Chocolate Factory Apartments Ltd v Westpoint Finance Pty Ltd - [2005] NSWSC 784

No judgment structure available for this case.

CITATION:
Chocolate Factory Apartments v Westpoint Finance & Ors [2005] NSWSC 784

HEARING DATE(S): 14, 15 and 16 June 2005. Further written submissions 24 June 2005 and 20, 26 and 29 July 2005.

JUDGMENT DATE :

8 August 2005

JURISDICTION:
Equity Division - Technology & Construction List

JUDGMENT OF:
McDougall J at [1]

DECISION:
See paras [212] to [214] of judgment

CATCHWORDS:
PRACTICE AND PROCEDURE - adoption of referee's report - relevant principles - whether referee erred in finding fiduciary duty case not open on pleadings - whether referee erred in construction of contract - DAMAGES - defective building works - whether appropriate measure of damage is cost of rectification or diminution in value - whether referee erred in finding rectification not reasonable - whether referee erred in finding no diminution in value

LEGISLATION CITED:
Corporations Act 2001 (Cth)
Evidence Act 1995 (NSW)
Home Building Act 1989 (NSW)
SCR Pt 72 r 8(2)(b)

CASES CITED:
Abigroup v Peninsula Balmain [2001] NSWSC 752
Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99
Bellgrove v Eldridge (1954) 90 CLR 613
B P Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 52 ALJR 20
Breen v Williams (1996) 186 CLR 71
Byrne v Australian Airlines Ltd (1995) 185 CLR 410
Central Coast Leagues Club v Gosford City Council (Giles CJ Comm D, 9 June 1998, unrep) [BC 9802257]
Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1983) 155 CLR 279
Chloride Batteries Australia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
Connecticut Fire Insurance Co v Kavanagh (1892) AC 473, 480
De Cesare v De Luxe Motors Pty Ltd (1996) 67 SASR 28
Director of War Service Homes v Harris [1968] Qd R 275
DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423
Foxman Holdings Pty Ltd v NMBE Pty Ltd (1994) 38 NSWLR 615
Franks & Anor v Berem Constructions Pty Ltd (NSWCA 2 December 1998, unreported; BC 9806367)
Grey v Manitoba and North Western Railway Co of Canada (1897) AC 254
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
Hughes Bros Pty Ltd v Minister for Public Works (Rolfe J, 17 August 1994, unreported; BC 9402885)
Hyder Consulting (Australia) Pty Ltd v Wilh Wilhelmsen Agency Pty Ltd [2001] NSWCA 313
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896
Jones v Dunkel (1959) 101 CLR 298
Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989
Royal Botanic Gardens & Domain Trust v South Sydney City Council (2002) 76 ALJR 436
SAS Trustee Corporation v Scott Carver Pty Ltd [2003] NSWSC 1097
Seven Sydney v Fuji Xerox [2004] NSWSC 902
Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549
Suttor v Gundowda Proprietary Limited (1950) 81 CLR 418
White Constructions (NT) Pty Ltd v Commonwealth of Australia (1990) 7 BCL 193
Xuereb v Viola (1989) 18 NSWLR 453

PARTIES:
Chocolate Factory Apartments Ltd (Plaintiff)
Westpoint Finance Pty Limited (First Defendant)
Westpoint Constructions Pty Ltd (Second Defendant)
Westpoint Management Ltd (Third Defendant)

FILE NUMBER(S):
SC 55018/04

COUNSEL:
F C Corsaro SC/F G Kalyk (Plaintiff)
D E Grieve QC/F P Hicks (Defendants)

SOLICITORS:
Hicksons Lawyers (Plaintiff)
RBHM Commercial Lawyers (Defendants)

LOWER COURT JURISDICTION:

CHOCOLATE FACTORY APARTMENTS v WESTPOINT FINANCE & ORS [2005] NSWSC 784

Index to Judgment

Para

The relevant principles 4

Background 9

The referee’s approach 23

The adoption proceedings 41

Fiduciary duty 55

Alleged errors in interpretation of the contracts 73

Extrinsic evidence 74

Finishes and inclusions 95

Reduction of parapet height 103

Management’s duty to Apartments 112

Implied term 116

Conclusion on the alleged errors in construction 135

Third and fourth grounds: failure by Management to arrange funding for the project; Management’s part in the execution of the design and construction contract 136

Fifth ground: defective or incomplete works – measure of damages 141

Sixth, seventh and eighth grounds; Telstra delay; variations; fair value 171

Ninth ground: Management’s obligations to supervise and approve claims 180

Tenth ground: failure to account 185

Eleventh ground: claim under the Corporations Act 191

Twelfth ground: miscellaneous matters 201

Conclusion on Apartments’ attack on the report 202

The defendants’ attacks 203

Conclusion 212

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
TECHNOLOGY AND CONSTRUCTION LIST

McDOUGALL J

Monday 8 August 2005

55018/04 CHOCOLATE FACTORY APARTMENTS LIMITED
v WESTPOINT FINANCE PTY LIMITED & ORS

JUDGMENT

1 HIS HONOUR: The plaintiff (Apartments) is a company formed by the Westpoint group of companies, of which the defendants are members, for the purpose of acquiring and redeveloping, into strata title residential apartments, a former chocolate factory at Stanmore. The project was financed partly by equity and partly by debt, organised by the first defendant (Finance). The construction work was undertaken by the second defendant (Constructions). The third defendant (Management) was responsible for managing the project in the interests of Apartments. Apartments claims that the completion took much longer than projected, and that much of the work done by Constructions was incomplete or defective. In these proceedings, it sought in various ways to recover the loss that it said it suffered. The whole of the proceedings (including a cross-claim brought by Finance and Constructions against Apartments) was referred to a referee, the Hon J M N Rolfe QC, for enquiry and report. The referee provided two “interim” reports, one dated 6 December 2004 and the other on 6 April 2005. He rejected many of Apartments’ claims, but nonetheless concluded that:

(1) Apartments was entitled to recover from Management $1,769,842.59.

(2) Apartments was entitled to recover from Constructions $518,054.59, part of the amount referred to in (1).

(3) Constructions was entitled to recover from Apartments $1,200,870.89.

2 Apartments moved for rejection of the report, and for an order that the Court decide all the issues in the proceedings on the basis of the evidence taken before the referee. The defendants moved in substance for adoption of the report, but challenged, and sought the rejection of, particular passages. At some cost to complete precision, I will refer to both applications compendiously as “the adoption proceedings”.

3 In these reasons, I shall refer to the two reports collectively as “the report” unless it is necessary to do otherwise. However, when referring to particular paragraphs, I shall indicate whether the paragraph is to be found in the first or the second report (“R1/XXX” or “R2/XXX”).

The relevant principles

4 SCR Pt 72 r 13 empowers the Court to adopt, vary or reject a report in whole or in part, and to decide any question for itself either on the evidence taken before the referee or on that and additional evidence. It reads:

“13 Proceedings on the report

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

5 I stated the relevant principles in my judgment in Seven Sydney v Fuji Xerox [2004] NSWSC 902 at paras [11] to [13]. For convenience, I repeat, in a slightly paraphrased and consolidated form, what I there said.

6 The principles to be applied, in exercising the discretion conferred upon the Court by Pt 72 r 13 to adopt, vary or reject in whole or in part a report of a referee, are well established. There are a number of cases to which, customarily, reference is made. They include Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549; the unreported proceedings in that case before Giles J (19 May 1992: the relevant considerations referred to by his Honour are sufficiently extracted in the decision of the Court of Appeal); Chloride Batteries Australia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60; White Constructions (NT) Pty Ltd v Commonwealth of Australia (1990) 7 BCL 193; and Foxman Holdings Pty Ltd v NMBE Pty Ltd (1994) 38 NSWLR 615. As to the nature and content of the referee’s obligation to give reasons, the relevant authorities include Xuereb v Viola (1989) 18 NSWLR 453 and Hughes Bros Pty Ltd v Minister for Public Works (Rolfe J, 17 August 1994, unreported; BC 9402885).

7 The relevant principles, distilled from those decisions, can be stated as follows:

(1) An application under Pt 72 r 13 is not an appeal either by way of hearing de novo or by way of rehearing.

(2) The discretion to adopt, vary or reject the report is to be exercised in a manner consistent with both the object and purpose of the rules and the wider setting in which they take their place. Subject to this, and to what is said in the next two sub paragraphs, it is undesirable to attempt closely to confine the manner in which the discretion is to be exercised.

(3) The purpose of Pt 72 is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation, that purpose would be frustrated if the reference were to be treated as some kind of warm up for the real contest.

(4) In so far as the subject matter of dissatisfaction with a report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh.

(5) Where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition towards acceptance of the report, for to do otherwise would be to negate both the purpose and the facility of referring complex technical issues to independent experts for enquiry and report.

(6) If the referee’s report reveals some error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than “unsafe and unsatisfactory”.

(7) Generally, the referee’s findings of fact should not be re-agitated in the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. Thus, the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence.

(8) The purpose of Pt 72 would be frustrated if the Court were required to reconsider disputed questions of fact in circumstances where it is conceded that there was material on which the conclusions could be based.

(9) The Court is entitled to consider the futility and cost of re-litigating an issue determined by the referee where the parties have had ample opportunity to place before the referee such evidence and submissions as they desire.

(10) Even if it were shown that the Court might have reached a different conclusion in some respect from that of the referee, it would not be (in the absence of any of the matters referred to in sub para (6) above) a proper exercise of the discretion conferred by Pt 72 r 13 to allow matters agitated before the referee to be re-explored so as to lead to qualification or rejection of the report.

(11) Referees should give reasons for their opinion so as to enable the parties, the Court and the disinterested observer to know that the conclusion is not arbitrary, or influenced by improper considerations; but that it is the result of a process of logic and the application of a considered mind to the factual circumstances proved. The reasoning process must be sufficiently disclosed so that the Court can be satisfied that the conclusions are based upon such an intellectual exercise.

(12) The right to be heard does not involve the right to be heard twice.

(13) A question as to whether there was evidence on which the referee, without manifest unreasonableness, could have come to the decision to which he or she did come is not raised “by a mere suggestion of factual error such that, if it were made by a trial judge, an appeal judge would correct it”. The real question is far more limited: ”to the situation where it is seriously and reasonably contended that the referee has reached a decision which no reasonable tribunal of fact could have reached; that is, a decision that any reasonable referee would have known was against the evidence and weight of evidence”.

(14) Where, although the referee’s reasons on their face appear adequate, the party challenging the report contends that they are not adequate because there was very significant evidence against the referee’s findings with which the referee did not at all deal, examination of the evidence may be undertaken to show that the reasons were in fact inadequate because they omitted any reference to significant evidence.

8 The twelfth point restates the aphorism of Mahoney JA in Super at 567. The thirteenth, fourteenth and fifteenth points are drawn (and include direct quotations) from the judgment of Hodgson CJ in Eq (with whom Priestley JA agreed and with whom, as to the relevant principles, Fitzgerald AJ also agreed) in Franks & Anor v Berem Constructions Pty Ltd (NSWCA 2 December 1998, unreported; BC 9806367). If I may say so with respect, I regard what his Honour said as giving content, on the facts of the particular case, to the operation of relevant principles rather than as stating any new principle.

Background

9 Before I turn to the challenges to the report, and to enable those challenges to be understood in context, I shall set out some matters of background.

10 When Apartments was incorporated in May 1999, its shareholder was Management and its directors, Messrs Carey, Beck and Bell, were directors of or senior executives in the Westpoint group of companies. Mr Carey had, and has, “the dominating controlling interest and power … directly or indirectly” in those companies (R1/2).

11 The project was to be financed by a mixture of equity funding and borrowings. The equity was to be subscribed by Chocolate Factory (Winthrop) Ltd (Winthrop); Chocolate Factory Investment Ltd (Investment); and Chocolate Factory (Charterbridge Davey) Ltd (Charterbridge Davey). It was intended that Winthrop, Investment and Charterbridge Davey would each issue a prospectus and obtain subscriptions from the public, and that each would use the money raised thereby to subscribe for shares in Apartments.

12 On 24 December 1999, Apartments entered into two agreements. One, with Management, was a “Management Agreement” whereby, among other things, Management undertook to oversee all aspects of the management of Apartments and the project: including arranging and managing funding, overseeing construction, and arranging marketing and sale of apartments.

13 The other agreement of 24 December 1999 was a “Shareholders’ Agreement”, to which Apartments, Management, Investment, Charterbridge Davey and Winthrop were parties. That appears to have dealt, in substance, with arrangements for funding the project.

14 It was apparently intended that Apartments and Constructions would enter into a “Construction Contract” on 24 December 1999. Indeed, the prospectuses stated clearly that this had been done. However, no fully executed construction contract of or about that date was ever produced; but a partially executed document, which became “exhibit Y” before the referee, was produced. Exhibit Y (as the referee called it, and as I shall call it) had the seal of Apartments affixed to it, and was signed by Mr Bell but not, as was intended, by Mr Beck. Mr Carey and a Mr Rundle signed as director and secretary of Constructions, but the seal of Constructions was not affixed.

15 The referee recorded at R1/34 that Apartments “ran an alternative case based on there having been a Construction Contract entered into on 24 December 1999.” He said that Apartments, since it propounded this case “was obliged … to establish that such a contract had been concluded. It did not do so.” That finding is not challenged. Clearly, it was consistent with Apartments’ primary case. Paragraph 43B of the further amended statement of claim alleged that until the design and construction contract of 31 August 2000 was made, Apartments and Constructions “had no binding Construction Contract for the Project”.

16 On 14 January 2000, Investment, Charterbridge Davey and Winthrop issued prospectuses whereby investors were invited to subscribe for fully paid ordinary shares (3,294,000 in the case of each of Investment and Winthrop, and 6,557,000 in the case of Charterbridge Davey). In each case, although the minimum subscription was achieved, the offer was not fully subscribed. There was a shortfall against maximum subscriptions of approximately $2,000,000 (R1/6).

17 The referee found that each prospectus was prepared by Management (R1/7). This finding is not challenged. Each prospectus described the project. It was expected that construction would commence in February 2000 and be completed by December 2000. A range of projected returns, expressed in both money and as percentages, were set out.

18 As I have noted, each prospectus stated that Apartments had entered into a design and construction contract with Constructions. It stated that the fixed price under that contract was $17.13 million, including fees for project management and fees for gaining necessary approvals. The total development cost was estimated to be $27.92 million, funded as to $11.86 million by equity and as to $16.06 million by debt. The undersubscriptions to which I have referred reduced the first figure, and increased the second, by about $2 million.

19 Each prospectus referred to a valuation report (the REA valuation) estimating gross realisations of $32.859 million. That was said to be subject to a standard of finishes and inclusions set out in the valuation.

20 Each prospectus pointed out that Telstra held a lease over a portion of the premises. That lease was due to expire in 2001, but Telstra had an option for renewal for a further five years. As each prospectus pointed out, if Telstra insisted on its rights under the lease, the project might be, in the referee’s words, “either … seriously compromised or incapable of proceeding” (R 1/19). Under the design and construction contract that was ultimately made between Apartments and Constructions, Constructions was responsible for the negotiations with Telstra for it to relocate in such a way that the project could proceed.

21 On 31 August 2000, Apartments and Constructions entered into a design and construction contract. The contract price was $17,129,961 – the same amount as stated in exhibit Y. However, Apartments said, the standards of inclusions and finishes were insignificantly diminished in the design and construction contract as compared to exhibit Y, whereby the cost to Constructions of completing the work was less than it would have been under exhibit Y (had it been a binding contract). Part of Apartments’ claim was that it was denied the benefit of these savings; or at least, because of a failure on Management’s part to advise it properly, of the opportunity to negotiate for a lower contract price by reason of those cost savings.

22 The execution of the works was substantially delayed. Development consent was not obtained until 15 May 2000, and a construction certificate was not obtained until 12 December 2000 (R1/794). It was accepted that construction work, as opposed to demolition work, could not commence until the construction certificate had been obtained (ibid).

23 The referee found that the date for practical completion was 31 July 2001 (this, as I understand it, being the date in accordance with the design and construction contract) and that the extended date for practical completion, having regard to extensions of time and the like, was 1 January 2002 (R1/795, 1/804). He found that practical completion was achieved on 13 March 2002 (R1/795) so that, prima facie, liquidated damages would run for 70 days from 2 January to 13 March 2002. However, he found, some 46 of those days were attributable to the negotiations with Telstra (R1/807) and that, although this was prima facie Constructions’ responsibility, Apartments had taken over the negotiations, to the point where it “was abrogating” that responsibility (R819). Thus, the referee concluded, Apartments was responsible for the delay referable to the relocation of Telstra (R1/844). The consequence was that the liquidated damages were calculated for 24 days rather than 70, and were quantified at $84,000 (24 x $3,500) (R1/855).

The referee’s approach

24 It was apparent that the proceedings were keenly (perhaps “bitterly” might be a more appropriate adverb) contested. The issues were defined by pleadings. Apartments’ case before the referee was propounded by a further amended statement of claim filed on 9 March 2004; and the issues were articulated by the defence thereto filed on 17 March 2004. The claims by Finance and Constructions against Apartments were propounded by their amended cross-claim filed on 4 March 2004; and the issues thereon were articulated by Apartments’ defence thereto filed on 12 March 2004.

25 The reference was conducted on the basis that the rules of evidence applied. The referee made it plain to the parties that, having regard to the intensity with which they were litigating their disputes, he proposed to conduct the reference strictly in accordance with the pleadings. This approach is manifested from time to time in the report: see, for example, R1/38, where the referee said that “Having regard to the chequered history of CFA’s pleadings, the best approach is to deal with each case propounded by it in its further amended statement of claim … seriatim and then with the amended cross-claim.”

26 Apartments criticised the referee for the manner in which he conducted the reference. It noted that he “restricted giving leave to adduce oral evidence to deal with issues of form only” and “steadfastly refused to grant leave to supplement the written material in any materially significant way” (outline of submissions filed 8 April 2005 (Apartments’ outline) para 13). It stated in that outline in para 15 that:

“ … the referee conducted the hearing to a level of pedantry and technicality going well beyond the intention of the rules relevant to the reference process. The referee’s conduct of the hearing throughout, and his ultimate findings, are typified by a narrowness that is close to perverse, and which, rather than designed to deal with the real issues on the merits, led to the issues being determined by procedure. This is not a modern view of how the interests of justice are to be served.”

27 This criticism of the referee is entirely unjustified. It was open to him to conduct the reference in such manner as he thought fit (SCR Pt 72 r 8(2)(b)). It was open to him, particularly having regard to the history of Apartments’ attempts to articulate its case through successive amendments, to hold the parties to their pleadings. Equally, it was open to him, having regard to directions given for the filing of evidence, to hold the parties to the case propounded in the statements of evidence that had been filed. The interests of justice are not, as Apartments clearly (through its written and oral submissions) regards them, one sided; they require attention to be paid to the legitimate interests of all parties. In context, I see no reason for concluding that the referee failed to do this.

28 In substance, the approach taken by the referee was to consider in principle a number of legal issues arising, and then to analyse in some detail the case brought by Apartments against Management and Constructions. The legal issues included the basis on which damages for defective or non complying works might be assessed (R1/69-104), and the extent to which extrinsic evidence could be taken into account in the construction of the management agreement (R1/105-131).

29 The central dispute on the first point was whether, and if so to what extent, Apartments was entitled to damages for defective or incomplete works notwithstanding that it had not rectified or completed, and appeared to have no intention of rectifying or completing, those works. The analysis was focussed on the decision of the High Court of Australia in Bellgrove v Eldridge (1954) 90 CLR 613 and cases following and applying it; and, in particular, on the requirement (Bellgrove at 618) that before the cost of rectification could be recovered, two conditions must be met, one of which was that it would be reasonable (or had been reasonable) to carry out those works so as to produce conformity. The referee concluded in substance that in circumstances where all the apartments had been sold, there was no evidence that the defective works or deviations from the plans and specifications had led to any diminution in their value or delay

30 The second matter related to Apartments’ case that the management agreement and the design and construction contract should be construed by reference to, among other things, the prospectuses and the REA valuation. The referee concluded, referring in particular to the decisions of the High Court of Australia in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 and Royal Botanic Gardens & Domain Trust v South Sydney City Council (2002) 76 ALJR 436, that this approach was only permissible where there was some relevant ambiguity, and that in this case there was not (R126).

31 The referee concluded, therefore, that the obligations of Constructions fell to be determined by reference to the design and construction contract of 31 August 2000. Nonetheless, he concluded, the prospectuses might be relevant in ascertaining the content of Management’s obligations under the management agreement, and whether there had been a breach. For example, the referee posed the question “whether Management was, on a proper construction of the Management Agreement, obliged to advise CFA that CFA was obtaining a lesser standard of finish than that anticipated in the prospectus and proposed contract”, and “whether there was an obligation on [Management], if it be the fact, to advise CFA that it should not enter into the [Design and Construction] contract without a diminution in the price to reflect the lesser standard of finish” (R1/132).

32 That led the referee to examine both the pleaded case against Management and the way in which the case had been run before him, and the obligations of Management under the management agreement (R1/135-163, 1/164-177). The referee summarised his conclusion in R 1/178:

(1) Apartments was in principle entitled to payment for any rectification works actually carried out by it, but not to damages quantified as the cost of rectification for work not actually carried out unless it could show loss by diminution in value: something that had not been alleged or proved.

(2) Reference to the factual matrix for the purpose of construction was only available where there was ambiguity.

(3) The management agreement and the design and construction contract were to be separately considered and construed; and absent ambiguity, the only relevance of surrounding circumstances “is to define any obligation on Management to draw matters to the attention of CFA resulting from any change of circumstances” between the making of the management agreement and the making of the design and construction contract.

33 With those matters disposed of, the referee turned to a detailed consideration of the evidence. The hearing before him was interrupted by an adjournment to enable an application to be made to the Court in relation to rulings given by the referee and amendments (R1/339). As the referee recorded in R1/340, those rulings “indicated that my discretion had miscarried in relation to certain rulings”. Even after this (which resulted in a further amendment to the statement of claim), and when the matter was mentioned before the referee in November 2003, it remained apparent that, notwithstanding the further amendment, “the pleadings did not reflect the cases the parties were seeking to put forward” (R1/348).

34 After dealing with events that happened when the hearing finally resumed, the referee then returned to his consideration of the evidence.

35 In his review of the evidence, the referee dealt, to the extent that it was necessary, with questions of credibility. He also dealt, to the extent that it was necessary, with conflicts in the evidence.

36 The referee then set out at R1/783 the conclusions that he reached following his review of the evidence. For convenience, and with corrections to sub paras (d) and (i) (indicated by deletions and underlinings), I set it out:

“(a) CFA and Constructions entered into only one building contract, that being the Contract dated 31 August 2000.

(b) In those circumstances, the rights and obligations of CFA and Constructions are governed by the terms of the Contract.

(c) The Contract contains no ambiguity, which makes it necessary to refer to the background matrix of mutually known facts for the purpose of interpreting it. In my opinion, the authorities binding on me only allow such an enquiry where there is an ambiguity.

it

CFA

(e) On 24 December 1999 CFA and Management entered into the Management Agreement.

inter alia,

(g) The obligations of Management under the Management Agreement continued from 24 December 1999.

(h) Management was, at all material times, controlled by the same people as controlled CFA, Constructions and Finance. There can be no doubt, on the evidence, that Management was aware of the terms of Exhibit Y and the Prospectuses, of the fact that from 24 December 1999 until 31 August 2000 the Contract’s terms were the subject of re-negotiation with Constructions, which led to the Contract containing a different scope of works from that envisaged in Exhibit Y.

~~Constructions~~

CFA

(j) The significance of this was that had CFA been aware of these circumstances, it may have been able to negotiate a lower price with either Constructions or another company for the carrying out of the work. However, whether or not it could have done so, the fact remains that in respect of certain items it was paying a higher price for them than it would have been obliged to pay for the items installed. Whilst this did not have the result of diminishing the value of the apartments, so far as the evidence has disclosed, it did have the effect of reducing the profit margin to CFA. This, in the view to which I have come, did not have the effect of making Constructions liable for carrying out the Contract. However, it did have the effect, in my opinion, of making Management liable for its failure to advise CFA that installations of a lesser value were being utilised.

(k) These matters have to be viewed against the light of the fact that both Exhibit Y and the Contract, subject to variations, each provided a contract sum of $17,129,961.00. The assumption has been made by CFA, which may not be found to be correct, that as there was a coincidence between the price in each contract there was also a requirement for the same work to be carried out under the Contract as was envisaged under Exhibit Y.

(l) As Management was employed to carry out the work under the Management Agreement it could not relieve itself of those obligations by the assertion that there was an obligation on the Directors of CFA to monitor such matters themselves. Whilst those Directors were, obviously enough, obliged to carry out their directorial duties in a proper manner, in so far as they lacked experience in building matters, they were entitled to look to Management and its obligations under the Management Agreement to ensure that its interests were protected fully. In so far as the Directors of Management had experience, through their respective positions with the Westpoint Group, in construction matters, there was clearly an obligation on those Directors, acting in their capacity as Directors of CFA, to draw to the attention of CFA’s board matters detrimental to CFA.”

37 The referee then concluded that Apartments was entitled to allowances for some eight items where there were variations between the exhibit Y standard of inclusions and finishes and the standard of inclusions and finishes actually provided under the design and construction contract. They related to shower screens; dishwashers; “design deliverables” (as built drawings); skirting boards; air conditioning; timber flooring; atrium glazing; and repair work.

38 The total of those allowances was $832,600. The referee concluded that Apartments was entitled, in the alternative, to recover the amounts for five

39 Finally, in R1/784, the referee concluded that Apartments was entitled to recover amounts totalling $205,263.59 from either Management or Constructions, relating to what he called “the Telstra Guarantee”.

40 The referee then turned to deal with various specific issues, including fiduciary duty, liquidated damages; a bank guarantee; and a number of items of defective or incomplete work. In other words, as he had foreshadowed (R1/38), the referee dealt “seriatim” with Apartments’ pleaded case and with the cross-claim.

The adoption proceedings

41 Apartments filed the outline to which I have referred (entitled “plaintiff’s statement as to matters of contest, bases of contest and outline of submissions in respect of the report of RMN [sic] Rolfe QC of 6 December 2004”) on 8 April 2005. It accepted that the principles relevant to the question of adoption were in substance dictated by the cases to which I have referred in para [6] above, and adopted what Barrett J had said in Abigroup v Peninsula Balmain [2001] NSWSC 752 at paras [19] to [21]. I do not discern any difference between his Honour’s analysis of the relevant principles and what I have said in para [7] above.

42 Thus, Apartments submitted (at para 58), it was “not entitled to have the issues reconsidered afresh” but “must demonstrate patent misapprehension of the evidence, perversity or manifest unreasonableness in fact finding or error in legal principle”. Further, it acknowledged that “[w]here the parties had an opportunity of litigating issues before the referee, and a fortiori where they did so, and where the report on [its] face … deals with the party’s [sic] contentions of fact, the Court would not be disposed to go into the evidence before the referee”.

43 In Politics, Book 3 Chapter xvi, Aristotle observed (in translation) that “the law is reason free from passion”. Apartments’ submissions paid little regard to the principles that it acknowledged or to the task confronting it as set out in para 58 of its outline. For the most part, its submissions may be characterised as passion free from reason.

44 Further, Apartments made an extraordinary attack on the referee in para 59 (following on from what it had said in paras 13 and 15, as referred to in para [25] above). It said:

“It is relevant to note that the Referee is a former Justice of the Supreme Court of New South Wales. He managed the Commercial and Construction Lists of the Court for a number of years before his retirement from the Court in 2001. He has also held an appointment as acting Justice of Appeal of the Court. CFAL mentions this because it appears to it, that for whatever reason, the Referee took a particular view of the merits of CFAL’s case that caused him to use his particular judicial skills in expressing the Report, and making factual findings, which make it difficult for CFAL to challenge at a superficial level, by reference only to what appears on the face of the report, and without a detailed and through analysis of the underlying material.”

45 The submissions that were advanced by that document occupied 460 paragraphs, and some 75 pages, of fine print. Although they repeated, as some sort of mantra, the phrases acknowledged in para 58, in truth they amounted to an attempt in substance to reargue the whole of the case.

46 That led the defendants to make an application for Apartments to define its position more closely. Apartments’ response was to file on 17 May 2005 a document entitled “Schedule of Findings in Contention” (the 17 May schedule). That document set out in four columns each “matter of objection”, “the grounds for that objection”, the “evidence and material contended to be relevant”, and the “findings which should have been made”. It did little either to identify the real issues and refine Apartments’ approach to the arguing of its case, or to mould that argument to the applicable principles.

47 On the hearing, Apartments tendered a number of folders of material, comprising extracts from the evidence before the referee. That material was admitted over, but subject to, the defendants’ objection, on the basis that I would rule on its admissibility in these reasons. It comprised no more than a small part of the totality of the evidence before the referee. No attempt was made at the hearing to show that the material tendered on the adoption proceedings had been specifically brought to the attention of the referee (in circumstances where the referee had been faced with the tender of a vast body of ill-digested documentary material, as well as written and oral testimony). In other words, Apartments did not seek, on the adoption proceedings, to demonstrate in relation to this material that the submission to me that it was said to support had been made, by reference to the same material, before the referee.

48 Nor did Apartments seek to demonstrate – indeed, it did not even suggest – that, in relation to the points argued before me, the material tendered represented the totality of the evidence before the referee. The reality, I think, is that the material could best be described as snippets of the totality of the material before the referee, not necessarily shown to have been drawn to the referee’s attention in support of particular propositions, but relied upon before me because it was perceived as being favourable to Apartments’ case.

49 I do not regard that as an appropriate basis for the tender of evidence on an adoption hearing. In the ordinary way, that would lead to the rejection of the tender. However, in view of the conclusions to which I have come, I think that the simplest course is that so much of the material tendered in the adoption hearing as Apartments relied on should remain in evidence. I directed that the material actually relied upon be extracted. It proved to occupy one lever arch folder (out of the six, excluding three folders of transcript, that were tendered).

50 However, matters do not end there. At the conclusion of oral submissions, I gave the parties leave to put in submission in reply. This prompted Apartments to deliver what purported to be “reply submissions”, comprising 176 paragraphs and 51 pages, again in fine print. With those submissions, Apartments delivered a further four volumes of material which, apparently, it sought to tender, together with a separate folder containing “its exhibits on adoption”. This last folder is the one (referred to in the previous paragraph) that I had requested, given that the oral submission made reference to a relatively small amount of the material tendered by Apartments on the adoption application. It will be marked accordingly as exhibit PX 13. Consistent with the position that I stated in the course of the adoption proceedings, I shall have regard, to the extent necessary, to the documents described in that exhibit and not to documents not otherwise referred to in the folders of exhibits from which it was drawn.

51 The other four folders are, however, in a different position. They suffer from exactly the same defects as did the material originally tendered (see paras [47] and [48] above). If they were to be relied upon, they should have been tendered in chief. This is so because, among other things, the purported reply submissions are in fact more properly to be considered as further submissions in chief. In the circumstances, the further tender should be rejected. It is not justified by the principles relating to the tender, on an adoption application, of evidence before the referee.

52 The material is incomplete and selective. Apartments did not at first seek to show that it had been drawn to the attention of the referee in relation to that relevant point (in so far as that point is now sought to be made before me). It did not even seek to address this problem until, the defendants having attacked the tender (on grounds including that just referred to), Apartments sought, by yet further written submissions, to justify the tender.

53 Those circumstances, and the timing of the tender, are productive of very great prejudice to the defendants. If the material were to be admitted, it would be necessary to give the defendants the opportunity to go through the totality of the material before the referee to see firstly, whether the material tendered by Apartments had been drawn to the attention of the referee; and secondly, whether there was in any event further material that bore upon the issues to which the tender is said to relate. I see no reason to put the defendants to that delay and expense.

54 Apartments has sought to articulate its case, in relation to adoption or rejection of the report, by the outline of 8 April 2005; the 17 May schedule (which was itself revised, although not so as to make it conformable with the principles governing adoption/rejection of reports, immediately prior to the hearing); its oral submissions at the hearing; its written submissions purportedly in reply after the hearing; its written submissions in support of the tender of further material after the hearing; and written submissions in reply (to the defendants’ written submissions dated 20 July 2005) of 29 July 2005. On no view could it be said that Apartment has been denied the opportunity to put its case on adoption/rejection. But at no time have its submissions sought to conform to the principles governing the decision of that question. Whether they are considered individually or en masse, they demonstrate, instead, a resolute intention to ignore those principles, and to seek to reargue the whole of the case. Although the submissions identify a number of topics in respect of which, Apartments submits, the referee fell into error, they do not, in the majority of cases, seek to identify the error conformably with the relevant principle. Instead, for the most part, they seek, often on the basis of selective and incomplete material, to reargue questions of fact dealt with by the referee.

55 Against that background, I turn to the particular complaints made by Apartments. I think that, analogously to the course taken by the referee, the best approach is to deal with each complaint that is made. However, to the extent that I consider that the complaints are not properly open, having regard to the principles governing the discretion relating to adoption of referees’ reports, I do not propose to delve into the detail. To do so would set those principles at nought, and risk rendering useless the reference procedure.

Fiduciary duty

56 Apartments submitted before the referee that it had pleaded, and was entitled to advance, a case that Management owed it, and had breached, fiduciary obligations. The referee rejected this case, concluding that it was not open on the pleadings, and noting that Apartments had not sought further to amend to allege it (R1/785; and see too R1/37).

57 It appears from the report that it was not until after the hiatus from June 2003 to June 2004 to which I have referred above that Apartments first indicated that it was putting its case on the basis of fiduciary duty. In R1/362, the referee records Mr Corsaro SC, for Apartments, as stating that Apartments’ allegations “are cast in the nature of fiduciary duty and, as we plead, it had a duty not to prefer anyone else’s interests to the plaintiff’s interests.” A similar point is recorded in R1/366. The referee noted at R1/363 that this was the first reference to Management’s duties being in the nature of a fiduciary obligation.

58 The referee indicated why it was important for the fiduciary case to be properly pleaded. He considered in some detail the decision of the High Court of Australia in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 (R1/785-790). He concluded at R1/791 that the decision in that case “made it clear … that it is necessary to look not only to the precise contract into which the parties entered, but also to all the relevant facts and circumstances in order to determine, particularly in a commercial contract type situation, whether a fiduciary duty existed and, if it did, the appropriate remedy for breach of it.” He then said, based on his consideration of that decision, “that for CFA to be able to rely upon an alleged breach of a fiduciary duty, it must plead that such a duty existed and its nature and, in addition, plead the specific relief, which it alleges it is entitled to because of that breach of duty. It is only then that the necessary factual investigation can take place.” (emphasis supplied).

59 I do not think that the referee erred in this statement. A party against whom a breach of fiduciary obligation is alleged is entitled to know the circumstances that are said to give rise to the fiduciary obligation; the precise content of the obligation alleged; the precise circumstances said to amount to a breach of the obligation so described; and the relief that is claimed by reason of the breach.

60 It may very well be that, even though no fiduciary obligation is pleaded, the evidence that is properly admitted on other issues will demonstrate both the existence (including the content) of such an obligation and its breach. But it does not follow that the party entitled to the benefit of the obligation may advance, in final submissions, an alternative claim founded on an allegation of fiduciary obligation. It would only be proper to allow that to happen where, among other things, the party against whom the allegation is made can be seen to have had an adequate opportunity of responding on the merits, and of adducing all evidence relevant to the case that is sought to be made.

61 In this case, notwithstanding what was said when the hearing resumed, Management at no time accepted that a case of breach of fiduciary obligation was open on the pleadings. At no time did it acquiesce in such a case being advanced against it. Nor, the matter having been opened, did Apartments seek to amend its pleadings to allege such a case.

62 In those circumstances, I do not think that the referee’s approach can be criticised. Far less do I think that it demonstrates error of a kind which entitles the Court to intervene.

63 In its written submissions of 29 July 2005, Apartments submitted that, as to the fiduciary claim, “the Defendants were on notice that the claims were made; it was clear from the Plaintiff’s opening address; it was clear from evidence and questions put to witnesses without objection that the fiduciary claims were pursued.” Apartments then referred to what the Privy Council (speaking through Lord Watson) said in Connecticut Fire Insurance Co v Kavanagh (1892) AC 473, 480, to the effect that a question of law might be decided even when “raised for the first time in a court of last resort, upon the construction of a document, or upon facts either admitted or proved beyond controversy” (cited with approval by the High Court of Australia in Suttor v Gundowda Proprietary Limited (1950) 81 CLR 418, 438; and see Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1983) 155 CLR 279, 283 (Gibbs CJ).)

64 Those submissions are not to the point. The evidence in question was admitted because it was relevant to issues that were pleaded. In an ideal world, it may have been that the defendants should have sought an order under s 136 of the Evidence Act 1995 (NSW) that the evidence be limited to those issues, but it can hardly be held against them that they did not do so. The reality is that Apartments’ failure to articulate its fiduciary claim (including the elements referred to in para [58] above) deprived the defendants – in particular, Management – of the opportunity of meeting it. It is all very well to say that the claim may be made out on the evidence that has been given. It does not follow that the claim would have been made out on all the evidence that could have been given had it, including the elements referred to above, been properly pleaded. This situation is entirely distinct from that referred to by Lord Watson, where there is no doubt that the question may be decided without injustice to either party because the evidence is, all relevant senses, complete. Indeed, in Suttor, the Court said, immediately following the citation of Lord Watson’s views on which Apartments relies:

“The present is not a case in which we are able to say that we have before us all the facts bearing on this belated defence as completely as would have been the case had it been raised in the Court below.”

65 The Court then made the point even clearer, by referring to the advice of the Privy Council (speaking through Lord Hobhouse) in Grey v Manitoba and North Western Railway Co of Canada (1897) AC 254, 267:

“The questions now raised ought to have been raised on the pleadings and evidence so that they might be properly thrashed out in the courts below. As the matter stands they have not been touched by the courts below … “.

66 In this case, the question may have been “touched” – in the sense that evidence relevant to other issues is now perceived to be relevant to it – before the referee, but it was not raised in the pleadings and was not “properly thrashed out”.

67 Unless the question was raised fairly and squarely before the referee, it ought not to be raised on the adoption proceedings; and the submissions to which I have referred do not demonstrate otherwise.

68 Apartments did submit before me that the case of breach of fiduciary obligation was open on the pleadings. It relied, in particular, on paras 22(a) (and its particulars) and 43D. Those paragraphs, including the relevant particulars, read as follows:

“22. The following were implied terms of the Management Agreement referred to in paragraph 2:

(a) Management would perform its functions and fulfil its responsibilities under the Management Agreement with proper professional skill and care in CFAL’s interest so as to enable CFAL to undertake the Project (as defined in paragraph 43A) to approved plans and specifications, to the level of finish and inclusions set out within the valuation report by REA Australia Pty Limited dated 3 December 1999, by means of a guaranteed fixed price design and construction contract for a total construction cost of $17.13 m so as to allow CFAL to obtain the maximum return by selling and settling the apartments by June 2001 and for a total project cost of $27.92 m.

…

PARTICULARS

(A) Implied term (a) was implied by operation of law from the fact that Management was retained to provide the services on a professional basis and contracted to provide the services on a professional basis, and in the alternative, as a matter of fact by reason that Management was retained to provide services on the basis that it was aware from at least 24 December 1999 of CFAL’s intention to undertake the project so as to achieve the outcome referred to in paragraph 43A.”

…

43D Management breached the terms of the Management Agreement by:

(a) failing to put in place a binding construction contract, or other suitable arrangement, by which Constructions or some other contractor would complete the Project on the terms of the construction contract referred to in the Prospectus;

(b) failing to put in place any arrangement for the construction of building works within the time frame indicated in the Prospectuses or within a reasonable time;

(c) failing to oversee and to manage the Project and to monitor the conversion of the Building in a way which enabled CFAL to CFAL [sic] to best achieve outcomes referred to in paragraph 22(a);

(d) failing to advise CFAL and its management in the period before 31 August 2000 that no binding construction contract, or other suitable arrangement, was in place but rather representing that the Contract was an amendment to an existing binding contract between CFAL and Constructions which amendments were in CFAL’s best interests;

(e) failing to advance the Project to enable CFAL to best achieve the outcomes referred to in paragraph 22(a); and

(f) as set out in paragraph 57.

… “.

69 It is apparent that the case that is advanced under those paragraphs is a case in contract. That is clear not just from the way in which the case is pleaded (referable to implied and express terms of the management agreement), but also from the pleaded case of breach. Paragraph 23(a) deals with breach of the implied terms alleged in para 2, alleging that “Management breached its obligations under the Management Agreement in a number of respects”. Likewise, para 43D alleges that “Management breached the terms of the Management Agreement” in a number of respects, as does para 57 (which is called up in para 43D(f)). None of this gives any hint of the case being framed as one of breach of fiduciary obligation. Nor is there any relief claimed that is referable to breach of fiduciary obligation. The relief claimed against Management is set out in the further amended statement of claim as follows:

“1. Damages.

2. Judgment for moneys had and received.

3. Judgment for all moneys for which Management is accountable to the Plaintiff.

4. In the event that as a result of these proceedings CFAL is entitled to rebate of 50% of the Project Definition and Establishment Fee, that sum.

5. A declaration as to how such rebate is to be calculated.

6. Interest pursuant to s.94 of the Supreme Court Act.

7. Costs.”

70 The reference to “monies for which Management is accountable” relates to para 23(i) of the further amended statement of claim. That sub paragraph reads as follows:

“(i) failing to account for moneys the property of CFAL and which Management has not paid to CFAL;

… “.

71 The particulars to that subparagraph refer to “[t]he instances identified in Schedules 3 and 4 in the evidence of J Burke (BDO)”. I deal with that evidence below; it is sufficient at present to say that Mr Burke (whose evidence the referee did not accept) sought to identify overpayments made or authorised by Management on behalf of Apartments out of Apartments’ monies, or credit facilities made available to Apartments. It has nothing to do with fiduciary liability.

72 Apartments relied on the allegation in para 22(a) and again in para 43C(a) that Management was obliged to perform its obligations under the Management Agreement “in CFAL’s interests”. However, that obligation is said in each paragraph to arise as a contractual obligation, not as a fiduciary obligation. The fact that it may also be an incident of a fiduciary obligation (where such an obligation exists) does not mean that a case so pleaded should be taken as being a breach of fiduciary obligation. In this context, I repeat that the pleaded case of breach is in each case one of breach of contract.

73 I therefore conclude that the referee was correct to determine that Apartments had not pleaded a case of breach of fiduciary obligation against Management. It follows that I reject this ground of challenge to the report.

Alleged errors in interpretation of the contracts

74 Apartments submitted that the referee had erred in a number of respects in his approach to the interpretation of the management agreement and the design and construction contract.

Extrinsic evidence

75 The first error alleged was that the referee had erred in finding that:

(1) He could not have regard to the prospectuses or the REA valuation as part of the surrounding matrix for the purpose of construction, unless there were some relevant ambiguity.

(2) The contract contained no relevant ambiguity.

76 As I have said, the referee considered these issues by reference to the decisions in Codelfa and Royal Botanic Gardens Trust. His consideration of the issues is to be found in R 1/105-131, and his analysis of the significance of his conclusion is found in R 1/132-134.

77 Apartments’ submission to the referee, as recorded in R 1/105, was that in interpreting the management agreement and the design and construction contract, it was necessary to “have regard to the factual matrix surrounding the contracts to determine the objective intentions of the parties as expressed in the contract documents”. It relied on the speech of Lord Wilberforce in Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989. That submission misstated what his Lordship said. He said, at 995-996, that it was legitimate to have regard to the surrounding circumstances as part of the process of ascertaining “the commercial purpose of the contract” – something that “presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.”

78 In DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, Stephen, Jacobs and Mason JJ said at 429 that evidence of surrounding circumstances – “mutually known facts” – was admissible for a number of purposes. One was to identify the meaning of a descriptive term used in the contract. Another was that evidence of the genesis and objective aim of a transaction might show that the attribution of a strict legal meaning to the contract would make the transaction futile.

79 In Codelfa, Mason J considered the authorities and concluded at 352 that evidence of surrounding circumstances was admissible as an aid to interpretation where the language of the contract was ambiguous or open to more than one meaning. But, his Honour said, it was not admissible to contradict the plain meaning of the contract. He said:

“The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties although, as we have seen, if the facts are notorious knowledge of them will be presumed.”

80 Stephen and Wilson JJ agreed with this aspect of Mason J’s reasons and Brennan J expressed a similar view. His Honour referred to surrounding circumstances (known to both parties) and their capacity to illuminate the meaning of expressions in the contract. He said:

Prenn v Simmonds …,

81 As the referee recorded at R1/123, Apartments submitted that “things” had moved since Codelfa was decided. It relied (R1/124) on the decision of the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896.

82 The High Court considered Codelfa, and decisions since then including Investors Compensation Scheme, in Royal Botanic Gardens Trust. At 445 [39], Gleeson CJ and Gaudron, McHugh, Gummow and Hayne JJ referred to the possibility that the House of Lords in Investors Compensation Scheme and other cases had taken a broader view of the admissibility and function of background facts than was taken in Codelfa. Their Honours did not decide whether that was so and, if so, whether those views should be preferred to what had been said in Codelfa. They said:

Codelfa,

Codelfa.”

83 Kirby J, who dissented in that he found an ambiguity in the relevant contract (the other members of the Court did not) nonetheless confirmed at 456 [104] that “contextual materials and extrinsic evidence” were still to be used in the manner stated by Mason J in Codelfa at 352, and expressed, on this point, his agreement with the joint reasons at 445 [39].

84 The referee concluded at R1/132 that “absent any ambiguity in the Contract, I do not consider that regard can be had to the material in [the prospectus and exhibit Y] or, indeed, in other documents, for the purpose of determining what was the obligation of Constructions under the contract. Those obligations will emerge from the Contract itself.”

85 The referee was correct in this conclusion.

86 The referee did not conclude that evidence of background – mutually known surrounding circumstances – was inadmissible. He concluded, as I have indicated, that it was only relevant to the process of interpretation where there was some relevant ambiguity.

87 The referee did not find any relevant ambiguity in the terms of the design and construction contract. Apartments criticised this, pointing out that at R1/893, the referee said that there was “clearly room to argue that there is an inconsistency between the requirement for finishes set forth in Schedule 2 and the terms of the Contract.” Its submission does not recognise that, in the following sentence, the referee concluded that, as a matter of construction, it was the terms of the contract – specifically cl 6.1, requiring Constructions to “carry out and complete the Works to accord with the Design Documents and the Principal’s Project Requirements, that prevailed”. The referee concluded that “as a matter of construction, these provisions override the standard of finishes”. In other words, the referee found that upon the proper construction of the contract, there was no relevant ambiguity.

88 Thus, Apartments’ submission as to the inconsistency misstates, by selective quotation, what it was that the referee said on this point; and, more importantly, overlooks the fact that the referee, by a process of construction, concluded that the possible ambiguity (or “inconsistency”) did not exist.

89 The referee may or may not have been correct in accepting (R1/130) that Apartments never asserted that there was any ambiguity in the Management Agreement. However, he said also that Apartments had not “established” that there was any such ambiguity. The submissions that Apartments made pointed to one example of “inconsistency” (which, I am prepared to assume, may be equated to at least potential ambiguity) in the design and construction contract. They did not point to any element of ambiguity in the management agreement. More importantly, Apartments has not established that there was any relevant ambiguity in the management agreement (or, for that matter, in the design and construction contract).

90 Thus, even if the referee had erred in the particular respect referred to in R1/130 - and, if I may say so, I doubt that he did – it goes nowhere.

91 In truth, it is apparent that Apartments relied on extrinsic material – the prospectuses and the REA valuation – not to resolve ambiguities in the design and construction contract, but to impose on Constructions a higher standard of obligation in relation to finishes and inclusions. There may perhaps have been some justification for this approach if the design and construction contract were silent on the standard of inclusions and finishes. But it was not. In those circumstances, I think, the referee was correct to say as he did, at R1/132, that the obligations of Constructions are to be found in the design and construction contract itself.

92 For this aspect of Apartments’ case to have been made good, it would be necessary for it to have pleaded that the design and construction contracts comprised exhibit Y and the relevant terms of the prospectuses and the REA valuation as well as the document of 31 August 2000, or that those other documents were somehow incorporated into the written contract of 31 August 2000. That is not how Constructions pleaded its case. Paragraph 1 of its further amended statement of claim pleaded “a contract made on 31 August 2000”, whereby Constructions agreed “to design and construct certain building works” at the Chocolate Factory site. Paragraph 3 pleaded a number of express terms by reference to schedule 1; all those express terms are express terms of the written contract dated 31 August 2000. Paragraph 4 pleaded an implied term to hand over keys, manuals, guarantees and documents. That was not particularised as arising from the earlier material.

93 Paragraph 43B pleaded that until Apartments and Constructions entered into the design and construction contract (of 31 August 2000) they “had no binding construction contract for the Project”. An alternative case was pleaded commencing at para 48, asserting that if there were a binding contract prior to 31 August 2000, it was (in substance) exhibit Y. The particulars asserted that the terms of that contract “are to the extent known to CFAL identified in the prospectuses”. However, as I have said, the referee found that Apartments had not proved that there was a binding contract prior to 31 August 2000, and this finding is not challenged.

94 Thus, Apartments did not plead, and it is not open to it now to assert (as in some respects its submissions appear to do), that the design and construction contract in some way incorporated terms derived from exhibit Y, the prospectuses or the REA valuation. Neither, for the reasons given above (which, in essence, replicate those given by the referee), are the terms of those documents available as an aid to the interpretation of the design and construction contract.

Finishes and inclusions

95 I have referred in para [86] above to the requirements of cl 6.1 of the contract. The “Design Documents” referred to therein were defined to mean “[t]he drawings, specifications and other relevant documents … listed in Schedule 3”. The “Principal’s Project Requirements” were defined as “[t]he written summary or outline of the Principal’s Requirements for the Works described in the documents in schedules 1, 2 and 3”.

96 Schedule 1 required the works to be “generally in accordance with the Principal’s Project Requirements shown in Schedule 2 and the Design Documents listed in Schedule 3”. Constructions was entitled to use “alternative details to those shown in the documents” as long as those changes did not “materially affect” internal or external appearance, views or aspect, dimensions and any existing contracts for sale.

97 By schedule 2, the “standard of finishes” was required to “comply with the materials, equipment and samples used in the construction of the display apartment (Apartment 111) which has been built on site.”

98 The referee found (R1/871) that low voltage down lights were included in the kitchen, living room and dining room of apartment 111, and oyster fittings in its bedrooms.

99 The referee noted at R1/874 that the electrical services specification “specified the installation of batten lights and the LV down lights in the various apartment types.” That specification (which formed part of the “Design Documents” referred to in cl 6.1) was inconsistent with the way in which LV down lights and oyster fittings (or batten lights) had been installed in apartment 111.

100 It was against that background that the referee in R1/893 referred to the possibility of inconsistency between the requirement for finishes set out in schedule 2 (by reference to apartment 111) and the terms of the contract. I have referred to this, and to the referee’s resolution of that possible inconsistency, in para [86] above.

101 In substance, the referee concluded that the Design Documents prevailed, in so far as the location of (in this case) LV down lights and oyster fittings (or batten lights) was concerned, and that schedule 2 (incorporating the standard of finishes understood by reference to apartment 111) governed the quality, or type, of each kind of fitting where, in accordance with the Design Documents, one or the other was to be installed. Thus, the electrical specification prescribed the location of LV down lights or batten lights (as the case may be). Schedule 2 prescribed the standard or quality of LV down lights and batten lights wherever, respectively, according to the terms of the electrical specification, each was to be installed.

102 Apartments submitted that the referee’s approach to construction was incorrect. On its face, this issue would appear to involve a question of law – namely, the proper interpretation of the design and construction contract, and the proper resolution of an apparent inconsistency within it. Nonetheless, Apartments’ submissions strayed well beyond this, and included assertions such as that “the Referee patently misunderstood the difference in functionality of the different types of light fittings” (Apartments’ outline, para 124). Even if it be assumed that this is so – and the submission that follows does no more than pick a few little grains out of the vast mullock heap of evidence, and seek to draw significance from the fact that the referee failed to refer to them – it cannot demonstrate an error of law. Nor is it shown how any such factual error could contribute to an error of law. The reality, I think, is that this suggested error is intertwined with the suggested error relating to the referee’s failure to have regard to exhibit Y, the prospectuses and the REA valuation in ascertaining the nature and extent of Constructions’ obligations under the design and construction contract.

103 I think that the referee’s approach was correct. In Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99, Gibbs J, in an oft cited paragraph at 109-110, set out the approach that a court should take in construing a written contract. He said that, in endeavouring to discover the intention of the parties from the words of the contract, regard should be had to the whole of it, and provisions should be construed, if possible, to render them “all harmonious one with another”. The referee referred to this passage (although in another context) at R1/129. I think that his approach to construction, in seeking to reconcile the provisions of cl 6.1 of the design and construction contract and schedules 1, 2 and 3 to it, is consistent with the approach outlined by Gibbs J. The referee’s construction means that each part of the contract has work to do. Further, it means that there is no internal inconsistency. If the construction favoured by Apartments were to be adopted, there would be some inconsistency, as the referee pointed out, between cl 6.1 (and the Design Documents in schedule 3) on the one hand, and schedule 2 on the other. The referee’s construction avoids this, whilst as I have said giving proper work to each to do. Where (as is the case here) an available alternative is open, a construction should be avoided that leads to ambiguity or inconsistency.

Reduction of parapet height

104 The existing building had a parapet at level 4. The height of that parapet was such that, without some modification, it would have impeded views from apartments on that level. Constructions’ position was that it was not required under the design and construction contract to reduce the parapet height. In the result, views were improved by the expedient of increasing the floor levels inside the parapet.

105 The referee dealt with this at R1/902-930. He found that there was no contractual obligation on Constructions to reduce the parapet height (R1/912). He then turned to work that was done. This included variation order 13, to increase the floor height in selected areas of level 4; and variation order 14, to reduce the height of approximately 6 metres of the parapet on level 4.

106 The referee noted that both variation orders were issued by Apartments on its letterhead and authorised by Mr Coleman, a director (R1/922 for VO13 and R1/920 for VO14). These variations were authorised against the background, as found by the referee, that the board of Apartments took the decision not to reduce the height of the parapet (R1/919 – presumably, except for the 6 metre length that was reduced pursuant to VO14). The referee also noted that there was no evidence that the drawings (which would form part of the Design Documents) called for the reduction in height of the parapet (R919, 927).

107 Apartments’ submissions on this issue confuse questions of law – which are susceptible of examination on an application to adopt a report – and questions of fact. Although these submissions incant the formula “a finding that no reasonable tribunal could have arrived at”, it is apparent even from the written submissions, and was made crystal clear during oral submissions, that there was a question of fact to which different answers could be given. The referee analysed the evidence in an appropriate way. It may be that he did not refer to every piece of it; but it is not necessary that this should be done.

108 To the extent that error of law is asserted, Apartments faces the difficulty that the variations authorised by it are inconsistent with its case that there was a contractual obligation to reduce the parapet height, and that the purpose to be achieved – maximising views – was intended to be achieved (and nothing else was intended to be achieved) by those variations.

109 In so far as the question of law depends on an interpretation of the relevant drawings, it is answered by the referee’s conclusion at R1/927 that no witness “gave evidence of any drawing which called for that reduction in height”.

110 In so far as the question involves a dispute of fact that, for the reason that I have indicated, was something for the referee to consider; and it is my view that his consideration of it was appropriate.

111 The final submission on this point was:

“The Referee ignored legal principles in failing himself to apply a scale ruler to the drawings which were in evidence in order to enable himself to identify the height of parapet shown in them.” (Apartments’ outline, para 137(d)).

112 None of the cases to which I have referred suggest that there is any legal principle requiring a referee to apply a scale ruler to drawings to ascertain some fact; particularly in circumstances where the party asserting the existence of that legal principle had the opportunity, through an appropriate qualified witness, to identify both the relevant drawings and the outcome of the exercise.

Management’s duty to Apartments

113 Apartments submitted (Apartments’ outline, para 93) that “[t]he nature and extent of Management’s duty to CFAL could only be correctly understood and assessed by reference to material that established what the parties intended the Project to be.”

114 This appears to be related to the submission – which I have already rejected – that the referee erred in law by failing to take account of extrinsic material in ascertaining the obligations of Constructions under the design and construction contract. To the extent that it is but a variant of that submission (or that submission adapted to the management agreement) it must fail.

115 However, it is wrong to say that the referee did not have regard to the extrinsic material (exhibit Y, the prospectus and the REA valuation) in considering the nature and extent of Management’s obligations under the management agreement. More than once, he found in favour of Apartments on the basis that it had got less under the design and construction contract of 31 August 2000 than it would have got under exhibit Y (had exhibit Y been binding), and that Management had failed to take appropriate steps to seek to protect Apartments’ position: see R1/784, where the matters are summarised and where the referee concludes, as I have noted, that Apartments is entitled to recover the relevant amounts from Management.

149 The Court made it clear that it was immaterial to the assessment of damages that the owner might not carry out the rectification works. Thus, in Director of War Service Homes v Harris [1968] Qd R 275, Gibbs J with whom Stable and Hart JJ agreed, held that the owner’s entitlement to damages was not lost because it had sold the premises; although the fact of sale might be something to be considered in deciding whether rectification is reasonable (at 278-279).

150 Again, in De Cesare v De Luxe Motors Pty Ltd (1996) 67 SASR 28, Doyle CJ (at 35) considered that the fact of sale was immaterial to the entitlement to recover the cost of rectification as damages, at least in circumstances where it was possible to infer that the sale price had been depressed because of the existence of the defects.

151 In Central Coast Leagues Club v Gosford City Council (Giles CJ Comm D, 9 June 1998, unrep) [BC 9802257], Giles CJ Comm D held that if it be found that the rectification work will never be carried out, then damages – at least on the basis of cost of rectification – should not be awarded. His Honour referred to this with apparent approval in Hyder Consulting (Australia) Pty Ltd v Wilh Wilhelmsen Agency Pty Ltd [2001] NSWCA 313 at para [99]. Even if his Honour’s decision be regarded as inconsistent with Bellgrove – and I am not to be taken as suggesting that it is – it is of no assistance to Apartments in these proceedings.

152 The referee reviewed these and other decisions. I do not propose to cite all of them, because I think that what I have said is sufficient to show that the conclusion to which he came at R1/103, 104 is correct.

153 That leaves the application of the principles. As the High Court pointed out in Bellgrove, whether work is reasonable in a particular case is a question of fact. Apartments devoted substantial time to showing that the referee’s conclusion, that it was not reasonable for the works to be carried out, was incorrect. Again, although it embellished those submissions with the usual phrases, they were in truth no more than an attempt to reargue, or be heard twice on, the whole of its case under this head. I am satisfied that the referee dealt appropriately with the factual issues, and that the conclusion to which he came – that, in the circumstances, it would not be reasonable for the rectification works to be performed – was open to him. Indeed, if I may say so, I think that it was clearly the correct conclusion.

154 The point may be illustrated by reference to the example that I have already given – the skirting boards. Mr Ash, an expert called by Apartments, agreed that the difference in cost between what was in Apartment 111 and what was installed in the other apartments was 10 cents or less per lineal metre, and that there was some 3,500 lineal metres of skirting boards throughout the project (R1/273). Mr Ash claimed to have spoken to a person who had complained about skirting boards, but the referee found that the complaint made included “no reference to either the type of skirting board used or to the display unit” (R1/273). As the referee recorded in R1/274, Mr Ash agreed “that if the skirting boards were removed and replaced it would entail massive disruption to the occupiers of the apartments and, further, that he had never suggested to anyone that this would be appropriate.”

155 There was no evidence that Apartments intended to undertake the massively disruptive task of removing and replacing the skirting boards; that anyone had asked it to do so; that any prospective purchaser had complained at the apparent discrepancy; or that the sale of any apartment had been adversely affected (either as to time or as to price) by this non conformance with the specified quality of finish.

156 Nonetheless, Apartments’ case was that it was entitled, not just to the $350 benefit to Constructions of installing the cheaper material, but to the entire cost of removal and replacement: $112,815 (R1/261). It is hard to imagine a less meritorious claim for damages; or a more clear example of facts that justify a finding that the cost of rectification is not, in Bellgrove terms, reasonable. It is hard to imagine a more appropriate case for the application of the principles stated by Giles CJ Comm D in Central Coast Leagues Club (see para [151] above).

157 I have referred to the question of diminution in value. The referee noted at R1/72 that:

“The units were sold, notwithstanding [the alleged non conformances], and there was no evidence that the failure to conform to the plans and specifications led to any diminution in their value or delay in selling them, such as to cause interest to run for a longer period. Nor was there any evidence that any purchaser required the “rectification” of any of these matters.”

158 That finding was open to the referee; and Apartments did not suggest otherwise. Its case was, rather, that the finding was irrelevant. For the reasons that I have given, I do not think that it was. Once it is shown that it is not reasonable to carry out rectification works, diminution in value becomes (and only then becomes) the measure of damages. That means, the referee having rejected the proposition that it was reasonable to carry out the rectification works, there was no proof of the alternative measure of damages.

159 At R1/253, the referee stated once more than “[t]here was no evidence that there was any diminution in the price of the units, nor that they took a longer time to sell, if in fact they did, because of any fault on the part of either Management or Constructions.” At R 783(d), he repeated “that CFA made no case of any diminution in value”. In other words, Apartments did not put a case based on, and there was no evidence to invoke, the analysis of Doyle CJ in De Cesare.

160 In its submissions of 29 July 2005, Apartments submitted that the referee had not considered whether the defects had “a depreciatory effect upon the value of the property”. As the citations from the report that I have given show, that submission is wrong.

161 Further, in that document, Apartments submitted that the referee “did not have regard to the evidence which was before him, relevant to the difficulty which the Plaintiff experienced in achieving timely sales of Apartments, nor to what in the submission of the Plaintiff is common knowledge, namely that an apartment with a lesser standard of finishes is of less value that one of higher standard [sic] finishes, or likely to sell less quickly … for the same price” (emphasis supplied). Again, as the citations that I have given show, the referee did consider this matter. Further, the proposition that the referee should have acted on what “is common knowledge” demonstrates the evidentiary defect, to which the referee referred more than once, in this aspect of Apartments’ case.

162 In the same document, and somewhat inconsistently, Apartments submits that it “did not conduct its case on the basis that there was no diminution in value”, but “on the basis that it was not an element which it was required to prove.” That submission seems to confirm (if confirmation were needed) the point repeatedly made by the referee: that there was no evidence of diminution of value. Further, the point portrays a manifest misunderstanding of the decision in Bellgrove. It is correct to say that a plaintiff entitled to receive damages quantified by reference to the cost of rectification need not prove diminution in value. But that entitlement depends on rectification being both necessary and reasonable. Where rectification is not reasonable or necessary, diminution in value is the measure of damages. Where diminution is the appropriate measure of damages, then it is for the party asserting (ie claiming) damage to prove the amount.

163 What I have said is sufficient to dispose of this aspect of the challenge. However, I should note that in particular cases the referee advanced other reasons for finding against Apartments: including that the particular item of loss had not been proved; or that the particular claim (for example, loss of saleable mezzanine space – see R1/1181-1187) had not been pleaded. In my view, where the referee advanced those additional reasons, it was reasonably open to him to do so; and, to the extent that they were advanced, they provide valid alternative bases for dismissing the particular claims.

164 Further, there was evidence that Constructions was attending to remedial works and the rectification of defects as required, and the referee so found (R1/694-702, 710, 712). In this context, it is worth noting that Constructions is obliged to do so if for no other reason than by virtue of the relevant provisions of the Home Building Act 1989.

165 Apartments submitted before me that it too had obligations under the Home Building Act: relying, in particular, on ss 18B and 18C. That may be correct. It may provide a basis for thinking that Apartments has a continuing liability to proprietors for defects. But, particularly where it is not a point raised before the referee, I do not think that it is one appropriate to be taken into account in assessing whether or not it would be “reasonable” for Apartments to carry out the relevant works. In this context, it is necessary to bear in mind that Apartments has had for some time both the funds and the opportunity to perform, but has spent not one dollar on, rectification since it completed the sale of the apartments. Instead, it has returned money to shareholders; and has indicated that it proposes to continue to do so.

166 One particular complaint related to the mechanical ventilation system. The supposed defects in that system were apparently identified in a report prepared by a Mr Floth. However, Mr Floth was not called and his report was not tendered. Apartments’ evidence on this point came from Mr McColl, a quantity surveyor. Mr McColl purported, among other things, to cost the work that, apparently, Mr Floth had said was necessary to bring the mechanical ventilation system “up to the required standard” (R1/325).

167 At R1/327, the referee noted that Mr Floth had consulted with an expert retained by the defendants, Mr Casburn, and they “have, as it were, agreed that further testing of the existing equipment is warranted” and some further report would be prepared. In R1/328, the referee referred to a report dealing with a number of problems, which “did not suggest that any further money had to be expended”. It is not clear whether that report deals with mechanical ventilation or not.

168 The defendants’ primary case was that, if rectification were needed, it was the responsibility of Constructions under the Home Building Act; and that even if Apartments recovered in respect of whatever the alleged defects were, “it will not spend it in rectifying the alleged defects and it will leave the present owners and occupiers to pursue claims against Constructions under the Home Building Act” (R1/942). The referee accepted this submission (R1/943). There was evidence to support it, and it was a matter for him whether to accept that evidence.

169 On the adoption proceedings, the defendants took the position that (because Mr Floth was not called) Apartments had not proved that there were any defects in the mechanical ventilation system. That position may or may not be meritorious. But in any event, the referee’s conclusion of fact, that even if Apartments recovered the cost of rectification it would not spend it to carry out the work but would return it to shareholders, provides an appropriate basis for him to have concluded that performance of those works was not relevantly (for the purposes of the test in Bellgrove) “reasonable”: for the reasons identified by Giles CJ Comm D in Central Coast Leagues Club (see para [151] above). In those circumstances, that conclusion of fact, coupled with the referee’s finding (which must be correct) that the occupants of the apartments have a continuing entitlement against Constructions under the Home Building Act, supports the referee’s conclusion that damages ought not to be ordered. On the referee’s finding of fact, if damages were ordered, Constructions would be liable both to pay those damages and to incur the like cost, at the suit of the owners, in rectifying the defects.

170 In short, the referee dealt with this question (both generally and in relation to the particular issue of mechanical ventilation) by enquiring whether it was relevantly “reasonable” for the rectification works in question to be carried out. He concluded that it was not. Bellgrove makes it clear that that question is one of fact. Apartments has demonstrated no basis for interfering with the referee’s conclusions on this question of fact.

Sixth, seventh and eighth grounds; Telstra delay; variations; fair value

171 None of these complaints raises any question of principle. In each case, Apartments seeks, inconsistent with principle, to reargue its case, or to be heard twice.

172 I have referred above (para [22]) briefly to the Telstra delay, and the way in which the referee dealt with it. Clearly, his conclusion on that was one of fact. It was one that was open to him on the evidence, and one that should not be the subject of interference in the adoption proceedings.

173 Apartments’ case in relation to variations was that it had paid Constructions for “variations” “which, on proper analysis, represented work which Constructions had agreed to do for the contract sum” (Apartments’ outline, para 338).

174 At R1/508, the referee noted that the variations in question had been authorised by the directors of Apartments. Apartments used this finding (which, clearly, was one that was open to the referee on the evidence) to suggest that its case in truth was that Management failed to advise Apartments to consider whether the variations claimed were in truth variations or not. However, as the referee again noted at R1/508, the high point of Apartments’ “proof” of this claim was that the expert called by it, Mr Holland, said that he had not “sighted such measurement, calculation and documentation and records in relation to the variations the subject of the contract between CFAL and Constructions. In the absence of a properly detailed claim with appropriate substantiation in a format facilitating assessment, I am unable to form a view that the contractor has any entitlement, and if so how much. Consistent with my comments above, it is my opinion that given the absence of a properly detailed claim with appropriate substantiation, no entitlement has been demonstrated and no adjustment to the contract sum is appropriate nor should adjustment have been effected by Management … “.

175 Thus, Apartments’ case before the referee was that Constructions had not demonstrated its entitlement to the variations in question; so that, that entitlement not having been demonstrated, it had some sort of claim against Management. However, as the referee observed at R1/508, the limited nature of Mr Holland’s evidence, coupled with the finding that Apartments (through its directors) had given authority for the variations in question, “shows the difficulty of seeking to build a case based on assumptions, which are either not proved or shown as reflecting what happened in a particular case.”

176 This demonstrates two things. The first is that the question was one of fact, and that the referee properly considered it as such. The second is that, in this instance, as in so many others, Apartments is seeking to reargue on the merits the case that it propounded before the referee.

177 The eighth ground (fair value of the works) relates to the referee’s consideration of what he called “a reasonable cost” at R1/752-755. The referee’s analysis of that question follows his review of the evidence of the relevant experts (Mr Batger at R1/605-618 and Mr Condliffe at R1/725-751). In substance, the referee preferred Mr Condliffe’s view (R1/754) although, as he said at R1/755, he bore in mind comments made by another relevant witness, Mr Holland, on Mr Condliffe’s approach. Apartments submitted (Apartments’ outline, para 371) that the referee’s reference to Mr Holland’s views “does not leave the Court with a level of satisfaction that the numerous and significant issues raised by Mr Holland were addressed and properly considered.” Otherwise, it submits (Apartments’ outline, paras 365-378) that the referee “did not consider and deal with” or “failed to have regard to” or “did not deal in any significant way with” the matters that Apartments contends to be of significance, and that “no reasonable referee” could have come to this conclusion. The criticisms, despite their by now familiar incantation of the relevant mantras, do no more than seek to reargue, or be heard again on, this aspect of Apartments’ case. There is nothing in them to suggest that the referee erred in a way that would justify the Court’s coming to a different conclusion.

178 In each case, the referee has dealt with the relevant subject matter in a logical and analytical way. He has disposed of each claim as a matter of fact. In each case, as is apparent both from the report and from Apartments’ submissions, there was evidence to support the conclusions to which he came. (Apartments’ claim in each case is, in substance, that he ought to have preferred its evidence to evidence called for the defendants.)

179 There is nothing in the submissions that makes it necessary to go to the detail of Apartments’ attempts to reargue these aspects of the case.

Ninth ground: Management’s obligations to supervise and approve claims

180 Apartments’ written submissions under this rubric comprise a stream of consciousness rearguing of the relevant points. Although, in common with other submissions, they reiterate the mantras that, presumably, are thought to entitle Apartments to reargue this aspect of its case, they fail to identify any finding that is erroneous and the reasons (whether mistake of law, manifestly unreasonable conclusion of fact or patent misapprehension of the evidence) that would entitle the Court to intervene. Nor do they attempt to demonstrate how any alleged mistake of fact leads to a relevant error in the conclusion, which was that Management had no obligation to Apartments in respect of this claim.

181 In substance, the claim asserted that Constructions was overpaid both for the work as a whole (because of defective and incomplete works) and for variations.

182 The referee concluded that, to the extent that Apartments had suffered loss in respect of defective works, it was entitled to damages from Constructions; and to the extent that he found that it was entitled to damages, he quantified them. (See generally R1/784, where the referee’s findings on particular items, including an amount for repair work, are made; and R1/868-979, where the referee considers further individual claims for incomplete or defective work.) At R1/980, the referee considered the alternative claim – that Constructions had been overpaid because of the defective and incomplete works – and said that it gave no higher entitlement than the primary claim for damages. I agree.

183 In R1/981, the referee referred to this aspect of the claim against Management. He said, in substance, that Management could not be liable (over and above the amounts that he had recommended in R1/784) except to the extent that Constructions was liable. Again, I agree.

184 As to variations, the referee concluded in substance that they were properly authorised; the work was done; and Constructions was entitled to be paid. Those findings dispose both of the claim against Constructions and of the claim against Management for failure to supervise the performance of variations.

Tenth ground: failure to account

185 The assertion is that Management has failed to account for money that it expended on behalf of, or drew from facilities advanced to, Apartments.

186 The basis of this claim was the evidence of a Mr Burke, an expert (accountant) called by Apartments. The referee rejected his evidence. Apartments’ submission is that he erred in doing so.

187 The referee gave detailed consideration to Mr Burke’s evidence, at R1/530-595. At R1/595 he concluded “that when one views the totality of Mr Burke’s evidence and methodology … the position is that his evidence has failed to establish that the amounts claimed are recoverable from Management”.

188 As the referee made clear (for example, at R1/530 and 1/579), Mr Burke had not been given sufficient material, but in the course of the hearing was given access to further material and the opportunity to prepare a further report. He did not do so.

189 The referee’s analysis of Mr Burke’s evidence is detailed and logical. I see no reason, consistent with principle, to reject his conclusion that Mr Burke’s evidence should not be accepted.

190 Apartments submitted (Apartments’ outline, para 414) that “the Referee simply failed to deal with CFA’s claim for an accounting by Finance in respect of the monies paid by CFAL in discharge of the Mortgage.” It is open to Apartments to seek that accounting, at its own risk as to costs. Adoption of this aspect of the report will not affect the position.

Eleventh ground: claim under the Corporations Act

191 This claim is pleaded in paras 44-54 of the further amended statement of claim. The steps in the pleaded case are:

(1) At all material times Apartments was under the control of a board appointed by companies in the Westpoint group.

(2) Each of the Westpoint companies was a related party to Apartments.

(3) Management controlled Apartments pursuant to the shareholders’ agreement.

(4) If exhibit Y was an enforceable contract, it was enforceable by Apartments against Constructions but not by Constructions against Apartments (because of s 7 of the Home Building Act) .

(5) The design and construction contract made on 31 August 2000 conferred a financial benefit on Constructions.

(6) The members of Apartments did not give approval to its entering into the design and construction contract.

(7) Apartments suffered loss as a result of entering into the design and construction contract.

Corporations Act.

192 It appears from R1/1209 that Apartments, in submissions, sought to extend this aspect of the case to a loan agreement made between it and Finance. There is no hint of such a case in the relevant paragraphs of the further amended statement of claim.

193 In paragraphs 417 and 418 of its outline, Apartments submits that the referee failed to deal with this claim, and at para 419, that he “refused to deal with it”. Those propositions are simply wrong. The referee dealt with this aspect of the case at length, in R1/1188-1215. Indeed, he went well beyond the pleaded case in doing so, since it is quite unclear from the pleaded case that (as, apparently, was finally revealed in Apartments’ submissions) the case was based on ss 208 and 209 of the Corporations Act.

194 At R1/1204, the referee said that “the matter has not been pleaded in a way which enables me, the Court, and not insignificantly the Defendants, to know the case, which CFA is seeking to make. … The pleadings should set out who or which contravened sections 208 and 209; the manner in which that contravention took place; the consequences flowing from that contravention (including the failure of any of the exempting provisions to apply); and the amount of compensation sought. “

195 With one exception – relating to pleading the exempting provisions – I agree. As to the pleading of the exempting provisions: if the referee were intending to suggest that it was for Apartments to plead them, I would not agree. But if the referee was simply making the point that, absent a pleading of reliance on ss 208 and 209 (and those sections are conspicuously absent from the relevant paragraphs of the further amended statement of claim) the defendants could not be expected to understand the potential relevance of, so as to consider whether to plead, any of the exempting provisions might be engaged, then I agree.

196 The referee concluded at R1/1204 that it was not for him or the Court “to plunge through the evidence in an attempt to answer such general questions.” Again, I agree.

197 At R1/1213 the referee said “that firstly, CFA has not satisfied me that it should be entitled to damages in consequence of its own breach of the Act and, secondly, it has not satisfied me that it was obliged to have the entry into the Contract approved by its members. Thirdly, I do not consider that CFA should be allowed to raise these matters in relation to the Loan Agreement because, on no view of the pleadings has this been alleged.” Again, I agree.

198 Because this aspect of Apartments’ submissions proceeds on the fallacious basis that the referee did not consider this aspect of the case, the submissions do not seek to demonstrate error in how the referee did in fact deal with it. It is therefore unnecessary for me to say anything more than that the referee dealt with the claim in a thorough and analytical manner – perhaps more than its pleaded form deserved – and that his approach shows no hint of error.

199 In the so called reply submissions, Apartments referred to what it said was “the referee’s refusal to deal with the merits of the case considering the matter to be a pleading point” (para 174). Reference is made to R1/44. That has nothing to do with the Corporations Act case. The only aspect of that case that the referee refused to deal with on the basis that it was not pleaded was the attempted extension of the case (whatever it was) to the loan agreement (R1/1209). That was unquestionably correct. The referee did refer to pleading problems (R1/1204), but his conclusion (R1/1213) was based on the failure of Apartments to make good what appeared, from its submissions, to be the elements of the case.

200 As with Apartments’ outline, the reply submissions simply fail to analyse, let alone criticise, the referee’s analysis. They do nothing to dissuade me from the view that I have expressed.

Twelfth ground: miscellaneous matters

201 This comprises a grab bag of complaints including failure to apply Jones v Dunkel (1959) 101 CLR 298; misunderstanding of some aspects of the evidence; and failure to consider other aspects of Apartments’ claim. It is nothing more than an attempt to reargue, or be heard twice on, findings that have been made contrary to the case for which Apartments contended before the referee.

Conclusion on Apartments’ attack on the report

202 None of Apartments’ attacks on the first report succeed. It made no separate attack on the second report. It follows that, subject to the defendants’ attacks, the report should be adopted.

The defendants’ attacks

203 In outline, the defendants attack relate to the way in which the referee dealt with what he found was loss sustained by Apartments by reason of the lesser scope of works (as to standard of finishes and inclusions) under the design and construction contract of 31 August 2000, compared to exhibit Y. In substance, the referee concluded that, through Management’s breach of its obligations under the management agreement, Apartments lost the opportunity to renegotiate (downwards) the price under the design and construction contract to accommodate those matters. (The price specified in exhibit Y and the price bargained for in the design and construction contract were the same; there was a diminution in the standard of finishes and inclusions in the latter, compared to the former.)

204 The standard of finishes and inclusions in exhibit Y was taken into account by the valuer, REA Australia, for the purpose of preparing the REA valuation that featured heavily in the prospectuses. By that means, in substance, the prospectuses were issued on the basis of, or assumed, the standard of inclusions and finishes in exhibit Y.

205 There was a dispute between Apartments and Management as to whether Apartments obtained less under the design and construction contract of 31 August 2000 than it would have obtained, for the same price, under exhibit Y had it been binding. The referee dealt with that and I see no reason to interfere with the factual findings that he made. They were open to him on the evidence.

206 In substance, the referee found that where there was a lower standard of finishes or inclusions, the damages sustained by Apartments as a result of Management’s breach of contract (in failing to advise it to seek to renegotiate the price under the design and construction agreement) equalled the difference in value between what was specified in or under exhibit Y and what was specified in or under the design and construction contract.

207 Management’s attack is, in principle, that this approach is erroneous; and that what was lost was no more than the chance to renegotiate. It submitted that, on the evidence, the value of that chance may have been substantially less than the actual difference in cost.

208 It may be that the referee did not in terms use the language of loss of chance. Nonetheless, he appreciated that his task was to estimate the damages flowing from the loss of the opportunity to renegotiate. There is no error in that approach. It was a question of fact for him, whether the amount of those damages was the amount of the difference in value, or some lesser amount (or nothing at all). There is no reason to interfere with his finding of fact that the damages were to be quantified in the sums that he found.

209 I therefore reject those challenges to the report.

210 One specific correction suggested relates to R1/783(d). In that paragraph, the referee set out the ways in which loss might be sustained where Constructions failed to comply with the terms of the design and construction contract. The referee referred to what he called “negative variations” (an assessment of damages by the analogy of a variation involving a lesser scope of work or standard of finishes); diminution in value; or expense to make good. The defendants accepted these categories but suggested that there should be added to them a fourth, namely “loss of a chance“. That is not an appropriate category to be added to this sub paragraph. The concept of loss of chance applies, on the defendants’ case, to the claim against Management relating to the differing standards of finishes and inclusions between exhibit Y and the design and construction contract. R1/783(d) is not concerned with that claim, but with the claim against Constructions for defective or incomplete work. Loss of a chance plays no part in the quantification of those damages.

211 I therefore reject the defendants’ challenges to the report.

Conclusion

212 The interim report of the Hon JMN Rolfe QC dated 6 December 2004, and the further interim report of the same referee delivered to the Court on 6 April 2005, should be adopted (on the basis that the interim conclusions in para 1291 of the first interim report are varied in the manner set out in para 48 of the further interim report).

213 That leaves the question of costs. My present view is that the referee should be asked to consider (after hearing from the parties) and report on the costs of the reference. However, I will hear the parties both on that issue and on the costs of the adoption proceedings.

214 I direct the parties within 14 days of the date of publication of these reasons to bring in short minutes of order to give effect to them (including as to the way in which the costs of the reference and the costs of the adoption proceedings should be addressed). If the parties cannot agree on the form of orders to be made, then each should within that time submit the form of orders for which it contends.

******

Citations

Chocolate Factory Apartments v Westpoint Finance [2005] NSWSC 784

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CITATION:	Chocolate Factory Apartments v Westpoint Finance & Ors [2005] NSWSC 784
HEARING DATE(S):	14, 15 and 16 June 2005. Further written submissions 24 June 2005 and 20, 26 and 29 July 2005.
JUDGMENT DATE :	8 August 2005
JURISDICTION:	Equity Division - Technology & Construction List
JUDGMENT OF:	McDougall J at [1]
DECISION:	See paras [212] to [214] of judgment

CATCHWORDS:	PRACTICE AND PROCEDURE - adoption of referee's report - relevant principles - whether referee erred in finding fiduciary duty case not open on pleadings - whether referee erred in construction of contract - DAMAGES - defective building works - whether appropriate measure of damage is cost of rectification or diminution in value - whether referee erred in finding rectification not reasonable - whether referee erred in finding no diminution in value
LEGISLATION CITED:	Corporations Act 2001 (Cth) Evidence Act 1995 (NSW) Home Building Act 1989 (NSW) SCR Pt 72 r 8(2)(b)
CASES CITED:	Abigroup v Peninsula Balmain [2001] NSWSC 752 Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99 Bellgrove v Eldridge (1954) 90 CLR 613 B P Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 52 ALJR 20 Breen v Williams (1996) 186 CLR 71 Byrne v Australian Airlines Ltd (1995) 185 CLR 410 Central Coast Leagues Club v Gosford City Council (Giles CJ Comm D, 9 June 1998, unrep) [BC 9802257] Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1983) 155 CLR 279 Chloride Batteries Australia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Connecticut Fire Insurance Co v Kavanagh (1892) AC 473, 480 De Cesare v De Luxe Motors Pty Ltd (1996) 67 SASR 28 Director of War Service Homes v Harris [1968] Qd R 275 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 Foxman Holdings Pty Ltd v NMBE Pty Ltd (1994) 38 NSWLR 615 Franks & Anor v Berem Constructions Pty Ltd (NSWCA 2 December 1998, unreported; BC 9806367) Grey v Manitoba and North Western Railway Co of Canada (1897) AC 254 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Hughes Bros Pty Ltd v Minister for Public Works (Rolfe J, 17 August 1994, unreported; BC 9402885) Hyder Consulting (Australia) Pty Ltd v Wilh Wilhelmsen Agency Pty Ltd [2001] NSWCA 313 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 Jones v Dunkel (1959) 101 CLR 298 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 Royal Botanic Gardens & Domain Trust v South Sydney City Council (2002) 76 ALJR 436 SAS Trustee Corporation v Scott Carver Pty Ltd [2003] NSWSC 1097 Seven Sydney v Fuji Xerox [2004] NSWSC 902 Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549 Suttor v Gundowda Proprietary Limited (1950) 81 CLR 418 White Constructions (NT) Pty Ltd v Commonwealth of Australia (1990) 7 BCL 193 Xuereb v Viola (1989) 18 NSWLR 453
PARTIES:	Chocolate Factory Apartments Ltd (Plaintiff) Westpoint Finance Pty Limited (First Defendant) Westpoint Constructions Pty Ltd (Second Defendant) Westpoint Management Ltd (Third Defendant)
FILE NUMBER(S):	SC 55018/04
COUNSEL:	F C Corsaro SC/F G Kalyk (Plaintiff) D E Grieve QC/F P Hicks (Defendants)
SOLICITORS:	Hicksons Lawyers (Plaintiff) RBHM Commercial Lawyers (Defendants)

The relevant principles	4
Background	9
The referee’s approach	23
The adoption proceedings	41
Fiduciary duty	55
Alleged errors in interpretation of the contracts	73
Extrinsic evidence	74
Finishes and inclusions	95
Reduction of parapet height	103
Management’s duty to Apartments	112
Implied term	116
Conclusion on the alleged errors in construction	135
Third and fourth grounds: failure by Management to arrange funding for the project; Management’s part in the execution of the design and construction contract	136
Fifth ground: defective or incomplete works – measure of damages	141
Sixth, seventh and eighth grounds; Telstra delay; variations; fair value	171
Ninth ground: Management’s obligations to supervise and approve claims	180
Tenth ground: failure to account	185
Eleventh ground: claim under the Corporations Act	191
Twelfth ground: miscellaneous matters	201
Conclusion on Apartments’ attack on the report	202
The defendants’ attacks	203
Conclusion	212