FEDERAL COURT OF AUSTRALIA

 

Seeley International Pty Ltd v Newtronics Pty Ltd [2001] FCA 1862

 

CONTRACT- Formation of Contract – exchange of correspondence, meetings and purchase orders with Terms and Conditions – assessment of actual terms of contracts –– where respondents did not object to printed terms or put forward their own terms over a prolonged period the applicant’s terms held to be incorporated into the contract

CONTRACT – whether breach of implied term that goods reasonably fit for purpose where respondent well aware of that purpose – whether implied warranty goods existed that were of merchantable quality – whether respondents breached implied term to use reasonable care and skill

TORTS – Duty of Care – whether respondents breached duties to exercise reasonable care and skill in designing and manufacturing product – whether the applicant relied upon respondents’ expertise

DAMAGES – liability of both respondents in tort and contract – business sold by first respondent to second respondent without applicant’s knowledge – second respondent continued to deal with applicant as before – both respondents in breach of express and implied terms of contract – held jointly and severally liable

DAMAGES – applicant sought damages for loss of reputation – respondent led evidence of lack of reliability in product – evidence disclosed general lack of brand awareness in product area – unable to find applicant enjoyed a high reputation for reliability

DAMAGES – past economic loss – calculation of direct losses as a result of product recall – losses due to negative publicity and required re-direction of monies away from research and development into marketing – assessment of impact on lost sales and market share taking into account other external factors and commercial contingencies

Trade Practices Act 1974 (Cth) ss 51A, 52, 82, 74

Sale of Goods Act 1895 (SA) s 14

Acts Interpretation Act 1901 (Cth) s 22(1)(a)

Fair Trading Act 1987 (SA) s 54

Limitations of Action Act 1936 (SA) s 48(3)(b)(i)

Evidence Act 1995 (Cth) s 69

McGregor on Damages (16^th Ed)

Macquarie Dictionary (3^rd Edition)

The Australian Oxford Dictionary

Cullinane v British ‘Rema’ Manufacturing Co Ltd [1954] 1 QB 292 referred to

Canvas Graphics Pty Ltd v Kodak (Australasia) Pty Ltd [1995] FCA 470 referred to

March v E & MH Stamare Pty Ltd (1991) 171 CLR 506 applied

Astley v Austrust Ltd (1999) 197 CLR 1 applied

Crawford v Mayne Nickless Ltd (1992) 59 SASR 490 discussed

Bryan v Maloney (1995) 182 CLR 609 applied

Perre v Apand Pty Ltd (1999) 198 CLR 180 applied

Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 followed

Amann Aviation Pty Ltd v Commonwealth (1990) 22 FCR 527 referred to

Gibbs Holdings Pty Ltd v MMI [2000] QCA 524 referred to

Hall v Meyrick [1957] 2 QB 455 referred to

Marra Developments Ltd and the Companies Act [1979] 2 NSWLR 193 cited

Valoutin Pty Ltd v Furst (1998) 154 ALR 119 applied

TPC v TNT Management Pty Ltd (1984) 56 ALR 647 cited

Jones v Dunkel (1959) 101 CLR 298 applied

SEELEY INTERNATIONAL PTY LTD v CINTRO PTY LTD AND NEWTRONICS PTY LTD

NO SG 21 OF 1998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

O’LOUGHLIN J

21 DECEMBER 2001

ADELAIDE

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SG 21 OF 1998

 

BETWEEN:	SEELEY INTERNATIONAL PTY LTD APPLICANT
AND:	CINTRO PTY LTD FIRST RESPONDENT
AND:	NEWTRONICS PTY LTD SECOND RESPONDENT

 

JUDGE:	O’LOUGHLIN J
DATE:	21 DECEMBER 2001
PLACE:	ADELAIDE

FINDINGS AND REASONS

the parties TO the PROCEEDINGS

1                     The applicant in these proceedings is Seeley International Pty Ltd (“Seeley”). On 12 February 1998, it filed an application and a statement of claim in this Court naming Newtronics Pty Ltd as the respondent to the proceedings. It pleaded (inter alia) that it had entered into certain agreements with that company; it alleged that those agreements related to the design, manufacture and supply by the respondent to Seeley of certain electronic components which were to be installed in Seeley’s domestic rooftop evaporative airconditioners. Those components, which will be described in detail in due course, can, at this stage, be referred to as a hand held remote control package. The agreements, or the negotiations leading up to the making of those agreements, were said by Seeley to date back to 1992.

2                     In February 1995, fires had broken out in three houses. In each case, the source of the fire was somewhere within a Seeley domestic rooftop evaporative airconditioner which had been installed on the roof of each house. It was Seeley’s case that the cause of each fire was the faulty componentry that the respondent had supplied to Seeley. It has claimed that the fires caused substantial losses to its business and its reputation; it has sought damages to compensate it for those losses, alleging that the respondent had breached its obligations under the agreements, that it had breached a duty of care that it owed to Seeley and that it had been guilty of misleading and deceptive conduct in the negotiations that preceded the making of the agreements.

3                     A defence was filed denying liability; there was also a cross-claim for the price of goods sold and delivered. Seeley must have realised that something was wrong because, in its defence, the respondent claimed that it was only incorporated in 1993, a year after the commencement of the negotiations. The consequential inquiries that Seeley made enabled it to place material before the Court which has satisfied me that the following findings can be made:

·                   a company by the name of Newtronics Pty Ltd was incorporated on 24 February 1981;

·                   however, that company changed its name to Cintro Pty Ltd (“Cintro”) on 27 October 1993;

·                   a company was incorporated as Biddop Pty Ltd on 3 September 1993;

·                   Biddop Pty Ltd changed its name to Newtronics Pty Ltd (“Newtronics”) on 27 October 1993;

·                   Cintro has, from 27 October 1993, owned approximately 49 per cent of the shares in Newtronics.

·                   By a Deed of Sale dated 15 day of October 1993 (“the Deed of Sale”) the business that had previously been conducted by the old Newtronics Pty Ltd (ie Cintro) was sold to the new Newtronics Pty Ltd. The Deed of Sale was tendered in evidence. By clause 2.1 (in conjunction with Clauses 1.1.5 and 1.1.9) Cintro transferred, with effect from 30 September 1993, all the relevant assets and liabilities of its business to Newtronics.)

·                   Neither the vendor nor the purchaser of that business caused notice of the sale to be given to Seeley and Seeley was unaware of the sale of the business and the change in the corporate identity of the party with whom it was dealing until a date subsequent to the institution of these proceedings.

4                     Henceforth in these reasons I will use the name “Cintro” to identify the body corporate with which Seeley first dealt. Any reference to “Newtronics” will, unless I indicate to the contrary, be a reference to the company that was incorporated under the name of Biddop Pty Ltd and with whom Seeley dealt after the sale of the business by Cintro.

5                     When Newtronics purchased the business from Cintro, employees of Cintro, including Messrs Tescher, Casey, Au and others, were then working on the Seeley project that has become the focal point of these proceedings. Newtronics took over the employment of those men so that they were thereby able to continue the work on the project that they had previously attended to as employees of Cintro. That work, as counsel for Newtronics acknowledged in his written submissions, “included the design of electronics for the Applicant so as to enable RF Units to be installed in the Applicant’s coolers”. The letters “RF” stand for “radio frequency” and the reference to “coolers” was a reference to Seeley’s domestic rooftop evaporative airconditioners.

6                     As I have already said, neither Cintro nor Newtronics disclosed to Seeley the change that had occurred in the ownership of the business. Seeley continued to deal with the same personnel; its employees continued to visit the same premises and they telephoned and sent facsimile transmissions to the same numbers as they had prior to the Deed of Sale. The fact that the same personnel held themselves out as employees and representatives of Newtronics, combined with the fact that none of them made any attempt to inform Seeley of the sale of the business, led, so Seeley claimed, to the conclusion that, by its conduct, the new company took over and bound itself to deal with Seeley in accordance with the terms and conditions of the contractual arrangements that were in force at the time of the changeover. During the course of his closing submissions, counsel for Newtronics stated that, whilst putting Seeley to proof, his client did not seek to take any advantage of the fact that there had been a change of ownership of the business in 1993. As I understand this concession, it could mean that this case might be decided against Newtronics – should the evidence warrant such a result – by having regard to the acts or omissions that occurred from the time of the first contact between Seeley and Cintro as if there had been no change in the corporate ownership of the business.

7                     The revelation about the existence of the two companies and the change of names, necessitated the filing of an amended application and an amended statement of claim; they were filed on 30 October 1998, naming Cintro as the first respondent to this action whilst Newtronics was identified as the second respondent. On 11 February 1999, Cintro filed its defence to Seeley’s amended statement of claim. Newtronics, as the second respondent, had earlier filed its defence and a cross-claim against Seeley on 26 November 1998.

8                     On 17 December 1998 Seeley filed its reply to Newtronics’ defence and its defence to Newtronics’ cross-claim. Pursuant to leave granted by a judge of this court, Seeley filed a further amended statement of claim (“the third statement of claim”) on 22 February 1999 and a fourth amended statement of claim (called “the substituted statement of claim”) on 27 May 1999. Newtronics filed a further amended defence to the third statement of claim and an amended cross-claim against Seeley and it later it filed its amended defence to the substituted statement of claim. Cintro did not, however, file an amended defence to the third statement of claim or to the substituted statement of claim.

9                     Newtronics’ cross-claim against Seeley was resolved on the last day of the trial on the following terms. The parties agreed that the quantum of Newtronics’ cross-claim for goods sold and delivered to Seeley was $217,718.98 plus interest that was to accrue from 1 March 1995 to date at 10.5 per cent per annum simple interest. They further agreed that if Seeley succeeded on its claim, that amount, together with accrued interest, was to be set off so that the amount for which judgment would be entered in Seeley’s favour would be accordingly reduced. If, on the other hand, Seeley were to wholly fail in this action, Newtronics would be entitled to judgment on its cross-claim in that sum plus accrued interest.

10                  In addition to reaching that agreement, the parties also reached an agreement, first, in respect of Newtronics’ cross-claim for lost profits, secondly, for the value of its lost work in progress and finally for the value of goods completed but not delivered. The agreed sum for all three subject matters totalled $25,000 plus interest that was to accrue from 1 March 1995 to date at 10.5 per cent per annum simple interest. However, if Seeley succeeded in its claim, the parties have agreed that Seeley will not have any liability to Newtronics in respect of any of these last mentioned matters. If, on the other hand, Seeley were to wholly fail in this action, Newtronics would be entitled to judgment on its cross-claim in that further sum plus accrued interest. Finally, the parties agreed that all questions of costs on the claim and cross-claim should be deferred pending the final determination of these proceedings.

11                  On 14 December 1998, Newtronics filed a second cross-claim; it named Cintro as the cross-respondent and it sought either indemnification or contribution with respect to the claims that Seeley had made against it. On 4 March 1999 Cintro filed a mirror cross-claim against Newtronics seeking indemnification or contribution from it. Defences to those cross-claims were duly filed. During the course of his closing submissions, counsel for Newtronics announced that his client was no longer pursuing its cross-claim against Cintro: nor was it pursuing an allegation of contributory negligence that it had made against Seeley. Newtronics had initially alleged that Seeley had failed to afford an appropriate measure of protection against fires in the design and manufacture of the motors that were installed in its rooftop evaporative airconditioners and had, as a result, been guilty of contributory negligence. Counsel for Seeley sought to use this abandonment to argue that Newtronics’ defence could now only succeed if it were able to show that Seeley’s acts or omissions were, as a matter of law, the only cause of the fires and the only cause of the loss and damage that flowed from the fires. However, such a submission overlooks Seeley’s primary onus of establishing, on the balance of probabilities, that Newtronics’ acts or omissions were responsible for the fires and the consequential losses. Seeley is only relieved, by the abandonment of the allegation of contributory negligence, of having to justify its conduct; it must still prove that one or other or both the respondents are liable to compensate it for its losses.

12                  Newtronics also filed another cross-claim, naming its insurer, Cigna Insurance Australia Limited (“Cigna”) as a cross-respondent. In that cross-claim, Newtronics alleged that if (which was denied) Newtronics were found to be liable to Seeley, then Newtronics was entitled to indemnity under its insurance policy from Cigna in respect of Seeley’s claim. Cigna denied liability under the policy. It alleged that its liability to indemnify Newtronics was limited to certain events and that the subject matters of Seeley’s claims were not within the class of events that were covered by the relevant policy. During the course of the trial Newtronics and Cigna settled their differences on undisclosed terms. By consent, Newtronics cross-claim against Cigna was dismissed: no order was made as to costs.

13                  Although Cintro filed a defence and was represented by counsel when this matter was called on for hearing, it would be fair to say that it had not played an active role in any of the pre-trial procedures. Mr Hevey, counsel for Cintro, informed the Court, when the matter was called on, that his client did not wish to take part in the trial; he said that his client would adopt Newtronics’ “defence and attitude” to Seeley’s claim; he also said that, whilst Cintro was not withdrawing its cross-claim against Newtronics, his instructions were to call no evidence on that claim. In those circumstances, leave was granted to Mr Hevey to withdraw. Cintro thereafter took no part in the trial although it did file some written submissions on 5 July 2001, a short time after judgment had been reserved in the matter. As Cintro has failed to lead any evidence in support of its cross-claim against Newtronics, its cross-claim must be dismissed. As I have already noted, Newtronics, for its part, elected not to proceed on its cross-claim against Cintro and accordingly there will also be an order dismissing Newtronics’ cross-claim. The net result of these many forensic manoeuvres was that the case settled down to a dispute between Seeley on the one hand and Cintro and Newtronics on the other, with Cintro taking no part in the proceedings.

the pleadings

14                  In paragraph 1 of the substituted statement of claim Seeley pleaded that it had, at all material times, carried on business as a manufacturer and wholesaler of evaporative air coolers. Newtronics admitted that claim but added, correctly in my opinion, that Seeley’s business also included the design and manufacture of electric motors and associated electronic circuitry and controls. Seeley next alleged that Cintro had carried on business as a manufacturer and a seller of electronic components; I have earlier noted, Cintro did not file an amended defence to the substituted statement of claim. As will become apparent, the evidence established that Seeley’s allegation was correct and I so find.

15                  In par 3 of the substituted statement of claim, Seeley alleged that Newtronics carried on business as a designer, manufacturer and seller of electronic products. In its defence Newtronics admitted that it carried on business as a manufacturer of electrical (not electronic) components (not products) but it denied the allegation that it was a designer or a seller of any products. That denial was inaccurate. The undisputed evidence established that first Cintro, and then Newtronics following in the footsteps of Cintro, designed and manufactured electronic objects. Those objects to the untutored eye could be called components or they could be called products.

16                  In par 4 of the substituted statement of claim and in its further and better particulars, Seeley alleged that on various dates in 1992 meetings took place between representatives of Seeley and Cintro. The evidence established that some of those meetings took place at Seeley’s premises at St Marys, South Australia; other meetings were held at Cintro’s premises in North Melbourne, Victoria. Seeley has claimed that, at those meetings, there were discussions between representatives of the two companies “with a view to the parties entering into the contractual arrangements for the design and subsequent manufacture of certain electronic components”. The discussions at those meetings, which were augmented by telephone conversations, were described in the substituted statement of claim as “the Cintro negotiation process”.

17                  The next stage in the development of the relationship between the companies was called “the Cintro development process” in the substituted statement of claim. That was said to have occurred as a result of personal meetings and telephone discussions in the period commencing in November 1992 and continuing until September 1993. As to the Cintro development process, Seeley has alleged that the discussions took place “in connection with the design, development and manufacture of the prototype and completed electronic components by Cintro”.

18                  Seeley then claimed in par 5 of the substituted statement of claim that in 1992 it entered into an agreement with Cintro (“the design agreement”). It alleged that the purpose of the design agreement was for Cintro to design, manufacture and sell to Seeley a prototype radio frequency remote control package for use in Seeley’s domestic rooftop evaporative airconditioners (“the prototype”).

19                  The second statement of claim, to which Cintro had pleaded, referred to the parties entering into the design agreement but it did not include the details of the Cintro negotiation process nor did it refer to the Cintro development process. Cintro’s answer in its defence was to admit that it and Seeley entered into an agreement whereby:

“Cintro agreed to design and sell to Seeley a pre-production prototype remote control (‘the prototype’) for an evaporative airconditioner.”

Save for this admission however, it did not admit the remaining allegations that were contained in par 3 of the second statement of claim. This meant that it did not admit that the agreement called for Cintro to manufacture the prototype; it also challenged Seeley’s description of the device. Seeley had called it:

“A prototype radio frequency remote control package for use in Seeley’s airconditioning units.”

Cintro described it as:

“A pre-production prototype remote control … for an evaporative airconditioner.”

20                  Newtronics did not plead to any of the allegations in pars 4 and 5 of the substituted statement of claim save to say that if any allegation was made against it in either of those paragraphs (which dealt with the Cintro negotiation process, the Cintro development process and the design agreement) the allegation was not admitted.

21                  In par 6 of the substituted statement of claim, Seeley alleged that the prototype comprised goods of a description which it was in the course of Cintro’s business to supply and deal in; that allegation had also appeared in the second statement of claim and Cintro – but not Newtronics – had admitted it. In both the second statement of claim and the substituted statement of claim, Seeley had then pleaded that it had expressly made known to Cintro the particular purpose for which the prototype was required and that it would be relying on Cintro’s skill and judgment. Cintro and Newtronics both denied those allegations, pleading instead that Seeley had relied upon its own experts and its own skill and judgment and that it had not relied on Cintro’s skill and judgment.

22                  According to Seeley, the continuing business dealings between it and Cintro (and, unknown to Seeley, later dealings with Newtronics) led to a second contract which Seeley described as “the supply agreement”. In par 39 of the substituted statement of claim, Seeley alleged that:

“On or about 7 or 8 September 1994 Seeley entered into an agreement (“the Supply Agreement”) whereby Seeley agreed to purchase and Newtronics agreed to manufacture and supply to Seeley approximately 3,000 units of the devices.”

Newtronics responded in its defence by pleading, inter alia, that:

“In or about September 1994 the Second Respondent entered into an agreement (“the Agreement”) with the Applicant whereby the Second Respondent agreed to supply and deliver equipment including hand held remote control units and circuit electronic control boards (“the electronic parts”) for use in the Applicant’s evaporative air-cooler.”

Newtronics otherwise denied the allegations in par 39 of the substituted statement of claim. Cintro addressed the making of the supply agreement in par 11 of its defence (when pleading to the second statement of claim). With qualifications that are not relevant for present purposes, it agreed that Newtronics entered into an agreement with Seeley whereby Newtronics was to manufacture and deliver “hand held remote control units and circuit electronic control boards and electronic parts for use” in Seeley’s evaporative rooftop airconditioners.

23                  This then is an outline of the broad allegations that ultimately led to this litigation. I leave the pleadings at this stage to discuss in further detail the nature of the businesses that were conducted by Seeley and the respondents.

seeley’s business

24                  Seeley is now, and has at all material times been, a South Australian based manufacturer and distributor of cooling and heating systems. It is said to be one of Australia’s largest manufacturers of fixed and portable evaporative airconditioners. Its principal products during the period with which these proceedings are concerned have been:

·                    electric domestic heaters;

·                    portable evaporative airconditioners that are marketed under the brand name “Convair”;

·                    industrial and commercial evaporative airconditioners that are marketed under the brand name “Breezair”; and

·                    domestic rooftop evaporative airconditioners that are also marketed under the brand name “Breezair”.

25                  Thus it can be said that Seeley manufactures two types of domestic airconditioning units. The first of them is the “Convair” standard portable unit (“the portable unit”); it is free-standing and can be moved from place to place. It is powered by connecting it to an ordinary electric power socket; it carries its own water reservoir and, when it is operational, it pumps cool air into a room. Seeley has manufactured that type of cooler for many years. These proceedings are not concerned with the portable unit, although it will be necessary to refer to it from time to time when discussing the history of Seeley. The second unit is the “Breezair”. The domestic rooftop version of this brand is the unit with which these proceedings are concerned. Hence, any reference hereafter to “Breezair” will refer only to a Seeley’s domestic rooftop evaporative airconditioner. It is much larger than the portable unit and, when used for a conventional house property, it is installed on the roof of the house.

26                  The Breezair operates on the principle of water cooled air. Inside the external cabinet (or housing structure) there is an evaporative media that is affixed to the four vertical sides of the cabinet. Initially, this media was “woodwool” but later a cellulose based medium that is called “CELdek” was used. A water distribution system is used to pump water from a holding tank in the bottom of the unit to a water spreader at the top of the unit. At the top of the unit the water spreader evenly distributes the water so that it is able to flow by gravity feed down the CELdek, thereby wetting the evaporative media. The water distribution system includes both inlet and outlet valves that are used to dump and replace old water in the tank. These valves were initially operated by electrically controlled devices called actuators. Mr Frank Seeley, the chairman of directors of the applicant, during the course of his evidence, described an actuator as something akin to a cylinder with a piston. He likened it to a bicycle pump. In a particular operation it would be as though the handle of the pump was extended and in the next phase the handle was driven, as if a piston, into the cylinder. There are two actuators in the system. One of them activates the opening of the dump valve and the other operates “to activate the closing of the water in that valve”. A large plastic centrifugal fan is located inside the cabinet and is used to draw air from outside the cabinet through the wet evaporative media (the CELdek) thereby cooling the incoming air. The fan then drives the cool air through an outlet at the bottom of the cabinet into the duct work and, from there the cool air is pushed into the internal rooms of the house. The unit operates by means of an electric motor which drives the centrifugal fan; a belt and pulleys are attached to the motor and the fan axle.

27                  The Seeley business commenced in 1967 as a partnership between Mr Frank Seeley and his brother, Cedric. Initially, its activities were limited to the retailing of “Coolair” portable evaporative airconditioners. In the first year of operations, the business was that of an assembly operation. The components that were used in the cooler were manufactured by other business houses and Messrs Seeley and their workforce merely assembled and sold them. Mr Cedric Seeley died in 1969. For a short time, Mr Frank Seeley continued the business with his brother’s widow, but then in 1972 Mrs Cedric Seeley sold her interest in the business to Mr Frank Seeley and his wife, Mrs Kathy Seeley. Subsequently, corporate changes have occurred and now the business is owned and operated by the applicant, a corporation, the shares in which are beneficially owned by members of the Frank and Kathy Seeley family.

28                  It was in about 1972 that the business switched from mere retailing to the manufacture of portable units. Mr Seeley, during the course of his evidence, explained that he developed a prototype portable cooler that was based on existing coolers save that he changed it, wherever possible, from a metal based product to one which, apart from its electrical components, was made almost entirely from plastics. Existing brands had been metal-based products and the use of water in the evaporative system meant that they were liable to corrode; his use of plastic was a substantial innovation. He sold about 1,000 units in his first year but in 1981, after ten years, the business had manufactured and sold about 150,000 portable evaporative air coolers. By 1976, the business was employing about 100 employees and in 1978 it started to supply Email Ltd with portable units that Email marketed under the badged name “Email Air”.

29                  In 1980, the business obtained an export order to supply Iraq with 40,000 portable units. According to Mr Seeley, the business sold a total of 70,000 portable units or thereabouts in Australia and Iraq that year with a turnover of approximately $10 million. It was also in 1980 that the business expended about $1 million in plant and equipment so that it might thereby be able to manufacture its own electric motors for its portable coolers. During 1980, further improvements were made and, as a result, more “air delivery” was achieved from the cooler. Noise level was reduced by 50 per cent and power consumption was cut by about 10 per cent. In 1981, the business obtained a further order from Iraq for 100,000 portable units. As the cost to the business of manufacturing its own motors had achieved a saving of about $10 per unit, the business recouped its capital investment in the new plant and equipment within a year or so. It also redesigned and reworked its product, reducing it from 389 components to 56 components. This was achieved, in the main, by the use of plastics and, in particular, plastic clips which were designed to replace metal screws and fastenings.

30                  Mr Seeley also said that in 1981 his company’s engineers had begun working on the idea of expanding the business so that it could manufacture rooftop evaporative airconditioners in addition to the portable units. In 1982, the business was further expanded; it purchased the plant and equipment that was necessary to enable it to undertake its own plastic injection moulding; it was now able to make its own plastic components.

31                  In 1983, Seeley entered the rooftop evaporative airconditioning market with its EA model. At that time, the market in Australia for such rooftop airconditioners was about 10,000 to 15,000 units per annum, although it grew to 25,000 units by 1989. The geographic market for evaporative coolers was and is limited to areas of dry heat; they are not particularly suitable for humid conditions. As a result, the market is centred on Perth, Adelaide, Melbourne and areas of rural Australia to the west of the Great Dividing Range.

32                  Seeley’s EA model had a plastic polymer cabinet, a plastic fan housing and a plastic centrifugal fan. Mr Seeley said that it had the advantages of a superior appearance, durability and resistance to corrosion because of its use of plastics and it was promoted as having these advantages. He said that it also had a significantly lower cost price and that its patented centrifugal fan was superior to the conventional propeller-type fan that was used in its competitors’ models. Initially when the EA model was introduced, it was sold under Seeley’s existing brand name, Convair. However, the General Electric group, which had initially been a purchaser of the EA model, decided to quit the field and Seeley took over that group’s brand name, “Breezair”. Seeley continued thereafter to use “Breezair” as the name for its EA model.

33                  In 1983, when the Breezair EA model was introduced, the motors that were used by Seeley to drive the evaporative airconditioners were fixed speed motors that operated at mains voltage. Some could operate at two different speed levels whilst others could operate at a three speed function. In either case, it meant that the level of cooling could only be set in limited steps such as “high”, “medium” or “low”. The controller that was used to operate the unit was wall mounted and was connected by conventional electrical wiring to the airconditioner on the roof. The basic task of such a controller was to switch the unit “on” and “off”. The controllers that were used by Seeley at that time were acquired by it from the manufacturer, a company that carried on its business under the name of “Clipsal”.

34                  In 1983, immediately before the introduction of the Breezair EA model, Seeley faced four major competitors in the rooftop market. Bonaire and Braemar each controlled about 40 per cent of the market, whilst Coolair and Celair each accounted for 10 per cent or thereabouts. According to the unchallenged evidence of Mr Seeley, Bonaire was based in Adelaide, as was Coolair, and those businesses sold throughout the Australia wide market. He said that the Braemar brand, which was based in Albury, sold mainly in New South Wales and South Australia, while the Celair brand, which was based in Leeton, sold mainly in New South Wales and Queensland. There were, in addition to these four major competitors, several other minor competitors throughout Australia. Despite this opposition, Breezair managed, nevertheless, to make a successful entry into the rooftop market as did another brand, Brivis, in 1986. Breezair’s success may be gauged from the fact that by the end of 1989 its sales of domestic rooftop evaporative airconditioners had risen from nil in 1983 to about 12,000 units. As at 1990, it was claimed by Mr Arnold, Seeley’s managing director, that Breezair enjoyed market leadership when regard was had to its market share of 43.4 per cent, to its innovative features and to the number of dealers who sold Breezair units.

35                  Between 1983 and 1989, Seeley introduced further innovations to its EA domestic rooftop evaporative airconditioner. For example, in 1986 Seeley introduced variable speed motors which, as their name suggests, permitted the units to operate at a multiple range of speeds. They required variable speed controllers which Seeley also introduced in 1986. The primary function of a controller is, as I have already noted, to activate the airconditioner by turning it “on” and “off”. It can, however, operate other functions of the airconditioner, including regulating the speed of the main motor and the fan; it can also be used to turn the pump motor “on” and “off” and to turn the inlet and outlet valves “on” and “off”. The controller is a vital part of any evaporative airconditioner. It is important that it responds correctly to any setting that may be made by the operator. Thus, it is important that the controller not energise the motor when it has been switched “off” by the operator. It is particularly important that the controller not energise the run winding only because such energisation could cause the motor to overheat without turning and that could lead to ignition and fire. The variable speed controller was also a wall mounted switch, similar to the fixed speed controller, but with the addition of a rotary knob which selected the variable speed. Variable speed motors had the advantage of offering consumers a greater range of comfort levels. This new type of controller was then connected to a control box within the airconditioner which incorporated a triac. A triac was used to control the variable speed of the motor by regulating the voltage that was supplied to the motor (and hence its speed). This high voltage, variable speed controller was manufactured for Seeley by Tekelek Pty Ltd (“Tekelek”).

36                  Between 1990 and 1992, Seeley’s share of the market receded. This was partly because of the activities of Seeley’s competitors, including Coolbreeze, which had entered the market in 1990, and partly because of the financial difficulties that Seeley suffered as a result of the default of an international customer. In 1989, Seeley suffered acute financial embarrassment when an international purchaser defaulted in payment of about $5m. Seeley acknowledged that, for the next several years, it was in strained financial circumstances and was unable to devote significant resources to product development and innovation. Ultimately, Seeley was successful in achieving the return of its goods from the defaulting purchaser but that did not occur until mid 1992.

37                  In about July or August 1992, Seeley, having overcome its financial crisis, resolved to pursue the development of a radio frequency [RF] remote control for its Breezair rooftop evaporative airconditioners. It had, in the preceding October, introduced a thermostatic electronic control with a liquid display known as “the Sensortouch” for the summer of 1991-1992. As I have already noted, Seeley’s rooftop airconditioners were then controlled by a wall-mounted “hard-wired device”. In the early 1990’s, those devices were still only available with one of two options: a customer could have a Clipsal “on/off” switch with two speeds or he or she could have the variable speed switch that was made by Tekelek. It was said, on Seeley’s behalf, that its decision to introduce the RF remote control was one of a series of innovations that had been planned by the company to regain Seeley’s market share. The evidence satisfies me, and I find that in August 1992 Seeley engaged Cintro to design and manufacture an RF remote control which was designated “the RF Sensortouch”. I also find that the RF Sensortouch remote control was to have similar functions to the Sensortouch that had early been designed and manufactured by Tekelek but that it was to be a moveable hand control that operated by means of radio waves.

38                  The initial task that Cintro, and later Newtronics, was to perform, was the design and manufacture of a radio frequency (RF) Sensortouch remote control prototype that would control the operation of Seeley’s rooftop evaporative airconditioners. That operation was to include the method by which the motor in the airconditioning unit would be energised. The prototype was to comprise three modules:

·        a hand held remote control transmitter unit; (this was known by several names such as “a radio frequency module” or “the remote control” or “the remote controller”); its technical name is an “electronic transmitting module” or an “ETM”. It is a conventional handset that is now a familiar object in most homes – the type of handset that is used to control a television set or a video recorder.

·        a printed circuit electronic control board with copper conducting tracks which was also called a “printed control board” or a “PCB”. It was to be installed inside the rooftop evaporative airconditioner; (this item is sometimes referred to as the evaporative cooler control module or “the ECCM”; it is also known as “the power board”); and

·        a receiver located in the roof space of the premises and fitted as part of the airconditioner; (“the receiver”).

39                  The system that Cintro was to design for Seeley was to have a variable speed control that could be used through the remote control system; it was intended that it would replace the wall-mounted hard-wired variable speed control system.

40                  A plastic box was to be mounted on the fan scroll which was inside the housing of the rooftop unit; it was to be connected by a lead to the radio receiver. The box was manufactured in two halves which fitted together. The top section, sometimes called “the lid”, was to hold the evaporative cooler control module (“the ECCM” or “the power board”). The purpose of the ECCM was to receive and interpret transmissions from the ETM and to provide control and power for all functions of the cooler. The receiver was to be mounted in the roof to receive the radio signals from the handset, that is the ETM.

41                  Seeley was to receive deliveries of the separate components from Newtronics – those components being the handset or the ETM, the ECCM and the radio receiver. Seeley would then incorporate those components in its assembly of the end product. This involved the installation of the ECCM in the lid together with various other components such as the heat sink and mylar insulating sheets for which Seeley was responsible.

42                  By facsimile transmission dated 11 October 1993, shortly after the date when Newtronics took over the business Cintro, Mr Ray Cox submitted to Seeley details of the price per unit for the supply and delivery of the ECCMs and the ETMs.

43                  By 1993, Seeley was in a position to launch a new rooftop model – the EM model. It was intended that it would have the RF Sensortouch remote control feature that Cintro had been retained in 1992 to develop, but Cintro had not been able to meet Seeley’s deadline. I am satisfied that the EM model can properly be described as innovative: it had a rounded lower profile together with a new special feature called “the no seasonal maintenance”; that involved the inclusion in the rooftop system of an automatic weather seal. Until then, all rooftop airconditioning units suffered the drawback that, as they were designed to admit air in the summer, they were prone to admitting cold air into the ducting system in the winter. The only solution was to climb on to the roof and cover the unit at the end of summer and uncover it at the end of winter. Seeley’s automatic weather seal avoided that; Seeley had designed an internal seal that could be locked in place by the use of an electronic device. The EM model, which came in various sizes and capacities was fitted with a variable speed motor which was controlled by the variable speed controller. The unit consisted of a plastic housing with vented sides to admit air into the housing; in fact, the unit was almost exclusively made of plastic injected moulding apart from the electrical componentry and a few other items, such as a steel axle. The large cylindrical centrifugal fan was also made by means of injection moulded plastic. Seeley claimed that its centrifugal fan had three advantages over a metal axial fan; first it could move the same volume of air as a much larger axial fan; secondly it was quieter in its operation than an axial fan and thirdly, it was much cheaper to produce. I accept that these features were well ahead of Breezair’s competitors.

44                  The new EM model was released in October 1993 in time for the 1993-1994 summer season, but it was September 1994 before Seeley was able to release the RF Sensortouch remote control for use with the EM Model.

45                  As from September 1994, a Seeley EM model could be purchased with one of three controlling devices. The first option was a hard-wired wall-mounted, variable speed controller that had been designed and manufactured by Tekelek. The second choice was a hard-wired, wall mounted Sensortouch electronic controller which included both an automatic temperature regulating function and a variable speed control function. That had also been designed and manufactured by Tekelek and it employed a triac to regulate voltage and, consequentially, power to the motor. In September 1994, however, Seeley was able to offer the third alternative – a radio frequency (RF) Sensortouch remote control. Its design had been commenced by Cintro and concluded by Newtronics. Newtronics was its manufacturer. Basically, it had the same functions as the wall-mounted Sensortouch controller, save that it had the huge advantage of being a hand held unit that was capable of being carried from place to place. It was an immediate success and Seeley achieved very substantial sales in the summer to January 1995. But then, in the space of four days in February 1995, the three fires occurred in three EM rooftop units. Each of them had been installed with a system that had been designed and supplied by Newtronics.

46                  The Seeley motor which was used in the EM model was described by one of Seeley’s expert witnesses, Professor Bonwick, as a “single phase induction motor connected through circuitry to mains supply electricity”. Elsewhere in a report that he produced, he said of the motor that it was a “Permanent Split-Phase Capacitor” motor, the word “Permanent” referring to the fact that the start motor always remains connected. It comprised a stator and a rotor. In the finished product, the rotor was installed inside the stator and rotated with a very small clearance. The stator was manufactured with a series of slots that were arranged around it in a diameter. Those slots contained turns of copper conducting wire. The Seeley motor had two windings – the start winding and the run (or main) winding. The start winding was arranged so that it traversed the ends of the stator that were closest to the outer perimeter of the stator, whilst the run (or main) winding was arranged so that it traversed the ends of the stator that were closest to the inner perimeter. In each case, the windings were turned in four symmetrical sections known as poles. The principal purpose of the start winding was to create a rotating magnetic field through the space that was occupied by the rotor. It thereby subjected the rotor to a rotating force of sufficient power to cause it to turn from a stationary position. When a passage of alternating current was passed through the run winding and the stator, it created a pulsating magnetic field. As the rotor sat in the path of that magnetic field, it became magnetised and so induced an electric current in the rotor.

47                  The start winding was to be connected by Seeley personnel to the mains supply through a mechanical relay or switch. The relay was to remain open and non-conducting until it received a signal that was initiated by pressing the “on” button on the remote control handset. That action would send a signal to the micro-processor which activated a low voltage circuit that passed through the winding coil; that, in turn, caused the switching arm to be drawn across to the connecting contact, thereby closing the start winding circuit and so activating the AC supply and connecting the start winding.

48                  Two of the principal components in the run winding circuit were the opto-coupled triac and the main (or power) triac. The circuit employed the opto-coupled triac to control the speed of the air-conditioning fan; it was also intended that it would block or isolate the mains supply from the run winding when the motor was not energised – that is, when it was intended that the motor be turned “off”.

49                  The motors for the rooftop airconditioners came in a variety of sizes, the smallest of which was 370W. The largest of the motors was 1500W but the evidence in these proceedings only referred to the 750W, the 1100W and the 1500W motors. The axle for the motor was made out of a section of rectangular stainless steel; it passed through a connecting section in the middle of the fan, enabling the axle to grip and turn the rotating fan. The unit had a plastic pulley that was so constructed that it was possible to adjust the diameter of its surface and the tension on the pulley belt. Using an instrument known as a tong meter, an installer could measure the current that was drawn by the motor under normal operating conditions and then adjust the pulley to achieve the optimum current, and hence, the optimum output of the motor. This ensured that the motor was not overloaded to the point of overheating under normal operating conditions.

50                  The design, manufacture and operation of the RF Sensortouch remote controllers is at the heart of this case. Seeley’s case includes the allegation that the controllers that had been used and installed in each of the units that were involved in the house fires had been designed by Cintro and Newtronics and manufactured by Newtronics. Seeley has alleged that they caused the fires and that Cintro and Newtronics were negligent in the design and that Newtronics was negligent in the manufacture of the controllers.

51                  As a result of the fires Seeley had to institute a nationwide recall (“the recall”) of all its RF Sensortouch controllers; it started this on 17 February 1995 by contacting its dealers and known purchasers. Emergency action was taken to isolate all units so that they were no longer attached to the mains power. At a later stage, owners were provided with an alternative, safe, control mechanism so that they could operate their units. Later again, owners were given the option of having better control units installed or keeping their existing control units and waiting until the remote control system was redesigned and available for use.

52                  The business that had been commenced by Mr Seeley and his brother in 1967, and which is now conducted by the applicant, has grown from a modest annual turnover of $100,000 to its present turnover of many, many millions of dollars. The applicant has claimed that this substantial increase in the size of the business has been the result of its corporate energy and its commitment to innovation; it has also claimed that it has always been a market leader and an innovator. However, Seeley has further claimed that, because of the three fires in February 1995 and the recall, its reputation has been seriously damaged; it had to wind down its research and development; its capacity to innovate was, so it has claimed, substantially impaired and it lost a large part of the market share. According to Dr Beaton, Seeley’s market share was materially reduced. Dr Beaton, an expert in marketing, gave evidence about the impact that the three fires and the recall had on Seeley’s business and its reputation.

seeley’s witnesses

53                  The first witness was Mr Frank Seeley who, together with members of his family, enjoy the indirect ownership of the whole of the issued shares in the capital of the applicant. His evidence about the history and progress of his company was supported by that of the applicant’s managing director, Mr Roy Arnold and its company secretary and finance manager, Mr Michael Steele. That evidence was not substantially challenged and I accept what Mr Seeley said in his evidence.

54                  Mr Seeley is presently the chairman of Seeley’s Board of Directors. Mr Arnold retired from the position of managing director on the last day on which he gave evidence in these proceedings. Mr Seeley’s evidence about the history of his company and its business was, for the most part, uncontentious. He said that in July 1992, Seeley resolved to pursue the development of a radio frequency (RF) remote control for its rooftop evaporative airconditioners. That project came to be known, as I have said, as the RF Sensortouch project. At that time, and until December 1992, Mr Ian Forte was the officer in Seeley who was in charge of product design and development for the project. When Mr Forte resigned in December 1992, Mr Bob James assumed responsibility in the company for product design and development generally but Mr Andrew Friebe took on the specific responsibility for the RF Sensortouch project. Thereafter, and until August 1994, he was the Seeley employee with the day to day responsibility for that project. In September 1994, Mr Paul Zuodar took over from the Mr Friebe and remained responsible for the RF Sensortouch project until February 1995.

55                  The remaining employees of Seeley who gave evidence, and who can be mentioned at this stage, are Mr Graeme Johnston: he was the production engineering manager until 1996 with responsibility for general production and quality control. Next was Mr Andrew Machin who was Seeley’s purchasing/supply officer and the person responsible for the procurement of the products that were used in the manufacture of Seeley’s products. Finally there was Mr Murray Morton. He was the manager in charge of overseas markets. However, his evidence was not concerned with overseas markets; he was one of Seeley’s officers who had made preliminary investigations into one of the fires.

56                  Three witnesses were called by Seeley in rebuttal without objection. They were Messrs Broadbent, McBratney and O’Hara. As Mr Broadbent was not required for cross-examination, his statement was received into evidence as Ex A288. His evidence concerned his testing in 2001 of ten Seeley motors that had been manufactured according to 1995 specifications. Mr McBratney’s evidence concerned the inquiries that he made of Texas Instruments, the manufacturer of the Klixon 9700k thermal protector; Mr McBratney is a consulting engineer. The remaining rebuttal witness, Mr O’Hara is an employee of Seeley who, at the time of giving his evidence, was Seeley’s national sales manager.

57                  In addition to these witnesses, Seeley called several expert witnesses with specialties in various disciplines. The first of them was Dr Pedder. At the time of giving his evidence, Dr Pedder was the senior Technical Consultant for ERA Technology Ltd and the Visiting Professor in Design Automation at the University of Southhampton (UK). His area of expertise is power electronics, modelling and simulation and he holds Master’s and Doctoral degrees in those and associated disciplines. He is a very highly qualified professional and academic engineer. In submitting his report of May 2000, Exhibit A63, Dr Pedder stated that he had been requested to examine the design of the power electronics that had been used to control the speed of the fan drive by studying the circuit diagram of the speed controller, of a sample wiring card and the component data. His primary task was to provide an opinion as to the competency of the design and the level of safety of Newtronics’ power board for its intended application.

58                  Mr Andrew H Baghurst also gave evidence on behalf of Seeley. Mr Baghurst is a Director of The Australian Electrical Testing Centre which is a Division of Techsearch Business Services at the University of South Australia. He holds Bachelor’s and Masters’ Degrees in engineering as well as a Diploma of Education. He was awarded a Churchill Fellowship in 1974 and in 1991 he received an Engineering Excellence Award in the Manufacturing Facilities Category from the Institution of Engineers. He is the author of numerous publications and seminar papers.

59                  The next of the applicant’s experts was Professor WJ Bonwick. He holds Bachelor’s and Doctoral degrees in Engineering, specialising in Electrical Engineering. He is now retired but had earlier held the position of Sir John Monash Professor of Electrical Power Engineering at Monash University and was later the Director of the Centre for Electrical Power Engineering at that University. His curriculum vitae is most extensive and most impressive. In his report of March 1999, Professor Bonwick said that he had been requested to express his opinion “as to the design of the Newtronics’ Circuit Board”. He was also asked to comment upon the suitability and the outcome of various tests that had been devised and carried out by Mr Baghurst and to comment on the conclusions that had been reached by Mr Baghurst, including those relating to the Newtronics’ circuit board design.

60                  The last of the technical and scientific experts was Mr Russell F Lee. Mr Lee practises as a Forensic Electrical Engineer. He had inspected the damage to one of the three homes on instructions from the home-owners’ insurer. He has developed extensive expertise in the investigation, reporting and the determination of the causes of electrical and other ignition source fires. He is highly qualified both academically and professionally. Mr Lee did not, however, undertake a detailed study of the electronic systems nor did he identify the manufacturers of the various components.

61                  Dr Beaton, who gave evidence on behalf of Seeley, holds Bachelor’s and Doctoral degrees in Medicine and Medical Sciences. He also holds a Master’s degree in Business Administration. His academic qualifications were all obtained at the University of Witwatersrand, Johannesburg, South Africa. He said that as part of his studies for his Master’s degree in Business Administration, he studied the subject of Organisational Behaviour, that being a subject that is based on an understanding on how human beings behave in various settings. These settings include, for example, the underpinning of marketing, including an analysis of how consumers behave in response to the marketing stimuli of marketers and their competitors. As part of his studies, he also investigated the nature and effects of innovation in relation to the introduction of new products into health care organisations. Initially, Dr Beaton pursued an academic career in medicine, being a Professor in the Faculty of Medicine at the University of Witwatersrand in the field of Medical Education. In 1980 however, he turned to advertising when he was appointed managing director of a major advertising agency. Later again, he went into market research. Since coming to Australia, Dr Beaton has followed a career in advertising, marketing and the investigation and analysis of quantitative survey findings. In addition to giving oral evidence in the proceedings, his report of 23 May 2000 was also received into evidence.

62                  The last of Seeley’s witnesses was Hugh Lachlan McPharlin, a chartered accountant, who prepared reports and gave evidence about the extent of the losses that Seeley was said to have suffered as a result o the fires and the recalls. Mr McPharlin is presently a partner in Edwards, Marshall and Co, having joined that firm in 1977 as a student. He obtained his degree of a Bachelor of Arts in Accountancy in 1983.

CINTRO’S AND newtronics’ business

63                  The original company, now called Cintro, carried on business between 1981 and 1993. Its shares were then owned by Garry Tescher, his brother, Otto Tescher and Odero Conci. Garry Tescher was the managing director and principal executive officer of Cintro at the time when its business was acquired in 1993 by Newtronics. Newtronics was thereafter owned, as to 51 per cent, by Atco Controls Pty Ltd, a company that was associated with Georgio Gjergja. The remaining 49 per cent was held by Cintro. Thereafter, and until February 1995, the directors of Newtronics were Garry Tescher and Georgio Gjergja. Following upon the sale of the business to Newtronics, Garry Tescher assumed the role of managing director and principal executive officer of Newtronics.

64                  Newtronics did not call any of its present or former officers or employees as witnesses in the trial. Therefore, its management structure and the nature and the extent of its business has to be inferred, in part, from the documents that were tendered as exhibits during the course of the trial and, in part, from what was said by those Seeley employees who gave evidence. Those documents reveal that sometime in 1995 David Bruce took over as managing director from Garry Tescher. Allan Charak was succeeded in August 1993 by Ray Cox as the marketing manager. The senior electronics engineer was Eric Au and the chief research and development engineer was Odero Conci. As senior electronics engineer, Eric Au was in charge of the development project for the RF Sensortouch remote control for Seeley throughout the period from August 1992 to August 1994. Engineers who worked under his supervision included Sengdy Manikhot and, from August 1993, Simon Casey. Following upon the acquisition by Newtronics of Cintro’s former business, Mr  Casey was assigned the day-to-day responsibility for Seeley’s RF Sensortouch project. Mr Conci was Cintro’s particular employee who was in charge of a related development project for Electrolux Vacuum Cleaners in the United States of America, a factor that will achieve a measure of importance at a later stage in these reasons.

65                  In his opening submissions, counsel for Newtronics acknowledged that Newtronics had purchased Cintro’s business and that Newtronics had carried on that business, employing certain of the former employees of Cintro to continue the work that they had been doing when in the employ of Cintro. That work included the work of designing the electronics for Seeley so as to enable radio frequency (RF) units to be installed in Seeley’s EM model domestic rooftop evaporative airconditioners. This meant that Newtronics was to complete the design (which had been commenced by Cintro) of the electronic features that would enable a hand-held remote control device to operate the rooftop airconditioner. Newtronics also conceded that, once it took over the business from Cintro, it took over all of Cintro’s responsibilities.

66                  Between October 1993 and into 1994, numerous meetings were held between the parties and several prototypes of the electronic transmitting module (“the ETM”) and the evaporative cooler control module (“the ECCM”) were submitted by Newtronics to Seeley for Seeley’s consideration. It was Seeley’s case that Cintro – and later Newtronics – were contractually bound to design and supply a package or a kit that was to comprise the handset (that is, the remote control), the receiver which was connected to the power board, and the power board. The handset was to be turned “on” and “off” by the use of a button.

67                  These proceedings have arisen because Seeley has claimed that the Newtronics’ package failed and that the failure caused the three fires; when the controls were switched to the “off” position, the airconditioning units did not shut down. They remained energised or live; electricity continued to run through the motors of the airconditioners but the fans were not turning. Because the fans were not turning, the units were not cooling, nor were they blowing air through the ducting system. The three home owners were unaware of this fault as the fault manifested itself in each case in the airconditioning unit which was installed on the roof of their respective homes. In each case, a fire broke out, causing damage, allegedly through the units overheating. Seeley has alleged, and Cintro and Newtronics have denied, that the fires occurred because of faults in the components that had been designed by Cintro and Newtronics and supplied by Newtronics.

68                  The commercial relationship between the parties to this litigation commenced in about March 1990 when Mr Charak, Cintro’s marketing manager, called at the offices of Seeley and met with Messrs Machin and Forte. The purpose of his visit was to promote Cintro’s motor controllers. The case for Seeley was that Mr Charak said that Cintro had the capability to develop a radio frequency (RF) control for the Breezair model and that Cintro could duplicate the Tekelek variable speed controller for a cheaper price. Newtronics had the opportunity, during the course of the trial, to refute this assertion; but it did not call Mr Charak and it has offered no reason for his absence. In those circumstances, I have no reason to doubt the veracity or the memories of Mr Machin and Mr Forte and I accordingly make findings in terms consistent with the evidence that they gave on this subject.

69                  In his final submissions, counsel for Newtronics submitted that the Court had heard that a dispute had arisen between the former directors of Cintro and the present directors of Newtronics. That dispute was said to be unrelated to this litigation but, submitted counsel, it explained why no former staff had been called to give evidence. I reject that submission. No details of any such dispute were given and no attempt whatsoever was made to explain why any such dispute might have inhibited Newtronics from calling members or former members of its technical and administrative staff to give evidence on its behalf.

70                  Following upon Mr Charak’s approach, Seeley provided Cintro with a Tekelek variable speed controller so that Cintro could consider its operation when making its quotation. Tekelek’s variable speed controller utilised an opto-coupled triac and a power triac to control the run winding; it also utilised a common relay to isolate both the run and the start winding. Cintro therefore knew that Tekelek had considered it desirable to use a common start-run winding relay. It will be necessary, in due course, to return to the subject of the presence of a relay in the circuitry.

71                  Following this first meeting, Mr Charak provided two alternative quotations to Seeley to design and manufacture a variable speed controller. One was dated 26 March 1990 and the second one was a month later on 26 April. Negotiations between Seeley and Newtronics broke down however, and Seeley continued to engage Tekelek to develop and manufacture its controls.

72                  In January 1992, Mr Charak approached Mr Forte again, once more seeking to take Seeley’s business from Tekelek by supplying electronic controllers to Seeley. Mr Charak’s visit was followed by a visit by Mr Gary Tescher who spoke with Mr Forte on 5 February 1992. Relying on the entries in his diary, Mr Friebe recalled that he also met with Mr Tescher on 5 February at Seeley’s premises. On that date it was agreed that Cintro would provide Seeley with a quotation to design and manufacture a replacement for the existing Sensortouch control.

73                  Mr Forte visited Cintro’s premises in Melbourne on 17 February 1992. On that occasion, Mr Tescher showed him Cintro’s production line and examples of some of Cintro’s work. It included controllers for Vulcan/Chef appliances, a variable speed controller for vacuum cleaners, a climate control for Holden Calais airconditioners and an RF remote control for B & D roller doors. It was during this tour that Mr Tescher informed Mr Forte that Cintro was an expert in the field of RF links and was very experienced in appliance controllers, including controls for motors. Mr Tescher also said that Cintro had overcome communication reliability problems for appliances such as the proposed RF Sensortouch remote control.

74                  Other statements that were attributed by Mr Forte to Mr Tescher included the assertion that Cintro’s Mr Au was a highly competent engineer, that Cintro was much better than its competitors and that Seeley would not have any problems because Cintro knew what they were doing. Mr Tescher also showed the Vulcan circuit board to Mr Forte telling him that it was typical of what Cintro made. I have no reason to doubt the integrity of Mr Forte and, in the absence of Mr Tescher, (his absence not having been satisfactorily explained) I find that statements, as summarised in these reasons, amounting to representations about the skill and expertise of Cintro were made by Mr Tescher to Mr Forte on the occasion of Mr Forte’s visit to the premises of Cintro in Melbourne on 17 February 1992. I further find that the representations that were made by Mr Tescher reasonably and understandably led Mr Forte, and therefore, his employer, Seeley, to believe that Cintro had the expertise and ability to design, develop and manufacture remote controllers with RF links for use in Seeley’s evaporative airconditioners. Mr Forte also said, and I accept, that he told both Mr Tescher and Mr Charak that Seeley wanted all the features that it then enjoyed in the hard-wired Sensortouch but with a number of additional features, such as the option of adding a heater to it and another control known as “the water miser control”.

75                  At about this time, Cintro supplied Seeley with copies of its brochures, some of which were tendered in evidence. The first was entitled “Touching the Future” whilst the second was called “Excellence in Electronics”.

76                  The brochure “Touching the Future” said that:

·                    Cintro had played a part in the rapid and continuing development of electronic devices to serve applications “undreamed of in the near past”;

·                    Cintro designs and markets electronic products that replace entire electro-mechanical control systems;

·                    the Cintro design team has produced advanced electronic solutions to product design problems in almost every area of manufacture, including major appliances such as ovens, microwaves, dryers, washers, vacuums, heating and airconditioning;

·                    Cintro offers a complete custom design service, from product evaluation and design through prototype testing and development to final manufacturing;

·                    electronics can reduce product cost and increase reliability and marketability; and

·                    Cintro’s long experience and the highest standards have brought it a record of economical manufacture and excellent quality control procedures.

77                  The brochure, “Excellence in Electronics”, outlined Cintro’s fully integrated design and manufacturing service. It also outlined Cintro’s claimed experience, expertise and high standards of design, manufacture and quality control asserting:

“In fact, we believe that [Cintro] has designed more custom microprocessors for appliances than any other company, in the world.”

78                  The brochure further said that:

·                    Cintro is Australia’s largest manufacturer of microprocessor based electronic products;

·                    Cintro has a 75 per cent share of the domestic appliance electronic control market;

·                    Cintro is acknowledged as a world class appliance control design and manufacturing company;

·                    Cintro is one of the few companies in the world whose expertise covered all applications from small to major appliances;

·                    great care is taken in design to ensure that the design was technically reliable;

·                    Cintro’s integrated research and development department covers all areas of electronics technology, from mass volume microprocessor applications through to radio frequency transmission and power electronics;

·                    Cintro achieves a consistently high level of quality of products and services.

79                  The case for the applicant was that Cintro (and therefore Newtronics) offered, in these written materials, a complete service from product evaluation and design through to prototype testing and development to final manufacture. That, in my opinion, was a justifiable submission and I accept it.

80                  In an undated document entitled “Fact Sheet”, Cintro claimed that in “the eight years since the company’s establishment, [Cintro] has captured 75% share of the domestic appliance electronic controls market …”. As Cintro was incorporated in 1981, it would seem that this statement was published sometime in 1989 or shortly thereafter. There was no evidence that the Fact Sheet was ever seen by or relied upon by Seeley but it is an indicator of how Cintro regarded itself and its expertise. It is an aid that can be enlisted when considering the extent to which Seeley has claimed that Cintro and (later) Newtronics presented themselves to Seeley as experts in their field and as experts upon whom Seeley could rely.

81                  Seeley has submitted that the design and manufacture of the RF Sensortouch remote control for its rooftop domestic evaporative airconditioners fell squarely within the claimed expertise of Cintro and Newtronics. In the absence of evidence to the contrary from the respondents, I accept that submission.

82                  Mr Forte returned to Cintro’s factory in Melbourne on 27 April 1992, accompanied by Mr Friebe. They met with Messrs Tescher, Charak and Au. During the course of this visit both Mr Tescher and Mr Charak demonstrated Cintro’s capabilities in various areas and, once again, emphasised the expertise that Cintro possessed. Mr Friebe said of this visit that they discussed the Sensortouch project and some other projects in which Cintro was involved on Seeley’s behalf. Mr Friebe said, echoing the evidence of Mr Forte on an earlier occasion, that Mr Tescher had said that Cintro was then making RF Controls for garage roller doors and that his company had experience in controlling motors and developing RF links with motors. During this visit on 27 April, Mr Friebe recalled that Cintro had, in its boardroom, one of the existing Tekelek hard-wired Sensortouch controls. According to Mr Friebe, Mr Casey of Cintro subsequently told Mr Friebe that Cintro had gone over the Tekelek controller and had identified areas which they thought were poorly designed. Mr Friebe said that Mr Casey told him that Cintro had improved on those areas in the controller that it was making for Seeley. Mr Friebe said that he and Mr Forte asked Cintro to give Seeley a quotation, first, for the cost of duplicating the existing Sensortouch control and, secondly, for the cost of duplicating the existing Sensortouch but with a radio frequency (RF) link. Thus, in April 1992, began the negotiations in earnest between Seeley and Cintro which culminated in Newtronics supplying to Seeley the radio frequency (RF) remote control package that was to be used by Seeley with its rooftop evaporative airconditioners.

83                  On 22 May 1992, Mr Charak sent a facsimile transmission to Seeley quoting $65.13 per controller. That price was accepted by Seeley. On 22 June 1992, Mr Charak sent another facsimile transmission to Mr Machin of Seeley. The facsimile stated inter alia:

“[Cintro] stands behind all its products with its reputation for quality and expertise as the largest manufacturer of electronic controls in Australia.”

Both Mr Machin and Mr Forte said that they relied upon this statement in believing that Cintro was an expert in the field of electronics. In the absence of Mr Charak and, relying upon Mr Forte and Mr Machin as witnesses of truth, I accept that they relied upon Mr Charak’s statement in the manner in which they described.

84                  The emerging pattern continued at Mr Tescher’s meeting in Adelaide on 24 July 1992 with Messrs Arnold and Forte. Mr Arnold and Mr Forte, in their respective witness statements, alluded to the nature of the representations that Mr Tescher made to them about Cintro’s expertise and ability. Those representations were in terms similar to, and consistent with, those that had earlier been made and which have already been summarised in these reasons. I accept the evidence of Mr Arnold and Mr Forte that Mr Tescher represented to them at that meeting that Cintro had the degree of expertise to warrant Seeley engaging it for the design and manufacture of the radio frequency remote controls. Following on the meeting with Mr Tescher on 24 July 1992, Mr Forte recommended to Mr Arnold that Seeley proceed with the RF Sensortouch control, using Cintro as the designer and manufacturer. Mr Arnold accepted the recommendation and decided that Cintro should be engaged to design and manufacture the controller; he had previously obtained the authority of his Board of Directors to incur the necessary expenditure.

85                  It was on the occasion of the meeting on 24 July 1992 that the scope of the design work that was to be carried out by Cintro was agreed. Cintro was to:

·                    design and develop two printed circuit boards, one to be fitted in the hand held unit and one to be fitted in the electrical control box that would be installed in the rooftop unit;

·                    design and develop software for both printed circuit boards; and

·                    design the tooling for both printed circuit boards.

In return, Cintro was to be paid the sum of $31,000 as the price for the design and development of the RF Sensortouch remote control.

86                  Mr Forte visited Cintro’s premises in Melbourne on 25 August 1992. He said in his witness statement that the purpose of his visit was “to expand on the specification given to us by (Cintro) on 21 July 1992”. During that visit, Mr Tescher introduced him to Mr Au as the engineer who was responsible for the RF Sensortouch design. Mr Tescher also showed Mr Forte a control board that Cintro had used for a Vulcan appliance, telling Mr Forte that it was an example of how Cintro could get a lot of information into a very small chip. Mr Tescher, once again, gave assurances about Cintro’s capabilities. It was during this visit that Mr Au, in his discussions with Mr Forte, exhibited a wide knowledge of electrical componentry and circuitry. He also told Mr Forte that he had undertaken the design work that had resulted in the power boards that Mr Forte had been shown.

87                  Mr Arnold visited Newtronics’ premises in Melbourne on 11 September 1992 where he spoke with Mr Tescher. According to Mr Arnold, Mr Tescher said words to the effect that “we know more about design and production of electronic controls than anyone else in Australia” and “[Cintro] is expert in the field of radio frequency electronics”. Mr Arnold also said that Mr Tescher claimed that Newtronics had “the best designers and engineers and we know what we are doing”. Mr Arnold said, and I accept, that Mr Tescher’s representations reassured Mr Arnold that Cintro would be able to handle Seeley’s requirements. The ease with which that finding can be made has been based upon my acceptance of Mr Arnold as a witness of truth and the absence of Mr Tescher as a potential witness to refute Mr Arnold’s evidence.

88                  Mr James attended at Cintro’s premises from October 1992 onwards on several occasions. He met with Mr Tescher and other representatives of Cintro and in his witness statement he has recorded the many representations that Mr Tescher made about Cintro and its abilities. These representations were in the same pattern as those that had been made by Mr Tescher to Mr Arnold. I accept Mr James’ evidence that Mr Tescher also said to him that Cintro was capable in all matters of design and production of electronic components, that it was the leading manufacturer of appliance controls and that he held Cintro out as a party that was competent to design and manufacture to Seeley’s requirements.

89                  The uncontradicted evidence of Messrs Forte, Machin, Friebe, Arnold and James justifies a finding, which I make, that Seeley relied upon the many representations that had been made to its senior officers by Mr Tescher and the other representatives of Cintro to whom reference has been made. Based upon the representations that had been made in the name of Cintro, Seeley was entitled to believe, and did believe, that Cintro had a high standard of quality, that it would use appropriate and high quality components, that its product would be both safe and reliable, that it would be of merchantable quality and that it would be fit for the purpose for which it was required; namely for use in rooftop evaporative airconditioners.

newtronics’ witnesses

90                  The witnesses for Newtronics can conveniently be divided into three groups. First, there were those who can be described as technical or scientific witnesses. They were Dr Holmes and Mr Collins, both of whom were called to repudiate the allegation that the three fires were caused by Newtronics faulty power boards. Mr Gartner, a metallurgist examined some thermal protectors and Mr Herzog, another metallurgist was retained to examine the method that was used by Seeley in fixing cooling fans to the electric motors that were used in its evaporative airconditioners. Mr Jansen, the last of the technical witnesses, was a Dutchman who was employed by the company that manufactured Klixon thermal protectors.

91                  In his written submissions, counsel for Newtronics did not attempt to rely on the evidence of Mr Collins as to the causes of the three fires. Significantly, he wrote:

“It would be our submission that the most significant aspect that Collins addressed related to the despoliation of the debris.”

92                  It is true that the evidence revealed that appropriate clinical and forensic procedures were not carried out in some respects when inspections of the debris from the three fires were conducted. However, those omissions or failures were not, in any sense, damaging to Seeley’s case. The matter of greater interest was that Mr Collins was advanced, initially, along with Dr Holmes, as an expert who would contradict the opinions of Seeley’s expert witnesses. Mr Collins failed in that exercise and, understandably, counsel for Newtronics has not relied on his opinions. The evidence of Mr Collins was contradictory and confusing. I do not consider that it is necessary to examine his evidence in detail.

93                  The next group comprised accounting, marketing and actuarial witnesses. Mr Lockwood was presented as an expert in accounting; Mr Solomon is an actuary and Messrs Fulton, Hildebrand, Ramage and Wegman gave evidence on aspects of marketing.

94                  The final group consisted of seven men who, for convenience, can be referred to as the lay witnesses. Messrs De Meo, Dullard and Mannix were former dealers or distributors of Seeley’s products. Messrs Doherty, Marshall, Ramsay and Reigel-Huth were former employees of Seeley.

the THREE fireS

95                  The first of the fires occurred at about 10.30 am on 14 February 1995 at the home of Mr and Mrs Douglas Gunning at 9 Grevillea Avenue Roleystone, Western Australia (“the Roleystone fire”). They had an EM model Breezair domestic rooftop evaporative airconditioner installed in their home just over two weeks earlier on 27 January. Mr Gunning said that he noticed a “funny” noise which occurred only when the unit was switched “off”. When the unit was running there was no problem with noise but when it was switched “off” it would make a sound like “err err” every five minutes of so. Mrs Gunning also noticed a noise and, like her husband, she said that it only occurred when the unit was switched “off”. She said the noise “came and went. It was not continuous”. Mrs Gunning was quite certain that the unit had not been in operation during the night preceding the fire and she was also certain that she had checked the unit and ascertained that it was “off” before leaving for work at about 6.30 am on the morning of the fire. (Her husband had left about fifteen minutes earlier). Each of them was separately telephoned at their work at about 10.30 am and were informed that their house was on fire. Fortunately, a neighbour had bravely climbed the roof of the house with a fire extinguisher and had succeeded in containing the fire. The evidence of Mr and Mrs Gunning was not challenged. I accept what they have said and I find that, at the time of the fire, their remote control was in the “off” position.

96                  The second fire, which happened two days later at about 10.40 pm on 16 February, occurred in the home of Mr and Mrs John Langfield at 252 Summerlakes Parade, Ballajura, Western Australia (“the Ballajura fire”). They had a Breezair domestic rooftop evaporative airconditioner installed in late November or early December 1994. It was also an EM Model. However, at the time of installation, they were not able to obtain an RF Sensortouch remote control. Mr Langfield said that he had been told that Seeley had been unable to keep up with the demand. He also said that he was told that an RF Sensortouch remote control would be installed as soon as it became available. As a result, Mr and Mrs Langfield accepted a manual control which, so Mr Langfield said, worked “well” with the airconditioner. On 15 February 1995, a serviceman disconnected the manual control and installed the RF Sensortouch remote control system.

97                  Mrs Langfield recollected that the airconditioner was operating on that day, 15 February, but only for a short period of time. Mrs Langfield said that she recalled using the remote control to switch the airconditioner “on” whilst she was at home on 16 February. However, she also recalled that she switched the power switch on the remote control to “off” at approximately 3.40 pm when she left for work. She said that she returned home at about 10.20 pm. Mr Langfield said that he arrived home from work on 16 February at about 4.10 pm; his wife had already left for her work. He said that the airconditioner was switched “off” when he got home and that he did not, at any later stage, turn it “on”. They each said that at about 10.45 pm, their neighbour alerted them to a fire in the airconditioner housing on the roof. Mr Langfield removed the fuse for the airconditioner from the fuse box and climbed the roof, using the garden hose in an unsuccessful attempt to contain the fire. Their house and its contents were extensively damaged before the Fire Brigade was able to control the fire. As was the case with Mr and Mrs Gunning, the evidence of Mr and Mrs Langfield was not challenged. I accept what they have said and I find that, at the time of the fire, their remote control was in the “off” position.

98                  The third fire occurred on 17 February 1995 in the home of Mr and Mrs Wayne Bradshaw. They lived at 24 Launders Avenue, Wonga Park, Victoria (“the Wonga Park fire”). It was their home that was examined by Mr Lee. They had had a Breezair domestic rooftop airconditioner installed on the roof of their home ten days earlier, on 7 February 1995. Both Mr and Mrs Bradshaw recalled that the unit was noisy. Mr Bradshaw was clear in his witness statement that the noise only occurred when the unit was switched “off” but Mrs Bradshaw could not remember whether it was switched “on” or “off” when it made the noise. Mr Bradshaw’s statement about the noise, was that:

“… the unit would seem to switch itself on and then off without anyone having touched the remote control. When this happened the airconditioner on the roof made a noise even though the remote control was switched off. Other than this, the airconditioner worked well when it was turned on by the remote control.”

Counsel for Newtronics did not require Mr and Mrs Bradshaw to be produced for cross-examination; their witness statements were received into evidence without challenge.

99                  The Langfields did not lead evidence about noise nor were they cross-examined on that subject. However, it must be remembered that their remote control was installed at about 8.30 am on Wednesday 15 February and the fire occurred at about 10.40 pm in the following evening, Thursday 16 February. In those thirty-eight hours, the airconditioner was operating for some of the time and both Mr and Mrs Langfield were absent at other times. The number of hours when the unit was switched “off” and one of them was at home was, therefore, quite small. Bearing in mind that the Gunnings and Mr Bradshaw all said that the noise was irregular or intermittent and that when it did occur, it was of short duration, I attach no significance to the fact that neither Mr nor Mrs Langfield noticed a noise from their unit when it was switched “off”.

100               Based on the evidence of the six home owners, I make the following findings of fact. First, at the time of each fire, the three homes had installed on their roofs a Breezair domestic rooftop evaporative airconditioner that had been manufactured by Seeley and sold to the consumers by one of Seeley’s agents or distributors. Secondly, at the time of each fire, the homeowners possessed and had used an RF Sensortouch remote control to operate their respective airconditioners. Thirdly, based on the evidence of the Gunnings and Mr Bradshaw, I am satisfied that their respective airconditioners made intermittent noises, even though the unit was not switched “on” at the time. Fourthly, I am also satisfied, on the balance of probabilities, that these noises were consistent with some form of energy operating on the units at the time of the noises – no other explanation was forthcoming. Fifthly, I find that the fires were, in some way, related to the remote control package. I have come to that conclusion, on the balance of probabilities, for the following reasons:

·        each of the homes was using an RF Sensortouch remote control;

·        the Langfield airconditioning unit had operated successfully with a manual control from December 1994 until February 1995;

·        the Ballajura fire in the Langfield’s home occurred within thirty-eight hours of the installation of the remote control;

·        all three remote controls were switched “off” at the time of each fire;

·        two of the three airconditioners made noises when they were turned “off”;

·        those noises warrant a finding that all three units were inappropriately energised when the remote control switches were in the “off” position; and

·        as the three remote controllers were in the “off” position when the fires occurred, they should have prevented any inappropriate form of energization in the motors.

101               The seven findings that I have made, important as they are, do not however identify how or why energization occurred. Seeley’s case is that the electronic components that Newtronics supplied to it for use in the remote control were not fit for the purpose for which they were required. Newtronics’ answer to that claim is to argue that the motors that Seeley manufactured and installed in the airconditioning units, or the motors’ thermal protectors, or both were inadequate and were the cause of the fires.

formation of contract

102               Before proceeding to establish the causes of the fires, it is first desirable to identify the terms of the contracts into which the parties entered. Seeley’s case initially postulated the existence of two contracts; in the first place, it asserted that in 1992 it entered into a contractual relationship with the company that is now known as Cintro for the design of the RF Sensortouch remote control package (“the design agreement”); secondly Seeley claimed that it entered into a second contract in 1994 with Newtronics (not knowing of the change in corporate identity and believing that it was dealing with the same party). That second contract (“the supply agreement”) was for the supply of the first batch of RF Sensortouch remote controls.

103               Seeley asserted that both contracts contained (inter alia) the terms and conditions that are printed on the back of Seeley’s purchase orders. With respect to the design agreement, it pleaded in par 66 of the substituted statement of claim that Cintro agreed to design, manufacture and supply a prototype and that it, in return, agreed to source, exclusively from Cintro, replications of the prototype for a period of a year. Seeley also asserted that it further agreed to pay Cintro $31,000 for the work that Cintro was to do.

104               Furthermore, it was pleaded in par 68 of the substituted statement of claim that the following implied terms were to be incorporated into the design agreement:

“68.1 that the prototype designed, manufactured and supplied pursuant to the Design Agreement would be fit for the required purpose by virtue of section 14(1) of the Sale of Goods Act 1895 (SA) and/or otherwise at law;

68.2          that the prototype designed, manufactured and supplied pursuant to the Design Agreement would be of merchantable quality by virtue of section 14(11) of the Sale of Goods Act 1895 (SA) and/or otherwise at law;

68.3          that the services rendered by Cintro pursuant to the Design Agreement would be rendered with due care and skill and that any materials supplied in connection with the services would be reasonably fit for the purpose for which they were supplied by virtue of section 74 of the Trade Practices Act 1974 (Cth) and/or otherwise at law.”

105               Newtronics did not accept that the agreement or agreements to which it was bound contained Seeley’s printed terms and conditions. As to the design agreement, it further claimed that Seeley did not rely on Cintro’s skill and judgment: rather, so it asserted, Seeley relied on the inspection, skill and judgment of its own employees. I will deal first with the design agreement.

106               On 13 August 1992, Mr Machin posted to Cintro Seeley’s purchase order no 45759. The order incorporated and attached the minutes of the meeting of 24 July 1992 between Messrs Tescher, Arnold and Forte together with a copy of Cintro’s facsimile transmission dated 7 August 1992 (which had confirmed the parties’ discussions about a period of exclusivity). The order also incorporated Seeley’s standard Conditions of Purchase that were printed on the back of the order form. In my opinion, Cintro accepted the order and a contract between Seeley and Cintro thereby came into existence. Work was carried out by Cintro pursuant to the contract. Ultimately, invoices were directed to Seeley by reference to Seeley’s purchase order. The invoices were dated 30 April 1993, 30 August 1993 and 29 July 1994. [It was Cintro who issued the first two of those invoices. However, when the invoice of 29 July 1994 issued, the changeover in the ownership of the business had occurred; hence it was Newtronics who issued that particular invoice].

107               Cintro in its written submissions contended, contrary to the conclusion at which I have arrived, that the design agreement did not include Seeley’s printed conditions. It claimed that the conditions that were applicable were those that were set out in its quotation forms which were earlier in point of time than Seeley’s purchase orders. However, those quotation forms were not identified in Cintro’s written submissions, nor were they relied upon by Newtronics. Cintro further submitted that the design work, for which it had been engaged by Seeley, had not been completed when it, Cintro, sold its business to Newtronics. It went on to argue that the obligations of the designer would only have ceased with the presentation of the final version of the design. It argued, and in my opinion correctly so, that the design was not completed until some twelve months after the sale of the business to Newtronics. It is true that a respondent is not to be held responsible for every loss that is suffered by a claimant for there must be a causal connection between the breach of contract or the breach of statutory or other duty and the loss that is suffered by the claimant. The question is whether Cintro’s breach was so connected to Seeley’s loss that, as a matter of ordinary common sense and experience, it should be regarded as the cause of it: March v E & MH Stamare Pty Ltd [1991] 171 CLR 506 per Deane J at p 522.

108               Cintro disputed that it had, in any way, engaged in conduct that could properly be described as misleading or deceptive. In any event, if, which it denied, a cause of action for misleading or deceptive conduct was available to Seeley against it, the limitation period under both the State legislation and the Trade Practices Act 1974 (Cth) (“the Trade Practices Act”)required proceedings to be instituted within three years of the date when the cause of action arose and Seeley had failed to institute its proceedings within that time limit. As any cause of action against Cintro would have to be based upon Cintro’s conduct, or its acts or omissions on or prior to 30 September 1993 (the date of the sale of the business), proceedings would need to have been instituted within three years of that date. I will deal with that submission at a later stage in these reasons.

109               Seeley sought to argue that the design agreement called for Cintro to supply to Seeley “all of Seeley’s remote controller requirements, comprising approximately 4,000 units per annum, for a period of two years after market release of the product …” In support of that submission Seeley relied on the notes of a meeting that had been held on or about 27 July 1992 between Messrs Arnold and Forte of Seeley and Mr Tescher of Cintro and a facsimile transmission from Mr Tescher to Seeley dated 7 August 1992. However, a close examination of those documents does not support that proposition. The notes of the July meeting do contain a reference to “approximately 4000 units/annum” but that was no more than an observation or an indicator of Seeley’s likely needs in the event that Cintro was able to show that it was capable of designing the RF Sensortouch remote control. The centre piece of the minutes of the meeting was the composition of the figure of $31,000 which was:

“ROOF TOP UNIT

Software design $ 6000

PCB Design $ 4000

Tooling of PCB’s $ 6000

Microprocessor Tooling $ 9000

LCD displays $ 2000 (OTS)

$27000

Test equipment $ 4000

TOTAL $31000”

Those figures show, quite clearly, that the parties were only addressing the design stage. The words that next followed “Anticipated volume approximately 4,000 units/annum” were not contractual as is evident by the next entry in the minutes:

“Conditions to be agreed upon”

There then followed reference to the period of exclusive dealing, the coverage of a guarantee and limitations of use as matters to be further discussed. Significantly, the minutes contained no reference to the cost per unit of the finished product. Cintro’s facsimile transmission of 7 August 1992 advanced matters somewhat; it addressed issues of exclusivity, for example, in terms that suggest that the parties might have reached agreement on some subsidiary aspects. However, once again, there was no reference to the cost per unit of the finished product.

110               The final document upon which Seeley relied was its purchase order of 13 August 1992. This is quite clear in its composition; it dealt only with the design cost of $31,000 and listed an approximate payment schedule that was to commence in October 1992 and last until August 1993. It contained no reference to the cost per unit of the finished product. For these reasons, I reject Seeley’s submission that it was a term of the 1992 design agreement that Cintro would supply approximately 4000 units per annum for a period of two years. There were other terms and conditions of the design agreement that were identified by Seeley during the course of its submissions which I accept but, as they do not affect the outcome of these proceedings, I will not stay to discuss them.

111               In my opinion most, but not all of, the submissions that were made on Seeley’s behalf about the nature and effect of the design agreement should be accepted. I find, therefore, that Cintro was to design for Seeley a radio frequency control unit which would safely and satisfactorily control Seeley’s rooftop evaporative airconditioners. The evidence that supports that finding appears in several documents but the document of prime importance is Seeley’s purchase order no 45759 dated 13 August 1992 which authorised Cintro to design and manufacture an “RF Rooftop Control Unit” and which contained Seeley’s standard terms and conditions as printed on the back of that order.

112               From that finding, it follows in my opinion, that the remote controls had to have an “on/off” function so that when an airconditioner was turned “off” at the handset it would, in fact, be “off”: it would not, when in the “off” position, have the potential to energise the motor. That subject had been addressed by Seeley in July 1992 when it forwarded Cintro a document that it described as “a very preliminary specification for the RF rooftop unit”. Under the heading “FUNCTION” Seeley wrote:

“The control unit shall have fully programmable thermostat and timer functions as well as on/off … functions.”

113               If it needs to be said, then I say that “off” means totally “off” or, in the language of the profession, totally de-energised; it also means that the remote control was to be so designed that when the unit had been switched “off” all of the energy outputs from all sources were to be de-energised; there was to be no tolerance for the possibility of energising a motor. That fundamental function was repeated by Seeley in May 1993 when Mr Friebe sent facsimile transmissions to Mr Eric Au on 4 and 13 May. The first of them commenced:

“I have a spec here which you faxed in February 1993. I have updated that specification with all changes made since. HERE IS A COPY. I marked all areas of change …”

Subparagraph 6.2 of the attached specifications, which had carried the heading “Stand by Mode”, had the word “Revised” written in the left hand margin. In the right hand margin there are some initials and a date, 9 November 1993. The language of the subparagraph, although couched in more formal language, nevertheless makes it clear that “off” means “off”:

“When the ETM is operating under the Manual or Auto or Timer modes, pressing and releasing the POWER button will place the ETM in the Standby mode. In this mode, the operations of the ECCM will be disabled.”

The second transmission from Mr Friebe enclosed the final specifications. Clause 3.3.1 headed “Standby Mode” said:

“This is the situation that the ECCM is in if it has just been installed or after an occurrence of a power failure. The ECCM will be placed in its standby mode, i.e. all the outputs are disabled and is waiting for commands from the ETM, which will be sent regularly at an interval of 10 minutes if the ETM is energised.”

The importance of these specifications was reinforced by the contents of cl 6 of Seeley’s printed terms and conditions:

“It shall be the vendor’s responsibility to assure all material and parts before delivery and offer for acceptance to the purchaser only those items of supply which are in accordance with the purchaser’s order, specification, drawing or approved sample. The vendor may also be requested to supply written confirmation as to the acceptability of material and parts with each delivery.”

Condition 8, containing an indemnity in favour of Seeley, was also important:

“The purchaser shall not be bound to accept nor be liable for goods, work or damages if the goods in the opinion of the purchaser fail to conform to the specifications, drawings, samples or description provided by the purchaser or any alteration, amendment or adjustment thereto authorised in writing by the purchaser. Demurrage and any other costs or expenses incurred due to the vendor’s failure to comply with any of the purchaser’s instructions shall be payable by the vendor and maybe set off against the vendor’s account. The vendor shall indemnify the purchaser for any failure by it to comply with any of the provisions of this clause and any consequential loss or damages incurred as a result thereof.”

114               The terms of the 1992 contract had called for Cintro to complete the design and production of the componentary by September 1993. However, it failed to meet that deadline, and that meant that Seeley could not release the RF Sensortouch remote control into the market place for the summer of 1993 – 1994. That, in turn, meant that Seeley had to use the Tekelek hard-wired Sensortouch controller for the 1993-1994 season.

115               In par 2.3.2 of his written submissions, counsel for Newtronics conceded that Newtronics took over the contract for the design of the components that made up the RF Sensortouch remote control system, thereby clearly acknowledging that a contract existed between Cintro and Seeley. Yet, later in those submissions (at par 2.4.1.), claiming to rely upon the evidence of Mr Machin, he submitted that no contract came into existence until September 1994. Mr Machin was, at that time, the employee of Seeley who had been the author of the documents that were said by Seeley to comprise the written section of the 1992 design agreement. Under cross-examination, Mr Machin had expressed the view that no contract had been reached in 1992 and that negotiations between the parties were ongoing from before August 1992 until September 1994. That was the base upon which Newtronics contended that the only contractual relationship that existed between the parties was a contract that was entered into in 1994. Newtronics’ short point was to the effect that Seeley confirmed the 1994 supply agreement when it, by its conduct, accepted Newtronics’ letter of 9 September 1994 and the terms and conditions that were attached to that letter.

116               In view of the submissions that have been advanced on behalf of Newtronics on the question of the contractual relationship between the parties, it is necessary to examine the evidence, particularly the documentary evidence, in some detail. A convenient starting point, however, is the oral evidence of Mr Machin.

117               Mr Machin was initially employed by Seeley from 1985 to 1987 as a purchasing officer. After a gap of three years, he resumed his employment with Seeley in 1990; on this occasion however he was employed as Seeley’s purchasing and supply manager, a title that was later changed to logistics manager. His duties included the responsibility for the procurement of the products that were used in the manufacture of Seeley’s products. Until 1994, he reported directly to the managing director, Mr Roy Arnold; thereafter, as a result of a reorganisation, he reported to a Mr Peter Williams who was the head of the dealer business group. Later in 1994, he was promoted to the position of State sales manager for South Australia and the Northern Territory, a position that he retained until his resignation in 1997. He is now an employee and a director of an airconditioning company that is a specialist dealer in Seeley’s products.

118               Mr Machin’s duties involved him in negotiations for purchases and in the preparation and presentation of purchase orders. Mr Machin explained that in the 1992-1994 period, when he was a purchasing officer, there was in place at Seeley a practice for the use and operation of purchase orders. The exercise would commence with his receipt of a document that was called a “material requisition”. Upon the premise that it had been properly completed by an authorised person, it represented the authority for Mr Machin’s purchasing department to purchase the material that was described in the material requisition. Exhibit A29, Vol 1, p 106 is a material requisition dated 12 August 1992. It identified Cintro as the proposed supplier of goods; it listed the price payable to the supplier and the stages of the supply at which various part-payments would be made. Under the heading “Description”, the author wrote:

“To design and manufacture RF ‘Rooftop’ Control Unit as per quote dated 27/7/92. Conditions as per fax dated 7/8/92 from [Cintro] with additional condition in para 4 that sourcing exclusivity is ‘subject to satisfactory product quality and price’. Payment to be split up as each stage finalised.”

119               The document that was described as a “quote dated 27/7/92” is better described as notes of matters that were discussed at a meeting on that date between Mr Ray Arnold and Mr Ian Forte of Seeley and Mr Gary Tescher of Cintro. Subject to that minor observation, six stages in the design and manufacture were listed under another heading “Price”, which totalled, in all, $31,000. The “fax” of 7 August 1992, which was referred to in the material requisition, came from Mr Gary Tescher of Cintro; it was addressed to Mr Ian Forte of Seeley and subject to some immaterial stipulations it contained a passage in the following terms:

“It is also understood that [Cintro] will not work directly with any other evaporative airconditioner manufacturer…

In return, Seeley International Pty Ltd will source exclusively from [Cintro] the radio design and manufacture during the period of exclusivity.

It was that latter statement that led to the qualification “subject to satisfactory product quality and price” in the material requisition.

120               The material requisition, accompanied by copies of the quotation dated 27 July 1992 and the facsimile transmission dated 7 August 1992, having been forwarded to Mr Machin, he prepared and forwarded to Cintro Seeley’s purchase order no. 45759 dated 13 August 1992. The language of the purchase order and its endorsements were, virtually, a repetition of the information that was contained in the material requisition. Mr Machin verified that the printed material appearing at pp 110-111 of Ex A29 vol 1 contained the standard terms and conditions that were part of Seeley’s purchase orders and that those printed terms and conditions were part of purchase order no 45759.

121               Mr Machin explained that purchase orders were always prepared in quadruplicate and the original (white) copy, which was forwarded to the vendor or the supplier, contained Seeley’s standard terms and conditions on the back of the document. The remaining copies were retained for Seeley’s internal use. It was Mr Machin’s invariable practice to post out the original copy of all purchase orders, even though a copy may have earlier been transmitted by facsimile. This was because of the presence of the standard terms and conditions on the back of the purchase order and also because the original copy contained the sales tax declaration. An endorsement appeared in the bottom left hand corner of the original copy of the purchase order in bold type in the following terms:

“Important note: Order subject to conditions printed on back hereof.”

122               Mr Machin added that neither he nor anyone else in the purchasing department had authority to vary Seeley’s terms and conditions as printed on its purchase orders unless prior approval had been obtained from a superior officer. He also said that at no time during his dealings with personnel from Cintro did Cintro reject or dispute Seeley’s standard terms and conditions. That passage in Mr Machin’s witness statement was not challenged in his cross-examination. I accept his evidence, both as to the system as it operated within Seeley’s administration and as to the presence of the standard terms and conditions in Seeley’s purchase orders.

123               The issue of the purchase order, and the endorsements contained in it amounted, in my opinion, to a qualified acceptance only of the offer that had been made by Cintro in its facsimile transmission of 7 August 1992. However, Cintro clearly accepted the qualified acceptance, or counter-offer, as evidenced by the fact that it proceeded to work on the design for the RF Sensortouch project. Contrary to the submissions that were made on behalf of Newtronics, there can be no doubt that a contract had come into existence in 1992.

124               During 1992 and 1993, Cintro worked on the design and the development of the remote control; there were regular and ongoing contacts between representatives of the two companies and testing was conducted by Seeley on the various prototypes. On 24 August 1993, Mr Machin received an instruction from Mr Arnold, informing him that he was to place an order with Cintro to cover the delivery of certain components. As a result of those instructions, Mr Machin sent a facsimile transmission to Mr Ray Cox of Cintro (who had replaced Mr Charak) confirming that he had approval to place the order, but first seeking information about part numbers, their description and their prices. Mr Machin needed this information to prepare an appropriate purchase order. Mr Cox sent a facsimile transmission to Mr Machin on 11 October 1993 quoting $31.21 for the ETM (plus a surcharge of $8.40) and $41.75 for the ECCM (plus a surcharge of $16.50). Seeley negotiated a lower surcharge and on 9 November 1993 it issued its purchase order no 49347 for 500 units at the prices and surcharges that the parties had agreed in the preceding month.

125               Mr Machin said that the purchase order, in accordance with standard practice, contained a copy of Seeley’s standard terms and conditions and that those terms and conditions were the same as those that had been included in purchase order no 45759. By this time, Cintro had sold its business to Newtronics and Mr Machin had issued the purchase order in favour of Newtronics not knowing of the change of names and the change in ownership of the business.

126               Seeley ordered a batch of 50 RF Sensortouch remote controls from Newtronics in February 1994 for field trials. This necessitated Mr Machin issuing a specific purchase order. Once again, that purchase order contained Seeley’s standard terms and conditions.

127               On 23 March 1994, Mr Cox of Newtronics telephoned Mr Machin, telling him that Newtronics had to give its suppliers advanced notice (i.e. lead time) for the supply of certain materials that Newtronics required for the manufacture of the electronic componentry. Mr Cox requested an authorisation from Seeley which would permit Newtronics to purchase these long lead time items so that Newtronics could be ready to manufacture in June 1994. On the same day, Mr Cox sent a facsimile transmission to Mr Machin confirming that conversation and requesting an appropriate purchase order. Mr Machin recounted in his witness statement the various reasons for delays at Seeley’s end, but, ultimately, on 10 May 1994, Seeley issued purchase order no 800501 which authorised Newtronics to purchase the necessary long lead times. That purchase order contained the standard printed terms and conditions that appeared on all of Seeley’s purchase orders. There was no evidence to suggest that those terms and conditions were rejected by Newtronics: there was no evidence to suggest that they were even the subject of discussion by Newtronics. That exercise was repeated on 8 September 1994, and again on 16 November 1994, when Seeley issued Newtronics with its purchase orders nos 53441 and 54515 for the stocking of other long lead time items. Once again Seeley’s standard terms and conditions were printed on the back of the purchase orders.

128               On about 21 April 1994, Newtronics sent to Seeley an ETM prototype; this turned out to be the final prototype. Two months later, on 22 June 1994, Newtronics sent to Seeley an ECCM prototype which also turned out to be the final prototype. Both prototypes had been preceded by several earlier versions. The ECCM prototype that had been supplied by Newtronics to Seeley contained a Motorola opto-coupled triac-MOC 3021-400v. The subsequent use of a different brand of opto-coupled triac is a subject to which I must return in due course.

129               Throughout May and June 1994, Newtronics carried out various tests on the ETM and the ECCM prototypes, sending a test report, setting out the results, to Seeley on 28 June 1994. The report represented that “the ECCM performs as per the product specification”.

130               The case for the applicant was to the effect that, by providing the final ETM prototype in April and the final ECCM prototype in June 1994, together with the test report of 28 June 1994, Newtronics purported to have completed the design. For example, Mr Friebe said in his witness statement that, as a result of the delivery of the two prototypes together with the test report, he believed that Newtronics’ controllers were safe for installation into Seeley’s airconditioners. He proceeded upon the premise that the controllers would not energise the motors except when the remote control was switched “on”; he also proceeded upon the premise that Newtronics’ controllers would be manufactured with world class skill and care and that the design and the development of the prototype components had been completed satisfactorily.

131               Mr James said much the same thing. In his witness statement he said that he believed that the Newtronics’ design was safe and would satisfactorily drive Seeley’s airconditioners; he believed that Newtronics had used high quality, reliable components and had manufacture the PCBs with all due skill and care. He proceeded upon the premise that Newtronics had completed the design and the development of the RF Sensortouch remote control and that the design was safe. Like Mr Friebe, he assumed that the motor windings would always de-energise when the remote control was switched “off”.

132               Seeley claimed, and I accept, that Mr Friebe and Mr James were unaware, at the relevant times, that the Newtronics power board could energise if the opto-coupled triac in the ECCM power board failed, and that such failure could result in the supply of DC current to the motor, leading to the potential of overheating and fire in the air-conditioning unit.

133               By facsimile transmission dated 11 May 1994, Seeley advised Newtronics that it anticipated that it would require 4,500 RF Sensortouch remote controls for the 1994-1995 summer season. Two days later, Seeley sent a further facsimile transmission, listing the numbers of the controls that it would require in specific months, commencing in July 1994. Newtronics accepted Seeley’s requirements in a facsimile transmission dated 17 May 1994. Over the ensuing months, these numbers and their dates of delivery were varied and this engendered a measure of correspondence between the parties but nothing turns on it, save to comment that there was no suggestion from Newtronics that Seeley’s standard terms and conditions were not to apply to any contractual relationship that was then in existence or that may thereafter come into existence. Between May 1994 and September 1994 the parties met from time to time and exchanged correspondence about the quantity of the likely orders that would be placed with Newtronics by Seeley. The negotiations concluded with an agreement that Seeley would purchase 4,000 units from Newtronics with provision for a further 2,000 units (making 6,000 units in all). On 3 August 1994, Mr Cox of Newtronics sent a facsimile transmission to Seeley agreeing to commence the dispatch of RF Sensortouch remote controllers to Seeley by 1 September 1994 at the latest.

134               The first deliveries from Newtronics were dispatched to Seeley on 31 August 1994 when 100 receivers were forwarded. Two days later, on 2 September 1994, Newtronics delivered thirty-two ECCMs and a further fifty receivers. On 5 September, Newtronics delivered 16 ETMs and thereafter the flow of deliveries continued until 17 February 1995. In September 1994, Seeley released “the Air-Conditioning Book” which promoted the EM model Breezair featuring the RF Sensortouch remote control. It extolled its virtues saying:

“Unlike infra-red remote controls, you don’t need to point it at the unit to make it work. You don’t even have to be in the same room.”

135               At about the same time, on 2 September 1994, Seeley held a “Vendor Information Day” for the benefit of Seeley’s suppliers. As Mr Arnold explained in his witness statement at par. 131.1:

“The purpose of this Information Day was to inform Seeley suppliers (vendors) of the plans and strategies of Seeley in order that they may more effectively supply the components and materials supplied.”

 

Mr Cox of Newtronics attended the Vendor Information Day.

136               After a pilot production run of the RF Sensortouch on 6 September 1994, Seeley commenced full production of its EM model domestic evaporative rooftop airconditioner. That production included the assembly of the ETM, the ECCM and the receiver.

137               Mr Arnold said, and I accept, that the response by dealers and consumers to the RF Sensortouch was enthusiastic to such an extent that Seeley was unable to obtain adequate supplies of components from Newtronics to satisfy demand. That situation continued until the occurrence of the fires in mid February 1995. For example, on 11 November 1994, Mr Arnold was compelled to write to all Breezair dealers explaining that the demand for the RF Sensortouch had been running “at twice predicted levels.” He said that the success of the unit had “left our supplier unable to cope with the demand”.

138               It is now necessary to step back in time to December 1993 so that Newtronics’ argument about the terms and conditions that governed its contract with Seeley may be understood. On 6 December 1993, Mr Machin wrote Mr Ray Cox of Newtronics saying:

“Further to our conversation last week could you please advise how you are going with offering Seeley a 2 year Warranty on the RF components your company will be supplying us. I need to have an answer this week.”

139               Mr Cox replied a few days later offering “18 months without any penalty” but adding that if Seeley wanted a two-year period “we would need to negotiate some penalty arrangement”. It would appear that Seeley did not further pursue the matter and nine months were to pass before Newtronics wrote on 9 September 1994 stating that it was “pleased to confirm our pricing, warranty and supply arrangements for the Remote Controls for your evaporative coolers”. There then followed pricing details. Attached to that letter were three typed-written pages containing detailed terms and conditions upon which “Newtronics is pleased to provide a 2 year warranty …” Those terms and conditions contained the familiar provisions that limited a vendor’s or supplier’s liability.

“To the extent permitted by law, all warranties, representations, promises, conditions or statements regarding supply of the goods and/or the provision of services, either express or implied, including without limiting the generality of the foregoing, warranties, representations, promises, conditions or statements as to the suitability or fitness of the goods and/or services for any particular application, capacity, output, performance or efficiency, are hereby expressly excluded. The Purchase acknowledges that he has relied solely upon his own inspection and skill and judgment and not upon any representation, promise, statement or description.”

140               In addition to this general limitation of liability, the terms and conditions then went on to provide that, in the event of the supplier being found liable for any breach, its liability was to be limited either to the costs of replacement or the costs of repairs to the goods or the refunding to the purchaser of the price paid in respect of the goods.

141               It is this letter of 9 September 1994 from Newtronics and its attachment upon which counsel for Newtronics relied in submitting that the contractual relationship between Seeley and Newtronics is governed only by the terms and conditions set out therein. It is Newtronics’ claim that the terms and conditions that are printed on Seeley’s purchase orders play no part in determining the parties respective contractual responsibilities.

142               In par 39 of the substituted statement of claim, Seeley alleged that on or about 7 or 8 September 1994, it entered into an agreement (“the supply agreement”) with Newtronics “whereby Seeley agreed to purchase and Newtronics agreed to manufacture and supply to Seeley approximately 3,000 (sic) units of the devices”. It was pleaded that the agreement was partly oral, partly in writing and partly to be inferred by conduct. In so far as it was oral, Seeley relied (inter alia) on conversations between representatives of the two companies on 13 and 29 July. Newtronics disputes that there was any oral component to that agreement, although it does acknowledge that there had been discussions between various employees of the two companies. In so far as the agreement was partly in writing, Seeley relied on facsimile transmissions that passed between the companies throughout August and September of that year. The conduct was said to be the dispatch of certain of those facsimile transmissions. In particularising the supply agreement, Seeley made no mention of Newtronics’ letter of 9 September nor of the printed terms and conditions that accompanied that letter: rather it pleaded in par 44 that:

“During the period 5 September to 17 November 1994, Newtronics manufactured and supplied Seeley pursuant to the Supply agreement approximately 1900 units of the devices”.

143               In its final submissions however, Seeley advanced the existence of the supply agreement merely as an alternative argument, claiming that its primary case was that Newtronics’ manufactured and supplied RF Sensortouch remote controls in late 1994 pursuant to the 1992 design agreement. As a matter of practicality and business efficacy, I think that Seeley’s original submission is the correct one: that is, there were two agreements, the design agreement in 1992 and the supply agreement in 1994. The discussions that had taken place in 1994 had been conducted by the two companies’ representatives in a business environment. They, or their predecessors had, two years earlier, worked on and agreed a commercial arrangement for the design and manufacture of prototypes for the remote control; that arrangement was conveniently called the design agreement. Thereafter, the parties continued to work together: first, Cintro and then Newtronics, designing and developing and Seeley examining and testing the prototypes. Then, in about mid to late 1994, the parties came to believe that the finished product had been achieved. That had the not unexpected consequence of Seeley placing its first commercial order for a large batch of remote controls. It was always possible for one of the parties to say, at that particular point in time, that it was then necessary for the parties to reassess their respective contractual and commercial positions so that a new contract could be entered into to govern the supply of the commercial quantities of the remote controls. However, as is so often the case in commercial matters, neither party said or did anything that would suggest positive action in that area; it is left to the lawyers and the courts to work out, as best they can, an appropriate legal classification of the parties’ conduct. The only feature to which Newtronics could point was its letter of 9 September 1994 but there was no evidence of any reaction from Seeley or its personnel to that letter or its attachment.

144               I have had no difficulty in coming to the conclusion that Seeley’s printed terms and conditions applied to the design agreement. They were contained in each of the purchase orders that Seeley issued to Cintro; there is no evidence that might suggest that Cintro rejected those terms and conditions or any of them. On the contrary, the correspondence and the conduct of Cintro’s employees points in the opposite direction – to an acceptance of Seeley’s terms and conditions. I turn then to consider whether its terms and conditions also apply to the supply agreement.

145               Seeley rejected the proposition that the supply agreement was governed by the terms and conditions that were contained in the attachment to Newtronics’ letter of 9 September 1994. It laid great stress on its purchase order no 53441 dated 8 September 1994 and the many purchase orders that had preceded it. That document contained an express statement that the order was subject to its printed terms and conditions and so, said Seeley, those terms thereby formed part of the supply agreement. Furthermore, Seeley argued that Newtronics well knew from its dealings, and from Cintro’s dealings, with Seeley that Seeley used a standard purchase order and that it operated on the standard terms and conditions that were printed on the purchase orders. It listed five purchase orders, all preceding Newtronics’ letter of 9 September 1994, that had been submitted by Seeley to Newtronics. They were additional to the purchase orders that Seeley had earlier presented to Cintro. Save for enclosing the set of terms and conditions in its letter of 9 September, Newtronics never, at any time, prior to 9 September 1994, rejected or objected to any of Seeley’s printed terms and conditions. Indeed, the letter of 9 September from Newtronics did not even address the fact that there was an enclosure to the letter. Seeley argued that the history of the relationship between the two companies was such that the Court should infer that Newtronics accepted and agreed to the standard terms and conditions that were printed on Seeley’s purchase order and which had repeatedly been presented to and accepted by Newtronics: and if the Court were prepared to do this, it should go one stage further and hold that Seeley’s terms and conditions – to the exclusion of Newtronics terms and conditions – should be treated as forming part of the supply agreement.

146               In addition to its argument that its standard terms and conditions formed part of each contract, Seeley also argued that the Court should find that the implied terms that are referred to in s 14(I) and s 14(II) of the Sale of Goods Act 1895 (SA) (“the Sale of Goods Act”) and s 74 of the Trade Practices Act were incorporated into the supply agreement. It also argued that the opto-coupled triacs in the devices should have been Motorola parts – a separate subject that is discussed later in these reasons.

147               Newtronics, on the other hand, relying on its letter of 9 September 1994 and the attachment to that letter, argued that the only implied terms in the supply agreement were to the effect that:

·        Newtronics would obey instructions from Seeley as to changes to the design; and

·        Newtronics would be responsible only for those parts of the fixed evaporative airconditioner (“the FEAC”) that it had manufactured and their safety.

Newtronics submitted that the first of these implied terms arose out of the evidence that was given during the trial to the effect that Seeley did, in fact, instruct and advise Newtronics about changes to the design. Newtronics acknowledged that, first Cintro, and then Newtronics, had the obligation to design the electronic circuitry and the method for energising the motors in Seeley’s airconditioning units. However, Newtronics argued that the design of the handset for the remote control (that is, the ETM or the electronic transmitter module) and the evaporative cooler control model (the ECCM) which comprised the printed circuit board (“the PCB”) and its components, was effected, at the least, as a collaborative exercise involving engineers who were employed by Seeley. Newtronics pointed to Messrs Friebe and Zuodar in particular who, so it said, acted under the overriding supervision of Mr James and, to a limited extent, Mr Ron Reigel-Huth. Newtronics accepted that the design of both the ETM and the ECCM had been commenced by Cintro and completed by Newtronics. It also accepted that the design process included the preparation of specifications. However, Newtronics claimed that, as a designer, its work was, in turn, tested by Seeley, bearing in mind that Messrs Friebe and Zuodar were and are appropriately qualified electronic engineers. Both were aware of half-waving, the role of triacs, that triacs could default in half-wave and how a motor was to be energised. Newtronics further claimed that a proper examination of the relationship between Newtronics and Seeley would establish that Seeley had clear control of the project in that, for example, it was Mr Friebe of Seeley who gave orders to Mr Casey of Newtronics. It was Seeley, said Newtronics, who designed and built the rest of the evaporative airconditioner; Seeley designed and used its own motor together with the lid, the isolator switch, the cabling and the heat-sink. Newtronics only designed and manufactured the ETM, the ECCM and the receiver. It was Seeley who fitted the ECCM, together with Seeley’s heat-sink, into the lid. Seeley’s workforce assembled the end product – that is, the domestic evaporative rooftop airconditioner. Newtronics claimed that, at all times, the burden of protecting the Seeley motor from excessive current rested with the manufacturer of that motor – that is, Seeley. The evidence supported the proposition, said Newtronics, that Newtronics could not have given, and did not give, Seeley any advice as to how Seeley should protect its motors. I accept that submission, but it does not assist Newtronics’ basic proposition that Seeley had control of the design project.

148               Naturally, there were discussions between the parties which included questions, suggestions and even decisions from Seeley, but that does not therefore mean that Seeley had control over the design. Such a proposition is paradoxical to say the least – Seeley went to Newtronics (and Cintro before it) because those companies had held themselves out as experts in the design and manufacture of controllers. The clear inference is that Seeley went to them because it did not believe that its employees had the ability to design and produce a radio frequency remote control. The fact that the customer engaged in dialogue with the expert and even made decisions about the progress of the matter remains totally compatible with its reliance on the expert. Quite frankly, the proposition that the party without the expertise would require the expert to obey instructions about changes to the design only has to be stated to recognise its fallacy. An expert might offer two competing choices to its customer and the customer might make the final decision. That does not mean that the customer has not relied on the expert nor does it relieve the expert from any obligations that may have been imposed on it.

149               Newtronics is prepared to accept the presence of implied terms that it was under an obligation to manufacture the remote control unit with due skill and care and in a proper and workmanlike manner. It accepts that there was cast upon it an obligation to take all reasonable care to produce a product that was safe and effective for its agreed purpose. However, so it claims, those implied terms remain qualified by the express terms that were to be found in the terms and conditions that were attached to its letter of 9 September 1994 to the effect that Seeley:

“… acknowledges that he (sic) has relied solely upon his (sic) own inspection, skill and judgment and not upon any representation, promise, statement or description.”

Newtronics, in particular, rejects any suggestion that any further conditions are to be implied pursuant to the Sale of Goods Act or any other legislation.

150               The submission that, after two years of dealings, during which time Seeley had issued at least five purchase orders, each containing its printed terms and conditions, Seeley would, contrary to its business practice, accept such an unfavourable set of conditions, has little or no appeal. Newtronics, and Cintro before it, had worked with Seeley and had based their contractual relationship with Seeley on the terms and conditions in Seeley’s numerous purchase orders. Perhaps Mr Cox, the author of Newtronics’ letter of 9 September 1994 might have been able to explain why he included the set of terms and conditions in his letter. Newtronics had the opportunity to call him so that the Court could hear his explanation, but it chose not to explain his absence. What then should be made of the presence of those terms and conditions? Were they inserted by mistake? Were they “slipped in” as a “smart” exercise in the hope that Seeley might not notice them? Were they the product of discussions between Newtronics and Seeley personnel and Seeley has now taken advantage of Mr Cox’s absence. (That is hardly likely because counsel for Newtronics, on more than one occasion, cross-examined witnesses by alluding to what Mr Cox would say when he gave his evidence).

151               The conclusion that I have reached is that there was an evidential onus on Newtronics to explain how those terms and conditions came to be submitted to Seeley; it has failed to do so and, because of that failure, coupled with the continuing course of conduct between the parties with respect to the use of Seeley’s standard terms and conditions, I propose to disregard the terms and conditions that were included in Newtronics’ letter of 9 September 1994.

152               My finding is to the effect that there was a second and separate agreement (called the supply agreement); the actions of the parties in September 1994, and thereafter, were the actions of two business houses who were operating in an extension of, (but subject to, where appropriate), the terms and conditions of their 1992 design agreement. They had moved from the subject of design and the supply of prototypes; they were now ready to enter the new phase of production and purchase. I also reject the submission that Seeley relied on its own expertise rather than the expertise of Cintro and Newtronics.

153               In my opinion, the remote controls that were supplied to Seeley, pursuant to the supply agreement were “goods” within the meaning of s 14(I) of the Sale of Goods Act. This passage in the legislation deals with “fitness for purpose”. In the circumstances postulated by the legislation, Seeley made known the particular purpose for which the remote controllers were being acquired. The supply of those goods was in the course of Newtronics’ business. There was an implied condition that the remote controls would be reasonably fit for their particular purpose. I am also satisfied that there was an implied term in the supply agreement to the effect that the remote controls that were to be manufactured and supplied by Newtronics to Seeley were to be of merchantable quality: see s 14(II) of the Sale of Goods Act.

154               Counsel for Newtronics submitted that s 74 of the Trade Practices Act could not apply to the parties’ contractual relationship because that section is only concerned with “services”. That submission overlooks, however, that the design agreement (as distinct from the supply agreement) was not just a contract for the supply of “goods”; it was a contract that included the design of the “goods”. The work that was involved in designing the remote control was, in my opinion, clearly a contract for the supply by a corporation, in the course of its business, of services to a consumer. As such, the design agreement clearly came within the purview of both subs (1) and (2) of s 74. I set out my reasons for coming to the conclusion that s 74 of the Trade Practices Act applies in the next paragraph of these reasons. However, I should further add that I also find that the design agreement included the implied warranties that are to be found in subs 74(1) and (2) of the Trade Practices Act. I am satisfied that there were implied terms that the design services that Cintro was to supply to Seeley would be prepared and presented with due skill and care, that they might reasonably be expected to achieve the required result and that they would be reasonably fit the purpose for which they were required. That purpose was well known to Cintro; Seeley had told Cintro that the remote controls were needed to control, safely and satisfactorily, Seeley’s domestic rooftop evaporative airconditioners. That was what had to be designed. Those implied terms arose, not only as a consequence of s 74 of the Trade Practices Act, they can also be implied from the express terms of the design agreement; they can also be implied as a consequence of the many representations that Cintro made about its expertise and by operation of law: as to which see Astley v Austrust Ltd (1999) 197 CLR 1 at par 47 per Gleeson CJ, McHugh, Gummow and Hayne JJ. Newtronics’ submission that there was no contract until 1994 calls for four comments. In the first place, whether a contract has, or has not, come into existence is a question of law to be determined by the trial judge: not by a lay witness such as Mr Machin. In the second place, the evidence of Mr Machin, upon which counsel relied to support his submission, did not fairly support that submission. Thirdly, the evidence quite clearly established the existence of the 1992 design agreement. Finally, counsel made the concession that the design agreement existed. At par 2.3.2 of his closing submissions Newtronics’ counsel wrote:

“It is conceded that the Second Respondent took over the contract to design the three components which made up the RF Remote control system.”

This is a clear concession that a “contract to design” existed.

155               I move then to consider the implied warranties that are to be found in s 74 of the Trade Practices Act and to set out my reasons for concluding that the provision of the design and the manufacture of the RF Sensortouch remote control prototype constituted a service pursuant to the provisions of that section of the Act.

156               The provisions of the section are as follows:

“74. (1) In every contract for the supply by a corporation in the course of a business of services to a consumer there is an implied warranty that the services will be rendered with due care and skill and that any materials supplied in connexion with those services will be reasonably fit for the purpose for which they are supplied.

(2)                Where a corporation supplies services (other than services of a professional nature provided by a qualified architect or engineer) to a consumer in the course of a business and the consumer, expressly or by implication, makes known to the corporation any particular purpose for which the services are required or the result that he desires the services to achieve, there is an implied warranty that the services supplied under the contract for the supply of the services and any materials supplied in connexion with those services will be reasonably fit for that purpose or are of such a nature and quality that they might reasonably be expected to achieve that result, except where the circumstances show that the consumer does not rely, or that it is unreasonable for him to rely, on the corporation’s skill or judgment.

(3)                A reference in this section to services does not include a reference to services that are, or are to be, provided, granted or conferred under –

(a)               a contract for or in relation to the transportation or storage of goods for the purposes of a business, trade, profession or occupation carried on or engaged in by the person for whom the goods are transported or stored; or

(b)               a contract of insurance.”

157               The Trade Practices Act now includes a definition for “services” in s 4 of the Act, which reads in part, as follows:

“‘services’ includes any rights (including rights in relation to, and interests in, real or personal property), benefits, privileges or facilities that are, or are to be, provided, granted or conferred in trade or commerce, and without limiting the generality of the foregoing, includes the rights, benefits, privileges or facilities that are, or are to be, provided, granted or conferred under –

(a)               a contract for or in relation to –

(i)                 the performance of professional work (including work of a professional nature), whether with or without the supply of goods;

(ii)               …

(iii)             …

(b)               …

(c)               …

(d)               …

but does not include rights or benefits being the supply of goods or performance of work under a contract of service.”

158               There are a number of definitions of the word “service” to be found in the dictionaries; I will mention only two. The Macquarie Dictionary (3^rd Edition) contains several definitions of the word including “the supplying or supplier of any articles, commodities, activities etc, required or demanded”. What Newtronics supplied would be a service pursuant to s 74 if this rather broad definition was accepted as accurate. A somewhat narrower definition (but which is one of many) is provided in The Australian Oxford Dictionary where service is defined as “assistance or advice given to customers after the sale of goods”. Clearly, what Newtronics supplied would not be a service pursuant to s 74 if this definition was to be applied. There are many more definitions from a wide variety of dictionaries and they provide a plethora of meanings for the word “service”, some of which would bring Newtronics actions within the meaning of “services” and some which would not. They therefore provide little assistance to the task at hand.

159               The word “services”, in the context of s 74 of the Trade Practices Act, was considered by the Full Court of the Supreme Court of South Australia, comprising Legoe, Mohr and Duggan JJ, in Crawford v Mayne Nickless Ltd (1992) 59 SASR 490, on appeal from the decision of Bollen J. Although the legislation as it then applied has since been substantially changed, it is nevertheless helpful to examine the reasoning of the judges in that case; the Court held that a contract for the supply and installation of a security system in a shop was a contract for the supply of services within the terms of s 74. Bollen J had earlier held that “the object of the Trade Practices Act (speaking very broadly) is to protect ‘consumers’ … I think that the Court should give a wide or liberal interpretation to the words in s 74(3)” (at 501).

160               Section 74(3), as it then existed, contained an exhaustive definition of “services” for the purposes of s 74. The section then read as follows:

“In this section, ‘services’ means services by way of –

(a)               the construction, maintenance, repair, treatment, processing, cleaning or alteration of goods or of fixtures on land;

(b)               the alteration of the physical state of the land;

(c)               the distribution of goods; or

(d)               the transportation of goods.”

Bollen J suggested that the installation of the components of the security system constituted a “treatment” or “processing” of the components sufficient to attract the protection of s 74, notwithstanding the submission that, if Parliament had intended installation to be covered by s 74, then it could have included the word “installation” in the exhaustive definition (at 502). But it was the view of Bollen J that the wide protective ambit of the Trade Practices Act “permits such a reasoning”. Even though s 74(3) has been amended to its current form, the general reasoning of Bollen J continues, in my opinion, to be of relevance. In upholding the object of consumer protection, it is appropriate to give the word “services” a wide interpretation.

161               The judgment of Bollen J was generally accepted on appeal, but with Mohr J saying “whilst not disagreeing with the conclusion reached in that passage, in my opinion, a more direct answer may be given by considering the word ‘construction’ used in the subsection” (at 512). That also pointed to the term “services” being widely construed. Legoe and Duggan JJ, in a joint judgment, agreed with the conclusion of Mohr J.

162               Cintro was contracted to design and manufacture the RF Sensortouch remote control package which was to be integrated into the Seeley airconditioning unit. In my view, the terminology that is used in sub par 4 (a)(i) of the definition of “services” can be applied to that situation; and it is not excluded by either the definition or the limitations contained in s 74(3) as they existed at the time when the contract was entered into by the parties. It is true that, unlike the scenario in Crawford’s case, Seeley installed the components itself. However, the dicta of Bollen J (impliedly approved by the Full Court) as to the wide ambit of the Act, along with the changes to the definition, result in the design agreement being, in my opinion, a contract for the supply of services; this is especially so because, unlike Crawford, the contract in this matter called for Cintro to design the components – not merely to supply them.

163               In subss 74(1) and (2) of the Trade Practices Act the legislation refers to warranties in relation to the supply of services to a consumer. The term “consumer”, so far as it is relevant for present purposes, is defined at s 4B of the Act in these terms:

“4B Consumers

(1)               For the purposes of this Act, unless the contrary intention appears:

(a)               …

(b)               a person shall be taken to have acquired particular services as a consumer if, and only if:

(i)                 the price of the services did not exceed the prescribed amount; or

(ii)               where that price exceeded the prescribed amount – the services were of a kind ordinarily acquired for personal, domestic or household use or consumption.

(2)               For the purposes of subsection (1):

(a)               the prescribed amount is $40,000 or, if a greater amount is prescribed for the purposes of this paragraph, that greater amount;

(b)               …

(c)                …

(d)               …

(3)               Where it is alleged in any proceeding under this Act or in any other proceeding in respect of a matter arising under this Act that a person was a consumer in relation to particular goods or services, it shall be presumed, unless the contrary is established, that the person was a consumer in relation to those goods or services.

(4)               …”

164               Section 74 is within Division 2 of Part V of the Trade Practices Act; this Division is entitled “Conditions and Warranties in Consumer Transactions”. Part V, as a whole, is entitled “Consumer Protection”. Unlike Division 1 of Part V, dealing with “Unfair Practices”, which has been very broadly applied, Division 2 must be applied with the definition of “consumer” in mind. For example, whilst s 52 in Division 1 does not contain the term “consumer” (and has been much more broadly interpreted in its potential application), s 74 repeatedly refers to the word “consumer”. In deciding whether or not s 74 applies in the design agreement, it is therefore necessary to have regard to the definition of “consumer” as it appears in the Act. It is quite clear that a person, for the purposes of par 4B(1)(b), can also be a corporation: Acts Interpretation Act 1901 (Cth) par 22(1)(a). Seeley is therefore able to have recourse to s 74 as a consumer provided the other conditions of s 4B are met.

165               A person will acquire services as a consumer where the services were priced under $40,000 or, if the amount paid exceeded $40,000 but the services were “of a kind ordinarily acquired for personal, domestic or household use or consumption”.

166               There were two agreements to which Seeley was a party, and it is the first one that is affected by s 74 of the Trade Practices Act. That was the design agreement that was entered into between Seeley and Cintro in August 1992. It was primarily for the design of a prototype remote control package for Seeley to use in its products. The contract price as stated in the agreement was $31,000, and as such, it is below the prescribed amount of $40,000 that is referred to in s 4B. On the other hand, the services were clearly not of a “personal, domestic or household” nature; the agreement would not have attracted the protection of s 74 under the second limb of subs 4B(b).

167               The second agreement, which was made in 1994, was for the manufacture of 3000 of the units and does not attract s 74, being a contract for the sale of goods as opposed to a contract for the supply of services.

168               It only remains to refer back to the provisions of subs 4B(3) of the Trade Practices Act. It provides (inter alia) that where it is alleged in a proceeding in respect of a matter arising under the Trade Practices Act that a person (i.e. Seeley) was a consumer in relation to particular services (and that allegation has been made by Seeley in these proceedings) “it shall be presumed, unless the contrary is established, that the person was a consumer in relation to those … services.” The effect of this provision is to cast an evidentiary onus on the respondents to prove that Seeley was not a consumer; this they have failed to do.

169               The evidence that was elicited during the course of the trial, and to which I have alluded, has made it clear that the services that were provided were of a non-personal nature, but they were below the prescribed limit of $40,000. Seeley has asserted that it was a consumer in its pleadings, and there is no evidence to the contrary. The applicant is, in my opinion, entitled to rely on the statutory warranties that are contained in s 74 of the Trade Practices Act with respect to the provisions of the design agreement.

the operation of the remote control and the motor

170               The identification of the two agreements and the identification of the express and implied terms of those agreements, although favouring Seeley, has not addressed the question of causation. It is therefore necessary to examine how various component parts of the remote control and of the motor in the airconditioner work. The purpose of this exercise is to see whether the evidence can substantiate Seeley’s claim that the cause of the fires can be traced back, in each case, to some flaw in the componentry that was designed by Cintro and Newtronics and that was manufactured by Newtronics. In particular were the fires caused by a faulty opto-coupled triac? It will be necessary to examine in detail, some aspects of the ECCM printed circuit board as well as some aspects of the motor.

171               The first of the components that should be mentioned is the thermal protector; it, together with the run and start windings, is part of the motor for which Seeley, to the exclusion of Cintro and Newtronics, was responsible. After explaining their functions, it will then be necessary to examine the role of the opto-coupled triac in the circuit board, followed by a consideration of the need for a relay. For the reasons that I will endeavour to explain, these investigations have satisfied me, on the balance of probabilities, that I can make five findings:

·                   that the opto-coupled triacs that were used in the three units where the fires occurred were faulty;

·                   that the presence of relays in the run windings would have given protection against those faults;

·                   that the thermal protectors were not intended to give protection against those faults;

·                   that the three fires were caused by the faulty opto-coupled triacs and the absence of a relay in the run winding;

·                   that these faults were the faults of Cintro and Newtronics in the design process and also of Newtronics in the manufacturing process.

the thermal protector and the windings

172               I turn first to a consideration of the thermal protector. A thermal protector is a device that is connected in circuit with the motor windings. It is designed to interrupt current in the event of the motor windings overheating. The function of a thermal protector is to protect the motor from the effects of overheating due to a malfunction in the motor itself. Seeley maintains that it is not a device to protect against a malfunction in an electronic system where the system has been installed as a means of control – an assertion that has been disputed by Newtronics.

173               A thermal protector consists of a bi-metallic strip with the metals having different co-efficients of expansion; it is enclosed in a metal case which is electrically insulated by a sleeve of mylar. The mylar sleeve (or insulation) thereby ensures that there is no short circuit involving the protector. In its normal operating state, the contacts of the thermal protector are closed together so that they complete a circuit, thereby permitting electric current to pass through them. If the bi-metallic strip reaches a pre-ordained temperature, it expands and a spring inside the protector casing forces the contact into an open position thereby breaking the circuit. Two thermal protectors, a Klixon and a Pepi, were the subject of evidence in this case. The opening temperature for both of those protectors was about 140º Celsius. When the contacts are open and the flow of current ceases, the motor cools down; when the motor cools to a pre-determined temperature of about 90º Celsius, the protector contacts revert to the closed position and the current begins to flow again in the motor. The differential between the opening and closing temperatures is known as the hysteresis. The 750 and 1100 watt motors, which formed part of the units at Roleystone and Wonga Park respectively, were fitted with Klixon 9700k thermal protectors that were made by Texas Instruments; the 1500 watt motor that was installed at the Ballajura premises was fitted with a Pepi thermal protector.

174               Mr Baghurst explained that the motors that were used by Seeley were equipped with two windings: a “main” or a “run” winding and an “auxiliary” or a “start” winding. Both windings must be energised for the motor to operate. He went on to say that the motor speed was controlled by energising, through a capacitor, the auxiliary or start winding from the mains supply and connecting the main or run winding to the supply by means of an electronic switch, such as a triac; the triac is able to vary the effective voltage that is applied to the run winding. The purpose of the start winding was to create a rotating magnetic field through the space that was occupied by the rotor, thereby causing it to turn. The start winding was controlled by a mechanical relay but the run winding was only controlled by the opto-coupled triac.

175               Although he disclaimed any knowledge about the control of motors, Dr Pedder said that, as a designer of a power board, he would expect the motor designer to have put in protection against overheating of the motor but he (the designer of the power board) would have independently put in protection to stop his electronics from failing. Dr Pedder explained his opinion on the subject by saying:

“A motor manufacturer doesn’t necessarily know what his motor is going to be fed from, and he puts a thermal protector in to protect the motor against overheating of the motor windings, not against overheating of the protector.”

176               This view was supported by Professor Bonwick who said that, in his opinion, the function of a thermal protector was to make sure “that the temperature of the winding doesn’t exceed a certain figure”

177               Dr Holmes, who gave evidence on behalf of Newtronics, expressed the view that a thermal protector must be treated as the last line of defence against any type of electrical failure. The logical extension of his theory would mean that the designer of the motor must take total responsibility to protect against every and any design fault in the power board. Dr Pedder disagreed with Dr Holmes’ opinion in his report and he reaffirmed his disagreement in cross-examination. I find that the views expressed by Dr Pedder, and the confidence with which he gave his evidence and withstood cross-examination, far more persuasive. Under cross-examination, Dr Holmes was asked:

“Do you say that a designer such as Newtronics was not required to have any regard to the safety of the motor from a fire point of view.”

He responded by saying:

“No. I don’t say that.”

The cross-examiner pursued the subject to the point where Dr Holmes volunteered a lengthy exposition of his opinions. The relevant passage from his evidence was as follows:

“But if you’re talking about protecting against fire you need to consider all possible failure modes. Now, if you put in a protection mechanism inside the motor to protect against all possible failure modes, then I don’t see why you necessarily have to put another layer of protection into the controller when the motor is already protected against all the circumstances you can think of. In my opinion that is why you put a thermal protector or a disconnect in the motor, so that irrespective of how it gets hot it will disconnect and you cannot rely on the electronics or anything under the control of the electronics to provide that function. This is the differentiation that I see between normal operation control and abnormal operation where you disconnect in the event of some fault going on. If you’re trying to protect against components failing and circuits failing you can’t inherently rely on those circuits to provide that protection mechanism.

MR WHITINGTON: That is really saying no more than this, Dr Holmes, that because you can have a last line of defence you don’t need a first and second life of defence? … Well, I suppose you could look at it that way, yes.

Yes, and what you’re really …

HIS HONOUR: But more to the point, aren’t you saying that the designer of the power board need not necessarily have concern to fire risks per Seeley because it’s the responsibility of the manufacturer and designer of the motor to have regard to those risks? … This comes back to my earlier comment, your Honour.

But is that what you’re … ? … Yes, it is.”

178               Dr Holmes noted that Professor Pedder had claimed that the Newtronics’ controller contained a number of design errors. However, he disagreed “that a competent electronics designer should necessarily have to take responsibility for user safety if the electronics designer was given to understand that the motor systems designer would include protection systems and the electronics designer considered that his design did not introduce hazards”: see Dr Holmes report dated 28 June 2000 at pp 2 – 3. In that report Dr Holmes gave his opinion about the cause of the fires. He concluded that overloading of the thermal protector and overheating had occurred because of locked rotor currents. Whilst he was prepared to concede that this could have occurred because of a temporary reduced peak voltage rating (PVR) of the opto-coupled triac, he claimed that it could also have occurred as a result of a mechanically failed motor. The difficulty in postulating this theory lies in the fact that the electronics designer or designers were not forthcoming; they were not called as witnesses to establish the facts upon which Dr Holmes had built his hypothesis. In particular, the respondents failed to lead any evidence that their electronic designers had understood that the motor systems designer had included protection systems and they failed to lead any evidence that their electronic designers had formed the opinion that their design did not introduce hazards.

179               Newtronics argued that Seeley, and not Newtronics, was the manufacturer of the entire appliance, that is, the fixed evaporative airconditioner (“the FEAC”). It was Seeley, claimed Newtronics, who had total control over the design, manufacture and marketing of the appliance; Newtronics was not in a position, either contractually or technically, to tell Seeley how to protect its motor. I cannot accept that submission; to do so would be tantamount to absolving the designer of the power board from all responsibility.

180               In my view, Dr Holmes was not justified in advancing a proposition to the effect that Seeley alone had the responsibility of ensuring that its motors did not catch fire. If that proposition were correct, it would render useless the many representations that Cintro and Newtronics had made about the efficacy of the product. The last thing that a manufacturer of a motor would expect would be the presence of some defect in a component that was supplied to it by a third party which would or might cause a fire in its motor. There was, in my opinion, an obligation on Cintro and Newtronics, in the design and manufacture of the remote control, to do all that was necessary to minimise – and preferably to prevent – the outbreak of fire in a motor as a result of some defect in the remote control. It should be remembered that the design and manufacture of the remote control was an exercise which, from Cintro’s and Newtronics’ point of view, was independent of the motor. The respondents knew the use to which Seeley intended to put the remote control, but neither played any part in the design of the motor or the inter-relationship between the remote control and the motor. The remote control should have been free standing in the sense that it was capable of safe operation independent of the design and structure of the motor.

181               There were other aspects of Dr Holmes’ evidence which gave me cause for concern. For example, he had initially advanced a thesis that a lower current through a Seeley motor will cause the internal temperature of the motor to increase before the thermal protector operates. Prior to his cross-examination, Newtronics (if they knew) had not advised Seeley that Dr Holmes had withdrawn or modified that thesis. It was not until his cross-examination that Dr Holmes was forced to concede that testing, subsequent to his initial report, had satisfied him that his original thesis was incorrect. In his re-examination he claimed that this matter has been the subject of mention in his third report, but he failed to identify where in that report the correction appeared. His re-examination addressed three other areas where he had departed from earlier stated views but his evidence did not suggest where, if at all, his change in views had been disclosed prior to his oral evidence. These changes in his views and opinions were disconcerting and forced me, in my final assessment of the expert evidence that was tendered during the course of the trial, to prefer and to rely upon the opinions of the applicant’s experts.

182               Mr Friebe tested several Klixon and Pepi thermal protectors. On 17 February 1995, he tested forty of each product in an oven and found that they all opened within specification. There was nothing to suggest that there was any latent or inherent fault in any of them. The next test that Mr Friebe carried out involved a triac which he had been told was defective. He connected a remote control lid, which contained the defective triac, to a 1500 watt motor driven airconditioner. He said in par 213 of his witness statement [Ex A58] that on connecting the lid to the power, without turning on the remote handset, he observed that the remote controller made the motor hum and then stop.

“I saw the motor jump violently for two or three seconds and then lock and hum. This continued for a few minutes and then the motor stopped. I saw small amounts of smoke coming from the motor and smelt a pungent smell.”

 

183               In his report of May 2000 (Ex A78) Professor Bonwick commented upon the damage to the thermal protector contacts, based on photographs of the magnified images that were made available to him. He said that the Klixon protectors in the Wonga Park premises and the Roleystone premises both showed heavy pitting damage to the contacts. A Pepi protector had been installed in the Ballajura premises and Professor Bonwick said of it that it showed “moderate arcing damage to contacts” to both the fixed and the moving contacts. Dr Pedder was of the opinion that, not only had the contact deteriorated badly, but that the deterioration was local – the implication being that, if the damage had been caused by the fire, he would have expected the deterioration to have been total. In any event, it was clear that the fixed and moving contacts had fused, causing them to remain closed and to conduct energy continuously. Once that occurred, the continuous conduction of current would ultimately heat the main winding wires until, finally, the insulation broke down, arcing occurred and pyrolysis followed. Pyrolysis is the decomposition of organic compounds that have been subjected to very high temperature.

184               Mr James and Mr Friebe attended at the home of Mr and Mrs Gunning. They examined the motor of the unit from the Roleystone fire and, in particular, its Klixon 9700K thermal protector. Mr Baghurst later photographed the contacts of the thermal protector with the use of a microscope. The fixed contact was substantially pitted and eroded and the moving contact showed a substantial build-up of material. Other photographs that were shown to Dr Pedder during the course of his evidence in chief evidenced, in his opinion, metal transfer from the fixed to the moving contact in a way that was consistent with a unidirectional transfer under the effect of half-wave current. Professor Bonwick was of the same opinion. These witnesses agreed that the appearance of the fixed and moving contacts was consistent with their having ultimately remained in closed circuit. The mylar casing of the thermal protector was punctured in two places. Professor Bonwick was of the opinion that this was caused by arcing between the run winding and the casing. The build up of heat would have caused plastic materials to vaporise and an arc or spark would ignite those vapours.

185               Newtronics claimed that the contacts of the Roleystone Klixon were not, however, fused and showed no evidence of having been fused. In fact, so it was said, Mr Friebe tested it in an oven on 6 March 1995 and it opened at 150°C. Seeley answered this submission by claiming that it was “a complete misrepresentation of the evidence”. As Seeley pointed out, Mr Friebe’s report made it clear that the protector was in very poor condition with very brittle leads. It was not possible to determine whether the protector had opened or the circuit had failed owing to the brittle protector leads not making contact.

186               Newtronics further claimed that the Roleystone Klixon thermal protector had been attached incorrectly to the start winding; it was suggested that both the Klixon and the Pepi protectors had a sensitive and non-sensitive side. I am unable to arrive at a conclusion on that subject. The Klixon brochure, for example, contains no reference to sensitivity and Professor Bonwick suggested that there was no material difference in the two sides.

187               Mr Gartner’s evidence was to the effect that the Roleystone contacts look more like full-wave current contact degradation than half-wave one-way metal transfer. However, as counsel for Seeley pointed out, that passage in the evidence occurred when Mr Gartner was speaking of the fixed contact only. I am not inclined to rely on this passage from Mr Gartner’s evidence. It became clear, during his cross-examination that he had not made a study of the behaviour of contacts on arcing.

188               The fire at the Bradshaws’ home (‘the Wonga Park fire’) was investigated by Mr RF Lee. I accept him as a competent and convincing witness. In his report dated 2 March 1995 Mr Lee noted, in particular, that the fixed wiring installation in the premises was not involved as a source of ignition for the fire. Among the more significant observations that Mr Lee made were those that related to the Klixon 9700k thermal protector. The surface of the fixed contact had been eroded with deep pitting evident. The surface of the moving contact showed globules of metal which, in Mr Lee’s opinion, were consistent with the contact having been welded to the fixed contact. As to the printed circuit board, he noted the erosion of the copper circuit tracks. He then wrote in his report:

“Seeley International advise that they have noted similar events and that the erosion is consistent with a failure associated with excessive current drawn by the fan drive motor, and a consequent arcing event between triac connections at this point.”

189               Mr Lee did not, at that stage of his report, comment upon Seeley’s opinion, but it would seem that he agreed with it. In his summary (appearing at p4 of his later report dated 19 March 1999) he concluded that the origin of the fire was inside the Breezair rooftop evaporative airconditioner and that the fire was initiated by the failure in service of the airconditioner. He then expressed the view that:

“The precipitating failure occurred in the electronic control system of the machine such that the fan drive motor was incorrectly energised.”

He went on to express the opinion that:

“Excessive currents drawn by the drive motor caused a failure of insulation of wiring to the motor and the consequent uncontrolled leakage of electric current.”

190               Accepting Mr Lee’s opinions and evidence, as I do, means that electricity must have been connected to the run winding up to the time immediately prior to ignition. That, of course, also means that the connecting wires would have been conducting electricity. The thermal protector cycled rapidly under the effects of half-wave current, resulting in its contacts being subjected to repeated arcing until, eventually, they formed a closed circuit - thereby rendering the thermal protector inoperative. Excessive heat was generated and ignition ultimately occurred. I accept the applicant’s submission that the fusion of the printed circuit board at the main triac indicated that the board had suffered severe thermal stress but that the arcing in the wire at the motor had occurred first, thereby precipitating the fusion of the board.

191               Mr Gartner examined several sample thermal protectors. Some had been subjected to full-wave AC current: others had been subjected to half-wave current. His view was that the appearance of those that had been submitted to full-wave had degradation similar in appearance to that observed in the Roleystone and Wonga Park Klixon protectors. Mr Gartner thought that the degraded zones of the contacts where half-wave had been used appeared to be less like the features that he saw in the photos of the Roleystone and Wonga Park protectors. I accept that Mr Gartner gave his evidence to the best of his ability and I am sure that he expressed his opinions honestly. However, I find that his views are at odds with the opinions of the Seeley witnesses and I accept what they have said in preference to Mr Gartner’s opinions.

192               Mr Jansen, from Texas Instruments in Holland, gave evidence on behalf of Newtronics. He was of the opinion that the Klixon 9700K should not have been used in either the 750 or the 1100 watt motor. However, I find that I cannot accept what Mr Jansen has said. He did not claim to have special experience with this kind of thermal protector; he said that the expertise in this area rested with the Massachusetts branch of his company, a fact that was corroborated by a Texas Instruments’ brochure. Mr McBratney, who was called as part of Seeley’s case in rebuttal, and whose evidence was not challenged, said that Texas Instruments informs prospective motor manufacturers that the Klixon 9700k thermal protector is suitable for a motor having the specifications of the Seeley 750w motor. Furthermore, a current Texas Instruments’ Klixon brochure holds out that “there is practically no motor the 9700K cannot protect against overheating and overloading”. For these reasons I am not prepared to find that the Klixon 9700K thermal protector was inadequate.

193               I am of the opinion that Seeley’s conduct subsequent to the fires with respect to the modifications that it made to its motor is relevant and admissible. For example, Seeley discarded the Klixon thermal protector for the Pepi in its 750 and 1100 watt motors and it also introduced a second type of protector called “a one-shot fuse”. Counsel for Newtronics argued that factors such as those point to concessions of fault by Seeley. That, however, is not necessarily the case. Steps taken by a manufacturer to improve the operation of its products do not mean, without more, that a previous version of the product was unsafe or unsuitable. In the circumstances of this case it is not appropriate to accept Newtronics’ submission that these modifications constitute an admission of responsibility on the part of Seeley. There is, in any event, a further answer to Newtronics’ submissions on this issue. It is to this effect: the presence of a Pepi thermal protector in the Ballajura premises did not prevent the fire that occurred in that unit.

194               I have not overlooked the special circumstances dealing with the Pepi protector in the Ballajura 1500 watt motor. It was retrieved from the Ballajura fire and its contacts were not fused. It was tested in an oven by Mr Friebe and it opened, albeit at a higher than rated temperature; the protector has, however, since been lost. Counsel for Newtronics submitted that the Court should view the disappearance of the Pepi thermal protector with suspicion; he submitted that I should not believe the evidence of Mr James about its loss; he also claimed that Mr Baghurst had been untruthful. I cannot accept these submissions. I was very impressed by Mr Baghurst and there was nothing about Mr James or his evidence which gave me cause for disquiet.

195               An examination of the Pepi protector after the fire pointed to a dent in it and Mr Friebe said that, on occasions, mallets were used on the assembly line to force protectors into their correct positions. Newtronics claimed that, as the contacts were off centre, the thermal protector would not work properly if it were dented. This led Newtronics to submit that the cause of the Ballajura fire was the presence of a damaged Pepi thermal protector which did not protect the motor against over-current. This proposition cannot be swept aside; it is a possibility. On the other hand, the physical evidence was that the operation of the protector was not impeded by the dent. Mr Baghurst gave evidence that the moving contact still fell completely within the area of the rectangular contact. The presence of the dent must be weighed against the evidence of the faulty batch of opto-triacs, the absence of a relay in the run winding and the timing of the other two fires. As a matter of probability it was, in my opinion, the faulty opto-triac and the absence of the relay that were the cause of the Ballajura fire.

the need for a relay

196               Subsequent to the parties entering into the design agreement, Cintro supplied Seeley, from time to time, with prototypes of the power board for Seeley’s inspection and acceptance. In about April 1993, the first sample prototype was supplied by Cintro. Mr Andrew Friebe of Seeley tested its performance. In so doing, he observed that the RF remote control operated so that the start winding of the motor to which it had been connected, was consistently energised even when the motor was switched “off”. This, he noted, had the potential to overheat the motor and to lead to an unsafe situation. Mr Friebe requested Mr Au of Cintro to include a start winding relay which would be energised when the fan motor was “on” but de-energised when it was “off”. That request was made at a meeting at Seeley’s premises on 15 April 1993; in addition, Mr Friebe addressed the issue in a facsimile transmission that he sent to Mr Au on 22 April 1993.

197               Dr Holmes agreed that the Tekelek wall mounted unit, which was the precursor to the Newtronics’ hand controlled remote control device, was so designed that there was independent control of both the run winding and the start winding so as to achieve speed control. Professor Bonwick asserted, and Dr Holmes conceded, that if the electronic circuitry in Newtronics’ ECCM had included a functional electro-magnetic relay that isolated both the run and the start windings, opto-coupled triac failure could not have led to fires occurring. Dr Pedder, in his report (Ex A63) and in his oral evidence, made it plain that the inclusion of an electro-magnetic relay in the run winding would have amounted to a relatively trivial change; Professor Bonwick referred to it as a simple but profound change. Dr Holmes also agreed. He said:

“Yes, if it had been part of the original design it would have been incorporated without issue, yes.”

198               Professor Bonwick was of the opinion that the circuit logic was deficient because it failed, electrically, to isolate the triac from the electrical supply when the airconditioning unit was turned “off”. He added:

“Electrical isolation of the triacs should have been by an open-circuited contact in a mechanical relay which is far more reliable and therefore safer than a solid state switch such as a triac.”

He added that the circuit logic was also deficient because it allowed the main or run winding to be energised without the auxiliary or start winding being energised. Dr Pedder was of the opinion that this was an unsatisfactory design situation; it would not allow the motor to rotate, it would lead to higher than natural winding current and it would lead to motor heating and temperature rise.

199               Professor Bonwick also agreed with Mr Baghurst’s conclusions that the design and manufacture of the Newtronics’ circuit board was deficient because of the absence of a relay in the design:

“… to give primary isolation of the two triacs from the electrical supply when the airconditioner was turned off. It was a bad design decision to rely only on the voltage withstand properties of the triac.”

Professor Bonwick said that a reasonably competent designer:

“… should have been aware that half wave triac operation would lead to a circuit operation with a direct current component resulting in arc damage to the contacts and then to failure of the cutout switch.”

He went on to add that this led to the contacts of the thermal protector welding together and, in turn, that led to the fires.

200               It is a matter of some significance to note that Newtronics, having been retained by Bonaire (a competitor of Seeley) to design and manufacture a remote control to perform a similar function to the Seeley RF Sensortouch, designed a circuit diagram in 1995 which contained a relay that governed both the start and run windings. That was in contrast to the design for Seeley where the relay only controlled the current through the start winding and did not control the run winding. It could not be said that Newtronics was merely taking additional precautions as a consequence of the fires; it had been retained by Bonaire in 1994 and the existence of the relay in both windings had been present since the first design; that design had been presented before the fires. The applicant has submitted, and I accept, that the presence of the relay in these designs demonstrates that Newtronics was capable of appreciating the need for a relay to isolate the triacs in the circuit.

201               The circuit for the hard-wired Sensortouch, as designed by Tekelek for Seeley, had a common relay which controlled both the start and the run windings; if Cintro had done no more than adapt the existing Tekelek circuit which was, in all respects, adequately and competently designed, the probabilities are that the fires would not have occurred. Cintro and Newtronics cannot escape the fact that Cintro had been given a Tekelek hard-wired Sensortouch controller in August 1992 prior to its undertaking the task of designing the RF Sensortouch for Seeley. Dr Holmes acknowledged this. Dr Holmes agreed that if Cintro had simply copied the Tekelek design then a faulty opto-coupled triac would not have passed current if the unit had been turned “off” at the handset. Unlike an electro-magnetic relay switch, a triac is only a switching device; it is not an isolator; it does not provide a level of physical isolation in the form of an air gap between its two contacts or terminals. The function of a mechanical isolator is to ensure that the electrical system is made as safe as possible, particularly from fires.

202               I accept the views of Seeley’s experts and I also accept the opinion of Mr Baghurst that the absence of such a relay was a material design fault. He said in his evidence:

“I have made the statement here that the failure of a single electronic device in this particular design of circuit controller can lead to abnormal conditions in the motor with which the motor is not able to cope, and that given that electronic devices are subject to random failure and given the likelihood that a device like this may fail in one direction and perhaps not in another, then the whole motor is prejudiced by a system in which the failure of the single component can lead to a fire, and it has always, in my opinion, been bad practice to have a situation in which the failure of a single device can cause a fire. The corollary to that is that there needs to be some backup circuits switching arrangement, and generally if you’re looking to mitigate against the effects of failure in a certain type of device, it’s best then to have backup provided by an entirely different type of device, in this particular case a switching device in which the opening of the circuit is caused by the positive separation of two metallic surfaces or contacts. Had such a device been incorporated into this circuit then the device would only – there is still the possibility of the failure of the triac, but it’s under conditions when the airconditioner is supposed to be running anyway and is therefore more closely monitored, and I have simply made the statement there that I think that the incorporation of a relay would have represented a much better design.”

203               Dr Holmes had said that the absence of a relay was not a design deficiency but Mr Baghurst said that he “emphatically” disagreed with Dr Holmes. For reasons that I have given elsewhere in these reasons when considering the evidence of Dr Holmes, I was not impressed by his views; I prefer to rely upon the opinion of Mr Baghurst. Cintro’s failure to incorporate a relay in the run winding circuit and the perpetuation of that omission by Newtronics did not meet the standard that was to be expected of a reasonable and competent power electronics designer.

204               Counsel for Newtronics, in his final submissions, conceded that if there had been a mechanical relay in the run winding, as there was in the start winding, the opto-coupled triac would not have allowed the main triac to turn on without the motor starting, except in the case of locked rotor. Counsel submitted, however, that this could not be regarded as a design fault. That submission is contrary to the evidence of Seeley’s experts. Accepting their evidence as I do, I reject that submission.

the triac

205               A triac is a well known method of achieving variable speed operation of single phase motors; it can reduce the voltage that is applied to an AC motor and the reduced voltage causes the motor to run at a lower speed. The case for Seeley was that the opto-coupled triac that was used by Newtronics in the Evaporative Cooler Control Module was sub-standard in that it had an inadequate peak voltage rating (PVR). Consequently, it failed. This failure produced excessive half-wave (DC) current through the run winding only. The current overloaded the thermal protector contacts and, as a result, they welded; the thermal protector was then ineffective; it permitted current to flow continuously. Under these circumstances, where the start winding was not energised but the run winding was, the motor would not start but would stand stationary, overheating to a point where there was insulation breakdown and ignition followed. For reasons which I will endeavour to explain, I am of the opinion that the design of the power board was deficient – first because of the use of an inadequate opto-coupled triac and, secondly, because, as I have already found, the design did not use a mechanical relay to physically disconnect the electronic switches when the unit was in standby.

206               The main triac in the Newtronics’ circuit was programmed to control a higher level of energy because it was primarily responsible for driving the motor. On the other hand, the opto-coupled triac was only a signal coupling device and, therefore, it only had to control sufficient energy to turn the main triac “on”. If there is high half-wave current through the main triac, there can be consequential excessive heat generation. If that were to occur, the main triac can, intermittently, enter the condition described as “thermal runaway”, such that, after an interval, the entire device is turned “on”.

207               Newtronics’ response to these claims was to repeat its assertion that Seeley had installed an inadequate thermal protector in its motor. It claimed that even if Newtronics’ opto-coupled triac was inadequate (which was denied) ignition and fire would not have occurred if an appropriate thermal protector had been provided.

208               On 16 February 1995, as a consequence of the three fires, Mr Zuodar together with a Seeley technician, began testing a number of Newtronics ECCM printed circuit boards which had been returned from the field. Mr Zuodar addressed in detail the nature of the tests that were conducted and the results of those tests in his witness statement. His notes recorded that several lids were faulty; they were diagnosed as having symptoms of opto-coupled breakdown.

209               On 17 February 1995, Mr James and Mr Zuodar tested a Newtronics’ power board which they obtained from Seeley’s stock. Mr Zuodar, in the presence of Mr James, soldered a wire across the opto-coupled triac terminals so that it conducted current at all times. He then connected a lid to a 1500 watt motor that had been manufactured by Seeley so that the motor might be powered from the Newtronics power board. On each occasion the motor made a “growling” noise and, on two occasions out of three, a small fire occurred in the motor. These tests led to the belief that the malfunctioning opto-coupled triacs in the Newtronics ECCM printed circuit boards were capable of causing a fire and had probably been the cause of the three fires in question.

210               The triac in the Newtronics’ device was used to control the flow of current into the run winding. Unless a trigger mechanism is set-off, the triac will not ‘activate’ and the circuit to the run winding will remain open (i.e. current will not flow). However, both Professor Bonwick and Mr Baghurst were of the opinion that triacs did not provide true electrical isolation. Prof Bonwick described true electrical isolation as “a complete break in the circuit”. Both experts thought that true isolation could only be achieved by a mechanical relay – the device that had been used in the start winding.

211               In Mr Baghurst’s report he wrote that, not only does triac failure tend to be asymmetrical, but that triacs are “inherently asymmetrical in the way they are constructed and would therefore be expected to fail in an asymmetrical manner …” He also discussed this subject during the course of his oral testimony, saying:

“It’s a well-known phenomenon in the manufacture of solid-state electronic devices that no two such devices are identical. It’s very difficult to make these things identical. Two identical devices sitting – even though sitting side by side and sharing much the same ambient conditions – would be expected in general to fail differently at different voltages, to exhibit different characteristics, and therefore if any failure were to occur it’s most likely to fail in one rather than the other, and not both simultaneously.”

212               In annexure 2 to his supplementary report Professor Bonwick discussed the behaviour of triacs, saying of them:

“A triac has two symmetrical parts, one which allows the passage of the electrical current in the positive phase of the cycle and the other which allows the passage of electrical current in the negative phase of the cycle.” (par 34)

However, during the course of his oral evidence he went further, saying, “… a triac is notoriously non-symmetrical to some degree. It’s very difficult to make it act completely symmetrical because of the way it’s constructed”. Professor Bonwick pointed out that, due to manufacturing faults, a triac may be able to withstand its rated voltage on one side, but not on the other. This would, even under ordinary mains power, allow current to pass in one direction only; that is, he was prepared to allow for the presence of half-wave current.

213               Dr Pedder was of the view that the possibility of a half-wave operation of the remote control, resulting in the application of a large DC component to the main winding did not seem to have been considered by the circuit designer. In his report of May 2000 (Ex A63) at pp 10 – 11, he added that it has been well known for more than 30 years “that triacs and bilateral switches may operate unintentionally in the half-wave mode, either as a result of device failure or of differential triggering sensitivities.” He was of the opinion that a competent power electronic designer would have considered “the possible effect upon the load fed by the phase controller of such malfunctions”. He said that there are simple circuits for the detection of a DC component, and that a competent designer would have incorporated such a circuit into the controller to inhibit “the digital phase-delay system and/or provide an alarm signal even though this would have required board re-designs”. Dr Pedder was of the opinion that the design of the power-electronics section of the control board was seriously flawed: it contained design errors that would not have been made by a competent electronics engineer. It was an important aspect of causation in the applicant’s case that it establish that the triac failure mode was in half wave as its experts had concluded that a triac failure in full-wave would be within the thermal protector’s range of protection.

214               Mr Baghurst concluded, from his examination of the circuit diagram of Newtronics’ remote control circuit board, that the primary function of the circuit board was to control the speed of the Seeley fan motor in response to signals that were received from a hand-held remote control. He said that the purpose of the opto-coupled triac in the Newtronics’ circuit board was to provide electrical isolation between the main winding circuit and the electronic control circuits that were associated with the board’s microprocessor; this was because the main winding circuit operated at full mains voltage while the electronic control circuits operated at a much lower voltage level. In other words, the triac was to behave as a “switch” so that it could “block” the passage of current. On the other hand, unintended or unwanted conduction in the triac (called “breakdown”) could occur if the triac section of the device was either faulty or subjected to a voltage level that was beyond its specified rating.

215               While mains voltage is nominally at 240 volts rms, the voltage delivered to households fluctuates by as much as 10% either way. In other words, the rms voltage that may be delivered at any one time could be as high as 264v. An rms voltage of 264v translates to a peak voltage of 374v. The opto-coupled triac that was chosen by Newtronics’ designer had a PVR of 400v – and that was very close to the peak voltage. Where an opto-coupled triac with a PVR that is close to peak voltage is employed, the margin for error, in the event of the device malfunctioning, is very small. Thus, the higher the voltage rating, the lower the risk of a failure. In both their reports and in their oral evidence, the applicant’s experts, Dr Pedder, Prof Bonwick and Mr Baghurst agreed that a reasonable and competent power electronics designer would have selected an opto-coupled triac with a higher peak voltage rating than 400v. Professor Bonwick suggested that, as the opto-coupled triac was only rated to 400v, it would be susceptible to breakdown by power surges in the mains power which could peak around that level; he said of using a 400v device, “the margin, as I say, is too close”.

216               Mr Baghurst explained that if breakdown occurred, either because the triac section of the device was faulty or because it was subjected to a voltage level that was beyond its specified rating, abnormal current flow tended to be in one direction only. In such a case, the triac behaved as a rectifier. He said:

“Such asymmetrical conduction is generally referred to as “half-wave” conduction and this produces a direct current in the main motor winding.”

If, on the other hand, symmetrical breakdown were to occur, it would result in the conduction of current in both directions: that is generally referred to a “full-wave” conduction which produces only alternating current in the motor winding.

217               The possibility of half wave failures in triacs, whereby they conduct in half wave mode, either as a result of a device failure or a differential triggering sensitivity, has been well known, particularly to power electronics designers for more than thirty years: see the report of Dr Pedder, Ex A63, p 8 and his evidence on the subject; see also the report of Professor Bonwick, (Ex A77), p 2, par 5 and his evidence at. Dr Holmes agreed that in 1994, power electronics engineers, and Mr Au of Cintro and Newtronics was such an engineer, would have known about the degradation of opto-coupled triacs because of environmental conditions and also because of batch problems – a separate subject that is discussed later in these reasons. Such an engineer would have also known about the degradation of opto-coupled triacs leading to the unintended conduction in the half wave mode.

218               Mr Baghurst’s opinion was that the three fires were caused by the failure of the opto-coupled triac. That triac formed part of the electronic power control board that had been designed by Cintro and Newtronics and manufactured by Newtronics for use by Seeley in its RF Sensortouch control package. In his report dated 22 August 1996 he explained that failure in half-wave conduction, as distinct from failure in full wave conduction, can cause the unit to overheat and catch fire.

“Full-Wave Conduction

If the optically coupled triac in the Newtronics controller fails in such a way as to produce full-wave conduction, the main motor winding is energised. In the absence of energisation of the associated “start” winding, however, the motor remains stationary, drawing an abnormally large current from the supply mains. This abnormally high (alternating) current produces abnormally high temperatures in the motor windings, which can in turn damage the electrical insulation of the motor windings and lead to fire. Possible damage to motor windings at excessively high temperatures includes melting or charring of insulation and the production of smoke and vapour. Such vapour is often highly flammable, and may be ignited by the hot winding.

However, the fan motor, as manufactured by Seeley, incorporates a self-resetting thermal cut-out, the purpose of which is to react to abnormal heating, and to interrupt the current in order to limit the rise and temperature of the motor windings to a safe value. Such devices incorporate a bi-metal strip which bends and separates current-carrying contacts at high temperatures. The term “self-resetting” used in conjunction with thermal cut-out devices indicates that when the temperature drops to a pre-determined value, the electrical contacts reclose, and current is again able to flow.

The self-resetting thermal cut-out with which Seeley airconditioner motors are fitted with protect those motors from damage which might otherwise be caused by failure, in the full-wave mode, of the optically coupled triac which forms part of the Newtronics controller.

Half-Wave Conduction

If the optically coupled triac in the Newtronics circuit board fails by half-wave conduction (with the “start” winding unenergised), the motor again fails to start, and abnormally high main winding current flows, producing a correspondingly high temperature rise. In this case, however, the motor main winding current now contains a large “direct current” component with which the self-resetting thermal cut-out is not designed to cope.

Direct currents are significantly more difficult to interrupt than are alternating currents of comparable magnitude. This is because direct currents do not fall to zero and reverse naturally as do alternating currents. When an attempt is made to use a device designed for alternating currents to switch direct current, there is generally a greater amount of arcing, greater heating of the contacts, and a greater likelihood of contact welding, leading to premature failure of the switching device. This type of failure manifests itself as an inability of the switch to break the circuit into which it is connected.

Further, the magnitude of the motor main winding current which flows under half-wave conditions is generally significantly in excess of the current which would flow under equivalent full-wave conditions. A self-resetting thermal cut-out of the type described above is, under half-wave conditions, thus required to cycle more rapidly than if alternating current only were flowing in the motor windings. Whilst it may function adequately at first, this extra demand on its performance will hasten the failure of the thermal cut-out device.

Under the half-wave mode of optically coupled triac failure, there is therefore a risk of significant overheating and thus fire due to excessive motor winding current against which it is likely to quickly lose protection.”

219               Unwanted energisation in half-wave mode, consequential upon a failure of the opto-coupled triac was, in the opinion of Mr Baghurst “a major fault in the design of the Newtronics’ circuit board”. In order to support his conclusion, Mr Baghurst tested nine opto-coupled triacs, being the same as those that had been used by Newtronics in the construction of the circuit boards that it supplied to Seeley. Mr Baghurst had ascertained, from the manufacturer’s published data, that the minimum triac breakdown voltage (also called the “peak reverse voltage rating”) was 400v. The nine opto-coupled units that he tested had been retrieved from Newtronics circuit boards; seven of them failed to meet the manufacturer’s specification. He found them liable to breakdown below rated voltage and unevenly, i.e. most broke down in half-wave.

220               In his report of 22 August 1996 (Ex A84) Mr Baghurst said that it was clear from the results of the tests that had been performed that “a number of optically coupled triacs incorporated in the Newtronics’ circuit boards, and which were recovered from the field, were of sub-standard quality, exhibiting performance which did not meet the manufacturer’s minimum performance specifications for peak inverse voltage rating”. Mr Baghurst was of the opinion that had any of these faulty boards been left in airconditioners in the field, it is highly likely that they would have brought about ignition of the air-conditioning units to which they had been fitted. Mr Baghurst was of the opinion that the choice by Newtronics of an opto-coupled triac with a rated breakdown voltage of only 400v was a further example of poor design. Professor Bonwick said that he agreed with the method of testing that had been used by Mr Baghurst on the opto-coupled triacs and that he supported the views expressed by Mr Baghurst about the inadequacy of those triacs.

221               Mr Baghurst further tested his opinions by operating a Seeley airconditioner that had been fitted with a Newtronics electronic circuit board. He proceeded to simulate half-wave failure of the opto-coupled triac; fire resulted. The inability of the thermal protector to handle the high direct current that was produced by the half-wave conduction led to the failure of the thermal protector cut-out. That, in turn led to very high motor temperature and to ignition; fire resulted and the airconditioner that Mr Baghurst had used in his test was destroyed.

222               In my opinion, the designer was deficient in his duties by failing to specify an opto-coupled triac that had a peak voltage rating greater than 400V. I find that a reasonable and competent power electronics designer would have designed the remote control package having in mind the identification of the end users of the airconditioning units. Those end users would have been ordinary lay people; they would not have been electrical experts. The reasonable and competent power electronics designer would have known that the end users would expect that, when they turned their units “off” at the handset, the electrical supply to the airconditioner’s motor would thereby be disconnected and that no current would flow through the unit.

223               Counsel for Newtronics, in his closing submissions, crystallised Newtronics’ position when he submitted that if there were half-waving (and Newtronics would not concede that there had been), nevertheless the cause of the fires was the breakdown, in each case, of the thermal protector, and that, said counsel, was the responsibility of Seeley. However, for the reasons that I have already given, I reject that submission.

224               Counsel also sought to make use of a perceived fault in Seeley’s heatsink. In February 1994, Newtronics wrote Seeley warning it that it regarded Seeley’s heatsink as inadequate. This led to a submission that if an opto-triac had overheated, it was probably due to an inadequate heatsink, whose purpose was to dissipate the heat that was produced by the triac. The Court cannot, however, turn the contents of that letter into a finding that the heatsink was inadequate. A mere assertion does not amount to proof of a fact. This is not a case of placing a reverse onus on Newtronics; it means no more than that the Court will not take note of unsubstantiated allegations. Extensive investigations were made into the operations of the triacs and the thermal protectors but similar detailed investigations were not undertaken with respect to the heatsinks. Newtronics’ attempt to attribute blame to faulty heatsinks cannot rise above the level of speculation for two reasons. In the first place, the documentary and oral evidence that was before the Court amounted to no more than assertions that lacked particularity. In the second place, Newtronics had the opportunity to adduce technical expert evidence on this subject but failed adequately to do so.

the batch problem

225               Dr Pedder was asked during the course of this cross-examination to explain how opto triacs become faulty. He replied by saying that “the single most likely reason in fact is not really becoming faulty, it’s a batch problem in manufacture.” These comments became highly significant as the evidence in the trial developed and it is now appropriate to discuss “the batch problem”.

226               The triac that was identified on Newtronics circuit diagram, and the prototype that was supplied by Newtronics during early testing, was a Motorola MOC 3021 400v device. However the production ECCMs that Newtronics supplied to Seeley between September 1994 and February 1995 contained a different brand; they were QTC MCP 3021 400v opto-coupled triacs. The evidence established that the QTC opto-coupled triac was constructed differently to the Motorola opto-coupled triac. Prior to 7 September 1994, Newtronics had, from time to time, in accordance with its obligations under the design agreement, supplied Seeley with prototypes of the power board. On each occasion when it did so, it included a Motorola opto-coupled triac as a component part of the board. Furthermore when, in September or October 1994, Newtronics supplied Seeley with a design drawing of the electrical circuitry that was contained in the prototype, the opto-coupled triac that was shown in the design drawing was a Motorola part number MOC 3021.

227               Seeley alleged in the substituted statement of claim that the opto-coupled triacs that Newtronics used were from QTC batch no 9306 (which was identified as allegedly containing a manufacturing fault resulting in half-wave current flow), and that these opto-coupled triacs were of a lesser quality than the Motorola opto-coupled triacs that had been specified in the design drawings by Newtronics. The opto-coupled triacs involved in the fires were recovered from the Ballajura and Wonga Park units, but not from the Roleystone unit. There was evidence that the opto-coupled triac from the Wonga Park unit was from batch no 9306 and Newtronics accepted that in its final submissions.

228               The case for Newtronics was that there was no significance in the fact that a QTC unit was used rather than a Motorola unit. Counsel for Newtronics submitted that the evidence revealed that both manufacturers were reputable and that second sourcing was common practice and acceptable in the industry.

229               Documents that were discovered by Newtronics during the course of the trial established that there was a high incidence of failure in the QTC opto-coupled triacs that had been supplied to Newtronics from batch 9306. In October 1994 Newtronics became aware that its supplier, a Malaysian corporation that was referred to during the evidence as “QTC”, had supplied to Newtronics opto-coupled triacs that were defective. The model identification of those triacs was MCP 3021. Newtronics was also aware that these opto-coupled triacs had been incorporated in the controllers that Newtronics had designed and manufactured, and that they had caused unintended half-wave energisation of motors in Electrolux vacuum cleaners.

230               In the latter part of 1994, Newtronics had been dealing with Electrolux Corporation, a manufacturer of vacuum cleaners in the United States of America. Operating in a joint venture with another company, Newtronics supplied electronic controllers to Electrolux for its vacuum cleaners using the same QTC opto-coupled triac model MCP3021 as it eventually used in the RF Sensortouch controllers. Commencing in the first week of October, Electrolux became aware of vacuum cleaners in the field that operated when their controls were in the “off” position. Throughout October, there were various meetings and telephone conferences involving Newtronics personnel, including Mr Tescher and Mr Au, both of whom were heavily involved with Seeley. Ultimately, Newtronics recognised that the problem with the vacuum cleaners could be traced back to the QTC opto-coupled triacs model MCP3021 from batch 9306. It led Newtronics to write to its Malaysian supplier of the triacs on 19 December 1994 informing it that “our customer in the USA continues to have field failures with our product”. It added that the faulty part was the opto triac which was identified with the letters “QED MOC” and with the figures “3021”. Notwithstanding the variation in the identification of the letters, it was accepted that Newtronics’ letter was directed to the same QTC manufactured opto-coupled triacs that were used in the vacuum cleaners and in the rooftop units in which the three fires occurred. The seriousness of the situation may be gauged from Newtronics letter of the 19^th December 1994 to its supplier when the author wrote:

“For your information, we lost all next year orders for this product because of the situation.

 

Since, there is no cooperation from the manufacture side, we have decided to remove all QED (sic – QTC) stock from our store and return it to (the supplier) for full refund.”

 

231               Earlier, on 16 December 1994, the Malaysian manufacturer of the QTC opto-coupled triacs wrote to Newtronics saying:

“It is suspected that the problem is batch related to date code 9306”.

232               The Malaysian manufacturer and supplier of the triac later confirmed that suspicion on 17 March 1995, referring to it as “a valid complaint due to burnt detector dies”. It wrote Newtronics saying that it had found that the fault in the opto-coupled triacs which had been installed in the Electrolux appliances was due to a silicone dye contamination of the surface in the manufacturing process. Exhibit A74 consists of correspondence between Newtronics and QTC beginning in October 1994 and detailing the failure of opto-coupled triacs model MCP 3021 by energising the motors when they were meant to have been “off”. Curiously, Dr Holmes conceded that he was aware of the report from the manufacturer but he could not explain why he had failed to refer to it in his report.

233               Due to their direct involvement in the discussions with Electrolux and the manufacturer of the opto-coupled triacs, Newtronics personnel, and in particular Messrs Tescher and Au, knew that there were problems with batch 9306 of the QTC opto-coupled triacs model MCP 3021; they knew that the problem involved the opto-couplers energising motors when those motors should have been in the “off” position. The information that they had obtained also identified the problem as involving a half-wave failure. As I have already said, Newtronics was so concerned with the information that it had received, that it took the extraordinary step of returning all its QTC stock. Yet Newtronics took no step to cease using the QTC opto-coupler (from batch 9306) in its remote controllers for Seeley’s rooftop evaporative airconditioners nor did it take any step to warn Seeley of the problem and the potential danger. The lack of action on the part of Newtronics was exacerbated by the fact that representatives of Seeley, including Mr Zuodar, met with Mr Casey of Newtronics on 18 January 1995. On that occasion, there was a discussion concerning some of the problems that Seeley had experienced to date, and, as Mr Zuodar reported in his witness statement, the Seeley personnel informed Mr Casey that they had experienced a unit turning itself “on” and turning itself “off” without any form of interception. Those present at the meeting discussed possible causes for the fault but no suggestion was made – particularly by Mr Casey of Newtronics – that the QTC opto-coupled triac might be the fault.

234               Independent testings at Phillips Industries by Mr Zuodar and by Mr Baghurst confirmed that opto-coupled triacs from batch 9306 displayed a tendency to breakdown under low voltage in one direction. The evidence is sufficient, as a matter of probability, to conclude that Newtronics had been installing faulty opto-coupled triacs from batch 9306 in the ECCMs that it delivered to Seeley between late December 1994 and mid February 1995. There is positive evidence that the opto-coupled triac from the Wonga Park house was from batch 9306 and, as a matter of probability, it is, in my opinion, safe to conclude that the remaining two opto-coupled triacs also came from batch 9306.

235               Counsel for Newtronics sought to distinguish the Electrolux problem. He submitted that it was a problem that arose out of a different application: it had a different power supply. There was, so the submission proceeded, no necessity for Newtronics to cease using QTC products. This was an unacceptable submission in view of Newtronics having returned its QTC stock to its supplier. Newtronics further submitted that it had no need to warn Seeley of any problems or dangers about the QTC batch because Seeley should have adequately protected its motor. I reject both these submission; Newtronics had knowledge of the faulty batch and knew that opto-coupled triacs from the faulty batch had been used in the power boards that it had supplied to Seeley. Common sense and reason called out from Newtronics to warn Seeley.

236               The case for the applicant, as pleaded, was to the effect that there were three fires, but only one cause. That cause was said to be that, in each case, the opto-coupled triac was either faulty or stressed and, because of that, it sent out a pulse even though the remote control was switched to the “off” position. That pulse was then said to be sufficient for the opto-coupled triac to energise the run winding in half-wave form. As a result of the half-wave current flowing through the main winding, the thermal protector eventually closed in solid form and ceased to offer the protection for which it was designed. Ultimately, over-heating occurred which, in turn, led to ignition and fire. I accept these submissions. The finding that I make in each case is that the cause of the fire was a faulty opto-coupled triac. Because it was faulty excessive half-wave (DC) current occurred and that led to excessive heating and failure of the thermal protector. Ignition and fire occurred. The evidence concerning the QTC opto-coupled triacs was of great importance, because it assisted in making these findings and because it established that Newtronics’ personnel were well aware of the risks that they were taking in using the QTC product in Seeley’s ECCMs.

237               Counsel for Newtronics complained that counsel for Seeley, during the course of his oral submissions in reply, sought to argue that Seeley could succeed in this case, notwithstanding that the evidence might not support a finding that the three fires arose from the same cause. Counsel for Seeley argued that even if only one fire had been caused by the opto-coupled triac failure in half-wave, that would have been sufficient to warrant Seeley conducting a recall: in other words, one fire resulting from a negligent design and a faulty component would have been sufficient to require a recall. Counsel for the applicant asked the Court to find that, even if it was concluded that the failure of an opto-coupled triac was not the common cause of all three fires, nonetheless, in the circumstances prevailing in February 1995, it was reasonable for Seeley to conclude that there was – or, at least, that there might be – a common cause and it was reasonable for Seeley to act as if there were a common cause even though that should ultimately not prove to be the case.

238               Counsel for Newtronics submitted, in response to these arguments, that the applicant’s case had been opened on the basis that there had been three fires but only one cause; he pointed to the evidence of Mr Seeley where Mr Seeley, in cross-examination, agreed that this was his company’s case. This led counsel for Newtronics to assert that proof of three fires through a common cause –ie, a faulty opto-coupled triac – was the only basis upon which Seeley could be successful in this action. If other causative factors were to be relied upon, these would affect the pleadings in the action, the conduct of the action, the claim of causation, the question of responsibility for the recall and the damages for which Newtronics could be held liable.

239               Counsel for Newtronics submitted that the burden rested on Seeley to prove, on the balance of probabilities, that there was only one cause for the three fires; he went so far as to concede that the burden would rest on Newtronics to establish that the fires were caused in some other way. Pursuing this submission, counsel for Newtronics argued that:

“… the evidence shows that each fire had its own causation and the probabilities would indicate that the causation of each fire was not the failure of the opto-triac but other causes.”

240               This rather important submission stood naked, bereft of particularity. Presumably, it was intended to rely on the claimed inadequacy of the thermal protectors, the heat dissipation system and the motor design but it is not possible to know what individual cause Newtronics intended to attribute to each of the three fires. The submission concluded with the enveloping assertion:

“However, if the Court concludes that each of the three fires were [sic] caused in the same way (that is by half-waving), then it is our submission that notwithstanding the root cause of the fires the legal cause of the fires was the failure of the applicant to adequately cool the components of the PCB by failing to have a proper heat dissipation system and/or the failure of the applicant to adequately protect its motor from over-current and/or over temperature.”

241               I have already endeavoured to explain why these submissions must be rejected.

242               There is, in my opinion, a short answer to Newtronics’ submissions on this subject; it is to this effect. The three fires in the rooftop evaporative airconditioners were sufficient, in my opinion, to justify Seeley recalling its product when there was cause to believe that some malfunction in, or in respect of, the airconditioners might have been the cause of the fire. Seeley did not have time to investigate the cause of the fires before implementing the recall. It could not risk the possibility that there might be more fires. There was nothing to suggest that the fires were caused by third party interference. The decision to make the recall was governed by the fact that there had been three fires in four days causing extensive damage to the three consumers’ houses. Initial inquiries had established that the fires had started when the air-conditioning units were in the “off” mode. All fires had involved the RF Sensortouch controller with an ECCM board that had been manufactured by Newtronics and urgent testing after the third fire had found that some Newtronics’ ECCM boards had energised the motor when the unit was in the “off” position at the remote control handset. What little information that was available pointed to an internal fault somewhere within the airconditioner. If, as a matter of evidence, Seeley can only prove that Newtronics was responsible for one of the fires – if the evidence be insufficient to justify a finding of fault against Newtronics for the other two fires – nevertheless, the liability of Newtronics would be the same and its obligations to compensate Seeley would be the same. One fire would have been sufficient, in my opinion, to justify an urgent and immediate recall. A fire in a residence is not only a threat to property, it also constitutes a frightening risk of bodily injury and death.

243               Based on the finding that each of the air-conditioning units was switched “off” at the remote control handset at the time of the fire, this should have meant that in each case the start winding was not energised at the time of the fire. The possibility of some failure or malfunction of the relay in the start winding circuit can be discounted. There has been no suggestion in the evidence of any such failure or malfunction and the probability of all three relays malfunctioning is so low as to be put to one side. Mr Collins advanced several theories which, if accepted, would have exonerated Newtronics. However, his evidence was unconvincing and little, if any, reliance was placed on it during the final submissions by counsel for Newtronics. I do not intend to rely on the evidence of Mr Collins.

244               Dr Pedder, Professor Bonwick and Mr Baghurst were all of the view that the base fault which ultimately led to the fire in each case was to be found in the opto-coupled triac. In each case, it failed or broke down at a lower voltage in the cycle on one side of the triac element. In other words, as the applied voltage rose in the electrical cycle, the opto-coupled triac turned on or conducted in one direction. It conducted current in half-wave (or perhaps partially in half-wave depending upon the precise point in the voltage cycle where the breakdown occurred). The current flowed to the main triac and, through it, the run winding was energised. I am satisfied that if there had been a mechanical relay in the run winding, as there was in the start winding circuit, this form of breakdown of the opto-coupled triac would not have allowed the opto-coupled triac to cause the main triac to conduct current while the unit was turned “off” at the handset.

245               Mr Baghurst concluded his report with a summary that embodied four conclusions; I accept his conclusions as they form a convenient summary of my principal findings:

·        The Newtronics’ circuit board was deficient because it failed to incorporate a relay to guard against the possibility of failure of the main triac and its associated opto-coupled triac.

·        the Newtronics’ circuit board was deficient because the opto-coupled triac that it used was substandard;

·        the Newtronics’ circuit board was deficient because triac-type devices are inherently asymmetrical and the likelihood of half-wave or direct current and its consequences should have been addressed in the design of the board;

·        the Newtronics’ circuit board was deficient because the peak inverse voltage rating of the opto-coupled triac did not allow sufficient margin against undesired conduction.

breach of contract

246               Accepting Mr Baghurst’s four conclusions means that Cintro and Newtronics breached the express and the implied terms of the 1992 design agreement in several areas. In the first place, there was a failure to design and, hence a failure to manufacture an RF Sensortouch remote control that conformed with the preliminary and the draft specifications that Mr Friebe submitted in May 1993. That failure was manifested in the functioning of the “on/off” switch. It meant that in the end result, the design that Cintro and Newtronics submitted to Seeley, and the remote controls that Newtronics supplied to Seeley, did not satisfactorily and safely control Seeley’s rooftop evaporative airconditioners; they did not have an “on/off” function that ensured that when the airconditioners were turned “off” at their handsets the motors were not energised. Expressed in another way, the design did not ensure that, when the “off” button on a handset was pressed, all outputs from the ECCM were disabled and the motor was not energised.

247               Cintro and Newtronics also breached an implied term of the 1992 design agreement that required the design and the product to be reasonably fit for the purpose for which it was required and the implied term that required Cintro and Newtronics to exercise reasonable care and skill. In the first place, its design should have made – but failed to make – provision for a relay in the run winding circuit; it was also in error when it specified a 400 v opto-coupled triac because such a triac did not safely and satisfactorily control Seeley’s evaporative airconditioners. This, in turn, meant that Newtronics breached the implied term of the 1992 design agreement that the design services were to achieve the result that had been made known by Seeley to Cintro.

248               All these design faults were perpetuated in the manufacture of the RF Sensortouch remote controls that were supplied by Newtronics to Seeley. The breaches of the implied conditions in the design process were likewise breaches by Newtronics in the manufacturing process. An unknown number of the remote controls that were supplied by Newtronics to Seeley were so defective as to be unmerchantable. The three RF Sensortouch remote controls that were used in the houses of Mr and Mrs Gunning, Mr and Mrs Langfield and Mr and Mrs Bradshaw were actually dangerous, defective and unmerchantable.

249               It is plain, in my opinion, that Newtronics must accept responsibility for the design of the remote control mechanism. It may have been Cintro who commenced the work on the design, but it was Newtronics who took over that work and completed it. The attempt that was made during the course of cross-examination of Seeley’s witnesses to extract a concession that Seeley’s employees were somehow responsible for the design had no foundation. Even Newtronics’ expert, Dr Holmes, conceded that Newtronics had sole responsibility for the design of the electronic circuit; he accepted that Seeley had relied on Newtronics as an expert electronics circuit designer to produce the circuit design and there was no evidence to suggest that Seeley undertook any design of the electronics circuit.

250               Dr Holmes was not happy to refer to a switch being turned “off”; he said that “off” can mean “standby” and a motor in “standby” mode is not necessarily isolated. It was his opinion that when the remote control was in the “off” position, it was meant to be de-energised. But, as he explained, when a motor is de-energised, it is not necessarily galvanically isolated; that is, there may still be some flow of electric energy. It would not be appropriate to act on the assumption that an opto-coupled triac would provide reliable electrical isolation; to achieve the required measure of certainty, it would have been necessary to insert a mechanical switch (that is, an isolator) into the circuit. Indeed, Dr Holmes went so far as to say that the only way to be sure that a device is “off” is to activate a physical switch (or, as I understand what he was intending to explain, to disconnect the power supply) for he added that “electronics can always fail to close a relay.” On the other hand, he accepted that it would be reasonable for a consumer, who had switched “off” the airconditioner by use of the remote control and who could not hear any noise in the airconditioning unit, to assume that the airconditioner motor was not energised.

251               Such a technical qualification as so expressed by Dr Holmes cannot, however, afford any assistance to the respondents. The specifications that passed between Seeley and Cintro indicated that when the hand set was turned “off” all outputs from the power board (the ECCM) were to be disabled. That specification remained throughout all subsequent versions up to and including the final ECCM specification dated 13 May 1993 as agreed between Seeley and Cintro: Ex A29 Vol 1 pp 330-339; Ex A 59 Mr Friebe’s statement par 57.

252               I further find that on using QTC opto-coupled triacs from batch number 9306, Newtronics breached the implied term of the supply agreement that the goods that it supplied would be of merchantable quality.

DUTY of care

253               I am satisfied that Cintro and Newtronics owed to Seeley a duty to exercise reasonable skill and care in undertaking the design work and (in the case of Newtronics) a like duty in manufacturing and supplying the RF remote controllers. These duties existed independently of, but concurrently with, their contractual duty to exercise reasonable skill and care in the performance of their contractual obligations. I am equally satisfied that a reasonable person in the position of Cintro and Newtronics could have and would have foreseen that its conduct involved a risk of damage to Seeley if the design for the RF Sensortouch remote controller was defective. In that regard, Seeley relied upon Cintro and Newtronics to design the remote controller so that, at all times, it could be operated with safety. I have rejected the proposition that Seeley had relied upon its own employees and their expertise. On the contrary, I accept the applicant’s submissions that Seeley was vulnerable to the conduct of first, Cintro and, later, Newtronics because of its reliance upon their special expertise and its inability to detect latent defects in the electronics circuitry.

254               In my opinion it is appropriate to infer that Cintro and Newtronics, holding themselves out as experienced power electronics designers, had knowledge of – and if they did not have knowledge of, they should have had knowledge of – the risks that would be associated with a failure of a triac to provide electrical isolation and the subsequent unintended and undesirable energisation of the motor. Cintro and Newtronics would also have known – and if they did not, they should have known – that the consequence of any such failure in the domestic appliances that were stored in consumers’ homes would have involved an expensive recall for Seeley. On this subject, Cintro and Newtronics chose to call no evidence from any of their personnel who were involved in the Seeley project. This means that the court can infer that their evidence would not have assisted Cintro or Newtronics and the absence of such evidence means that the court may more confidently draw the inference that Cintro and Newtronics had actual knowledge of these risks and these consequences: Jones v Dunkel (1959) 101 CLR 298 at 312.

255               Furthermore, Newtronics had actual knowledge by October 1994, because of the Electrolux problems, of the risks that were associated with the failure of a triac to provide electrical isolation and the unintended and undesirable energisation of the motor. Knowledge of such risks leads to the further conclusion that a party in the position of Newtronics, acting reasonably, would have foreseen that a likely consequence of such a failure, coupled with a consequential fire, would inevitably mean that Seeley, as the supplier of the rooftop evaporative airconditioner would have to incur the costs of an urgent recall of its product.

256               In Bryan v Maloney (1995) 182 CLR 609 at 618 – 619 Mason CJ, Deane and Gaudron JJ pointed out that one reason why the law will often refuse to impose a duty to take reasonable care to protect another person from economic loss is its concern to avoid the imposition of liability “in an indeterminate amount for an indeterminate time to an indeterminate class”. In Perre v Apand Pty Ltd (1999) 198 CLR 180 at 221, McHugh J, after quoting this passage added:

“Concern about indeterminacy most frequently arises where the defendant could not determine how many claims might be brought against it or what the general nature of them might be. One feature that is more likely to be present in economic loss cases than physical damage cases is the ‘ripple effect’ of careless conduct.”

There has been no suggestion of any “ripple effect” in the circumstances of this case, nor could it be said that there is any question of indeterminacy.

257               The duty was to design and manufacture the circuitry in a manner which eliminated (so far as was reasonably practicable) the risk of unintended energisation of the motor. There was also a duty to select components with adequate specifications and safety margins. The designer and the supplier of the RF Sensortouch package were negligent in that, as Mr Baghurst concluded:

·        the Newtronics’ circuit board was deficient because it failed to incorporate a relay to guard against the possibility of failure of the main triac and its associated opto-coupled triac;

·        the Newtronics’ circuit board was deficient because the opto-coupled triac that it used was substandard;

·        the Newtronics’ circuit board was deficient because triac-type devices are inherently asymmetrical and the likelihood of half-wave or direct current and its consequences should have been addressed in the design of the board;

·        the Newtronics’ circuit board was deficient because the peak inverse voltage rating of the opto-coupled triac did not allow sufficient margin against undesired conduction.

Newtronics was also negligent in using QTC opto-coupled triacs from batch number 9306.

MISLEADING AND DECEPTIVE CONDUCT

258               The representations that were made to Seeley by Messrs Tescher and others (first as employees of Cintro and later as employees of Newtronics) were first made in 1992 before the parties entered into a contractual relationship. Indeed, as I have already noted, I have found that the nature of the oral representations combined with the written representations were so persuasive as to induce Seeley to enter into contractual arrangements with Cintro in 1992. The representations that were made by the various employees of Cintro in Cintro’s name were ongoing and repetitive; they were continuous in that they were repeated from time to time. Furthermore, they were never retracted throughout the design and manufacturing process; those representations were then perpetuated by the same people in their later capacity as employees of Newtronics. Contrary to the representations that were made in the names of Cintro and Newtronics, the design of the remote controller was not safe and reliable and their manufacture was not safe and reliable; they were neither designed nor manufactured with care and skill nor to the highest standards of quality. In contradiction of the representations that had been made to Seeley, the personnel who were employed, first by Cintro and then by Newtronics, did not possess or apply the expertise and the competence that was required to design a safe and satisfactory controller. I once again, refer to Mr Baghurst’s four conclusions: see pars 244 and 256.

259               When Newtronics ultimately produced the final prototype remote control in June 1994, these representations were reaffirmed and they were applied to the design which had by then, been completed. When Newtronics commenced production on 31 August 1994, the representations continued to apply to the controllers that it was then manufacturing.

260               Cintro, and later Newtronics, each represented that it had the expertise and competence to design and manufacture satisfactory remote controllers and that the design and the manufacturing process would be conducted with due skill and care to the highest standards of quality. These representations also continued to apply as the work on the design progressed to completion and the work of manufacture commenced and concluded.

261               I turn then to the question of reliance. I do not see how Newtronics can seriously suggest that Seeley did not rely on the expertise of Cintro and Newtronics. In the first place, Cintro’s literature makes it clear that it was holding itself out as a leader and as an expert in its field. Next, Seeley’s employees who gave evidence in the trial said that they relied on what they had read and on what Cintro’s employees (and in later times what Newtronics employees) had told them about their expertise; Mr Friebe and Mr James both gave evidence that they continued to rely on the representations that had been made by Cintro and Newtronics concerning the remote controllers and finally, Cintro and Newtronics did not challenge that evidence.

262               The representations that were made by Cintro and by Newtronics were representations that were made by corporations in trade or commerce and they were representations that amounted to misleading or deceptive conduct. This so happened because Cintro and Newtronics did not design, nor did Newtronics manufacture, the remote controls with skill and care or to the highest standards of quality. Furthermore, Newtronics engineers either did not possess, or if they did possess, they did not apply the expertise and competence that was necessary to design and manufacture a safe and satisfactory controller. Both Cintro and Newtronics were guilty of misleading or deceptive conduct.

seeley’s claim against cintro

263               Even though Seeley has alleged that it was Newtronics who manufactured and supplied the faulty componentry, it has maintained its cause of action against Cintro. It has submitted that both respondents are liable for the same loss and damage and in the same amount. It concedes that any set-off in favour of Newtronics must also enure for the benefit of Cintro because the subject matter of the set-off would be a benefit that Seeley received as a result of the supply of the remote controls by Newtronics. This argument was advanced upon the premise that Seeley must make an allowance for the benefit because it received the benefit as a result of Cintro’s original representations.

264               This line of reasoning assumes that, because the componentry was faulty at the time of supply to Seeley, (that is, at the end of the exercise), it, or its design, must have been faulty at some stage prior to the takeover of the ownership of the business. That may have been the case, particularly when one bears in mind that first, Cintro, and then Newtronics, used the same technical staff, Messrs Tescher, Au and Casey throughout all stages of the design, manufacture and supply. The question then would be whether the evidence that was led during the course of the trial would point to a chain of evidence that would, as a matter of probability, lead to the conclusion that the ultimate fault could be traced back to a time when Cintro was the active and controlling party. I do not think that it is necessary to examine this question for, in my opinion, there is a more fundamental reason why I must find that Cintro remains liable to Seeley.

265               Cintro made representations in 1992 to officers of Seeley and Seeley relied on those representations. Cintro held out, incorrectly and inappropriately as it ultimately transpired, that it had the necessary expertise and competence to design and manufacture, in a safe fashion, the remote controls that Seeley required for its rooftop evaporative airconditioning units. These representations induced Seeley to engage Cintro in August 1992 to design, and subsequently, to have Newtronics manufacture on an exclusive basis for two years, the remote controls. As at 30 September 1993, when Cintro sold its business to Newtronics, the contract that Cintro had entered into with Seeley remained on foot. Cintro had made no attempt to cancel it: nor had it made any attempt to novate its obligations under the agreement to Newtronics. In fact it put up a wall of silence. As far as Seeley and its officers were concerned, the contract with Cintro remained alive and the personnel who, prior to 1 October, had worked on the design continued to work on the design. It was as if Cintro had subcontracted its obligations under its contract with Seeley to a third party, but without the knowledge or permission of Seeley. The fact that, in such hypothetical circumstances, the ongoing work may have been done by a third party would not have relieved Cintro from its obligations under its contract with Seeley. The same may be said in the present case. Even though, as between Cintro and Newtronics, Newtronics had undertaken to meet Cintro’s liabilities and contractual commitments, Cintro remained answerable to Seeley for the quality of the design and the deficiencies that were inherent in the design.

266               The representations that were made in the name of Cintro in 1992 were false at the time. Its engineers were not competent; subsequent events established that fact. To the extent to which representations related to future matters, the onus lay on Cintro to show that it had reasonable grounds to make them: see s 51A of the Trade Practices Act and s 54 of the Fair Trading Act 1987 (SA). Cintro has not discharged that onus. I am satisfied that, but for the representations that were made by Cintro in and before August 1992, Seeley would not have dealt with it; it would have dealt with some other electronic designer such as Technical Components or Tekelek; it would not have entered into the design agreement with Cintro and, in that event, there would have been no agreement for Cintro to assign to Newtronics. There was a chain of causation that flowed directly and naturally from the misrepresentations by Cintro and Seeley’s reliance upon them. But for the misrepresentations the design would not have been completed, the units would not have been manufactured, the faulty controllers would not have caused the fires and Seeley would not have suffered loss. Seeley continued to rely upon those 1992 representations when it installed the remote controls in its airconditioning units and sold them to its dealers for installation in consumer’s homes.

267               The fact that Newtronics is liable to Seeley for its own conduct is in no way inconsistent with Seeley’s reliance upon Cintro’s misrepresentations in the first instance and their continuing effect. The fact that Newtronics has conceded that it adopted the Cintro representations does not absolve Cintro from their responsibilities that flow from its misrepresentations, nor does it deny Seeley the right to continue to rely on the Cintro representations.

268               Both Cintro and Newtronics are liable for the same loss and damage and in the same amount. The set-off, or deduction, in favour of Newtronics (the subject of the agreement with respect to the cross-claim) will enure for the benefit of Cintro because the subject matter of the set-off is a benefit which Seeley received as a result of the supply of the remote controllers. Seeley must make allowance for that benefit because it received the benefit as a result of the original representations. The quantum of that benefit has been agreed at $217,781.98.

269               I turn then to consider the question of Seeley’s damages, but before doing so I should shortly state why I would grant Seeley an extension of time within which to institute its proceedings against Cintro in tort and contract but not for misleading or deceptive conduct.

EXTENSION OF TIME

270               I would, without hesitation, grant Seeley an extension of time, as sought in the substituted statement of claim, within which to institute its proceedings against Cintro in tort and contract. When Seeley instituted its proceedings on 12 February 1998, it did so within three years of the earliest of the fires. The party that it named as the respondent was Newtronics (not Cintro). It only learned, formally, of the existence of the two companies and, subsequently, about the sale of business from Cintro to Newtronics, as a result of Newtronics pleading in its defence that it had not been incorporated until 1993. There had earlier been mention of the sale of the business, but without appropriate particularity, by counsel then representing Newtronics at a direction hearing on 9 March 1998. It was not sufficient to amount to appropriate notice to Seeley.

271               I do not need to make a finding about why Cintro and Newtronics failed to inform Seeley about the sale of the business. It may have been no more than mere oversight; nothing surfaced during the trial to suggest bad faith. Nevertheless, it was the omission by Cintro and Newtronics that was responsible for Seeley’s failure to include Cintro as a respondent when it instituted its proceedings. Upon learning the truth of the matter, Seeley acted with reasonable expedition in correcting the position when it filed its amended statement of claim on 30 October 1998. This is a case where the applicant is blameless for the delay; it is a case where the responsibility for the delay is that of the two respondents. Seeley learnt of a fact that was material to its claim against Cintro within the twelve months prior to 30 October 1998. The material fact was the acquisition of the knowledge that it had been dealing with two – not one – corporate entities. The material fact activated the provisions of subpar 48(3)(b)(i) of the Limitations of Action Act 1936 (SA).

272               I turned then to a consideration of Seeley’s cause of action for misleading and deceptive conduct. In order to recover damages Seeley must prove that the damages that it has suffered were caused “by” conduct that amounted to a breach of the Trade Practices Act. In Wardley Australia Ltd v Western Australia (1992) 175 CLR 514, Mason CJ said at 525 that the word “by”:

“… clearly expresses the notion of causation without defining or elucidating it. In this situation, s 82(1) should be understood as taking up the common law practical or common-sense concept of causation recently discussed by this Court in March v Stamere …”

Causation becomes, therefore, a question of fact and common sense. In the circumstances of this case, the conduct of Cintro and Newtronics leads to a conclusion that the loss or damage was caused, not so much by the act or omission that amounted to the faulty design, but by the fires which became the practical manifestation of the original fault. To find otherwise would mean that a faulty design might lie dormant for years, but when its fault was ultimately revealed the perpetrator of the fault would be immune from suit if the period of three years from the date of the design had elapsed: see subs 82(2) of the Trade Practices Act. On the other hand, the Trade Practices Act does not contain any provision for an extension of time within which to institute proceedings. For this reason, Seeley cannot maintain an action against Cintro under the Trade Practices Act. That conclusion does not, however, afford any great assistance to Cintro for it does not apply to Seeley’s causes of action in tort and contract.

273               Newtronics separately raised the defence that any cause of action based on misleading or deceptive conduct was statute barred. However, counsel did not further address that issue: no argument was advanced in support of the assertion and I therefore put it to one side.

damages

274               Before considering the quantification of the damages that Seeley has suffered, it is first necessary to consider the large body of evidence that resulted from Newtronics’ strong attack on Seeley’s commercial reputation and its position as an alleged market leader. Dr Beaton was of the opinion that Seeley’s Breezair brand had made it a market leader in innovation at the start of the 1994/1995 summer season. Asked in cross-examination whether his opinion referred to Seeley as a market leader “in terms of market share, product innovation or some other form of leadership?” Dr Beaton replied that he was expressing that opinion in terms of product innovation. He was then asked whether or not his opinion was based on Seeley’s market share, to which he replied that leadership had multiple dimensions and market share was only one of the matters that was to be taken into consideration. In fact, he said that he was impressed by Seeley’s innovation record to such an extent that he was not referring to its market share when he defined it as a market leader. It was then put to him that if, contrary to his premise, market leadership were to be related to sales and the relevant market share then, upon that premise, Seeley could not claim market leadership. He answered consistently saying that he was not claiming that market leadership was a function only of sales and market share. He went on to explain:

“I’m saying it’s a function of price, brand image, which dealers you have in your dealership, your market sales and your market share and the technology that you have and that you have in the pipeline. All of those constitute market leadership.”

 

275               I am not sure that this aspect of Dr Beaton’s evidence is of use to Seeley’s claim for damages. Market leadership may be good for prestige, but if it is not reflected in market share, it is of little financial use to the would-be leader. Seeley’s complaint is that the fires and the recall were the cause of it losing sales and thereby losing its former market share. In this context loss of market leadership, whilst not to be ignored, sounds less in damages than loss of market share.

276               From 1990, Seeley faced difficulties in the market, caused, in part, by the huge default by its international purchaser, but, also, because of the activities of its competitors. Dr Beaton noted that Seeley’s Breezair unit sales, as a percentage of the total market for evaporative airconditioners, was in steady decline from a high 46.6 per cent in January 1990 to a low of 29.8 per cent by January 1993. However, he noted that, commencing in mid 1993, its market share increased steadily to a high of 40.1 per cent by November 1994. Dr Beaton then said:

“From this point onwards, the third phase has seen Seeley’s Breezair market share decline steadily to a low of 29.9 per cent (twelve month rolling average) in December 1998 and has remained at this approximate level ever since.”

277               Naturally, Seeley points to the fires of February 1995 as a significant factor – if not the factor – for the decline in that market share. The fires in Perth and Melbourne were reported on television, on the radio and in the newspapers. In addition, as Mr Arnold noted in his witness statement, Seeley’s competitors advertised, at least in Western Australia, seeking to capitalise on Seeley’s misfortunes. One such competitor inserted a large notice in the “Western Australian” newspaper on Wednesday 22 February 1995. It was addressed to “Breezair Evaporative Air-Conditioning Remote Control Unit owners” and it reminded them that they had been left without airconditioning during one of the hottest summers on record, but that the competitor could help with excellent airconditioning.

DAMAGES - other fires

278               In his written submissions, counsel for Newtronics made much of the fact that evidence in the trial had revealed that there had been fires in other Seeley units over the years. There is no doubt that there are many ways in which fires can start in motors and the evidence revealed that, for a variety of causes, several fires have occurred in Seeley motors over the last few years. Twenty-five instances of fires were then listed in Newtronics’ submissions. In every case the evidence concerning the fires was elicited through cross-examination; Newtronics did not lead any direct oral or documentary evidence on the subject. Most of the information upon which the cross-examination was based came from discovered or subpoenaed documents. As to this, I must say that Seeley was remiss in its failure to make discovery of documents in respect of some of the fires but, on the other hand, Newtronics was quite unreasonable in complaining about a failure of discovery in other cases. A few examples, extracted from Newtronics’ written submissions, will indicate where Seeley should have given discovery:

“7.2.2. Aramac Qld

A report on this fire was produced by the Applicant in Court on 8 August 2000 in response to a subpoena issued by the Second Respondent. The fire occurred on 28 October 1998 in an EA rooftop cooler. It was one of five fires (other than the three fires involved in this case) investigated by Lee who gave evidence (T1035) that the only cause of the fire he could determine was a faulty capacitor. The evidence in this case is that the capacitor is a device fitted by the Applicant to its motors.”

…

7.2.4 Bendigo (aka Eaglehawk Fire), Vic

Discovery of Lee’s investigation report of this fire (N41) was given through Friebe in the witness box on 7 August 2000. The fire occurred on 5 January 1997 in a Breezair EA Sensortouch with a 560 watt motor. Lee’s conclusion was that the fire was caused by a series of arcing events between crushed wires in the control box which generated heat sufficient to start the fire (T1048). The control box to which the witness referred we understand is an expression to describe the isolator switch (T1049) which is the other half of the box which houses the ECCM or PCB. As a consequence of these findings, Lee recommended to the Applicant in his report that it changes its assembly methods (TT1048 & 1050) to avoid the crushing of wires. As an example of how wide-spread this problem was, upon inspecting another unit taken from stock at the Applicant, Lee noted that that unit also had crushed wires in the control box (T1047). Further, Lee considered that the problem could be exacerbated by a technician on a roof who needs to open the box and then crushes the wires when re-closing it (T1050). The cause of this fire we submit is on the balance of probabilities identical to the Wonga Park fire. In each fire the wires going to the motor gave out before the motor or the thermal protector and an arcing event emanating from the wire as a consequence caused the ignition of flammable material in the vicinity.”

7.2.5 Blackwater, Qld

Lee also investigated this fire for the Applicant. The fire began in an EA 560 watt cooler by reason of the pulley slipping and the belt igniting through friction (T1034). James confirmed that the thermal protector had been switching under load and this was consistent with the cause of the fire (T1452).”

279               Examples of fires that were totally irrelevant in a determination of the issues in this trial – again extracted from Newtronics’ written submissions - are as follows:

“7.2.6 Boree Creek, NSW

Lee investigated this fire and concluded that a mounted exhaust fan in the kitchen of the house ignited and that this then spread to the evaporative cooler (T1522).”

7.2.8 Casuarina, WA

Frank Seeley had only vague recollection of this fire which concerned an ES machine in January 1998 and an ember which had caused it to ignite somehow (T198). The complaint was that the cooler was highly flammable, and Frank Seeley, the Applicant acknowledged that was the complaint.”

7.2.25 Victoria

Forte said he knew of a fire in an EA model Breezair in Victoria when he was an employee of the Applicant (T339).”

280               Two things are apparent from these random examples. In the first place, there was evidence in the trial that established that there were occasions when Seeley’s domestic rooftop evaporative airconditioners caught fire for reasons that were entirely disconnected from an electronic power board. Secondly however, the second respondent went to extremes in its attempts to besmirch Seeley’s name and business reputation and, in doing so, suggested that it was unable to differentiate between relevant and irrelevant issues.

281               Mr Seeley was cross-examined extensively about the other fires that were said to have occurred and that were said to have involved Breezair evaporative airconditioners. Mr Seeley gave his evidence on this subject openly and in a forthright manner. He remembered some of the incidents and said so without hesitation; others he did not recall. For example, Seeley had installed thirty EA Breezair units in the Gosnells market. One of those coolers was involved in a fire that occurred in the market. This occurred in 1989, before Seeley had any involvement with Newtronics. The coolers that had been installed were not therefore operated by remote control devices. According to Mr Seeley’s evidence, no litigation occurred as a result of this fire. He added:

“There were rags found inside the burnt cooler.”

He did not expand on that answer save to say in re-examination that they were burnt rags. There was no evidence that would point to the fire having been caused through some fault on the part of Seeley.

282               Another fire occurred in a Hungry Jacks establishment in which a Seeley evaporative airconditioner had been installed. The location of the establishment was not identified in evidence, but Mr Seeley claimed that it was a fire that occurred in an exhaust fan when hot fat ignited. When the fire broke out, it was adjacent to the airconditioning ducting: the flames spread into the ducting and, as Mr Seeley said, “you had a natural chimney effect and it went up and burnt the unit.” That being the limit of the evidence on the subject, there could not be any finding of fault in the part of Seeley.

283               It was put to Mr Seeley that one of his units had been involved in a fire at Gooseberry Hill. He denied that. He said that he had heard many statements about a fire at Gooseberry Hill but he had not been able to find any information that would verify the fact. Mr Seeley referred in his cross-examination to another fire in an EM unit that had occurred at Mullewa. He said it was caused when an ember from a burning tree on the property next door landed in the unit setting the CELdek alight. It was not suggested that the use of CELdek might have, in some unspecified way, attributed blame to Seeley.

284               It was put to Mr Seeley during the course of his cross-examination that there had been a fire at Ballajura in the home of a Mr Hughes in November 1997. Mr Seeley did not recognise the name of Hughes and no further evidence was led on the subject. It was also put to Mr Seeley that there had been a fire at Armadale in Western Australia on 2 November 1999 when a Breezair unit short-circuited. Mr Seeley did not have a recollection of that incident, nor of a fire at Casuarina in January 1998 but he did know the name of a customer called McGillvray. It was put to him that Mr McGillvray was the owner of the home that had been burnt when an ember entered the airconditioner; he could not connect the name to the event.

285               During his cross-examination, Mr Seeley was questioned at large about the occasions when a Seeley’s Breezair unit had been involved in a fire. It became apparent from his answers that the CELdek, when dry, was highly inflammable. He told of one incident in Western Australia when the unit was still on the ground awaiting installation; a workman carelessly threw away a burning cigarette butt. As Mr Seeley said: “it burnt the filter medium”.

286               Mr Seeley was asked:

“Would you agree that your units are highly inflammable?”

He answered:

“If subjected to abnormal conditions, yes, they are quite flammable.”

287               A Seeley’s EA Breezair model was involved in a fire in June 1995 in the Brisbane showgrounds. Legal proceedings involving Seeley with respect to that fire and the damage that it caused are yet to be resolved. Mr Seeley’s evidence was that he believed that the cause of the fire was faulty wiring by the customer’s electricians, coupled with their use of a piece of uninsulated wire. On the other hand, he agreed with the proposition that was put to him in cross-examination, that others have claimed that the cause of the fire was an overheated motor and a failed protector. However, Mr Seeley was allowed to add to his answer, without objection that, although the matter remains unresolved:

“There was a mediation which occurred and the interesting thing about that is that the experts from all sides that were present at that mediation agreed at the mediation that there was no problem with either the design of the motors, nor was there any evident problem with the particular motor involved.”

 

Mr Seeley nevertheless acknowledged in cross-examination that it was still open to the plaintiff in that case to pursue a claim that a defect in Seeley’s motor caused the fire.

288               Although no findings can be made in these proceedings about the cause of the fire at the Brisbane showgrounds, it remains relevant to these proceedings to record Mr Seeley’s concession that out of the 300 to 350 units that Seeleys installed in the showgrounds, it was necessary, within a few months of installation, to replace twenty-one motors. Mr Seeley’s explanation: “That was a result of the wiring problems” attempted to attribute blame to the customer’s electricians.

289               Two further fires were discussed during Mr Seeley’s cross-examination. The first case involved a Mrs Dorothy Byrne who instituted legal proceedings as a result of a fire in her home. That fire was, however, caused by a Braemar unit. At the time of the fire, Braemar was a competitor of Seeleys, although some years after Mrs Byrne’s fire, Seeley took over Braemar. The second fire occurred in Gosnells, Western Australia. The details of this fire were very sketchy but it somehow involved a Seeley rooftop unit; it was, according to Mr Seeley, a case of arson.

290               The nature of the extensive cross-examination with respect to these fires suggested, erroneously as events transpired, that a wealth of witnesses would be called by the defence in an attempt to discredit Seeley’s product. No such witnesses were forthcoming. Much of this line of cross-examination was futile. No significant concessions were gained by Newtronics. This particular line of cross-examination did not, in my opinion, reflect adversely, in any way, on Seeley or on its products. I have not been able to obtain any assistance from the evidence about other fires. It has not established a pattern of similar facts into which the Ballajura, Wonga Park or Roleystone fires could be placed. It has not pointed to a course of conduct, a pattern of behaviour or a recurring fault that could be applied to any of the three fires with which this trial is concerned.

seeley’s service repair records

291               The material that Seeley was forced to discover has established to my satisfaction that Seeley’s products are far from faultless. Complaints from consumers and service records show a huge number of faults such as units turning themselves “on and off”, units vibrating, noisy units, units blowing fuses or not blowing cold air or blowing hot air. Other complaints included burning smells, water damage to ceilings, failed pumps and failed actuators. Seeley’s poor performance history was not only evident from its documents but it was apparent from the evidence of Seeley’s former dealers who gave evidence on behalf of Newtronics.

292               Mr Peter Schouten, is the product reliability manager for Brivis Australia Pty Ltd (“Brivis”) a direct competitor of Seeley in the manufacture of evaporative airconditioning units. He was called as a witness for Newtronics and an order was made, without objection, that his evidence was to be taken and received in confidence because it was commercially sensitive. Objection was made by Seeley to the receipt of Mr Schouten’s evidence upon the basis that certain computer records of his employer were not business records capable of admission under s 69 of the Evidence Act 1995 (Cth). In Valoutin Pty Ltd v Furst and Others (1998) 154 ALR 119 at 129 Finkelstein J discussed the admissibility of business records under s 69, saying that the section:

“… makes admissible a document that contains an asserted fact if that document forms part of the records kept by a person for the purposes of a business provided the asserted fact was made by a person who had or might reasonably be supposed to have had knowledge of the asserted fact or was made on the basis of information supplied by such a person. Thus, to receive the [document] into evidence under s 69 two conditions must be satisfied, viz (a) that it is a record of a business and (b) that it was prepared by a person who had or was supplied with information by a person who had, or was likely to have had personal knowledge of the asserted facts contained in it.”

293               As to the first test, the word “business” as defined in the Evidence Act must be widely construed: Re Marra Developments Ltd and The Companies Act (1979) 2 NSWLR 193 at 204 and TPC v TNT Management Pty Ltd (1984) 56 ALR 647 at 650. I am also satisfied that the second condition is met.

294               I am therefore of the view that there is no substance in that objection. In my opinion, the evidence of Mr Schouten, including the contents of the computer records, are relevant and admissible to establish the call out rate and the number of repairs undertaken by a direct competitor of the applicant. Without recording details that would be commercially sensitive to Brivis, I am satisfied from the information that Mr Schouten provided that, although the statistical details of the two companies’ sales is different, the information does justify a finding that Seeley’s warranty call outs and complaints are high.

295               Seeley maintained records of the complaints that they received about their units (“the complaint files”). They also maintained details of all warranty services that their dealers and distributors carried out to their units. It is not a pretty picture. Seeley’s Service Repair Records (“SRRs”) were the company’s computerised internal records of the occasions when the company was required to organise repairs to their products during a warranty period. A CD-ROM containing the particulars of the SRRs from 1992 to 1998 was discovered by Seeley and its contents were analysed by Newtronics’ advisers. Mr Seeley, who was cross-examined about the resulting analyses, admitted that he was not familiar with the detail of the SRRs. However, he did accept certain propositions that were put to him by the cross-examiner which, in my assessment, were quite significant, as the following passage from his evidence reveals:

“If I was to put to you that in 1993-1994, though you sold 11,000 units there were only 466 warranty claims, would you know whether that sounds right? … It wouldn’t sound right to me. It’s the sort of thing I would hope for but not what I would expect.

What about 1994-1995 where there was 15,859 units sold, according to the disk, and 4668 warranty calls. Does that sound right? … Yes, that could be.

So it’s about one in three. Would that be right? … It could be.

So would you expect then one in every three units sold would require a warranty call within 12 months or two years, depending on the length of the warranty? … Would I expect …

Would you expect that to happen? … I expect that could happen, yes.

So something goes wrong with one out of every three units within the warranty period? … Yes, that could happen.

Is that what happens? … I’m saying it could. I’m not that close to the business, I’ve stepped back from it, but it would not surprise me that that was the case.

If it was, however, 16,542 units and 9252 warranty calls, would that surprise you? … That would be high but I think it has to be looked at with respect to two considerations, and one is that we did increase warranty periods. Originally they were one year and subsequently it was increased to two. It has subsequently been increased to three. That extends your warranty rate substantially.

When do you say it was increased to three years? … When did I say it?

When was it increased to three years? …I don’t know. I can’t give you a precise date but I’m saying that that’s my understanding of where it is at the moment.

So that if in 1996-97 there were 16,000 units sold and 15,000 warranty calls that could be because some of the warranties were for previous years, or even two years. Is that what you’re saying? Yes.”

296               Mr Arnold, like Mr Seeley, was not in a position to quote exact figures, but he, like Mr Seeley, was unable to disagree with the many propositions that were put to him in cross-examination, the effect of which was that Seeley’s products were the subject of numerous warranty call-outs. Mr Seeley was the first witness to give evidence on behalf of his company. In this long trial, Seeley and its advisers had ample opportunity to examine the SRRs and to call knowledgable witnesses if the propositions that had been put to Mr Seeley were, in any way, misleading. That not having been done I see no reason why I should not accept Mr Seeley’ concessions as evidence of the general nature of the rate of call outs that Seeley received under its warranties.

297               Newtronics called a wealth of evidence on this subject – some from disgruntled ex‑dealers and distributors but some from independent, disinterested marketing personnel. Mr Dullard, the managing director of Air Attention (WA) Pty Ltd (“Air Attention”) referred to Seeley being “inundated all the time with warranty calls”, whilst Mr De Meo, a former director of Thermelec Pty Ltd (in liquidation) said that “in the EM Breezair, failures in late 1994 were an epidemic”.

298               Mr Dullard’s company had been a Seeley dealer from 1988 until 1996. He claimed that in that period he estimated that 80 to 90 per cent of all Breezair units required some form of warranty call out as compared with an opposition product (not Brivis) where he said that the call out rate was only one to two per cent. Mr Dullard was, in my opinion, prone to exaggeration. He has been in conflict with Seeley and he made no attempt to disguise his ill feelings towards the applicant. I cannot accept the estimations that he gave as being accurate but I do accept that Seeley’s call out rate was higher than that of the competitor who was named by Mr Dullard. Mr De Meo was not a satisfactory witness; he was biased and bitter towards Seeley. Mr De Meo said that he had seen between fifty and 100 fans fall off and had seen molten plastic lying at the bottom of motors. In order to reject a proposition that there was yet another fault in Seeley’s product – that the fan in the motor would dislodge and jam the motor – Mr Seeley gave a demonstration during his re-examination, using Ex A44, a 750w motor with a loose fan. The demonstration appeared to show that the plastic fan could not jam a motor. Mr Seeley added that the fan being plastic, it could not have jammed the metal parts of the motor – being plastic it would have broken. Be that as it may, Mr Herzog’s examination of the motor fans revealed, in his opinion, that the method of securing the fans to the motors was inadequate: movement could occur and this could lead to a fan becoming loose and ultimately being dislodged. When that occurred there was a risk that the plastic fan might jam the motor. Despite Mr De Meo’s unimpressive manner during his cross-examination, his evidence on that subject was effectively supported by concessions that were obtained during the cross-examination of Mr Arnold, and, to a lesser extent, Mr Forte.

299               Mr Ramage, who conceded that his comments on this topic were coloured to a large extent by the comments of Messrs Dullard and De Meo, was of the opinion that the level of customer complaints and their repetitiveness “must have driven dealers crazy”.

300               Mr Mannix is the managing director of Mannix Electrical Pty Ltd (“Mannix Electrical”). The company was established in 1969 as an electrical contracting company but for the last fifteen years it has engaged exclusively in the business which Mr Mannix, in his witness statement, described as “an airconditioning/evaporative air cooling company”. Mr Mannix regards his company as “the number one retailer of evaporative systems in South Australia, a position we have held since the early 1990s”. Mannix Electrical was never an exclusive dealer for Seeley’s products but it started retailing Seeley’s evaporative airconditioners in the 1980s. It was Mr Mannix’s evidence that his company ceased its relationship with Seeley in about 1990 because “I did not regard the Seeley cooler as a reliable product”. When Seeley’s EM model was introduced in 1994, Mannix Electrical became, once more, an independent distributor for Seeley. Mr Mannix said that the EM model impressed him with its new and innovative design. However, Mr Mannix said that his company started to receive complaints from its customers. He said:

“During the summer of 1994/1995, it came to a point where our staff were becoming very stressed about the abusive calls they were receiving from customers in relation to repeated breakdowns and the fact that Seeley repair time was blowing out to sometimes over six weeks.”

Mannix Electrical did not renew its association with Seeley when its contract expired in June 1996.

301               Mr Mannix did not like Seeley and his evidence must be viewed with caution. However, although the circumstances of the two terminations of his company’s dealership were challenged, I feel that I should accept in general – if not specific – terms his assertion about the complaints that his company received from dissatisfied customers.

302               The combined evidence of Messrs De Meo, Dullard and Mannix pointed to Seeley’s motors being a continuing source of complaint from consumers. These men did not impressed me as witnesses; they clearly disliked Seeley for one reason or another and this severely tainted their evidence. On the other hand, much of what they said found independent support in the documentary evidence. I am satisfied that each of them experienced many problems with Seeley’s airconditioners – particularly the motors.

303               Mr Marshall who was the Western Australian State Manager for Seeley between June 1995 and May 1997 believed that the recall had no impact on Seeley’s market share or sales. He said that in Western Australia, Seeley’s total sales grew from $7.5m to $11m in his first year and then to $13m in the year that he left Seeley. On the other hand, he claimed that in the six month period from October 1996 to March 1997, the Western Australian Office received in excess of 10,000 warranty and service related phone calls.

304               Mr Wegman, who prepared a report on Seeley’s customer-complaints file, expressed the view, which I considered to be reasonable, that “the complaints file clearly shows [that] there has been an on-going negative consumer sentiment with respect to product quality and performance”. Mr Wegman also compared the call rate figures for Brivis and Seeley and concluded that “Seeley does have a significantly higher call rate …”, a view that was shared by Mr Solomon. Mr Wegman said that his analysis of the complaint files produced five propositions:

·                   a wide range of technical problems;

·                   a level of customer dissatisfaction;

·                   a significant word of mouth effect;

·                   a lack of mention of the fires and the recall; and

·                   the problems reflected by the complaints and the consequences of those problems were one of the causes of the decline in Seeley’s market share.

305               Dr Beaton had never seen Seeley’s complaint files. He acknowledged that their contents would have been important information and that he would have taken them into account. Dr Beaton did, however, sound a note of caution about relying too heavily on the existence of complaint files from consumers. Whilst he recognised that a dissatisfied customer might tell his or her friends and neighbours about the cause of the complaint, there is no certainty that those friends or neighbours were then in the market to buy an evaporative airconditioner. In other words, it is not to be assumed that negative word-of-mouth would have anything like a saturating effect on Seeley’s product. That might be so, but no product is assisted by negative word of mouth publicity.

306               The totality of the evidence leads me to the conclusion that Breezair has had problems with the reliability of their products since, at least, 1995 and those problems must be factored into any consideration about the effect that the fires and the recall had on Seeley’s commercial reputation, its future sales and its place in the market. The finding that Seeley’s warranty call outs and complaints are high leads then to a further finding that a high call out rate and high service requirements would not be conducive to a high business reputation. That, in my opinion, is as far as the evidence would permit me to go, but it is sufficient to negate a general proposition that Seeley holds a high reputation for reliability in the market place.

307               Newtronics claimed that the evidence that was produced during the course of the trial did not disclose that there had been any loss of sales or loss of market share or loss of capacity to undertake research and development arising as a consequence of the recall. It pointed out that Seeley’s own records showed that there were at least 60,000 warranty calls arising out of these evaporative airconditioners in five years; it claimed that this constituted an unacceptable warranty call-out rate, a proposition which was said to have been accepted by Mr Arnold. I accept that submission.

308               Newtronics submitted that the respondents should not be made to pay for the costs that Seeley incurred in improving its product when such improvements were warranted independently of the fires. It pointed to Seeley having acknowledged the presence of about twenty-five fires in Seeley’s airconditioning units which were unconnected to the fires that are the subject of these proceedings. Arguably, Newtronics submitted, those twenty-five fires, and their causes, may well have contributed to the reason for the alleged market share loss that Seeley had suffered. That particular assertion, in my opinion, is no more than speculation and can be ignored.

309               Newtronics further submitted that there were other reasons for Seeley’s alleged loss of market share. Mr Seeley, in his cross-examination, acknowledged, for example, that fans “do occasionally fall off” and he estimated that there could have been as many as twenty per year. Mr Arnold also agreed that there had been complaints about fans “coming adrift” and “rattling”. Later in his cross-examination, Mr Arnold was asked to give an estimate of the number of fans that “may have come adrift.” Surprisingly, he answered saying:

“A very broad estimate – a thousand or so.”

310               Newtronics argued that if the combination of the three fires and the recall was the only, or at least the dominant, cause for loss of sales, one would have expected there to be an immediate and a dramatic loss. However, the evidence that was adduced on behalf of Seeley did not support such a proposition. Newtronics pointed to the fact that no market survey had been undertaken after the fires. Mr Arnold was questioned on this subject during the course of his cross-examination. He agreed that the customer recall list contained details of 3,575 customers who had been affected by the recall and he agreed that there had never been any formal market survey conducted by or on behalf of Seeley to ascertain the reaction of those customers. Mr Arnold said that there had been informal meetings and discussions with dealers but, as with the consumers, there had not been a formal market inquiry.

311               Newtronics also claimed that there was no objective way of knowing whether any loss of market share or any loss of sales were due to the recall or to other problems that related to Seeley’s product: perhaps the loss (if there was a loss) was due partly to one and partly to the other. Thus, said Newtronics, Seeley had failed to prove its case in so far as a loss of market share or a loss of sales was claimed. There was, submitted Newtronics, an abundance of evidence from discovered documents as well as from witnesses in the trial which described the poor performance and the poor service history of Breezair’s products. Newtronics argued that there was a lack of the evidence that was needed to establish the link between the alleged loss of sales and the alleged loss of market share and the three fires and the recall.

312               A report that was prepared for Seeley in June 1993 by Leo Burnett Connaghan and May vetted the findings of exploratory qualitative consumer research that had been conducted in Adelaide into the nature of the ducted evaporative air-conditioning market. One of its comments was to this effect:

“While there is moderate brand awareness, no air-conditioning brand has a strong image, and the market makes no distinction between brands in terms of acceptability or attractiveness.”

 

313               Seeley had also earlier obtained a marketing research report from “The Marketing Centre” in March 1992. That report recorded:

“In reviewing image attributes of leading brands, the brands which consumers had most difficulty in associating an attribute with, were Convair and Breezair. This was found both in South Australia and Victoria.

 

This suggests that the awareness and image-building of these two brands may not be as effective as that of competitors brands.” Emphasis in original

The reports offer some support to the attack that Newtronics made on Seeley’s claim to market leadership.

314               I have not separately referred to the submissions that were made on behalf of Cintro on the question of Seeley’s reputation. For the most part, they were a truncated version of Newtronics’ submissions which, I trust, I have adequately canvassed.

The Recall

315               Mr Arnold made the decision to recall all RF Sensortouch controllers on the evening of 17 February 1995. The recall was a large and expensive exercise for Seeley. The company established a recall committee (“the committee”) comprising senior members of its staff. Members of the committee urgently contacted the 146 Breezair dealers throughout Australia who had been selling rooftop airconditioners with RF Sensortouch controllers. Not only was it necessary to enlist the aid of the dealers in having them contact consumers and warn them, it was also necessary to ensure that the dealers knew that they had to stop selling and installing RF Sensortouch controllers. Contact with the dealers commenced during the evening of Friday 17 February 1995 and continued throughout the weekend of 18-19 February.

316               Consumers with RF Sensortouch units were advised to disconnect their airconditioners or to call in electricians, at Seeley’s expense, to do that. I accept that Seeley engaged electricians around Australia to attend at consumers’ premises to disconnect units from the electricity mains supply where that was necessary. However, because of the large number of consumers who were involved, and because Seeley did not have its own records of purchases (relying as it did on its dealers’ records) it was also necessary for Seeley to advertise the recall in the major markets of the southern states.

317               It was also necessary for Seeley, because of the volume of transactions, to engage temporary contract staff and to procure additional telephone lines so that it and its staff could deal with the numerous communications that the recall had generated.

318               Seeley had to arrange for its 3,575 consumers, as a matter of urgency, a method of operating their units without a remote control. To achieve this, it purchased simple “on/off” switches and despatched them to its dealers for installation at Seeley’s expense in the consumers’ units. I find that this was a reasonable item of expenditure and I also find that it was a reasonable and expected consequence of the fires that senior members of Seeley’s management team travelled around Australia, visiting dealers, explaining what had happened and seeking to reassure them about the safety of Seeley’s products. These visits took place in March and April 1995. Newtronics did not dispute the necessity and reasonableness of the decision by Seeley to recall all RF controlled evaporative airconditioners. Its witness, Mr Ramage, agreed in cross-examination that this type of fire was “about as serious as you can get”. Mr Fulton was, however, critical of the handling of the recall. In my opinion that was an unreasonable attitude to adopt. It smacks of the wisdom of hindsight. In my opinion, Seeley is to be commended for the speed with which it worked, putting the safety of its consumers at the highest level without regard to the effect that the recall might have on Seeley, its products or its reputation.

319               During the course of cross-examination, counsel for Newtronics put to Dr Beaton, and Dr Beaton agreed, that Seeley had only advertised the recall in newspapers in Western Australia, South Australia and Victoria. The nature of the cross-examination suggested that this was a criticism of Seeley’s conduct in that they should have advertised on a nationwide basis. Dr Beaton rejected that proposition, and in my opinion correctly so, for, as he pointed out, Seeley made calls (so far as it was aware) to every owner of a remote control unit, irrespective of the location of the unit. That was the information that had been conveyed to Dr Beaton and he accepted it, as do I. I therefore reject any suggestion that there was a need for advertising in States and Territories other than Western Australia, South Australia and Victoria. As Dr Beaton said of the advertising:

“But that was only one component of their strategy. They made calls to every single owner irrespective of their location, as I was informed, and every single dealer irrespective of their location.”

320               In his report, Exhibit A63, Dr Pedder addressed the question of the recall obligation. He came to the conclusion that Seeley’s conduct in implementing the recall “can only be considered as correct and responsible”. He came to that conclusion after commenting upon the fact that all three fires had involved installations that contained the new controller and he pointed out that problems of that type had not previously occurred. He went so far as to say that in the event that Seeley had become aware of the faults in the new controller design before the fires had occurred, recall of the airconditioners would still have been the correct and responsible action.

the quantification of seeley’s direct expenses

321               When these proceedings were instituted, the amount of Seeley’s claim was then quantified at about $17m. (The amount of the claim grew alarmingly, however during the course of Seeley’s final submissions). In answer to the claim of $17m , Newtronics made the following submissions:

·                   the financial accounts for Seeley for the 1996 financial year, the year following the fires, contained only a provision for a loss of $1.7m, the costs of the recall:

·                   that figure of $1.7M was also contained in the accounts for the following financial year;

·                   the amount of $17m was never reflected in the company’s accounts;

·                   Mr Arnold conceded that the figure of $17m had never been passed on to the company’s banker.

322               I do not suggest that these matters are irrelevant; on the contrary they could be quite material in affording some measure of additional evidence to the ultimate size of Seeley’s claim. However, in the final analysis, the question of whether Seeley suffered any losses and, if so, the size of those losses, will be for the Court to decide on the totality of the evidence. Newtronics did not suggest that Seeley’s failure to include the size of its claim in its accounts or its failure to inform its bank manager of the size of its claim could amount to some form of estoppel – nor could it. It did seek, however, to use these matters as issues in support of an argument that Seeley’s claims had been grossly inflated.

323               In his written opening, counsel for Newtronics said that:

“… there is little dispute as to the direct costs of the recall. It is approximately $1.7 to $1.8 million.”

In fact, Seeley’s financial manager, Mr Steele, had established a specific system to account for the direct expenses which, in Seeley’s opinion, were attributable to the recall. That system produced a figure of $1,754,477. Little, if any, challenge was made to this figure or to the amounts that contributed to it during the cross-examination of Seeley’s witnesses. It was not until Mr Lockwood was giving his evidence for Newtronics that the quantification of this figure was challenged. Mr Lockwood was of the view that the figure should be reduced by $299,547.

324               In my opinion, Mr Lockwood was wrong in advancing this proposed reduction. He had arrived at his figure by conducting a sampling exercise of some of the transactions where Seeley had spent money or incurred costs because of the recall. Mr McPharlin, Seeley’s accounting expert, had conducted a similar exercise, examining a total of 143 transactions. Mr Lockwood contented himself with examining only 123 of those transactions. He was satisfied that the remaining twenty – which happened to be the largest twenty – were accurate. That was his first mistake because he ignored the accuracy of those twenty transactions when he sought to apply the value of the errors, as he perceived them, in the 123 transactions, rateably to all transactions. His second mistake was his failure to investigate properly the records of Seeley that he was examining. If the information that he was given did not vouch a particular item of expenditure, he treated the value of that item as an error; he made no attempt to make further inquiries. I cannot rely on his methodology. I am not satisfied that there should be any reduction in the size of Seeley’s claim for the recall expense account. I allow the sum of $1,754,477.

325               Seeley included in its claim for damages, the wages that it paid to its staff where their work was attributable to the fires or the recall. Those expenses included the costs to Seeley for its research and development staff investigating the cause or causes of the fire and involving themselves in modifications to the design of the RF Sensortouch controllers. It also included the cost to Seeley for its research and development staff working on the recall as well as the cost to Seeley for its general staff working of matters attributable to the fires or the recall. Because of the fires and because of the work that was generated within Seeley as a result of the fires and the recall, I am satisfied and I find that it was necessary for Seeley to redirect the focus of its research and development to an investigation into the cause or causes of the fires. Work in the area of research and development was deferred or postponed so that Seeley’s personnel could devote the necessary amount of time and attention to the redesign of the controller and its modifications thereby ensuring safety in the future operations of the unit.

326               In my opinion, these claims are reasonable and relevant and I allow the figure of $378,397, as claimed, for the cost to Seeley of wages paid to its employees.

327               Seeley engaged a power electronics designer and manufacturer, Technical Components Pty Ltd, to design and implement modifications to the Newtronics RF Sensortouch controllers to make them safe. Design took place between March and July 1995 and the manufacture of the modifications lasted until December of that year. Initially, the price per unit was $29.48 but this was later increased to $36.73. It was necessary for Seeley to distribute the modified controllers and to engage electricians, at Seeley’s cost, to install them. Seeley paid an amount of $112,218 to Technical Components Pty Ltd for the work that it did in redesigning and producing the necessary modifications to the RF Sensortouch controller. That figure was not questioned by Newtronics and I allow it.

328               The final item of direct expense that was incurred by Seeley and claimed as part of its damages was $9894 for telephone charges. Numerous telephone calls were made by Seeley’s staff and agents to dealers, electricians and consumers. Mr Steele made a series of calculations to justify this claim and Newtronics has not challenged the figure. I therefore allow this sum. As a result, Seeley’s direct expenses can be quantified as follows:

·                   Recall expenses account	$1,754,477
·                   Staff time	$ 378,397
·                   Technical Components Pty Ltd	$ 112,218
·                   Telephone costs	$ 9,894 $2,254,986

329               I turn now to consider the nature and extent of Seeley’s indirect losses.

warranty extension

330               In an attempt to mitigate the losses that it suffered as a result of the fires and the recall, Seeley extended, by twelve months, its manufacturer’s guarantee to those consumers who were affected by the recall. The reasonability of the extension of the guarantee was not challenged by Newtronics. Its marketing expert, Mr Fulton, for example, accepted that the extension would have assisted in customer relations. Seeley has claimed against Newtronics an amount of $204,459, the costs incurred by Seeley in gratuitously offering its recall customers an extra twelve months on its manufacturer’s warranty. A total of 4,119 Breezair consumers were directly affected by the recall of whom 3,575 had already had installed RF Sensortouch controllers. The remaining 554 had purchased and accepted delivery of Breezair airconditioners but were awaiting the installation of the remote controllers.

dealer loyalty scheme

331               In July 1995, Mr Arnold decided to implement a dealer loyalty scheme. The object was to encourage dealers to remain with Seeley and to maintain sales. Experts from both sides recognised that it was important for Seeley to maintain a good relationship with each member in its dealer network and to keep their confidence and trust. Mr Arnold said, and I accept, that the feedback that he got from the dealers was that the company could not permit a similar problem to occur again. He said that his senior management had made an assessment that the company had come close to losing many of its dealers and that it was necessary to expend time and energy in building up the confidence of the dealers. In my opinion, such an assessment sounds quite reasonable and understandable and I accept it.

332               The dealer loyalty scheme was only available to those dealers who met designated sales targets. A dealer would accumulate points in order to reach certain agreed levels of sales; a sufficient number of points could gain for a dealer an expense free attendance at an overseas conference that had been sponsored by Seeley. Not all the witnesses in the field of marketing supported Seeley’s decision. Its expert Dr Beaton did, as did Newtronics’ witness Mr Fulton. Another of Newtronics’ witnesses, Mr Hillebrand expressed reservations but, on balance, it seems that it was a reasonable and necessary strategy for Seeley to adopt. The question remains, however, whether the extent of Seeley’s claim for recompense is too expensive.

333               Seeley has claimed the costs associated with three dealer conferences that it organised and paid for. They were held in the Maldives in 1996, Mauritius in 1997 and Fraser Island in 1998. Prior to the recall, it had not been Seeley’s practice to have annual conferences involving its dealers at a common venue. Rather, Seeley’s practice was to hold a low cost meeting in each State (or part of a State) at which the product range and other matters relating to the forthcoming season’s programs were explained to the dealers. The costs associated with such meetings usually only included the cost of a conference venue, a dinner and the travel cost of Seeley’s personnel. The average cost of those meetings was $61,059 per year. In quantifying its claim under this heading at $574,602, Seeley took the actual costs that were incurred by it for the three conferences in 1996, 1997 and 1998 and then deducted three times $61,059. Mr Doherty asserted in his evidence that he was the person who was responsible for the organisation of the Maldives conference, which, so he said, was planned long before the fires and the recall. In the head on collision between Mr Doherty and Mr Steele, Mr Arnold and others on this subject, I prefer the evidence of the Seeley witnesses.

334               There is, of course, no doubt that Seeley organised and paid for the three conferences: nor do I doubt Seeley’s bona fides in holding those conferences. My concern is whether these costs should be brought home to Newtronics. Seeley was in a most difficult position. It had to make sure that it maintained its dealer loyalty. I can well accept that the idea of a “paid holiday” for the dealers would be a practical and reasonable stratagem. I do not believe, however, that three such “holidays” with two of them held at overseas destinations were necessary. I would have thought that one rather splendid affair followed by a second, but less spectacular conference, both held in Australia, would have been sufficient. I have no exact figures to quantify those hypotheses but using a broad axe I would allow Seeley an amount of $180,000 under this particular heading of its claim.

additional marketing costs

335               Seeley increased its advertising and marketing expenditure after the fires and the recall. Newtronics, for its part, submitted that Seeley that failed to prove that it suffered any loss of sales as a consequence of the fires and the recall; it also submitted that there was no proof that there had been any loss of market share as a consequence of the recall. Mr Arnold said, and I accept, that he decided to increase advertising and marketing expenditure as a result of his discussions with his company’s dealers. They had said that this additional expenditure was necessary so that Seeley could do its best to maintain its market share. The dealers were of the opinion that the fires, the recall and the attendant publicity would make it difficult for the dealers and Seeley to maintain the rate of growth of sales and market share that Seeley had previously enjoyed. Mr Arnold was also of the opinion that the increased expenditure would help reassure the dealers. That, so it seems to me, is a reasonable hypothesis and I accept it. Seeley claimed that this increased marketing expenditure amounted to $1,715,338. However, those increased costs were incurred in the period commencing October 1995 and continued through to September 1999, a period that encapsulated four summers. I find it surprising that the fires and the recalls would have had such long term effects but Dr Beaton supported Seeley’s claim. He said in his report, Ex A97 at par 16.2:

“Expenditure between October 1995 and September 1999 on marketing the Breezair brand of $6,096,101 instead of $4,356,293, being what I would have regarded as normal for such a brand given its expenditure history prior to the events of early 1995. In my opinion, this additional marketing expenditure (in the order of $1,739,808 [sic] in excess of “normal”) was necessary in order to defend and restore the reputation of the Breezair brand in the market following the impact of the events of early 1995.”

336               Mr Fulton, who gave marketing evidence on behalf of Newtronics agreed, in principle, to the need for an “increased marketing campaign to assuage the dealers”. He agreed that it would be “a reasonable thing to undertake and that it would certainly help to “instil confidence in the dealer network”. Newtronics called four witnesses to give evidence on the subject of marketing and the effects of the fires and the recall on Seeley’s market share. They were Messrs Fulton, Hillebrand, Wegman and Ramage. Counsel for Seeley said in his written submissions:

“In almost all respects, the witnesses called by Newtronics came to agree with the analysis of Dr Beaton.”

337               I do not think that I could accept that statement without qualification, but it does remain the fact that I found Dr Beaton to be a most impressive witness and, for the most part, I am prepared to rely, substantially, on his opinions where they are at variance with the opinions of Newtronics’ witnesses. Having regard to the evidence from the complaints files and the SRRs, (which had not been made available to Dr Beaton) I cannot, however, accept that all increased expenditure on marketing was attributable solely or predominantly to the fires and the recall.

338               Mr Steele used Seeley’s contemporaneous business records to calculate the company’s expenditure on marketing Breezair domestic airconditioners throughout the years 1996 to 1999. Those figures, after making some necessary adjustments, show a clear increase in the amount spent on marketing but they also suggest that there was an earlier history of increased expenditure prior to the fires. The figures, as prepared by Mr Steele are as follows:

	1993	1994	1995	1996	1997	1998	1999
Actual Expenditure	719,470	825,806	1,115,445	1,814,467	1,843,035	1,923,370	1,788,873
Less Dealer Conference	-100,226	-66,381	-54,844	-344,130	-265,494	-148,155	-504,734
	619,244	759,425	1,060,601	1,470,337	1,577,541	1,775,215	1,284,139
Normalised Expenditure	567,884	773,218	1,098,168	998,164	1,084,726	1,180,120	1,128,884
Extra Expenditure				472,173	492,815	595,095	155,255	1,715,338

 

339               I do not think that it would be fair to place all this increased expenditure on Newtronics. Once again, it is necessary to use a broad axe. I put to one side the increase in expenditure in 1995 for that was the year of the fires. But expenditure in marketing increased from $567,884 in 1993 to $773,218 in 1994, an increase of about 36 percent. If I factor in an increase of this size as a normal incremental cost in the advertising and market expenditure it would suggest that the size of Seeley’s claim should be commensurately reduced to a figure of $1,097,816. Allowing for other reasons for increased marketing expenditure, I will discount that figure and allow Seeley $700,000.

340               The costs that Seeley incurred in its attempts to mitigate its losses which should be allowed to it by way of damages, are therefore:

·                   $ 204,459	Warranty extension
·                   $ 180,000	Dealer loyalty scheme
·                   $ 700,000 ·                   $1,084,459	Additional marketing costs

economic losses

341               Seeley’s claims in respect of its economic losses that have and will result from the fires and the recall are based, in the first place, on its past economic losses in respect of losses of sales for the period March 1995 to September 2000. Additionally, it seeks to be compensated for its future economic losses for the period commencing in September 2000 and, continuing, so it would seem, indefinitely. At its highest, Seeley seeks as much as $35.7m for its past losses and $89.5m for its future losses. Both these figures are predicated on the premise that Seeley would have, but for the fires and the recall, achieved and held, in perpetuity, a market share of 50 per cent – a proposition that I soundly reject.

342               Following the fires and the recall, Seeley’s market share for fixed evaporative airconditioners suffered a steady decline. Its market share fell from 38.6 per cent in February 1995 to 29.9 per cent in December 1998 and has remained at about that level ever since. The fixed evaporative airconditioning market is a small market that is made up of only a few manufacturers. Several witnesses from both sides acknowledged that it is a market that is characterised by reasonably rapid rates of technological innovation and change and that it is a market in which there are strong competitors who are continuously pursuing product development and product innovation as a means of gaining market share. The marketing experts for both parties agreed that the capacity to innovate and to be first in the market with a new product is of vital importance in maintaining or enhancing market share.

343               Dr Beaton identified three consequences of the fires and the recall, each of which, in his opinion, materially contributed to Seeley’s loss of market share. In the first place, negative publicity would have had an adverse effect on intending purchasers. That publicity would have been exacerbated by the comments and conduct of rival dealers. In the second place, the fires and the recall would have affected Seeley’s ability to attract new Breezair dealers. Finally, there was a long-term effect due to the diversion of Seeley’s resources away from research and development for a period of two years or so. This diversion allowed rival manufacturers to overtake Seeley in important areas of product development. Thus Mr Arnold said, and I accept, that had it not been necessary to divert the company’s resources, he was of the opinion that Seeley would have been able to release its new domestic rooftop airconditioner model (the EV model) some two years earlier than its actual release. There are, however, other factors, adverse to Seeley’s interests, that must be taken into consideration.

344               Seeley had, prior to the fires, engaged from time to time in market research but it did not cause any such research to be undertaken after the fires. I find that, on the balance of probabilities, such research could have been quite material to Seeley’s claims in these proceedings. After all, Seeley has asserted a loss of business reputation as well as a loss of market share as a result of the fires and the recall. In my view, the applicant’s claim for damages has been impeded by the absence of a market survey just as it has been impeded by its failure to call any of its distributors. They would have been a meaningful source of information about the effect of the fires and the recall on the sales of Seeley’s domestic rooftop evaporative airconditioners. There is, in my opinion, another matter of importance that must be taken into account when considering a quantification of Seeley’s future losses. Mr Arnold conceded that the gap in the costs between evaporative and refrigerated airconditioning was closing. This, of course, means that the former advantage of cheaper evaporative airconditioners was diminishing in importance.

345               Using Seeley’s market share in February 1995 as a base, it can be accepted that Seeley was then at risk, because of the fires and the recall, of suffering a loss of market share and a consequential loss of sales commencing in February 1995. The difficulty is to determine how long those losses continued as a result of the fires and the recall. I can readily accept that the fires and recall would have had a deleterious effect, but in reaching that conclusion, I have to factor in a discount factor and make some allowance for the evidence of the lay witnesses who gave evidence on behalf of Newtronics. For example, Mr Dullard said that he continued to sell units to customers who had not raised the issue of the recall. Mr Doherty claimed that the recall had had no effect on the consumer market; he went so far as to say that there was no concern within Seeley’s management that the recall had effected the Breezair market share. That, of course, is at odds with the consistent evidence of the Seeley witnesses whose evidence I prefer. Mr Riegel-Huth said that Seeley was always struggling to meet demand, suggesting therefore, that there had been no loss of sales at all.

346               Although the consequences of the fires and the recall may not have been the sole contributing cause to changes in Seeleys’ business results, nevertheless they did, in my opinion, have adverse effects on Seeley’s market share; they also generated some negative publicity and they directed resources away from the applicants research and development division. I am also of the opinion that the fires and the recall would have created a measure of difficulty for Seeley in its attempts to attract new dealers. These are all matters for which Seeley is entitled to be compensated.

347               Seeley has claimed that at the time of the fires, its market share was on the rise and Mr Hillebrand, one of Newtronics marketing experts, agreed with that claim. Seeley said that it expected its share of the market to increase to 50 per cent. That may have been its hope and even its expectation, but I cannot accept it as a probability for the purposes of calculating its damages. In fact, I am not even prepared to accept that Seeley would have held on to its 38.6 per cent share of the market if the fires had not occurred. Seeley entered the rooftop market in 1983. In the twelve years before the fires its share of the market rose and fell because of the vagaries of commercial life. There is no reason to suppose that there would have been a material beneficial change in circumstances if the fires had not occurred. The most that Seeley can hope for would be a calculation of losses based on its market share as at February 1995 and then reasonably discounted to allow for contingencies.

348               It has been inherent in Seeley’s submissions that the consequence of the fires and the recall is that its losses will continue in perpetuity. This is a paradoxical submission for it suggests that, no matter the quality of Seeley’s product, it will never regain its rightful place in the market. I cannot accept such a gloomy forecast. Over six years have already past since the fires occurred. If Seeley’s product is as good as it claims, it would have by now, in my opinion, clawed its way back to its rightful position. I consider that more than enough time has elapsed to allow the consumers to forget the tragic events of February 1995 and to allow Seeley to prove to its dealers and the community that it has a safe and viable product.

349               A calculation of past loss (ie a calculation based on a market share of 38.6 per cent and not the predicted share of 50 per cent) was prepared by Mr McPharlin. He calculated the loss of sales from February 1995 to September 2000 by subtracting the figures for actual sales of Breezair units in that period from the predicted figure for the sales that would have occurred but for the fires. The number of sales that were said to have been lost in that period has then been multiplied by the contribution per unit lost and the results have been aggregated to give the following figures:

Year	Lost Sales		Contribution Rate	Loss
1995/1996	122	$680			$82,960
1996/1997	818	$721			$589,778
1997/1998	3,569	$842			$3,005,098
1998/1999	4,317	$738			$3,185,946
1999/2000	4,223	$717			$3,027,891
Mar-Sep 2000	3,182	$717			$2,281,494
Total					$12,173,167

350               I have already noted that these figures should incur a reasonable discount to accommodate various commercial contingencies. There are a host of such matters: strong competitors, consumer reaction to differing brands and the closing gap between the cost of refrigerated and evaporative airconditioning are three of the more obvious.

351               It must be recognised that discounting for “commercial” contingencies has not achieved universal support. Davies J in Amann Aviation Pty Ltd v Commonwealth (1990) 22 FCR 527 at 537 said:

“See also TCN Channel Nine Pty Ltd v Hayden Enterprises (1989) 16 NSWLR 130, in which a submission was rejected that, in the assessment of damages for breach of contract, there should be imported a discount for vicissitudes such as is commonly allowed in the assessment of economic loss in personal injury cases.

 

Nevertheless, as the circumstances of commercial life are complex and varied, issues of chance and contingency may play a part.”

On the other hand Sheppard J in the same case said at 548:

“It remains to say that the difference in the approach which I have adopted from that adopted by my brothers lies in my conclusion that is appropriate to discount the amount which the contractor might otherwise have been awarded because of a number of contingencies.”

352               In Canvas Graphics Pty Ltd v Kodak (Australasia) Pty Ltd [1995] FCA 470 the Full Court did not disturb the trial Judge’s use of “commercial contingencies”, whilst in Gibbs Holdings Pty Ltd v MMI [2000] QCA 524 at [115-6] an award was reduced for various commercial contingencies. In the English case of Hall v Meyrick [1957] 2 QB 455 Ashworth J concluded that “the more the contingencies, the lower the value of the chance…of which the plaintiff was deprived”, whilst in Cullinane v British “Rema” Manufacturing Co Ltd [1954] 1 QB 292 Evershed MR at 304 (with whom Jenkins LJ agreed) upheld that part of an assessment of damages that allowed a deduction for “due allowance to commercial contingencies” (see generally McGregor on Damages 16^th Edition at par 382). On balance, I remain convinced that this is an appropriate case to make an appropriate allowance for “commercial contingencies”.

353               However, additionally, I think that the base of $12,173,167 should be reduced. I would have thought that a manufacturer, such as Seeley, would have completely recovered from the aftermath of the events of February 1995 within a period of three to four years. Naturally there will be those with long memories, particularly competitors and opposition dealers: some small allowance can be made for them. With that qualification however, I would reduce Mr McPharlin’s base of $12,173,167 to (say) $6.8m (which would roughly equate to a loss for four years) and then further discount that figure by 15 per cent. On this basis I would allow $5,780,000 for past economic loss and nothing further for future economic loss.

354               Subject to calculations on questions of interest, which could exceed $6.2M, and subject to hearing the parties on costs, I have calculated Seeley’s losses as follows:

·                   $2,254,968.00	Being the costs of the recall and associated expenses
·                   $1,084,459.00	Being indirect costs
·                   $5,780,000.00 $9,119,427.00	Being Seeley’s economic loss
·                   - $ 217,718.98 $8,801,708.02	Being the agreed set-off

355               I will defer entering judgment to allow counsel to check my calculations and to do their calculations of interest so that, if possible, an agreed final figure can be reached.

I certify that the preceding three hundred and fifty-five (355) numbered paragraphs are a true copy of the Findings and Reasons herein of the Honourable Justice O’Loughlin.

Associate:

Dated: 21 December 2001

Counsel for the Applicant:	Mr RJ Whitington QC with Mr MF Blue QC
Solicitor for the Applicant:	Thomson Playford
Counsel for the First Respondent:	Mr G Hevey
Solicitor for the First Respondent:	Cornwall Stoddart
Counsel for the Second Respondent:	Mr T Graham QC with Mr P Marzella and Mr S Le Grand
Solicitor for the Second Respondent:	Russell Kennedy
Counsel for the Cross-Respondent (Cigna Insurance):	Mr B Bongiorno QC with Mr D Masel
Solicitor for the Cross-Respondent (Cigna Insurance):	Norris Coates

Dates of Hearing:	17-26 July 2000, 1-10 August 2000, 14 August 2000, 18 August 2000, 21-23 August 2000, 29 August 2001, 1 September 2000, 5 September 2000, 4-6 December 2000, 8-12 December 2000, 19-22 December 2000, 8-19 January 2001, 29 January – 21 February 2001, 23-28 February 2001, 30 May – 1 June 2001
Date of Findings and Reasons:	21 December 2001