Sural SpA & Anor v Downer EDI Rail Pty Limited [2007] NSWSC 1234 | Case summary

Sural SpA & Anor v Downer EDI Rail Pty Limited [2007] NSWSC 1234 | Case summary | Zoe

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ABB Engineering Construction Pty Ltd v Abigroup Contractors Pty Ltd [2003] NSWSC 665 Abigroup Contractors Pty Ltd v ABB Service Pty Ltd [2004] NSWCA 181 Adler v Australian Securities and Investments Commission [2003] NSWCA 131 Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 Allen v Carbone (1975) 132 CLR 528 Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452 Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 Bellingham v Dhillon [1973] 1 All ER 20 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 Brunninghausen v Glavanics (1999) 46 NSWLR 538 B Seppelt & Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147 Cardwell Shire Council v Calabrese (1975) 49 ALJR 164 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Dunkirk Colliery Company v Lever [1878] 9 Ch D 20 FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343 Fightvision Pty Ltd v Onisforou & Ors (1999) 47 NSWLR 473 Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 Garnac Grain Co Inc v HMF Faure & Fairclough Ltd & Bunge Corp [1968] AC 1130 Geebung Investments Pty Ltd v Varga Group Investments (No.8) Pty Ltd (1995) 7 BPR 14,551 Godecke v Kirwan (1973) 129 CLR 629 Graham Evans Pty Ltd v Stencraft Pty Ltd (2000) 16 BCL 335 G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 Harpers Trading (Singapore) Pte Ltd v RFL International Ltd (unreported, Supreme Court of New South Wales, Carruthers J, 12 December 1994, BC9403441) Hasell v Bagot Shakes and Lewis Ltd (1911) 13 CLR 374 Heysham Properties Pty Limited v Action Motor Group Pty Limited & Ors (1996) 14 BCL 145 CASES CITED : Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 Hoad v Scone Motors Pty Limited [1977] 1 NSWLR 88 Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 Inland Revenue Commissioners v Raphael [1935] AC 96 Integrated Computer Services Pty Limited v Digital Equipment Corporation (Australia) Pty Limited (unreported, Court of Appeal of New South Wales, McHugh, Mahoney and Hope JJA, 23 December 1988, BC8801158) James Findlay & Company Limited v NV Kwik Hoo Tong Handel Maatschappij [1929] 1 KB 400 John R Keith Ltd v Multiplex Constructions (NSW) Pty Ltd & Anor [2002] NSWSC 43 Jones v Dunkel (1959) 101 CLR 298 London & South of England Building Society v Stone [1983] 3 All ER 105 Love & Stewart Ltd v S Instone & Co Ltd (1917) 33 TLR 475 Masters v Cameron (1954) 91 CLR 353 Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507 Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1 Munce v Vinidex Tubemarkers Pty Ltd [1974] 2 NSWLR 235 Narni Pty Ltd v National Australia Bank Limited [2001] VSCA 31 NRMA Ltd v Morgan (1999) 31 ACSR 435 Payzu Ltd v Saunders [1919] 2 KB 581 Pobjie Agencies Pty Ltd v Vinidex Tubemakers Pty Ltd [2000] NSWCA 105 Raguz v Sullivan (2000) 50 NSWLR 236 Reardon-Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 Roper v Johnson (1873) LR8CP 167 Ryan (Receiver & Manager of Homfray Carpets Australia Pty Ltd) v Textile Clothing & Footwear Union Australia [1996] 2 VR 235 Sacher Investments Pty Limited v Forma Stereo Consultants Pty Limited [1976] 1 NSWLR 5 Schellenberg v Tunnel Holdings Pty Ltd (2000) 170 ALR 594 Segenhoe Limited v Akins (1990) 29 NSWLR 569 Simonius Vischer & Co Ltd v Holt & Thompson [1979] 2 NSWLR 322 Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310 Smailes & Son v Hans Dessen & Co (1906) 95 LT 809 Sotiros Shipping Inc & Anor v Sameiet Solholt (The "Solholt") [1983] 1 Lloyd's Rep 605 TCN Channel Nine v Hayden Enterprises Pty Limited (1989) 16 NSWLR 130 Telstra Corporation Limited v Australis Media Holdings (1997) 24 ACSR 55 Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486 Tomko v Palasty [2007] NSWCA 258 Wenkart v Pitman (1998) 46 NSWLR 502

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The matter was put in the following terms by the Chief Justice (at 550 and following) with whose reasons for judgment Hope and Mahoney JJA agreed: "…The case involves the objective determination of the intention of the parties from a consideration of a series of communications exchanged by them in the context of their dealings over a period of time. In those circumstances it is both appropriate and necessary to have regard to the commercial circumstances surrounding the exchange of communications and, in particular to the subject matter of those communications: Allen v Carbone (1975) 132 CLR 528 at 531-532. Furthermore, as was noted earlier, it is proper to have regard to communications between the parties subsequent to the date of the alleged contract to the extent to which those communications throw light upon the meaning of the language which is being considered for the purpose of determining whether it expresses an intention one way or the other upon the critical matter. At the least, such subsequent communications will often form part of the context in which the particular exchanges in question are to be evaluated. The position is by no means so clear, however, in connection with internal memoranda… or statements as to subjective intention made by individuals in the course of giving evidence. As it happens, although the learned judge had a good deal of material of this kind put before him at the hearing, it was not particularly helpful even if admissible. In the first place, a great deal of it was equivocal and individual pieces of evidence were contradictory in effect. Some of the persons who participated in the negotiations in question were called to the witness box and vigorously examined as to what was going on inside their minds at particular times. This process in the end principally served to demonstrate what might have been expected to be the case, that is to say, that the witnesses, not being lawyers themselves, were in a state of considerable confusion about the issue that ultimately emerged as determinative of the rights of the parties… In so far as acts or statements of the kind referred to, not involving communications between the parties, are claimed to be relevant in a case such as the present upon the ground that they constitute an admission, it seems to me that it will often be necessary to identify with some care the fact which is said to have been admitted. As was noted, there may be cases in which the issue is such that the fact of the subjective state of mind of one or other of the parties is relevant. Normally, however, what is in issue is not their subjective state of mind but their "intention as expressed" (cf Inland Revenue Commissioners v Raphael [1935] AC 96 at 142 per Lord Wright) and caution may need to be exercised in relating the fact which is said to be admitted to the fact which is legally relevant." [emphasis added] Novation 13 Novation is a transaction by which, with the consent of all parties concerned, a new contract is substituted for one that has already been made. Intention is crucial to show a novation. A novation may be express or implied from the circumstances. However, when searching for such an intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements. Novation may be inferred from evidence of informal conversations and the subsequent consistent pattern of conduct of the parties: Fightvision Pty Ltd v Onisforou & Ors (1999) 47 NSWLR 473 at 491-493.

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Variation 14 Variation by contract (as opposed to waiver or estoppel) involves two contracts, the existing one and the contract of variation: Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 at [19]-[31]. The existence of a contract of variation must be clearly demonstrated by reference to the ordinary rules of contract formation [Cheshire and Fifoot's, "Law of Contract", Eighth Australian Edition at [22.4]]. Principles concerning mitigation 15 Downer's submissions accurately summarised these principles. 16 The general principle is that a plaintiff must take all reasonable steps to mitigate the loss to it consequent upon the defendants' wrong and cannot recover damages for any such loss which it could have avoided, but has failed, through unreasonable action or inaction to avoid. In British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 at 689 Viscount Haldane LC described the principle in terms of a "duty". Although not strictly relevant for current purposes, it should be noted that the "duty" to mitigate is something of a misnomer for the reasons identified by Sir John Donaldson MR (as he then was) in The Solholt [1983] 1 Lloyd's Rep 605 at 608: "A plaintiff is under no duty to mitigate his loss, despite the habitual use by the lawyers of the phrase 'duty to mitigate'. He is completely free to act as he judges to be in his best interests. On the other hand, a defendant is not liable for all loss suffered by the plaintiff in consequence of his so acting. A defendant is only liable for such part of the plaintiff's loss as is properly to be regarded as caused by the defendants' breach of duty. As Viscount Haldane LC put it [in British Westinghouse Electric and Manufacturing ] at 689: The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps. And later: "Whether a loss is avoidable by reasonable action on the part of the plaintiff is a question of fact not law. This was decided in Payzu Ltd v Saunders [1919] 2 KB 581."

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"The question, therefore, is what a prudent person ought reasonably to do in order to mitigate his loss arising from a breach of contract. … the plaintiffs … were fully entitled to consider the terms in which the offer was made, its bona fides or otherwise, its relation to their own business methods and financial position, and all the circumstances of the case…" 18 As can be seen from these well-established principles, the defendant assumes an onus to establish that the plaintiff has acted unreasonably in respect of the minimisation of loss occasioned by the defendant's breach. If the defendant is unable to discharge that onus, the normal measure of damages will apply [Roper v Johnson (1873) LR 8 CP 167; Hasell v Bagot Shakes and Lewis Ltd (1911) 13 CLR 374 at 388; British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London [1912] AC 673 at 689; Garnac Grain Co Inc v Faure & Fairclough [1968] AC 1130 at 1140; Munce v Vinidex Tubemarkers Pty Ltd [1974] 2 NSWLR 235 at 240; TCN Channel 9 v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 158; Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1 at 17 and 29; Wenkart v Pitman (1998) 46 NSWLR 502 at 504, 520-523 and 535; Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507 at 509 and 513]. 19 As Downer has contended, the Court does not weigh the conduct of the plaintiff in fine scales for the benefit of the defendant, [see Banco de Portugal v Waterlow & Sons [1932] AC 452 at 506: "Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticize the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of duty owed to him has acted reasonably in the adoption of remedial measures and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken" [cited in Simonius Vischer & Co Ltd v Holt & Thompson [1979] 2 NSWLR 322 at 355]. Nor will the Court impose a high standard on the plaintiff [Sacher Investments Pty Limited v Forma Stereo Consultants Pty Limited [1976] 1 NSWLR 5 at 9; Harpers Trading (Singapore) Pte Ltd v RFL International Ltd (unreported, Supreme Court of New South Wales, Carruthers J, 12 December 1994)], or judge the actions of the plaintiff with the critical eye of hindsight [Banco de Portugal v Waterlow [1932] AC 452 at 506]. After all, in this situation it has already been accepted that the defendant is the wrongdoer [Banco de Portugal v Waterlow [1932] AC 452 at 506; Sacher Investments Pty Limited v Forma Stereo Consultants Pty Limited [1976] 1 NSWLR 5 at 9; Harpers Trading (Singapore) Pte Ltd v RFL International Ltd; Segenhoe Limited v Akins (1990) 29 NSWLR 569 at 582]. 20 The pragmatic approach to the assessment of the plaintiff's actions is governed by the following principles:

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iii. the mitigation principle does not require a plaintiff to act in a way it perceives to be commercially unwise for it. [In James Findlay & Co Ltd v NV Kwik Hoo Tong Maatschappij [1929] 1 KB 400 at 410, 415 and 418 the plaintiff's loss could have been offset had they insisted upon their legal rights under a pre-existing contract with a third party. However that pre-existing contract was based upon a premise that the plaintiff had subsequently found out was incorrect, so that whilst enforcement was strictly available, to do so would have tarnished the plaintiff's commercial reputation. Greer LJ at 415 said: "I see nothing immoral or unconscionable in an endeavour to hold to their bargain the Indian sub-purchasers who had bought goods on different terms from those on which the respondents bought them - namely, as goods which were certified by the bill of lading as having been shipped in September. The respondents would have been perfectly entitled, as a matter of business morals, to hold the sub-purchasers to their bargain and make them pay damages if they did not take the goods. But it is wholly unreasonable to say that that would be the ordinary course of business which they ought to pursue to diminish the damages. People have not to consider what is right in a strict court of conscience; they have to consider the effect of their conduct upon their business relations with other people, and I have little doubt that it would not have suited the respondent's business, nor would it be reasonable as a matter of business to require them, to do what is suggested in order to diminish the damages, if prima facie they are entitled to recover damages from the defendants." In Harpers Trading (Singapore) Pte Ltd v RFL International Ltd (unreported, SCNSW, Carruthers J, 12 December 1994) the Court found that the requirement to mitigate did not require the plaintiff to "fire sell" its product in circumstances where it was perceived it would be commercially unwise to do so. See also Smailes & Son v Hans Dessen & Co (1906) 95 LT 809 at 814; and the dissenting judgment of Samuels JA in Hoad v Scone Motors Pty Limited [1977] 1 NSWLR 88 at 100]. Assessing quantification of damages 21 The Sural parties' summary of the well-established general principles in assessing the quantification of damages is accepted as correct:

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ii. secondly, a variation whereby in lieu of the security by way of bank guarantee, Downer would retain from the payment for the first batch of conductor, an amount of 10% of the total contract price. The ultimate holding concerning the claimed steel to wooden drums variation 27 As the evidence and the reasons make plain there was no oral agreement to vary the obligations under the contract to supply the conductor on wooden drums. It is common ground that there was no agreement in writing to that effect. The approach taken to setting out the evidence 28 It is inappropriate to endeavour to chronicle all of the evidence. This is particularly the case where there were so many emails passing between the parties at material times, not to mention the number of conversations which occurred. The approach taken in this judgment is to attempt to deal only with those communications which seem to have particular significance for the issues arising for determination. Even so it has been necessary to deal with many emails and with some correspondence. All of the communications have of course been taken into account in order to make the factual findings. 29 It is pertinent to also note that in relation to the factual issues as to the alleged breaches of contract, many witnesses were called to give evidence as to what they had seen and in some cases [as where the first-hand hearsay rule applied], as to what others had told them had occurred. At the same time the volumes of written material inter alia comprising the actual site records were before the Court. Mercifully there were some useful summaries of the site records. Here a deal of the evidence has had to be referred to in order to make material factual findings. 30 Although it was the case that one or other of the witnesses called by either party disagreed in a number of instances with the version of conversations said to have taken place with the other, in some instances the inconsistencies in their different versions played no part in being determinative of any finding in these reasons. Of course other instances involve vital questions of whose version is accepted. The reliability of witnesses Ms Holzhaker 31 Ms Holzhaker [a product manager with the Sural group of companies at the relevant time] appears to have carried out her level best to accurately recall the events in respect of which she gave evidence. [She was based in Venezuela until approximately 10 June 2003 at which time she relocated to Italy.] In the nature of things that evidence was often that she acted at the dictate or direction of Mr Riviere, yet curiously, when he gave evidence, he did not seem to always agree that this had happened with the regularity she had expressed. 32 It has been difficult to determine some of the reliability issues on the balance of probabilities. The Court has in many instances, [including that of having to assess the reliability of Ms Holzhaker], required to closely study the contemporaneous written documents. But in several instances a close examination of the contemporaneous documents seen in the light of contradictory evidence given by other witnesses, particularly Mr Riviere, has ultimately led to the Court accepting the evidence of certain of the Downer witnesses as the more reliable: and in particular accepting the evidence of Mr Antoniazzi as being more reliable than that given by Ms Holzhaker. This is not to say that Ms Holzhaker did not earnestly believe that the content of the conversations said by her to have occurred was otherwise than as she stated in her affidavits and in the witness box. However in other instances, Ms Holzhaker's evidence as to the content of conversations is held to be the more reliable. 33 Ms Holzhaker was clearly confused from time to time in her recollection of events and conceded that her recollection was less than perfect. In particular at one stage she gave evidence under cross-examination that Mr Riviere was at a particular time, negotiating with Mr Antoniazzi concerning the supply of wooden drums as one of the technical issues under discussion on 28 April 2003. She then moved away from that answer, later accepting that she did not know [if wooden reels had been the subject of the discussion]. Neither Mr Riviere nor Mr Antoniazzi gave evidence of any such discussion at this time and no contemporaneous documents recorded such discussions. Hence the difficulties encountered in accepting some of her evidence. Mr Riviere 34 The evidence given by Mr Riviere requires to be very carefully treated with for the reason that he was obviously very partisan to the Sural interests: his evidence was that his parents were ultimately the beneficial owners of SpA as well as CA [T 199-200]. The answers given by Mr Riviere were in a number of instances, inconsistent with the contemporaneous materials. In some instances his evidence clearly requires to be rejected. 35 Mr Riviere verified a creditor's statutory demand for payment of debt issued by SpA to Downer and dated 9 June 2004. That affidavit included Mr Riviere deposing that SpA was a creditor of Downer in respect of a debt totalling US $321,209.47 that was owing pursuant to the Formal Instrument of Agreement dated 16 August 2002 (as varied). He deposed that as part of his duties with SpA, he was responsible for the implementation of the agreement and had inspected the business records of SpA in relation to its client Downer. He deposed that the debt was due and payable by Downer. 36 Critically for present purposes, he deposed that he believed that there was no genuine dispute about the existence or amount of the debt. 37 He was closely cross-examined on this last mentioned sentence in his affidavit. That cross-examination extended over many pages [commencing at T 320]. It is quite plain that he must have known that there was indeed a genuine dispute about the existence and amount of the debt. This was patently clear from the terms of the detailed 9-page letter from Downer addressed to the Sural companies and dated 10 May 2004 [PX 1804] which gave chapter and verse in the most graphic terms to the contention by Downer of its rights at law. This matter reflects adversely on Mr Riviere's credit. 38 Another indicator of Mr Riviere's evidence being sometimes unreliable concerns the following:

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ii. he initially claimed that Sural SpA still bought wooden drums from CLS, then said that it had last bought drums from CLS in 2005 or 2006; [I accept that this ignorance was certainly curious given the centrality of the wooden drums to these proceedings.] 41 Then there is the fact that notwithstanding the repeated requests for documents relating to the wooden drums, not one of which was discovered prior to the hearing, Mr Riviere was able to supply invoices on short notice after cross-examination commenced. Yet it was he who gave instructions to Sural's solicitors, and he who verified Sural's discovery. Mr Todaro 42 Mr Todaro was a mechanical engineer employed by SpA. He was at all relevant times based in Italy. On one occasion he visited the Downer work site in Western Australia to implement a program involving the insertion of inflatable bladders into the wooden reels supplied by Sural to Downer in response to alleged problems experienced by Downer in the unwinding of the wooden drums. His evidence was given through an interpreter and I was unable to discern any area in respect of which his evidence could be seen to be unreliable. Mr Fanelli 43 Evidence [both in affidavit form as well by video-link] was given by Mr Fanelli. He had visited Australia in late November and early December 2003 to undertake work involved in rewinding electrical conductor from the full to the empty wooden reels supplied by SpA, the reels being located at the Ridolfo premises. His evidence was that the rewinding was successful, although the conductor on only 7 of the 30 drums were not damaged by the rewinding process [which was stopped for that reason]. This evidence is inconsistent with that given by Mr Chigioni [Downer's logistic manager] that the trial was equivocal: [Mr Chigioni not having been required for cross-examination]. 44 In my view Mr Fanelli's evidence requires very careful assessment. It is inconsistent with the evidence given by Mr Barona that the rewinding process was abandoned following excessive tail extrusion and layers of the conductor biting on themselves and jamming. It is plain that Mr Fanelli took a number of photographs whilst in Australia but only the three photographs the subject of cross-examination had been produced. He appears to have first denied that Mr Guazzelli had discussed with him the nails found in the layers of conductor and to then have proceeded to give evidence of what he claimed to say to Mr Guazzelli in response. In the result the evidence by Mr Fanelli can be given little weight.

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Mr Antoniazzi 45 Mr Antoniazzi impressed me as a generally reliable witness. He was the Downer procurement manager for the subject Project. In that role he was responsible for co-ordinating the supply of materials and equipment necessary for the transmission line project [including conductor]. 46 There were extensive communications between Mr Antoniazzi and, in the main, Ms Holzhaker, being his counterpart first in Venezuela and then in Italy when she relocated there on or about 10 June 2003. He was very careful with his answers. Generally his evidence was often corroborated by contemporaneous documentation. There was no matter put to him in cross-examination which to my mind could be seriously pointed at as suggesting a general lack of reliability. Having said that, it remains the case that in a few instances his recollection of conversations with Ms Holzhaker is rejected in favour of her version. Mr Barona 47 Mr Barona was Downer's contract manager. Since 1987 Mr Barona has been engaged in preparing tender estimates for power transmission line projects. From 1990 he was appointed contracts manager (western zone) and since that time had prepared numerous tender estimates, including for at least 30 major tenders for Australian and international power transmission projects. He was the person responsible for the tender for this Project in 2001. His evidence appeared to me to be reliable. Unfortunately there were a number of questions put to him in cross-examination which he could not answer because of a degree of confusion to the witness where the questions were simply misconceived. His answers were carefully given. He was clearly very familiar with the materials. I was impressed by his approach in the witness box. To my mind there was no section of the cross-examination which seriously tested the reliability of his evidence. Mr Rantucci 48 Mr Rantucci was the Downer site manager at the project site from 11 February 2004. Mr Rantucci records that he was seconded from a Queensland project to assist Mr Hendrick [Downer's project manager] with the "stringing" of conductor because of the problems being experienced with its "run out" [the rolling out of the conductor off its wooden reels]. As site manager he oversaw construction of the project to which he was assigned, from a technical perspective. His role on this Project involved supervising the stringing and reporting daily to Mr Hendrick, spending time both in the field and in the site office. In the course of his activities, various reports were completed by both himself and those who reported to him. The leading hand (Mr Glen Dickenson) completed a supervisor's daily report and the brake operator (Mr David Price) completed a conductor run out report for every "pull" [a pull defined as the stringing of a 10.5km length of the transmission line]. Mr Rantucci completed daily activity reports, which dealt mainly with stringing activities as most other preliminary activities had been completed by the time he arrived. Examples of the reports appear at Exhibit SR1 tab 2. I accept his evidence as reliable. Mr Guazzelli 49 Mr Guazzelli was the Downer project supervisor at the Project site. It was his role to supervise the stringing of the Project, a capacity he continued in until 16 January 2004. He has significant experience [detailed below] in stringing conductor of the type similar to the Sural conductor. His evidence appeared to me to be entirely reliable.

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Assessing the experience of the Downer personnel assigned to the Project 53 There being so many contentious areas, [most particularly in relation to usual work practices as well as the special focus upon the problems faced by Downer on this particular Project], I accept that a reasonably important parameter involves the need to assess the experience of those with respective responsibilities to supervise and to carry out the stringing process in particular, and the other processes necessary to achieve completion of the Project. The finding is that Downer had assembled a very experienced project team in this regard: · The background and experience of Messrs Antoniazzi, Barona, Rantucci, Guazzelli, Hendrick and Todaro has already been set out. · The evidence given by Mr Guazzelli and Mr Rantucci, clearly demonstrates the very extensive experience held by the core stringing team [which in the main comprised persons often with very many number of years of experience with Downer]. The chronology with respect to drum delivery and modification 54 Basic to being able to follow the events which occurred is an understanding of this chronology [MFI D5]: Date Event 26.06.03 Sural packed 49 drums (Batch 1) 7.08.03 Batch 1a delivered 28.08.03 Sural packed 50 drums (Batch 2a) 10.09.03 Sural packed 40 drums (Batch 2b) 2.10.03 Batch 1b and 2a delivered 16.10.03 Batch 2b delivered 6.11.03 - 8.11.03 Millarte in Australia 12.11.03 Meeting between Sural and its drum supplier, following which a decision is made to change the timber from fir to larch. 16.11.03 - 19.11.03 Riviere and Holzhaker in Australia 28.11.03 - 10.12.03 Fanelli and Sardiello in Australia and rewind conductor at the Ridolfo yard Riviere sends email to Antoniazzi attaching procedure for rewinding conductor and corrective action to be taken in relation to batches 3 and 4, including: · change from fir to larch timber; 30.11.03 · the use of helicoidal nails; · fixing of the internal drum; and · insertion of plastic in rewound drums. 5.12.03 - 9.12.03 Antoniazzi visits Sural's Taranto factory 9.12.03 Sural packed 55 drums (Batch 3a) 9.12.03 Riviere determines to cease rewinding due to damage to Conductor. 16.12.03 Sural packed 25 drums (Batch 3b) 14.01.04 Sural packed 60 drums (Batch 4a) 15.01.04 Batch 3a and 3b delivered 05.02.04 Sural packed 43 drums (Batch 4b) 26.02.04 Batch 4a and 4b delivered 02.04.04 - 06.04.04 Todaro and Giuliani in Australia and conduct inflatable bladder trial

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ii. on the other hand, it is quite plain from the contemporaneous documents that Mr Riviere was travelling a great deal at the time, trying among other things to cope with the sudden influx of orders to the Taranto plant, and was dealing with a number of customers. 91 The position would have been quite different had SpA provided some financial incentive but it failed to do so. Importantly the fact that SpA would absorb the additional 1% customs duty attaching to supply from Italy as opposed to Venezuela had been promised on 29 January 2003 92 Downer also points to the failure of Sural to comply with the contractual stipulation that variations were to be in writing as a further reason why the contractual case fails. At the very least, the parties' failure to reduce the alleged variation to writing is a further circumstance tending against its occurrence. The estoppel claim 93 There is no substance in the claim put forward by SpA that Downer by route of a conventional estoppel, cannot now deny that it agreed to accept supply of conductor on wooden reels instead of steel reels. It was months after the late January 2003 conditional novation agreement [by the substitution of SpA for CA as the sole contracting party] when for the first time, Downer was informed that SpA proposed to supply on wooden drums, which proposition was always firmly rejected as constituting a contractual breach. Downer having been informed that wooden drums would be arriving only six weeks before the first batch was due to arrive in Fremantle, was placed in an invidious position and whilst protesting at this contractual breach, was entitled to make enquiries as it did. Nothing that it did thereafter in terms of the inter partes communications amounted to an acceptance of a contractual variation permitting supply now of wooden drums. Downer was entitled to elect between exercising one of two rights: the first was to accept SpA's conduct as repudiatory; the second was to claim as it has, damages for breach of contract. It made clear that it was holding SpA to its contractual obligation to provide steel drums. A close examination of the sundry oral and written communications makes quite clear that Downer did not act unconscionably in relation to this issue. And of course, SpA's contention that it had relied upon an assumption that Downer was content to accept wooden drums, must on the evidence be accepted as reliable, be rejected out of hand. Variation qua 10% retention in lieu of bank guarantee 94 As the reasons have already made clear, for many months Mr Antoniazzi pursued Sural CA and later Sural SpA for the bank guarantee to which Downer was entitled under the contract. For many months, Mr Riviere, Ms Holzhaker and Mr Pecoraro gave undertakings which turned out to be illusory. The finding is that the true position was known to Mr Riviere at all times, cf T 224:

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"Q The truth of the matter is, isn't it, that at the middle of February 2003 Sural SpA had already obtained pretty much as much financial accommodation from its bank as its bank was going to let it have? A. Meaning our bank line was almost full, yes." 95 Various excuses were made, until on 13 June 2003, after all relevant communications relating to the supply on wooden drums, Ms Holzhaker told Mr Antoniazzi the truth ("our guarantee credit line is quite full") and proposed that in lieu of the bank guarantee, Downer would hold as security, 10% of the total value of the conductor to be supplied under the varied agreement by deducting such sum from the first payment [for the first delivery] to Sural SpA. The details of this, and the manner of invoicing, were subsequently agreed between them on or about 18 June 2003. The parties agreed that Downer would release the agreed security to Sural SpA on a pro-rata basis after Downer received each shipment [see PX 1035-1038; 1039-1040; 1042]. At the relevant time, Mr Antoniazzi was unaware of the provision in the contract for retention of security for the defects liability period of 2-years, and lacked actual authority to bargain that away, but plainly he had ostensible authority to deal with Ms Holzhaker. 96 As Downer has contended, nothing turns on the entitlement to keep the whole amount of the security for the defects liability period [after the ultimate completion of deliveries] for present purposes. It seems that neither party turned their mind to the 2-year defects liability period during which the security was agreed to be held (see GC 20, GC 24, Annexure A at PX 775 and definition of "Defects Liability Period"). In those circumstances, the outcome was to apply those provisions to the substituted security being the agreed 10% of the total value of the conductor. 97 There appears to have been no issue taken by the parties that on the one hand, the defects liability period allowed Downer to hold onto the security for the relevant 2-year period after the last shipment had arrived, yet on the other hand, it had been agreed between the parties that Downer would release the agreed security back to Sural SpA on a pro-rata basis after Downer received each shipment. 98 The agreed 10% security was in the amount of US$334,918.86 and was deducted by Downer from payment for the first shipment. 99 SpA's contention is then as follows:

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c) In response to this evidence of Mr Antoniazzi, Downer contended that this cross-examination had been put on a false premise [T 822:36]. The question was asked by Sural's leading counsel after referring the witness to PX 1091 [which detailed the set off from the security of the amount owed from Sural for liquidated damages and 1% additional duty for the first shipment]. Downer contends that at the time this question was asked, the cross-examiner either did or ought to have known that that what was put was not true. This is said to be because what in fact happened was that all the invoices were paid in full (which I infer to mean to include the first shipment, despite the seeming effect of PX 1091). Mr Antoniazzi's evidence that the set-off occurred in all subsequent shipments is said by Downer to be wrong. 105 The state of the evidence justifies a finding accepting Downer's approach to satisfying itself of the liquidated damages and relevant interest owing to it. Hence Sural SpA is required to reimburse Downer for the additional 1% duty payable on all deliveries. Mr Moy's evidence that Downer continues to hold the 10% security and has otherwise paid Sural for all of the conductor supplied by way of letter of credit [except for Batch 4b] was uncontradicted. Also uncontradicted was his evidence that batch 4b was paid by Downer on 17 May 2004 [a reduced amount because Downer claims to have set off the total liquidated damages amount owed]. Breach of contract 106 This aspect of the proceedings was heavily litigated. Its significance was always obvious. Unfortunately, as is often the case, it becomes necessary to descend to the detail. In this particular case that detail [much of which is technical] is nothing short of vital to the end result. However at the end of the day it is fair to say that the vast preponderance of the evidence before the Court sustained Downer's overarching contention that the run out problems it experienced arose because of the deficiencies in the wooden drums which had been provided. The way forward 107 It seems convenient to move through the reasons concerning breach broadly in the following fashion:

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iii. a treatment of the evidence given by the experts called on causation, loss and damage; iv. to set out the ultimate findings of drum deficiency; 109 Finally the findings as to the quantum of the damages will be dealt with. Overview of the findings of breach 110 The ultimate findings can be expressed in a number of ways 111 In overview the evidence justifies the finding that the manner in which the conductor was wound on to the drums did not allow for "the smooth running out in lengths as long as could be conveniently handled and erected" [SC 7.3]. They did not provide the serviceability needed for the runout of the conductor, permitting a far slower run out rate than that experienced by Messrs Hendrick, Chigioni, Rantucci and Barona on similar transmission line projects. This was because the layers were not firmly and evenly wound onto the drums, which had the consequence that voids were allowed to form, such that there was potential for intermixing of the conductor layers and tail feed, causing jamming of the inner layers of the conductor during unwinding. The more detailed findings of the drum deficiencies are set out later in these reasons. The stringing process 112 Downer provided a convenient brief overview of the activities required to be undertaken to complete a project of the nature the subject of these proceedings: also carefully described by Mr Hendrick in his affidavit. Most relevant is the way in which the transmission line cable is strung out between the electricity transmission structures [towers] extending the length of the power transmission line. 113 The procedure for "stringing" of conductor cable on the Project can generally be described in the following terms: i. The "stringing" operation itself consists of a number of sub-activities: (a) setting up conductor drum and winch sites along the line route (typically some 10km apart, depending on terrain etc); (b) installation of stringing sheaves (pulleys) on each structure in the section to be strung; (c) run out of pilot wires and/or draw wires, and placing the draw wires in sheaves; and (d) connecting the phase conductors [wires] and overhead earthwires [OHEW] to each draw wire, and then pulling the draw wire, conductors, and OHEW's through the strining sheaves in the section of line between the drum and winch sites.

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DATE DETAILS OF COMMUNICATION Email from Antoniazzi to Holzhaker plus photos 28.2.2003 poor workmanship signs of deformation concerns about effect on runout 2.9.2003 Email Antoniazzi to Holzhaker seeking advice in response to concerns about drums 2.9.2003 Email Holzhaker to Antoniazzi Spoke to wooden drum manufacturer and they are arranging for a solution in the next shipments Email Barona to Paris recording complaints of Guazzelli loose winding 13.10.2003 birdcaging cardboard pieces filling gaps distortion 13.10.2003 Email Antoniazzi to Holzhaker passing on the above and also referring to bumps on the surface of the wound conductor indicating that beneath there is cross over of conductor causing irregularity 14.10.2003 Facsimile from Downer to Holzhaker (incl photos) … supply of wooden reels has meant that Downer has had to run the risk of encountering construction difficulties, delays and associated costs when running out conductor as a result of potentially warped or damaged drums, causes of which have already been seen and notified to Sural after the first shipment Email Hendrick to Paris (incl photos) bottom layer not firmly and evenly wound following layers are not firmly and evenly wound wedging into inner layer gaps 15.10.2003 layers of conductor move/slide across each other causing abrasive damage wedging slow down of pull when reach the sides drum buckling nail damage 27.10.2003 Email Antoniazzi to Holzhaker - asking about technical visit to inspect issue of wooden drums and poor winding Email Hendrick to Barona and others (incl photos) damaged conductor nail heads catching 28.10.2003 bird cages broken strands conductor abrasions and markings suggestion that timber not properly seasoned 30.10.2003 Email Tanner (Western Power) to Barona (with photos) showing conductor problems 3.11.2003 Email Antoniazzi to Holzhaker (with photos) More photos of "problematic reels that are causing Downer great difficulty, delays and amounting (sic) costs" 12.11.2003 Email Hendrick to Paris (with photos) showing unevenness in winding Email U'Chong to Antoniazzi (with photos) of the rewinding at the Ridolfo yard during Riviere's visit (he is in some of the photos). Photos show: severe tail feed 18.11.2003 uneven winding damaged conductor significant marking of wood on drums 1.12.2003 Email Paris to Riviere - attaching memorandum recording actions and agreements made between Downer and Sural during visit 1.12.2003 Email Riviere to Antoniazzi - proposed solutions for the drums in Australia and corrective actions 2.12.2003 Email Riviere to Paris comments on actions and agreements email (general agreement with content) Rewound drum trial (with photos) wedging 5.12.2003 damaged conductor coach screws coming loose nail damage severe marking of wood on drum 8.12.2003 Email Hendrick to Barona (with photos) - glass damage through layers of conductor (Chinotto bottle) 9.12.2003 Email Paris to Riviere objecting to Fanelli/Sardiello leaving site as Downer was continuing to have problems with batch 2a and 2b Email Riviere to Paris re results of rewinding: 9.12.2003 risk of causing damage to conductor increases the more the drum is manipulated most drums had conductor damage during rewinding recommends using batch 2b or rewound drums until arrival of batch 3a (i.e. effectively recommending against the use of batch 2a) 19.1.2004 Email Hendrick to Riviere (with photos) - severe nail damage 21.1.2004 Photos taken by Fanelli (note the wood is green in colour) Email Rantucci to Antoniazzi (observations when running out some rewound drums): 3.4.2004 drums appear to be worse than new drums damage either from nails on the wooden drums or from damage already marked

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iii. Mr Millarte returned to Taranto. It is not entirely clear what occurred at the meeting apparently held with CLS when he returned, as the evidence of Mr Riviere is not entirely clear [Ms Holzhaker does not recall and no one else from the meeting (Messrs Millarte, Caprino, Schiano and others from CLS) was called]. The position appears to be that it is accepted that Mr Millarte was the first Sural representative to go to Western Australia, and that when he went back he saw Mr Riviere before Mr Riviere came over to Western Australia. It also appears to be the case that a meeting took place between Sural and CLS, which resulted in changes to the drum design prior to Mr Riviere coming out to Australia. The persons at the meeting are not clearly identified. At one stage it would appear that Mr Riviere thought the meeting consisted of the CLS owner and two office people, and from Sural Messrs Millarte, Riviere, Caprino and Ms Holzhaker [Ms Holzaker has a different recollection of her attendance]. It is clear that Mr Millarte was at the CLS meeting and told those present what he observed whilst in Australia. After initially saying that not all changes were recommended by Mr Millarte, Mr Riviere then claimed that the recommendations were made by Mr Schiano of CLS and that he did not recall Mr Millarte making any changes. He also started by saying that Mr Antonio Caprino, the Sural Logistics Manager, may have been the person to suggest incrementing the density of the wood, but later in his evidence he became clear that the recommendation came from Mr Caprino, bolstering that evidence by saying that Mr Caprino had more experience in relation to wood than himself, and that Mr Caprino said a higher density wood would be better and would contribute positively to any problem. At another time he claimed that Mr Schiano proposed some changes which Mr Riviere wrote in an email - higher density wood, changing the position of the rods to be at the same level as the inner drum, checking the nails. Whatever the true position at the meeting, it appears clear that, as a consequence of Mr Millarte's Australian observations, a series of recommendations came forward, which included those recorded in an email of 13 November 2003 that "further improvements were to be made to the reels part of which was the use of harder/heavier timber", the change of position of the rods and some modifications to the nailing of the drums.

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ii. During Mr Riviere's trip he was involved in a round table meeting in which he suggested to those present that: "We have taken steps to strengthen the drums to be used for Batch 3 and 4 of the conductor and have delayed shipment of Batch 3 to put the conductor on the stronger drums. This will prevent the problems arising in future batches, so we just need to solve the problems with the drums you have." It was also decided at this meeting that steps ought to be taken to try to set up a system at the Ridolfo yard to roll or wind the conductor from a full drum to an empty drum to fully investigate these problems. This prompted Mr Riviere to hire the Bullivants conductor rewinder [to better handle the weight of the conductor] and to have it set up in the Ridolfo yard. 134 As Downer has contended, the position that Mr Riviere was in is further illustrated by the fact that on 20 November 2003, prior to the further trial with the Bullivants machine, he attached some coach screws to one or two drums to stop the drum from rotating, and advised Mr Chigioni that he was prepared "to try anything that may fix the problem." The rewinding was then commenced and soon after it had started the same problems were encountered, namely, jamming of the layers and the conductor not being able to free itself from the drum, wobbling and creaking at the very slow pace of about 1km/hr. The unwinding was stopped periodically to repair the damage and then the conductor was released again. The same problems occurred numerous times during the unwinding of the drum. It took half a day to unwind one drum. Mr Riviere was present during the whole process and participated in the unjamming of the wedged conductor and in carrying out repairs to the conductor. The problem was not isolated to the first drum that was tried. Similar problems were encountered with other drums that were sought to be rewound over the following days. It appears that it was at this time that Mr Riviere started to be satisfied with the enormity of the problems faced by Downer. On or about 21 November 2003 he had a conversation with Mr Chigioni to the following effect:

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166 Mr Simms' curriculum vitae showed that he had 19 years experience in private practice as an independent consulting engineer in the area of, among others, investigating mechanical failures, industrial and vehicle accidents as well as the testing of motor vehicles for compliance with safety standards. Prior to commencing private practice, he had had 12 years experience as the Engineer in Charge of the Police Department's Licensing Division (in charge of vehicle inspection system throughout Western Australia and responsibility for technical policy relating to motor vehicle design and usage). He had also, concurrently in the same 12 years, held the position as a WA representative on the Australian Motor Vehicle Certification Board and the Australian Vehicle Standards Advisory Committee. He had had experience in giving expert evidence in courts on a number of occasions, in mostly motor vehicle cases where he provided his opinion as to what were the dynamics of a motor vehicle accident at a given scene. Relevantly, he had no substantive tertiary training in relation to the properties of wooden structures but some experience dealing with some wooden structures during his employment as an undergraduate student and in his subsequent experience in the design of upper storey extensions of residential house and the crane industry. He conceded that his training in relation to wooden structures was all by way of self-education. Hence there are grave problems with the issue of his having acquired section 79 specialised knowledge permitting him to express the views he does. As no objection was taken to his expertise, I have treated with his opinions by regarding the matter as going to weight cognisant that his more general training may permit certain opinions as admissible. However his reports and cross-examination satisfied me that his opinions were particularly uninformed on many topics. 167 In the result the opinions of Professor Bradford are generally accepted where in conflict with those of Mr Simms. Professor Bradford's views were supported by careful explanations and his reasoning processes were transparent. His command of the materials was clear. He was an impressive witness. 168 Generally the experts dealt with issues concerning:

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(b) lifting the drums by using a forklift in an improper manner; vi. failure to use a motorised pay off device; vii. failure to use [or properly use] a brake during pay off; viii. non-compliance of the Sural drums with standards; ix. re-winding of conductor as a rectification measure; x. use of inflatable bladders as a rectification measure. Dealing with the positive defences which came forward in Sural's case Insufficiently trained employees 169 There was no substance in the defence which alleged that the loss and damage was caused by failure to use sufficient or sufficiently trained employees or agents in handling the drums or conductor during loading, unloading and pay off. 170 There was an abundance of evidence that Downer placed its most experienced persons on the Project. There was no suggestion that at any time there was a lack of personnel on hand to operate the stringing equipment. As Downer has contended, whilst there was some attempt made to cross examine Mr Hendrick about the staffing of the stringing team, that cross-examination was ultimately of no consequence, as the questions were directed at the "stringing team/crew", which it was clear Mr Hendrick treated as including all of the individual crews involved in the stringing out process, including the crews that constructed the towers. 171 In particular, the evidence given by Mr Hendrick was to the effect that the stringing crew operating on this Project were made up of both Downer employees and contract labour, but he then referred to the subcontractors involved in tower erection, before agreeing that the stringing crew predominantly comprised Downer employees rather than subcontractors. I accept that it is unsurprising that Mr Hendrick would think in these terms. He was the person responsible for the overall project; not just the run-out component. This is the context in which he agreed that there were occasions where they were short of manpower on stringing conductor, but this was rectified by use of subcontractors - referring to the tower assembly subcontractors. He also made reference to the occasion when another project in Queensland finished, at which time personnel came to the Western Australian Project and Downer pulled out subcontractors and placed their own men in.

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178 It is next convenient to consider the manner in which the experts dealt with the alleged mishandling of the drums, first concerning the failure to use a spreader bar when lifting the drums by chain. 179 Mr Simms' opinion was that on a wooden drum, the compression would cause some local damage to the flange on either side of the reel and would cause forces to be transferred to the conductor (thereby disturbing (intermingling) the layers of the conductor). 180 Mr Simms performed calculations of the horizontal force on the drums in his reports and it was his opinion that lifting the drum in the above-described manner was likely to cause disruption (intermingling) of the conductor. Professor Bradford agreed that the lifting of wooden drums in this manner would exacerbate the problems of the deformation of the drums, but noted that Mr Simms hypothesis was somewhat contradictory to his theory on the structural stiffness of the drums in Mr Simms' first report [in that he had expressed the view that the mass of conductor was rigid and precluded the ability of the drums to deflect]. Professor Bradford also gave evidence that when a wooden drum was fully wound with 3.5km of conductor, as opposed to (hypothetically) being half loaded, the forces on the top layers of the conductor [being closer to the lifting chains] differed in a way that the flanges would predictably deflect to a lesser degree. Mr Simms basically agreed with this evidence [T 659:47-660:9]. Further during his cross-examination, Professor Bradford gave evidence that under certain conditions where the horizontal inward force was sufficiently large a steel drum may actually yield (bend and deform in shape) and if the same force was applied to a wooden drum, his estimate was that the timber would actually break. This was not reported by Downer to have occurred in practice. 181 As to the manner in which the experts dealt with the alleged lifting of the drums by the use of a forklift in an improper manner the position is as follows. 182 Mr Riviere gave evidence that on his visit to Downer's storage facility at Ridolfo between 16 and 22 November 2003, he saw that the wooden reels were moved around in a very rough manner by forklift, with the forklift blades often making heavy contact with the drums [15 April 2005 affidavit at [24]]. Downer put forward a number of witnesses who deposed to never having seen any mishandling of the Sural drums on the occasions they visited the Ridolfo yard. 183 Mr Simms opinion was that if the forklift used was of inadequate capacity and/or was not operated properly, there was a significant risk that the drums could be damaged and the conductor disturbed in a way that would cause problems during run out. In particular, it was said that "if a drum was picked up or lowered carelessly such that a vertical load was applied to one flange this could cause the drum to skew in such a way that it would rotate with a wobble and also disturb the conductor in a way whereby a gap could open up on one side resulting in layers dropping down into the layer below". 184 Similarly Professor Bradford's opinion was that given the tendency of the wooden drums to flex and the disproportionate mass of conductor on them, it was almost self-evident that any improper handling of the drums would result in damage to the conductor induced by flange distortion. Again Professor Bradford noted Mr Simms' seemingly contradictory position in that he accepted the possibilities of drum wobble, undesirable dynamic effects as well as conductor being wound unevenly in this regard, but had earlier rejected Professor Bradford's hypothesis, when discussing the structural soundness of the drums under the disproportionate weight of conductor. Failure to use bladders 185 A careful treatment of the principles with respect to mitigation of loss was set out early in these reasons. The matter particularly involves the issue of the alleged failure of Downer to use bladders. By definition this defence must properly be considered as a mitigation defence as the premise to it must be that there is a deficiency in the drums sufficient to require the use of inflatable bladders. 186 The finding is that there was no substance in the proposition that the loss and damage claimed was caused by failure to use or to adequately use pneumatic bladders during pay off:

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During April 2004, Sural representatives proposed the use of (low pressure pneumatic) inflatable bladders to be inserted inside the drums and inflated to provide a more rigid barrel and therefore to produce a stiffer drum. 187 This mitigation defence seems to be directed at the period of time after the trial in April 2004 [that is, many months into the experiencing of problems]. It is to be noted that the reason that Sural agreed to undertake this trial at that time is because Downer was by then refusing to pay further money to it [the outstanding money related to shipment 4b]. It follows that the defence appears to be directed at a short period of time. 188 In attempted discharge of the onus upon it, Sural appears to singularly rely upon the views of Mr Todaro, who seems to have reached the conclusion that the bladder trial conducted by him was a success. 189 One needs however to consider the perceptions of Downer at the time. 190 There is no evidence that the bladders enabled the conductor to be run out at any faster rate than could be run out without them. On Mr Todaro's evidence, the advantage of the use of the bladder is that its use meant that [at least for the trialled drums] there was not the need to have as many stops during the slow run-out as was needed without the bladders. However for the purposes of working out what was efficient for the run-out, that is not the end of the enquiry. 191 The comparison to be made is between the lengthy time it took to install the bladders when compared to the time allegedly saved as a consequence of less stops. 192 The Downer staff were of the view that the use of the bladders was not an efficient alternative. The evidence of Mr Rantucci and Mr Hendrick is probably the best summary of the views then held by the Downer staff. There is no clear evidence put forward by Sural to suggest that the bladder solution represented a clearly more efficient means of dealing with the deficient drums. It was not suggested to Mr Rantucci and Mr Hendrick that there was anything unreasonable in the decision taken by Downer to not persist with this perceived inefficient means of overcoming the drum problems. 193 Notably, Sural's expert, Mr Simms, stated that it was his opinion that:

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203 Further the technique adopted by Downer for the brake on site was adopted in part to deal with the falling in and wedging experienced at the edges of the drum. It is not suggested that the tension between the drums and the tensioner was maintained at the degree of precision for optimal performance. To the contrary, the evidence is that the tension was kept on the looser side in an attempt to reduce the wedging. Motorised pay off 204 Mr Simms was of the view that a motorised pay off device may have been theoretically ideal but would present some practical difficulties in implementation. It was his view that if Downer did not already own such equipment, it would be unreasonable to expect them to provide it. Professor Bradford did not believe the problems were caused or contributed to by the lack of a motorised pay off device. He further explained during his cross-examination that he believed such a device had no impact upon the forces at play [T 625-626]. 205 There was no substance to the defence that the loss and damage claimed was caused by failure to use a motorised pay off. The theory is rejected by a comparison as to what had occurred on site when the Olex steel drums were deployed. There was no need for a motorised pay off to be deployed at that time to successfully run out all six of the drums. 206 In the result none of the five positive defences raised by the Sural companies in paragraphs 20(a)-(e) of the Further Amended Defence to Cross-Claim are of substance. 207 It seems next appropriate to give more attention to the cross examination of the respective opposing experts. The manner in which each cross-examiner treated with the opposing expert Professor Bradford's cross-examination 208 Without being exhaustive, Mr Slattery's cross-examination of Professor Bradford involved the areas discussed below. There were attempts made to erode the strength and logic of his conclusions and the method in which they were reached. Ultimately, Professor Bradford's hypotheses were not in any serious fashion successfully challenged by the cross-examiner.

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209 Mr Slattery cross-examined Professor Bradford on the variations in his hypotheses as to the cause of the problems in his three reports. Professor Bradford did not agree with Mr Slattery's proposition that his hypotheses in his various reports put forward as causative of the difficulties had changed: rather his hypotheses had been refined as other variables and assumptions were accommodated following the exchange of reports with Mr Simms and further information being made available. This included factors such as the strength of the steel rods and the mass of conductor spinning around a deformed barrel of the drum [T 627]. These variations in his reports did not in my view denigrate the seeming logic behind his final opinions that seem to have been solidly established with clear transparency of reasoning processes. The reasons underlying the variations in his reports were carefully explained. 210 Professor Bradford agreed with Mr Slattery that he could not exclude other possible causes of problems [T 629:10], one of which may have been the mishandling of the drums, but he reasoned why it was less likely to be so [T 629:20]. He explained that there were so many parameters that interacted in different ways that all could not be perfectly measured in his reports. Nevertheless he believed he had taken into account all those factors that in his experience and expertise were seemingly obvious [T 623-624]. 211 Mr Slattery attempted to challenge Professor Bradford's reasoning and conclusions by asking him whether the validity of his hypotheses were undermined if he were to assume that one of the Sural wooden drums did not exhibit the effects of his hypotheses. Professor Bradford explained that not every drum was identical, not least because the timber from which they were manufactured was of "very high variability" [T 605:53] so it was not possible to predict how each and every drum would behave. This seemed to be an entirely reasonable explanation given he could not practicably take all the variables into account. For this reason he had assumed that all the drums were similar as coming from the same generic batch of timber, manufacturing conditions and dimension in his reports [T 603]. 212 Professor Bradford explained the process by reference to which he formulated and tested his hypotheses, after having the problems defined to him in his letter of engagement. He did not agree that any hypothesis as to the cause of the problems could only be as good as its ability to describe what was able to be observed in practice in the DVD footage [T 596]. Further he accepted that the DVD footage and photographic images of drums taken in Western Australia during the Project would necessarily show those drums after they had been through the process of transport and handling to get them from the Taranto factory to Fremantle in Western Australia. The experts had not been asked to assume that the transport of the drums to Western Australia had involved particular problems: so that speculation on these matters was inappropriate.

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Mr Simms' cross-examination 214 Again without being exhaustive, Mr Leeming's cross-examination of Mr Simms covered the areas dealt with below. 215 Mr Simms confirmed during his cross-examination that he had not looked at any Sural drums that Downer had kept from the Project. Apart from what he had seen in the DVDs, the only Sural drums he had seen in person were the drums he saw at the Taranto factory in January 2007 [T 643:10]. He accepted Mr Leeming's proposition that the DVDs of what actually happened in Western Australia to the drums that had come out from Italy were more representative than the drums shown in the video footage at the Taranto factory [T 649:1]. 216 Mr Simms explained that the dishing of the flanges, that is accepted to have occurred on some drums shown in the evidence, was a natural effect of cable being wound onto the drums. He expressed the opinion that deflection of the flanges logically occurred in all drums whether they were the Sural drums or drums compliant with the Australian or Italian (ANIE) standard, and therefore did not think it was a likely explanation for the problems. To my mind this seemed to ignore the degree of dishing that would occur on each type of drum. Further, it is somewhat speculative in that Mr Leeming established that Mr Simms had had no practical experience of problems occurring in a roll out of conductor on wooden drums compliant with Australian standards. 217 Only under cross-examination did Mr Simms introduce further explanations and possible reasons for the dishing of the flanges of the drum and why it would not have been a cause of Downer's problems [T 651-656]. His explanation for not having included these further opinions in his reports or in a new report was that he did not having enough time and had been otherwise occupied. The introduction of these further explanations was somewhat stilted and did not reflect well on the manner in which Mr Simms had been briefed or on the amount of time he had been able to devote to his reports. 218 Mr Simms was critical in his reports of Professor Bradford's estimate of the run out rates shown in the DVDs in that, in his view, they did not constitute irrefutable evidence of the actual run out rates for the entire Project. However during cross-examination, he was not able to describe the type of evidence he would expect to be available in order to be satisfied as to the actual run out rate: since he had not 'given a great deal of thought as to how much evidence might constitute sufficient' evidence. He merely suggested some records that may have been kept for each drum [T 657:30].

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Structural rigidity of the wooden drums provided by Sural 219 Professor Bradford's conclusions were based significantly on the hypothesis that the drums lacked the requisite structural rigidity such that they deflected under the weight of conductor wound onto them. When combined with poor quality control when conductor was wound on during manufacture, it was his opinion that this resulted in the problems Downer appeared to have suffered. 220 Mr Simms and Professor Bradford disagreed in key respects as to what conclusions could reliably be deduced from the video footage and as to what extent any drum distortion was due to the inherent structural inadequacy of the drums. 221 Professor Bradford's opinion was that it was possible, with high probability, to attribute the cause of the problems with the drums from the videos. On his viewing, the videos were consistent with the contemporaneous documents [the numerous emails and photographs] that were sent to Sural during the material time. He gave evidence that he could observe flange wobble [the distorted rotation of the 'cheeks' of the drum during run-out] in the videos and that this could be attributed to the flexible nature of the drums. Annexed to his third report was a photo [Appendix B] that was said to be a drum at the Project site which showed the warped deformation of the flange [that is, the flange was not in a plane but had deflected [bent] outwards. His evidence was that this was consistent with the jamming of conductor near the flanges during the winding on process, with the effects being more profound as more conductor was wound onto the drum, with the deflections being greater and the surface of the wound-on conductor becoming less straight. 222 Despite taking into account the steel rods in the drum barrels [in his second report, and not his first], Professor Bradford did not agree that the stiffness of the rods meant that the flanges did not deflect under the weight of the conductor. He agreed with Mr Simms that the inclusion of the rods reduced the flange deflection but contended that a degree of deflection still occurred [as per his calculations]. His opinion was that the cable jamming that occurred was a result of flange deflections in that gaps opened up in the windings of conductor causing jamming. [Professor Bradford explained that his calculations in the first report did not accommodate the effect of steel rods in the barrel of the drums because he did not have the data provided at the time of the original report].

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ii. breaches of clause SC 8 of the Special Conditions of Contract. 239 In relation to the former, the breaches are a priori [as the reasons and the materials in evidence make clear]. The drums were not of a steel type; they did not enable smooth running out in lengths as long as could be conveniently handled and erected; they were not constructed so as to withstand rough handling in transit and they were not of a type, size and construction which would ensure that during and after winding of the conductor onto the drums and during transit and storage, the conductor would withstand significant damage in any way. 240 Indeed in relation to each of clauses SC 7.3 and SC 8, I accept as correct the proposition put by Downer that either by the route of a textual implication or a more conventional BP v Hastings implication [BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266], there is seen to have been a contractual obligation to supply the conductor on drums able to be run out at a reasonable rate. 241 Each of these provisions would be [and were] breached if, as was here the case, the drums could only be rolled out at substantially less than the run-out rates usually experienced on similar transmission line projects: cf the evidence given by Messrs Hendrick, Chigioni and Rantucci earlier identified in theses reasons, noting that Mr Chigioni was not required for cross-examination. That is to say, the clauses yield to the construction that there is a contractual obligation to provide drums from which conductor can be unwound otherwise than at rates which are substantially less than the run-out rates usually experienced on similar transmission line projects. 242 Ultimately the findings do not depend upon non-compliance with particular standards for the reason in particular that the experts agreed that failure to comply with the code limits was neither sufficient proof of inadequacy nor a satisfactory explanation of the problems which occurred. Such non-compliance would not itself necessarily mean that the wooden drums were inadequate or not fit for their purpose. The size of the drums could be pushed outside of its code limits provided in the standards and still be serviceable and of sufficient strength. 243 The findings can be expressed with more particularity by reference to the performance of the drums, in short:

[478]

Method 1 - quantified loss $2,717,701 [later adjusted for arithmetic errors to $2,706,807] 246 Downer's quantification of its claim for damages was primarily based upon so-called "Method 1". This method sought to quantify the additional costs in fact incurred by Downer for the Project said to be attributable to the breaches of contract. It involved the subtraction of the revised tender cost estimate for the entire stringing process from the actual costs incurred [recorded in account records and summarised in spreadsheets], but making allowances for the cost of other lost time incidents [and other expenses] not related to the breaches of contract [totalling $290,655]. Finally, the cost of additional materials and miscellaneous costs associated with rectifying damaged conductor and drums was added. The need to subtract the revised tender cost estimate instead of the initial tender cost estimate was due to the need to take into account the changes to the scope of work after the initial tender was awarded to Downer. Method 2 - quantified loss $2,760,821 247 Downer also put forward an alternative method, so-called "Method 2", for the quantification of its claim for damages so as to provide an independent confirmation of the robustness of the quantum of its claim derived from Method 1. 248 Method 2 involved the extrapolation of the average conductor run out rates for both the Sural and Olex supplied conductor [the latter being used as an example of the rate that ought to have been expected had the Sural conductor been supplied on steel drums], for the purposes of calculating the differences in run out speeds and hence the days required to string the entire line. The difference in days was then multiplied by what was said to be "the actual daily cost" of stringing activities which then gave a total loss of $2,760,821. [The method gave allowance for additional "lost times" due to the need to repair or replace damaged sections of the Sural conductor and also was adjusted for other recorded stoppages not related to Sural conductor issues.] 249 The quantified loss figure was contended by Downer to be well 'within the range' of the ultimate figure arising from the calculation of Method 1 and thereby to provide some confidence in the Method 1 calculation.

[482]

The 'unstated premise' 255 Sural contended that there existed a 'critical unstated premise' underlying the Method 1 calculations which Mr Masters failed to identify and critically analyse. 256 Simply put the unstated premise was said to be that the revised tender cost estimate in relation to stringing, after making allowance for lost time and costs for reasons not related to the supply of conductor, would have equated to the actual costs incurred in the stringing operation, had there been no breach of contract. That is, that Mr Barona's revised tender estimate in relation to stringing would really have been a close to realistic expectation of the cost to Downer even had there been no problems with the Sural drums. 257 Mr Barona acknowledged that the tender estimates in relation to stringing that he had prepared over the past 15 years as Contracts Manager for Downer had been accurate to within about 15%, when compared to the actual costs of stringing carried out by Downer. This acknowledgement was identified by Sural in final submissions as a criticism of the reliability of the tender estimate figures in relation to stringing. Hence Sural asserted that Mr Barona's revised tender estimate was not a measure of Downer's costs had there been no breach. 258 I do not accept that the 15% variability renders the revised estimate figures in relation to stringing unreliable. The tender estimate was calculated by Mr Barona for the purpose of enabling Downer to bid an appropriate price for the Project. The revised tender estimate was calculated by Mr Barona for internal purposes to cope with the changes in the job description, and was a task that was carried out before there was any litigation. 259 Mr Barona had had substantial experience in providing tender estimates. He had also consulted with fellow employees in the process of preparing his calculations. 260 Mr Barona's cross-examination notably proceeded on the basis that his estimate was generally accurate [T 452.40]. He had deposed that there were many variables in such transmission line projects, with the area of greatest variability [in relation to tendered costs versus actual costs], being the costs involved with foundation construction due to the unknown underground conditions. On the other hand, Mr Barona's evidence was that the stringing part of the estimate was less variable. 261 Mr Masters was satisfied that Mr Barona's tender estimate stringing costs were appropriate (Mr Masters' 18 October 2007 affidavit at [16]). Costs of the entire stringing operation Treating further with Sural's claim that a critical shortcoming of Method 1 was that it compared the estimated costs of the entire stringing operation with the actual costs of the entire stringing operation. 262 A stringing operation involved multiple stages, including (among others) the transport of materials to site, the establishment of draw wire, the run out of conductor and OPGW, the use of a tensioner and the installation of other components. 263 Sural contended that since the only stage that was affected by the problems with the Sural drums was the run out of conductor, the focus of the quantification analysis should have only been on the actual costs (labour, plant and equipment) of this Project that related only to the running out of the conductor. Sural relied upon Mr Masters acceptance that the amount of time it took for conductor to be run out did not have an impact upon the amount of time it took to set up the conductor drums and winches on the sites along the line route, or any other steps in the stringing process. 264 This alleged shortcoming may be dismissed out of hand. Sural has failed to adequately address the uncontradicted evidence of Mr Antoniazzi and Mr Masters of the adverse 'ripple effects' that would occur, in that the difficulties with the run out of the conductor would mean an overall slowing down of the stringing process due to flow-on effects from the run out delay. Both Mr Masters [T 684.50 to 685.35] and Mr Antoniazzi [T 731.52 to 733.6] gave evidence that the effect of the difficulties and delay in the run out of the conductor was that it took longer to string the whole line, since stringing was a "critical path" activity that involved an ordered process. For example, certain steps such as the 'fixing' in place of the conductor [after it had been strung up] were delayed since the deployment of the initial draw wire, stringing the conductor and tensioning of the conductor had required to be carried out first. 265 Although Sural was strictly correct in pointing out that the run out of the conductor was a distinct part of the process and that any delay in this task did not technically affect the time taken to complete the other parts of the stringing process (confirmed by Masters [T680]), the obvious fact was that Downer still had to pay the employees engaged for all parts of the process: delay in any part of the process meant that Downer was obliged continue to pay relevant labour costs until the Project was complete. Challenges to the costs of additional labour and plant 266 Sural submitted that there were fundamental deficiencies with Method 1 in so far as it purported to calculate the cost of additional labour and plant said to be incurred as a result of the supply of conductor on wooden drums. Sural also challenged certain of the additional materials and miscellaneous costs claimed by Downer. It is appropriate to next deal with these issues.

[486]

iii. not made any payment to the staff at all ('let go' or taken leave without pay) [T 729-30]. 268 During his cross-examination, Mr Slattery put to Mr Masters that he had no basis for saying that the apparent overrun costs for the entire stringing project were attributable to any alleged defect in the conductor run out [t 684.50]. Mr Masters did not agree and explained [at T 685:1-35] that the stringing process was much like a production process, and on his experience with the 37 transmission lines with which he had previously been involved, a contractor did not have an infinite number of stringing sheaves to put one on every tower in the transmission line: similarly there are limited quantities of other equipment such as tensioners and winches [so that a stringing team would basically have perhaps two sets of winches, and enough stringing sheaves for maybe two to three sections of the proposed transmission line]. The sheaves had to stay on the tower until the stringing for that section was completed before being redeployed, and the sag and tension also needed to be adjusted to the client's specifications. Hence any delay on any one part of that process in a particular section, was going to affect the next section and the processes involved [T 685:31]. The indisputable result was that overall, it took longer to string the whole line, because this was a critical path activity. Mr Antoniazzi similarly described the stringing as a cyclic process in that the same activities and equipment needed to be used again as the stringing team progressed onto the next section of the line. 269 The explanations provided by Mr Masters and Mr Antoniazzi are accepted as inherently plausible and reasonable. 270 Sural sought to place reliance on NRMA Ltd v Morgan (1999) 31 ACSR 435 for the proposition that internal costs [such as the salaries of full-time permanent employees] which payment would have been made in any event, are not recoverable. However it is evident that the company in issue, NRMA, structured its wages and salaries of its personnel in a very different way to Downer. It cannot be said that Downer would have paid by way of salaries and wages, what it in fact paid over the same period had the problems not arisen. Furthermore, the delay experienced during the run out meant that the employees were required to spend additional time fixing and coping with the run out problems, and hence additional moneys were required to be paid by Downer (at least for the waged employees) being moneys that would not have been paid had the job had not taken so much longer than estimated. In Downer's situation, most of the salaried employees and all of the waged employees, were employed on a project specific basis [T 835:35]. I accept that not all of the employment contracts were produced by Downer in response to the Notice to Produce served by Sural during these proceedings [as late as 19 October 2007] given the limited time frame for response. However I am satisfied that all of the waged personnel were expressly retained on a per project basis and that on the balance of probabilities, the vast majority of the salaried personnel for which costs are claimed by Downer, had contracts terminable with 1 month's notice [or with no notice but with pay in lieu of notice]. Additional plant costs

[492]

277 Downer claims $357,000 in respect of foregone planned revenue from the sale of empty steel drums. Mr Antoniazzi (19 October 2007 affidavit at [46] and in cross-examination at T 739:9-54) gave evidence that there exists a market for second-hand steel drums; that he received a real offer at $1,000 per drum [the cost price of new steel reels being apparently around $3,000]. Mr Antoniazzi gave evidence that the usual practice, based on his involvement in other projects, was for the second-hand purchaser to come to the site and collect the used drums. 278 Mr Masters similarly gave evidence of his experience in the sale of steel drums in his affidavit. His experience had been that a company similar to Downer would purchase the conductor supplied on steel returnable drums and once the conductor had been used, the empty drums were returned to the conductor manufacturer for re-use (rather than sold second-hand in the open market). Mr Masters evidence was qualified by the fact that he has never had to sell steel drums on the open market [T 703:20]. 279 In the situation of Downer, the return of any drums to Sural (for value) in Italy was not possible since the contract had stipulated "non-returnable steel drums". 280 The evidence of Mr Masters and Mr Antoniazzi in regards to the market re-sale value of any steel drums left a deal to be desired. They did not purport to be experienced in selling second-hand steel drums in the market. The oral quote that Mr Antoniazzi obtained for the steel drums is insufficient to prove their re-sale value or that there was a ready market for the second-hand drums. The fact that the planned revenue from the re-sale of steel drums may have been factored into Mr Barona's tender estimate for the Project [suggesting that their anticipated re-sale value was realistic] does not overcome the defect in the necessary proof of the re-sale value in a second-hand market. 281 Furthermore, although neither party appears to have drawn the Court's attention to the relevant portion of the faxed letter dated 14 October 2003 from Downer to Sural [PX 1171], Mr Antoniazzi said "Lastly, Downer has foregone the benefit of the substantial re-sale value of the steel reels, which in this instance would amount in the order of USD 400 to USD 700 each." Hence this would seem to have been an altogether other answer to the claim for foregone planned revenue from the re-sale of steel drums.

Sural SpA & Anor v Downer EDI Rail Pty Limited

At a glance

Court

Decision date

Before

Source

Judgment (500 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (37)

Cited By (1)