Proctor & Gamble P/L v Australian Slatwall Industries P/L

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50052/1999 - PROCTOR & GAMBLE P/L v AUSTRALIAN SLATWALL INDUSTRIES P/L

1 These proceedings arise out of problems associated with the design and manufacture of Display Units supplied by the defendant, Australian Slatwall Industries Pty Ltd (ASI), to the plaintiff, Proctor & Gamble Australia Pty Ltd (PG). 2 The Display Units were in part manufactured and assembled by ASI in Australia. A significant part of the componentry was designed and supplied by an Italian Corporation, the Second Cross Defendant, Sarno S.N.C. Di Renato Nobili & C (Sarno). 3 The proceedings between PG and ASI were settled on 4 May 2001. The only matters for decision by the Court are ASI's claims by way of Cross Claim against Sarno. The Cross Claim was heard on 14 May 2001 when Mr Leopold, of counsel, appeared for ASI. There was no appearance for Sarno.

Facts 4 In 1991 PG acquired the rights to distribute certain Max Factor cosmetic products in Australia and New Zealand for Revlon. In early 1993 PG sought tenders from various companies to design and supply Display Units in which the Max Factor products could be displayed in retail stores. ASI's tender was initially unsuccessful. 5 Subsequently Mr Brian Martin Levy (Mr Levy), the managing director of ASI, attended a Trade Fair in Dusseldorf. He observed a display fixture system with illuminated shelving and columns capable of being used for cosmetics. This display fixture system was exhibited by Sarno. It was called the "Sarnosystem". 6 Mr Levy met with Mr Alessandro Fossati at the Trade Fair. From conversations with Mr Fossati it was apparent that he represented Sarno and was the son in law of the principal, Mr Renato Nobili. As a result of those and subsequent discussions between ASI and Sarno samples of the shelving and display units were provided to ASI by Sarno. From the correspondence in evidence it is clear that Sarno was sending the samples to ASI so that it could be exhibited to PG in the hope of obtaining orders from PG for the Display Units to market new products which PG was launching in October 1993. 7 In August 1993 Mr Levy corresponded with Mr Fossati and informed him that quite a few problems were being experienced in "getting the shelves to illuminate; there seems to be a problem with the contact". Mr Levy said in his letter "I presume you will have a solution for this". In correspondence from Sarno to Mr Levy in late August 1993 Mr Fossati advised Mr Levy that: SHELVES: We realized and already solved the problem of contacts with the columns. The problem is now overcome. We judge unconvenient to assemble the shelves in Australia as most of the assembling operations are made during the injection time in order to save costs. 8 It is apparent that PG was placing some pressure on ASI to produce a "re-worked fixture" with the suggestion that if this could not be done it intended to pursue orders through a different supplier. ASI requested Sarno to send a "telescopic" extended shelf prototype immediately and to fax drawings of the design for presentation to PG. 9 By 8 September 1993 the Unit was being referred to as the "ASI/Sarno Unit". At around this time Mr Levy visited the Sarno factory in Italy and discussed the Display Units with Mr Fossati. After that visit Sarno confirmed that it would supply certain parts of the Display Unit to ASI including plastic guides for the columns, lighted crowners, clip mount and relative telescopic lighted trays and vacuum formed parts covering the trays. 10 In October 1993 PG ordered some display units and ASI placed the first orders with Sarno for the componentry parts of the Display Unit. This order followed a number of meetings between ASI and PG some of which were attended by Sarno. 11 It is apparent that problems were experienced with the illuminated shelving. In mid October Sarno wrote to ASI confirming that it had sent six shelves with lights with the modifications. It advised that: According to our tests they can work for 24 hours with a very low heat that can be acceptable and we think to have overcome the problem. 12 ASI informed Sarno that the leading edge of the shelf became very hot and that it was concerned that PG would find it too hot. ASI asked Sarno whether it had suggestions on how the problem could be reduced and also requested any recommendations as to the type of material that should be used in the shelf edge. ASI subsequently advised that: Proctor and Gamble say they wish to achieve 30C. I think we have no problem with Tungston but will be advised by you.

13 Mr Nobili, the principal of Sarno, attended a meeting with ASI in Australia on 8 November 1993. During that meeting it was agreed that Sarno would provide new drawings of trays to show changes to the lighting under the tray and to adjust and modify drawings of the trays as required. A further meeting was held on 10 November 1993 during which it was noted that Sarno had commenced modification to contact and would supply a sample. It was further noted that Mr Nobili would adjust the sides of the tray to come flush with tray connection points and that Sarno would supply revised full size drawings. Sarno agreed to advise on a suitable method to deal with the cabling for a retracted shelf. 14 During the meetings between ASI and Mr Nobili in November 1993 Mr Levy had a conversation with Mr Nobili in the following terms: Mr Levy: The Sarnosystem and all its componentry needs to comply with the relevant Australian standards and regulations. Mr Nobili: You don't need to concern yourself with that. All our electrical componentry and the fixtures themselves comply with all European standards including the International Standards Organisation and TUV. We've been doing this successfully for years working in Italy, Germany, England and France with clients including Wella, Gillette, Shiseido and L'Oreal. We have not had any problems. You have my assurance that the units which we supplied to you will fully comply with all Australian Standards and regulations. 15 Notwithstanding the assurances given to Mr Levy by Mr Nobili, ASI took the sample crowner to the Energy Authority to ascertain that it could be approved for use in Australia. The Energy Authority requested further information and ASI wrote to Mr Fossati on 7 December 1993. In particular Mr Fossati was asked whether the ballast inside the crowner had a European approval/certification. Prior to Sarno responding in writing Mr Levy had a conversation with Mr Fossati in which Mr Fossati said: Don't worry. The sample which we gave to you was one which we did in a hurry. It was made by our prototyping department. It did not go through the normal factory quality control procedures and is not part of a production run at all. All of the matters your Energy Authority has raised will be more than satisfied within the production run. The purpose of the sample was only for you to show the general design of a light box to Proctor and Gamble. 16 Sarno wrote to ASI on 23 December 1993 and advised: All the electrical appliances inside the crowner are covered with all international security - see attached the related characteristics including the IMQ certification.

Mr Fossati advised Mr Levy in a later letter: Light crowner; we can guarantee to have solved this problem - sending you a sample. 17 The Display Units were supplied to PG between 1993 and 1995. In 1995 PG ordered a further 500 units. ASI in turn placed further orders for the componentry with Sarno. In August 1997 one of the units caught fire at the Target retail store in Maroochydore. It is apparent that concern had arisen that 20 watt globes were being used in the shelving instead of 5 watt globes. To overcome this problem PG contributed $100,000 to the cost of some rectification work that was carried out in November 1997. 18 In March 1998 there was a further fire in one of the units at a Target outlet in Robina in Queensland. From August 1998 to late 1998 a rectification program was carried out by PG on all of the units that had been supplied to end users throughout Australia.

The Display Units 19 The Display Units as ultimately supplied to PG are large free standing Units with 28 individual shelves. Luminaires are built into the front of the shelves illuminating the product on the shelves immediately below. Above the shelving there is a section with lamps inside the units (the crowners) to provide back lighting for photographs on each side of the top of the Display Unit. There is also up and down lighting for the Unit. The spotlights at the top of the Unit highlight the brand name Max Factor. 20 The 28 shelves on which product (lipstick and other cosmetics) is placed, are supported and located on a multi-position back channel. The back channel supplies low voltage power to the luminaires within the shelves. Each shelf has two spring loaded contacts which are aligned with the back channels. These contacts are connected to the leads from the two lamps at the front of the shelf by coiled flexible wires inside the body of the shelf unit. 21 On top of each tray is a pallet with appropriately moulded spaces for the placement of product. The shelves were able to be extended forward from the back of the Unit to facilitate easier replenishment of the stock. Once refilled, the trays were able to be returned to the back of the Unit by the "telescopic" mechanism.

Proceedings commenced 22 On 15 April 1999 PG commenced proceedings against ASI and its principals. On 30 August 1999, by Amended Summons, PG pursued only ASI. On 26 August 1999 ASI filed its Cross Claim against PG and Sarno. That Cross Claim sought, as against Sarno, damages for breach of contract, damages for negligence, indemnity in respect of PG's claim against ASI and contribution to any liability which PG established against ASI. An order for interest and costs was also sought.

Leave to proceed against Sarno 23 In July 2000 ASI sought leave pursuant to Part 10 Rule 2 of Supreme Court Rules to proceed against Sarno. Where an Originating Process is served on a defendant outside Australia and the defendant does not enter an appearance within the time limited for appearance, the plaintiff is not able to proceed against that defendant except with the leave of the Court. 24 Sarno has not entered an appearance in this matter and on 25 October 2000 Rolfe J made an Order granting leave to ASI to proceed against Sarno.

Preparation for Trial 25 On 1 September 2000 the matter was listed for hearing for five weeks commencing on 14 May 2001. Interlocutory steps including discovery and inspection were completed. Agreed orders as to the provision of expert's reports were made. PG relied upon the expert opinion and report of Gordon Watson (Mr Watson). In response ASI instructed Maurice Phillip Swarts (Mr Swarts) to prepare an expert report. 26 Numerous affidavits were prepared by both PG and ASI. They are in evidence before me (Ex. G and Ex. L). Additionally ASI read the affidavits of Mr Swarts of 11 May 2001 and Vivian Evans of 23 June 2000, 11 May 2001 and 14 May 2001. Various reports from Deloitte Touche Tohmatsu are also in evidence (Ex. G).

Communication between ASI and Sarno 27 I have already referred to a number of letters between ASI and Sarno commencing in 1993. When the problems with the Display Units emerged and PG made claims upon ASI in respect of the rectification work, ASI communicated further with Sarno. In December 1997 Mr Fossati advised in a facsimile transmission from Sarno to ASI as follows: We had a brief meeting here at office with Brian and our insurance agent. Probably Brian explained that it is necessary for us to receive countersigned the letter of Sarno that inform you that in case of substitution of halogen lamps for the coming shelves it is necessary to fit with a 5 watt lamp. We need this letter otherwise the agent cannot proceed with the trial of getting money from the Sun Alliance which is in charge for this matter. By the way, a person of Sun Alliance will contact you in mid January to fix an appointment and to check from you all details of the claim of Proctor and Gamble. 28 Sarno further advised by facsimile of January 30, 1998 that the matter was still in the hands of the insurance company and that it would visit ASI in Sydney to start the damage checking. 29 On 11 February 1998 ASI wrote to Mr Fossati in Italy in the following terms: I wrote to you the other day and unfortunately I have heard nothing in return. I would very much like to hear from you because I believe, as I have said before, that in the first instance you and I are friends and second must come business. Please phone me or send me a fax because it is better for us to talk than to ignore each other. The facts are that the insurance company has still not contacted us and it would appear that they are not at all interested in doing this. Meanwhile, we have had all this expense and we must start talking to you about helping us with the costs. I do look forward to hearing from you soon. 30 Subsequently Mr Levy had a telephone conversation with Mr Fossati in which the following was said: Mr Levy: Alex, you made the Sarnosystem product. It is your responsibility to resolve PG's claims. Get on a plane and come here and help us fix the problem. Mr Fossati: Our legal advice is that we are not to communicate with you whatsoever. I feel very embarrassed by this, as I believe we are responsible. But Senor Nobili and our lawyers and our insurers have told me that I must not talk to you at all. 31 The correspondence annexed to Ms Evans' affidavit of 23 June 2000 demonstrates beyond any doubt that, notwithstanding Ms Evans forwarding pleadings and correspondence to Sarno, the strategy of non-communication was pursued by Sarno. 32 Apparently at short notice PG and ASI agreed to engage in a formal mediation with the Honourable Mr TR Morling QC as the mediator on 1 May 2001. The mediation was successful and consent Orders were agreed to. Those Consent Orders were made on 4 May 2001 as follows: By consent as between the plaintiff/first cross defendant and the defendant/cross claimant, the court makes the following orders: 1. Judgment for the plaintiff in the sum of $200,000 payable as follows: (a) the amount of $125,000 on or before 30 June 2001 and (b) the amount of $75,000 on or before 30 June 2002. 2. Judgment for the first cross defendant on the cross claim against it. 3. Vacate all costs orders to date. 4. No order as to costs in the proceedings between the plaintiff/cross defendant and the defendant/cross claimant.

The Court also noted an agreement between the plaintiff (PG) and the defendant (ASI) to release each other in respect of claims of any kind. 33 On 4 May 2001 ASI's solicitors forwarded a copy of the Consent Orders to Sarno advising that they had been able to resolve the matter against PG for a sum substantially less than PG's claim of approximately $1.4 million. The solicitors also advised that leave had been granted to proceed against Sarno ex parte on 14 and 15 May 2001 and continued: We urge Sarno again, to have representation at the hearing of the matter and to advise your insurers accordingly. Please note that a copy of this letter has been forwarded to the solicitor whom we were advised was acting on your behalf and the insurance company's behalf. Please note, that if our client is successful in obtaining a judgment against you our clients will be entitled to recover that judgment, which we expect to be in the vicinity of $200,000 plus costs of approximately $200,000 being a total of AUD$400,000.

Consistently with its previously adopted approach, no response was received to that letter or to a further letter forwarded on 7 May 2001. However a legal representative from Studio Legale Capponi in Italy advised that he was not the "present Sarno's lawyer". 34 ASI's solicitors have taken further steps of instructing an agent in Italy to translate its correspondence into Italian and to personally serve that correspondence on Sarno. Notwithstanding all of this no response has been received. This is in stark contrast to the prompt responses that were received from the same address and the same facsimile numbers when orders were being placed for the supply of the componentry. The Italian agent advised ASI's solicitors that it had obtained what it thought may be a new facsimile number for Sarno. The solicitors for ASI also forwarded facsimile copies of its recent communications to that facsimile number. Still there has been no response.

PG's claims against ASI 35 PG's claim against ASI was that it had suffered loss and damage in respect of (a) the cost of rectification works to the Display Units, (b) loss of profits from reduced sales, (c) loss of opportunity to sell product through other outlets and (d) damage to reputation. The evidence prepared for the trial prior to settlement was restricted to the cost of rectification work to the Display Units. That evidence includes two reports by the Deloitte's partner Mr Mark Ronan dated 17 April 2000 and 15 June 2000 (Ex. G). Mr Ronan quantified the total cost to PG of a rectification program carried out by it pursuant to the recommendation of its expert, Mr Watson, to whom I have already referred. 36 In his report of 3 July 1998 Mr Watson identified a number of defects in the Display Units and recommended that "in order to render the Display Units safe for return to full power in retail outlets, a complete rectification program needed to be carried out on every Display Unit in the field" (Ex. G). Deloitte's quantified the total cost to PG of the rectification program at $1,402,367.54. The vast majority of that amount was for payment to the electrical contractors who carried out the rectification work.

ASI's claim against Sarno in Negligence 37 ASI chose to rely upon the negligence claim in preference to making submissions in respect of the complex task of dealing with the allegation that the proper law of the Sarno Contract was the law of New South Wales. The Cross Claim pleads that (a) Sarno owed a duty to ASI to take all reasonable care in the design of the componentry, (b) by reason of the defects alleged by PG Sarno breached its duty, and (c) that breach has caused ASI to suffer loss and damage in the nature of its liability to PG. ASI concedes that the breach by Sarno is limited only to the extent of the defects in the componentry. 38 The communications referred to earlier between Sarno and ASI during 1993 demonstrate that Sarno took upon itself the task of solving the problems in respect of the heat generated in the shelves. It demonstrates that ASI relied upon Sarno in this respect and that Sarno knew that ASI was relying on it. Sarno "guaranteed" to ASI that the componentry complied with the Australian Standards. 39 A manufacturer, is not obliged to take precautions against a risk which may arise when the use to which the product is put is so unusual or improper as to make it wholly unforeseeable, falling outside the range of any reasonable person's contemplation. However within the range of foreseeable risk Sarno was required to take reasonable care in the design and manufacture of the componentry. 40 It was required to think through the suitability of the design and the problems and risks associated with it. The more serious the foreseeable consequences of failure to take care, the greater the necessity for special circumspection. In Suosaari v Steinhardt (1989) 2 Qd. R 477 Cooper J, with whom Connolly and Ryan JJ agreed, said at p 489: Where the risk is real, although the incidence of it may be low, the designer is under a duty to minimise the risk by taking all reasonable steps to eliminate it, particularly where the alteration to the design is simple and inexpensive. The manufacturer is under a duty to take care to reduce the risk of injury as far as he reasonably can, and to eliminate it, if reasonably possible, when the product is being used to perform its usual or foreseeable function.

And: A manufacturer is under a duty not to put a product into circulation without bringing to it, in the case of machinery, the mind of a reasonably competent engineer to ascertain whether the design of the product is safe. If a competent engineer would have discovered the defect as one which unreasonably exposed the user to risk then the duty of the manufacturer is twofold: firstly, to actually see the risk, secondly, to take all reasonable steps to eliminate or minimise it, or if it cannot be eliminated or minimised, to clearly warn the user of its existence. A manufacturer who fails to take both of these steps breaches the duty of care owed to the user of the product. 41 In relation to each of the defects the subject of the rectification program, as far as they concern the componentry, the evidence establishes that each defect was avoidable and resulted from the way in which the componentry was designed, or in the case of the ballasts, the use of unapproved items. I am satisfied that Sarno breached its duty of care to ASI. 42 Mr Leopold raised the question of the "double actionability" rule in relation to international torts: McKain v RW Miller & Co (South Australia) Pty Ltd (1991) 174 CLR 1; Zhang v Regi Nationale des Usines Renault SA [2000] NSWCA 188 (unreported 27 July 2000) [52]. Mr Leopold submitted that the onus falls upon Sarno and not ASI to plead that particular conduct may be justifiable according to the relevant foreign law. In support of this proposition he relied upon what Hutley JA said in Walker v WA Pickles Pty Ltd [1980] 2 NSWLR 281 at 286: The plaintiff may be required to give particulars of the time and place of the acts or omissions relied upon; and, having given these, I see no reasons why the defendant should not be able to find the foreign law which makes what he has done excusable. He is in no different position from the litigant who has to search through the local law, if he wishes to rely on some special protection. In my opinion, until the issue of justification by foreign law is raised, the plaintiff may ignore foreign law, and rely upon the presumed identity of foreign and local law. 43 Mr Leopold submitted that in Sarno's absence ASI is not required to deal with this matter. However assuming that it is at least arguable that the tort took place in Italy he submitted that, in accordance with Walker, ASI is entitled to the benefit of the presumption that the Italian law is no different from the Australian law of negligence. I agree with this submission.

ASI's claim against Sarno for contribution 44 Section 5 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) provides relevantly as follows: s 5(1) Where damage is suffered by any person as a result of a tort (whether a crime or not) - (a) judgment recovered against any tort-feasor liable in respect of that damage shall not be a bar to an action against any other person who would, if sued, have been liable as a joint tort-feasor in respect of the same damage; (b) ….. (c) any tort-feasor liable in respect of that damage may recover contribution from any other tort-feasor who is, or would if sued have been liable in respect of the same damage, whether as a joint tort-feasor or otherwise, so, however, that no person shall be entitled to recover contribution under this section from any person entitled to be indemnified by that person in respect of the liability in respect of which the contribution is sought. (2) In any proceedings for contribution under this section the amount of the contribution recoverable from any person shall be such as may be found by the court to be just and equitable having regard to the extent of that person's responsibility for the damage; and the court shall have power to exempt any person from liability to make contribution, or to direct that the contribution to be recovered from any person shall amount to a complete indemnity. 45 There is no doubt on the evidence before me that Sarno was fully aware that the componentry was for re-supply to PG. Mr Leopold submitted that the liability of ASI to PG which led to the entry of judgment arose in part out of the defects in the componentry and to that extent is the same damage for which Sarno would have been liable to PG if sued by PG in negligence. I am satisfied that the liability was in respect of the same damage within the meaning of s 5 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). In those circumstances I am satisfied that ASI's claim against Sarno for contribution is made out.

Assessment of contribution 46 What has to be decided is the amount of contribution ASI is entitled to obtain from Sarno. The Court must decide what is just and equitable in the circumstances having regard to the extent of Sarno's responsibility for the damage. 47 A number of defects in the Display Units have been identified by Mr Watson. Those defects have been analysed by Mr Swarts who has prepared a table setting out his estimates of the amount of time that electrical contractors would have taken to rectify the defects. The Court has had the benefit of viewing a video that was supplied to all Display Unit owners for the rectification of the Display Units at their premises by electrical contractors (Ex.F). The table produced by Mr Swarts is as follows: Rectification Work Completed Estimate of total time to be taken by Electrical Contractor

No. of Time Est. Total % of items per Mins Mins. Total item 1. Installation of circuit-breaker in accordance with number of 1 30 30 32 6.8 busbars; 2. PVC protection on rear busbar; 6x 3 18 19 4.0 3. Ventilation holes to transformer, 1 3 3 4 0.8 front and back; 4. To securely fix transformers; 1 5 5 5.5 1.2 5. Secure wiring in head-section and 1 10 10 10.7 2.3 J-box. Install where required; 6. Install approved ballasts in 2x 15 30 32 6.8 crowner units; 7. Install 2 x 5 watt lamps and 1 amp fuses in shelf units, and replace 28x 10 280 299 63.0 damaged curly (spiral) wires if any 8. Fix shelves to prevent slide-out 28x 5 sec 5 5.5 1.2 9. Install powerboard, if require (QA tests, test bushbar, short across PWSDTESTCB's 1 5 30 36 38.5 8.1 bushbar trips, circuit-breaker); 10. Test shelf unit short across pins of 5 watt lamp; 1x 3 3 4 0.8

11. Complete questions and answers and inspect unit in order to 'A' 'B' 'C' 10 10 2 2222 23.5 5.0 complete questions and answer sheet; TOTAL 473.70 mins 100.00

48 ASI admits that it is solely responsible for the items other than items 6, 7, 8, 10 and 11. In respect of those items ASI claims that Sarno is solely responsible. It is submitted that Sarno is responsible for 75.58% of the total amount of time estimated to be necessary to complete the rectification. ASI makes a claim against Sarno for 75.58% of the amount of the judgment, $200,000.

Item 6 49 At the top of the Display Unit on each side there is a crowner. A single ballast is used to control the two fluorescent lamps and a starter for each lamp. When a lamp or starter fails, the lamp continues to have supply at the filaments, causing a heat build up at each end of the lamp adjacent to the filaments. Mr Watson stated in his report: This build up of heat causes the crowner body material to degrade and melt at these points. It was observed that when this situation occurred with the higher lamp, the melting material dripped onto the lamp. My inspections revealed that the material adjacent to the lamp filament was generally degraded to such an extent that it had deformed, changed colour to brown and in the number of instances the material had disintegrated causing a hole to appear adjacent to the end of the lamp (Ex.G report 19.4.99 par. 3.2.l(i)). 50 Mr Watson claimed that the ballasts used in the crowners did not have an approval number from the Department of Energy. Mr Swarts reported that only 161 ballasts did not meet the criteria for use in Australia. He reported that all other ballasts were an "APF" brand made in Italy conforming to "IEC 920" (EN 60920) which translated into AS 3168. 51 ASI claims, and I accept on the evidence, that it was Sarno's responsibility to ensure that approved ballasts were used. Accepting that only 161 ballasts did not meet the criteria, it was still necessary to inspect all ballasts to check whether they complied. However the estimated necessary time overall would be reduced if a checking, rather than replacement process had to be completed. I intend to take such a reduction into account although it will be necessary to approximate a discount as there is no evidence as to the break up of the time it would take to check, as opposed to replace, the ballasts. I intend to apply a discount from 6.8% to 5% in assessing this matter.

Item 7 52 Mr Watson dealt with the one amp fuse installation in his report as follows: There is no control over the length of coiled wire that is introduced into the luminaire section of the shelf. Where an excessive length of wire is introduced there is a high possibility that this wire rests close to or against the lamp. The result of this is that the insulation of the wire is degraded or melted due to the high temperature generated by the lamp. It was observed in some cases that the insulation degraded to such an extent that only bare copper wire was what remained of the coiled wire within the luminaire section adjacent to the lamp. The ABS plastic material of which the shelves are made, will combust if in direct contact with the glowing exposed wiring. Furthermore, the AS 3000 Wiring Rules require that electrical overcurrent and short circuit protection be provided when a change of wiring gauge is made. Transition from the busbars to the coiled wire in the shelves is a change of gauge and consequentially a reduction in conductor capacity. No such protection was provided within the shelves and I therefore recommended that a 1 amp fuse be inserted into the electrical circuit of each shelf so that the wiring rules were complied with and to eliminate the potential for fire (Ex. G. Report 19.4.1999 par. 3.3(iv). 53 There was some disagreement between Mr Swarts and Mr Watson in respect of this matter. Approval had been given by the Department of Energy predicated upon the use of 5 watt lamps in all the shelves together with a requirement that warning stickers should be applied to all shelving. I am not satisfied that such disagreement impacts upon the conclusion to be drawn from this evidence. 54 The problems with which this Item deals are composite. There is, on one view, the failure to recognise that the transition from the busbars to the coiled wire was a change in gauge thus requiring the provision of electrical overcurrent and short circuit protection. This was a failure to comply with the AS 3000 Wiring Rules. There is also the failure to recognise and protect against the insulation wire in the coiled section of wire melting and creating the danger of a fire. 55 The componentry was Sarno's responsibility and in particular it guaranteed to provide "relative telescopic lighted trays". The coiled wire was part of that system. However to burden Sarno with the whole of the responsibility for the estimated time for rectification for failure to install a circuit breaker would in my view not be just or equitable. ASI was exercising its judgment in respect of the composite ASI/Sarno product it was supplying to PG and should have at the very least checked that a circuit breaker was installed. It must bear some responsibility. I intend to apportion Mr Swarts' estimate in respect of this item at 55% to Sarno.

Item 8 56 If the retractable shelf is opened and closed quickly it will not allow the coil wire sufficient time to retract. In the result the wires become caught in the enclosure and parts of it remain outside the enclosure and became jammed between the column and the outside edge of the tray. When the shelf is repeatedly closed quickly or roughly the wires bunch or kink. After making these observations in his report Mr Watson continued: When this takes place within the tunnel section of the shelf there is a build up of heat causing a hot spot and creating a potential fire hazard. The only way to overcome this problem short of redesigning the shelf wiring was to immobilise the shelves. I therefore recommended that a screw be inserted on one side of each shelf to prevent the shelf from sliding. Although this made restocking the shelves more difficult, it was the only practical way of avoiding the bunching/kinking problem (Ex. G. report 19.4.1999 par. 3.3 (iii). 57 I am not satisfied that Sarno should be burdened with responsibility for the whole of the time attributable to this process in the rectification program. ASI was in my view able to assess the working of the Display Unit on site and should be responsible for 50% of the time so attributed. Sarno is therefore responsible as to .6% of the estimated time in respect of this Item.

Items 10 and 11 58 The combined time attributed to these Items is 5.8% of the total. Having regard to my earlier findings I am satisfied that Sarno should be responsible for 60.6% (Item 6 - 5%; Item 7 - 55% and Item 8 - .6%) of that 5.8%, which is 3.5%. 59 The responsibility to be attributed to Sarno is therefore 64.1% of the total time estimated to have been necessary for the rectification of the defects. 60 This is not a matter that was fought to judgment. It was ultimately mediated, settled and judgment was entered. In all the circumstances I am satisfied that the settlement was a reasonable and fair step to take in concluding this litigation as between PG and ASI. I am also satisfied that it is just and equitable that Sarno should pay an amount of 64.1% of the judgment amount of $200,000 which is $128,200.

ASI's costs of defending the claim brought by PG 61 Mr Leopold submitted that there are special circumstances in this case that would justify an order that Sarno pay a proportion of the costs ASI incurred in defending PG's claim against it. Those matters include the following:

(a) Prior to the Deloitte's report of 17 April 2000 the claim by PG was for an open-ended sum. This was said to include various components for loss of profits and various other aspects to which reference has been made earlier which were ultimately not pursued by PG in its evidence.

(b) It was only after the Deloitte's report was served that it became evident that PG's claim was confined to costs associated with the rectification program.

(c) Endeavours were made both before and after the service of the Deloitte's report to settle the claims made by PG against ASI. The Deloitte's report assessed the amount for rectification at $1.4 million plus interest.

(d) After extensive work in defending PG's claim, including retaining Mr Swarts to prepare a report, ASI was ultimately able to settle the claim against it for a small fraction of the amount claimed, payable in instalments over 14 months.

(e) All attempts since February 1998 to talk to Sarno about the dispute have been met with silence. 62 Mr Leopold helpfully referred me to Kirby J's judgment in Patten v Moffatt & Ors [1999] NSWSC 1322, (unreported 17 February 2000) in which his Honour deals with an application by a defendant for an order from a third party to contribute to the costs of the defendant in resisting the plaintiff's claim against the defendants. His Honour's judgment provides helpful guidance to the approach in this matter and I respectfully agree that the source of power in respect of any order that I might make on ASI's application in this regard does not stem from the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) but from s 76(1) of the Supreme Court Act, 1970 and the Rules of Court. 63 Kirby J referred to Thomas J's judgment in Sherras v Van der Matt [1989] 1 Qd.R 114. In that case Thomas J made orders that the third defendant pay the first and second defendants' costs of defending the plaintiff's claim against them. In that case Thomas J said at p. 118: In many, perhaps most cases in which a defendant unsuccessfully defends a plaintiff's action, the discretion to order another even less successful defendant to pay his costs of defending the plaintiff's action will not be made. This will usually follow from the fact that such costs may reasonably be regarded as having unnecessarily been incurred. However in the present case the only cost that could be so described are trivial or insignificant. It therefore seems to me that the present case is an appropriate one in which to order the third defendant to pay the costs of the first and second defendants, not only of the contribution proceedings, but also defending the plaintiff's action. 64 In this case it seems to me that ASI's expenditure and costs could not be categorised as having been unnecessarily incurred. ASI was required to prepare for a case which had a much wider claim in damages than that which was ultimately pursued by PG. ASI took what seems to me to have been a necessary step of instructing Mr Swarts and having available for the purpose of mediation, and ultimately settlement, a respectable expert opinion. This, together with the other evidence prepared by ASI enabled it to mediate and settle the claim for a relatively small amount of the total claim. In doing so it saved costs that would have been incurred in a 5 week hearing in this Court. 65 In exercising my discretion in favour of awarding these costs I have taken into account the fact that ASI made every effort to communicate with Sarno for the purpose of including it in the approach it adopted in this litigation. ASI's conduct in defending the case and in preparing relevant evidence to enable it to successfully mediate and settle the matter, has benefited Sarno by reducing Sarno's liability. I am satisfied that this is an appropriate case in which to award costs. I intend to order that 64.1% of ASI's costs of defending the plaintiff's claim against it should be paid by Sarno. 66 Additionally as ASI has been successful in its Cross Claim against Sarno, the costs incurred by ASI on the Cross Claim should be paid by Sarno.

Orders 67 The effect of Part 6 Rule 9 of the Supreme Court Rules is that unless the Court otherwise orders, ASI would not be permitted to enter or execute on any judgment it obtains against Sarno until PG's judgment against ASI is satisfied. 68 Mr Leopold submitted that there is no sound reason why, if Sarno is liable, ASI should not have the benefit of Sarno's contribution in meeting the judgment against it. It was further submitted that the relatively complex step of enforcing the judgment in Italy should not be made more complex by a process which is staged in a way which corresponds with the payment regime the subject of the 4 May 2001 Consent Orders. 69 Mr Leopold submitted that the fairest course would be to give leave to ASI to enter judgment against Sarno and to execute upon it, but to order that interest should not run on certain percentages of the judgment, 62.5% of the judgment sum until 30 June 2001 and 37.5% of the judgment sum until 30 June 2002. This reflects the percentages of the two instalments in the judgment PG obtained against ASI. I agree with these submissions. 70 I make the following orders:

Judgment for the Cross Claimant in the sum of $128,200.

Pursuant to Part 6 Rule 9(1)(a) of the Supreme Court Rules I direct that such judgment may be entered immediately.

Pursuant to Part 6 Rule 9(1)(b) of the Supreme Court Rules I order that the Cross Claimant may immediately enforce such judgment by execution.

I order that interest on the judgment sum referred to in Order 1 is only to run, as to $80,125 of the judgment sum, from 1 July 2001 and as to the balance of the judgment sum from 1 July 2002.

I order that the Second Cross Defendant pay on a party/party basis: (a) 64.1% of the defendant's costs of defending, mediating and settling the claims made by the plaintiff against the defendant; and (b) the Cross Claimant's costs of its Cross Claim against the Second Cross Defendant. **************

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