressed in much the same way as for stage 1. Robert Italiano had given instructions on the stage 2 parts of the project in May-July 2003, and gave further instructions to ICA during the stage 1 works phase, on which ICA quoted and did the work after payment of the deposit.

105 Mr Miller submitted a number of drawings to Robert Italiano regarding the layout of the Stage 2/3 area.[52]

106 Based on Robert Italiano's instructions, and the layout drawing, Mr Erskine produced a new quotation for stage 2 dated 1 September 2003.[53] In that quotation, Mr Erskine specifically excluded work outside normal working hours, liquidated damages, retention, any conditions unknown to ICA at the time of quotation and any additional guarding which might be required due to the final application of equipment. Mr Erskine said that guarding could not be produced until the equipment was actually installed on site.

107 Several quotations were produced, and the layouts and drawings were revised by Robert Italiano to try and get the project within his tight financial requirements.[54]**

**108 The responsibility for disc screens is a significant issue in the case. Mr Erskine says that Robert Italiano first provided instructions to ICA regarding the manufacture of the disc screens from in or around late June 2003 and at each subsequent meeting discussions took place regarding the disc screens. Instructions were given to Mr Miller by Robert. Mr Erskine was present at these meetings. Mr Erskine said that drawings were then subsequently produced by Mr Miller and sent through to Robert for his approval. The disc screens were included in ICA's quotation as a fixed price based on the information that Robert had provided.

109 During October 2003, several discussions took place both at SKM's premises at Thornbury and at Coolaroo. These meetings were attended by Mr Erskine, Mr Miller, Mr Byleveld, Robert Italiano and Anthony Italiano, and were held to discuss matters that related to design of the disc screens.

110 ICA had no experience with disc screens. and had never previously manufactured them, so relied totally on Robert Italiano for the principle of operation and the design criteria required to construct the disc screens. The details and drawings were provided to ICA, together with a short video clip showing the operation of a disc screen in (as Mr Erskine recalls) a plant in the USA. Mr Erskine understood the use of disc screens was relatively new technology that Robert Italiano was adapting from overseas design. The design Robert was using was based on disc screens that SKM had manufactured for their own operations.

111 Around this time, Anthony Italiano was manufacturing his own disc screens for another part of the process. On several occasions, Mr Erskine says that Anthony disagreed with Robert as to the design of the disc screens Robert was proposing, in particular to the diameter, the shape and the spacing of the discs. Heated discussions took place on several occasions which Mr Erskine witnessed, and where their father, Joe, stepped in. The altercations were normally quickly put to one side and the meetings got back on course.

112 ICA manufactured the disc screens. Mr Miller gave evidence that Robert Italiano gave detailed instructions as to their manufacture.

113 Mr Erskine says that there were a large number of modifications needed to improve the performance of the disc screens designed by Robert, and when ICA left the site in June 2004, these modifications were still being carried out by SKM.

114 The disc screens were the only item that ICA manufactured in this project that related directly to the separation of product. All other items manufactured by ICA related to the transport of product between items of equipment that had been supplied by SKM, the support structure, and electrical control of the supplied equipment.**

115 Mr Erskine prepared quotation number 1714 Rev 2 dated 13 October 2003[55] based on layout drawing number 24622,[56] and sent it to Robert Italiano on or about that date. The layout drawing continued to be developed through until 11 November 2003.[57] This was the drawing that was current at the time SKM gave the go ahead to proceed and pay the deposit on 26 November 2003.

**116 On 12 November 2003, Mr Byleveld, Mr Miller and Mr Erskine met with Robert Italiano at Thornbury. As discussed below, Robert disputes this meeting took place.

117 Mr Erskine had been seeking confirmation from SKM on throughputs and there were discussions about product mix and input. Robert confirmed that the input was to be 25 tonnes per hour. (Robert's idea was that there would be two in-feed lines for stages 2 and 4 of 25 tonnes per hour each, however the second in-feed line and sorting lines never eventuated, so the in-feed for stage 2 was 25 tonne per hour.) This reduced the need to install the second ten tonne glass line that had been previously proposed and was to be part of the stage 2 line. Robert wanted to reduce the amount of product going into landfill. His proposal was to convey waste product to the outside of the building to be deposited into a garbage compaction unit (provided by SKM) and to deliver binda (fine glass) to a separate holding bin.

118 At this meeting, Robert Italiano also confirmed that he was satisfied with the drawings and design of the disc screens that had been prepared by Mr Miller as per Robert's instructions. There was some discussion about using square shafts for the disc screens. These points were noted on the drawing used during these discussions.[58]

119 In his oral evidence in chief, Mr Erskine elaborated on this meeting of 12 November 2003. I deal with this in some detail, as it does provide a better idea of ICA's case as to the dealings between ICA and SKM.

120 Mr Erskine says that at this meeting he was told by Robert Italiano that the infeed line for stage 2 was 25 tonnes. He said that he instructed his people at the meeting to design the plant at 30 tonnes so that there was a bit of a buffer in the design and he marked as such on the drawing.[59] Mr Erskine says he also marked on the drawing the conveyor C17 that ran across to the bottle line: 10 tonnes.

121 Mr Erskine referred to the disc screens for stage 2. He said that he wrote on the drawing 'SKM to provide disc details, spacing and pitch and shape and angle for 6 and 8 paper.' He also wrote 'Anthony to get disc material info he uses and supplier.' Mr Erskine said that there was a debate between Anthony and Robert about the shape and size of the shafts and either during or after the meeting it was decided to go for the square shafts. Mr Erskine said that the issue was resolved at the meeting and on the back of the drawing there are sketches of the disc made by himself.

122 Mr Erskine says that there was also debate about the material to be used on the surface (of the discs) because the surface was in contact with the paper and determined how the paper would be secured. Mr Erskine noted that Anthony was to provide the disc material. Mr Erskine said that Robert provided detail of the shape of the discs.[60]

123 Mr Erskine said that Anthony provided ICA with the name of his supplier of the disc material and that ICA contacted the supplier but the material referred to by Anthony was not used. Mr Erskine said that at the same discussion someone indicated that ICA had a problem getting the material in time and on the sketch on the back of the drawing an alternative was put up using conveyor belting. Mr Erskine says that it was basically agreed between himself, Robert and Anthony that that was what they would use.[61]

124 Mr Erskine was asked about completion. He said this was critical to SKM. Originally the equipment was to be installed by Christmas. Mr Erskine says that Robert told him the delay was due to the bank approving their loan facility.[62]

125 At the time of quoting on 13 October 2003, the target delivery date was before Christmas. SKM's delay in confirming the go ahead for the works created problems for ICA because it pushed the work into the Christmas period. Under ICA's enterprise bargaining agreement, ICA was required to give its employees at least six to eight weeks' notice in advance if ICA wanted them to work over the Christmas period. This issue was discussed with Robert Italiano at the meeting on 12 November 2003. Mr Erskine said that ICA would use its best endeavours to complete the project in as short a period of time as possible.

126 Mr Erskine pointed out, however, that ICA could not force its employees to work over the Christmas period, but that ICA would call for volunteers. Robert would not agree to any increase in the price due to the extra cost of labour working the holiday period, stating that he had only just got the finance package through with the bank and he was not prepared to go back and ask for more.

127 Mr Erskine referred to the two sorting lines on the drawing and his note of 15 tonnes on each. He said that Robert nominated all the points where he wanted the sorters placed on the sorting lines.

128 Mr Erskine says that initially stage 1 was to have a second bottle line so that the bottle line would produce 20 tonnes, but this plan was not proceeded with.

129 Mr Erskine referred to his note on the drawing stating 'temporary dump until capacity lifted for 1C'. Mr Erskine explained that the bottle line was handling 10 tonnes per hour of waste and stage 2 was to have two lines handling 10 tonnes an hour each. Mr Erskine said the plant couldn't handle the proposed input on the paper lines due to the limit on the bottle line.

130 Mr Erskine said that in order to handle the product coming from the paper line the idea was discussed to dump the product coming from the paper line across the wall onto the storage area and then manually load that product back into the infeed hopper for the bottle line.

131 Mr Erskine explained his notation 'New alternative glass clean up and waste - Rob provide design required to Clinton.' Mr Erskine said that at this time there was in existence another quote. Mr Erskine said another conveyor was proposed to deliver waste product from the paper line to another location. He said that 'right through all these projects Robert was instructing Clinton on what he required, how he wanted the layout done and how he wanted the plant put together.' He said that ICA's draftsmen had been seconded to SKM did draw up Robert's requirements.[63]

132 Mr Erskine referred to his notation on the drawing for a new eddy current unit that was to be provided by SKM. He said it was not installed while ICA was at the plant.

133 Mr Erskine said that prior to ICA's quote of 13 October 2003, the plan was to deliver course (grade 6) and fine (grade 8) paper. He said that prior to the meeting on 12 November 2003, Robert had told him that he had found a new buyer who would require mixed paper and to save some money he was eliminating the storage silo and the system would only provide mixed paper. Mr Erskine said he wrote on the drawing 'combine 6 & 8 paper' to reflect that change.

134 Mr Erskine identified on the drawing the two storage silos that were included in the stage 2 layout sent from Mr Miller to Robert on 17 September 2003.[64] He then referred to the quote revision of 15 October 2003 that removed the silos, with $240,000 being deducted from the quote.

135 Mr Erskine referred to his note on the drawing stating 'Mix of infeed. Now with more paper. Less through this infeed.'[65] Mr Erskine said that this related to information that the Council was delivering waste with more paper in it.

136 Mr Erskine referred to the information provided by Robert and Anthony on the density of the infeed product.[66] Mr Erskine said that those figures were very important to ICA because if gave them 'bulk density. Even though the belt widths and lengths had been given to us by Robert or had been given to Clinton we still need to calculate [indistinct] of our requirements to conveyor the product.'[67]

137 Mr Erskine referred to his note on the drawing stating 'SKM provide packers.'[68] Mr Erskine said that SKM were providing everything other than the conveyors in this part of the project. SKM were providing second hand packers coming from one of their plants and ICA had to deliver product to those packers.[69]

138 Mr Erskine referred to his note on the drawing stating '10/20% waste'[70] relating to the waste hopper. He said they were told at the meeting that 10 to 20 per cent of all material coming into the place would have finished up having to be carted to the tip.

139 Mr Erskine said that at the meeting the parties discussed shortening the long conveyor C17 and putting another conveyor in place to dump the feed over the wall.[71] He said that ICA provided a tilt wall works so the conveyor equipment was isolated from the front end loaders and trucks entering the building, and also to contain the waste sitting on the floor. He said that a little conveyor feeding the circle where the waste was dumped over the wall was provided by shortening C17.

140 Mr Erskine identified the variation in the drawing also dated 11 November 2003 24622.[72] The drawing identifies a small conveyor at right angles to C17 described as C25. Mr Erskine says that this drawing was the final drawing of stage 2 that was used after the meeting of 12 November.[73]

141 I now return to Mr Erskine's witness statement to complete the summary of his evidence in chief.

142 Even though ICA had not given final confirmation of the stage 2 works, in early November 2003 Mr Erskine gave instructions to purchase the material for the support structure in an endeavour to have the bulk of it installed prior to Christmas. Robert's delay in giving confirmation put ICA into an awkward position because not only did ICA have an EBA and union commitments to consider for the Christmas shutdown period, it also put works into a period when suppliers were not available - the majority of ICA suppliers returned to work during the second and third weeks of January.

143 SKM paid a deposit for the stage 2 works on 26 November 2003,[74] which was the first official notification to proceed. This was regarded by ICA as the commencement date for the stage 2 works.[75]**

**144 ICA performed the stage 2 works referred to in the 13 October 2003 quotation. The works were commissioned and in use in mid-February 2004 and fully taken over by SKM in or around early March 2004. The key ICA employees for the stage 2 works were essentially the same as those for the stage 1 works.

145 There was delay on stage 2 due to SKM failing to have the concrete installed until 1 February 2004 allowing for curing time.[76]

146 On 22 March 2004, Mr Erskine visited the site and observed the front-end loader operator moving a pile of glass from the discharge from stage 2 and depositing the glass by the front-end loader bucket onto the in-feed to stage 1. Mr Erskine said the system was never designed to take glass in those volumes. The glass was supposed to be mixed with lighter products as per the product mix provided by Anthony Italiano on 1 July 2003.[77] The concentration of glass caused the conveyors to drop out in overload due to the excessive weight. When this happened, the operator went to the control cubicle and turned up the overload to force the motor to drive. Following this observation, Mr Erskine agreed to install a larger drive with more torque on the main incline conveyor as part of the cost plus work ICA was performing for SKM on site, separate to the stage 1 and 2 contracts. Further works were done by ICA at the site up until early June 2004, and then in 2006.**

147 I now summarise the evidence of Robert Italiano concerning the contract negotiations.

**148 Robert says that the first occasion he met representatives of ICA was at SKM's plant in Thornbury in about May 2003. He says that Mr Erskine and Mr Granger were the representatives of ICA who were present.[78]

149 Robert says that at that meeting he told Mr Erskine, 'in substance' that:

(a) SKM wanted to build a modern and efficient recycling plant at a property in Coolaroo.

(b) The new plant, once completed, would be required to process fully co-mingled materials comprising paper, glass, aluminium, steel and plastics which were delivered to it.

(c) One of the most important requirements of the new plant was that it had to be capable of processing fully co-mingled recyclable materials.

(d) SKM processed a variety of types of plastic, which Robert says in the industry is referred to as 'mixed plastics'.

(e) SKM wanted the new plant to process about 50 tonnes of material per hour.

150 Robert says that he told Mr Erskine about some of the issues that SKM had experienced at its Thornbury plant. He says he can recall, in particular, that he said the chain-linked conveyors at the Thornbury plant could not handle glass recycling well and the links had a relatively short life cycle. Robert said that he told Mr Erskine that when the new plant was built, he did not want to have the same issue with glass falling off the conveyor. He said that he wanted the components in the system to have a long life cycle, unlike the chain conveyors that SKM was then using.

151 Mr Erskine replied that ICA knew all of the 'ins and outs' and problems that could arise during the design and construction of recycling plants, including the problems which could arise in relation to power consumption and the motors and gearboxes which are used in the plants.[79]

152 Robert then told Mr Erskine that SKM had already engaged a firm of designers called Indecon to provide a preliminary design for a recycling plant for SKM and to provide ideas for a possible solution for building a plant. Mr Erskine said that ICA would not need any of the drawings which SKM had obtained. Mr Erskine said that ICA had the expertise to design and manufacture a recycling plant and that Mr Erskine preferred to use ICA's own designers. Mr Erskine said that if ICA got the job, it would do the whole job from design to manufacture and installation.[80]

153 Robert said that Mr Erskine said that ICA had undertaken jobs for Visy, including designing and building a plastics plant for them, and that he was familiar with recycling conveying systems. Either during Robert's first meeting with Mr Erskine, or at a subsequent meeting or telephone conversation, Mr Erskine said that ICA had built a plastics plant for a company called Waverly Industries which used industrial conveyors.[81]

154 Mr Erskine said to Robert that ICA designed and built their own conveyors. He said that ICA had done a lot of work in both the tobacco industry and the recycling industry. He said that ICA had performed work for CUB or Fosters which involved devising a new way of loading their trucks. Mr Erskine also said that ICA had designed and constructed mobile trailers for use in the sheep industry. He said that ICA had extensive experience in designing, building and installing heavy duty conveyors.[82]

155 Mr Erskine and Robert discussed the research which Robert had undertaken into recycling plants. Robert said to Mr Erskine that disc screens were, in his view, an important development in recycling. Robert said to Mr Erskine that SKM wanted easily moveable disc screens as part of the plant system.[83]

156 Robert asked Mr Erskine whether ICA had any experience with disc screens. Mr Erskine said, in substance, that he was familiar with the screens and that he had seen screens at ICA's last project for Visy. Mr Erskine said that his company was experienced with disc screens and garbage packers, and that he could design a disc screen that would be suitable for SKM's needs. Mr Erskine said that he was aware of the importance of having the right amount of friction and angle for the disc screen to function properly and to be able to separate the paper from the plastic, steel, aluminium and glass being processed at a plant.[84]

157 Robert had a drawing of a disc screen with him that had been prepared by Indecon during this first meeting with Mr Erskine. Robert showed Mr Erskine a copy of the drawing prepared by Indecon during the meeting and gave Mr Erskine a copy to take away with him.[85]

158 Robert said that during this discussion, or possibly at a later face-to-face discussion with Mr Erskine, he said to Mr Erskine that the Coolaroo plant would need to be capable of producing grade 6 and grade 8 recycled paper. Robert said that Mr Erskine responded that that would not be a problem.[86]

159 Robert said to Mr Erskine that SKM had won a number of contracts, and would need to have the new plant up and running by mid-September 2003. Robert also said that SKM had won a contract with the Mornington Shire Council that would come online in December 2003 and that that contract would supply SKM with a large quantity of recyclable material.

160 Mr Erskine told Robert that one of the strengths of his company was that it had expertise and capacity to design and manufacture the recycling plant quickly. Mr Erskine said that ICA could design and build a recycling plant, that met SKM's performance criteria, by mid-September 2003. He also said, in substance, that SKM could rest assured that the plant would be built properly by ICA and would be in accordance with all relevant Australian Standards.

161 Robert said that his brother Anthony showed Mr Erskine and Mr Granger through the Thornbury plant so that they could see the recycling system which was presently in use and operating.**

At a glance

Court

Decision date

Before

Source

Judgment (1139 paragraphs)

Parties

Legislation Cited (6)

Cases Cited (4)