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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Deepak Fertilizers &Anor v Davy McKee (UK) London Ltd [2002] EWCA Civ 1396 (12 July 2002)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2002/1396.html
Cite as: [2002] EWCA Civ 1396
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- At about 1800 hours local time on the 30th October 1992, an explosion occurred in the appellants’ methanol plant at Taloja, near Mumbai in India which, fortunately, did not cause death or any serious injury. This appeal is from the dismissal by HHJ Toulmin CMG QC of the appellants’ claim for damages arising out of that explosion. After protracted interlocutory litigation, the appellants’ claim was restricted to a claim in breach of contract. The judge held that there had been a breach of contract, but that the appellants had not satisfied him that the explosion would not have happened anyway. The appellants’ grounds of appeal are that the judge did not fully or adequately identify the breach, and was wrong in his conclusion as to causation. The respondents cross-appeal on the ground that the judge was wrong in his conclusions as to breach of contract, and by a respondents’ notice support his conclusion as to causation on grounds other than those identified by the judge. The judge concluded that, had he found that the appellants’ claim was well founded, he would have awarded damages of RS 105,999,364. On the respondents’ counterclaim for unpaid invoices, the judge gave judgment in their favour in the sum of £230,847. The appellants appeal against the judge’s conclusions as to the amount of damages had they been successful, and against the judgment on the counterclaim. The respondents in turn cross-appeal against the judge’s conclusions as to damages in the event that the appeal is successful.
- Methanol (methyl alcohol) is manufactured from natural gas, carbon dioxide and water. The process used by the appellants to convert these substances to methanol was devised by ICI Chemicals and Polymers Ltd (ICI). The respondents were licensed by ICI to market that process. They in turn granted a sub-licence to the appellants to use that process. The terms of that sub-licence form the basis of the appellants’ claim.
- In simple terms, the process involves passing a mixture of natural gas, carbon dioxide and water in the form of steam over a copper catalyst thereby producing methanol. The gas mixture, known as syngas, is heated and passed under pressure into a converter in which there are tubes through which the gas passes, surrounded by the catalyst material comprising balls of zinc coated with copper. The syngas rises to the top of the converter through the tubes. It then emerges from the top of the tubes and passes down through the catalyst producing methanol and steam, together with other by-products including methane. The chemical reaction is exothermic, which means that it produces heat. The reaction itself can only take place if the syngas as it emerges from the top is at a sufficiently high temperature which needs to be above 210ºC. The process of forcing the syngas up the tubes surrounded by the catalyst means that the syngas is further heated, reducing the need for pre-heating to a level which will in itself enable the reaction to take place. The optimum temperature is 260º C as the syngas emerges from the top, resulting in a temperature of 270º C as it leaves the bed of the catalyst. Temperatures above 290º C degrade the catalyst.
- After leaving the converter, the products of the catalytic reaction are then passed through a heat exchanger, to which I shall return, in order to cool them. The pure products of the process, that is methanol and steam, are then cooled to liquid form. The final step in the production process is for the liquid methanol to be distilled from the water in order to remove any remaining impurities.
- However, the process is not completely efficient in the sense that all the syngas is converted to methanol and steam. A significant proportion of syngas remains unconverted and includes pure methane. These remaining products of the process, now cool, are carried round what is called the loop and passed back into the converter through the heat exchanger. They provide the cooling for the gases emerging from the converter and are in turn reheated to a level which enables them to be fed into the syngas as it is forced into the converter and back into the manufacturing process so as to maximise the use of the syngas.
- To prevent a build up of methane there is a release valve in the loop which enables the methane to be drawn off.
- At the time that the process was sub-licensed to the appellants, ICI had not appreciated that the calculations that they had made in relation to the heat transfer in the converter were wrong. As a result the temperature of the gasses leaving the converter was higher than ICI had calculated, as was the temperature of the syngas returning to the converter through the heat exchanger, and hence the temperature of the syngas as it passed over the catalyst That, in itself, was not originally thought to create any danger. But it did degrade the catalyst.
- The design parameters of the converter within which it should operate were between 210ºC and 290ºC for the reasons I have referred to above. There was an upper limit of 325ºC. The appellants’ converter consistently ran hot. Temperatures in excess of 300ºC were regularly experienced when the plant tripped out, that is when the compressor feeding the syngas into the converter malfunctioned, so that there was no circulation of syngas, and the temperature could rise to 380-390ºC.
- Although it was not appreciated by anyone at ICI or the respondents, at the time that the plant was accepted by the appellants on the 5th February 1992, a reaction known as methanation could occur at the temperatures experienced in this converter. Methanation is a process by which, as a result of a reaction with a catalyst, in this case probably minute particles of iron, excess methane could be produced. This process is itself exothermic, and would be uncontrolled in the design of this converter. ICI eventually suspected that this process might be occurring in the appellants’ converter in August 1992; but the respondents were not informed. In circumstances to which I shall return, the appellants continued to run the plant into the autumn of 1992. The probability is that the explosion occurred in the lower portion of the converter, where methanation generated excessive heat which weakened the walls of the converter until they failed, causing the explosion.
- During the commissioning period of the plant, between October 1991 and February 1992, ICI and Davy had been aware that the plant had been running at higher than the design temperatures. They addressed these problems in relation to a plant which was to be constructed in Trinidad. Two solutions were proposed. First, in that plant, which unlike the appellants’ converter, had metal rods inserted in the top of the tubes in the converter, those rods should be shortened. Second, a by-pass should be designed to take the loop gases round the heat exchanger controlled by a heat sensor in the top of the converter. These proposals were made in March 1992, but the appellants were not made aware of either of them. I shall return to the history in more detail later.
- The claim was originally brought against ICI in 1993, based on wide ranging allegations of breach of duty. ICI’s parent, ICI plc, and Davy were each subsequently joined, and again wide ranging allegations both in tort and of breach of contract were made.
- Preliminary issues were identified in order to limit the ambit of the claims. These ultimately came before this court, whose decision is reported as Deepak Fertilisers & Petrochemical Corporation –v- ICI Chemicals and Polymers Ltd & Others [1999] 1 Lloyd’s Rep. 387. The court held that the contractual relationship between the parties was such that the only claim which the appellants were entitled to make was against the respondents for breach of Article 10.5.3 of its contract with the respondents namely a failure to inform the appellants of the solutions adopted for Trinidad, and that the appellants were precluded from claiming any consequential damage, including loss of profits. The claims against ICI plc were accordingly dismissed. Those against ICI were settled amicably.
- By a contract dated the 23rd November 1988, which took effect on the 28th April 1987, ICI licensed the respondents to design, construct and commission plants using the ICI process, using all the relevant patent rights, and giving to the respondents all sufficient information necessary for a competent contractor to complete a plant using the ICI process. The latter information was to include not only all the technical information available to ICI at the time of the contract, but also all further technical information which came into the possession of ICI and which it was free to dispose of, thereafter. The process required the use of catalytic material purchased from ICI, as to which ICI gave a one year guarantee, in the sense that the cost of a new charge of catalytic material would be reduced pro rata in the event of the previous catalytic material failing to continue to meet its agreed performance level within one year of the original charge.
- The agreement between the appellants and the respondents was made on the 22nd May 1987, and was described in the preamble as a contract for:
- Article 3 of the contract set out the respondents’ obligations. Article 3(1) provided:
- The term of the contract upon which the appellants rely is Article 10.5.3 which was a mutual covenant clearly intended to ensure that the various licensees and sub-licensees of the process should share any benefits resulting from or obtained as a result of designing, constructing, commissioning or running individual plants using the process. It provided:
- An “improvement” was defined by Article 1.13 in the following terms:
- As I have already said, the plant was accepted by the appellants on the 5th February 1992, despite the fact that temperatures in excess of those stipulated in the design had been experienced throughout the commissioning period. However, these were not critical in contractual terms so far as acceptance of the plant was concerned. They were, however, clearly of concern both to the respondents and ICI. The appellants’ plant was the second plant which had been developed under licence by the respondents. The first had been in Assam. In that plant a different miscalculation had been made, resulting in the input temperature to the converter being less, so that the problem with the heat transfer had not been identified. The respondents were, however, at the time of the take over of the plant by the appellants, developing a third plant in Trinidad. From the documents it is clear that both the respondents and ICI were determined to ensure, if they could, that the problems with the appellants’ plant were not replicated. Towards the end of February 1992 a review was carried out on the data obtained from the appellants’ plant. In a fax from ICI to Mr Forbes of the respondents, Mr Mansfield of ICI said on the 4th March 1992:
- It should be noted that the design for the Trinidad plant included rods inserted into the top of the tubes in the converter which were intended to improve the efficiency of heat exchange within the converter. Those were not part of the design of the appellants’ plant; and no complaint is made that they should have been.
- Following further discussions and technical evaluation, Mr Abbott of ICI faxed Mr Weedon of the respondents on the 18th March 1992 in the following terms:
- The same day, Mr Weedon faxed to Mr Mansfield and Mr Abbott the following:
- The notes of a meeting between ICI and the respondents of the 30th March 1992 in relation to the Trinidad plant show as follows:
- It is common ground that none of this information was passed to the appellants. They continued to experience overheating problems, together with other problems which are irrelevant to the present dispute. As a result of the latter, the appellants’ plant was shut down at the beginning of June 1992 and was not restarted until September 1992. In a fax dated the 17th June 1992 Mr Khungar, the appellants’ Vice President, Projects, informed the respondents of the shut down by fax, which included the following paragraph:
- This fax included, amongst the matters of complaint, the following:
- On the 7th July 1992, there was a meeting between ICI and the respondents at which the problems of high temperatures at the appellants’ plant were again addressed, in particular the complaint made in the fax to which I have just referred. By a further fax of the 14th August 1992, ICI informed the respondents as follows:
- At paragraph 120 of the judgment the judge said:
- He rejected the appellants’ claim that the knowledge that they obtained of the risk of methanation was an advance amounting to an improvement for the purposes of Article 1.13.
- The appellants submit that the judge was right to conclude that there was a breach of contract in relation to both the core rods and the by-pass on the 20th March 1992. They submit, however, that the judge was wrong in relation to the risk of methanation and that the respondents were obliged to inform the appellants of the possibility of methanation of which they were apprised in the fax of the 14th August 1992. They submit that that knowledge constituted an “advance” in that it became part of the know how, namely confidential knowledge, which was acquired by the respondents. They submit that it is difficult to see how, otherwise, the word “advance” could be given any separate and distinct meaning. The fact that it was confidential gave it the necessary proprietary quality.
- The respondents submit that the information about the core rods was irrelevant. The core rods played no part in the design of the appellants’ converter and were not relevant to its efficacy. As far as the by-pass was concerned, that was merely a design suggestion which could not be said to amount to an improvement “of a proprietary nature”. Those words required the improvement to have some marketable quality. The suggestion of a by-pass was no more than a standard engineering solution requiring no special expertise or knowledge. As for the risk of methanation, that was merely information in which there was no property and could not, accordingly, amount to an improvement within the meaning of Article 1.13.
- I have no doubt that the judge was right to conclude that the information in relation to the core rods and as to the by-pass constituted improvements of a “proprietary nature”. The amendments to the rods and the provision of the by-pass were both design features developed consequent upon an assessment of the performance of the plant and which were specific to the particular engineering and construction features of the plant and the process. They therefore formed part of the know how obtained by the respondents and constituted modifications of a proprietary nature. Neither were “off the peg” solutions which were not specific to the parameters of the plant or the process itself. The judge was clearly right to conclude that there was a breach of contract.
- Ingenious though the appellants’ argument is in relation to the risk of methanation, I do not consider that it can properly be described as an “advance ... of a proprietary nature”. Whilst I accept that the passing of information in confidence can carry with it a proprietary quality, I do not consider that it can fall within the contractual definition of “improvement” unless it is information which has been translated into some design, construction, or other feature affecting the running of the plant. The risk of methanation may be the reason or stimulus for the development of an improvement; but it cannot, in my judgment, be an improvement in itself.
- For the sake of completeness I should add that the respondents had, albeit somewhat faintly, argued that they had discharged their duty to inform the appellants. The evidence upon which they relied was that of their main witness Mr Forbes who had direct contact with the appellants throughout the commissioning period. He gave evidence that he had mentioned the possibility of using a by-pass to one of the appellants’ engineers in a conversation in February 1992. The judge, in my view rightly, rejected the argument that this conversation, even if it had taken place, could amount to a communication “of the details of the improvement” required by Article 10.5.3 of the contract.
- There were three issues in relation to causation. The first was whether the information relating to the modifications to the core rods would have had any effect on the appellants’ position, bearing in mind the fact that their design did not use core rods. The second was whether, even if the appellants had been given the information about the by-pass, they would have taken any steps to install one before the explosion. The third was whether the appellants had continued to run the plant at a time when it was or should have been so apparent to them that the plant was in danger of seriously overheating that they were reckless, thereby breaking the chain of causation between the breach of contract and the explosion.
- As to the first, the judge concluded that the failure to provide that information was unlikely, in itself, to have stimulated the appellants to take any steps prior to the explosion. He was clearly of the view that the most that the appellants would have done would have been to ask whether or not there was any other step that could be taken in relation to the design of their plant. The proper answer would have been to fit a by-pass. It is accordingly the failure to inform the appellants about the by-pass which is the critical breach of contract.
- As to this second issue, the judge came to the conclusion that even if the appellants had been informed of the possibility of a by-pass when they should have been in March 1992, they would nonetheless not have installed one before the explosion. The appellants submit that this was not a finding that was open to the judge on the evidence and in the way that the case was presented.
- The evidence on behalf of the appellants was given by Mr Kotwal, Vice-President Operations. In his statement, he referred to the fact that the plant was shut down between June and September 1992. By then, it was clear that the catalyst’s life had been substantially shortened by the high operating temperatures. On the 17th June 1992, Mr Khungar, as I have already said in paragraph 22, had faxed the respondents requesting as follows:
- Despite this request for assistance, the respondents, in their reply, made no mention of the possibility of installing the by-pass.
- In his statement, Mr Kotwal said that whatever may have been the position before:
- In examination in chief, however, he expanded on this statement to explain that this would have been the appellants’ preferred course had they been made aware of the extent to which the catalyst had by that time degraded, and that there was a possibility of methanation. His evidence was that, even in the absence of either of those pieces of knowledge, he would certainly have recommended the fitting of a by-pass had he been informed that that was an available solution to the overheating problem, and that there was no reason to believe that his advice would not have been accepted. The plant was shut down in any event for three months; there was no disincentive to carrying out the work: and the appellants had replacement catalyst in stock.
- In fact what happened after the plant was restarted in September 1992 was that the same problem that had been experienced before shut-down recurred, complicated by the fact that the catalyst had degraded to such an extent that the plant was not producing methanol at the stipulated daily rate. Constant complaints by the appellants eventually resulted in ICI sending a fax on the 6th October 1992 acknowledging that the catalyst had indeed become degraded as a result of the high operating temperatures. It continued:
- The appellants replied on the 14th October 1992 as follows:
- ICI replied by fax on the 19th October 1992, accepting that there had been excess temperatures which needed investigation, and said:
- It may be that the reference to the 23rd October was a mistake for the 23rd November because in the next fax from ICI, of the 21st October 1992, ICI stated that they would not be able to visit before the 23rd November. The appellants were seriously concerned and urged an earlier meeting. They pointed out in a fax that on the 23rd October 1992 their production rate had dropped to 60% of the contract rate, and that high temperatures continued to be experienced after trips which only reduced slowly after the plant resumed normal functioning. On the 29th October 1992, the day before the explosion, the appellants again faxed ICI stating that they were making all efforts to keep the plant running. On the same day ICI faxed the respondents stating ironically that the solution to the appellants’ problems was a by-pass.
- Mr Kotwal’s evidence as to what he would have advised the appellants and what the appellants would have done on receiving such advice was not challenged by the respondents either in cross-examination or in argument, even though the respondents’ counsel in opening had said:
- Further, the evidence of Mr Kotwal was not the subject of any questions from the judge indicating that he in any way doubted or was concerned about its reliability.
- In dealing with this issue the judge referred to the paragraph in Mr Kotwal’s statement which I have already set out above. He went on:
- The appellants submit that these were not findings that were open to the judge in the absence of any challenge by the respondents to Mr Kotwal’s evidence or of any submission to that effect. They submit that the judge, in any event, misunderstood the evidence of Mr Kotwal in that he failed to appreciate that the advice that Mr Kotwal would have given to the appellants as to the fitting of a by-pass was not dependant upon any knowledge of the condition of the catalyst or the risks of methanation. Mr Kotwal said that those were matters, had he known about them, which could have resulted in his advising that there be a new converter as he set out in his statement. The by-pass was a modification which he would have advised could have been made readily and easily during the course of the shut down between June and September 1992. The only possible complication would have been the need to replace the catalyst; but as the judge recognised himself, the appellants already had replacement catalyst in stock. The judge would appear to have overlooked the fact of the shut down. He could not otherwise have expressed his conclusions in the way he did in paragraph 211.
- The respondents submit that the judge clearly considered this aspect of the case with care due to the fact that it ultimately determined the result of the action. He was entitled to conclude that he was not satisfied by the appellants’ evidence on a matter in respect of which the burden of proof was on them. His conclusions were based on an assessment not only of the evidence but on the way in which Mr Kotwal gave that evidence. In these circumstances, this court, it is submitted, is in no position to conclude that the judge was wrong, still less to substitute its own findings for those of the judge. The respondents’ counsel accepts that he had not challenged Mr Kotwal’s evidence and had accordingly made no submissions to the effect that the evidence could be disbelieved or otherwise treated as unreliable. But, it is submitted, that did not mean that the judge was obliged to accept that evidence.
- The general rule in adversarial proceedings, as between the parties, is that one party should not be entitled to impugn the evidence of another party’s witness if he has not asked appropriate questions enabling the witness to deal with the criticisms that are being made. This general rule is stated in Phipson on Evidence 15th Edition at paragraph 11-26 in the following terms:
- The caveat in the last sentence that I have quoted, is important particularly in the context of the Civil Procure Rules in which, by Part 32 r. 1(3) the court is given a power to limit cross-examination. Nonetheless, the general rule remains a valid rule of good practice and fairness. The judge of fact is, however, in a different position from the protagonists. So long as a matter remains clearly in issue, it is the judge’s task to determine the facts on which the issue is to be decided. However it seems to me that where, as in the present case, an issue has been identified, but then counsel asks no questions, the judge should be slow to conclude that it remains an issue which has to be determined on the basis of an assessment of reliability or credibility without enquiry of the parties as to their position. The judge should be particularly cautious of doing so if he or she has not given any indication of concern about the evidence so as to alert the witness or counsel acting on the side calling the witness, to the fact that it may be that further explanation should be given in relation to the issue in question.
- At the end of the day each case will depend upon the way in which the issue arose, and was dealt with in evidence. The present case is a good example of the way unfairness can arise if a judge makes an adverse finding in the absence of a very secure basis for so doing. At the end of Mr Kotwal’s evidence the appellants were entitled to conclude that his evidence on this particular issue had been accepted by the respondents at least to the extent that it was not in dispute. It is clear that the judge in his judgment had misunderstood the difference between the passage in Mr Kotwal’s statement in which he referred to a new converter, and his evidence in chief which was directed to the insertion of a by-pass. He also appears to have overlooked the fact that the plant was shut down in any event between June and September 1992, and that there was no inhibition on replacing the catalyst, in the sense that the appellant had replacement catalyst in stock in any event. Further, there was no evidence from the respondents to suggest that they or ICI would have attempted to dissuade the appellants from inserting a by-pass until there had been further investigation if they had been pressed by the appellants to do so. Had the appellants appreciated the judge’s state of mind as expressed in the judgment, further questions could have been asked of Mr Kotwal to clarify the position; and it may be that the issue would have been explored in cross-examination with Mr Forbes. None of that occurred because at the end of the cross-examination of Mr Kotwal, the matter no longer appeared to be in issue.
- In my judgment, in the light of the foregoing, the judge’s conclusions as to causation cannot, in this respect, be upheld. Although one can readily understand, from the exchange of faxes during October 1992, that there was at least a possibility that ICI or the respondents would have sought to dissuade the appellants from taking any steps such as the insertion of a by-pass until after they had the opportunity to come and examine the plant, there was no evidence to that effect other than the faxes. I do not consider that that possibility could justify the conclusion, in the absence of clear evidence to that effect, that had the appellants been told about a by-pass at least at the time that they notified the respondents of the shut down on the 17th June 1992, they would not have followed up that suggestion. Whilst accepting that this court has not had the advantage of hearing and seeing Mr Kotwal giving evidence, I consider that in the circumstances of this case and the way in which the evidence was presented it was not open to the judge to come to the conclusion that he did.
- In my judgment, the only proper finding on the evidence in this respect was that the appellants had established that had they been informed, as they should have been, of the modification of fitting the by-pass, that modification would have been carried out, as a matter of probability, during the shut down. Had that by-pass been inserted at that time, it was effectively common ground that the overheating problem would have been resolved at least to the extent of ensuring that the methanation problem which caused the explosion would not have occurred.
- This was the aspect of the respondents’ case on causation upon which the respondents themselves concentrated their evidence. Essentially the respondents’ argument was that the appellants continued to run the plant in the face of such overwhelming signs of the plant malfunctioning that their actions were reckless in the sense that they were outside the parameters which could be expected of operators of plants such as this to an extent which broke the chain of causation and became the sole effective cause of the explosion. The judge concluded otherwise.
- Detailed evidence was given to the judge about the way in which the plant was operated during the period from September 1992 to the date of the explosion. Experts were called on both sides. It was perhaps surprising, as the judge himself noted, that in the face of the express allegation as to the way in which the plant was being operated, the only factual witness called on behalf of the appellants was Mr Kotwal, who was not the person in day to day charge of the running of the plant. Nonetheless, it is clear that there was enough raw material from the data provided to enable an assessment to be made of the way in which the plant was operating, in particular in the hours leading up to the explosion. As the judge found, there is no doubt that the plant was being run abnormally, in other words in a way which made no economic sense, throughout the period from the start up in September 1992. From then onwards, the plant operated with increasing inefficiency. Abnormal temperature profiles were developing in the catalyst bed, and there was clear evidence of a build up of methane, both from the production of excessive water, and the need for purging of excess methane through the release valve. Further, readings of methane levels themselves confirmed that there were significant increases in methane production.
- The most significant evidence related to the 30th October 1992 itself. The data showed that between 0800 hours and 1700 hours that day, water content increased from 20% (the norm) to 39%. Between 0330 and 1330 the percentage of methane gas measured at the inlet into the converter increased from 5.22% to 22.7%, clearly as a result of the fact that at 0330 there was a substantial differential between the inlet percentage of 5.22% and the outlet percentage of 8.25%, indicating the creation of excess methane. And there was a significant build up of temperature in one quadrant of the converter from the end of a trip which lasted from 0515 to 0830. This resulted in a temperature of 335ºC in the critical area at 1800 at the time of the explosion.
- The experts were all agreed that these figures showed that the converter was operating well outside its design parameters and was producing excess methane, which was ultimately the cause of the explosion.
- The judge set out in significant detail the evidence relating to the operation of the plant in September and October 1992, and the evidence relating to its behaviour on the 30th October 1992, together with the expert evidence called by both parties. In dealing with his conclusions, the judge said as follows:
- The respondents submit that the judge’s assessment of the evidence was wrong. They submit that the evidence of their experts Mr Duffield and Mr Pettman was such as to lead inexorably to the conclusion that the signs, at least during the period between 0330 and 1800 hours, were such that any reasonably competent plant operator should have appreciated that the plant was malfunctioning to an extent which should have caused them to shut it down. It was further submitted that if that had been done, by at the latest, 1330 hours on the 30th October 1992, the excessive heat build-up and the quantity of methane which caused the explosion would have been prevented. In support of that argument, we were taken in detail through the data, and the evidence of the experts, including the evidence of Mr Nageswaran, the appellants’ expert, about whose evidence, the respondents submit, the judge should have had considerable scepticism. His evidence was to the effect that in the absence of any knowledge of the risk of methanation, those running the plant at the time could not and should not have had any concern that there was an imminent danger of catastrophe.
- The appellants, on the other hand, submit that the conclusions of the judge were justified on the basis that, in the absence of any knowledge that there was a risk of methanation, they were entitled to wait and see how matters progressed. They point to the fact that a temperature had been achieved at 0030 hours on the 30th October of 404ºC without any apparent adverse consequences. Even though that had been at a time when the data relating to water and methane production were not outside previously experienced parameters, the operators of the plant could not be said to have been shutting their minds to a possibility of imminent danger to the plant. Even if they could be criticised, their actions could not properly be categorised as reckless.
- The judge, in my view, correctly directed himself as to the approach in this type of case which was set out in the judgment of Hobhouse LJ in County Ltd –v- Girozentrale Services [1996] 3 All ER 834 at 857. The respondents could only succeed on this issue of causation if they could establish that the appellants acted in reckless disregard of the relevant risks. The background seems to me to be all important. The appellants had been, in effect, required by ICI to continue to operate the plant even though on any sensible assessment, it was operating uneconomically and outside its design parameters. Both those factors were known to ICI. The high temperatures which were experienced during the afternoon of the 30th October 1992 were not outside the experience of those operating the plant. The maximum recorded temperature was 335ºC, significantly below the temperature experienced earlier in the day, and significantly below temperatures experienced on numerous occasions before. The difference on the critical day was the build up of methane. While that was undoubtedly an abnormality which could and should have caused someone concern, it was only of significance in the context of the explosion if the operators had appreciated that there was a risk of methanation, that is the exothermic reaction caused by a catalytic effect. ICI and, through them, the respondents, were aware of that possibility in August 1992. That information was not passed to the appellants. It may be that the operators on duty at the time, should, as competent plant operators, have had concerns that something, even though unknown to them, might create a real danger to the plant, and taken steps to shut the plant down. But that is a far cry from concluding that they recklessly disregarded a relevant risk. There was no evidence before the judge which could have justified the conclusion that the plant operators should have suspected, let alone known of, a risk of which ICI itself only became aware in August 1992. In these circumstances, I do not consider that the judge’s assessment of the evidence can be said to have been wrong.
- The appellants claim damages under three heads:
- This is for the sum of RS105,989,364, being made up of RS80,971,000 as the cost of construction of the new converter, and RS25,018,364 for the cost of the first charge of catalyst. There is no dispute that if, as I have held, the respondents are in breach of contract, and causation is established, the appellants are entitled to the cost of reconstruction. The only dispute has been about their liability to pay for the first charge of catalyst.
- The basis of the appellants’ case was that, had the by-pass been inserted, the new catalyst required at that time would have been supplied pursuant to the catalyst guarantee. The respondents argued that the appellants had failed to mitigate their loss by not seeking to obtain the catalyst for the new converter free of charge from ICI, or at a reduced charge, to reflect the fact that they would have been so entitled had the by-pass been inserted.
- The judge rejected the respondents’ argument. He did so on the basis that the respondents had not cross-examined any of the appellants’ witnesses to this effect nor had they submitted any evidence in support of their contention. In my judgment the judge was entitled for this reason to conclude that the appellants should recover the full sum claimed under Claim A.
- As originally pleaded, this claim was in two parts, a claim for RS223,931,000 representing interest on a financing package which was not being covered by revenue for the fifteen month period of reconstruction between October 1992 and January 1994, and a claim for wasted overheads. The appellants do not pursue the latter before this court.
- The interest claim was supported by little in the way of documentation. The basis of the claim was set out in three documents, a letter of the 23rd April 1992 from the Industrial Development Bank of India, a calculation of the debt to equity ratios of the appellants at the 31st March 1992 and the 31st March 1993, and a calculation of the weighted average costs of the debt. As far as the letter was concerned, this merely set out the appellants’ proposed project costs, including the methanol plant and the proposed means of financing it. It was not in itself a contractual document setting out the respective obligations of the bank and the appellants. Not surprisingly, the respondents pressed for disclosure of the company’s own documentation from which it should have been possible to evaluate the validity of the claim. Disclosure was grudging and incomplete. It became apparent that whatever may have been the original terms of the financing arrangements, these were restructured in 1993. The company’s accounts showed that no interest was paid in respect of those financing arrangements for the accounting year 1992 to 1993. The documents relating to the accounting year 1993 to 1994 provided no evidence which would enable the court to determine the extent to which any sums paid by way of interest related to the methanol plant.
- The judge held that the evidence was insufficient to enable him to be sure on the balance of probabilities that any sum was paid by way of interest which was in any way attributable to the plant. He concluded that the appellants’ disclosure was simply inadequate. I agree.
- This claim was based upon the proposition that the replacement converter required a greater catalytic charge. The appellants’ case was that despite the increase in size, the replacement converter had, since commissioning, only been able to produce on average over 13 monthly periods the amount of methanol which the original converter had been designed to produce in a year. It was therefore submitted that the increased cost of the additional catalytic material represented a continuing loss to the appellants. The judge, however, in rejecting this claim noted that no evidence had been produced other than the mere fact of the life of the catalytic material which would enable him to assess the extent to which it could properly be said that the additional cost represented a loss. There was no evidence as to the efficiency of the plant as a whole to enable the judge to evaluate the extent to which that additional cost represented a level of inefficiency which could provide a secure basis for the claim for damages. In my judgment the judge was entirely correct to conclude that in the absence of such evidence, the appellants had not established that the replacement converter was more expensive to run than the original converter.
- The counterclaim fell into two parts. The first was for the sum of £50,000 due under the contract which was effectively admitted by the appellants.
- The second relates to five invoices, two relating to the period before the hand over of the original converter to the appellants, and three relating to the period after the explosion when the respondents undoubtedly did carry out investigations into the cause of the explosion. The appellants at no time admitted that they were liable to pay any of these invoices. The only evidence that the respondents led was the invoices themselves, and the fact that they had not been queried on receipt by the appellants. The judge concluded that in the absence of such objection taken at the time, the respondents were entitled to conclude that subject to the overall issue of liability the invoices were accepted. He went on to say that it was for the appellants to put the matters in issue, not merely on the pleadings but by leading evidence which put the issues before the court.
- In doing so, the judge wrongly reversed the burden of proof. The appellants had put in issue their liability to pay the invoices in their pleadings. It was accordingly for the respondents to take appropriate steps to call evidence to prove not only that work was done in accordance with the invoices, but that the appellants were liable to pay.
- I would accordingly allow the appeal and give judgment for the appellants on the claim for RS 105,989,364 plus interest, and reduce the sum recoverable on the counterclaim to £50,000 plus interest.
- With one qualification, immaterial to the result, I agree with the judgment of Latham LJ which I have seen in draft.
- The qualification relates to whether, in the context of this contract, an advance in knowledge which has not been translated into some design, construction, or other feature affecting the running of the plant could ever come within the words “other advances patentable or unpatentable of a proprietory [sic] nature”. In principle it seems to me that such knowledge could fall within those words, although I accept that in most cases such knowledge would be unlikely to have any practical utility until applied in the way suggested by Latham LJ.
- However that may be, I am not persuaded that the information disclosed by ICI to Davy in the fax dated 14 August 1992 can be described as “knowledge” for this purpose. The concluding paragraph of that fax read:
- In that context the suggestion that methanation could be responsible for the temperature rise appears to me to have had the quality of an untested hypothesis rather than knowledge.
- I agree, and I wish only to add a few words in relation to the respondents’ argument that the chain of causation was broken by a new intervening event, namely the recklessness of the plant operators during the hours leading up to the explosion.
- As Latham LJ has showed, Mr Kotwal and his staff at Deepak knew nothing about the risk of methanation which had started to feature in ICI’s thinking from August 1992 onwards. Mr Duffield, an expert witness for the respondents, was to tell the judge that he had never heard of methanation occurring in a converter using the ICI low pressure process except in the context of the Deepak plant. Indeed, if anyone had asked him during 1992 whether methanation was possible in such a converter, he would have probably said that it was not, and this appeared to have been the received wisdom at the time.
- He agreed that in the absence of a suitable catalyst methanation could not occur within the converter, and that methane by itself was regarded as an inert in the converter loop. He also agreed that methanation was the only possible cause of a temperature which might threaten the integrity of the vessel, apart from a potential excursion of high pressure.
- The evidence showed that Mr Kotwal had performed a calculation, with whose accuracy the respondents agreed, which had satisfied him that the integrity of the converter vessel was safe up to a temperature of 384ºC. On the assumption that this calculation was accurate, and on the further assumption that those responsible for the operation of the Deepak converter had been told, or understood, that methanation was not a possibility in this converter, Mr Duffield agreed that it would have appeared to the operator that there was no immediate danger to the vessel from the temperatures that were being recorded during the hours leading up to the explosion, although there was significant potential danger.
- He accepted that in these circumstances there was a judgment call to be made by the plant operator as to whether to continue with the pressurisation and to see whether the plant stabilised on the one hand, or whether he was to stop pressurising on the other.
- Although Mr Wilmot-Smith drew our attention to other evidence which showed that Mr Duffield would have expected an experienced plant operator to have called for certain exercises of re-analysis to be done (of the loop circulating gas, for example, or the crude methanol water content), it appears to me that the judge was entitled to rely on Mr Duffield’s evidence as a reason for rejecting the respondents’ case that the appellants acted recklessly in not shutting down the plant before the explosion occurred. That the judge did rely on Mr Duffield’s evidence in this respect is clear not only from what he said in paragraph 143 of his judgment (which Latham LJ has set out in paragraph 57 of his judgment), but also from paragraphs 145 and 146 of his judgment, in which he summarised the effect of Mr Duffield’s evidence on this point.
- In these circumstances I find it impossible to say that the judge was wrong to decide that the chain of causation was not broken by the plant operators’ acts or omissions during the final critical hours of the converter’s life.
- For these reasons, and for the reasons given by Latham LJ, with which I agree, I agree with the order he proposes.
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM TECHNOLOGY & CONSTRUCTION COURT
HHJ TOULMIN CMG QC
Strand, London, WC2A 2LL | ||
B e f o r e :
LORD JUSTICE LATHAM
and
MR JUSTICE HART
____________________
| DEEPAK FERTILIZERS & PETROCHEMICAL LTD | Appellants | |
| - and - | ||
DAVY McKEE (UK) LONDON LTD | Respondents |
____________________
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Richard Wilmot-Smith QC (instructed by Berrymans Lace Mawer, London) for the Respondents
____________________
AS APPROVED BY THE COURT
Crown Copyright ©
Lord Justice Latham:
The Plant
The Problem
The Solution
The Claim
The Contractual Position
“i. Supply of process licence and know how, basic engineering and supervision of detailed engineering,
ii. Procurement services for input equipment, and
iii. Supply of supervisory personnel
for the establishment of their 300 MTPD (metric tonnes per day) Grade AA Methanol on the terms and conditions hereinafter stipulated.”
“Supply of Process Licence for the PLANT:
DAVY hereby grants DEEPAK the non-exclusive rights and a licence for the patented and unpatented know how presently owned by or in possession of DAVY or which may be available to DAVY in future by way of IMPROVEMENTS covering the PROCESS to design, construct (and/or have designed or constructed) operate and maintain the PLANT according to PROCESS to manufacture therein 300 MTPD methanol per day of 24 hours.”
“For a period of 7 years from the EFFECTIVE DATE of this CONTRACT, if either DAVY or DEEPAK shall invent, make, discover, control, process, acquire or be aware of any improvement, such a party shall unless and to the extent that it shall be restricted by the terms and circumstances in which it is in a position to communicate the improvement forthwith, communicate the details of the improvements to the other party and ensure (subject to such terms and circumstances as aforesaid) that the other party shall receive full and sufficient licence, authority, information and assistance thereon and in relation thereto in order to enable it to use the improvement”
“IMPROVEMENT:
Shall mean any innovation, improvement, modification, and other advances patentable or unpatentable of a proprietory [sic] nature of directed or related to the PROCESS which does not change the basic character of the PROCESS, and does not in the opinion of the disclosing party, constitute a major technological breakthrough.”
The history as it relates to the alleged breach of contract in more detail
“Following the review carried out by ICI Katalco on the operating data of the Deepak Methanol plant it is clear that the actual heat transfer coefficient observed in the tube cooled converter is higher than that used by ICI Katalco for the design. The consequence of this for Deepak is that the converter temperatures are higher than desired, but given the robustness of the catalyst in other plant situations, it may not significantly affect catalyst life. By-product formation at Deepak is also higher than expected at this early stage of catalyst life but it is expected that with further discussion on analytical techniques, full achievement of Federal AA Grade specification will be achieved. No further action in respect to Deepak is at present required.
Modification to the Caribbean Methanol Company’s converter is however necessary. There are three options:
(1) Fit an interchanger by-pass
(2) Cut the core rod length to 30% of design.
(3) Re-design the top distributor.”
“CMC “(The Trinidad Plant)” Tube Cooled Converter Design.
Following discussions relating to the possible variability in actual heat transfer performance in the converter we have come to these conclusions:
1. The length of the core rods should be reduced so that they extend for only 40% of the reduced bed of catalyst. They are required to extend for a length of 2.951 meters below the tops of the tubes.
2. We strongly recommend that a bypass facility is installed on the converter feed gas side of the interchanger. This is not expected to be used, but is a precautionary measure to cope with extremes in certain parameters. (e.g. very high catalyst activity, low circulation rate in early catalyst life)....”
“Subject: CMC Converter Design/Loop modifications.
We acknowledge receipt of your fax of 18/3/92 on the above subject and respond to your points as follows
(1) We will arrange for the core rods to be modified to give a length of 2.915 below the tops of the tubes.
(2) We will install an additional by-pass (10”) around the loop interchanger on the feed gas side to take account of the potential of extreme high catalyst activity at beginning of life......”
“DML (the respondents) are to proceed with the implementation of the required modifications, namely shortening of tube core rods and installation of 10 inch by-pass”
“Any other jobs to be carried out during the current shut down to better evaluate/improve plant performance may please be informed immediately so that this could be simultaneously taken up.”
“Converter catalyst bed temperature shot up to 380ºC during loop trip-out. ICI anticipated rise in temperature up to 320ºC only.”
“At the liaison meeting between ICI Katalco and Davy Process Technology Group on 7th July 1992 the issue of temperature peaking in the Deepak converter was discussed.
When the loop circulator tripped the converter was almost “blocked in” the temperature of the catalyst bed rose to 380ºC. The normal adiabatic temperature due to methanol formation is 325ºC. A similar phenomena has been seen at NMC. When the circulator was restarted the temperature fell very slow, suggesting that both the catalyst and the gas had been heated.
We have discussed with our research team the possibility of a secondary reaction causing the increased temperature rise. At this stage we would suggest that methanation is a possible cause for such a temperature rise.
If the reactor was almost “blocked in” then the flow of process gas through the converter would be very small. This would result in the catalyst bed heating up to such an extent that some “activation temperature” is achieved at which point methanation could start to occur. A small but continuous gas flow would supply the carbon oxides for the methanation reaction.
Methanation will only take place in the reactor if iron is present. Iron carbonyl could be present in the Deepak case where the gas from the loop compressor is very rich in carbon oxides, but this is an unlikely scenario for the NMC case where the gas is very hydrogen rich.”
The judgment in relation to breach of contract
“The improvement referred to in Article 10.5.3 is “any innovation, improvement, modification and other advances relating to the process.” (Article 1.1.3) The process is defined as “ICI Low Pressure process for manufacture of methanol.” (Article 1.1.2). In my view the modifications to the core rods and the installation of the by-pass were improvements to the ICI low pressure process for the manufacture of methanol and should under the terms of the contract have been communicated to Deepak on or soon after 20th March 1992.”
The submissions before us
Conclusions as to Breach of Contract
Causation: The issues
The evidence as to the first two issues
“Any other jobs to be carried out during the current shut down to better evaluate/improve plant performance may we please be informed immediately so that this can be simultaneously taken.”
“Had Davy disclosed to Deepak at that time, about the catalyst condition and the possibility of methanation in the present converter and the modifications of the CMC Plant (the Trinidad plant) I would have certainly recommended installing a new converter with a reduced heat transfer or reduced number or length of the tubes as Davy would have advised. This would have been possible only at the time of the next catalyst change due to the time required for its manufacture.”
“It is our intention that an ICI Katalco technical representative and Mr Catchpole visit you in the next one to two months (tentatively the week beginning the 23rd November, though this will have to be confirmed). The purpose of this visit would be to go through the performance of the loop, and proposals as to how its performance can be returned to a satisfactory level. It would be very important to us to have the plant in operation when we visit, so that we can resolve some inconsistencies in the raw data and see the performance first hand.
.......
It is clear that the methanol synthesis cannot account for the high temperatures seen after a trip, because equilibrium limits the maximum temperature rise to 340ºC. However we are investigating the possibility that the temperature rise could set up another reaction locally in the metal thermocouple sheathes which are in contact with the hottest catalysts. The local heat release would then heat up the thermocouples giving the temperature seen before the heat is absorbed into the bulk catalyst in the bed. We have some further questions about the phenomena below.”
“We have noted your observation that the catalyst has prematurely attained low activity below expected level at this stage in its life probably due to high operating temperatures. We are concerned whether this high temperature is due to bad batch of catalyst or due to converter design problems.
As you are already aware, during every trip-out, the bed temperature shoots up to 390ºC. Since design temperature of the converter is 325ºC we are deeply concerned about the converter and its internals. ...
We have apprehensions to change the catalyst bed with new charge, until we find out the solutions to avoid deterioration of the catalyst.
You are requested to depute your representatives to our plant at the earliest before we are forced to shut down our plant due to the above reasons.”
“To this end we have suggested in our fax to Mr Kulkarni that we meet on the Deepak site as soon as possible the week commencing 23 October would be convenient, so that we can establish a full understanding of the problems being encountered and jointly agree on the required solutions. We have suggested to Davy that their involvement in this meeting would also be valuable.”
“Evidence will have to be called and tested to deal with the question whether the by-pass was something which should have been notified, Deepak would have fitted one.”
The Judgment
“206. Having seen him give evidence for a number of days I have had ample opportunity to assess his evidence. I do not accept all his answers in respect of what he said he would have done. In any event it is important to note that his statement is based on the premise that he (and ICI and Davy) knew fully about the catalyst’s condition and the possibility and effect of methanation and the improvements he said he would have insisted on are based on this knowledge. In March 1992 at the time when the improvements should have been notified, ICI thought that the condition of the catalyst was robust. There was no suggestion at that stage that ICI/Davy thought that methanation was occurring or that there was any danger to the plant. Even in August 1992 when the possibility of methanation was identified ICI/Davy did not regard this as potentially threatening the overall safety of the plant.
207. I conclude that if Mr Kotwal/Deepak had been given notice of these improvements in late March/early April 1992 as they should have been, they would have sought advice from ICI/Davy as to whether any modifications should be made to the existing catalyst which had gone beyond the beginning of life stage.
208. They would have been assured by ICI/Davy that there was no need to take any immediate action but they should wait for advice as to how to deal with any problems that might arise later in the life cycle. This was the advice which they awaited in any event in response to the concerns they had expressed.
209. Without any knowledge of the improvements Deepak continued to express concerns about particular aspects of the operation of the catalyst and ICI said they were investigating these matters but did not resolve their concern.
210. The knowledge of the improvements to the design of the CMC Plant would have made no difference to what happened subsequently. Deepak would have continued to express its concern. ICI/Davy would have continued to say that there was no serious risk that the catalyst and that in due course they would investigate Deepak’s concerns and suggest what appropriate action (if any) should be taken.
211. I find therefore that on the basis of the information which Davy/ICI should have given, Deepak would not:
(i) Have caused a by-pass to be installed at its Taloja plant.
(ii) Have shut the plant until the improvement was made; and
(iii) Have replaced the catalyst with fresh catalyst which Deepak had in stock”
The appellants’ submissions
The respondents’ submissions
Conclusions
“As a rule a party should put to each of his opponent’s witnesses in turn so much of his own case as concerns that particular witness, or in which he had a share, eg if the witness has deposed a conversation, the opposing counsel should put to the witnesses any significant differences from his own case. If he asks no questions he will generally be taken to accept the witness’s account and will not be permitted to attack it in his final speech. ..... Failure to cross-examine will not, however, always amount to acceptance of the witness’s testimony, if for example the witness has had notice to the contrary beforehand, or the story itself is of an incredible or romancing character.”
The third issue: Recklessness
The Judgment
“141. It may well be, as Davy contends in its final submissions, that there were several signals that there were problems at the plant but there is a substantial difference between this conclusion and the conclusion that Deepak was reckless in not taking action to shut down the plant. This is particularly in the context of a plant Deepak was continuing to operate in abnormal conditions at ICI’s and Davy’s specific request so ICI and Davy could rectify its poor performance in circumstances where ICI and Davy’s advice against Deepak’s repeatedly expressed concerns, was predicated on the basis that there was no great urgency in rectifying the problem and certainly no suggestion that there was any imminent danger of an explosion.
142. It was also very significant for Deepak that at no stage in response to Deepak’s concerns, had ICI or Davy expressed any word of caution that to continue to operate the plant might in certain circumstances carry serious risks. Deepak was not reckless in these circumstances in not taking the decision at 1330 to shut down the plant.
143. This finding is supported by the answer given by Mr Duffield in his evidence that methanation was the only possible source of a high enough temperature to pose a threat and that neither ICI/Davy or Deepak had ever heard of methanation having occurred inside a converter using the ICI low pressure process before the explosion of this plant. This not only accounted at least in part for the lack of urgency of the part of ICI/Davy in dealing with Deepak’s complaints but also meant that Deepak’s operators were unaware of any urgency in considering and taking action on the abnormal signs which did exist on 29/30 October 1992. In these circumstances it is only if the warning signs showed clear and imminent danger that the operators would have been reckless in disregarding them.
..........
153. Having considered all the evidence, including the expert evidence relating to the warning signs, I cannot conclude either that taking the signs individually or together Deepak was reckless in not being aware that the plant was heading for disaster. Nor do I find that, if I am wrong about that, Deepak would, on the balance of probability acting in a way which was not reckless have managed to take the necessary action to shut down the plant after proper investigation before the explosion occurred.
154. On the contrary, I have reached the conclusion that they were not reckless for not taking steps at 13.30 on 30th October 1992 to make further investigations because of the concern which they should have felt on considering the previous data over the previous 24 hours and the data which was available at 13.30 hours. Further, if I conclude that even if they had been sufficiently concerned to have made further investigations either to reinforce or dispel their concerns, such investigations would probably not have been completed in time for the plant to be shut down so as to have avoided the explosion. The operators would have reasonably assumed that they had 24 hours not 4 hours in which to carry out their investigations. In this event it is more likely that Deepak would have made these investigations over a number of hours than they would have taken the decision to start the shutdown at 16.00hours that day.”
The Submissions
Conclusion
Damages
Claim A –
the cost to the appellants of the re-construction of the plant following the explosion. The judge would have allowed this in full.
Claim B –
the fixed costs attributable to the methanol plant which were incurred by the appellants during reconstruction. The judge would have rejected this.
Claim C –
the costs to Deepak of the extra catalyst volume required by the new replacement converter. The judge would have rejected this.
Claim A:
Claim B:
Claim C:
Counterclaim
Conclusion.
Mr Justice Hart:
“The research department have agreed to do trials on the microreactor to look at the phenomenon. The trials are scheduled for October.”
Lord Justice Brooke: