Yevad Products Pty Limited v Brookfield

REASONS FOR JUDGMENT 1 This is an appeal from a judgment of Lander J dated 9 September 2004, and consequential orders, setting aside orders made by Branson J in 1996 and 1997. On 8 February 1996, her Honour dismissed proceedings brought by the respondents against the appellant ("Yevad"). On 19 December 1997, her Honour ordered the first respondent ("Mr Brookfield") to pay Yevad's costs specified in an amount slightly in excess of $380,000. Lander J ordered that Branson J's orders be set aside because of Yevad's failure to make full discovery in the proceedings. 2 Mr Brookfield is a qualified master plumber. In about 1987 he began to supply his customers with a household waste water treatment system known as the Parco Beaver system. Commencing in about 1990 Mr Brookfield, either on his own behalf or through the second respondent, Septic Products Australia Pty Limited ("SPA") supplied a modified version of the Parco Beaver system, the BPS Trickle Filter system, ("the BPS system") to his customers. The BPS system used pumps manufactured and supplied to the respondents by Yevad. 3 In the proceedings before Branson J, it was contended that the pumps supplied by Yevad were defective. A number of causes of action were alleged including breach of implied conditions of merchantability and fitness for the purpose said to have been made known to Yevad. These conditions were said to have been implied under s 14 of the Sale of Goods Act 1895 (SA) ("Sale of Goods Act"). 4 Branson J found that approximately 50% of one type of pump supplied by Yevad were not fit for the purpose for which they were in fact used. However, her Honour found that the respondents did not make known to Yevad the particular purpose for which those pumps were required. Accordingly, her Honour found that the claim for breach of the implied condition of fitness for the purpose failed. 5 This issue of fitness for the purpose turned upon the modification to the Parco Beaver system made by Mr Brookfield and whether that had been made known to Yevad. Whether the fact of the modification had been communicated to Yevad turned substantially on evidence of conversations between Mr Brookfield and an employee of Yevad, Mr Wilsdon. Her Honour preferred the evidence of Mr Wilsdon. 6 Lander J found that two categories of discoverable documents were not discovered by Yevad. The first category was warranty returns and replacement records, known as job cards, for pumps supplied by Yevad to customers other than those for whom the respondent had installed the PBS system. The job cards for the respondents' customers were discovered. 7 The second category of documents was a single memorandum prepared by the Products Manager of Yevad, Mr Ashley White, dated 29 October 1991 ("the Ashley White memorandum"). 8 Lander J found at [281] that the undiscovered job cards could have been used by the respondents to prove that other users of Yevad's pumps experienced failures that were the same or similar to those experienced by the respondents. His Honour found that had the job cards been available at the trial the respondents may have been able to establish that failures were occurring at high rates in systems that did not incorporate Mr Brookfield's modification to the Parco Beaver system. 9 His Honour observed at [336] that the Ashley White memorandum identified that the type of pump in question was susceptible to premature wear. It would have put Mr Brookfield on notice that high rates of lip seal and shaft grooving failures were experienced by other system manufacturers; see at [342]. 10 There was no dispute before Lander J that Yevad had failed to make discovery of both categories of documents, which his Honour said at [384] were "directly and indirectly relevant to issues at the trial". In his Honour's view, the documents would have led the applicants to a train of inquiry, "in particular, to investigate the causes of failure of the pumps"; see at [386]. 11 Lander J was of the view, at [414], that there was "a real possibility" that if the documents had been available at the trial, "a different result would have been obtained". His Honour followed the decision of the High Court in Commonwealth Bank of Australia v Quade (1991) 178 CLR 134 ("Quade") and concluded that the interests of justice would be served by setting aside the orders made by Branson J on 8 February 1996 and 19 December 1997. 12 Leave to appeal against Lander J's orders was granted by Mansfield J on 24 February 2005. 13 The issues raised by Yevad on appeal turn upon whether his Honour correctly applied the principles stated in Quade. Five principal submissions were put by senior counsel for Yevad, Mr Wells QC. The submissions were as follows:- (a) that Lander J was required to confine himself to a consideration of the "fresh evidence" sought to be adduced and that his Honour should not have taken into account lines of inquiry which might have been available and which were said to involve speculation as to whether the result would have been different. (b) that his Honour failed to consider, or adequately consider, whether the respondents could have obtained the evidence at the trial by the exercise of reasonable diligence. (c) that his Honour found that the failure to give discovery was not deliberate and that this should have weighed against the setting aside of the trial judge's reasons. (d) that his Honour failed to address what was called the "appropriate impact threshold" of the "fresh evidence". It was submitted that this was to be determined according to a sliding scale depending upon the degree of default. (e) that his Honour wrongly took into account Yevad's continuing failure to give full discovery. Branson J's judgment 14 Her Honour referred (at p 4) to the contractual arrangements which were put in place between the parties in about October 1990 for the supply by Yevad (then known as Davey Products Pty Limited) of two models of pump. The first was the Davey Lowara Doc 3 ("the Doc 3 pump"). The second was the Davey Lowara Doc 7 ("the Doc 7 pump"). The arrangements were made following upon conversations between Mr Brookfield and Mr Wilsdon. 15 From about October 1990 to about October 1991, Yevad supplied SPA with the Doc 3 pump and the Doc 7 pump, both of which were used by SPA in the manufacture and installation of the BPS system. 16 The differences between the Parco Beaver system and the BPS system were described by her Honour at pp. 116-7. The principal difference was that the BPS system used a disc pack as the filtering medium in the filter system ("the disc pack modification") whereas the Parco Beaver system used short lengths of cut plastic piping held within the concrete bowl. 17 Six causes of action were alleged. The first was a claim for damages under s 82 of the Trade Practices Act 1974 (Cth) ("the TPA"), consequent upon a contravention of s 52 of the TPA. The second was for breach of the conditions of merchantability and fitness implied under s 71 of the TPA. The third was for negligent misrepresentation. The fourth was for damages under the Misrepresentation Act 1972 (SA). The fifth and sixth causes of action were for breach of the implied conditions of merchantability and fitness for the purpose under the Sale of Goods Act. 18 Her Honour found that the particular purpose which Mr Brookfield made known to Mr Wilsdon was the purpose of acting as a recirculation pump in a Parco Beaver system. She found (at p 60) that Mr Brookfield did not make known that the Doc 3 pump was required for the purpose of acting as a recirculation pump in the BPS system; that is to say, using the disc pack modification in lieu of the cut plastic piping. 19 There was a very high rate of failure in the Doc 3 pump. Her Honour found (at p 67) that the failure rate in the Doc 3 pump was 50% in a relatively short period and that the Doc 3 pumps were not fit for the purpose for which they were in fact used. There was a lower failure rate in the Doc 7 pump. 20 All of the experts who gave evidence agreed that the Doc 3 and Doc 7 pumps failed because lip seals on the pump shafts failed thereby causing fluid to enter the motors. The dispute between the experts was why the failures in the lip seals had occurred (see at p 71). 21 The case sought to be made through Mr Brookfield and SPA's expert was that the seals failed because the pump shafts were manufactured from steel which was too soft for use in the lip seals. Yevad's expert evidence was that the seals failed because the pumps were operated for extended periods in an environment containing excessively high concentration of abrasive particles. 22 Her Honour found (at p 73) that the steel with which at least the Doc 7 pump was manufactured was not too soft. Her Honour accepted Mr Wilsdon's evidence that a number of the Doc 3 and Doc 7 pumps were sold by Yevad over the relevant periods to customers other than Mr Brookfield and SPA and "that the return rate for such pumps was not out of the ordinary" (p 73). 23 Her Honour recorded the following acknowledgment made by Mr Brookfield and the consequent evidentiary gap:- "Mr Brookfield acknowledged that the applicants' records indicated that only 'a handful' of Doc 3 pumps supplied to the applicants had failed in systems which did not have the disc pack modification. There was no attempt made on behalf of the applicant to call admissible evidence of Doc 3 pumps failing in significant numbers in Parco Beaver systems which did not have the disc pack modification, or in any other waste water systems." 24 Her Honour went on to make the following critical finding:- "I find that, on the balance of probabilities, there is a relationship between the established failure of a significant proportion of the Doc 3 pumps supplied to Septic Products by the respondent and the modification effected by Mr Brookfield to the Parco Beaver system. The evidence does not disclose that Mr Brookfield, or any other person on behalf of the applicants, advised the respondent of the modification made by Mr Brookfield to the Parco Beaver system." (p 74) 25 Accordingly, her Honour found that Yevad did not breach the implied condition of fitness for the purpose. She also found, applying the principles in cases such as Grant v Australian Knitting Mills Limited (1933) 50 CLR 387, that Mr Brookfield and SPA had failed to establish that the Doc 3 pumps were not of merchantable quality. 26 An appeal from her Honour's judgment was dismissed by a Full Court (von Doussa, O'Loughlin and Lehane JJ) on 12 September 1996. 27 Special leave to appeal to the High Court was refused on 30 May 1997. Proceedings for a stay of Branson J's orders 28 As early as 16 December 1997, Mr Brookfield brought an application for a stay of execution of the costs orders made by Branson J on the ground, inter alia, of Yevad's failure to give discovery. Lander J described the application, which was determined by O'Loughlin J on 19 May 1998, at [84] - [106]. 29 The application before O'Loughlin J relied in large measure on a number of exhibits to an affidavit of Mr Wilsdon sworn 30 July 1995 which had been read in the proceedings before Branson J. Mr Wilsdon was, at the relevant time, the State Manager for Yevad. 30 Exhibit DW 25 to Mr Wilsdon's affidavit contained a summary of sales, returns and replacements of Davey Lowara pumps from 1988 to 1994 indicating that there were no records for the two financial years commencing on 1 July 1988 and concluding on 30 June 1990. 31 Exhibit DW 27 contained a further schedule of sales and returns from 1988 to 1993. The schedule contained a note made by Mr Wilsdon as follows:- "These figures have been collated from Customer Sales Reports, Warranty Transaction Reports, and Return Job Cards over the above period." 32 Exhibit DW 28 contained a number of customer sales reports. 33 Mr Brookfield complained that the documents referred to in the notation to Exhibit DW 27 were not discovered. These included the return job cards for other customers. He also complained that the documents in Exhibit DW 28 showed that there were records for pump returns for 1990 and 1991 which were not discovered in the principal proceedings. 34 In addition, Mr Brookfield pointed to false evidence given by Mr Wilsdon in the affidavit as to the date of a fire at Yevad's premises which had destroyed some documents. Mr Morrow, the credit manager of Yevad who had co-ordinated the defence of the proceedings, swore an affidavit in the application before O'Loughlin J indicating that the fire had occurred at a later date than that deposed to by Mr Wilsdon. 35 The effect of this was that fewer documents were in fact destroyed by the fire than had been indicated in Mr Wilsdon's evidence. 36 O'Loughlin J refused the stay for two reasons. First, he considered that the documents were not of sufficient substance to warrant the Court's intervention. Second, he considered that Mr Brookfield and his legal advisers were on notice of the existence of the documents because they were referred to or appeared from the exhibits to Mr Wilsdon's affidavit. 37 Nevertheless, O'Loughlin J held that the documents were discoverable and that they should have been discovered in the proceedings before Branson J. His Honour also referred to evidence filed in the application for a stay which indicated that documents of a kind referred to in Exhibit DW 27 had been destroyed in August 1996 when Yevad had moved offices in New South Wales. His Honour did not draw any adverse inference against Yevad as a consequence of the destruction of the documents in 1996. 38 Lander J summed up the effect of the application before O'Loughlin J as follows at [106]:- "Although Mr Brookfield's application to O'Loughlin J was unsuccessful, he did establish that: