Sas v Scott Carver [2003] NSWSC 1097 (28 November 2003)

Last Updated: 5 December 2003

NEW SOUTH WALES SUPREME COURT

CITATION: SAS v Scott Carver [2003] NSWSC 1097 revised - 4/12/2003

CURRENT JURISDICTION: Equity Division

FILE NUMBER(S): 55052 of 1998

HEARING DATE{S): 29, 30 September 2003

JUDGMENT DATE: 28/11/2003

PARTIES:

SAS Trustee Corporation v Scott Carver Pty Limited & Ors

JUDGMENT OF: Master Macready

LOWER COURT JURISDICTION: Not Applicable

LOWER COURT FILE NUMBER(S): Not Applicable

LOWER COURT JUDICIAL OFFICER: Not Applicable

COUNSEL:

F Corsaro SC & RM McKeand for plaintiff

SR Donaldson SC for 1st defendant

SA Kerr & GB Beveridge for 4th defendant

M.R. Gracie for 5th defendant

SOLICITORS:

Clayton Utz for plaintiff

Ebsworth & Ebsworth for 1st defendant

Henry Davis York for 4th defendant

Whitfields Solicitors for 5th defendant

CATCHWORDS:

Building Contracts. Measure of damages for breach where building sold before rectification carried out. Whether there was substantial performance. Defendants liable notwithstanding that defects were not intended to be rectified.

Contracts. Construction of clauses restricting liability for claims.

Damages. Causation, forseeability of negligence by others in rectifying faulty workmanwork.

ACTS CITED:

DECISION:

Paragraph 87

JUDGMENT:

- 1 -

IN THE SUPREME COURT

OF NEW SOUTH WALES

EQUITY DIVISION

TECHNOLOGY AND CONSTRUCTION LIST

Master Macready

Friday 28 November 2003

55052/1998 SAS Trustee Corporation (formerly State Authorities Superannuation Board) v Scott Carver Pty Ltd & Ors

JUDGMENT

1 Master: This is the hearing of a series of notices of motions, concerning the adoption in whole or in part of a report of a referee in this matter. The referee, Mr GE Markham, a consulting engineer, was appointed by an order of this court on 5 October 2001. His report is dated 3 April 2003. A judge of the court has ordered that the matter he heard by a Master of the court.

Nature of the dispute

2 The plaintiff’s written submissions helpfully set out in a summary form the nature of the dispute and accordingly I will adopt them in this judgment.

3 The proceedings arise out of building works undertaken to connect two high rise towers by means of a glazed pavilion (the "Pavilion") to serve as a common entry foyer for both towers at a prestigious commercial property, known as the Zenith Centre, located in Chatswood in north western Sydney.

4 The plaintiff entered into contracts with several companies to design, manage and construct the pavilion and associated works including:

(a) An architect - the first defendant Scott Carver Pty Limited ("Scott Carver");

(b) A construction manager - the second defendant Nubra Constructions Pty Limited ("Nubra");

(c) A membrane contractor - the fourth defendant Rightway Roofing Pty Limited ("Rightway");

(d) A paving contractor - the fifth defendant Ace Ceramics Pty Limited ("Ace Ceramics"); and

(e) A glazing contractor - the sixth and eighth defendants O'Brien Glass Industries Limited and O'Brien Glass Holdings Pty Limited ("O'Brien").

5 In the Proceedings the plaintiff claims the following:

(a) In carrying out their respective functions in relation to the works at the Zenith Centre, each of Scott Carver, Nubra, Rightway, Ace and O'Brien breached:

(i) its contractual obligations; and

(ii) its duty of care to the plaintiff.

(b) As a result of the breaches of contract and duties of care, the works carried out in the Atrium area of the Zenith Centre are defective. The defects can be broken down into four categories:

(i) the waterproofing claims;

(ii) the glazing claims;

(iii) the paving claims; and

(iv) the pergola steelwork claims.

(c) As a result of the defects, the plaintiff suffered loss and damage.

6 Various cross-claims seeking contribution in the event of a finding of liability were lodged by the defendants against each other. During the hearing, there was a settlement in respect of the plaintiff's glazing claims against O’Brien and Scott Carver in the terms of Annexure "A" to the Report.

Summary of the referee's findings

7 In summary, the Referee found (paragraph 437 of the Report) that the plaintiff is entitled to judgment against:

a) Nubra and Rightway in the sum of $375,442 for the waterproofing claims;

b) Nubra in the sum of $53,608 for the paving claims; and

c) Nubra in the sum of $65,465 for the pergola steelwork claims.

8 The Referee further stated that as the above sums were assessed as at May 1998, in his opinion, the plaintiff is entitled to interest on those amounts at Supreme Court rates from 1 June 1998 until final judgment.

9 The Referee was of the view that the plaintiff would have been entitled to judgment against Scott Carver in respect of the waterproofing claims if those claims had not been barred as against Scott Carver by operation of a limitation clause within Scott Carver's contract.

10 The Referee also found that due to breaches by Ace of its contract with the plaintiff and its common law duty of care, the plaintiff would have been entitled to judgment against Ace in respect of the paving claims if the plaintiff had not been estopped from bringing claims against Ace.

The various motions

11 In its motion filed 6 May 2003 the plaintiffs sought that the referee’s report be adopted pursuant to part 72 rule 13 (1) except for certain of the findings which were as follows:

(a) The findings by the Referee at paragraphs 380 to 397 of the report that by 13 June 1997 Scott Carver was discharged from liability in respect of its services by reason of a contractual time bar and that the plaintiff was thereby barred from bringing the claims in these proceedings against Scott Carver;

(b) The finding by the Referee at paragraph 295 that the plaintiff is estopped from bringing claims against Ace for defects in its works;

(c) The finding by the Referee at paragraph 442 that, if it is held by the Court that the claims against Scott Carver were not barred by operation of clause 4.3 of its contract, that Scott Carver's liability for waterproofing ought to be reduced by 25% as a consequence of the liability of O'Brien.

12 The motion of Scott Carver, the first defendant, was filed on 6 June 2003. It will be appreciated that the referee made no finding of liability in respect of Scott Carver other than a potential liability if the court did not except some of the referee's findings. And accordingly Scott Carver sought the adoption of the report except for certain paragraphs which are as follows:

(a) The findings at paragraphs 417 -- 419 matter, not withstanding that there was no diminution in the value of the property, there was a diminution in the value of the works.

(b) The finding at paragraphs 422 -- 432 that the plaintiffs suffered loss as a result of defective work and was entitled to damages.

(c) The findings at paragraphs 438 -- 442 that, leaving aside the operation of clause 4.3 of its contract with the plaintiff, that the first defendant was a tortfeasor within the meaning of section 5 of the law reform (miscellaneous provisions) act 1946

13 The substance of the complaint in respect of the first two findings referred to was that the referee should have found that no loss was suffered because after the commencement of the proceedings, but before their finalisation, the plaintiffs sold the relevant properties without having carried out any rectification works.

14 Nubra, the second defendant, did not appear on the hearing of the application for the adoption of the report. However, adequate notice was given to them of the hearing and they have chosen not to attend.

15 Rightway the fourth defendant filed a motion on 21 May 2003. It did not press for the orders sought in paragraphs 1 (a) and (e) of the notice of motion. It sought the adoption of the referee's report except for certain paragraphs. In essence it adopted the plaintiff’s submissions to the extent that the plaintiffs sought to attach liability to Scott Carver. This had the practical effect of reducing the liability, which the referee had found against Rightway in respect of the waterproofing claims. It also adopted Scott Carver's submission that the plaintiff had established no entitlement to damages as a result of the sale of the buildings.

16 Ace Ceramics, the fifth defendant, filed a motion on 8 July 2003. Ace Ceramics did not seek to proceed in respect of paragraphs 2 (iii) to (vi) of its notice of motion. It opposed the plaintiff’s application and relied upon the findings made by the referee as to estoppel, or more accurately non-compliance with a condition precedent. It supported Scott Carver's claim that the plaintiff was not entitled to any damages as a result of the sale of the properties. It also raised a question that the referee decided against it, namely, that a verdict against Ace Ceramics for $37,525.60 would not attract the operation of the de minimus principle.

The relevant principles on the adoption of the report

17 Part 72 rule 13 provides as follows:

"(1) Where a report is made, the Court may, of its own motion, after notice to the parties, or on application by any party, on a matter of fact or law or both--

(a) adopt, vary or reject the report in whole or in part;

(b) require an explanation by way of report from the referee;

(c) on any ground, remit for further consideration by

the referee the whole or any part of the matter referred for

a further report;

(d) decide any matter on the evidence taken before the

referee, with or without additional evidence,

and shall give such judgment or make such order as the Court thinks fit.

(2) Evidence additional to the evidence taken before the referee may not be adduced before the Court except with the leave of the Court."

18 The plaintiff submitted that the general principles which were applicable to the court’s consideration of the report in this case could be summarised as follows:

(a) Insofar as an issue involves a question of law or application or a legal standard to established facts, the Court is to consider and determine the matter afresh: Super Pty Limited v SJP Formwork Pty Limited (1992) 29 NSWLR 549, particularly Gleeson CJ at 563E following Homebush Abattoir Corporation v Bermria Pty Limited (1991) 22 NSWLR 605; and

(b) As to issues of fact, the line of cases from Chloride Batteries of Australia Pty Limited v Glendale Chemical Products Pty Limited (1988) 17 NSWLR 60 and Xureb v Viola (1989) 18 NSWLR 453, to Super v SJP Formwork, applied by the Court of Appeal in WC Gray (Constructions) Pty Limited v Hogan (unreported) [2000] NSWSC 26, establish that where the Court, having closely scrutinised a report, has a comfortable feeling of satisfaction that the factual issues have been properly explored and considered, the report's findings of fact may be adopted unless the report "reveals some error of principle, some absence or excess of jurisdiction or some patent misapprehension of the evidence": per Gleeson CJ in Super at 563G.

19 Given the issues that arise in this case which require the application of such principles I think what has been submitted by the plaintiff is an appropriate summary of the relevant principles.

The claim against Scott Carver

20 In respect of the waterproofing claims against Scott Carver, the Referee found that:

(a) Scott Carver breached its contractual and tortious obligations to the plaintiff (paragraphs 108-111 and 434 of the Report);

(b) The breaches by Scott Carver were a cause of the water penetration into the Pavilion (paragraphs 112 and 434 of the Report); and

(c) Subject to the application of the successful defence by Scott Carver (that the plaintiff's claims were barred by the operation of clause 4.3 of the contract between the plaintiff and Scott Carver (referred to by the Referee as the "Architect's Contract")), the plaintiff was entitled to damages being the reasonable cost of necessary rectification (paragraph 435 of the Report).

21 The finding of the referee was as a result of his interpretation of the architect’s contract that the time for commencement of any action or claim in respect of services provided by Scott Carver was six years from commencement of those services. Applying this construction and also assuming that the agreement contained a release in respect of the liability in tort and contract (which it appears to do) the referee found that Scott Carver was discharged from liability in respect of the services by not later than the beginning of February 1996 which was prior to the commencement of the proceedings on 13 June 1997.

22 This requires a consideration of the contract, which appears at tab 9 of exhibit A. The contract is reasonably comprehensive and is not limited by time. Annexure F deals with fee payments and includes a provision that these may be renegotiated if scope of work varies by more than 10 percent or the project is to extend beyond March 1991. There is no limit to the period of engagement and, accordingly, the contract would normally be in place for the period of the building contract.

23 In clause 8.5 of the contract it is provided that headings have been inserted for guidance only and do not form part of the agreement. The critical parts for present purposes are contained in part 4 and are in the following terms:

“4.1 professional indemnity insurance

The architect shall effect insurance under a professional indemnity policy in the amount specified in item 7 of the schedule upon such terms and conditions, including extensions, exclusions and excesses (if any) as may be agreed between the client and the architect or, failing agreement, as shall be reasonably required by the client and the architect shall provide satisfactory evidence thereof to the project manager within (7) days thereof and thereafter shall provide such certificates of currency as may be requested in writing by the project manager from time to time.

“4.2 Period of Policy

The Architect shall maintain the policy of insurance referred to in Clause 4.1 for the period specified in Item 8 of the Schedule.

4.3 Duration of Liability

The Architect shall be deemed to have been discharged from all liability in respect of the Services, whether under the law of contract, tort or otherwise, at the expiration of the period specified in Item 8 of the Schedule and the Client (and persons claiming through or under the Client) shall not be entitled to commence any action or claim whatsoever against the Architect (or any employee of the Architect) in respect of the Services after the expiration of that period.

4.4 Architect’s Liability for Damages

The Architect shall be liable to pay damages to the Client for any breach by the Architect of his professional duty under this Agreement, Libel and Slander, Breach of Copyright, Loss of Documents, Fraud and Dishonesty.”

24 The text and entry in the Schedule was as follows:

ITEM NO. 8 PERIOD AFTER WHICH ARCHITECT’S LIABILITY CEASES (Clause 4.2 and 4.3)

6 YEARS

25 The submissions of Scott Carver not only suggested that the referee's interpretation of contract was correct but also included a submission that because the referee dealt with the question in a logical and reasonable way, when considering his report I should not interfere with his construction merely because some other view might be arguable. In my view this is not an appropriate course as the correct construction of the agreement is clearly something which can either be right or wrong and the Court should, if the referee's construction is wrong, substitute its own view.

26 The referee's reasoning appears at paragraphs 387 through to 396 which are in the following terms:

387. In issue between SAS and Scott Carver is whether the Architect’s liability ceases six years after the commencement or the completion of the services.

388. Having regard to Item No. 8, the words of Cl 4.2 clearly require the policy of insurance to be maintained for a period of six years. It does not require maintenance of a policy for a period of six years after completion of the services.

389. In relation to claims for breach of contract, the statutory limitation period of six years runs from the date of breach which will occur within the duration of the contract. For tortious claims in negligence, time runs from the date the damage becomes manifest. Manifestation of damage could occur during the contract or some years after the contract is discharged. It seems to me that the purpose of a clause such as Cl 4.3 is to define a date at which liability ceases for the Architect in respect of claims in contract, tort or otherwise. Absent such a clause, the duration of liability is uncertain particularly from tortious claims relating to latent defects. The remarks of Mahoney JA in Sheldon v McBeath (supra) support this view:

“The law of limitation, in relation to latent defaults, often operates in ways which can only be regretted. There is a public interest in having a clear point beyond which no claim can be made: the interests of defendants, their insurers, and those who must fund the legal system require this. This requires that there be a time from which the limitation period commences to run. It is the fixing of that time which causes problems when the defaults in question are latent.”

390. I do not think the Cl 4.3 words “discharge from all liability in respect of the Services” can be construed as indicating that the liability period runs from either the commencement or the completion of the services.

391. If the duration of liability runs from the completion of the services, the Architect’s liability will cease six years after that date except the liability period for claims of breach of contract, and tortious claims becoming manifest within the duration of the contract will have a foreshortened duration of liability due to the operation of the Limitation Act. This situation is workable, however, the amount of any foreshortening of the duration of liability is uncertain at the time of contract. A further uncertainty and commercially unsatisfactory aspect of this scenario is that, contractually, the Architect is not required to maintain a PI policy after six years from the commencement of the services. Hypothetically, the Architect could be uninsured or, alternatively, insured for an amount less than the sum required by the Architect’s Contract.

392. It was argued by SAS that the services might not be completed or even started within the time fixed for discharge of liability if time ran from the date of contract. It submitted: what would be the situation if the contract ran for four or six years? There can be no doubt that the parties did not intend the contract to run for anything like six years. It is necessary, however, to ascertain the intentions of the parties as expressed by the words in the contract. Indeed, the fee could be renegotiated if the project was delayed beyond March 1991. From this and what I have said earlier, it seems to be unlikely the parties were contemplating that the duration of the Architect’s Contract would run for a period of the order of six years. Even if the Architect’s Contract ran for four years, the Architect’s liability in that case would be discharged two years later, which remains a workable outcome to the bargain.

393. SAS also submitted that Cl 4.3 was ambiguous and that, under the contra proferentum rules, I should construe the clause against Scott Carver being the party seeking to rely on the clause. This is a rule of last resort and I think the construction can be determined from the words used and, therefore, resort to this rule is unnecessary.

394. If the duration of liability runs from the commencement of the services, the Architect’s liability ceases six years after that date irrespective of when claims arise for breach of contract, in tort or otherwise. This seems to me to be straightforward and certain. In addition, it is commercially satisfactory and sensible that the periods of insurance and liability are coincident.

395. Further, Cls 4.2 and 4.3 are both linked to Item No. 8 and the common period of six years. In my view, this is a clear indication that the parties intended that the duration of the period of liability was to correspond with the period under which PI insurance was to be maintained under the contract. For the above reasons, I am persuaded that time should run from the commencement of the services.

396. In my opinion, therefore, the Architect was discharged from all liability in respect of the services not later than the beginning of February 1996, which is prior to the commencement of proceedings on 13 June 1997.

27 Although the referee referred to commencement of services in paragraph 387 the position contended for by Scott Carver was that the correct time was the date of contract. The referee had included in paragraph 382 that the contract was probably on foot by the beginning of February 1990 and at that stage all the terms appear to have been agreed. It was submitted that one does not get any clue from item No 8 as to what is the commencement of the six-year period. This led the simple submission by Scott Carver and that the natural position would be that the period would be from the date of the agreement. It should be noted that in fact the date of the agreement was not completed in the schedule hence the need for the referee to make the findings to which I have referred.

28 The plaintiff referred to a number of cases in its submissions on the correct interpretation of agreements. The principles are well-known and a useful statement of them appears in Whishaw v Stevens (1970) AC 508 at 522.

"There is no doubt that the first task is to try and ascertain the settlor's intention, so to speak, without regard to the consequences, and then, having construed the document, apply the test. The Court, whose task it is to discover that intention, starts by applying the usual canons of construction; words must be given their usual meaning, the clause should be read literally and in accordance with the ordinary rules of grammar. But very frequently, whether it be in wills, settlements or commercial agreements, the application of such fundamental canons leads nowhere, the draftsman has used words wrongly, his sentences border on the illiterate and his grammar may be appalling. It is then the duty of the Court by the exercise of its judicial knowledge and experience in the relevant matter, innate common sense, and desire to make sense of the settlor's or party's expressed intentions, however obscure and ambiguous the language that may have been used, to give a reasonable meaning to that language if it can do so without doing complete violence to it. The fact that the Court has to see whether the contract is "certain" for a particular purpose does not disentitle the Court from doing otherwise than, in the first place, to try to make sense of it".

29 It does not seem to me, having regard to the terms of item No 8 that a natural construction is that the six years was to commence from the date of the agreement. It is simply silent on the matter. The plaintiff’s submissions on the correct construction were expressed in the following way:

“The liability in question is "in respect of the Services". By definition, "the Services" include all that Scott Carver was obliged to do in performance of the Architect's Contract. The expression used is "the Services" rather than "each of the Services". This implies that time commences to run from the completion of all of the Services. The Architect's Contract defines "the Services" as meaning: "those professional services specifically described in Annexure "A" and include those professional services which are incidental thereto." Annexure A describes the Services as including schematic design, design development, preparation of construction documents and work during the contract administration stage. Work during the administration stage includes: "inspecting the works, discussion with the Construction Manager to resolve construction and co-ordination issues, attendance at site meetings and written quality control reports on a monthly basis." Obviously, the parties intended the services provided by Scott Carver were to continue through the construction phase of the project until completion.

The commercial rationale behind the existence of clause 4.3 was one intended to allow Scott Carver to know that its liability in respect of the Services would not continue for an indeterminate period in the future as might have been the case for any tortious liability (until the presence of any latent defect became known) and to provide SAS with a known period within which to commence proceedings. The remarks of Mahoney JA in Sheldon v McBeath referred to by the Referee at paragraph 389 of the Report repeated below are relevant:

"The law of limitation, in relation to latent defects, often operates in ways which can only be regretted. There is a public interest in having a clear point beyond which no claim can be made: the interests of defendants, their insurers, and those who must fund the legal system require this. This requires that there be a time from which the limitation period commences to run. It is the fixing of that time which causes problems when the defaults in question are latent."

In light of Sheldon v McBeath (1993) Aust Torts Reports 81-209; [BC 9302000] and the extended obligations that will generally continue after the provision of services early in the performance of the contract, the most logical construction of clause 4.3 is one that absolves Scott Carver from any liability in contract or tort in respect of the Services six years after Scott Carver had completed all of the Services.

This construction aligns the limitation periods in contract and tort, consistently with the more certain contractual limitation period under the Limitation Act. This construction makes commercial sense. There is no evidence which would indicate an intention to reduce the period of Scott Carver's exposure to liability to any shorter period than the statutory period for contract.

Support for the above intention is also found by looking at the potential duration of "the Services". Scott Carver commenced its services in approximately February 1990, practical completion was achieved during November 1991 and the Services were completed in approximately May 1992 (paragraphs 380-382, 182 and 104 of the Report). If time began to run at the date of commencement of the Services and it took almost two and a half years to complete the services then, following the Referee's interpretation, liability "under the law of contract tort or otherwise" was confined to a period of less than four years from conclusion of the Services. The Referee noted that the Services were apparently expected to be completed within a period of little more than one year. However, the contract also provided for negotiation of further fees if it ran longer (which it did). It is notorious in the construction industry that contracts, by variation or otherwise, frequently run well beyond their originally anticipated completion date. This contract had no ascertained completion date. In those circumstances it is not commercially logical to fix a limitation period to run from the commencement of the Services. Particularly so when performance of the contract was well under way by the time that it was signed by the parties.

When there was no certainty as to when the Services were to conclude, it is unlikely that the parties to the contract, acting in accordance with sound commercial principles and good business sense would have intended to limit SAS's rights in such an indeterminate manner. Instead, it is submitted, the likely intention was to limit the time for commencement of actions after completion of the Services to a distinct period, that is six years from completion and so avoid the potential for latent defect claims being made at later dates.

30 The reasons of the referee rely upon the interplay between the professional indemnity insurance required under 4.1 and the limitation on liability under 4.3. There is nothing that appears in clause 4.2 which would allow one to conclude that the professional indemnity insurance was to be in place for a period from the commencement of the services. Indeed the terms of both clause 4.4 and clause 4.3 would seem to indicate that the liability dealt with under those clauses is of a substantially wider nature than that in respect of which the professional indemnity insurance is required. For instance the commencing words in clause 4.4 include the words “breach by the architect of his professional duty under this agreement”. That head of liability would be covered by professional indemnity insurance and the other liabilities might well not be covered by such insurance. In addition the range of liabilities in respect of which there is a discharge under 4.3 is probably far greater than the liabilities that would be covered by the professional indemnity policy of insurance.

31 Normally a professional indemnity policy provides cover for a period of time. The cover is for claims notified to the insurer within that time regardless of when the event occurred giving rise to the claim. (This is subject to the operation of s54 Insurance Contracts Act 1984 (Cth): see FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641.)

32 Provided the policy is on foot when notification is given it will cover a cause of action commenced within the limitation period but notified after expiry of that period. There is thus commonly an overlap but no necessary coincidence in respect of the period of the insurance indemnity and the limitation period. For this reason I do not attach a necessary link between the periods in respect of professional indemnity insurance and liability. The clauses may be wanting in respect of the extent of professional indemnity covered required. The cover called for plainly does not cover all possible liabilities of the architect.

33 I also have some difficulty with the referee’s conclusion that it would be commercially appropriate for the limitation period to conclude only a few years after the building contract concluded in the event that it went beyond the parties’ then expectations.

34 I have earlier referred to and set out the submissions of the plaintiffs as to the correct construction of the agreement. The clause has to be considered in the light of the existing law on limitations. As pointed out above it is relatively clear in respect of contract. The last claim could be expected to be filed six years after conclusion of the services. For tort it is indeterminate and the rectification of this vice is a clear object of the clause. If the six years were to run from completion of services there would be certainty and a recognition of the basic six year rule in the Limitation Act.

35 In contrast if the six years were to run from the commencement of services the effective limitation period would be reduced to a lesser figure than six years with the possibility, if the building contract extended beyond six years, of preventing recovery in respect of a period when architectural services were still being performed.

36 Having picked “six years” to put in the schedule, that being the time in the Act, it is unlikely the parties intended to shorten the limitation period other than in respect of the indeterminate period for tort. If they had selected four years other considerations may have followed.

37 Fixing upon commencement of services opens up an area of uncertainty which is to be avoided. There is nothing which suggests an intention to reduce the contract limitation period.

38 In my view the correct construction is as contended for by the plaintiff and, accordingly, there is a liability in respect of Scott Carver.

39 Given the conclusions to which I have come I see no need to resort to the contra proferentem rule that they should be interpreted in a manner which is least favourable to the parties seeking to rely upon it, in this case Scott Carver. See Thomas National Transport (Melbourne) Pty Limited v May and Baker (Australia) Pty Limited (1966) 115 CLR 376, Halford v Price (1960) 105 CLR 23, Herron v McMahon (1984) 2 ANZ Ins Cas 60-568.

The claim against Ace Ceramics

40 In its second further amended statement of claim the plaintiff made a number of different claims against Ace Ceramics. In summary they were as follows:

(a) breach of its contract with SAS to carry out paving work surrounding the Pavilion (the "Paving Contract") through failures to construct in a workmanlike manner, or with reasonable care in accordance with the specification;

(b) breach of a 10 year warranty against any defect due to faulty materials or laying (the "Paving Guarantee") contained within the specification to the Paving Contract;

(c) breach of contract through Ace's failure to provide the Paving Guarantee;

(d) breach of its common law duty of care;

(e) breach of a deed of guarantee made in July 1992 (the "Deed") pursuant to which Ace warranted that it would repair or rectify all defects or damage caused by such defects at its cost.

41 The referee made findings that Ace Ceramics breached its contract with the plaintiff, an implied term thereof, and also its duty to take reasonable care in performing its contractual obligations. He found that the plaintiff’s measure of damage in both contract and tort was the reasonable cost of the necessary rectification which he fixed at $53,608. However he found that a defence of estoppel had been made out and, accordingly, did not make an ultimate finding against Ace Ceramics.

42 The plaintiff’s submissions accurately summarised the way the referee had dealt with the matter at paragraphs 277 to 245 of the report in the following manner:

The Referee found that:

(a) Ace entered the Paving Contract with SAS (paragraph 269);

(b) under the Paving Contract Ace was obliged to provide a one source warranty for 10 years (the Paving Guarantee) against any defect due to faulty materials or laying (paragraph 277);

(c) Ace did not supply the specific warranty required under the terms of the Paving Contract (paragraph 277);

(d) Ace executed the Deed which was delivered to Nubra on 2 September 1992 (paragraph 282);

(e) The Deed subsumed the contractual warranties of the Paving Contract, made the contractual warranties superfluous and replaced the need for a co-existing contractual warranty;

(f) In the circumstances it was unconscionable for SAS to sue Ace for failing to provide the contractual warranty (Paving Guarantee) to Ace's detriment and Ace is therefore estopped from claiming against Ace for its failure to provide the contractual warranty (paragraphs 282, 283);

(g) Absent any notification of defects in writing, Ace was not required to carry out any repairs or rectification under the Deed (paragraph 293);

(h) SAS did not give Ace any notification of defects under the Deed (paragraph 292);

(i) By failing to give notification in writing prior to commencing legal proceedings, SAS breached the terms of the Deed (paragraph 282);

(j) Because of its failure to give notification in accordance with the requirements of clause 2 of the Deed, "it would be unconscionable for SAS to be permitted to claim for the defects now found in Ace's work and consequential damage, and to do so would be to Ace's detriment. SAS is therefore estopped from doing so." (paragraph 285).

43 Ace Ceramics did not attempt to defend the referee's finding on estoppel as clearly there were a number of elements which were not made out. For example there is absolutely no evidence that Ace Ceramics had acted or abstained from acting in reliance on any assumption or expectation contained in the deed. See Tolcher v Loiterton & Ors (2002) NSW SC 373. Nor is there any evidence of relevant damage. The referee was most likely misled in this respect by the very abbreviated form of pleading which raised the alleged estoppel. Instead Ace Ceramics sought to maintain the referee's decision on the basis that the deed contained a condition precedent to liability and that there had been no fulfilment of that condition precedent.

44 The deed was made between the plaintiff, Pritpro Pty Ltd and Ace Ceramics, who are defined in the deed as the contractor. The recitals in the deed were as follows:

“A. The Board and Pritpro are the joint registered proprietors of the property and buildings known as Zenith Centre, 821 Pacific Highway, Chatswood, in the State of New South Wales.

B. By contract dated 28 August 1990, between the Board and Pritpro; the registered proprietors, and ACE; the contractor, ACE agreed to pave and concrete the works to the project in strict accordance with the current Architectural drawings by Scott Carver Pty Limited and Specification, all to the complete satisfaction of the architect, all relevant authorities and the Project Manager, Colin Ging and Partners Pty Limited.”

C. the works reached a practical completion on or about 1990.

D. “The Contract Works have not been executed in accordance with the Contract in that:

(a) The slip sheet material referred to in item ... of the Specification and on construction drawings numbered ... has not been installed in all areas.

(b) The caulk [sic cork] expansion material referred to in item ... of the Specification and on construction drawings numbered ... has not been installed down to the membrane, being the full thickness of the paving, in all areas.”

45 The operative provisions of the defects as far as relevant were as follows:

"In consideration for the Proprietors not commencing an action against the Contractor and at the request of the contractor that the Proprietors enter into this Deed, the Contractor hereby undertakes, agrees and warrants for a period of ten (10) years from the date of Actual Completion as follows:

“1. All Contract Works... which have been supplied, installed and performed...shall be in all respects completed in accordance with the respective qualities, standards, tests and requirement specified in the Contract Documents...

2. Should the Contract Works...be defective in any way during the Guarantee Period, and should such defect be reported in writing by the Proprietors or their agents to the Contractor...the Contractor shall within a reasonable time after such notification make safe and then properly repair or rectify such defects and any damage caused by such defects...”

46 It is fairly clear that the forbearance to sue contained in the operative part of the deed is linked to the particular defects which are referred to in recital D. The plaintiff does not seek to recover in respect of those particular defects. Although the plaintiff sued on its original contractual entitlement and duty of care I will deal for the moment with just the terms of the deed as the plaintiff argues that it is entitled to recover damages for breach under clause 1 of the deed. On its construction clause 2 merely gives an additional right to require the contractor to come and rectify defects. For its part Ace Ceramics contends that the only liability under the deed is that which arises under clause 2 and absent proper notification there is no compliance with the condition precedent.

47 When one looks at the terms of clause 2 one does not find any express language that notice is to be a condition precedent. In particular one does not find any express language which limits the rights which have already been given in clause 1 of the deed. The plaintiff’s submission was that the rights given by the addition of paragraph 2 were similar to or analogous to the additional rights conferred on a principal pursuant to a defects liability clause in a construction contract. As is pointed out in Keating on Building Contracts 6th Edition page 267 a principal’s right to damages for breach of contract is not removed by the existence of the defects clause except by clear words. See also Modern Engineering (Bristol) Ltd v Gilbert-Ash (Northern) Ltd [1974] AC 689 at pp717-718. Normally to exclude the right to recover damages clear and express words must be used. See Pearson-Limited v John P Baxter and Mrs A S Baxter [1999] EWCA Civ 789; (1999) BLR 101.

48 In the present case there is nothing on the face of the deed which in any way limits the right to sue for damages in respect of any breach of clause 1 of the deed. In these circumstances I am satisfied that it was not a condition precedent to liability that notice of defects be given. In these circumstances it is not necessary to deal with other arguments advanced on the plaintiff’s part in respect of any right to sue on the original contract and whether in fact notice of defects have been given.

49 I turn to the submission of Ace Ceramics that the de minimus principle should be applied. The maxim de minimis non curat lex translates to "the law does not concern itself with trifles". It is exemplified in Williams v R [1978] HCA 49; (1978) 140 CLR 591, per Murphy J at 602. Here in the present case the plaintiff is entitled to recover from Ace Ceramics the sum of $53,609 although this will be reduced to $37,525.60 if there is appropriate apportionment of responsibility. Ace Ceramics pointed to the value of the building being something in excess of $170 million or, alternatively, that its own lump sum contract was for an amount of $979,268. The first comparison is not relevant and although the amount recovered is in the order of about 3 percent of its contract sum I would not consider the amount to be trifling. Accordingly, I reject the submissions.

O’Brien’s liability

50 This matter arises because the plaintiff challenges the referee’s finding that, if it is held by the court as I have found, that the claims against Scott Carver are not barred by the operation of clause 4.3 of its contract, Scott Carver's liability for waterproofing ought to be reduced by 25% as a consequence of the liability of O’Brien for conduct relating to the installation of its works which was found by the referee as being in breach of contract and negligent.

51 Relevant factual findings by the referee were adequately summarised by the plaintiff in submissions in the following manner:

(a) The majority of the perimeter of the pavilion was constructed with a raised concrete hob which was above the external paving level (paragraph 56 of the Report);

(b) Nubra experienced some difficulty in constructing the concrete hobs to the correct level (paragraph 63 of the Report);

(c) Construction drawings prepared by Scott Carver provided for 2 layers of membrane to be laid over the hob. A sill glazing channel to support the glazing was then to be installed above the membrane layers (paragraph 63 of the Report);

(d) Although two layers of membrane were laid by Rightway over the hob, prior to the installation of the sill glazing channel, the membrane was cut away and the sill glazing channel was installed directly on top of the concrete hob (paragraph 63 of the Report);

(e) The sill glazing channel was installed by O'Brien. By laying the sill glazing channel directly on top of the concrete hob and by omitting the stainless steel flashing angle required by the construction drawings, O'Brien failed to follow the requirements of the drawings in breach of its contract with SAS (paragraphs 63 and 64 of the Report);

(f) Because the sill glazing channel was installed out of sequence, to provide waterproofing to the Pavilion, following a meeting attended by a Rightway representative, a Sealex representative and a Nubra representative, a proposal for waterproofing the hob was developed by Rightway (in consultation with Sealex). The proposal was reviewed by Scott Carver who approved it in principle by sending a facsimile (incorporating a sketch) to that effect to Nubra (paragraph 65 of the Report);

(g) The revised hob design approved by Scott Carver by way of facsimile was inadequate (paragraph 74(c) of the Report);

(h) Nubra issued Rightway with a site instruction and sketch instructing Rightway to carry out the waterproofing in accordance with the revised hob design (thus varying the original design) (paragraph 67 of the Report);

(i) Not only was the revised hob design inadequate, in its instruction to Rightway, Nubra specified too light an angle for the membrane pressure seal (paragraph 74(d) of the Report);

(j) Rightway compounded matters by constructing the membrane pressure seal using too widely spaced and inappropriate pop rivet fixings instead of screw fixings (paragraph 74(e) of the Report);

52 The plaintiffs submitted that O'Brien's failure to construct the sill work in accordance with its trade contract was not an operative cause of the plaintiffs loss in respect of the waterproofing defects. It submitted that the conduct of Scott Carver, Nubra and Rightway effectively negatived any causal connection between O'Brien's breaches and the plaintiff’s loss. The plaintiff’s interest on this aspect is because of the terms of the settlement of the glazing claims, which are referred to in annexure A to the referee’s report. They provide for a reduction in in the payments to be made to the plaintiff by Scott Carver if O'Brien is obliged to contribute to the liability to the plaintiff by Scott Carver.

53 In Medlin v State Government Insurance Commission [1995] HCA 5; (1995) 182 CLR 1 in their joint judgment Dean, Dawson, Toohey and Gauldron JJ stated:

"For the purposes of the law of negligence, the question whether the requisite causal connection exists between a particular breach of duty and particular loss or damage is essentially one to be resolved, on the probabilities, as a matter of commonsense and experience. (see Fitzgerald v Penn [1954] HCA 74; (1954) 91 CLR 268 at 277-8; March v Stramare (E&MH) Pty Limited [1991] HCA 12; (1991) 171 CLR 506 at 515, 522-3; [1991] HCA 12; 99 ALR 423; Bennett v Minister of Community Welfare [1992] HCA 27; (1992) 176 CLR 408 at 412-413, 418-419, 428; [1992] HCA 27; 107 ALR 617) And that remains so in a case such as the present where the question of the existence of the requisite causal connection is complicated by the intervention of some act or decision of the plaintiff or a third party which constitutes a more immediate cause of the loss or damage. In such a case, the "but for" test, while retaining the important role as a negative criterion which will commonly (but not always) exclude causation if not satisfied, is inadequate as a comprehensive positive test (see, eg., March v Stramare (E&MH) 171 CLR at 515-519, 522-4). If, in such a case, it can be seen that the necessary causal connection would exist if the intervening act or decision be disregarded, the question of causation may often be conveniently expressed in terms of whether the intrusion of that act or decision has had the effect of breaking the chain of causation which would otherwise have existed between the breach of duty and the particular loss or damage. The ultimate question must, however, always be whether, notwithstanding the intervention of the subsequent decision, the Defendant's wrongful act or omission is, as between the plaintiff and the defendant and as a matter of commonsense and experience, properly to be seen as having caused the relevant loss or damage...."

54 A substantial part of the plaintiff’s submissions were that O'Brien could not reasonably foresee the intervening acts in question. It referred to a number of cases which refer to the role such foreseeability plays in any determination of the court. In Latham v Johnson [1913] 1 KB 398 the Court of Appeal said:

"No doubt each intervenor is a causa sine qua non, but unless the intervention is a fresh, independent cause, the person guilty of the original negligence will still be the effective cause, if he ought reasonably to have anticipated such interventions and to have foreseen that if they occur the result would be that his negligence would lead to mischief."

55 The comments of Dowd J, in Griffin v State of New South Wales [2002] NSWSC 1273 at paragraph 27, which considered the legal principles for determining whether an intervening act should have been foreseen, were also referred to in submissions. Dowd J stated:

"As a practical matter, once this Court has been satisfied that the wrongful act or omission of the defendant caused the harm the plaintiff is complaining of, the question of law becomes whether there exists a principle which precludes the acceptance of the wrongful conduct being the cause of the harm complained of. The guiding principles behind the High Court's adoption of a 'commonsense' approach in March v E & MH Stramare Pty Limited [1991] HCA 12; [1991] 171 CLR 506, rather than the 'but for' or (sine qua non) test as being the sole test for causation can be summarised in terms that are applicable to the case as follows per Smith J in Haber v Walker [1963] VicRp 51; [1963] VR 339 at 358:

'In the first place a wrongful act or omission cannot ordinarily be held to have been a cause of subsequent harm unless the harm would not have occurred without the act or omission having previously occurred with such of its incidences rendered it wrongful. Exceptions to this first principle are narrowly confined. Secondly, where the requirements of this first principle are satisfied, the act or omission is to be regarded as a cause of the harm unless there intervenes between the act or omission and the harm an occurrence which is necessary for the production of the harm and is sufficient in law to sever the causal connection. [the intervening occurrence, if it is to be sufficient to sever the connection] must ordinarily be either -

(a) human action that is properly to be regarded as voluntary; or

(b) a causally independent event the conjunction of which with the wrongful act or omission is by ordinary standards so extremely unlikely as to termed a coincidence.' "

56 This approach seems to be endorsed by the High Court in Norton Australia Pty Limited v Streets Ice Cream Pty Ltd [1968] HCA 61; (1916) 120 CLR 635 when Barwick CJ said at page 648 the following:

“Lastly, I should say something about causation, though to refer to it at all in this case is, in my opinion, to indulge in a work of supererogation. But let it be supposed that the warning to the contractor was inadequate in that it did not convey to him the knowledge of the rate of evaporation of the solvent and of the density of the fumes. Did this deficiency cause or contribute to the cause of the fire? Of course, it is in general no answer to a person who has suffered injury or damage to say that the negligence of another person has contributed to cause the damage where the defendant or some person for whose acts he is responsible has negligently done or omitted something which is causally related to such injury or damage. But where the act or omission of another has intervened between the defendant's negligent act or omission so as to open up a new chain of causation, the defendant will not be responsible for the injury or damage caused by the intervening act or omission. The two principles seem often in competition. Once the defendant's negligence is proved, it will embrace within its attributable consequences all that was or ought to have been foreseen by the defendant or the actor for whom he is responsible at the time of the commission of the act or omission. If the intervening act or omission of another does not fall within the area of the foreseen, then, assuming it to be causally related to the resultant injury, the defendant will not, in my opinion, be responsible for that injury or damage. The person responsible for the new act or omission will bear that responsibility.”

57 Chief Justice Barwick’s reference to “a work of supererogation” and the facts of that case neatly illustrate his use of that expression. The defendant was sued by the plaintiff whose factory had been destroyed by the fire. The incident happened in a coolroom when some adhesive containing a petroleum solvent was being used. The defendant made the adhesive and it was sued on the basis that sufficient warning was not given of its inflammable nature. The caution on the adhesive was “Caution: highly inflammable. For further information ask for data sheet”. The solvent was being used in one room and nearby the contractor was melting bitumen using a naked flame from a Porta gas burner. Needless to say, the court held that this negligent act could not have been foreseen by he manufacturer of the product. Clearly the negligent act was gross.

58 Although it is not always useful to compare the factual situation of other cases it is interesting to note the circumstances in March v M & H Stramare Pty (supra). The facts in that case were that a driver was injured when his car ran into a truck which had been parked in a position where it straddled the centre line of a six lane road. The collision occurred at night and the truck’s parking and hazard lights were illuminated. The driver was under the influence of alcohol and was driving at an excessive speed. In an action by the driver of the car against the owner and driver of the truck, the trial judge found that the owner and driver of the truck were negligent, but that the driver of the car was also negligent and apportioned responsibility. On appeal to the Supreme Court of South Australia it was held that the plaintiff’s own negligence was the sole effective cause of the accident and the action was dismissed. On appeal to the High Court the court reversed the Court of Appeal and held that the defendant’s negligence was the cause of the accident. In effect the court held that an intoxicated driver, driving at excessive speed and failing to keep a proper lookout, might collide with the parked truck was the “very kind of thing” which was likely to happen if there was a want of care on the part of the truck owner.

59 When illustrating this proposition Mason CJ referred to Dorset Yacht Company v The Home Office [1970] UKHL 2; (1970) AC 1004 at 10030 where Lord Reid observed:

“But if the intervening action was likely to happen I do not think it can matter whether that action was innocent or tortious or criminal. Unfortunately, tortious or criminal action by a third party is very often the kind of thing which is likely to happen as a result of the wrongful or careless act of the defendant.”

60 In this case, of course, the question is whether the subsequent negligence of the architects and the others involved was the very kind of thing which was likely to happen when a contractor charged with installing external windows in a building which obviously would have to be water proof, did so negligently. O’Brien created a situation which would cause there to be a breakdown in the waterproofing. That may or may not be able to be rectified by some other contractors but it clearly opened the way for there to be an ultimate problem if it was not able to be fixed or if it was sought to be fixed improperly.

61 It is notorious that many waterproofing problems occur in glass walled buildings and as it worked in the area O’Brien would appreciate this fact. Great care is needed in design and execution of work in order to ensure that waterproofing measures are effective. The fact that there may be any variety of further problems when attempting to fix O’Brien’s faulty workmanship indicates that this possibility is one of the very kind of things which was likely to happen. The need to fix it would obviously be very likely because the problem existed. The fact that the work to “fix” the problem may not be appropriate is, I would have thought, something that should have been foreseen given the care that is needed in respect of waterproofing work.

62 In these circumstances it seems to me that the actions of Scott Carver, Nubra and Rightway in negligently carrying out their respective tasks are not a supervening cause or nova actus interveniens severing the causal connection. The suggestions that there were some breaches of the contract by Nubra do not make any difference to this finding.

Has the Plaintiff suffered any damage?

63 This problem arises because the plaintiff commenced these proceedings on 13 June 1997 and, subsequently in October 1998, sold the property, along with several other properties, to Perpetual Trustees Limited. The sale price of $170 million was discounted by $2,352,741 to allow for rectification of the damage. The amount of this discount was based upon the plaintiff's estimate of the remedial work. Although there were valuations in order to set the price for the sale it was not an arm’s length transaction and, indeed, the plaintiff ended up having a 50% interested in the trust administered by the purchaser. No funds were expended by the plaintiff on rectification either before or after the sale.

64 The referee concluded at paragraph 417 that there was no diminution in the value of the property resulting from the subject defects. This finding was not challenged and the plaintiff's position then was that there was a diminution in the value of the works. In the plaintiff’s submission it was the cost of rectification of the works which was the true measure of damages. The referee accepted this submission and held that the plaintiff was entitled to damages. This rendered otiose the reduction in the sale price. In considering the cases to which I will turn it is important to realise that in the present case we are concerned with the cost of rectification of works to the atrium and entrance to two large office buildings. In contrast to the value of the buildings ($170 million) the works were quite minor and obviously would have little or no effect on the value of the building.

65 There are a number of cases which touch upon the problem and it is necessary to deal with them in some detail. The first is Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 a case where due to faulty construction of foundations a plaintiff cross claimed against a builder for the cost of demolition and rebuilding of the house. At p616 the court expressed the principle as to the assessment of damages in these terms:

"It is true that a difference in the values indicated may, in one sense, represent the (owner's) financial loss. But it is not in any real sense so represented. In assessing damages in cases which are concerned with the sale of goods the measure, prima facie, to be applied where defective goods have been tendered and accepted, is the difference between value of the goods at the time of delivery and the value they would have had if they had conformed to the contract. But in such cases the plaintiff sues for damages for breach of warranty with respect to marketable commodities and this is in no real sense the position in cases such as the present. In the present case, the (owner) was entitled to have the building erected upon her land in accordance with the contract and the plans and specifications which formed part of it, and her damage is the loss which she has sustained by the failure of the (contractor) to perform his obligation to her. This loss cannot be measured by comparing the value of the building which has been erected with the value it would have borne if erected in accordance with the contract ..."

66 The plaintiff cited this passage to indicate that the lack of diminution in value of the building as a whole is not the true measure.

67 However, the court went on at 617 to say the following:

“In the present case, the respondent was entitled to have a building erected upon her land in accordance with the contract and the plans and specifications which formed part of it, and her damage is the loss which she has sustained by the failure of the appellant to perform his obligation to her. This loss cannot be measured by comparing the value of the building which has been erected with the value it would have borne if erected in accordance with the contract; her loss can, prima facie, be measured only by ascertaining the amount required to rectify the defects complained of and so give to her the equivalent of a building on her land which is substantially in accordance with the contract. One or two illustrations are sufficient to show that the prima facie rule for assessing damages for a breach of warranty upon the sale of goods has no application to the present case. Departures from the plans and specifications forming part of a contract for the erection of a building may result in the completion of a building which, whilst differing in some particulars from that contracted for, is no less valuable. For instance, particular rooms in such a building may be finished in one colour instead of quite a different colour as specified. Is the owner in these circumstances without a remedy? In our opinion he is not; he is entitled to the reasonable cost of rectifying the departure or defect so far as that is possible. Subject to a qualification to which we shall refer presently the rule is, we think, correctly stated in Hudson on Building Contracts, 7th ed. (1946), p. 343. ‘The measure of the damages recoverable by the building owner for the breach of a building contract is, it is submitted, the difference between the contract price of the work or building contracted for and the cost of making the work or building conform to the contract, with the addition, in most cases, of the amount of profits or earnings lost by the breach’.

Ample support for this proposition is to be found in . . . . . . . . . . But the work necessary to remedy defects in a building and so produce conformity with the plans and specifications may, and frequently will, require the removal or demolition of some part of the structure. And it is obvious that the necessary remedial work may call for the removal or demolition of a more or less substantial part of the building. Indeed – and such was held to be the position in the present case – there may well be cases where the only practicable method of producing conformity with plans and specifications is by demolishing the whole of the building and erecting another in its place. In none of these cases is anything more done than that work which is required to achieve conformity and the cost of the work, whether it be necessary to replace only a small part, or a substantial part, or, indeed, the whole of the building is, subject to the qualification which we have already mentioned and to which we shall refer, together with any appropriate consequential damages, the extent of the building owner’s loss.

The qualification, however, to which this rule is subject is that, not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt. No one would doubt that where pursuant to a building contract calling for the erection of a house with cement rendered external walls of second-hand bricks, the builder has constructed the walls of new bricks of first quality the owner would not be entitled to the cost of demolishing the walls and re-erecting them in second-hand bricks. In such circumstances the work of demolition and re-erection would be quite unreasonable or it would, to use a term current in the United States, constitute ‘economic waste’. (See Restatement of the Law of Contracts, (1932) par. 346). We prefer, however, to think that the building owner’s right to undertake remedial works at the expense of a builder is not subject to any limit other than is to be found in the expressions ‘necessary’ and ‘reasonable’ for the expression ‘economic waste’ appears to us to go too far and would deny to a building owner the right to demolish a structure which, though satisfactory as a structure of a particular type, is quite different in character from that called for by the contract. Many examples may, of course, be given of remedial work, which though necessary to produce conformity would not constitute a reasonable method of dealing with the situation and in such cases the true measure of the building owner’s loss will be the diminution in value, if any, produced by the departure from the plans and specifications or by the defective workmanship or materials.”

68 Scott Carver seized upon the qualification that the work to be undertaken must be a reasonable course to adopt. It submitted that in the circumstances that:

1. The plaintiff had sold the property;

2. It had no obligation under the contract of sale to complete rectification works;

3. It was a trustee for its members and was presumably under fiduciary duties not to waste its funds;

a claim for cost of remedial works was not a reasonable course to adopt and that as there was no diminution in value no damage had been suffered.

69 The first defendant’s submission that a claim for remedial costs was not a reasonable course to adopt is inconsistent with the decision in Bellgrove v Eldridge where the example of an “unreasonable course” involved the demolition of a house in order to replace the bricks used in the exterior walls. The example provides a useful guide to what is “unreasonable” and I do not agree with Scott Carver’s submission that this is such an extreme case. Rectification, were it to occur, would not entail destroying a significant part of the pavilion, nor would it jeopardise the structural integrity of the building or entail great expenditure. As is discussed below, the sale of the building does not affect the right of the plaintiff to take action for loss of value of the works.

70 The next case is Director of War Service Homes v Harris (1968) Qd R 275 which concerned an action for damages brought by an initial building owner against the builder of a number of houses. The defects were not discovered until after the houses had been sold by the initial owner who then sued the builder for the cost of remedying defects which it had rectified although not obliged to do so. Sir Harry Gibbs, with whom Stable and Hart JJ agreed, said :

“It is true that Bellgrove v. Eldridge was not a case in which the building owner had sold the building before bringing the action but I am unable to see any reason why there should be a different measure of damages in such a case and nothing is said in Bellgrove v. Eldridge to support any such distinction. When the builder, in breach of his contract, delivered to the building owner a building that did not conform to the specifications, the owner became entitled to recover damages according to the measure approved in Bellgrove v. Eldridge. If the owner subsequently sold the building, or gave it away, to a third person, that would not affect his accrued right against the builder to damages according to the same measure. The fact that the building had been sold might be one of the circumstances that would have to be considered in relation to the question whether it would be reasonable to effect the remedial work, but assuming that it would be reasonable to do the work the owner would still be entitled to recover as damages the cost of remedying the defects or deviations from the contract (assuming of course that the contract price had been paid). In assessing those damages it would not be relevant whether the owner was under a legal liability to remedy the defects, or whether he had made a profit or a loss on the sale of the building, for the builder has no concern with the details of any contract that the owner might make with a third party. There is a principle that in actions for non-delivery or breach of warranty under a contract for the sale of goods ‘the law does not take into account in estimating the damages anything that is accidental as between the plaintiff and the defendant, as for instance an intermediate contract entered into with a third party for the purchase or sale of the goods’ (Rodocanachi v. Milburn (1886) 18 Q.B.D. 67 at 77: Williams Brothers v. Ed. T. Agius Ltd. [1914] A.C. 510; Slater v. Hoyle [1920] 2 K.B. 11) and this principle (which has been applied to a contract for the sale of a lease, plant, buildings and stock, treated as realty – Brading v. F. McNeill & Company Limited [1946] 1 Ch. 145) should in my view be similarly applied to the case of a building contract. The owner of defective building may decide to remedy the defects before he sells it so that he may obtain the highest possible price on the sale; he may sell subject to a condition that he will remedy the defects; or he may resolve to put the building in order after it has been sold because he feels morally, although he is not legally, bound to do so. These matters are nothing to do with the builder, whose liability to pay damages has already accrued.”

71 Certainly the case is not on all fours with the present in that the defects were rectified but it is a case that considered the circumstance of the sale of the building.

72 The next case of interest is De Cesare v Deluxe Motors Pty Ltd (1996) 67 SASR 28. The case concerned the situation where building work performed under a contract with the building owner was not complete and it was necessary to rectify work which had been done defectively. The question arose as to whether the building owner was able to recover damages measured by the cost of that further work even though the owner had sold the building, did not intend to carry out the further work, and had not established by evidence that the price for which the building was sold was less than would have been if the building work had been completed in accordance with the contract. Notwithstanding this later finding the case proceeded on the basis that the price paid by the buyer of the building was less than it otherwise would have been. The case was a decision of Full Court of South Australia and there was consideration of the cases by Knox CJ and Nyland J including, of course, Harris' case.

73 Knox CJ referred to the passage which I have italicised in the quote from Harris' case and suggested that what was said might be too absolute. He went on to say that in principle the relevance of the sale of the building is limited to the question of whether it would be reasonable to effect the remedial work. He concluded at page 35:

“In my opinion, in the present case, having regard to the findings of the magistrate it was reasonable for the building owner to carry out the remedial work. Prima facie the building owner was entitled to damages measured according to that cost. There is no doubt at all, in my opinion, that that would be the measure of damages if the property had not been sold, and that that would have been the measure without inquiry as to the owner’s intention to carry out the work.

“The performance of that work and the claim for the cost of doing it, does not cease to be reasonable because the building has been sold. The fact that the building owner in the present case no longer intends to carry out the work throws no light on the reasonableness of doing so. The reasonableness of doing so is to be judged, in a case like this, objectively and does not depend in any way upon an inquiry as the likelihood of the work in fact being done.”

74 The plaintiff illustrated in submissions a situation where a particular form of sale might be relevant to whether it would be reasonable to effect the remedial work. That was where a property had been sold for the express purpose of demolishing the house. (Another case which concentrates on the method of effecting the remedial works is the example of the different class of bricks in Bellgrove v Eldridge.)

75 Reference was also made in submissions to the English decision of Ruxley Electronics & Construction Limited v Forsythe [1996] AC 344. There was extensive reference to this case in De Cesare v Deluxe Motor Pty Ltd. In that case the owner of a property had contracted with the builders to build a swimming pool in his garden, the maximum depth of which was to be 7 feet 6 inches. After the work had been completed the owner discovered that the maximum depth was only 6 feet 9 inches and that at the point where people were diving into the pool the depth was only 6 feet. There was no adverse effect on the value of the property. The House of Lords held that the work involved in the reinstatement would be out of all proportion to the benefit to be obtained and therefore held that the plaintiff was entitled only to any diminution in value caused by the breach. Contrary to Australian authority the court said that the innocent parties’ intention or lack of it to reinstate was relevant to the reasonableness and hence to the extent of the loss sustained. As is made clear in the Chief Justice’s judgment in De Cesare, Ruxley was a case where there had been substantial performance. At page 35 he said:-

“In my opinion the cost of remedying the defect in contractual performance remains a primary measure of damages, subject to the test of reasonableness and a careful consideration of what was contracted for and what has been lost. I make these qualifications because the caselaw makes it quite clear the plaintiff may recover damages for the completion of a pointless but decorative and desired structure. I make the further point as is made by their Lordships in Ruxley Electronics & Construction Limited v Forsyth it may be necessary to distinguish between cases in which there has been substantial performance and cases in which there has not.”

76 He distinguished Ruxley’s case by concluding at page 36 in these terms:-

“This is not one of those cases like Ruxley Electronics & Construction Limited v Forsyth in which one can say that the defective performance had no practical significance, that one is concerned only with a desire by the building owner to be compensated for non-performance which has no effect upon the value or utility of the contract works. In the present case the position is the reverse.”

77 Nyland J after careful consideration also characterised Ruxley as a case of substantial performance having been achieved. This led to it being unreasonable to ask for reinstatement.

78 In order to see whether there has been substantial performance it is appropriate in my view to look at the matters referred to by Knox CJ. These include what was contracted for but not provided and whether there has been no effect upon the value or utility of the contract works. Plainly there has been no effect on the value of the overall building and to that extent one could perhaps conclude that there has been no effect on value of the works that comprised but a small part of the building. That is not to say that there may not have been some effect on the utility of the contract works and thus the building.

79 One of the defects was in relation to waterproofing and at paragraph 50 of his report the referee accepted various experts’ views that there had been water penetration into the pavilion through the waterproofing system in these terms:-

“Water has penetrated perimeter concrete hobs, sand, cement and mortar bedding of the floor of the pavilion and adjacent lobby link areas, stone flooring of the pavilion and adjacent lobby link areas, reinforced concrete walls below the landing of the western stairs and stone veneer finishes (a) to walls below and above the western stair landing and (b) along the western wall between the floor level of the pavilion and the top of the hob (or kerb) at the base of the glazing.”

80 The cost of the rectification of the waterproofing was found at $375,442.

81 At pages 58 and 59 of the referee’s report he found a number of defects in relation to the paving installation. In respect of some of them rectification was not necessary but in respect of some of them rectification was necessary. The cost of rectification of the paving was found by the referee at $53,608.

82 There were also complaints about the finish of the pergola supports in respect of their surface treatment. This led to a corrosion of the column bases and consequential damage to the stone cladding around the column pedestals. The cost of the rectification was found at $65,465.

83 What we are concerned with here are defects that have an effect on the structure of the building and its enjoyment. The part of the building affected is the public entrance. We are not here concerned with questions of taste or eccentricity. They are real problems. Although in some circumstances the subsequent sale may have relevance as to reasonableness, here there are no objective facts surrounding the fact of sale which would impact on the question of the reasonableness of the claim for rectification. The building is still going to exist and it will still be affected by the defects and thus there is an effect on the utility of the building. This is not a case of there being substantial performance.

84 Although there is no suggestion that the plaintiff is proposing, unlike the director of War Service Homes in Harris’ case, to make ex gratia payments to effect rectification work, that is not the enquiry to which the authorities direct attention.

85 There is no doubt that the authorities in Australia on principles in respect of damages make it clear that a person cannot seek to be in a better position than he or she would have been had the contract not been performed. See Commonwealth v Aman Aviation Pty Limited [1991] HCA 54; (1991) 174 CLR 64 per Mason CJ and Dawson J at 82 and Toohey J at 136. Although there was no effect on the value of the building as a whole there is no doubt that as a result of the improper performance of the building works that the plaintiff did own a building and received after completion of the works a building which suffered from a series of real and obvious defects. In these circumstances it seems to me that the cost of remedying the defects are recoverable.

86 There was a submission on behalf of Scott Carver that the principles in Belgrove v Eldridge had no application to the law of torts. It would seem that this is contrary to the decision of the Court of Appeal in Evans v Balog (1976) 1 NSWLR 36 at 39 and Parramatta City Council v Lutz (1988) 12 NSW LR 293.

Rightway’s cross claim

87 At paragraph 442 of the report the referee indicated that should the court find that the claims against Scott Carver were not statute barred the referee would have assessed Scott Carver’s liability for waterproofing defects at 20%. Accordingly, the apportionment for waterproofing would be 20% Scott Carver, 24% to Nubra, and 56% to Rightway. It would follow from my decision on Scott Carver’s liability that the fourteenth cross claim against Scott Carver should succeed.

Decision

88 I direct the parties to bring in short minutes and I will hear argument on costs.

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LAST UPDATED: 04/12/2003

Authorities Cited4

Referred to (4)