CH2M Hill v State of NSW
[2012] NSWSC 963
•24 August 2012
Supreme Court
New South Wales
Medium Neutral Citation: CH2M Hill v State of NSW [2012] NSWSC 963 Hearing dates: 03/07/2012, 04/07/2012, 05/07/2012, 09/07/2012, 10/07/2012, 12/07/2012, 16/07/2012, 17/07/2012,18/07/2012, 19/07/2012, 24/07/2012, 01/08/2012, 02/08/2012; further written submissions received 06/08/2012, 08/08/2012, 09/08/2012. Decision date: 24 August 2012 Jurisdiction: Equity Division - Technology and Construction List Before: McDougall J Decision: Judgment for defendant with costs.
Catchwords: [CONTRACT] - building and construction - whether defendants breached contractual duty of care - whether breach of specific design criteria - whether defendants design of the works was in accordance with best engineering practices - whether defendant complied with contractual duty of care - whether defendant engaged in misleading and deceptive conduct by representing it would provide design services properly - whether rectification works unreasonable.
[EQUITY] - assignments - whether valid assignment - whether genuine commercial interest.
[DAMAGES] - contract - calculation of indirect costs - whether plaintiff is entitled to recover damages for corporate overheads - whether assessment of loss includes rectification works.
[TORTS] - duty of care - whether defendant owed the plaintiff a duty of care - whether duty of care more extensive than the obligations under the express retainer.
[PROCEDURE] - application for leave to amend - whether amendment propounded was so deficient as to be embarrassing - whether proposed pleading is likely to cause significant prejudice.Legislation Cited: Law Reform (Miscellaneous Provisions) Amendment Act 2000 (NSW)
Civil Procedure Act 2005 (NSW)
Practice Note SC Eq 3Cases Cited: AJ Lucas Drilling Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd (No.3) [2008] VSC 315
Astley v Austrust Limited (1999) 197 CLR 1)
Banabelle Electrical v State of New South Wales [2005] NSWSC 714
Bulk Materials (Coal Handling) Pty Ltd v Compressed Air and Packaging Systems (NSW) Pty Ltd (1997) 14 BCL 109
Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Pty Ltd [2008] NSWCA 243
Commonwealth Bank of Australia v Hamilton [2012] NSWSC 242
Equuscorp Pty Ltd v Haxton (2012) 86 ALJR 296
Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603
HSD Co Pty Ltd v Masu Financial Management Pty Ltd [2008] NSWSC 1279
Jones v Dunkel (1959) 101 CLR 298
Ucak v Avante Developments [2007] NSWSC 367
Thiess Watkins White Constructions Ltd v The Commonwealth (1992) 14 BCL 61Texts Cited: Proportionate Liability in Construction Litigation" (2006) 22 BCL 394 Category: Principal judgment Parties: CH2M Hill Australia Pty Limited (Plaintiff)
State of New South Wales (Defendant)Representation: Counsel:
M Christie SC / L Shipway (Plaintiff)
J Simpkins SC / D Talintyre (Defendant)
Solicitors:
Norton Rose (Plaintiff)
Clayton Utz (Defendant)
File Number(s): 2009/326148
Judgment
HIS HONOUR: In July 2004, Sydney Water Corporation (Sydney Water) made a "design and construct" agreement (the head contract) with Barclay Mowlem Construction Limited (BM) and CH2M Hill Australia Pty Limited (CH2M) in joint venture. The joint venture was known as CHBM Water, and I will refer to it in these reasons as "the joint venture" or "CHBM". Under the contract, CHBM was required to design and construct an upgrade of Sydney Water's sewerage treatment plant facility (STP) at West Camden. The project was often referred to (inevitably and not inappropriately) as the WC project.
On 1 March 2005, CHBM contracted (the design contract) with what was then the Department of Commerce of the State of New South Wales (DOC), that DOC would supply design services in relation to three earthen lagoons that formed part of the STP upgrade. DOC provided a design in which the lagoons were lined with a geosynthetic clay liner (GCL) overlaid for protection by reinforced concrete panels.
In February 2007, following heavy rains earlier that month, the lagoons suffered significant damage. CHBM alleged that the damage occurred because of deficiencies in the design provided by DOC. DOC says that its design was adequate, and that the damage occurred because of deficiencies in construction.
CHBM decided to rebuild the lagoons using a different design, supplied by Parsons Brinckerhoff Australia. There is a dispute as to the rebuilding. DOC says that the damage sustained in February 2007 could have been repaired, adequately, short of rebuilding. CHBM took the view, and CH2M now says, that rebuilding was necessary.
In December 2009, BM assigned to CH2M (the assignment) all its right in claims against DOC arising under the design contract.
CH2M sues the State of New South Wales to recover damages for what it says are DOC's breach of express and implied obligations under the design contract, for breach of alleged common law duties of care (including an alleged duty to warn of issues affecting the longevity of the works) and for misleading or deceptive conduct. The claim raises not only the failure of the lagoons in February 2007, but also what are said to have been inherent deficiencies in DOC's design that meant, according to CH2M, that the lagoons would not have performed as required over their design life of 50 years, thus justifying the decision to rebuild.
The real issues in dispute
The (agreed) statement of issues
At the start of the hearing, Mr Simpkins of Senior Counsel, who appeared with Mr Talintyre of counsel for DOC, provided a statement of what he said (then) were the real issues in dispute. Mr Christie of Senior Counsel, who appeared with Mr Shipway of counsel for CH2M, agreed that those were the real issues arising on the "pleadings". I set out, with some minor and insubstantial amendments, that statement of issues:
Breach of contract
1. Whether the terms pleaded at paragraphs C7 and C8 of the Technology and Construction List Statement [TCLS] were implied terms of the contract made with the Defendant on 1 March 2005 [the Contract].
2. Whether as designed, the Tanks (as defined in the TCLS) did not have a design life of 50 years because:-
(a) The Embankments were liable to become saturated with water or other liquid;
(b) Water or other liquid was liable to collect in the interface between the Embankment and the Bentofix liner;
(c) Voids were likely to form between the Embankment and the Bentofix liner, and any such voids would facilitate the collection of water at the interface and the entry of water into the Embankments;
(d) When the Embankments were saturated with water or other liquid, or when water or other liquid was present in the interface between the Embankment and the Bentofix liner, the Embankments, the Bentofix liner and/or the concrete slabs were liable to suffer damage or destruction during normal use;
(e) The Embankments did not possess an adequate factor of safety [TCLS paragraph C13].
3. If so, whether the following provisions of the Contract were breached:-
(a) Clauses 2 and 3 of the Contract;
(b) Clauses 8.1, 8.4, 9.1 and Schedule 2 of Annexure B;
(c) Annexure C;
(d) Clauses 3 and 4 of Annexure D;
(e) An implied term that the Defendant would provide a design that was fit in all respects for its intended purpose.
4. Whether the design of the Tanks failed to accord with best engineering principles and practices in that:-
(a) The Defendant failed to undertake an appropriate geotechnical analysis;
(b) The Defendant failed to take account of, or include measures to prevent, the formation of voids between the fill in the Embankments and the Bentofix;
(c) The Defendant failed to take account of the potential sources and behaviour of water or other liquid and the manner in which it might interact with or affect the Tanks or the Embankments;
(d) The Defendant failed to take adequate account of or include adequate measures to prevent the entry or accumulation of water or other liquid in the Embankments or in the interface between the Bentofix liner and the Embankments;
(e) The Defendant failed to include adequate measures to drain or otherwise remove water or other liquid that might accumulate:
(i) In the Embankments;
(ii) At the interface between the Embankments and the Bentofix;
(f) The Defendant failed to specify an appropriate method for installation of the Bentofix;
(g) The Embankments had a factor of safety of less than 1.5 for a permanent case and less than 1.3 for a temporary case;
(h) The Defendant failed to provide an appropriate earthworks specification [TCLS paragraph C16].
5. Whether the drawings and specifications provided by the Defendant failed to contain adequate detail of drainage requirements during and after construction [TCLS paragraph C17].
6. If either or both 4 and 5 are answered in the affirmative, whether the following provisions of the Contract were breached:-
(a) Clauses 2 and 3 of the Contract;
(b) Clauses 8.1, 8.4, 9.1 and Schedule 2 of Annexure B;
(c) Annexure C;
(d) Clauses 3 and 4 of Annexure D;
(e) An implied term that the Defendant would provide a design that was fit in all respects for its intended purpose.
7. Whether the absence of a leachate collection system from the design was a breach of:-
(a) Clauses 2 and 3 of the Contract;
(b) Clauses 8.1, 8.4, 9.1 and Schedule 2 of Annexure B;
(c) Annexure C;
(d) Clauses 3 and 4 of Annexure D;
(e) An implied term that the Defendant would provide a design that was fit in all respects for its intended purpose[TCLS paragraph C19; Technology and Construction List Response (TCLR) paragraph 6(z), (aa), (bb) (cc) (dd) and (ee)].
8. Whether tanks constructed according to the design could not have been emptied temporarily in order to be taken off-line for maintenance without breaching the applicable performance requirements [TCLS paragraph C21].
9. If so, whether the following provisions of the Contract were breached:-
(a) Clauses 2 and 3 of the Contract;
(b) Clauses 8.1, 8.4, 9.1 and Schedule 2 of Annexure B;
(c) Annexure C;
(d) Clauses 3 and 4 of Annexure D;
(e) An implied term that the Defendant would provide a design that was fit in all respects for its intended purpose.
10. Whether tanks constructed according to the design would have allowed sewerage to enter the groundwater beneath the site and escape the bounds of the site [TCLS paragraph C23]
11. If so, whether the following provisions of the Contract were breached:-
(a) Clauses 2 and 3 of the Contract;
(b) Clauses 8.1, 8.4, 9.1 and Schedule 2 of Annexure B;
(c) Annexure C;
(d) Clauses 3 and 4 of Annexure D;
(e) An implied term that the Defendant would provide a design that was fit in all respects for its intended purpose.
12. Whether the Defendant failed to give notice immediately to the Joint Venture upon discovering the presence of errors, omissions or defects in documents prepared by it [TCLS paragraph 31].
13. If so, whether the Defendant breached clause 9.5 of Annexure B of the Contract.
14. Whether the Defendant:-
(a) Failed to ensure that its design for the tanks was not susceptible to damage or destruction during the course of construction;
(b) Provided a design for the tanks that was susceptible to damage or destruction during the course of construction;
(c) Failed to warn the Joint Venture of the risk of damage to or destruction of the tanks during construction or of appropriate measures to minimise that risk [TCLS paragraphs C33 and 35].
15. If so, whether the Defendant beach:-
(a) Clauses 8.1 and 9.5 of Annexure B;
(b) The implied term pleaded at paragraph C8.
16. Whether the Plaintiff constructed the tanks in reliance upon, and according to, the Design [TCLS paragraph C37].
17. Whether in consequence of the breaches of the Contract (or any of them):-
(a) The tanks were defective;
(b) The Tanks were not fit for purpose;
(c) The Plaintiff was delayed and disrupted in completing the tanks [TCLS paragraph C38].
18. Whether on 11 and 12 February 2007 rainfall occurred which, by reason of defects in the design of the tanks, destroyed them or rendered them unusable [TCLS paragraph C44].
19. Whether any breach of the Contract caused the Plaintiff and, and if so what, loss and damage [TCLS paragraphs C47 to C53; TCLR paragraphs 13(e), 13(f), 13(g), 13(h), 13(i), 13(n), 16(a), 16(b), 16(d), 17(d), 17(e), 17(f), 17(g), 17(h), 17(i), 31, 38(a), 38(b), 47, 48].
Negligence
20. Whether the Defendant owed the Plaintiff a duty of care:-
(a) To provide a design that contained no material defects and was fit for purpose;
(b) To provide a design that would satisfy the requirements imposed upon the Plaintiff by the Head Contract and would not cause the Plaintiff to breach any of the requirements of the Head Contract;
(c) To provide a design that would not cause the Plaintiff to suffer loss and damage if and when the Plaintiff built the tanks according to the Design;
(d) When advised by SWC or the Joint Venture that the defects existed or might exist in the tanks arising from defects in the design to promptly carry our appropriate enquiries and assist the Plaintiff to eliminate the defects or reduce them to an acceptable level;
(e) To provide a design for the tanks that ensured that they were not susceptible to damage or destruction during the course of construction;
(f) To warn the Joint Venture with all due expedition of any material risk of damage or destruction during construction and advise of appropriate steps to minimise it [TCLS paragraphs C56 and C57].
21. Whether the Defendant breached such duties (if owed) or any duty to provide the Services with due professional skill and care [TCLS paragraphs C58 to C61].
22. Whether any breach of such duty or duties caused the Plaintiff any, and if so what, loss and damage [TCLS paragraphs C63 to C65; ; TCLR paragraphs 13(e), 13(f), 13(g), 13(h), 13(i), 13(n), 16(a), 16(b), 16(d), 17(d), 17(e), 17(f), 17(g), 17(h), 17(i), 31, 38(a), 38(b), 47, 48].
Misleading and deceptive conduct
23. Whether the Defendant made the representations pleaded at paragraph C66 of any of them [TCLS paragraph C66].
24. Whether the representations, if made, were misleading and deceptive.
25. Whether any of the representations, if made, were relied upon by the Plaintiff.
26. Whether any such conduct caused the Plaintiff and, and if so what, loss and damage [TCLS paragraph C69; ; TCLR paragraphs 13(e), 13(f), 13(g), 13(h), 13(i), 13(n), 16(a), 16(b), 16(d), 17(d), 17(e), 17(f), 17(g), 17(h), 17(i), 31, 38(a), 38(b), 47, 48].
Assignment
27. What is the legal effect of the Deed of Assignment made 23 December 2009 [TCLS paragraph 5].
It will be necessary to go to some paragraphs of the list statement, and to some provisions of the design contract, to give content to that statement. It should also be noted that there is a dispute as to the extent of the issue comprised within issue 27: the effect of the assignment. Again, it will be necessary to refer to the relevant pleadings to deal with this dispute.
The pleadings
As I have said, the pleaded case for CH2M alleged breaches of contract, breaches of a common law duty of care, and misleading or deceptive conduct, on the part of DOC in connection with its provision of the design. I think it is fair to say that, in final submissions, Mr Christie accepted that if his client could not make out its case based on the express terms of the contract, then it was unlikely that it could succeed on the other bases.
Mr Simpkins submitted, in any event, that where the parties had entered into a detailed written contract, which provided specifically for the rights and obligations of each, there was no reason for the law to impose any duty of care that went further than the express obligations imposed on DOC by the design contract.
It is a little difficult to understand issue 1. Paragraph 7 of CH2M's contentions allege some eleven terms of the design contract. Each of those is said to be an express term, and is particularised by reference to a specific contractual document (as one might expect, the design contract comprised a large number of different documents). It may be, although I am unsure even after final closing submissions, that the real issue is:
(1) do the terms pleaded arise on the proper construction of the particularised portion of the contract?
(2) Alternatively, what is the proper construction and operation of the terms particularised?
(3) Again alternatively, perhaps some combination of the two preceding issues.
Likewise, the terms pleaded in para 8, are said, in the first instance, to be express terms, and again are particularised by reference to the specific contractual documents. To the extent that the terms are express, it is possible that the issue is intended to raise the questions to which I have just referred. However, the terms are also said to be, in the alternative, implied; and (at least to as to those alleged implied terms) would give rise to the issue asserted as the first issue.
As to issues 2, 4, 5, 7, 8, 10, 12, 14, 16, 17, 18, 19, 20, 21, 22, 23, 26 and 27, the references to paragraphs of the pleadings is intended, as I understand it, to indicate where it is that those issues arise. It is not necessary to go to the pleadings to understand those issues.
As to issue 3 (and again, as to the terms of the contract referred to, by reference to paras 7 and 8 of the list statement, in issue 1): I shall return to the relevant terms of the design contract.
I return to issue 27, relating to the assignment.
Paragraph 5 of the list statement (with its particulars) alleges:
On or about 22 December 2009, BM assigned to the plaintiff all BM's right, title and interest in all claims that BM has against DOC in connection with the Contract.
Particulars
Agreement between BM and the plaintiff dated 22 December 2009.
Paragraph 5 of the list response (in each of its articulations, including the amended list response filed by leave on 26 July 2012) alleges, in answer, that:
The State does not admit paragraph 5 of CH2M's Contentions.
Paragraph 5 of the contentions is a composite allegation setting out what CH2M says is both:
(1) the making of the assignment, or the fact of its making; and
(2) the legal effect of the assignment.
Thus, the non-admission pleaded in reply could be taken to traverse both the fact of making the assignment and its legal effect.
In their final written submissions for DOC, Mr Simpkins and Mr Talintyre devoted some 26 detailed paragraphs to an attack on the validity or effect of the assignment, on a number of bases. One basis was that CH2M either did not have, or had not shown that it had (the onus resting upon it), a genuine commercial interest in the subject matter of the assignment.
Mr Christie protested, with some force (and some justification) that these arguments had not been flagged either by the list response or by the way in which issue 27 was stated. He submitted, correctly, that the opening submissions for DOC made no reference at all to issue 27.
I think that Mr Christie's submission is correct. The non-admission could be dealt with simply, by proving in a formal way the agreement to assign, and tendering a copy. Once that was done, CH2M would have satisfied its onus of showing that there had been an agreement by which, in terms, the assignment alleged was made.
It would then be a matter of construction of the agreement, so proved, as to whether it had the effect for which CH2M contended by para 5 of its contentions: namely, that it amounted to an assignment to CH2M of "all BM's right, title and interest in all claims that BM has against DOC in connection with the" design contract.
Section 56 of the Civil Procedure Act 2005 (NSW) requires parties and their legal representatives to seek to identify the real issues in dispute, and to resolve those real issues as justly, quickly and cheaply as the nature of the case allows. The days of trial by ambush, or surprise, are over. The court requires of parties and their legal representatives that they articulate fully and clearly the issues for trial. That is an essential aspect of contemporary civil litigation; and characterising the litigation as "commercial" does not alter this. See Allsop P (with whom Beazley and Campbell JJA agreed) in Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Pty Ltd [2008] NSWCA 243 at [160] to [163].
Practice Note SC Eq 3, which deals with proceedings in the commercial list and the technology and construction list, specifies, among other things, that a defendant's contentions in its list response should "avoid formality", "admit or deny the allegations the plaintiff makes", "state the allegations the defendant makes including adequate particulars of those allegations" and "identify the legal grounds for opposite to the relief claimed".
In this case, para 5 of the list response neither admits or denies the allegation in question, and thus does not conform with para 11 of the practice note. Nor does it include, either by way of pleading or by way of particulars, details of the material facts underlying the arguments raised in the closing written submissions. Further, it could be said, it does not identify the legal grounds now for opposition to the relief sought, insofar as the entitlement to that relief is said to depend on the assignment.
I have qualified this last statement ("it could be said") because the closing submissions for DOC appear to accept (at [628]) that "CH2M was able to sue to recover for itself without any assignment". If, by that, DOC meant to concede that CH2M was entitled to full recovery of damages claimed to have been suffered by itself and BM in joint venture, then the arguments go nowhere because they do not suggest that the matters raised afford any ground of opposition to the relief claimed (by way of damages) in the summons. However, in his final oral submissions, Mr Simpkins said that no such concession was intended or made.
This leads to another point, which was raised with counsel in the course of submissions. BM and CH2M were joint venturers, no doubt pursuant to some form of joint venture agreement. As joint venturers, they made the head contract with Sydney Water, to carry out the STP upgrade works to Sydney Water's requirements as specified in that head contract. As joint venturers, they made the design contract with DOC, for DOC to perform the design services specified, to the standards specified, in that contract.
Thus, at a level of some generality at least, if by reason of DOC's breaches of its obligations under the design contract, BM and CH2M as joint venturers suffered loss under their head contract with Sydney Water, it may well be the case that in law each of them was liable to Sydney Water for the full extent of that loss (subject of course to the general principle against double recovery). Equally, it may be, each of them is entitled to recover the full amount of any losses caused by DOC (again, with the same limitation).
If that is the reasoning underlying the rather cryptic last sentence (of [628] of DOC's submissions), then it is a matter that can be addressed.
However, in my view, in circumstances where DOC had not flagged in any way the arguments as to lack of genuine commercial interest that it raises in its closing written submissions, and where CH2M has been deprived of the opportunity to meet those arguments by way of evidence, I think that the interests of justice dictate that the court should not entertain the unheralded arguments.
Thus, I propose to confine issue 27 to:
(1) the proper construction and effect of the assignment; and
(2) the proposition tentatively advanced at [29] above.
In any event, it is possible to state some fundamental issues more shortly. There are a number of specific aspects of the design provided by DOC, and the work undertaken by CHBM, that are the subject of criticism. An understanding of those specific criticisms will enable these fundamental issues to be more readily understood. To understand those criticisms, it is necessary to know a little more about the design and the works. Accordingly, I shall give what I hope is a non-contentious summary of the design provided by DOC, of the works undertaken by CHBM, and of the mechanism of the failure following the rains in February 2007, and then return to the fundamental issues of design and performance.
Factual background
DOC's design provided for sewage to be treated by a process known as "intermittent decanting and aeration" (IDEA). That process was to be carried out in two lagoons, known as intermittent decanting and aeration lagoons (IDALs; known respectively, as IDAL 1 and IDAL 2). The IDALs were linked to another lagoon known as the "equalisation basin" (EB).
For obvious reasons, it was necessary to ensure that the contents of the three lagoons could not escape into the surrounding soil. Thus, DOC specified that the lagoons should be lined with a GCL which had very low permeability. The upper surfaces of the GCL (i.e., the surfaces facing into the lagoons) were protected from damage by overlying reinforced concrete panels. Those panels were cast in situ over the GCL. The lower surfaces of the GCL were laid on the underlying earthen subgrade. The zone, or "interface", between the exterior surface of the GCL and the subgrade was referred to as, among other things, the "transmissive zone".
The locale where the works were carried out sloped generally from the south-west to the north-east. The lagoons were to be constructed partly in cut and partly in fill. CHBM engaged another firm of engineers to design the cut and fill operations. No criticism is made of that design.
It appears to be common ground that, either as a matter of design or as a matter of construction (or, perhaps, both), the entry of moisture behind the GCL (i.e., into the underlying subgrade) should be prevented so far as possible. To jump ahead for a moment: the mechanism postulated for the failure that occurred, following heavy rain in February 2007, is that water did penetrate behind the GCL, building up hydrostatic pressure which the concrete panels could not contain, and thus caused those concrete panels to heave and crack. The concrete panels were not designed or intended to restrain such forces; and in the ordinary way, if the lagoons were full, the very substantial pressure imposed by their contents on the panels and underlying lining would help to restrain movement.
When the failure occurred, IDAL 2 and the EB were, if not completely empty, certainly not full to their intended operating levels. However, IDAL 1 did contain water up to the lower limit (about 3.7 metres) of its operating level.
The design provided by DOC did not in terms provide for any seal around the perimeter around the lagoons. As I understand it, DOC says that:
(1) proper placing of the GCL (which DOC says was an aspect of construction, not of design) required the use of an "anchor trench" which would have provided perimeter sealing in any event; and
(2) once the works were completed, there would be a pavement between and around the lagoons, butting up to the concrete kerbs of the lagoons and separated from those kerbs by an expansion joint, which again would have acted as a seal.
Nor did DOC's design provide for any underdrainage or leachate collection system. It appears to be common ground that if underdrainage or a leachate collection system of adequate capacity had been installed, either would have operated, among other things, to collect moisture moving through the embankments and to carry it away from the lining. As I understand it, DOC says that neither underdrainage nor a leachate collection system was necessary, because:
(1) if the earthworks were properly constructed, and the GCL were properly installed using an anchor trench as recommended by the manufacturer, there would be minimal water entry into the earthen embankments;
(2) when the works were completed and the pavements were constructed as I have indicated, this would further minimise the entry of moisture;
(3) in any event, there was minimal risk of accumulation of groundwater because of the location of the site and its height above the permanent water table;
(4) it was CHBM's responsibility, as contractor, to take appropriate measures to protect the works from rain and stormwater during construction;
(5) as to leachate: the permeability of the GCL (if properly installed) was so low that the transmission of liquids from the lagoons through the GCL to the earthen embankments would be minimal, and anything that did permeate would drain naturally; and
(6) further, and in any event, the underlying rock was heavily fractured, and any moisture collecting in the embankments would drain away naturally.
The GCL that was chosen, known as Bentofix X 2000, comprised a layer of bentonite clay sandwiched between two thin lining membranes. Bentonite is a form of clay which, when wetted, expands substantially. When such a GCL is properly laid, the wetted and swollen bentonite forms a barrier which is highly impermeable to the transmission of moisture. DOC had used the basic design in other projects which, so far as the evidence shows (and it will be necessary to return to the sufficiency of this evidence), were operating in a satisfactory manner.
Because Bentofix GCL is a flexible membrane, the effectiveness of which depends very much on its integrity, care is required when it is being placed and when (as here) it is being overlain by cast in situ concrete panels. It is important that the GCL be placed according to the manufacturer's recommendations, and that it not move until the concrete has set. One of the recommended ways of ensuring that the GCL does not move (adapted to the facts of this case) is to construct an anchor trench around the perimeter of the embankments. The upper ends of the GCL panels that line the embankments are placed in the anchor trench, and the anchor trench is then backfilled. Although the reason for doing this is to ensure that the GCL does not move during the construction process, the anchor trench will also act as a barrier against the entry of moisture into the embankment behind the GCL.
The design provided by DOC did not specify that an anchor trench be used. It stated that the GCL should be laid in accordance with the manufacturer's requirements. It is common ground that those requirements indicated the use of an anchor trench. However, CHBM did not construct an anchor trench. Instead, at the top of the embankments, it drove spikes through the GCL, with a view to securing it while the processes of construction were carried through to completion.
CH2M says that DOC should have specified an anchor trench as part of the design. DOC says that the use of an anchor trench is a construction issue, and that it did what was required by referring to the manufacturer's requirements. It says, further, that in any event it was poor workmanship to secure the GCL by spiking it in the way that CHBM did.
DOC says, further, that CHBM failed adequately (in accordance with the relevant specification) to compact the earthen embankments, and to provide surface drainage during construction so as to keep surface water away from the GCL.
There is another issue relating to design. This issue arises out of the extensive expert investigations that have been conducted. CH2M and DOC each retained an expert in the field of GCLs: Professor Carl H Benson (retained by CH2M) and Professor Kerry Rowe (retained by DOC). It appears to be common ground that those gentleman are, if not the world's leading experts in the field, then certainly within the class of leading experts in that field. Professors Benson and Rowe produced individual reports, and collaborated to produce joint reports.
Professor Benson postulated a mechanism known as "cation exchange". Bentonite is a clay, the principal component of which is a compound known as sodium bentonite. As its name suggests, that is a compound where the positive ions (or cations) are sodium ions. It appears to be recognised that if liquids containing calcium (or for that matter magnesium) cations come into contact with sodium bentonite, the calcium ions (for simplicity, I will concentrate on those only) will preferentially replace the sodium ions, thus converting the compound to calcium bentonite. Calcium bentonite is far less reactive than sodium bentonite: it does not swell so much in the presence of moisture.
Thus, if the process of cation exchange occurs to any substantial extent, the GCL will become more permeable because the highly reactive sodium bentonite will be converted to less reactive calcium bentonite, thus reducing the capacity of the composite liner to swell in the presence of moisture. As I have said already, it is the ability of the composite liner to swell in the presence of moisture that is responsible for its low permeability.
Professor Benson was of the view that the design, requiring the placement of wet concrete over the GCL liner, would produce an environment that was rich in calcium cations. Thus, in his view, it would facilitate cation exchange and would necessarily diminish the impermeability (or increase the permeability) of the GCL. In short, in Professor Benson's view, the design was such that, necessarily, the impermeability of the GCL would be compromised. Professor Rowe accepted that the process of cation exchange would be likely to occur, and that to the extent that it did, it would compromise the impermeability of the GCL. However, he differed from Professor Benson as to the extent to which this would happen, and, in consequence, as to its significance.
Associated with the problem of cation exchange is the question of "wet/dry cycling". Professors Benson and Rowe agreed that if the sodium bentonite in the GCL were alternately wetted and dried out, it would (during and as a result of the drying process) develop cracks and fissures that would not be completely closed when it was next wetted. The presence of those cracks and fissures would further compromise the impermeability of the GCL.
The operation of the IDALs required that, most of the time, they would be kept filled to within their operating levels of 3.7 metres to 4.7 metres. Professors Benson and Rowe agreed that such drying out as occurred when the level fluctuated between those limits was unlikely to cause problems. However, the performance criteria required by Sydney Water to be met stipulated that either of the IDALs should be able to be taken out of service, for up to two weeks, for maintenance, without affecting the functioning of the plant overall. It was Professor Benson's view (and I do not think that Professor Rowe controverted this) that if an IDAL were emptied accordingly, for two weeks, during a period of warm weather, then there was a real likelihood that the bentonite in the GCL would dry out, and thus give rise to the problem of cracking or fissuring.
As to the EB: it was not intended to be kept, more or less permanently, full of liquid between specified levels. Thus, it might be thought, the problem of wet/dry cycling might affect the EB in any event.
For present purposes, the significance of the debate relates to the design. CH2M says that the process of cation exchange was sufficiently well known, when the design was prepared, to suggest that a design involving the placing of wet concrete over a GCL containing sodium bentonite would have the risk of compromising the impermeability of the GCL. Thus, it says, the design was inherently defective. This is one of the factual bases for CH2M's "failure to warn" case.
DOC challenges the proposition that the process of cation exchange was sufficiently well known, in 2004 and following when its design was produced, to constitute a danger that a competent designer should take into account in preparing a design. It says, in any event (based on Professor Rowe's evidence and on its own practical experience), that to the extent that process of cation exchange occurred, or might occur, it did not damage the impermeability of the GCL sufficiently to explain the failure that occurred following the February rains, and would not affect adversely the long-term serviceability of the lagoons.
I interpose to note that, on CH2M's case, the problem of cation exchange (either alone or in conjunction with wet/dry cycling) would have affected the long term functionality of the lagoons to a point where they were unlikely to meet what, it said, was Sydney Water's requirement for a 50 year lifespan. That is one of the reasons why, after the failure in February 2007, CHBM decided in any event to rebuild the works completely to a different design.
DOC points to other designs that it prepared, using concrete panels cast in situ over GCL liners, which it says were properly constructed, have not failed and are showing no signs of failure.
Some fundamental issues as to design and construction
Stripping aside the verbiage of the pleadings, the fundamental alleged defects in the design are:
(1) failure to specify an anchor trench or some other effective form of perimeter seal;
(2) failure to specify underdrainage of some form; and
(3) failure to guard against the risk that the GCL could not perform its function, to the required standard, because of the process of cation exchange.
In addition, CH2M alleges that DOC failed to give any, let alone any proper, warning to CHBM of the risk that the works might fail, or that the works constructed according to DOC's design might not see out their expected lifespan. The warning issue relates both to the works during the course of construction and to the works when completed. It is based on the proposition that there was a high risk of, or vulnerability to, instability, because of the likelihood that excessive moisture would permeate and render unstable the earthworks.
The fundamental construction defects alleged against CHBM (and, thus, against CH2M) are:
(1) failure to install the GCL using an anchor trench, thus facilitating the entry of moisture behind the GCL;
(2) securing the GCL using spikes, thus permitting moisture to enter and move through the bentonite layer;
(3) failure to construct and maintain adequate surface drainage during the construction process, thus allowing water to collect and enter into the embankments:
(4) failure to compact the earthworks properly, thus facilitating the movement of water through the embankments; and
(5) failure to protect the GCL from the elements after it was laid and before the protective concrete panels were poured.
For the purposes of analysis, I propose to concentrate on those fundamental issues relating to design and construction.
The application for leave to amend
It will be noted that the statement of issues propounded by DOC and accepted by CH2M contained no reference to proportionate liability. This was raised in the course of Mr Simpkins' opening. He said that he would give it consideration.
That consideration matured into an application for leave to amend which was notified in the evening of Friday, 6 July 2012 (a non-sitting day: as were all Fridays of the weeks allocated for hearing, at the request of the parties). The application was raised in court on Monday, 9 July 2012 (the fourth day of hearing) and was by agreement postponed until the evidence was finalised.
At the conclusion of the oral evidence (lay and expert), debate on the application took place: on the 11th day of the hearing, 24 July 2012. By then, the proposed amendment, in so far as it sought to raise proportionate liability, had been somewhat refined.
The contentious issue of proportionate liability was sought to be raised by para 71 of the amended list response:
71. In further answer to the whole of CH2M's Contentions the State says, and it is the fact that:-
(a) The claims made by CH2M are apportionable claims within the meaning of section 34(1) of
the Civil Liability Act 2002 [the CLA] and 87 CB of the Trade Practices Act 1974 [the TPA];
(b) If the Joint Venture suffered any loss or damage, by reason of the matters pleaded and
particularised herein BM was a concurrent wrongdoer in respect of any loss or damage
suffered by CH2M Hill and CH2M Hill was a concurrent wrongdoer in respect of any loss or
damage suffered by BM in that they each owed to each other a duty to exercise all due care
skill and diligence in and about the performance of the works;
(c) In the premises, if the State has any liability to the Joint Venture, its liability is limited by
section 35 of the CLA and sections 87CD and 82(1)(b)of the TPA to an amount reflecting
the proportion of the loss or damage that the Court considers just having regard to the extent
of the State's responsibility for the damage or loss, after excluding the proportion of the
damage in relation to which there has been contributory negligence.
It will be seen that the thesis proposed by the amendment was that each of BM and CH2M owed the other, and breached, a duty to exercise reasonable care in relation to the performance of the works under the head contract (a broad but sufficient paraphrase of para 71(b)). Thus, DOC sought to allege, BM was a concurrent wrongdoer in respect of any loss or damage sustained by CH2M; and CH2M was, likewise, a concurrent wrongdoer in respect of any damage sustained by BM.
The basis on which the foundational "duty" was alleged to exist was not made clear either in the original version of para 71 or in the final version on which DOC moved.
It may be assumed that the joint venture relationship between BM and CH2M was governed by some contract. One would expect such a contract, made between substantial and sophisticated parties in the field of civil engineering and infrastructure works, to contain provisions that each of them thought necessary to protect itself against the risk of default (of the kind raised in para 71) on the part of the other. Thus, one would expect any "duty", in respect of such default, to be a matter of contract.
In those circumstances, it is very difficult to see why the law would impose some common law duty of care going beyond whatever duties were imposed by the joint venture agreement.
DOC did not allege a duty of care imposed by the joint venture agreement, nor did it refer to that agreement, so as (for example) to allege that there were common law duties of care corresponding to whatever contractual duties, in respect of performance of works by the joint venture, each of BM and CH2M undertook to the other.
Paragraph 71 provides no hint of the material facts which might be relied upon to support the proposition that each of the joint venturers owed to the other some duty of the kind sought to be alleged by it.
Writing extracurially, I have said that a defendant pleading a proportionate liability defence should disclose (in relation to the alleged concurrent wrongdoer) the cause of action and damage "in at least as detailed a manner as would be required of any initiating process for such a cause of action". Thus, among other things, I said that it was necessary for the basis of the cause of action to be identified: by reference to some underlying contract, or by reference to (for example) a common law duty of care. See "Proportionate Liability in Construction Litigation" (2006) 22 BCL 394 at 400. Similar propositions have been advanced, with greater authority, by judges at first instance in many cases. I refer, by way of example only, to the decision of Rothman J in HSD Co Pty Ltd v Masu Financial Management Pty Ltd [2008] NSWSC 1279 and the decision of Hammerschlag J in Ucak v Avante Developments [2007] NSWSC 367.
On any view, para 71 does not achieve that degree of specificity. As I have said, no hint is given of the basis on which the "duty" is said to arise. It cannot be said that para 71 exposes, with appropriate "clarity, precision and openness" the issues that CH2M would have to face. (The quotation comes from the reasons of Allsop P in Baulderstone Hornibrook Engineering v Gordian Runoff, cited at [24] above).
Thus, in my view, the proposed pleading was likely to cause significant prejudice to CH2M. That prejudice would arise, if leave to amend were granted, because CH2M would be left to defend a case, the factual basis of which was entirely unpleaded, in circumstances where (no doubt) DOC would seek to support its case by reference to whatever in the evidence might be thought to lend it some aid.
Further, it is in my view not without significance that, with the agreement of DOC, debate on the application for leave to amend was postponed until after the oral evidence for each party had been completed. I accept that if leave had been granted, it would have been open to CH2M to apply for some adjournment, and to reopen its case. But even if such an application were made, and granted, there would be delay and expense.
It could hardly be said that DOC pleaded, as it did, on the basis of some inadequate understanding of the legal position, or of the defences that might be available to it. The arguments that hitherto it had chosen to raise were:
(1) that its design was not in any relevant way defective;
(2) in any event, even if its design were in some way defective, the sole cause of loss was defective construction undertaken by BM and CH2M in joint venture; and
(3) in the further alternative, any damages for which it might be liable should be reduced by reason of contributory negligence on the part of BM and CH2M.
The considered decision (as I take it to be) of DOC to rest its defence on those bases is reflected in the statement of issues propounded by it at the start of the hearing. That statement of issues does not suggest any question of proportionate liability.
In substance, there were two distinct reasons for refusing the application for leave to amend. The first was that the amendment propounded was so deficient as to be embarrassing, and thus not one that the court should sanction by leave. The second was that even if some more suitable amendment might have been propounded (and the question of insufficiency of the pleading was raised when the topic of amendment was first pressed in court on 9 July 2012), the kinds of prejudice that would be caused to CH2M by granting the amendment, at the time and in the circumstances when it was pressed, were sufficiently substantial as, of themselves, to justify the decision to refuse leave to amend.
It may be accepted that refusal of the application could leave DOC in a position of some disadvantage, if the first and second of its arguments summarised at [75] are not accepted. That disadvantage would be intensified if the court were to conclude that contributory negligence was not available to reduce any award for damages for breach of contract, because any breach established was not of a term conditioned upon the use of reasonable care. (See the Law Reform (Miscellaneous Provisions) Amendment Act 2000 (NSW), and in particular s 9 of schedule 1 to that Act; and cases such as Commonwealth Bank of Australia v Hamilton [2012] NSWSC 242 at [324] to [331]. If the statute did not apply, then the common law position - that contributory negligence is not available - would apply: Astley v Austrust Limited (1999) 197 CLR 1).)
Accepting, as I do, that refusal of leave to amend to raise proportionate liability may occasion real disadvantage to DOC, that nonetheless seems to me to be a necessary result of the way in which, with advice of the highest quality, it conducted the proceedings right up until the time of opening submissions.
In those circumstances, balancing the competing prejudices as best I can and taking into account the other factors that I have mentioned, I concluded that the application for leave to amend, in so far as it sought to raise proportionate liability in the manner propounded by para 71 of the draft amended list response, should be refused.
Relevant terms of the design contract
The design contract is documented in a "consultancy agreement" made on 1 March 2005. I do not propose to set out all the provisions of that agreement, and of the documents called up by or incorporated into it, that are referred to in the pleadings. Instead, I propose to focus on the specific provisions that were the subject of the parties' closing submissions.
DOC began to provide consultancy services well before 1 March 2005. However, nothing turns on this; it is common ground that, whenever the services may have been provided, their provision was governed by the terms of the design contract, as properly construed.
The background to the consultancy agreement was summarised in the recitals:
A. CHBM Water has entered into an agreement with SYDNEY WATER CORPORATION (hereinafter referred to as "the Principle") with respect to the Project. The nature of the agreement is set out in Annexure A.
B. The Consultant has held out and represented to CHBM Water that it has the necessary skills, experience, resources and professional competence to carry out and successfully complete certain Services in a timely manner in accordance with the Agreement.
C. In reliance upon the aforesaid representation of the Consultant, CHBM, Water wishes to engage the Consultant to furnish certain Services for the Project. Such services include but are not limited to those as set out in the Consultant's proposal No. 040012 dated 23rd February 2004.
D. The Consultant has agreed to accept such engagement upon and subject to the terms and conditions described and contained in this Agreement.
By cl 1, CHBM engaged DOC "to furnish certain Services for the Project". By cl 2, DOC warranted "that it will well and faithfully execute the Services in accordance with the Agreement".
Clause 4 specified the documents that should "be taken to be the Agreement" and their order of precedence. Of relevance are:
Annexure A - details of agreement;
Annexure B - general conditions of contract;
Annexure C - CHBM's standards for the Project;
Annexure D - Consultant's Services;
Annexure E - Amendments
Clause 8 of Annexure B (the general conditions of contract) set out DOC's obligations. Clause 8.1 is of prime importance. I set it out:
8.1 Consultant's Services
The Consultant shall provide Services pursuant to the Agreement in a proper, thorough, skilful and professional manner with all due expedition. The Consultant shall submit progressively to CHBM Water, as applicable, all documents required under the Agreement in sufficient time to enable CHBM Water and, where relevant, the Principal and Authorities to approve such documents for each phase of the Project by the Dates for Completion set out in Schedule 1 or as extended pursuant to the provisions of clause 20 hereof.
The Consultant's Services shall comply with:
The requirements of Annexure C: Brief;
All relevant Authorities, legislation, regulations and building codes;
Australian Standards;
CHBM Water's Standards for the Project as set out n Annexure D; and
The requirements of Annexure E: Consultant's Services
Without limiting the generality of the foregoing, the Consultant's Services shall provide effective, efficient and economical solutions to satisfy the performance objectives and other requirements set out in the Brief. Where appropriate, the Consultant shall provide details of alternative proposals that satisfy these objectives and requirements.
The Consultant shall ensure the adequacy of its services and shall make whatever further enquiries are necessary to satisfy this obligation and shall report to CHBM Water on any further investigations or information required which the Consultant cannot obtain from its own enquiries and which are reasonably necessary to ensure the adequacy of its Services as soon as such requirements become known to the Consultant.
Minor services not expressly mentioned which are necessary for the satisfactory completion and performance of the Services shall be carried out without adjustment to the Consultancy Fee.
It is common ground that there was no brief, either as Annexure C or otherwise; that CHBM's standards were annexed as C; and the consultant's services document was Annexure D.
Clause 2 of Annexure D (the annexure specifying the scope of services to be provided by DOC) defined the physical limits of the work. Nothing of present significance turns on that.
Clause 3 specified certain "Design Inputs". I set it out:
3.Design Inputs
Contract Documents (DS-304.5.9, DS-505, DS-506, DS-310, DS-1001.3,45, DS-512, DS-310, DS-311, DS-1001.6, DS-1003)
CHBM Water Tender as Consolidated
Sydney Water Corporation isolation requirements
Site visits as necessary to establish design approach
Work is to be done in accordance with DS-300, DS1001 and DS1100 and other appropriate parts of the specification and Addenda.
Clause 4 of that annexure specified "Tasks and Design Outputs".
So far as is relevant, cl 4 included the following:
The scope of work includes:
Preparation of layout drawings for IDEA and equalisation tank and pits to "Issued for Construction" status.
...
Civil and earthworks design for the IDEA tanks. Road works and landscaping will be by others.
Review of geotechnical reports and advice for additional geotechnical if required.
Structural design for IDEA and equalisation tanks and pits
Structural details for IDEA and equalisation tanks and pits
CH2M had pleaded that it was a term of the design contract that the design would be "fit in all respects for its intended purpose". Particulars were given of various provisions of the contract, including of the head contract; and in the alternative, the term was said to be implied.
DOC's pleading denied that alleged term. However, in final submissions, Mr Simpkins accepted that there would be at least an implied term of the design contract that the design to be provided by DOC pursuant to it would be fit for the purposes that it was required to serve, as those purposes had been made known to DOC. It is thus unlike necessary to consider whether (for example) some of the individual paragraphs of cl 8.1 of Annexure B on their proper construction give rise to such an obligation in any event.
There was little controversy as to the proper construction of cl 8.1. However, there was some controversy as to the proper construction and application of certain provisions of the various design specifications, on which CH2M relied.
I turn to the provisions of the design specification on which CH2M placed particular reliance.
DS-304.5.9 dealt with "operational security requirements for the" IDALs. It stated:
DS-304.5.9
Page 30
Clarification to the operational security requirements for the bioreactors
Line 1399
Add 2
Delete:
"The new IDEA tanks shall be designed so that one aeration tank (either the existing MLE tank or one of the new IDEA tanks) can be taken off-line for maintenance without breaching performance requirements."
Replace with:
"The new IDEA tanks shall be designed so that one aeration tank (either the existing MLE tank or one of the new IDEA tanks) can be taken off-line for maintenance for a period of two (2) weeks without breaching performance requirements. The load may be spread over the remaining operational units in proportion to their capacity. Such maintenance will be scheduled to avoid low operating temperatures."
DS-502.3, relating to the design of earthworks, stated, among other things:
DS-502.3 Design of Earthworks
Any structure, including any building, used for purposes as described anywhere in the whole of this Contract and constructed as part of the Works shall, over the design life of the Works, not suffer any deterioration other than through normal wear and tear or other means beyond the Contractor's control.
...
Design of earthworks shall be in accordance with the Specification and best engineering practices and with AS3798 and or other Australian Standard relevant to the portion of Works under consideration.
...
The Contractor shall adhere to the standard of compaction specified in the various areas and stages of the Works. Foundations are required to provide adequate structural support without excessive settlement for the various components of the Works, including pipelines.
The following details shall be amongst those included on the Contractor's drawings, and/or contained in a separate specification prepared by the Contractor for construction of the Works:
...
(c) Drainage requirements during and after construction.
DS-504.4 required the installation of a leachate collection system. It is unnecessary to set out this part of the specification, because it was common ground that Sydney Water had agreed to the deletion of this requirement from the head contract; and, hence, from the ambit from the design of the design contract.
DS-1102 dealt with "design life". It provided:
DS-1102 DESIGN LIFE
All equipment shall be designed and constructed to have a working life of at least 15 years, working 24 hours a day, 365 days a year. Valves and pipework shall be designed and constructed of materials that shall have a design life of 30 years. Structures such as concrete and steel shall be designed and constructed of materials that shall have a design life of 50 years and be maintenance free for 50 years.
Some issues as to construction of the design contract
It appeared to be common ground that, by reason of DS-304.5.9, DOC was made aware that its design (assuming proper construction) must enable one IDAL to be taken off line for maintenance for up to two weeks. At least implicit in this, and certainly a matter of general understanding, was that this would involve the IDALs' standing empty for most if not all of the period of maintenance.
I am not sure if, at the end, it was CH2M's case that DOC was obliged, as part of its earth work design obligations by reference to DS-502.3, to specify "[d]rainage requirements during and after construction".
There is no doubt that, to the extent that permanent drainage was required as a feature of the earthworks and other parts of DOC's design, DOC was (or would have been) required to design that permanent drainage. No doubt, that is why Mr Guy Boncardo (the principal engineer in charge of DOC's design team) specifically turned his mind to the question of underdrainage, and decided that it was not needed.
The question of temporary drainage during construction is governed by various provisions of the General Specification. It did not appear to be in doubt that, by reference to some of those provisions, it was CHBM's responsibility to manage surface drainage, to keep the site free of water and to repair any damage resulting from the failure to protect the works from water. Further, it appeared to be common ground between the various experts that, as a matter of construction practice, it was the responsibility of CHBM as contractor carrying out the works to manage stormwater during the course of construction. Indeed, it was CH2M's case that CHBM's site personnel had attended diligently to that task.
There was controversy as to the proper construction of DS-1102. Mr Christie submitted that, on its proper construction, the earthworks and their associated structures (excluding valves and pipe work) were required "to have a design life of 50 years and be maintenance free for 50 years".
Mr Simpkins accepted that, generally, the phrase "such as" is used to indicate that the examples following it are not exhaustive of the general case or proposition preceding it (see for example Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at [71] to [77]). But in this case, he submitted, the particular examples following that phrase were exhaustive of the preceding general proposition.
I do not think that this is the proper construction of DS-1102. In my view, it falls into two parts. One part (which itself is subdivided into two further parts) deals with "equipment". The other part deals with "structures". Between them, "equipment" and "structures" are exhaustive of the works to be performed under the head contract. In the context of the design contract, those two categories of works are exhaustive of the elements that were to be the subject of DOC's design.
The general requirement in relation to equipment is "a working life of at least 15 years, working 24 hours a day, 365 days a year". However, in the case of "valves and pipe work", there is a requirement for "a design life of 30 years".
It is not controversial to say that DS-1102 was intended to apply to the whole of the works to be performed by CHBM under the head contract; or that the same view of its operation applies, making appropriate changes, to the scope of services to be provided by DOC under the design contract. Thus, as having I have said, the residual category of "structures" must be taken to be everything in the works (or the relevant part of them) that is not "equipment" or "valves and pipe work" (assuming, for the moment, that the latter may or may not be a subset of the former).
Cation exchange
The court was treated to a substantial quantity of expert evidence dealing with this topic. It is common ground between Professors Benson and Rowe that cation exchange will occur when sodium bentonite is placed in an environment where there are freely available calcium cations. That means:
(1) there must be calcium cations in the environment adjacent to the sodium bentonite; and
(2) there must be moisture present in sufficient quantities to facilitate the process of cation exchange.
Professor Benson said that those conditions would be met when the wet concrete (a substance rich in calcium cations) was placed over the GCL. Professor Rowe agreed that these conditions would be conducive to the process of cation exchange.
Professor Benson said that in circumstances where the lagoons were filled with water (and of course other substances), the process of cation exchange would continue, even after the concrete had cured fully, because water would be available at the interface between the concrete panel and the GCL. Professor Rowe did not share Professor Benson's opinion as to the extent to which cation exchange would continue.
The disagreement, as to the ongoing rate of cation exchange, was based on differing views as to the presence of moisture at the interface between the concrete and the GCL. It was common ground that the flexible filler between the individual concrete panels was not (and was not intended to be) watertight. Thus, water could pass through that flexible filler. However, Professors Benson and Rowe agreed that when concrete was laid over a GCL containing sodium bentonite, the concrete and the GCL effectively bonded together. Thus, Professor Rowe was of opinion that, even allowing that water could penetrate through the joints between the panels, nonetheless it could not penetrate to any great extent into the interface between the concrete and the GCL, having regard to the bonding to which I have referred.
If it were necessary to express a concluded view on this point (and I have to say that I feel more than usually diffident at having to choose between the views of two such eminent experts), I would prefer Professor Rowe's view. That is because, to the extent that common sense is relevant, it suggests that it would be unlikely for water to penetrate to any great extent into what was described as being a close bond between the concrete and the upper layer of the GCL.
Further, as Professors Benson and Rowe agreed, cation exchange could take place between the sodium bentonite in the GCL and the underlying subgrade, to the extent that there was calcium - containing material in that subgrade and that moisture was present. It appeared to be common ground that the natural clays would contain some calcium, although there was disagreement as to the extent of its abundance in those clays. Further, of course, water would need to be present to facilitate the process of cation exchange. Professor Benson appeared to think that the water present in the clays at the time of compaction would be sufficient. Again, I think, Professor Rowe did not agree.
On the view that I have come as to the proper construction of DS-505.22.3 (see at [110] to [131] above), it was not necessary that the lagoons should comply with the requirements of AS 3735 over the whole of their design lives. It was however necessary that, over that time, they should meet the EPA guidelines as to the maximum permissible leakage rate.
Professor Benson calculated, on various assumptions (not all of which have been shown to be appropriate), that over the life the GCLs, their permeability might increase. At the outset, as required by AS 3735, the maximum permissible leakage rate was 1.3mm per day (Professors Benson and Rowe agreed on this). Professor Benson calculated that, over the 50 year design life of the lagoons, this leakage rate might increase to 5.5mm per day. However, Professor Benson calculated (and Professor Rowe agreed), the maximum leakage rate permitted under the EPA guidelines was 52mm per day.
Thus, even if the process of cation exchange occurred to the extent suggested by Professor Benson, it would not increase the permeability of the GCL to a point anywhere near sufficient to create a risk that leakage would exceed the amount allowable under the EPA guidelines.
Putting the matter in terms of contractual obligations, the projected maximum leakage rate would be nowhere near a rate that would demonstrate that the design was not fit for its purpose, or serviceable without maintenance over a 50 year life span.
I have dealt with the matter in terms of Professor Benson's calculations because they are, from CH2M's perspective, the more favourable. I should however note that Professor Rowe produced different calculations which showed much lower leakage rates over the life of the lagoons.
It is extraordinarily difficult for a court to conclude in favour of one expert rather than another, where:
(1) each expert is among the leaders in the world in the particular field of expertise;
(2) each expert gives what the court perceives to be frank and truthful evidence to the best of his ability;
(3) the evidence depends on assumptions which the court entirely lacks the expertise to judge; and
(4) in any event, the area of expertise is abstruse.
Each of those requirements is satisfied in the present case.
Nonetheless, were it necessary to do so, I would accept Professor Rowe's calculated leakage rates in preference to Professor Benson's. That is because Professor Rowe's leakage rates are calculated not on the basis of assumptions which require justification, but by reference to the results of testing that he has carried out, over some period of time, in conjunction with a student or research associate, Mr Hosney. Although those practical experiments have not continued for long enough to model the behaviour of the liners over the specified 50 year design life, nonetheless, so far as they go, they provide a factual foundation for Professor Rowe's calculations.
Professor Benson did not criticise the design or methodology, or for that matter the results, of the experiments. He said, and I accept, that they had not continued for long enough to provide any realistic modeling of the performance of the lagoons over a 50 year period. Nonetheless, they provide the only factual evidence that is available.
Thus, as I have said, Professor Rowe's evidence being based on factual observations, I would if necessary accept it on this point in preference to the evidence of Professor Benson.
There was some debate as to the extent to which a designer in DOC's position should have been aware of, and where necessary guarded against the results of, the mechanism of cation exchange. Professor Benson's evidence satisfies me that the process had been known for sufficiently long, and publicised in a sufficient number of journals and elsewhere, to make it available to a competent designer. I am persuaded further, not withstanding Dr Burman's protestations, that a competent designer in DOC's position should have kept itself abreast of the literature in areas relevant to its design, and that if DOC had done so, it would have become aware of the phenomenon.
In fact, I think, Mr Boncardo was aware of the process of cation exchange. Whether or not his design team were I do not know, because the relevant designers did not give evidence. In the absence of that evidence, I would infer, were it necessary to do so, that they were aware of the process.
The assignment
The result of the conclusions that I have expressed is that the plaintiff's claim must fail. Thus, it is unnecessary to consider the issues as to the assignment, or the extended debate as to whether (in the absence of an effective assignment) CH2M could in any event recover the whole of the loss sustained by the joint venture as a result of any breach of contract on the part of DOC.
In those circumstances, I will do no more than say that, in my view, the assignment was valid. It is clear that an assignment of a bare right of action may be upheld where the assignee has a genuine or substantial commercial interest in the suit. See Gummow and Bell JJ in Equuscorp Pty Ltd v Haxton (2012) 86 ALJR 296 at [79].
The liability of BM and CH2M to Sydney Water under the head contract was joint and several. Assuming (against my conclusions above) that their breaches of that head contract flowed at least in part from breaches by DOC of its obligations under the design contract, that joint and several liability would in my view be sufficient to give CH2M a sufficient interest to support the assignment.
I add, further, that if I had concluded that DOC did breach its obligations under the design contract, and cause loss to the joint venturers thereby, but that the assignment was not valid, I would have given favourable consideration to an application for leave to join BM, even at this late stage, so that the claim would not fail for want of parties. But again, that is hypothetical.
Damages
On the view to which I have come, it is not necessary to deal with the question of damages. Nor is it possible to express even tentative or preliminary conclusions. Consideration of the question of damages requires, as a starting point, identification of the breach of duty, and then of the consequences of that breach of duty.
In this case, there was a contest as to whether repair of the embankments would have been sufficient (as DOC said), or whether (as CH2M said) the design was so deficient as to require that the works be demolished and reconstructed according to a different design.
On the view to which I have come, DOC's design was not deficient in any way. If, however, it were concluded that the design was deficient, it would be necessary to consider the nature of that deficiency and whether it could be made good in the process of repair, or whether it was so great as to require demolition and reconstruction.
I do not think that it is either appropriate or helpful to speculate on those matters.
Further, any consideration of damages would raise the question of contributory negligence. For the reasons indicated at [78] above, that is only relevant if the breach of design obligation is in substance a breach of a duty of care, even though contractual in origin. Once that is dealt with (and assuming that it is dealt with against CH2M), it would be necessary to consider the respective contributions of CHBM and DOC to the loss. Again, that would require close attention to the precise breach of obligation and its consequences.
Again, I think it neither appropriate nor helpful to speculate on those matters.
However, what were said to be questions of principle in relation to assessment were raised. I said, in the course of the hearing, that I would if necessary decide those questions of principle, and then (if the parties could not agree on the outcome) send the question of damages out to a referee for assessment should it be necessary to do so.
The suggested questions of principle related to:
(1) the basis on which indirect costs should be calculated; and
(2) whether any damages assessed should include an allowance for corporate overheads.
It might be thought that the difference between the subject of indirect costs on the one hand, and corporate overheads on the other, is elusive: given that in a number of cases the expression "indirect costs" appears to be used as synonymous with "corporate overheads". However, in this case:
(1) the expression "indirect costs" was used by both experts, Messrs Griffith (for CH2M) and Tozer (for DOC) to refer to project costs other than, or excluding, "direct costs associated with the execution of the work" (to quote Mr Griffith at T568.40); and
(2) the expression "corporate overheads" was used to refer to offsite standing overhead costs.
In short, as I understand it, the distinction that it was made is between onsite, or project-specific, standing or overhead costs on the one hand, and offsite corporate overhead costs on the other.
Mr Griffith explained in more detail the concept of indirect costs, as he and Mr Tozer used that expression (T569.1-.9):
WITNESS GRIFFITH: In all my reports where I've used to indirect costs I refer to on site indirects and they are costs such as managers, the administration staff on the proposal, the site establishment. Costs which you need to run the project which are not associated with any particular direct activity, any particular direct construction activity. So the majority of those costs are staff costs your overhead or sometimes called unproductive staff. They are people who are there looking after the whole of the project rather than being involved at the work face on any specific job.
Mr Tozer said that he agreed "in principle" with that classification, or distinction (T570.15-.19). However, he said, it was necessary to go to the project records to see how the particular costs were coded, to understand how they should be classified (T570.20-.28).
As the concurrent evidence session involving Messrs Griffith and Tozer proceeded, it seemed to me that the distinction between onsite productive and non-productive costs (the latter being "indirect costs" in the jargon of this case) became less one of principle and more one of impression; or, perhaps, more one of fact.
Having reviewed the whole of the evidence given in concurrent session, on the topic of indirect costs (and having reviewed the underlying reports and joint report), I have concluded that there is no real question of principle that is capable of being isolated or identified, and resolved. Had it become necessary to consider the question of quantification of damages, I would have left this aspect of the process of quantification at large, for the referee to deal with.
Corporate overheads (being the offsite costs necessarily incurred by a contractor to sustain the whole of its business operations) are relatively well-understood. As has been said, the concept of corporate overheads "represents the contribution of the project to the general overheads of the contractor for all its business activities. ... it is part of the expense of conducting the... business, which expense is incurred whatever happen to a given project". (See Byrne J in AJ Lucas Drilling Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd (No.3) [2008] VSC 315 at [10].)
As Giles J pointed out in Thiess Watkins White Constructions Ltd v The Commonwealth (1992) 14 BCL 61 at 77, a claim in respect of corporate overheads is really a claim for loss of opportunity: loss of the opportunity to make, and earn profit under, another contract. Thus, the entitlement to recover corporate overheads depends on showing, among other things, that the contractor did not have sufficient resources, or flexibility, to enable it to take other work notwithstanding the problems in the subject contract.
In Banabelle Electrical v State of New South Wales [2005] NSWSC 714, I referred to what Giles J said in Thiess Watkins White, and to what his Honour had said (to similar effect) in Bulk Materials (Coal Handling) Pty Ltd v Compressed Air and Packaging Systems (NSW) Pty Ltd (1997) 14 BCL 109 at 133 - 135. At [142], I drew from those cases the proposition that "it is in principle wrong to make an allowance for recovery of an offsite (or head office, or fixed) overhead, or loss of profit, unless there is a basis for concluding that they could have been recovered or earned through the performance of other profitable work... where the effect of... delay is to prevent the contractor from undertaking other profitable work".
I remain of that view. Further, I remain of the view that the entitlement to corporate overheads is not just a question of principle, but is entirely fact-dependent. It must be shown that the breach of contract for which damages are claimed resulted in, among other things, the loss of opportunity to undertake profitable work, from which further work corporate overheads could have been defrayed.
The submissions for CH2M asserted that DOC's "breaches of contract and negligence resulted in the Project taking longer than it would otherwise have taken" (written closing submissions at [270]). This is correct, having regard to the joint report of the programming experts, Mr Marinovich (called for CH2M) and Mr Tozer.
Those submissions said, further, that the question of causation (whether DOC's breaches of contract prevented "CH2M" from earning corporate overheads on another project") should be dealt with by a referee (at [278]).
Whilst I accept in principle that if the question of recovery of corporate overheads requires decision, then it ought be referred to a referee, I do not accept that CH2M should have a further opportunity to put on evidence to deal with the question of causation. Any submissions to be put to a referee (or, for that matter, to the court) should be based on the evidence that has been adduced. I take that view, because this matter was originally set down for hearing on all issues. DOC was entitled to expect (as was the court) that CH2M had put on all its evidence on all issues, including causation and quantification of damages.
In circumstances where the parties have addressed on the question, and where DOC has put a submission that there is no evidence of loss of the opportunity to undertake other profitable works from which corporate overheads might have been defrayed, it would in my view be inconsistent with the requirements of s 56 of the Civil Procedure Act to permit CH2M to take advantage of what has happened, and to seek to improve its case on this point.
Conclusion and orders
It follows from what I have said that DOC did not breach its obligations under the design contract in the ways alleged by CH2M. Further, the failures of the lagoons that occurred in February 2007, following the heavy rains of that month, were caused by various deficiencies in CHBM's performance of its construction obligations, including specifically its unjustified omission of an anchor trench to secure the GCL, and the poor and uneven compaction of the embankments. The prolonged exposure of the GCL to the elements before the concrete panels were cast over it also played some part.
Accordingly, the proceedings should be dismissed. I make the following orders:
(1) Order that the proceedings be dismissed.
(2) Order the plaintiff to pay the defendant's costs.
(3) Direct that any application for a special or further order as to costs be made by notice of motion filed and served, together with its supporting affidavit, within 14 days.
(4) Order that the exhibits be handed out.
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Decision last updated: 27 August 2012
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