Bekaa Dairy Products Pty Ltd trading as Ultimate Dairies v Sepak Industries Pty Ltd

1. [1]

   Bekaa Dairy Products Pty Ltd trading as Ultimate Dairies, formerly Top Fit Sheeting Pty Ltd (hereinafter referred to as “Bekaa”) appeals against a judgment of Magistrate Funston in the Local Court given on 19 July 2019. The appeal relates also to an interlocutory decision made on 10 May 2019. The defendant, Sepak Industries Pty Ltd (hereinafter referred to as “Sepak”) was the plaintiff in proceedings commenced in the Local Court on 21 May 2018.

2. [2]

   Sepak claimed an amount of a little under $40,000 alleged to be owing as monthly payments pursuant to a contract between the parties made on 2 March 2017. Under that contract Sepak was to provide a milk pasteurisation machine with installation and commissioning services. Bekaa was to pay a deposit of $30,000 upon placement of the order with payments of $8,000 per month due at the end of each month. Clause 7.1 provided that a financial charge of 3% per month would be applied to any overdue payment.

3. [3]

   The machine was installed and monthly payments were made up to the end of January 2018. Thereafter no further payments were made, and that led to the filing of the proceedings. Bekaa denied that Sepak had provided the machine in accordance with the specifications in the offer. Its complaint in that regard was more particularly identified in a cross-claim filed against Sepak which pleaded that it was an essential term of the agreement that the machine have an output of 5000 litres per hour of milk pasteuriser, and that the machine was not meeting that output. The cross-claim went on to plead that Sepak had failed to repair and/or modify the machine to the agreed output amount, and that Ultimate Dairies had expended money and would expend further money to increase the machine’s capacity to what had been specified in the contract.

4. [4]

   In a judgment delivered on 19 July 2019 and entered on 22 July 2019 the learned Magistrate gave judgment in favour of Sepak in the sum of $59,625.65, dismissed the cross-claim, and ordered Bekaa to pay the plaintiff’s costs on an ordinary basis until 30 January 2019 and on an indemnity basis from 31 January 2019. In an interlocutory decision made on 10 May 2019, the Magistrate rejected a report of Christopher Fox date 15 June 2018 tendered by Bekaa.

5. [5]

   In its amended summons, Bekaa seeks leave to appeal from the whole of the Magistrate’s decision, seeks that the statement of claim filed in the Local Court be dismissed and that there be judgment on Bekaa’s cross-claim in the sum of $61,419. In the alternative, Bekaa seeks that the proceedings be remitted to the Local Court for determination in accordance with four directions specified in the amended summons.

6. [6]

   The grounds of the appeal contained in the amended summons are these:

7. [7]

   Subsequently, in written submissions, Bekaa abandoned ground 2 and, at the hearing, abandoned ground 3.

8. [8]

   Sections 39 and 40 of the Local Court Act 2007 (NSW) provide:

9. [9]

   Ground 1 involves an interlocutory judgment and each of grounds 4, 5, 6 and 7 involves a question of mixed law and fact. In relation to all grounds, leave is required.

Grounds of appeal

1. [10]

   Counsel for Bekaa said that grounds 4 and 5 were dependent on the success of ground 1. It is convenient, therefore, to deal with these grounds together.

2. [11]

   The Fox report was dated 15 June 2018. The author was said to be M Hucknall, and Mr Chris Fox was said to have reviewed the report.

3. [12]

   The report was connected with an email sent by Mr Hucknall to Bekaa on 15 June 2018. That email estimated the cost of two options to upgrade the Regen heat exchanger to deliver the 5000 litres per hour required. The first option was estimated to cost $39,000 and the second $21,450. There was a qualification in these terms:

4. [13]

   In its cross-claim Bekka sought to obtain the cost of option 1.

5. [14]

   At the Local Court hearing, the report was objected to by Sepak on a number of grounds. First, it was submitted that the report was served outside the time given by the Court for the filing of expert evidence including being filed outside the deadline under a guillotine order. Secondly, it was submitted there was no acknowledgment of the expert witness Code of Conduct with respect to the report. Thirdly, Mr Fox’s expertise was challenged. Fourthly, the report was said not to comply with r 31.27 Uniform Civil Procedure Rules 2005 (NSW) in that facts and assumptions were not set out, nor were reasons for the conclusions given.

6. [15]

   The argument about the admissibility of the report extended over 28 pages of transcript. At the conclusion of the argument the Magistrate said this:

7. [16]

   At the hearing of the appeal, Bekaa submitted in its written submissions that the Magistrate erred in excluding the report for four reasons:

8. [17]

   In Welker & Ors v Rinehart & Anor (No 6) [2012] NSWSC 160, Ball J at [38] summarised six criteria from the judgment of Heydon JA (as his Honour then was) in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 at [85] with respect to expert evidence:

9. [18]

   In my opinion, the Magistrate was correct to reject the report of Mr Fox although, in the light of the extensive arguments put to him, his reasons were economical. However, it is clear from the passage in his Honour’s judgment set out at [15] above that the report was rejected because his Honour did not consider that the opinion expressed was based on the witness’s specialised knowledge. His Honour could have reached that view for either or both of two reasons. It may have been because Mr Fox did not have expertise in the relevant area or, if he did have the expertise, the opinion expressed was not based on that expertise.

10. [19]

    In my opinion, whichever was the basis, his Honour was correct.

11. [20]

    In relation to Mr Fox’s expertise, nothing in the brief description of his background suggests that he had expertise in providing an opinion about a milk pasteurisation machine. The report simply said this about him:

12. [21]

    Subsequent to the Magistrate’s decision refusing admission of the report into evidence, Mr Fox was cross-examined because of a further report he had prepared in response to an expert opinion on behalf of Sepak. He said that he had never installed or commissioned a milk pasteurisation machine, and he said that the vast majority of companies for which he had worked were in the brewing industry.

13. [22]

    Mr Cornish of counsel for Bekaa submitted that there was no evidence to suggest that there is a unique science of milk pasteurisation as compared to brewing, so that it could not be said that Mr Fox did not have the relevant expertise. However, it was Bekaa who was putting forward Mr Fox as an expert who could opine about milk pasteurisation. There was a clear onus on it to establish what the area of expertise was, and to show that Mr Fox had specialised knowledge of that area. The only evidence of Mr Fox’s expertise at the time his report was tendered was what was contained in the very brief summary of his experience in the report (set out at [20] above).

14. [23]

    Mr Hucknall, who was said to be the author of the report, was said to have,

15. [24]

    It is not clear what part of the report had Mr Fox’s input. In circumstances where the expertise of both authors of the report was doubtful, it was important that the report identify clearly who provided the conclusions so that the link could be seen between the opinion expressed and the specialised knowledge: Dasreef at [42].

16. [25]

    The opinion expressed in the report was this:

17. [26]

    The report does not comply with the provisions of r 31.27 because facts and/or assumptions upon which the opinion is based are not set out, nor is the reasoning of the author of the report set out. The issue in the case was whether the pasteurisation machine achieved an output of 5000 litres per hour. The report simply records an observation that the equipment was unable to maintain sufficient pasteurisation temperature when producing more than 2000 l/hr of product. No records from the machine were referred to nor put in evidence in that regard.

18. [27]

    In that way, there is a failure to demonstrate that any opinion expressed is based on Mr Fox’s specialised knowledge which was not, in any event, proved.

19. [28]

    There are additional reasons on the basis of which the Magistrate could have found that the report was inadmissible, from the arguments put to him but not dealt with by him in his reasons.

20. [29]

    First, Bekaa had been ordered to file expert evidence by 27 November 2018. It did not do so. An extension was granted to 15 January 2019 but with a guillotine order attached. Bekaa failed to file Mr Fox’s report by 15 January. The matter was relisted on 24 January 2019 and Bekaa sought leave to serve three affidavits, presumably the affidavits of Katie Chedid, Jamie Chedid and George Chedid all sworn on 27 January 2019. No application was made for leave to serve any expert evidence nor Mr Fox’s report in particular. The report was served, therefore, without leave having been given to do so.

21. [30]

    Rule 31.28 provides that a report not served in accordance with the rule (and here, that means, not served in accordance with directions made) is not admissible without the leave of the court. Subrule (4) provides that leave is not to be given unless the court is satisfied that there are exceptional circumstances. Bekaa did not put forward anything to the Magistrate nor on this appeal to suggest that there were exceptional circumstances.

22. [31]

    Whilst I do not overlook the fact that these were Local Court proceedings involving claims on either side of less than $50,000, nor do I overlook the provisions of ss 56 and 58 of the Civil Procedure Act 2005 (NSW), compliance with court orders, and in particular guillotine orders, is not to be thought of as optional. Where a guillotine order is made, a party requires the leave of the court to rely on the pleading or evidence concerned. A failure to comply with a guillotine order needs an explanation for the failure: Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27 at [103]. Mr Cornish accepted that no explanation had been given for what he described as the “clearly egregious delay” in the circumstances.

23. [32]

    Secondly, Mr Fox at no stage acknowledged that his report had been prepared in accordance with the Expert Witness Code. Bekaa initially submitted that the report was not prepared for the purposes of litigation and did not, therefore, need to comply because of the terms of s 31.23(2) and (3). However, that submission was abandoned at the hearing of the appeal.

24. [33]

    This report was prepared some three weeks after the proceedings commenced. If it was sought to be relied upon as an expert report, the expert was required to comply with the Code of Conduct. Significantly, Mr Fox swore an affidavit apparently on 1 March 2019 where he said he had been provided with a copy of the Expert Witness Code and agreed to be bound by it. He then went on to annex another report which he prepared on 28 February 2019. He said nothing in that affidavit about his principal report which is the subject of this ground of appeal.

25. [34]

    In Hodder Rook & Associates Pty Ltd v Genworth Financial Mortgage Insurance Pty Ltd [2011] NSWCA 279, Young JA (Beazley JA and Handley AJA agreeing) set out at [57] three principles which the trial judge in that case employed to reject expert evidence in circumstances where the expert had not read the Code of Conduct and adopted it before preparing the report. The third such principle was this:

26. [35]

    Justice Young said of this at [63]:

27. [36]

    In Welker & Ors v Rinehart & Anor (No 6) [2012] NSWSC 160, Ball J said at [35]:

28. [37]

    It is significant in this regard that the report was prepared on 15 June 2018, the orders for the service of expert evidence were made in late 2018 and January 2019, the hearing was in May and July 2019, and yet nothing was done to ensure that Mr Fox explained that he had prepared or approved the report in accordance with the Code of Conduct. This was said by Bekaa to be an oversight. Although counsel for Bekaa offered to call Mr Fox to give evidence concerning his adoption of the Code for this report, the Magistrate and counsel then appear to have focused on other aspects concerned with the expert report, and Mr Fox was not called to give that evidence.

29. [38]

    The end result is that, although having the opportunity to do so in his affidavit of 1 March 2019, Mr Fox did not say that he had prepared his report of 15 June 2018 in accordance with the Code, and he has not subsequently done so. Since I have found for other reasons that the report was correctly rejected, nothing flows from any failure (if there was a failure) of the Magistrate to permit Mr Fox to give that evidence ex post facto about his compliance with the Code.

30. [39]

    Finally, the report can scarcely be seen as an independent report by an expert seeking to assist the court. The document was prepared in circumstances where the company for whom Mr Hucknall and Mr Fox worked was providing a quotation to solve the problems Bekaa claimed to be having with the machine. The report was clearly prepared in circumstances where Mr Fox was seeking to be given a contract to rectify what was perceived to be the problems with the machine.

31. [40]

    It follows that the report of Mr Hucknall and Mr Fox was correctly rejected.

32. [41]

    Although Mr Cornish said that success on grounds 4 and 5 was dependent on success on ground 1, I will say something about other submissions made in relation to these grounds.

33. [42]

    Bekka submitted that the intent of ground 4 was to contend that the Court ought to have found a variation of the contract to provide for pasteurised milk output of 5000 litres per hour at 92°, rather than 85° as was specified in the initial written contract. Bekaa submitted that the Court’s rejection of the Fox report was material to its rejection of Bekaa’s case in this regard.

34. [43]

    Bekka submitted that the Magistrate failed to direct himself properly to the question of whether the pasteuriser did in fact possess the requisite capacity, although it accepted that the Magistrate did consider certain evidence which addressed the issue of capacity at 92° output.

35. [44]

    In his judgment the Magistrate said this regarding the evidence of the flow rate:

36. [45]

    The evidence amply supported the Magistrate’s conclusions. Sepak’s expert, Mr Malcolm Curley, said in his report at paragraph 131 that he did not observe anything which showed that the flow rate was below 5000l/h. In addition, there was a failure by Bekaa to produce relevant documents notwithstanding a notice to produce issued on 9 October 2018. The reason given for the non-production of documents was that the paperless data recorder malfunctioned. That was said to have happened “recently” prior to Mr Jamie Chedid swearing his affidavit of 27 January 2019.

37. [46]

    Mr Chedid gave this evidence in cross-examination:

38. [47]

    Although, somewhat inconsistently with his other evidence, he said that he had documents and could bring the documents in to support his case, the significance of this evidence was that the data recorder was working for at least a year during which it was alleged that the pasteuriser was not meeting the 5000 litres per hour output.

39. [48]

    Mr Chedid gave evidence that there was a second screen called a PLC screen. Unlike the data recorder, this screen was not malfunctioning. Bekaa only put into evidence one photograph of that screen taken when the pasteuriser was not in production. He gave this evidence:

40. [49]

    There was evidence that spreadsheets were prepared at the end of each day showing how much yoghurt was produced, and that in turn would show how many litres of milk were used in the production. Those spreadsheets were not put into evidence as Mr Chedid admitted in cross-examination as follows:

41. [50]

    When Mr Curley’s evidence concerning his observations of the flow rate are considered, together with the failure of Bekaa to produce the documents identified in the cross-examination of Mr Chedid, the Magistrate was not in error in reaching the conclusion that Bekaa failed to prove that the machine did not meet the promised output.

42. [51]

    The claim for damages in ground 5 was based on the higher of the two figures quoted in the report of Mr Hucknall of 15 June 2018. In the circumstances where Mr Fox’s report was correctly rejected, and where the Magistrate was correct to find that the plaintiff had not proved the breach of the agreement, the issue of damages does not arise. It must be noted, however, that no justification is shown for choosing the more expensive of the two options quoted by Mr Hucknall. Further, those figures were qualified by the statement in Mr Hucknall’s quote set out at [12] above.

43. [52]

    Even if the other grounds had been successful, it could not have been found on the balance of probabilities that the measure of damages was the amount claimed.

44. [53]

    I would reject grounds 1, 4 and 5.

45. [54]

    The issue of the interest rate amounting to a penalty appears to have arisen because Bekaa sought to argue the point when it had not been pleaded. The Magistrate’s determination of this issue was as follows:

46. [55]

    Bekaa submitted at the hearing of the appeal that:

47. [56]

    The agreement between the parties provided in clause 7.1:

48. [57]

    The amounts of $30,000 and $8,000 in that clause had originally read $40,000 and $10,000 respectively. The reduction in those amounts was agreed after a negotiation. It is significant also that other changes were made to the contract presented to Bekaa by Sepak.

49. [58]

    The issue before the Magistrate arose in this way. Paragraph 12 of the statement of claim said this:

50. [59]

    Nevertheless, the defence filed by Bekaa pleaded at paragraph 9:

51. [60]

    On 26 February 2019, one week before the trial commenced, Bekaa filed a document entitled “Case summary” in which the following appeared:

52. [61]

    No application was made by Bekaa at the outset of the trial to amend its defence to plead a penalty.

53. [62]

    Rule 14.14 UCPR relevantly provides:

54. [63]

    There is no basis for the assertion that the denial of paragraph 12 of the statement of claim by paragraph 9 of the defence identified the issue associated with penalty interest. Any reasonable person would only understand the denial as being a denial that Bekaa owed Sepak the amount claimed. The suggestion that somehow it was Sepak’s fault for not having requested particulars of the denial is without any merit.

55. [64]

    The paragraph contained in the “Case summary” does not identify an issue concerned with penalty. It simply asserts that the clause in the agreement was void and unenforceable. That statement is confusing because the clause is principally concerned with the amount of the instalment payments and the amount of the deposit. Even if, however, that is a reference only to the finance charge of 3% per month, no basis is identified for the assertion that the clause is void and unenforceable. Certainly, no reference is made to 3% amounting to a penalty.

56. [65]

    In his opening, counsel for Bekaa said that a claim would be made that the 3% charge was a penalty. It was said that the penalty had been identified two days after the “Case summary” was served. Counsel for Sepak objected to penalty being an issue in the case on the basis that it was not pleaded. He said that if that issue was to run there would be a lot of evidence his client would need to put on to test if it was reasonable pre-estimate of the loss. Although the objection was taken, no application was made to amend.

57. [66]

    Counsel for Bekaa submitted on the appeal that there had been significant evidence placed before the Court so that it could inform itself of relevant matters arising on the penalty case. I was taken to a portion of the transcript where the principal witness for Sepak was giving evidence. He was cross-examined and the following exchanges occurred:

58. [67]

    That passage shows that as soon as it became clear that counsel for Bekaa was cross-examining Sepak’s witness on issues to deal with penalty, objection was taken in line with the objection that had been taken at the opening. Bekaa still made no application to amend.

59. [68]

    In my opinion, if the issue of penalty was to be raised, it needed to have been pleaded and notified at a sufficiently early stage to allow Sepak to obtain whatever evidence it needed in relation to the matter. I do not consider that identifying the issue some three business days prior to the start of the trial was adequate notice. Even in the absence of an application to amend, no explanation was given about why the matter had not been raised at an earlier time: Aon at [103] and [112].

60. [69]

    In that regard, what Sackville AJA said in Arab Bank Australia Ltd v Sayde Developments Pty Ltd (2016) 93 NSWLR 231; [2016] NSWCA 328 at [8] is pertinent:

61. [70]

    In Arab Bank, McDougall J (with whom Gleeson JA agreed and Sackville AJA agreed with added reasons) surveyed the High Court’s approach to the question of contractual penalties. His Honour held that in Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; [2005] HCA 71 the High Court accepted that Lord Dunedin’s speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 set out the principles in relation to penalties in contractual stipulations and that those principles expressed the law in Australia. Similarly, in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30, the High Court followed those principles.

62. [71]

    The relevant part of Lord Dunedin’s speech (at 86-87) is as follows:

63. [72]

    Justice McDougall then summarised the propositions emerging from the judgments of those forming the majority in Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28:

64. [73]

    Even if the issue of penalty ought to have been permitted to be aired, Bekaa led no evidence to justify its assertion that the finance charge of 3% per month amounted to a penalty. Although it submitted that a court was in a position to judge the matter for itself, in reliance on what was said by Bergin J (as her Honour then was) in Capital Securitisation Limited v Jammal [2007] NSWSC 1073 at [98], the position in the present matter does not seem to me to be nearly so clear. A finance charge of 3% per month does not leap out as being obviously a penalty. As McDougall J said in Arab Bank at [74]:

65. [74]

    Two other matters should be mentioned. The first is that it is clear that Bekaa bore the evidentiary and persuasive onus on the matter: Paciocco at [167]. Secondly, because the matter must be determined at the time the contract was made, it is significant that this was a contract made between two commercial enterprises where the customer sought and obtained variations to other aspects of the contract, including amounts payable under the very clause now challenged. In that regard, in Arab Bank, Sackville AJA said at [7]:

66. [75]

    In my opinion, the Magistrate was correct to reject Bekaa’s arguments on penalty.

67. [76]

    I would reject these grounds of appeal.

Need for leave

1. [77]

   In Ashi Pty Limited v Karasco Investments Pty Ltd [2009] NSWSC 780 I had to consider what must be shown for leave to be granted in respect of an appeal under s 40 of the Local Court Act. I drew attention to what was said in Coulter v R (1988) 164 CLR 350 by Deane and Gaudron JJ at 359, and what was said in Chapmans Ltd v Yandell [1999] NSWCA 361 by Fitzgerald JA (Mason P and Davies AJ agreeing) at [10]-[12]. I concluded at [34]-[35]:

2. [78]

   The plaintiff submitted that the point over and above error was the adoption of the wrong principle with respect to the admission of Mr Fox’s report. It was submitted further that the issue the Magistrate adopted in relation to the Code of Conduct manifested a perennial confusion which arises in relation to the application of that Code of Conduct.

3. [79]

   I do not consider that either of these matters is of significance. I do not consider that the Magistrate adopted a wrong principle, nor do I consider that there was any confusion in relation to the need to rely on the Code of Conduct. The only confusion appeared to lie with Bekaa in failing to consider that Mr Fox needed, if he wished to rely on the report without regard to the Code of Conduct, to adopt the Code of Conduct in an appropriate way, notwithstanding that the report was prepared at an earlier time.

Conclusion

1. [80]

   I cannot conclude this judgment without expressing my considerable regret that the parties have expended so much effort, time and money in relation to a modest Local Court claim. The hearing before the Magistrate extended over four days and, as counsel agreed at the hearing of the appeal, the costs far exceed the amounts in issue. The problems that gave rise to the grounds of appeal were entirely the fault of Bekaa in ensuring appropriate compliance with the Rules for an expert’s report, and in relation to proper pleading concerning the asserted penalty provision, so that the true issues were identified. None of this was consistent with the parties’ obligations under s 56 of the Civil Procedure Act.

2. [81]

   I make the following orders: