Casbee Properties Pty Ltd v Patoka Pty Ltd

[2003] NSWCA 361

CITATION:	Casbee Properties Pty Ltd v Patoka Pty Ltd [2003] NSWCA 361
HEARING DATE(S):	24 November 2003
JUDGMENT DATE:	11 December 2003
JUDGMENT OF:	Mason P at 1; Giles JA at 2; McColl JA at 63
DECISION:	In both applications leave to appeal refused with costs.
CATCHWORDS:	Contract for road construction - concurernt arbitration and reference - issue of time of practical completion - obscure contract - whether manifest error of law in arbitrator's construction of contract - no manifest error of law - no leave to appeal - whether leave to appeal on same issue in reference - on discretionary grounds, no leave to appeal - issue of reasonableness for proprietor to have non-conforming works rectified - whether referee applied correct test of reasonableness - no error in judge holding that he did - in any event on discretionary grounds no leave to appeal.
CASES CITED:	Bellgrove v Eldridge (1954) 90 CLR 613; Huxley Electronics and Construction Ltd v Forsyth (1999) All ER 268; Natoli v Walker (CA, 26 May 1994, unreported); New South Wales v Coya (Constructions) Pty Ltd (CA, 4 August 1995, unreported); Promenade Investments Pty Ltd v State of New South Wales (1992) NSWLR 203; Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549.
PARTIES :	Casbee Properties Pty Ltd - Claimant Patoka Pty Ltd - Opponent
FILE NUMBER(S):	CA 40429/03; 40430/03
COUNSEL:	G McVay - Claimant J Gooley - Opponent
SOLICITORS:	Spencer Whitby & Co, East Sydney - Claimant Peter Evans & Associates, Newcastle - Opponent

LOWER COURTJURISDICTION:	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):	ED 55003/03; 55004/03
LOWER COURT JUDICIAL OFFICER :	Nicholas J

CA 40429/03
CA 40430/03
ED 55003/03
ED 55004/03

MASON P
GILES JA
McCOLL JA

Thursday, 11 December 2003

CASBEE PROPERTIES PTY LTD v PATOKA PTY LTD

CASBEE PROPERTIES PTY LTD v PATOKA PTY LTD

Judgment

1 MASON P: I agree with Giles JA.

2 GILES JA: Casbee Properties Pty Ltd (“the Principal”) applied for leave to appeal from decisions of Nicholas J in proceedings brought against Patoka Pty Ltd (“the Contractor”) in the Technology and Construction List. In one proceedings his Honour refused leave to appeal from the award in an arbitration. In the other proceedings his Honour adopted the report of a referee. The applications were for leave to appeal from parts only of those decisions. They were heard on full submissions so that, if leave to appeal were granted, the appeal could be decided without a further hearing.

Background

3 The Principal owned land at Middle Road, Paxton, near Cessnock. It obtained the approval of Cessnock City Council (“the Council”) to the sub-division of the land into twenty-one residential blocks. Sub-division in accordance with the approved plans required the construction of a bitumen sealed kerbed road running off Middle Road and ending in a cul-de-sac and, at three places off the road, bitumen sealed driveways providing access to battle-axe blocks.

4 By a written contract executed by the Contractor on 2 August 2000 and by the Principal on 20 August 2000, the Principal engaged the Contractor to construct the road and the driveways for a contract price of $339,465.30.

5 Disputes arose concerning the payment of progress claims and completion of the works. The Contractor left the site and, having served a statutory demand, brought proceedings to wind up the Principal. In April 2001 the proceedings were settled. It was agreed that the Contractor would return to the site to undertake the work set out in a quotation from Wallis Constructions, which work “would be regarded as complete when performed within four weeks from 11 April 2001 and when the Council certified in writing that the Contractor had completed the work to its satisfaction”. This description of the agreement is taken from the reasons of Nicholas J, the terms of settlement not being in the appeal papers: a similar description is also found in the report. It was also agreed that the Principal would “make various payments in the form of bank guarantees” and that “an arbitration could be proceeded with in relation to the original disputes”. These descriptions of the further agreement are found in the award and the report.

6 The winding-up proceedings were dismissed. An arbitration was subsequently established, in which the Contractor was the claimant and the Principal cross-claimed.

7 Further disputes arose in relation to the performance of the Wallis Construction works. The Contractor brought proceedings against the Principal and the Principal cross-claimed against the Contractor. It was ordered that the proceedings be the subject of a reference and report.

8 The arbitration and the reference were conducted contemporaneously by Mr A M N Grieve. In the arbitration the Contractor claimed $152,460.27 and the Principal cross-claimed for $124,725.54. In the reference the Contractor claimed $78,674.59 under a bank guarantee and unspecified damages and the Principal cross-claimed for $107,266.10. There were many items of claim and cross-claim.

9 According to Mr Grieve’s award and report, the award “address[ed] disputes which arose during the first visit of the Contractor to complete the works” and the report “address[ed] disputes which arose during the second visit of the Contractor to complete the works”. The first visit was the original contract works, the second visit was the Wallis Constructions works. Mr Grieve said in the report that “the applicability of the Contract to the settlement works was not disputed in the proceedings”, meaning as I understand it the Wallis Constructions works, but that “[t]he effect of the settlement proceedings was to vary some of the terms of the original Contract such as the time to complete and the method of payment”.

10 Mr Grieve delivered a report on 21 August 2002 and an award on 4 September 2002, with a corrected award on 11 December 2002. He determined by the award that the Principal should pay the Contractor $109,233.39 and the Contractor should pay the Principal $15,396.00, a net payment by the Principal to the Contractor of $93,837.39. He reported that the Principal should pay the Contractor $87,720.80 and the Contractor should pay the Principal $7,360.00, a net payment by the Principal to the Contractor of $80,360.80.

11 The Principal brought proceedings applying for leave to appeal from the award. By notice of motion in the existing proceedings the Contractor sought orders that the report be adopted and the Principal pay to it the $80,360.80, and by notice of motion in the existing proceedings the Principal sought an order that the report be rejected save as to two of the items.

12 The application for leave to appeal from the award and the notices of motion were heard contemporaneously by Nicholas J. Not all of the items of claim and cross-claim were ultimately in issue before him, although it seems that some were abandoned only during the course of the hearing. In the application for leave to appeal from the award the items in issue were Contractor’s bonus ($4,500.00) and the reciprocal Principal’s liquidated damages ($32,400.00), rutting to roads ($5,400.00), hourly hire ($3,830.00) and provisional items ($32,839.83). In the notices of motion the items in issue were table drains on high side ($10,280.00), sealing of drains ($29,930.00) and liquidated damages ($18,900.00). As will appear, there was duplication in the items of liquidated damages.

13 The present applications for leave to appeal were from his Honour’s decisions with respect to Contractor’s bonus and Principal’s liquidated damages and with respect to table drains on high side.

Bonus and liquidated damages

14 By cl 31.7 of the contract, if the works did not reach practical completion by the date for practical completion the Principal was entitled to liquidated damages of $150 per day until practical completion or either dismissal of the Contractor or taking over the works. By cl 31.8, if the date of practical completion was earlier than the date for practical completion the Contractor was entitled to a bonus of $300 per day until the date for practical completion. Clause 4 specified the date for practical completion, being ten weeks from the execution of the contract inclusive of an allowance for wet weather. It was common ground that the contractual date for practical completion of the original contract works was 11 October 2000. For the present I put aside practical completion of the Wallis Constructions works.

15 Clause 2.1 of the contract described “WUC and Payment”, the initials standing for work under contract. It began -

“2.1 WUC and Payment
Lump sum contract to carry out works in accordance with drawings prepared by Marshal Scott Surveyors. (detailed below) and the requirements and specifications of Cessnock City Council.”

16 After the listing of the drawings cl 2.1 provided -

“Your quotation reference number 00-684 dated 11/7/2000. Including two (2) page scheduled Bill of Quantities for the Total Contract lump sum price $339 465.30 (Three hundred and thirty nine thousand four hundred and sixty five dollars and thirty cents).”

17 The tender letter dated 11 July 2000 included, “The estimated time for completion of the project is ten weeks from when we start till practical completion. This is when the prime seal is put on the road, and we have a final inspection by Council”. A revised tender letter dated 1 August 2000 included, “The estimated time for completion is ten weeks from 1st August 2000. Practical completion is when the prime seal is put on the road, and we have a final inspection by Council”. Mr Grieve referred to the letter of 1 August 2000 in the award, apparently as a contractual document, and in the report he said it was part of the contract. This does not seem correct. The letter of 11 July 2000 may have been part of the contract, although that is debateable. However, neither party took issue with the position that the contract included a letter in the terms of one of these letters referring to practical completion when there was a final inspection by the Council. The Contractor relied on the letter, and the Principal did not contest that reliance.

18 Clause 1 of the contract, the definitions clause, had a number of definitions material to practical completion. They were -

“ Practical Completion is that stage in the carrying out and completion of WUC when, the Contract Works are complete, and the final certificate issued by council, and linen plans accepted by the same.”
“ Date of Practical Completion means:

(a) the date evidenced in a certificate of practical completion as the date upon which practical completion was reached; or

(b) where another date is determined in any arbitration or litigation as the date upon which practical completion was reached, that other date;”
“ Certificate of Practical Completion has the meaning in subclause 31.6”
“ Final certificate
That issued by Council upon practical completion.”

19 Clause 31.6, to which the definition of Certificate of Practical Completion referred, read -

“31.6 Practical completion
Practical completion is the day in which all WUC have been completed including works as excercuted [sic] drawings to the satisifaction [sic] of local council.
The Contractor shall give the Contract Superintendent at least 14 days written notice of the date upon which the Contractor anticipates that practical completion will be reached.
When the Contractor is of the opinion that practical completion has been reached, the Contractor shall in writing request the Contract Superintendent to issue a certificate of practical completion. Within 14 days after receiving the request, the Contract Superintendent shall give the Contractor and the Principal either a certificate of practical completion evidencing the date of practical completion or written reasons for not doing so.”

20 The final certificate was taken up in the contract only in cl 34.3 -

“34.3 Final payment claim and certificate
30 days after Practical completion, the Contractor shall give the Contract Superintendent a written final payment claim endorsed ‘Final Payment Claim’ being a progress claim together with all other claims whatsoever in connection with the subject matter of the Contract.
The final certificate shall be conclusive evidence of accord and satisfaction, and discharge of each party’s obligations in connection with the subject matter of the Contract except for:

(a) fraud or dishonestly relating to WUC or any part thereof or to any matter dealt with in the final certificate;

(b) any defect or omission in the Contract Works or any part thereof which was not apparent at the end of the last defects liability period, or which would not have been disclosed upon unreasonable inspection at the time of the issue of the final certificate;

(c) any accidental or erroneous inclusion or exclusion of any work or figures in any computation or an arithmetical error in any computation; and

(d) unresolved issues the subject of any notice of dispute pursuant to clause 39, served before the 7th day after the issue of the final certificate.”

21 It is evident that the contract was not well drawn. It gave the satisfaction of the Council some contractual effect in establishing the date of practical completion. At issue was the extent of the effect.

22 The Contractor’s claims in the arbitration included a claim for $4,500.00 as the bonus. The Principal’s cross-claims in the arbitration included a cross-claim for $32,400.00 as liquidated damages. In the reference the Principal cross-claimed for $18,900.00 as liquidated damages. The $32,400.00 was calculated from 11 October 2000 to 15 May 2001. The $18,900.00 was calculated from 11 October 2000 to 15 February 2001.

23 Mr Grieve noted the duplication in the cross-claims for liquidated damages, and said that he thought it appropriate to consider liquidated damages from 11 October 2000 to 9 May 2001 in the arbitration and liquidated damages from 9 May 2001 to 15 May 2001 in the reference. This accorded with his addressing the first visit disputes in the award and the second visit disputes in the report. It seems that the disputes the subject of a reference and report were generally only those which arose in relation to the Wallis Constructions works. But that was not so to the extent that the Principal claimed liquidated damages from 11 October 2000 in both the arbitration and the curial proceedings, and Mr Grieve departed from the cross-claims as made in the arbitration and the proceedings in that liquidated damages after 15 February 2001 were not claimed in the reference and liquidated damages for the May days were claimed in the arbitration. Neither party took the point before Nicholas J that he was wrong in doing so. In the applications before us the limited reach of the report, so far as it was confined only to the May days, was brought out only as a result of questions by the Court.

24 I continue to put aside for the present practical completion of the Wallis Construction works. On the approach thought appropriate by Mr Grieve, his decision upon the date of practical completion of the original contract works did not involve regard to the settlement agreement and is found in the award.

25 The Contractor said that the satisfaction of the Council was conclusive as to practical completion. It relied on a letter from the Council dated 11 October 2000, addressed to it and saying -

“Further to our recent discussions we confirm that we accept the works as reaching practical completion on 25 September, 2000.
The job has come up well and has been left in a tidy state. I have taken members of Council’s planning staff to the site as an example of what a well finished subdivision should look like, they have all been pleased with the result.
Please call if you have any queries.”

26 The Principal accepted that the satisfaction of the Council was an element in practical completion, but said that it was also necessary that the works in fact be completed. It said that the works were not.

27 Mr Grieve found that at least some of the work under the contract was incomplete as at 25 September 2000: it is not necessary to go into detail. He said in a number of places that the incomplete work “does not effect [sic] practical completion but … was incomplete as regards the Contract”, or used similar words, plainly enough because he concluded that practical completion was determined by the Council’s satisfaction even if some of the works were incomplete.

28 Mr Grieve gave reasons for that conclusion in the award when considering the Contractor’s claim for a bonus and when considering the Principal’s cross-claim for liquidated damages.

29 When considering the Contractor’s claim for a bonus, Mr Grieve said concisely that practical completion “was achieved on 26 September 2000, certified by the council in accordance with Clause 31.6”.

30 When considering the Principal’s cross-claim for liquidated damages, Mr Grieve was more expansive. The core of his reasoning, after reference amongst other things to the letter of 1 August 2000 and cl 31.6 of the contract, was -

“The usual arrangement in subdivision projects is for the council to have the prime responsibility for the quality of the work. Councils exert a high degree of control over subdivisional works such as this and this is the reason for the inclusion of this Clause. I therefore do not accept that the Principal’s Superintendent has any major role in determining practical completion, apart from complying with the formalities of the Contract. Since the council is not a party to the Contract, it cannot issue the contractually binding Certificate of Practical Completion. However, in my opinion, it is bound to issue such a certificate once the council has certified that it is practically complete. It is of course accepted that there may be some minor issues where there is a difference of opinion between the council and the Principal. This is noted in the third paragraph of the clause, which is as follows:
When the Contractor is of the opinion that practical completion has been reached, the Contractor shall in writing request the Contract Superintendent to issue a certificate of practical completion. Within 14 days after receiving the request, the Contract Superintendent shall give the Contractor and the Principal either a certificate of practical completion evidencing the date of practical completion or written reasons for not doing so.”

31 Mr Grieve then said that he had “found that the work was practically completed on 25 September 2000, albeit with some defective and incomplete items, on the basis that the council certified that the work was practically complete”. This was clearly enough founded on the Council’s letter of 11 October 2000.

32 On the approach thought appropriate by Mr Grieve, in the report he came to a separate decision upon the date of practical completion of the Wallis Construction works, one which involved variation of the contract by the settlement agreement.

33 In the report Mr Grieve repeated his references to the letter of 1 August 2000 and cl 31.6 of the contract. He repeated the passage commencing “The usual arrangement … “ which I have described as the core of his reasoning. But he then noted “that the work of the settlement agreement was to be performed within 4 weeks of 11 April 2001 and when the relevant council certified in writing that the plaintiff had completed the work to its satisfaction”. He referred to a letter of 17 May 2001 in which the Council “confirmed that the works were satisfactorily completed on 15 May 2001” and to extension of the date for completion to 15 May 2001, his conclusion that “[t]here are no liquidated damages” plainly enough being founded on those matters. Thus for the liquidated damages from 9 May 2001 to 15 May 2001 which he thought it appropriate to consider in the reference, Mr Grieve addressed different dates for and of practical completion, and there was added to his view of the operation of cl 31.6 a variation to the contract by the settlement agreement.

(a) Leave to appeal from Nicholas J’s decision refusing leave to appeal from the award

34 In order to obtain leave to appeal from the award, it was necessary that the Principal bring itself within s 38 of the Commercial Arbitration Act 1984. It could appeal “on any question of law arising out of an award” (s 38(2)), but only with leave (s 38(4)(b)), and by s 38(5) -

“(5) The Supreme Court shall not grant leave under subsection (4) (b) unless it considers that:
(a) having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more parties to the arbitration agreement, and
(b) there is:
(i) a manifest error of law on the face of the award, or
(ii) strong evidence that the arbitrator or umpire made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law.”

35 The Principal relied on the alternative in s 38(5)(b)(i). It had to show a manifest error of law on the face of the award and that determination of the question of law could substantially affect its or the Contractor’s rights.

36 Nicholas J noted the observations in Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203 at 225-6 and New South Wales v Coya (Constructions) Pty Ltd (CA, 4 August 1995, unreported) concerning evident or obvious error of law, rather than arguable, and the legislative objective of sharply narrowing the ways in which arbitrator’s decisions can be challenged in the courts. Although his Honour did not advert to it, it was made clear in those cases and in Natoli v Walker (CA, 26 May 1994, unreported) that, even if the requirements of s 38(5) were satisfied, it remained to exercise a discretion as to whether leave to appeal should be granted.

37 His Honour did not address s 38(5)(a) or whether any error of law was manifest on the face of the award, nor did he consider the exercise of his discretion. He considered that Mr Grieve had been correct, saying of cl 31.6 when considering the Contractor’s bonus -

“27 In my opinion the ordinary English words of this provision establish that the parties agreed that the extent to which the works have been completed to the stage when it may be said of them that they are practically complete has been left to the judgment of council. That is to say, the day on which council is satisfied that the works have reached the stage of practical completion is the day of practical completion for the purposes of the contract.

28 Having regard to the terms of the whole contract it is evident that by practical completion the parties envisaged that there would be work, including omissions and/or defects, yet to be done under the contract. It seems to me that if the interpretation relied upon by the Principal was correct there could no be practical completion whilst work remained to be done. In my view such an outcome would be inconsistent with the concept of practical completion as it is ordinarily understood, and in particular with cl 34.3 as to the final payment claim and certificate, particularly sub-paras (b) and (d) which contemplate defects, omissions and disputed issues. If the parties really intended that all work under the contract must be completed before the satisfaction of council is sought and obtained it may be expected they would have chosen clear words to give effect to such intention. The words of cl 31.6 do not do so.

29 The conclusion that this construction of the provision is correct and reflects the intention of the parties derives support from its compatibility with the contract considered as a whole. For example, it is plain from cl 2.1 that to the obligation to carry out the works in accordance with the drawings of the surveyors therein detailed there was the additional obligation to carry them out in accordance with the requirements and specifications of the council. It seems to me entirely consistent with such an obligation that the parties would agree to be bound by the judgment of the council as to the date on which, for practical purposes, the works had been completed to its satisfaction, and to accept that date as the date of practical completion under the contract.

30 In my opinion, therefore, the Arbitrator was correct in his interpretation of cl 36.1 upon which he found the date of practical completion was 25 September 2000. He was thus correct in upholding the Contractor’s claim. Accordingly, I hold that, in respect of claim No. 2 the Principal has not demonstrated an error of law, manifest or otherwise, on the face of the award and has not met the requirement of s 38(5)(b)(i) of the Act.”

38 This flowed through to his Honour stating as to the Principal’s liquidated damages that there was no error on the face of the award.

39 The Principal accepted that the Council had been brought into the contract to some extent. On one view, the extent was only that the works as executed drawings had to be completed to the Council’s satisfaction. Presumably because of the references to the Council in the definitions, particularly the definition of practical completion, the Principal acknowledged a greater extent. The Principal acknowledged that the works had to be completed to the satisfaction of the Council, but submitted that as well the works had to be completed in fact.

40 There are many difficulties in this. The Principal submitted that, because the Council was not a party to the contract but was a local authority performing its ordinary functions, it would be strange if it played the part of a certifier under the contact. On the view Mr Grieve took the Council was strictly not a certifier under the contract: the Contract Superintendent certified, although his certification was dictated by the Council’s satisfaction. This is close to the Council being a certifier, and the thrust of the submission holds good. But certification by third parties is by no means unusual, and once the Principal acknowledged that the Council played a part under the contract to the extent that the works had to be completed to its satisfaction, the force of the submission was much diminished. On the words of the first sentence of cl 31.6, if the satisfaction of the Council was not confined to the works as executed drawings, it is difficult to see why it did not apply to the completion of the works and was not the criterion for practical completion. Once the criterion was met, the Contract Superintendent had to issue a certificate of practical completion.

41 It can be said that this was an odd procedure, and there remains much obscurity, particularly in the references to a final certificate issued by the Council. But the conclusion to which Mr Grieve came was an available construction of a poorly drawn contract, a construction informed by a council’s role in exercising control over subdivisional works. It is not necessary to decide whether it was correct: it is enough that it was not manifestly erroneous in law. Without going so far as did Nicholas J, therefore, in my opinion leave to appeal from the award should have been refused.

42 Leave to appeal from Nicholas J’s decision is required because it was a decision in proceedings under the Commercial Arbitration Act (Supreme Court Act 1970 s 101(2)(i)). It is also required because the amount at stake, $4,500.00 plus at most $32,400.00, is less than $100,000 (ibid, s 101(2)(r). Had I thought that the conclusion to which Mr Grieve came was incorrect, it may nonetheless have been appropriate to decline to grant leave to appeal. As it is, leave to appeal should be refused because, although for a different reason, the result before Nicholas J must stand.

(b) Leave to appeal from Nicholas J’s decision to adopt the report

43 The requirement of manifest error of law did not apply, nor did the other restrictions in s 38 of the Commercial Arbitration Act. There was a discretion to adopt or reject the report, see in particular Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549.

44 Nicholas J did not expressly advert to the manner of exercise of his discretion in reviewing the report. When considering the report his Honour said -

“67 Before the Court it was accepted by the Principal that the outcome of this claim would be similar to the outcome of the claim for liquidated damages in the arbitration proceedings, both claims turning on the decision as to the date of practical completion. The claim under the reference was a substantial duplication of that in the arbitration proceedings. Consistent with the finding that the challenge to the award in respect of the claim for liquidated damages was unsuccessful I find that there is no basis for rejection of the report in respect of cross-claim No. 7.”

45 No doubt because the parties did not advert to it, this overlooked the fact that Mr Grieve took an approach which eliminated the duplication in the cross-claims for liquidated damages, and founded his conclusion in the report at least in part on a variation to the contract by the settlement agreement. The variation appears to have made more clear that the Council’s satisfaction was the determinant of practical completion.

46 The report in this respect was not a reprise of the award. On the approach thought appropriate by Mr Grieve, the liquidated damages the subject of the report were only for the period 9 May 2001 to 15 May 2001. The date of practical completion was governed at least in part by the settlement agreement. The Principal’s submissions earlier described were without distinction between the award and the report, and did not accommodate that Mr Grieve paid regard to the settlement agreement and addressed different dates for and of practical completion.

47 Leave to appeal is required because the amount at stake is less than $100,000. As Mr Grieve approached the matter, the amount at stake is less than $1,000, and because of the settlement agreement his construction of the contract as varied has not been shown to be arguably incorrect. There is no case for leave to appeal.

48 If it be assumed that Mr Grieve’s approach was incorrect, in that there was before him in the reference a cross-claim for liquidated damages of $18,900.00 for the period 11 October 2000 to 15 February 2001, the duplication of the cross-claims for liquidated damages is material to the grant of leave to appeal. It would be an abuse of process for the Principal to claim the same liquidated damages in the arbitration and in the curial proceedings. We were informed that the arbitration was established after the curial proceedings had been brought, although an arbitration was proposed prior to the disputes in relation to the performance of the Wallis Constructions works from which came the proceedings. As a matter of the periods, the cross-claim in the reference was subsumed within the cross-claim in the arbitration. Even if the conclusion to which Mr Grieve came in relation to the original contract works be regarded as arguably incorrect, in my opinion leave to appeal should be refused. That is so because of the relatively small amount at stake, the extensive litigation thus far of which the present applications are the rump, and the incongruity of the Principal litigating on appeal an issue which it chose to litigate in the arbitration with limited appellate rights which have now been held to be unavailable.

Table drains on high side

49 I have described the driveways off the road. The contract called for carrying out the works in accordance with the drawings. The drawings had a “typical cross-section bitumen driveway”. It showed the natural surface falling from left to right, with a two coat bitumen seal on 200 mm compacted gravel following the natural surface for 3 m from the high side and then formed as a table drain 1 m wide. According to the typical cross-section, the table drain was on the low side of the driveway.

50 The table drains were constructed on the low side of the driveway for two of the driveways off the road. For the third of the driveways, however, the table drain was constructed on the high side of the driveway. The Contractor received payment for this work. By its cross-claim in the reference the Principal claimed $10,280 as the cost of constructing the table drain on the low side of the driveway.

51 Mr Grieve noted that the Contractor had deliberately constructed the table drain on the high side of the driveway, in an attempt better to manage surface run-off. According to Mr Nandapalan of the Principal, putting the table drain on the high side would allow water penetration under the pavement and destabilise the pavement. According to Mr Rumbel of the Contractor, having the table drain on the high side would contribute to preventing saturation beneath the pavement from sub-soil water and was good engineering practice. Mr Grieve said -

“Mr Rumbel stated that the typical cross-section did not necessarily apply to every driveway. Mr Rumbel stated that he put it on the high side to prevent water flowing on to the road. If put on the lower side, the surface water will run off sufficiently but not the subsoil water.”

52 With the consent of the parties, Mr Grieve sought the expert advice of Ms Vella. He said -

“Ms Vella in her report dated 7 December 2001 on page 8 noted that the placement of the table drain on the high side of the driveway was in her opinion good engineering practice as it traps surface flow prior to the water flowing across the driveway, hence protecting the integrity of the pavement.
Ms Vella further commented that if the table drain invert on the high side of the driveway is above the level of the subgrade of the pavement, then subsoil drainage should be installed.”

53 Mr Grieve said -

“I accept the evidence of Ms Vella and Mr Rumbel that it was good engineering practice to place the drain on the high side. I can understand Mr Rumbel’s concern on returning to the project and noting that, although he had constructed the driveways to the detail, that is with no drain on the high side, they were actually saturated. Furthermore, the drains being put on the high side has eased this problem according to my observations made during the view held on 8 October 2001. Mr Nandapalan accepted that the drain was to be put on the high side of driveway 3 in his negotiations with Mr Wallis. I therefore conclude that the drains should have been designed and constructed on the high side and that the Contractor’s action, in placing the drains on the high side, was not defective.”

54 Again Nicholas J did not expressly advert to the manner of exercise of his discretion in reviewing Mr Grieve’s report. He outlined the Principal’s submissions, which were essentially repeated before us and are referred to below. He said that it was apparent that Mr Grieve gave careful consideration to all the evidence, and set out the passage from the report commencing with the acceptance of the evidence of Ms Vella and Mr Rumble. He then said -

“57 Clearly, it was the Referee’s finding that it was good engineering practice to place the drain on the high side and that, in the circumstances of the case, there was good cause to do so. He observed that the saturation problem which the Contractor sought to overcome had been eased as a result. His opinion, based on the evidence, was that the design should have specified construction on the high side.
58 The Referee came to the conclusion that, in the circumstances, it was not reasonable for the Principal to insist upon compliance, and the facts found by him provide ample support for it. His conclusion establishes the qualification to the Principal’s prima facie entitlement to the cost of rectifying a departure from a contract as discussed in Bellgrove v Eldridge at 618.
59 In my opinion the Principal has failed to demonstrate any basis for disturbing the factual findings of the Referee or that his conclusion, either as a matter of fact and/or of law, was wrong. The report on this cross-claim should be adopted by the Court.”

55 The Principal submitted that Mr Grieve was in error because he asked himself the wrong question. It said that Mr Grieve asked the irrelevant question whether the construction of the table drain on the high side was defective notwithstanding that it did not comply with the contract, when the question he should have asked was whether it was reasonable for the Principal to be paid the cost of having the work comply with the contract. Having asked the wrong question, it said, Mr Grieve did not make the findings of fact necessary for the Contractor to have the benefit of the principles in Bellgrove v Eldridge (1954) 90 CLR 613. The Principal submitted that the judge was in error in failing to recognise and act upon this error of Mr Grieve.

56 Bellgrove v Eldridge was concerned with the alternative measures of loss, cost of rectification and difference in value. It was said that the loss from failure to comply with a building contract was normally not measured by comparing the value of the building which had been erected with the value it would have borne if erected in accordance with the contract, and that the respondent’s loss could “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.” (at 617). That was subject to the qualification 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 … 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” (at 618-9).

57 As was said of this case by Lord Lloyd in Huxley Electronics and Construction Ltd v Forsyth (1999) All ER 268 at 284 -

“Once again one finds the court emphasising the central importance of reasonableness in selecting the appropriate measure of damages. If reinstatement is not the reasonable way of dealing with the situation, then diminution in value, if any, is the true measure of the plaintiff’s loss. If there is no diminution in value, the plaintiff has suffered no loss. His damages will be nominal.”

58 It may be that Mr Grieve’s reasoning did not take him to Bellgrove v Eldridge at all. He referred to the differing views of Mr Nandapalan and Mr Rumbel as to the better side for the table drain and to Mr Rumbel’s assertion that the drawing showing the table drain on the low side of the driveway was only typical. He found that it was “good engineering practice to place the drain on the high side” and that the Contractor’s action in doing so “was not defective”. This was the language of compliance with the contract, compliance because the contract permitted construction of a table drain on the high side of the driveway if good engineering practice so directed. It is not entirely clear, however, since in also saying that the table drains “should have been designed and constructed on the high side” Mr Grieve appears to have accepted that the design, as found in the drawings and therefore contractually mandated, called for construction of the table drains on the low side of the driveways.

59 Assuming that Mr Grieve considered that there was failure to comply with the contract, what did he mean by his conclusion that the Contractor’s action in placing the drains on the high side was not defective? The judge understood him to mean that it was not reasonable for the Principal to insist on compliance with the contract: that is, that it was not a reasonable course for the Principal to construct the table drain on the low side of the driveway.

60 It was not necessary that Mr Grieve express his conclusion in those words, and Belgrove v Eldridge, like any judgment, is not to be treated like a statute for the application of its words. No doubt Mr Grieve was addressed on Bellgrove v Eldridge. Whether it was a reasonable course for the Principal to construct the table drain on the high side of the driveway depended on the engineering purpose of the table drains. Mr Grieve found that the purpose was served by construction of the table drains on the high side of the driveways: the drains “should have been designed and constructed on the high side”. Implicitly, the purpose was not served by construction of the table drains on the low side of the driveways, and so construction of the table drain on the low side of the driveway was not a reasonable method of dealing with the departure from the contract. This was a finding of fact. I do not think the judge’s understanding of the report in this respect could be said to be in error, and he was entitled in the exercise of his discretion to adopt Mr Grieve’s finding of fact.

61 In any event, once more the Principal needs leave to appeal because the amount at stake is less than $100,000. The amount at stake is $10,280. The refusal of leave to appeal from the award stands, and the Principal does not have leave to appeal in relation to its cross-claim for liquidated damages in the reference. This is the only outstanding item in the protracted dispute between the parties. Discouragement of unnecessary litigation in small amounts, and recognition of disproportionate cost burdens thereby generated, are reasons for the requirement of leave. They are cogent reasons in this case. There has been extensive litigation, although with decreasing contest as the dispute resolution ladder has been scaled. There was a difference between the parties of over $460,000.00 at the time of the arbitration and reference, and approximately $120,000.00 at the hearing before Nicholas J. Further progress up the ladder over an amount of $10,280 is not warranted, and in my opinion for this reason alone leave to appeal should be refused.

Orders

62 I propose that in both applications leave to appeal be refused with costs.

63 McCOLL JA: I agree with Giles JA.

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Last Modified: 12/12/2003