Baseline Constructions Pty Ltd v Chen
[2020] FCCA 2080
•31 July 2020
FEDERAL CIRCUIT COURT OF AUSTRALIA
| BASELINE CONSTRUCTIONS PTY LTD v CHEN | [2020] FCCA 2080 |
| Catchwords: BANKRUPTCY – Application for sequestration order based on act of bankruptcy arising out of failure of respondent to comply with the requirements of a bankruptcy notice – at time of issue of bankruptcy notice the District Court of New South Wales made two orders, one that there be judgment for the applicant for $150,000 (first judgment debt), and one that there be judgment for the applicant for $150,000, but subject to a temporary stay (second judgment debt) – applicant issued bankruptcy notice demanding payment of the first judgment debt – the respondent paid $100,000 of the first judgment debt after the day by which the bankruptcy notice required payment of the first judgment debt – creditor’s petition claimed the applicant relied on a judgment debt of $300,000 being the sum of the first and second judgment debts, noting that the respondent had paid $100,000 – the respondent later paid the outstanding $50,000 of the first judgment debt – whether in those circumstances the District Court had given only one judgment for $150,000 with the consequence that by paying the $150,000 the respondent discharged the judgment and the applicant was not a creditor of the respondent – held District Court made one order that created two judgment debts – whether the stay in relation to the second judgment debt had lifted – stay lifted – whether respondent has offsetting claim exceeding the amount of the second judgment debt – no arguable case of an offsetting claim that was equal to or in excess of the second judgment debt – matter to be listed for the making of a sequestration order to give respondent opportunity to come to terms with the applicant. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.43, 47(1), 47(1A), 52(1), 156A Civil Procedure Act 2005 (NSW), ss.4(1), 73, 90(1), Schedule 1 |
| Cases cited: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Corney v Brien (1951) 84 CLR 343 Darling Downs Investments Pty Ltd v Ellwood (1988) 18 FCR 510; 80 ALR 203 Dinch v Dinch [1987] 1 WLR 252 Gorczynski v Bendigo and Adelaide Bank Ltd [2016] NSWCA 170 Kinch v Walcott [1929] AC 484 Liang v LV Property Investments Pty Ltd [2015] FCA 1057 McCracken v Phoenix Constructions (Queensland) Pty Ltd [2013] FCAFC 41 Opie v Opie (1951) 84 CLR 362 Re Joseph Francis Emerson and Wilma Lucy Emerson v Wreckair Pty Ltd [1992] FCA 16 Shout Rocks Cafes Pty Ltd & Anor v City of Port Philip & Ors [2018] VSC 120 Siebe Gorman & Co Ltd v Pneupac Ltd [1982] 1 WLR 185 Thomson Australian Holdings Pty Ltd v Trade Practices Commission (1980) 148 CLR 150 |
| Applicant: | BASELINE CONSTRUCTIONS PTY LTD ACN 058 578 662 |
| Respondent: | CRUZ CHEN |
| File Number: | SYG 251 of 2020 |
| Judgment of: | Judge Manousaridis |
| Hearing date: | 17 June 2020 |
| Date of Last Submission: | 17 June 2020 |
| Delivered at: | Sydney |
| Delivered on: | 31 July 2020 |
REPRESENTATION
| Counsel for the Applicant: | Mr J Raftery, by video |
| Solicitors for the Applicant: | Somerset Ryckmans |
| Counsel for the Respondent: | Mr A Vincent, by video |
| Solicitors for the Respondent: | Salim Rutherford Lawyers |
ORDERS
The respondent’s application for leave to rely on paragraphs 7-14 of the notice stating grounds of opposition to petition filed on 12 June 2020 is dismissed.
The matter is listed before the Court at 9.30 am on 14 August 2020 for the purpose of the Court making the following orders:
(a)the estate of the respondent, Cruz Chen, is sequestrated under the Bankruptcy Act 1966 (Cth) (Act);
(b)the applicant creditor’s costs (including any reserved costs) be taxed and paid from the estate of the respondent, Cruz Chen, in accordance with the Act;
and for the purpose of the Court noting the following matters:
(c)the date of the act of bankruptcy is 8 January 2020;
(d)a consent to act as trustee signed by Mr Adam Shepard has been filed under s.156A of the Act; and
(e)a copy of these orders is to be provided to the Official Receiver in Sydney within two business days.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 251 of 2020
| BASELINE CONSTRUCTIONS PTY LTD ACN 058 578 662 |
Applicant
And
| CRUZ CHEN |
Respondent
REASONS FOR JUDGMENT
Introduction
The applicant (Baseline) applies for a sequestration order under s.52(1) of the Bankruptcy Act 1966 (Cth) (Act) against the estate of the respondent, Mr Chen.
The act of bankruptcy on which Baseline relies is Mr Chen’s failure to comply with the requirements of a bankruptcy notice that was issued on 12 December 2019, and served on Mr Chen on 18 December 2019. The bankruptcy notice demanded payment of $150,000 within 21 days from the date of service. This represents what Baseline submits was part of a judgment for $300,000 that was made by the Judicial Registrar of the District Court of New South Wales (Judgment) on 9 December 2019 with the consent of Baseline and Mr Chen.
Mr Chen opposes the application for a sequestration order on a number of grounds.
a)First, Mr Chen submits he discharged the Judgment by payment, and, for that reason, Mr Chen does not owe Baseline any debt. This ground relies on a particular construction of the Judgment, namely, that it was for $150,000. Baseline, on the other hand, submits the Judgment was for $300,000; it consisted of two judgment debts, each in the amount of $150,000; Mr Chen paid the first judgment debt, but not the second judgment debt; and, for that reason, Baseline is a creditor of Mr Chen in the amount of $150,000.
b)Second, assuming the Judgment consisted of two judgment debts, Mr Chen submits he was liable to pay the second judgment debt only in particular circumstances that have not eventuated. The second judgment debt, therefore, was not payable when the bankruptcy notice was issued, and remains not payable.
c)Third, Mr Chen seeks leave to rely as a ground for opposing the making of a sequestration order a claim (Offsetting Claim) in the sum of $196,869 Mr Chen lodged against Baseline in the New South Wales Civil and Administrative Tribunal (NCAT). Mr Chen alleges that the $196,869 represents the cost of making good defective work Baseline performed at a property of which Mr Chen and his wife are the registered proprietors (Property).
d)Fourth, Mr Chen relies on an affidavit that contains evidence that is potentially relevant to establishing his solvency.
Baseline opposes Mr Chen being granted leave to rely on the Offsetting Claim as a ground for the Court not making a sequestration order because it submits the claim lacks merit. Counsel for Baseline, however, indicated that Baseline would be in a position to deal with the substance of the ground if I were to grant Mr Chen leave to rely on it. At my invitation, counsel for Baseline and Mr Chen made submissions on the merits of the proposed ground on the basis that I would consider the ground, first, for the purpose of determining whether it had sufficient merit to warrant my granting Mr Chen leave to rely on it and, second, assuming I were to conclude the ground has sufficient merits, whether the ground is made out and, if so, whether I should rely on that ground as a reason for not making a sequestration order, assuming Baseline otherwise establishes the matters that must be established before the Court can make a sequestration order under s.52(1) of the Act.
I will proceed as follows. I will first set out the evidence in narrative form of the events leading to the filing of the creditor’s petition. All of the evidence is contained in documents and, for that reason, is not contentious. Second, I will briefly set out the matters s.52(1) of the Act requires a creditor prove before the Court can make a sequestration order. Third, I will consider the first and second grounds on which Mr Chen relies because, if successful, Baseline will not be able to prove the preconditions prescribed by s.52(1) of the Act for the making of a sequestration order. Fourth, assuming these two grounds are decided against Mr Chen, I will consider whether Baseline has proved all the preconditions for the making of a sequestration order. Fifth, I will consider the merits of the Offsetting Claim. Finally, I will consider the relevance of Mr Chen’s affidavit.
Facts
In about May 2017 Baseline and Mr Chen entered into a construction management agreement (CM Agreement) under which Baseline agreed to carry out, or arrange for the carrying out of, certain work on the Property.
In May 2018 Baseline commenced a proceeding in the District Court of New South Wales in which it claimed Mr Chen owed to Baseline amounts for work Baseline claimed it performed under the CM Agreement. In his defence Mr Chen pleaded the CM Agreement was not enforceable because Baseline was not licensed to perform residential building work, and it did not have warranty insurance, contrary to the Home Building Act 1989 (NSW) (HB Act). That led Baseline to file an amended statement of claim on 6 December 2018.
In the amended statement of claim Baseline alleged that, pursuant to the CM Agreement, Baseline provided to Mr Chen a trade break-up of work that was to be performed; after Mr Chen directed on a number of occasions that the scope of work depicted in that trade break-up be varied, Baseline engaged various trades to undertake the work defined by the scope of works; from 17 October 2017 to 30 March 2018 Baseline issued to Mr Chen invoices that described, and claimed payment for, the work that had been completed for the period covered by the invoices; Mr Chen did not pay $477,551, being the amount claimed by the last of the seven invoices Baseline issued; and, after the work was completed, Mr Chen accepted the work, and moved into the Property. On the basis of these allegations, and relying on s.94(1A) of the HB Act, Baseline claimed Mr Chen owed it an amount equal to the value of the work that was carried out on the Property. Mr Chen filed a defence to the amended statement of claim on 12 April 2019 in which he did not admit most of the allegations Baseline made because Mr Chen alleged Baseline had not provided or identified to Mr Chen the invoices.
In the District Court proceedings both Baseline and Mr Chen filed the following expert reports:
a)A “Quantity Surveyors Expert Report” dated 29 March 2019 by Mr Hammond, filed on behalf of Baseline.[1] That report considered the “fair and reasonable market value” of the work Baseline performed on the Property. Mr Hammond valued the work at $2,383,507 (inclusive of GST).
b)A report prepared by Mr Madden dated 5 July 2019 and filed on behalf of Mr Chen.[2] Mr Madden valued the work at $1,550,772.39 (exclusive of GST).
c)A “Quantity Surveyors Expert - Report in Reply” dated 13 August 2019 by Mr Hammond, filed on behalf of Baseline.[3]
[1] Affidavit of N Fasullo 16.06.2020, exhibit “NF-2”
[2] Affidavit of N Fasullo 16.06.2020, exhibit “NF-4”
[3] Affidavit of N Fasullo 16.06.2020, exhibit “NF-3”
In addition, on 9 August 2019 Mr Hammond and Mr Madden prepared a joint experts’ report.[4]
[4] Affidavit of N Fasullo 16.06.2020, exhibit “NF-5”
On 14 August 2019 Baseline and Mr Chen entered into an agreement (Settlement Agreement) to resolve Baseline’s claims in the District Court proceeding. The Settlement Agreement recites that on about 31 March 2017 Baseline and Mr Chen entered into “a construction management contract”; on 22 March 2018 “certain internal alterations and additions (Works) were carried out at” the Property as contemplated by the CM Agreement; practical completion of the Works was achieved on 22 March 2018; certain disputes had arisen between the parties in relation to the CM Agreement, the Works, and the Property; and, without any admissions, Baseline agreed to perform the work identified in the annexure to the Settlement Agreement (Agreed Works), and Mr Chen will pay to Baseline $300,000. The Settlement Agreement contains terms that include the following:
a)Clause 1 provides that by 4 September 2019 Mr Chen would pay to Baseline $150,000, and the remaining $150,000 within 7 days of the completion of the Agreed Works in accordance with clause 2.
b)Clause 2 provides that Baseline will notify Mr Chen when it completes the Agreed Works; within 5 days of such notification Mr Chen would take all reasonable steps to arrange an expert to inspect the performance of the Agreed Works, at the end of which the expert will notify the parties whether he agrees the Agreed Works have been completed; and, if he considered the Agreed Works have not been completed, the expert will notify the parties of the items of the Agreed Works that have not been completed, giving detailed reasons.
c)Clause 4 provides that Baseline “will be liable for any defects in the Works for 6 years from the Date of Practical Completion”.
d)Clause 5 provides that, following the payment of the second of the two amounts referred to in clause 1, the parties would take all necessary steps to dismiss the District Court proceeding on the basis that each party will bear its or his own costs.
Mr Chen did not pay the $150,000 by 4 September 2019. In an email sent to Mr Chen’s lawyer on 11 September 2019, Baseline’s lawyer said Baseline agreed to Mr Chen’s request that he be given until 20 September 2019 to pay the $150,000, and also said Baseline wanted “to arrange a suitable time and date to attend your client’s property for the purposes of carrying out the Agreed Works under the Settlement Agreement”.[5] Mr Chen did not make any payment by 20 September 2019, and Mr Chen did not respond to Baseline’s request for the fixing of a suitable time to carry out the Agreed Works.[6] In those circumstances, on 17 October 2019 Baseline filed a statement of claim in the District Court claiming judgment for the $150,000 that was payable under clause 1 of the Settlement Agreement.[7]
[5] Affidavit of N Better 08.05.2020, exhibit NB-5, page 30
[6] Affidavit of N Better 08.05.2020, exhibit NB-5, pages 31-34
[7] Affidavit of N Better 08.05.2020, exhibit NB-5, pages 22-23, [13]
In addition, on 2 December 2019 Baseline filed a notice of motion in the District Court proceeding in which it sought an order purportedly under s.73 of the Civil Procedure Act 2005 (NSW) (CP Act) that there be judgment for $300,000 or, in the alternative, that judgment be entered “in the sum of $150,000 as referred to in clause 1(a) of the” Settlement Agreement, and “in the sum of $150,000 as referred to in clause 1(b) of the” Settlement Agreement.[8] Subsection 73(1) of the CP Act provides that the “court” “has and may exercise jurisdiction to determine any question in dispute between the parties to the proceedings as to whether, and on what terms, the proceedings have been compromised or settled between them” and “may make such orders as it considers appropriate to give effect to any such determination”.
[8] The CP Act applies to the District Court of New South Wales – see s.4(1) of the CP Act; Schedule 1
The notice of motion came before Judicial Registrar Howard on 9 December 2019.[9] There was also listed before the Judicial Registrar a notice of motion for an order for substituted service of the statement of claim Baseline filed on 17 October 2019. After discussion between the Judicial Registrar and the legal representatives of Baseline and Mr Chen, the parties consented to the Judicial Registrar making the following “Judgement/Order”:
[9] Exhibit B
TERMS OF JUDGMENT/ORDER
1)SMO 1 and 2 filed in court today.
2)Leave to relist on 3 days notice.
3)Defendant to pay plaintiffs [sic] costs of the motion.
Attached to this document is a handwritten document headed “Short Minutes of Order/Consent Orders” (Orders) which is as follows:
1.Judgment for the plaintiff against the defendant in the sum of $150,000.
2.Judgment for the plaintiff against the defendant in the sum of $150,000 to be stayed until:
(a)within 7 days of a date to be agreed by the parties for completion and inspection of the agreed works as that term is defined in the agreement between the parties dated 14 August 2019; or
(b)if no agreement is reached, 17/1/2020.
On 11 December 2019 Mr Chen “provided Baseline with access to the Property to undertake the rectification works required under the” Settlement Agreement;[10] and Baseline inspected the Property on that day.[11]
[10] Affidavit of C Chen 30.04.2020, [9]
[11] Affidavit of N Bettar 08.05.2020, [16]; exhibit NB-12, page 45
On 18 December 2020 Baseline applied for, and there was issued, a bankruptcy notice demanding Mr Chen pay $150,000. The bankruptcy notice stated $150,000 to be the amount of the debt; and it required that the debt be paid within 21 days of service, or for Mr Chen to make arrangements to Baseline’s satisfaction “for settlement of the debt” within that time. Baseline’s lawyer sent the bankruptcy notice by email to Mr Chen on 18 December 2019.[12]
[12] Affidavit of Service of N Fasullo 05.02.2020, [4]
On 7 January 2020 Mr Chen’s lawyer sent an email to Baseline’s lawyer, noting that Baseline intended to carry out work on 13 January 2020, being only “3 days before the stay is to lapse”. Mr Chen’s lawyer stated that “a date needs to be agreed by the parties for completion and inspection of the agreed works, in order to extend the stay”. Mr Chen’s lawyer requested that Baseline’s lawyer indicate when Baseline intends to complete the Agreed Works, noting that the “parties will also need to take into account a reasonable time of say 2 weeks, to allow the expert to inspect”.[13] Baseline’s lawyer responded, noting that the necessary rectification work would be completed by 17 January 2020, and that an inspection can be arranged after that date. The lawyer also said that Baseline agreed that the parties “send a joint communication to the [District] Court requesting that the stay of judgment be extended to 31 January 2020”.[14] On 15 January 2020 Mr Chen’s lawyer sent to the District Court Judicial Registrar the following email:[15]
[13] Affidavit of N Bettar 08.05.2020, [16]; exhibit NB-12, page 45
[14] Affidavit of N Bettar 08.05.2020, [17]; exhibit NB-13, page 46
[15] Affidavit of N Bettar 08.05.2020, [21]; exhibit NB-17, pages 118-119
We act for the defendant in these proceedings.
We are writing to you in relation to the orders made on 9 December 2019.
The parties have agreed that the stay of judgment be extended to enable the plaintiff to complete the works and to enable the defendant to arrange for an expert to inspect those works.
In the circumstances, the parties seek, by consent, that the stay of the judgment referred to at Order 2 of the orders made on 9 December 2019 is extended to 31 January 2020.
The parties respectfully request that this order be made in Chambers, but please let us know if the matter is required to be relisted for the parties to appear before the Court.
We confirm that the solicitor for the plaintiff has been copied into this email.
Also on 15 January 2020 Baseline’s lawyer sent by email to Mr Chen’s lawyer a letter stating that Baseline considered that the Agreed Works identified in the Settlement Agreement, had been completed, and attached a letter dated 15 January 2020 from Baseline to its lawyer. That letter begins: “As per the agreement which is attached . . . it notes under Annexure A, eight separate works to be actioned accordingly”, and then describes the work Baseline carried out.[16]
[16] Affidavit of N Bettar 08.05.2020, [20]; exhibit NB-16, pages 55-117
According to Mr Chen, after he received Baseline’s letter he inspected the work Baseline carried out, and he formed the opinion that Baseline had not completed the Agreed Works. On his instructions, on 21 January 2020 Mr Chen’s lawyer sent by email to the Resolution Institute a “Nomination Application for Dispute Resolver” asking for the nomination of an “Expert Determiner”.[17] On 23 January 2020 Mr Chen’s lawyer sent an email to Baseline’s lawyer informing him that, although Mr Chen did not agree that Baseline had completed the Agreed Works, Mr Chen had applied to the Resolution Institute for the appointment of an expert.[18]
[17] Affidavit of C Chen 30.04.2020, [18]; Annexure 10
[18] Affidavit of C Chen 30.04.2020, [19]; Annexure 11
On 30 January 2020 Mr Chen’s lawyer sent an email to Baseline’s lawyer stating that the Resolution Institute had not yet appointed an expert. He requested that Baseline agree to a stay being granted until 14 February 2020.[19] The lawyer for Baseline requested that Mr Chen’s lawyer provide a copy of the application Mr Chen made to the Resolution Institute for the appointment of an expert.[20] Mr Chen’s lawyer provided a copy to Baseline’s lawyer who, on enquiries initiated by him, was informed that Mr Chen’s application to the Resolution Institute for the appointment of an expert had not been processed because no application fee had been paid.[21] By email sent on 31 January 2020 Baseline’s lawyer informed Mr Chen’s lawyer that Baseline did not consent to the extension of the stay. The email concluded by stating that if Mr Chen were to apply for a stay the email from Baseline’s lawyer not consenting to a stay should be provided to the District Court.[22]
[19] Affidavit of N Bettar 08.05.2020, [25]; exhibit NB-19, page 121
[20] Affidavit of N Bettar 08.05.2020, [26]; exhibit NB-20, page 122
[21] Affidavit of N Bettar 08.05.2020, [27]-[28]; exhibit NB-21, NB-22, pages 123-130
[22] Affidavit of N Bettar 08.05.2020, [29]; exhibit NB-23, page 131
On 2 February 2020 the Judicial Registrar of the District Court responded to the request for a stay that was made by email sent on 15 January 2020. The Judicial Registrar said he had been on leave and had only “just seen” the email. The Judicial Registrar also noted that, given the day to which the parties had agreed the stay be extended had passed, it appeared it was not necessary for the District Court to make any order.
On 5 February 2020 Baseline filed its creditor’s petition, paragraph 1 of which states as follows:
The respondent debtor owes the applicant creditor the amount of $300,000 pursuant to a judgment entered on 9 December 2019 in favour of the creditor against the debtor in District Court of NSW Proceedings 2018/150904 (“the Judgment”). As at the date of this petition, the stay in order 2 of the Judgment has lapsed.
On 16 January 2020, the respondent debtor paid an amount of $100,000 to the applicant creditor in part-satisfaction of the Judgment and there presently remains an amount of $200,000 which is due and owing to the applicant creditor.
Further events occurred after Baseline filed the creditor’s petition, which I will set out when I consider the Offsetting Claim. At this stage I need only mention one thing; and that is Mr Chen paid $50,000 to Baseline on 15 April 2020.
Preconditions for making a sequestration order
Before the Court can make a sequestration order, it must be satisfied that the matters identified in s.52(1) of the Act have been proved. Two of those matters are relevant to what I have to decide. The first are the matters stated in s.52(1)(a), namely, “the matters stated in the petition”. These are the matters contained in the form of petition prescribed by the Federal Circuit Court (Bankruptcy) Rules 2016 (Cth) (Bankruptcy Rules).[23] The second is that specified by s.52(1)(c) of the Act, namely, “that the debt or debts on which the petitioning creditor relies is or are still owing”. That is a reference to the debt the creditor’s petition claims is owed by the debtor. The debt need not be the debt on which the act of bankruptcy is based.[24]
[23] See s.47(1A) of the Act
[24] See Re Joseph Francis Emerson and Wilma Lucy Emerson v Wreckair Pty Ltd [1992] FCA 16, at [28]; McCracken v Phoenix Constructions (Queensland) Pty Ltd [2013] FCAFC 41, at [61], [62]
Ground 1 of opposition – No debt owing
In his notice stating grounds of opposition to petition (Grounds of Opposition), Mr Chen states as follows:[25]
To the extent that it is contended by the applicant that the Judgment is for a sum greater than $150,000 then the judgment is irregular and unenforceable as such as:
a.There is no power to enter two final judgments in the one proceeding between the same two parties;
b.Upon entry of the judgment contained in order 1 of the Judgment, the Court was functus officio and could not enter judgment once more.
[25] Grounds of Opposition, [4]
Mr Chen, in his counsel’s written submissions, submits that, on the proper construction of the Judgment, there was created only one judgment debt, which Mr Chen discharged by payment. Counsel submits that paragraph 1 of the Orders created that debt, namely, $150,000; whereas paragraph 2 of the Orders did not even purport to create any judgment. Mr Chen submits that this construction of the Judgment is consistent with the District Court “only being constituted to deliver a single judgment, unless expressly entering partial judgment on a matter”.[26] Counsel relies on r.13.3 of the Uniform Civil Procedure Rules 2005 (NSW) which permits a judgment for part of the amount; and Mr Chen also relies on s.81 of the District Court Act 1973 (NSW), which provides that a “judgment in an action shall, unless set aside in accordance with this Act, be final and conclusive between the parties to the action”. Mr Chen further submits that, on order 1 having been made, the District Court became “functus officio” and, for that reason, had no power to make order 2.[27]
[26] As, for example, r.13.3 of the Uniform Civil Procedure Rules 2005 (NSW).
[27] Respondent’s Outline of Submissions, [3]-[9]
Counsel for Baseline submits that in construing the Judgment the “ordinary principles of construction [of contracts] ought to apply”; and that, based on those principles, the Judgment is a judgment for $300,000, with $150,000 payable immediately, and the balance by the time provided for by order 2 of the Orders, that is, by 17 January 2020. Counsel further submits that even if it made two judgments, the District Court has power to do so under s.90(1) of the CP Act.
Two questions arise: first, what is the proper construction of the Judgment? Second, as properly construed, is the Judgment one which it was within the power of the District Court to make?
Construction of Judgment
The Judgment was pronounced with the consent of Baseline and Mr Chen; it was, in other words, pronounced pursuant to “a real contract between the parties”.[28] An order made by consent is “as effective as an order of the Court made otherwise than by consent and not discharged on appeal”. [29] That is subject to the court having jurisdiction to make such order in the first place, because “parties by consent cannot confer power upon the Court to make orders which the Court lacks power to make”.[30]
[28] Siebe Gorman & Co Ltd v Pneupac Ltd [1982] 1 WLR 185, at page 189
[29] Kinch v Walcott [1929] AC 484, at page 493 (PC) (reference omitted)
[30] Thomson Australian Holdings Pty Ltd v Trade Practices Commission (1980) 148 CLR 150, at page 163
Where a court makes an order by consent it “will only interfere with such an order on the same grounds as it would with any other contract”. [31] That implies that a judgment or order that was made by consent – that is, pursuant to a contract – is to be construed in the manner contracts are construed. In Dinch v Dinch, for example, Lord Oliver said:[32]
One has, as it seems to me, simply to look at the order and any admissible material available for its construction, and determine what the court intended – or, in the case of the consent order, what the parties intended – to effect by the order.
[31] Siebe Gorman & Co Ltd v Pneupac Ltd [1982] 1 WLR 185, at page 189
[32] Dinch v Dinch [1987] 1 WLR 252, at page 263 (Lord Keith, Lord Templeman, Lord Griffiths, and Lord Goff agreeing).
That orders and judgments that have been entered pursuant to an agreement between the parties are to be construed in the manner contracts are construed is further supported by a number of cases that have considered when surrounding circumstances may be taken into account when construing a consent order or judgment.[33]
[33] See the authorities referred to in the judgment of J Forrest J in Shout Rocks Cafes Pty Ltd & Anor v City of Port Philip & Ors [2018] VSC 120, at [14]
The first step in construing the Judgment is to identify its terms. It consists of the words “SMO 1 and 2 filed in court today”. That is a reference to paragraphs 1 and 2 of the Orders that are annexed to the Judgment. By making orders in terms of “SMO 1 and 2 filed in court today”, therefore, the District Court purported to incorporate as its orders the contents of the Orders. What must be construed, therefore, are the contents of the Orders.
I begin with the word “judgment”. It is reasonable to assume that Baseline and Mr Chen, acting as they did through lawyers, intended “judgment” to bear its ordinary legal meaning. Blackstone said “judgments” are “the sentence of the law, pronounced by the court upon the matter contained in the record”.[34] A more contemporary definition of “judgment” is the “determination of a court in legal proceedings”.[35] Historically “judgment” referred to the determinations of actions by courts of common law. That is the meaning given to “judgment” in 1884 when it was defined as a “liability of the debtor to the creditor being established in an action”.[36] In modern usage, however, “judgment” is no longer uniquely associated with determinations of actions at law.[37]
[34] Blackstone Commentaries on the Laws of England, Vol. III 1768, page 395
[35] Encyclopaedic Australian Legal Dictionary, accessed on 22 July 2020
[36] Ex Parte Chinery, In Re Chinery (1884) 12 QBD 342, at page 346; see also Opie v Opie (1951) 84 CLR 362, at pages 372-373
[37] See, for example, s.5 of the Federal Circuit Court of Australia Act 1999 (Cth) where “judgment” is defined to mean “a judgment, decree or order, whether final or interlocutory, or a sentence, and includes a decree within the meaning of the Family Law Act 1975”.
In this usage “judgment” is a denoting expression. At its most general it denotes a court’s determination of a claim; and it may also denote the particular words by which a court in a given case expresses its determination of a claim. In modern practice, however, “judgment” often forms part of the words by which a court expresses its determination of a money claim. A formula by which a court commonly expresses its determination of a money claim is “judgment for the plaintiff in the sum of $”. When used in this way, “judgment” does not operate as a denoting expression; it operates as a performative, that is, a word which, when pronounced as part of an order, has legal effect. By pronouncing an order consisting of the words “judgment for the plaintiff” for a particular amount, a court creates a new obligation - a judgment debt - into which there merges the money claim determined by the order. This was explained by Fullagar J in Corney v Brien:[38]
Generally speaking, a judgment at law for a sum of money creates an obligation of its own force. The pre-existing obligation, which the judgment is intended to enforce, merges in the new obligation so created . . . .
[38] Corney v Brien (1951) 84 CLR 343, at page 353
Thus, an order that there be “judgment” for an amount of money has a constitutive effect; by its pronouncement the order creates a judgment debt. Assuming it acted within jurisdiction, therefore, when the District Court pronounced by incorporation the expression in order 1 of the Orders – “judgment for the plaintiff against the defendant in the sum of $150,000” - there was created a judgment debt in favour of Baseline against Mr Chen for $150,000; and, when created, there merged into that judgment debt a pre-existing right, that being the right Baseline had under clause 1 of the Settlement Agreement that Mr Chen pay to it $150,000 by 4 September 2019.
Next, there is the expression “judgment for the plaintiff against the defendant in the sum of $150,000” in order 2 of the Orders. It is the same as the expression contained in order 1, except it is followed by text not contained in order 1. Counsel for Mr Chen submits the expression should be construed as referring to the expression “judgment for the plaintiff against the defendant in the sum of $150,000” that appears in order 1 of the Orders. I do not accept that submission.
If, as counsel for Mr Chen submits, the expression in order 2 is intended to denote the “judgment” referred to in order 1, it would be reasonable to expect that the parties would have included words which in some way referred to the “judgment” in order 1 as being the intended object of clause 2. That could have been done, for example, by placing “the” at the beginning of order 2, to indicate that the subject matter of the Orders was one “judgment”, namely the “judgment” referred to in order 1 of the Orders. Instead, order 2 of the Orders uses the same expression as order 1 - “judgment for the plaintiff against the defendant in the sum of $150,000” – which, assuming the District Court acted within jurisdiction, I have found operated to create a distinct judgment debt; and that is what the expression also does in order 2 of the Orders – it creates a distinct judgment debt for $150,000, but subject to the text contained in order 2, being text that is not part of order 1. Further, just as there is an identifiable right that merged into order 1, so too there is an identifiable right that merged into order 2; that is the right Baseline had against Mr Chen under clause 1(b) of the Settlement Agreement as qualified by clause 2 of that agreement.
There is another approach for determining whether orders 1 and 2 of the Orders constitute one judgment debt or two distinct judgments debts. Evidence of prior negotiations is admissible to prove the intended subject matter of a contract.[39] Here, the subject matter of the agreement between Baseline and Mr Chen by which they agreed to the Judicial Registrar making the Judgment is the claims for relief identified in the notice of motion for judgment. Those claims refer to the rights Baseline had under paragraphs (a) and (b) of clause 1 of the Settlement Agreement to receive two payments of $150,000, with the proviso that the second payment was conditional on Baseline carrying out the Agreed Works. The agreement between the parties that led to the Judgment was that Baseline’s right to be paid the two amounts of $150,000 be converted into two judgment debts, each for $150,000, subject to the terms contained in order 2 of the Orders.
[39] Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, at pages 349, 352 (Mason J)
What of the text in order 2 of the Orders that follows the expression “judgment for the plaintiff against the defendant in the sum of $150,000”? The central notion of the text is the word “stayed”. Read literally, it is directed to the “judgment” for $150,000. A judgment, however, is not something that is capable of being stayed; it is the execution of a judgment that is capable of being stayed. The true effect of the text that follows “judgment for the plaintiff against the defendant in the sum of $150,000” is that execution of the judgment debt is stayed until the first of two days. The first is a day that is seven days from the day on which the parties agree for the completion and inspection of the Agreed Works. The second is 17 January 2020 if no agreement is reached.
For these reasons, I am satisfied that, by consenting to the Judgment, Baseline and Mr Chen intended that there be created two judgment debts; one for $150,000 that was payable immediately; and one for $150,000 that was payable on the first of the two days specified in order 2 of the Orders.
Was the Judgment within power?
As I have noted, the Judgment was entered by consent after Baseline filed a notice of motion purportedly pursuant to s.73 of the CP Act. I say “purportedly”, because s.73(1) is expressed rather narrowly. It creates (or perhaps confirms) a jurisdiction to determine a particular question or set of questions, namely, whether any question in dispute between parties to a proceeding has been compromised or settled between them, and, if so, on what terms; and to make such order as to give effect to such determination. Read literally, s.73(1) does not confer jurisdiction on the District Court to enforce the terms of a compromise about which there is no dispute. The potential significance of this literal construction of s.73(1) of the CP Act is that there is nothing in the material before me that suggests there was any dispute between Baseline and Mr Chen that the claims Baseline made in the District Court proceeding had been settled on the terms set out in the Settlement Agreement; and that might suggest the District Court did not have jurisdiction under s.73(1) of the CP Act to enforce the terms of the Settlement Agreement.
There are a number of answers to this potentially limited operation of s.73(1) of the CP Act. First, a party’s not complying with what is alleged to be a compromise by itself can be taken as evidence of a dispute in relation to the compromise; and, for that reason alone, would fall within the terms of s.73(1). Second, s.73(1) has been construed broadly. In Gorczynski v Bendigo and Adelaide Bank Ltd Basten JA said:[40]
Section 73 (and its analogues in other jurisdictions) has been understood to confer power on the court to deal with settlements in the proceedings to which they relate, rather than leaving the parties to commence separate proceedings to enforce a settlement. Accepting that to be the primary purpose of the provision, it is nevertheless expressed in broad terms as to the scope of the power conferred, terms which should not be read down by implied constraints. Rather, the breadth of the power as it operates in the Supreme Court is confirmed when it is read in the context of other powers conferred on the Court. Thus, s 56 of the Civil Procedure Act, to which the primary judge referred, states that the court must give effect to the overriding purpose of facilitating “the just, quick and cheap resolution of the real issues in the proceedings.”
[40] Gorczynski v Bendigo and Adelaide Bank Ltd [2016] NSWCA 170, at [6] (references omitted)
Third, quite apart from s.73(1) of the CP Act, it has been held that provisions such as s.63 of the Supreme Court Act 1970 (NSW) (SC Act) (which confer power on a court to grant any remedy to which the party appears to be entitled, so that, as far as possible, all matters in controversy may be completely and finally determined) confer power on a court to enforce an agreement for the compromise of an action by a motion for judgment in the action itself in accordance with the agreed terms.[41] Section 90(1) of the CP Act, which provides that, at or after trial, or otherwise, the court is to give such judgment or make such order as the nature of the case requires, is sufficiently analogous to s.63 of the SC Act to confer jurisdiction on the District Court to enforce an agreement for the compromise of an action by a motion for judgment in the action itself in accordance with the agreed terms.
[41] Darling Downs Investments Pty Ltd v Ellwood (1988) 18 FCR 510; 80 ALR 203; Roberts v Gippsland Agricultural & Earth Moving Contracting Co Pty Ltd [1956] VLR 555
I conclude, therefore, that by filing the notice of motion on 2 December 2019 Baseline applied for a judgment to give effect to the Settlement Agreement, being an agreement that constituted the compromise of the claims Baseline made in the proceeding; and the District Court had jurisdiction to determine whether it should give judgment on Baseline’s motion.
The next question is whether, as Mr Chen submits, the Judgment purports to constitute two judgments. I have held that “judgment”, as it appears in each of orders 1 and 2 of the Orders, operated as a performative; it is the word Baseline and Mr Chen consented the District Court use in each of orders 1 and 2 of the Orders when it determined the claim Baseline made by its notice of motion that there be judgment to give effect to the terms of the Settlement Agreement. That, however, does not mean there are two judgments – that is to say, two determinations – in relation to the claim Baseline made by its notice of motion. By pronouncing the orders recorded in the Judgment, the District Court gave one judgment – that is, it made one determination – in relation to the claim Baseline made by notice of motion for judgment to give effect to the terms of the Settlement Agreement; and by giving the one judgment, there were created two distinct judgment debts, one for $150,000, that was immediately payable, and one for $150,000, that was payable at the earliest of the two days specified in order 2 of the Orders.
It was within the power of the District Court to pronounce a judgment – that is, make a determination - that consisted of two orders each of which created a judgment debt. Such a judgment answers the description of the judgments s.90(1) and s.73(1) of the CP Act provide a court can make.
Conclusion
Given I have found the Judgment created two distinct judgment debts, each for $150,000, Mr Chen’s payment of $150,000 by itself did not discharge both judgment debts. There still remains unpaid the second judgment debt of $150,000, being part of the debt on which Baseline relies in the creditor’s petition.
Ground 2 of opposition – stay of obligation to pay $150,000
The second ground of opposition is as follows:
[T]o the extent that a second final judgment was properly entered against the respondent as part of the Judgment (Second Judgment), which is denied, then:
a.The Second Judgment was entered on terms such that it was to be stayed until within 7 days of a date to be agreed by the parties for completion and inspection of the Agreed Works as that term is defined in the agreement between the parties dated 14 August 2019 (Agreement);
b.This order provided mutual obligations on the parties including that the respondent [sic] was obligated to endeavor to agree a time to complete and inspect the Agreed Works;
c.The applicant failed to attempt to agree a date for or completion and inspection of the Agreed Works;
d.The applicant cannot rely upon its own conduct in failing to endeavor to agree a time to complete and inspect the Agreed Works as a basis to assert that the stay of the Second Judgment has lapsed.
In his counsel’s written submissions, Mr Chen submits as follows:[42]
a)on 15 January 2020, being two days before the day on which the stay ordered by order 2 of the Judgment was to expire, Baseline sought to have Mr Chen appoint an independent expert to inspect the Agreed Works;
b)pursuant to clause 2 of the Settlement Agreement an expert was to be arranged within five business days of Baseline’s notifying the respondent of the completion of the works;
c)given the day on which Baseline sought to have Mr Chen appoint an independent expert, it was not possible for the parties to agree before 17 January 2020 to the day by which the Agreed Works were to be completed and inspected; and
d)in those circumstances, having engaged in the process of seeking to agree to a day by which the Agreed Works would be completed and inspected, Baseline could not rely on its own conduct to withdraw from that process, and instead rely on a lack of agreement to enliven order 2(b) of the Judgment.
[42] Respondent’s Outline of Submissions, [10]-[12]
I do not accept these submissions. First, they ignore the terms of order 2 of the Orders. That order provides that the stay will be lifted on the first of two days; the first is a day seven days from the day on which the parties agree for the completion and inspection of the Agreed Works; and the second was 17 January 2020 if no agreement were reached by that day. Order 2, therefore, contemplated that the parties may not reach agreement by 17 January 2020, even if one of the parties were to have imitated a process for reaching such agreement; and that if no agreement were to be reached by 17 January 2020, Mr Chen would become liable to pay $150,000 immediately after that day. It may be accepted that there could readily be implied into order 2 a term to the effect that Baseline and Mr Chen would each do all that was reasonably within their power to reach an agreement by 17 January 2020; but Mr Chen does not rely on any such implied term, and he does not allege Baseline failed to do all that it was reasonably within its power to do to reach agreement by 17 January 2020 for the completion and inspection of the Agreed Works.
A second reason I do not accept Mr Chen’s submissions is that they ignore what occurred. By its letter dated 15 January 2020 Baseline gave notice to Mr Chen that it had completed the Agreed Works so that Mr Chen could arrange an expert to inspect the performance of that work. Baseline appears to have given this notice because it considered it remained bound to do so under clause 2 of the Settlement Agreement. At Mr Chen’s request, Baseline agreed to extend the stay provided for by order 2(b) of the Orders from 17 January 2020 to 31 January 2020 to give Mr Chen an opportunity to arrange for an expert to inspect the Agreed Works and, therefore, to give the parties an opportunity to agree on a day on which the Agreed Works could be inspected. No agreement, however, was made by 31 January 2020. In those circumstances, the stay provided for by order 2, as extended to 31 January 2020 by agreement of the parties, lapsed, and Mr Chen became liable to pay the $150,000 from 1 February 2020.
That the parties did not reach agreement by 31 January 2020 was not due to anything Baseline did or failed to do; it was due to Mr Chen’s neglect. He did not purport to take any steps to arrange for an expert until more than five days after he received Baseline’s letter of 15 January 2020; and the steps Mr Chen took to arrange for an expert were ineffective because he did not provide the fees necessary to arrange for an expert to inspect the Agreed Works. Further, Mr Chen did not apply to the District Court for an order extending the stay the parties had agreed to.
Ground 2 of the Grounds of Opposition, therefore, also fails.
Proof of matters specified in s.52(1) of Act
I now consider whether I am satisfied Baseline has proved the matters s.52(1) of the Act requires it prove before the Court can make a sequestration order against the estate of Mr Chen.
As I have already noted, the act of bankruptcy on which Baseline relies is the failure by Mr Chen to comply with the requirements of a bankruptcy notice that was issued on 12 December 2019. The amount demanded by the bankruptcy notice, namely, $150,000, being the first of the two judgment debts created by the Judgment, was not the subject of any stay. The bankruptcy notice was served on Mr Chen by email on 18 December 2019.[43] It required Mr Chen to comply with its requirements within 21 days after service on him. Although Mr Chen paid the amount demanded by the bankruptcy notice - $100,000 on 16 January 2020 and $50,000 on 15 April 2020 – those payments were not made within the period required by the bankruptcy notice. Mr Chen, therefore, committed an act of bankruptcy on 8 January 2020, being the last day by which Mr Chen was required to comply with the bankruptcy notice.
[43] Affidavit of Service of N Fasullo 05.02.2020
Baseline filed a creditor’s petition on 5 February 2020 in the prescribed form,[44] and, as required by s.47(1) of the Act and r.4.02(2) of the Bankruptcy Rules, an affidavit verifying paragraphs 1, 2, 3, and 4 of the creditor’s petition has been made.[45] Baseline also filed at the time it filed the creditor’s petition an affidavit as required by r.4.04(1)(a)(ii) of the Bankruptcy Rules,[46] and, as required by r.4.04(1)(b), an affidavit of service of the bankruptcy notice.[47] In addition Baseline filed a “Trustee Consent to Act Declaration” given by Mr Adam Shepard. Baseline has not, however, filed an affidavit of service of the creditor’s petition and other documents, as required by r.4.05 of the Bankruptcy Rules. Mr Chen, however, has obviously received notice of the proceeding because he has filed the Grounds of Opposition, and he has appeared at the hearing to present evidence and make submissions in opposition to Baseline’s application for a sequestration order. Finally, an affidavit of debt,[48] as required by r.4.06(4) of the Bankruptcy Rules, and an affidavit of search, as required by r.4.06(3), have also been read.[49]
[44] Bankruptcy Rules, r.4.02(1); Form B6
[45] Affidavit verifying creditor’s petition sworn by N Bettar on 04.02.2020
[46] Second affidavit of N Fasullo 05.02.2020
[47] Affidavit of Service of N Fasullo 05.02.2020
[48] Affidavit of debt N Bettar 17.06.2020
[49] Affidavit of N Fasullo 17.06.2020
I am therefore satisfied Baseline has proved the matters it is required to prove under s.52(1) of the Act.
Offsetting Claim
The third ground on which Mr Chen intends to rely, and for which he requires leave to rely, is that articulated in paragraphs 7-14 of what I will call the “Amended Grounds of Opposition”. I will refer to the proposed ground as the “Offsetting Claim”. The elements of the Offsetting Claim are as follows:
a)Baseline and Mr Chen entered into the CM Agreement under which Baseline agreed to perform work at the Property (Works), those works being “residential building work” as that expression is defined in Schedule 1 to the HB Act.
b)By the operation of s.18B of the HB Act, warranties to the effect provided for in s.18B(1)(a)-(f) of the HB Act were implied as terms of the CM Agreement, and remain binding on Baseline.
c)Under clause 4 of the Settlement Agreement Baseline is liable for any defects in the Works for six years after the date of practical completion, which was reached on 22 March 2018.
d)There are defects in the work Baseline performed, and these are identified in a report prepared by Mr Gordon Xue.
e)As a consequence of the defective work, Mr Chen has suffered damage in an amount that exceeds $150,000.
Before I consider the parties’ submissions on the merits of the Offsetting Claim, it will be necessary, first, to identify the legal principles that explain the relevance or potential relevance of the Offsetting Claim to whether I should make a sequestration order and, second, to set out some more facts and evidence.
Principles
As I discussed elsewhere,[50] it is open to a debtor to claim at the hearing of a creditor’s petition that he or she had a cross-claim against the creditor in an amount that exceeds the amount of the debt on which the creditor relies. Such a claim, when made, may be relevant in two ways. The first is where the bankruptcy court is not in a position to determine whether the asserted cross-claim is likely to succeed, but nevertheless is satisfied that the claim is of sufficient substance that the validity of the claim ought to be determined by the ordinary process by which civil claims are determined. Where the bankruptcy court is so satisfied it has a discretion to adjourn the creditor’s petition until such time as the cross-claim is determined in the ordinary course.
[50] Commonwealth Bank of Australia Trading as Bankwest v Mastronardo [2019] FCCA 2371, at [36]-[40]
The assertion of a cross-claim against the creditor may be relevant in another way. The bankruptcy court may not only be satisfied that the cross-claim is of substance, but also that the debtor is likely to have a cross-claim that exceeds the judgment on which the creditor’s petition is based. Here, although the bankruptcy court retains a discretion to adjourn the hearing of the creditor’s petition it has the additional discretion to treat the existence of the cross-claim as “some other sufficient cause” under s.52(2)(b) of the Act and, for that reason, dismiss the creditor’s petition.
What I say in the preceding two paragraphs is based on the following passage from the judgment of Beach J in Liang v LV Property Investments Pty Ltd:[51]
An important distinction is to be made between a cross-claim which is likely to succeed and a cross-claim which is a bona fide and reasonably arguable claim, but where it is not established by the judgment debtor that it is likely to succeed. In the former case, where it is established that the claim is likely to succeed, such a claim may warrant the refusal of a sequestration order . . . . In the latter case, only a basis for adjourning the creditor’s petition may be established, but the ultimate refusal of a sequestration order may not be justified . . . . .
There is a theoretical question. If you have the latter case, do you establish a “sufficient cause” at all? Some authorities suggest that you do not and that only cases in the former category fit within s 52(2)(b) . . . . . In my view, these authorities support what was said in Rigg v Baker that cases in the former category support a refusal of a sequestration order, whereas cases in the latter category support only an adjournment of the petition. In such a case, a “sufficient cause” has not been shown. The discretion to adjourn does not then arise under s 52(2), but rather arises more generally (s 33) as to when the petition should be decided. In any event, there is little doubt that the discretion to adjourn arises in the latter case . . . . .
[51] [2015] FCA 1057, at [59]-[60] (references omitted)
When considering whether a debtor has a substantial cross-claim, it is not enough for the debtor to produce a pleading he or she has filed in another proceeding:[52]
There must be sufficient evidence or other material to show that it is reasonably arguable or of substance. This may require prima facie verification of the key factual elements as well as demonstrating legal tenability.
[52] Liang v LV Property Investments Pty Ltd [2015] FCA 1057, at [61]
Counsel for Mr Chen and counsel for Baseline, in their written submissions, referred to other authorities, but it is not necessary for me to refer to these.
Evidence
On 13 February 2020 the Resolution Institute appointed an expert and, on that day, the expert sent an email to the lawyers for each of Baseline and Mr Chen announcing his appointment and a proposal that a preliminary conference be held, and noting the expert expected that a site inspection will take place two weeks after the conference.[53]
[53] Affidavit of C Chen 30.04.2020, [20]; Annexure 12
According to Mr Chen, on 19 February 2020, parts of the ceiling at the Property collapsed.[54] On that day Mr Chen’s lawyer sent an email to Baseline’s lawyer in which he stated that an expert has been appointed; requested that Baseline not take any steps to enforce the Judgment until “the process under the [Settlement] Agreement” is completed; stated that, notwithstanding the dispute about the completion of the Agreed Works, Baseline remains liable under clause 4 of the Settlement Agreement for any defects in “the Works”; requested Baseline attend the Property on 20 February 2020 to rectify the collapsed ceiling, and that if Baseline does not rectify the collapsed ceiling Mr Chen will engage others to rectify them and claim the costs for doing so from Baseline.[55]
[54] Affidavit of C Chen 30.04.2020, [21]
[55] Affidavit of C Chen 30.04.2020, [21]; Annexure 13
The lawyer for Baseline (on this occasion Ms Hutchings) responded by email on the same day.[56] Ms Hutchings said that her firm did not act for Baseline in relation to the bankruptcy proceeding and, therefore, she could not confirm that Baseline would not take steps to enforce the Judgment. Ms Hutchings also said that, on the basis of the information Mr Chen’s lawyer provided in his email of 19 February 2020, Baseline “does not consider that the ceiling relates to the works performed by it or on its behalf”, and that unless Mr Chen “is able to demonstrate to [Baseline] that the issue complained of relates to the works performed by it or on its behalf, or gives [Baseline] a reasonable period of time to respond to the same, [Baseline] does not agree that [Mr Chen] is simply entitled to pursue this course”, that is, engage others to rectify the work and seek to recover from Baseline the cost of the rectification.
[56] Affidavit of C Chen 30.04.2020, [22]; Annexure 14
Mr Chen’s lawyer responded to the expert’s email of 13 February 2020 by email on 20 April 2020, in which he informed the expert that “this matter is not resolved and would ask that you provide the parties with a time to conduct the preliminary conference”.[57] By email sent on 21 April 2020 the expert requested the parties confer to make arrangements for a preliminary conference on 30 April 2020.[58] By email sent on 26 April 2020 Ms Hutchings stated that Mr Chen “has for his own designs chosen not to comply with the clear and unequivocal requirements of clause 2 of the” Settlement Agreement and “[a]ccordingly, it must be taken that the Agreed Works are complete”.[59]
[57] Affidavit of C Chen 30.04.2020, [25], [26]; Annexures 16 and 17
[58] Affidavit of C Chen 30.04.2020, [26]; Annexure 17
[59] Affidavit of C Chen 30.04.2020, [29]; Annexure 20
According to an affidavit made by Mr McGrath, Mr Chen’s lawyer, Mr Chen engaged Mr Xue, a building expert, to inspect the Property. Mr Xue undertook “a preliminary inspection of the property” on 22 April 2020; but he was unable to further inspect the Property until 1 June 2020 because of his “commitments to Court matters”, and “restrictions arising from the COVID-19 pandemic”.[60] Mr Xue inspected the Property on 1 June 2020, and produced a report dated 12 June 2020.[61] In the meantime, on 11 June 2020 Mr Chen lodged an application to NCAT in which he claims an order against Baseline that it pay Mr Chen $196,870. In the section of the form of application headed “Reasons for the Order/s”, there is stated the substance of the Offsetting Claim I set out earlier in these reasons.
[60] Affidavit of C McGrath 12.06.2020, [10], [12], [13]
[61] Exhibit A
Mr Xue prepared his report dated 12 June 2020 in response to a letter of instructions dated 10 June 2020 from Mr Chen’s lawyer.[62] The letter identified a number of assumptions Mr Xue was requested to make. These included Mr Chen having entered into an agreement with Baseline on 17 May 2017 “to undertake renovations to the Property”, and that those renovations included “the installation of sliding doors to the balcony and re-paving the balcony”, and the “installation of vergolas and all associated electrical works”. The letter then instructed Mr Xue to attend the Property for the purpose of preparing a report identifying, among other things, whether in Mr Xue’s opinion “any of the works at the Property are defective” and, “for those works at the Property which in your opinion are defective”, Mr Xue’s opinion on “the reasonable scope of rectification”, and “the reasonable cost of rectification”.
[62] Exhibit A, pages 35-37
Mr Xue identifies four defects.
a)The first relates to water damage to the “ground floor alfresco”. Mr Xue set out the water damage he observed, and concluded that “waterproofing to the balcony area above the alfresco area have failed by way of an active water leak”.[63] The rectification work Mr Xue recommended is the installation of new waterproofing, and work to make good the damage caused by the water leakage;[64] and Mr Xue estimates the cost of the rectification work to be $91,406.[65]
b)The second defect Mr Xue identified is water damage to the ceiling above the windows of the living room and stairwell area. Mr Xue expressed the following opinions:[66]
It is of my opinion that a failure of the waterproofing membrane above do exist, the failure is however a pin hole failure which is allowing moisture to seep through at a slower rate during wet weather event. It is also impossible to find the exact location of the leak without fully removing the paving and plasterboard ceiling.
It is . . . my opinion that the balcony above should be re-waterproofed in accordance with AS4654.1 - External Waterproofing.
The rectification work Mr Xue recommended is the installation of new waterproofing;[67] and Mr Xue estimates the cost of the rectification work to be $87,282.[68]
c)The third defect Mr Xue identifies is two patches of dark stain marks at the first riser of the main stair at the entry, Mr Xue is of the opinion that this reflects a water leak from the fish pond;[69] and Mr Xue estimates the cost of the rectification work to be $15,496.[70]
d)The fourth defect is incomplete wiring to all installed vergolas;[71] and Mr Xue estimates the cost of rectification to be $2,685.[72]
[63] Exhibit A, page 6, [6.1.14]
[64] Exhibit A, page 15, [6.1.17]
[65] Exhibit A, page 16, [6.1.18]
[66] Exhibit A, page 17, [6.2.5], [6.2.6]
[67] Exhibit A, page 23, [6.2.9]
[68] Exhibit A, pages 23-24, [6.2.10]
[69] Exhibit A, page 25, [6.3.4]
[70] Exhibit A, page 27, [6.3.7]
[71] Exhibit A, page 28, [6.4.1]
[72] Exhibit A, page 29, [6.4.5]
Parties’ submissions
Counsel for Mr Chen submits the defects identified by Mr Xue were the result of work Baseline performed or was responsible for performing. Counsel for Mr Xue attempted to make good this submission largely by reference to plans and site diaries that are in evidence. As for the first two defects Mr Xue identifies, namely, those that relate to the water damage to the “ground floor alfresco”, and to the water damage to the ceiling above the windows of the living room and stairwell area, counsel for Mr Chen submitted that this resulted from tiling work Baseline performed on the balcony area of the first floor. Counsel relied on the unchallenged evidence of Mr Chen that in around January 2018 he observed “Baseline installed the sliding doors to the balcony and re-paved the balconies”;[73] the words “existing tile to be washed & polished” appearing in “2 Floor Finish Plan Ground Floor”;[74] the words “existing floor make good” appearing in “4 Floor Finish Plan First Floor”, and the words “terrace existing floor finish to be make good” appearing in “6 Floor Finish Plan Second Floor”.[75] Counsel for Mr Chen submitted that the words “make good” in the last two expressions mean “waterproofing and making it good as opposed to just polishing”.[76] Counsel for Mr Chen also pointed to site diaries which referred to tiles being collected.[77] On the basis of this evidence, counsel for Mr Chen submits that “waterproofing to the balcony areas has failed”,[78] that these failures account for the first two defects; and the sum of the costs of rectifying these two defects exceeds the $150,000 debt owing to Baseline.
[73] Affidavit of C Chen 11.06.2020, [15]
[74] Affidavit of C Chen 11.06.2020, annexure 4, page 113
[75] Affidavit of C Chen 11.06.2020, annexure 4, page 113
[76] T36
[77] Affidavit of C Chen 11.06.2020, annexure 7, pages 246, 278
[78] T40
Counsel for Baseline, on the other hand, submits there is no merit to the Offsetting Claim. Counsel submits the defects identified by Mr Xue are not the product of any work Baseline performed or was required to perform under the CM Agreement or Settlement Agreement. Counsel sought to establish that submission by reference to the experts’ reports that were filed in the District Court proceeding. Counsel submitted those reports identified the scope of works for which Baseline was responsible. Although counsel for Mr Chen accepted documents referred to tiling, he submitted the tiling did not relate to the balconies. Counsel also submitted there is no reference to Baseline being required to undertake waterproofing.
Counsel for the parties also made submissions on the third and fourth defects identified by Mr Xue. For reasons that will shortly appear, it is unnecessary to assess the merits of the Offsetting Claim to the extent it relies on those two alleged defects.
Merits of Offsetting Claim to the extent it relies on the first and second defects
It is apparent from Mr Xue’s report that there already existed waterproofing in the areas on which he was instructed to assume Baseline laid tiles; and that it was the failure of the waterproofing that led to water damage to the “ground floor alfresco”, and to the ceiling above the windows of the living room and stairwell area. Assuming, as Mr Chen claims, that Baseline was responsible for placing tiles on those areas, Mr Chen’s case must be that Baseline was also required to replace the waterproofing that already existed in the area in which the tiles were laid. In other words, Mr Chen’s case is that the work Baseline had agreed to undertake under the CM Agreement included the work Mr Xue described needs to be done to make good the waterproofing.
The only basis on which Mr Chen appears to so claim is his claim that Baseline laid tiles on the balconies. That implies the submission that Baseline’s engagement to lay tiles carried with it an obligation to replace such waterproofing as existed in the area on which Baseline was to lay the tiles. In the absence of some probative expert evidence which supports the view that the engagement of a person to carry out tiling in an area that already has waterproofing necessarily carries with it an obligation to replace the waterproofing, I am not prepared to hold it is arguable that such a view is correct. Further, given Mr Xue’s estimate of the costs of replacing waterproofing – $178,688 - it is reasonable to expect that if the parties intended Baseline to replace the waterproofing, there would have been some document that would have identified this as one of the tasks Baseline was required to perform. Mr Chen, however, has pointed to no such document.
It may be accepted that in carrying out tiling work Baseline might have come under an obligation to inspect for itself whether there was waterproofing and, if so, whether the waterproofing that existed was adequate.[79] Mr Chen, however, does not suggest Baseline came under any such obligation. Nor does he suggest that it ought reasonably have been apparent to Baseline that the existing waterproofing was inadequate. But even if Mr Chen were to have claimed Baseline, in breach of some duty, failed to detect the waterproofing was inadequate, and inform Mr Chen of that fact, then, in the absence of having contractually committed itself to replace the waterproofing, Baseline would not have been liable in an amount equal to the costs of replacing the waterproofing. Baseline would have been liable for such loss as Mr Chen might have suffered as a consequence of his not having been made aware that the existing waterproofing was inadequate. The extent of the loss would depend on what Mr Chen would have done had he been told of any inadequate waterproofing. That loss would not have included his replacing the existing waterproofing because that is not a task I am satisfied Mr Chen has arguably shown Mr Chen engaged Baseline to perform.
[79] It is also conceivable that the waterproofing was damaged in the course of laying the tiles. Mr Chen, however, makes no such allegation.
Conclusion
Even if it be assumed the CM Agreement required Baseline to lay tiles on the balconies, I am not satisfied there is an arguable case that Baseline is liable to Mr Chen for the costs estimated by Mr Xue to rectify what Mr Xue identified as the first and second defects. Thus, even if it be assumed Baseline is liable to Mr Chen for the costs estimated by Mr Xue to rectify what Mr Xue identified as the third and fourth defects, the amount of the Offsetting Claim would be $18,181. That would mean that even if Mr Chen might have an Offsetting Claim, it would be significantly less than the $150,000 debt I have found he owes to Baseline.
I propose, therefore, to dispose of this part of the case by making an order refusing Mr Chen leave to rely on the Offsetting Claim.
Mr Chen’s affidavit
Mr Chen has made an affidavit in which he deposes he and his wife are the registered proprietors of the Property; the Property is subject to a mortgage that secures a loan of $5.2 million; and that in August 2019 the Property was valued at $8 million.[80] Counsel for Mr Chen did not submit that this affidavit proved solvency; counsel said Mr Chen relies on it for the purpose of showing that Mr Chen has the ability to access money, and that this might be a consideration in favour of granting a short adjournment, should I be satisfied that a sequestration order be made. Counsel for Mr Chen says that Mr Chen feels strongly that he is not indebted because of what he believes are defects.
[80] Affidavit of C Chen 17.06.2020
Mr Chen’s affidavit, and the absence of any supporting creditor, suggests that Mr Chen might have the capacity to readily access funds with which to pay the debt he owes to Baseline. That, of course, affords no reason why I should not make a sequestration order against his estate; however, I see no difficulty in not making a sequestration order when I publish these reason, but instead set the matter down at a time and day two weeks after I publish my reasons for the purpose of making a sequestration order at that time. This will give Mr Chen an opportunity to attempt to come to terms with Baseline with a view to Baseline withdrawing the creditor’s petition before the day on which I propose to make a sequestration order.
Disposition
I am satisfied that it is appropriate to make a sequestration order against the estate of Mr Chen, and that Baseline’s costs be paid out of Mr Chen’s estate. I will make orders to that effect at 9.30 am on 14 August 2020 unless on or before that time Baseline informs the Court that it wishes to withdraw the creditor’s petition. In addition to making an order dismissing Mr Chen’s application to rely on the Offsetting Claim, I propose to order that the matter be listed at 9.30 am on 14 August 2020 before the Court for the purpose of making a sequestration order and an order that Baseline’s costs be paid out of Mr Chen’s estate.
I certify that the preceding eighty-three (83) paragraphs are a true copy of the reasons for judgment of Judge Manousaridis
Associate:
Date: 31 July 2020
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