Demlakian Engineers Pty Ltd v The Owners of Strata Plan 80453

[2014] NSWSC 401

Supreme Court

New South Wales

Medium Neutral Citation:

Demlakian Engineers Pty Ltd v The Owners of Strata Plan 80453 [2014] NSWSC 401

Hearing dates:

25 March 2014; 26 March 2014

Decision date:

08 April 2014

Jurisdiction:

Equity Division

Before:

Young AJA

Decision:

Judgment in favour of the plaintiff on the contractual claim. The defendant to pay $585.00 damages plus court interest.

Judgment in favour of the defendant in respect of the copyright claim.

Judgment in favour of the cross-defendant in respect of the misleading and deceptive conduct claim.

No order for costs, save that the plaintiff should pay the defendant's costs of the copyright claim.

Catchwords:

CONTRACT - terms in attached printed form - terms inappropriate to contract in question - how contract construed

COPYRIGHT - what rights does customer have to use report of engineer it bespoke for possible litigation purposes

Legislation Cited:

Trade Practices Act 1974 (Cth)
Copyright Act, 1966 (Cth)

Cases Cited:

Hyde & Skin Trading Pty Ltd v The Oceanic Meat Traders Ltd (1990) 20 NSWLR 31
Gloria Jean's Coffee v Western Export Services Inc. [2011] NSWCA 137
Glynn v Margetson & Co. [1893] AC 351
Beck v Montana Constructions Pty Ltd [1964-5] NSWR 229
Torpey Vander Have Pty Ltd v Mass Constructions Pty Ltd (2002) 55 IPR 542
Ng v Clyde Securities Pty Ltd [1976] 1 NSWLR 443
Gruzman Pty Ltd v Percy Marks Pty Ltd (1989) 99 FLR 116
Haxton v Equuscorp Pty Ltd (2010) 28 VR 499
Rowland v Divall [1923] 2 KB 500
Wimble, Son & Co v Lillico & Son (1922) 38 TLR 296.
Bellotti v Chequers Development [1936] 1 All ER 89
Ogawa v Spender (2006) 152 FCR 228

Texts Cited:

Lewison and Hughes, The Interpretation of Contracts in Australia (2012, Law Book Co, Sydney)
Young, Croft and Smith on Equity (2009, Thomson Reuters)

Category:

Principal judgment

Parties:

Demlakian Engineers Pty Ltd (Plaintiff)
The Owners (Defendant)

Representation:

Counsel:
A. Di Francesco (Plaintiff)
A. M. Gruzman (Defendant)
Solicitors:
Konstan Lawyers (Plaintiff)
Di Lizo & Associates (Defendant)

File Number(s):

2011/310085; 2012/00379744

Publication restriction:

None

Judgment

1. These proceedings are supposed to be the consolidation of two sets of proceedings;(1) an action in contract commenced in the North Sydney Local Court; and (2) an application for injunction to restrain a breach of copyright.

1. The former proceedings were removed into this Court, apparently because of the copyright proceedings and an order was made for consolidation, however this order was never implemented. I will treat the matter as if the proceedings had been consolidated within the copyright proceedings. Probably the earlier proceedings in hindsight should have remained in the Local Court, but in fact the consolidated proceedings occupied two days in this Court over a very small amount of money. That will probably have to be reflected in costs in due course.

1. The proceedings were heard by me on the 25th and 26th of March 2014, Mr A. Di Francesco appearing for the plaintiff and Mr A. M. Gruzman for the defendant.

1. I will structure these reasons as follows:

(1) Background and essential facts

I will then deal with the four issues raised by the parties viz

(2) Is the defendant liable to the plaintiff for any money in respect of the preparation of its report.

This question involves various sub-questions, namely:

(a)   With whom was any contract made concerning the report;

(b)   What was the contract;

(c)   Was there any total failure of consideration;

(d)   If the plaintiff is entitled to succeed, for how much?

(e)   Is the plaintiff entitled to its claim for 18% interest?

(f)   Conclusion.

(3) The defendant's cross claim for false and misleading conduct under the Trade Practices Act 1974 (Cth).

(4) The defendant's cross-claim for a refund of monies paid and for damages for breach of contract.

(5) The copyright claim.

(6) I will then state the result of the case.

1. Background and Essential Facts

1. The plaintiff is to a corporation, which provides consulting engineers services and reports. It purports to trade on its own behalf as well as trustee for a family trust (a concept I find a little difficult to digest), under the business name Demlakian Consulting Engineers. However, the plaintiff and the Trust have separate ABNs. A further difficulty is that at some stage a new company Demlakian Strata & Remedial Pty Limited came into the picture and commenced issuing invoices for work done by Demlakian Consulting Engineers in the new company's own name. For ease I will simply use the words "the plaintiff" for whomsoever Demlakian Consulting Engineers is.

1. The defendant is the body corporate with respect to a block of 24 Units at Sans Souci.

1. The defendant was concerned that the block of units, which had relevantly recently been constructed, appeared to be built very defectively and it was seeking redress against the builder. The plaintiff was retained on or about 5 December 2008 to prepare a report as to the defects in the building.

1. The statement of claim in the Local Court pleads that the plaintiff entered into a services agreement with the defendant in respect of the Sans Souci property for a fee estimated in the region of approximately $7,500 - $8,500 plus GST.

1. There seems little doubt that some contract was made for the plaintiff to supply the report, though it is not clear by whom. The way in which the contract, which is particularised as being in writing was made, was that a document called a "fee proposal" was sent by the plaintiff by its representative Mr Nash-Smith to the Whelan Property Group the managing agent for the strata units concerned.

1. The Strata Manager then consulted with the executive committee of the defendant and that proposal was accepted by Roland Jones who claimed to be the chairman of the executive committee on the 5th of December 2008. Additionally, the managing agents sent the plaintiff a "work order" for the same work simply saying, "please be advised we accept your attached fee proposal dated 7th August 2008".

1. Paragraph 4 of the statement of claim is as follows:

On or about 18 December 2008, the parties agreed to amend the Agreement in respect of the services to be undertaken by the plaintiff and agreed to incur additional fees greater than those estimated in the Agreement.

1. Particulars were merely:

The amendment was in writing authorised before or on behalf of the defendant.

1. What the plaintiff appears to mean by this is that on 17 December 2008, Mr Nash-Smith of the plaintiff sent an email after an initial site inspection. This email contained the following:

I would like to draw to your attention that form (sic) our inspection yesterday, we have compiled a considerable number of issues and defects, more than we anticipated and which we had allowed for in our fee estimate. Therefore, in order to record all the building defects and issues etc., it is likely that the report will take longer to prepare than we had originally estimated and we will need to charge for this additional time accordingly.

1. The email was actually sent to Mr Andrew Ucchino, the Strata Manager, with copies to Mrs Filtz and Mr Jones. Mr Jones replied on the 18th of December "ok by me for the increased fee. It's actually not surprising that the whole place is one big defect." The plaintiff says that this was an amendment which authorised its current claim. The defendant denies this and denies that the email had any authority in any event.

1. The plaintiff then proceeded to prepare a report. In due course it rendered a bill or a series of bills totalling $53,955.00. The defendant paid $8,500.00 in total. The plaintiff thus claims the balance of $45,455.00 plus interest at 18% from the date of billing.

1. The defendant's defences basically are that there was no agreement to pay as per the alleged amended agreement and that it had already paid the full amount for which the plaintiff was entitled. However, it also says that the report was of no value to it, and there was a total failure of consideration, and that it is entitled to have a refund of the $8,500.00 paid plus be compensated for the $18,000.00 plus GST which it had to pay to get a proper report. It also cross claimed for false and misleading conduct in trade and commerce under the former Trade Practices Act 1974 (Cth), in that the fee statement indicated that there would be a fee estimated at approximately $8,500.00 and that $53,955.00 is not approximately in that range. In addition to those disputes there is the copyright matter, which I will detail shortly.

1. It is necessary to set out a number of parts of the fee proposal and the conditions which were attached to it.

Thank you for allowing us the opportunity to offer our professional services as rectification engineers for the above premises. We look forward to working closely with you and are pleased to confirm our fees for the necessary site inspection, consultation and preparation of documentation as required for the review of documents, inspection and preparation of detailed reporting for the above property. We thank you for your referral and confirm that we would be pleased to accept instructions in this regard.

Following on from your quote request order no. 002717 dated 25th July 2008, we confirm that initially and without prior or detailed knowledge of the extent and nature of distress, in all areas through out the property or the condition of the property, we propose to charge for our professional services at our prescribed hourly rates in accordance with the attached schedule and confirm that out engagement will be in accordance with out conditions of engagement also attached.

From our brief telephone discussion and review of the strata plans we understand that the building is a 2-storey block above a basement 'Storage' level comprising of 24 units, together with 'common' areas. As you have not indicated any major defects, we have based our inspection time allowance on typical defects within the building of reasonable condition and type of construction, which had been maintained.

Obviously, as the scope or extent of work to be required at this stage is either unknown or not yet defined, the provision of a more definitive estimate of our fees is not appropriate.

...

1.0 FEE ESTIMATE OF PROFESSIONAL SERVICES

For your budgeting purposes and from our experience on similar projects, at this stage we anticipate that our fees for a preliminary inspection and report would be in the region of approximately $7,500.00 - $8,500.00 plus GST.

This fee submissions is based on the inspection of the 24 units together with the common areas including the basement 'Storage' level, being carried out in no more than three visits to site and the inspections of the units will be carried out consecutively at prearranged inspection appointments with the full cooperation of the owners. Also, we have assumed that a member of the executive committee or the Owners Representative will arrange access to the individual units i.e. time and dates, but should we be required to arrange access, or find that additional visits are required to inspect units not accessible at the agreed appointment, we reserve the right to charge for additional time including travel time, at our standard hourly rates.

Finally we reiterate that major defects, such as cracks of a structural nature and major weatherproofing issues and the like, requiring more extensive investigation, will be charged out on an hourly rates basis. However, we will notify you prior to commencing additional investigations, if the need arises.

1. The relevant conditions of engagement are as follows:

1. Definitions

"the Client" means the person for whom the Fee Proposal is prepared, and normally means the person receiving the benefit of the Services. A reference to person includes a company, corporation, firm or other body of persons;

"the Project" means the design, development, construction, excavation or other works to which the Services relate pursuant to the Agreement;

"the Services" means those professional services that the Engineer and the Client agree the Engineer will perform in relation to the Project, including certification.

...

2.3 Variations to the Services

If, after the date of the Agreement, the Engineer is required to vary the Services on the Client's instructions or for any reason outside the Engineer's control the Client shall pay to the Engineer fees for any additional work required by the Engineer, calculated at the hourly rates set out in the Fee Proposal.

...

4. AMOUNT OF ENGINEER'S FEES

4.1 Calculation of Fees

The Engineer's fees shall be calculated as outlined in the Fee Proposal, whether as a lump sum and/or at hourly rates.

4.2 Special Conditions or Circumstances

If, after entering into the Agreement, the Client's instructions require the Engineer to document and/or administer a project governed by special conditions, or it the Engineer incurs additional work due to a change in circumstances other than those normally pertaining to such a project, then an additional fee is chargeable in accordance with the work involved calculated at the hourly rates set out in the Fee Proposal.

...

5. PAYMENT OF ENGINEER'S FEES

5.2.3 The engagement of the consultation and the provision of the consultant's services for the consideration of payments and fees pursuant to the legislation detailed in the Building & Construction Industry Security of Payment Act 1999.

...

5.3 Interest on Overdue Payments

5.3.1 The Client agrees that in addition to all other rights and remedies of the Engineer, if the Client fails to pay all monies as and when they are due, the Engineer shall be entitled to recover interest at the rate of 18% per annum.

5.3.2 The interest shall be calculated on daily balances of all fees due and not paid from the date of the account to the date of payment of the account by the Client.

6. SCOPE OF LIABILITY

6.4 Estimate of Cost for the Service

The Engineer warrants only that he will exercise the reasonable skill, care and diligence of an Engineer in the preparation of his professional opinion of an estimate of the likely costs for performing the Services.

...

7. COPYRIGHT AND USE OF DOCUMENTS

7.1 Copyright

Copyright in all drawings, reports, specifications, bills of quantities, calculations and other documents provided by the Engineer in connection with the project shall remain vested in the Engineer whether or not the Project is carried out.

7.2 Client's Rights to Use Documents

7.2.1 Subject to Clause 7.3 the Client alone shall have a licence to use the documents referred to in Clause 7.1 for the purpose of completing the project,

7.2.2 The Client shall not use or make copies of such documents in connection with any work other than work comprised in the Project unless express approval is given in advance by the engineer.

7.3 Revocation of Licence

Notwithstanding any other provision of the Agreement, if the Client is in breach of any of the provisions of the Agreement then the Engineer in his absolute discretion may revoke the licence referred to in Clause 7.1 by notice in writing to the Client whereupon the Client shall immediately return, or cause to be returned, to the Engineer all documents referred to in Clause 7.1.

7.4 Publication of Articles

The Engineer may with the consent of the Client publish, either alone or in conjunction with others, articles, photographs and other illustrations relating to the Project.

1. There was some debate before me as to whether the retainer required the plaintiff to prepare a Defects Report or a Litigation Report. The plaintiff claimed and Mr Ken Demlakian, it's principal, said that there are various types of reports that his company can issue. Mr Demlakian said:

When we get requested for a report we specifically ask our clients there are three different types of reports prepared by consulting engineers. There is a dilapidation report, a defect report and a litigation type report. They serve different purposes. The dilapidation report just inspects the defects on a building, photographs them and gives no comment on what has caused the problem, or how to rectify it...a defect report, which was what was requested here, is one where we actually identify defects, we comment on the cause and we make a recommendation of repair and that is the extent of a defect report.

The litigation report, or sometimes commonly used as a word for a Scott Schedule, but the litigation type report goes further than that. It actually, not only identifies the cause of the defect, it actually then has to do a lot more investigation into what breach ____ what, you know, part of the Home Owner Warranty Act, or standards of guides and tolerances and the B, C, A that it breaches. So it goes into identifying who caused the problem, how they caused it, in terms of a breach, as opposed to the technical cause and then makes a recommendation of repair.

1. The tale, which Mr Demlakian wished me to accept, was that initially the defendant asked for a defects report but then the request was amended to a litigation report.

1. It is hard to accept this and I do not.

1. Mr Demlakian also endeavoured to create a fourth class of report namely a litigation report with a Scott Schedule.

1. Scott Schedules initially were informally ordered in directions hearings in buildings cases in the District Court having come from their use in London. In due time they became a standard part of building cases. They take the form of a tabular score sheet in which are individual paragraphs for each claim setting out the claim made by the plaintiff, the amount claimed by the plaintiff, the defence, the defendant's assessment of quantum if the claim were admitted and a blank column for a Judge to write his or her decision.

1. It would now seem that it is not unusual for consultants to do the first draft of a Scott Schedule. The difference between a litigation report and a litigation report with Scott Schedule was explained that in the former there may be a common defect such as, for instance that panes of glass which are thinner than that required by that of the specification have been put in the windows of each of 20 units. That can be stated in one paragraph. However, if a Scott Schedule type report has been prepared that fact is set out twenty times on twenty different sheets of paper.

1. The plaintiff concedes that originally it was asked for a defects report. There is nothing in the fee proposal document to indicate this. However, it must be remarked that in the fee proposal document appears to be a good example of a standard form being used without much consideration being given as to whether it is relevant. For instance it contains on the second page the following:

Therefore, in order to assist you further, when the extent of the proposed works has been determined and agreed, we are able to provide the following services:

a. Prepare Scope of Works, Technical Specifications and Repair Methodology.

b. Issue Tender 'Packages' to specialist Building Contractors.

c. Accompany Tenderers through the proposed works/site.

d. Tender appraisal and report providing recommendations on the tender quotations.

e. Project Management services including supervision of the remedial works and administration of the contract.

1. This can have absolutely no relevance to the situation where the engineer is being asked really for a report and not to do any actual work.

1. There were tendered some internal memoranda of the plaintiff's office. The document on page 39 of the court book says:

The following procedure should be used as a guide for preparation of fee proposals for the defect reports used for residential buildings (blocks of units), townhouses, villas, semi-detached and detached houses. When preparing fee proposals for commercial or industrial properties the rates may vary considerably and therefore it is advised that a site inspection is carried out beforehand to determine the sizes of the units and complexity of the report.

The following report types are covered by this procedure:

(1) simple defect reports

(2) defect reports for litigation

(3) defect reports with Scott Schedule

1. The next document at CB41 says:

FEE ESTIMATE

Block of units

Preparation of a report for litigation purposes - without Scott Schedule

1. This is an internal document, which was generated before the fee proposal and clearly indicates that at that stage the plaintiff's office considered that it was preparing a report for litigation without Scott Schedule though it probably was better classed as a defect report for litigation without Scott Schedule.

1. There does not appear to be any request by the body corporate that the report was to be upgraded to a more detailed report. Not even Mr Nash-Smith's email of the 17th of December goes that far. Following the exchange of emails between Mr Nash-Smith and Mr Jones, Mr Nash-Smith sent Mr Ucchino the following email on the 19th of December 2008:

I would estimate that it would take one and a half hours travel followed by one to three hours to review the documentation at counsel depending on the amount and what they have archived and stored away!

Regarding the additional charges to prepare the report. It is very difficult to confirm as to until we can carry out the inspection we wont know exactly what the number or extent of the defects are. Based on however our observations so far, there are more defects than we have expected to find, hence my email raising the issue.

Please be assured that we will not "milk" the situation, but we will just charge to our time the complete works and where possible, say "group" several defects together to reduce repetition and subsequently our time etc.

Can you please confirm that this is acceptable...

1. Professor Carmichael who gave evidence on behalf of the defendant whose evidence I accept, said that in his experience this claim of not being able to make an estimate of these at the stage reached by the 19th of December was difficult to accept because an experienced engineer should be able even at an early stage to give an approximate estimation of the proper fee.

1. The defendant says that it is significant in the light of this evidence that the email of the 19th of December was written in the form it was after Mr Ucchino had asked for a better indication of costs for preparing the report and that the expression by Mr Nash-Smith that he would not "milk" gives the flavour that it was not unknown for the plaintiff to charge excessive fees but he wouldn't do it on this occasion. Mr Di Francesco who appeared for the plaintiff suggested that I not draw that inference, and I do not have to draw that inference, but it is a bit difficult not to do so.

1. I can see no material to suggest that the brief was changed from some simple defects report to a detailed litigation report. It was clear that there was a dispute with the builder and that this might lead to litigation, this was accepted by the internal records of the plaintiff. However, despite the internal document which noted a litigation report without Scott Schedule, the report that the plaintiff did prepare was 146 page report in the form of a Scott Schedule. A considerable amount of work was done in not grouping the defects as Mr Nash-Smith said he would do, but setting out each defect in each unit on a separate sheet of paper in the form of the first part of a Scott Schedule. Of course it was not a Scott Schedule because there was no completion of any costing or any answer by the builder to the proprietors claims.

1. A massive charge was made for photocopying hundreds of pages as well as the time taken by engineers to set out the same defects twenty four times. I should add that although the plaintiff prepared a report covering all 24 units, the evidence strongly suggests that in fact it only inspected 14 of the 24.

1. As I indicated earlier the plaintiff commenced proceedings in this court alleging a breach of copyright. The basis of this is that clause 7 of the conditions of engagement allegedly confer on the defendant a very limited right to use the report that it has requested and that it produced the report it received to Vero, the insurer, of the builder (the builder at that stage apparently having vanished). Vero in turn handed the report to its investigator who in turn prepared its report setting out word for word it is claimed substantial parts of the plaintiff's report. Furthermore, when its bill was not paid the plaintiff purported to revoke the license to use the report for any reason at all. It claimed an injunction to prevent the defendant making further use of the report.

1. Under cross examination Mr Gruzman who appeared for the defendant put to Mr Demlakian (T47):

Q. ...What I suggest to you is that your attempt to obtain an injunction in these proceedings is to apply pressure on the defendant to pay the outstanding account, isn't it?

A. I think it's unfair for them to use a report that they haven't paid for.

Q. I take it the answer to my question is yes?

A. Yes.

1. However, there was not defence of unclean hands or a complaint of abuse of process. Even so, it seems to me that a litigant who commences Supreme Court proceedings for the purpose of putting pressure on a person to pay a small bill and to frustrate the hearing in a Local Court of the proceedings which are just about to be heard in that court may well be deprived of any injunction on discretionary grounds. I do not need to decide that because it is quite clear in this case that no injunction should be granted and that if there is any breach of copyright it should be atoned for in damages.

1. I should make a statement as to my acceptance or otherwise of the witnesses. This was not a case where I could make a decision on the case by saying I believed X but not Y.

1. I basically accept the evidence of Mr Ken Demlakian despite the fact that he tended to make speeches rather than answer the question put to him. I put this down to almost an obsessive feeling that the defendant had cheated him of his fee and had used his document without paying for it, rather than any conscious attempt to mislead the court.

1. There was some significance on the fact that Mr Nash-Smith was not called because there was a suggestion that he had left the plaintiff's employ because of its unethical practices. However, I should instantly add that there is no substantial evidence to support this theory. Indeed, on a number of occasions during the trial, there was material to make me suspect unethical conduct, but as counsel did not pursue them, I made no use of my suspicions.

1. I believe I have now set out the principal documents and matters of background to enable me to address the issues that arise.

2(a). With whom was the contract made?

1. I have already set out the difficulties that the plaintiff has in demonstrating who was the proper plaintiff. The Local Court proceedings were commenced in the name of Demlakian Engineers Pty Ltd "in its on capacity and as trustee for the Demlakian Trust trading as Demlakian Consulting Engineers" which was legal nonsense. There was no suggestion that the plaintiff was both trading on its own account and as trustee under the business name. Accordingly one has to read it merely as being a claim by Demlakian Engineers Pty Ltd. It's letterhead claims that it is the entity that trades as Demlakian Consulting Engineers.

1. However at some stage and it is not clear when a new company came into the picture called Demlakian Strata and Remedial Pty Ltd. Mr Demlakian was asked about this in the witness box and he said that this company took over the business. On further questioning he retreated from this and said that the new company was merely dealing with the administration of the old company. It is a little unclear what the true position is. However there is no doubt that there was a contract and the preponderance of evidence to my mind is that it is with the plaintiff.

2(b). What was the Contract?

1. It follows from what I have already said that the contract was to prepare a defect litigation report. However, the complications arose principally because of the fact that the conditions of engagement were contained in a document obviously prepared for a situation where an engineer does actual work on a site as opposed to merely giving a report. Accordingly a lot of it does not make literal sense.

1. Earlier in these reasons, I set out various definitions contained in the Conditions of Engagement. I need to repeat the definition of "the Client" viz:

"the Client" means the person for whom the Fee Proposal is prepared, and normally means the person receiving the benefit of the Services. A reference to person includes a company, corporation, firm or other body of persons

1. The definition of "Client" is strange and is almost incomprehensible. It is hard to see exactly who the client is in this case if one applied the definition. The person for whom the fee proposal was prepared was actually the managing agent. However, I would think that to make commercial sense of the document, one would have to read the definition as if it said the person on whose behalf the fee proposal was prepared, notwithstanding that it might have been prepared and sent to an agent.

1. However what "normally" means in the definition is completely obscure. In any event the person receiving the benefits of the services may not be a party to the contract for instance the case where a man builds a granny flat in his backyard for the housing of his parents. The definition gets close to being completely meaningless and so one has to assume that the client is the person who made the contract with the engineer.

1. The definition of the Project is,

"the Project" means the design, development, construction, excavation or other works to which the Services relate pursuant to the Agreement;

1. It is to be noted that the word Project is defined by using the word "means" rather than "includes". It then employs a concatenation of words, "design, development, construction, excavation or other works". Although Mr Di Francesco said other works could include the making of a report, I would reject this for two reasons. One the words that is employed "design" etc. must be read ejusdem generis to mean physical works and secondly clause 5.2.3 makes it clear that the works are works which come within the Building and Construction Industry Security of Payment Act, and I do not consider that reports come within that. Accordingly there is no project in the present case.

1. Services are then defined as services in relation to the Project, so if there is no Project, the engineer is not providing Services.

1. One then turns to clause 7.1. This claims copyright in all reports etc. "in connection with the Project" and this is to apply whether or not the project is carried out, as there was no project the clause cannot apply. Again the client's right to use the documents in 7.2 is that the client only has a license to use the documents "for the purpose of completing the Project" as there is no Project the clause literally stops the client from using the documents at all, and if that is the correct construction then there was never any benefit to the client, so there is no reason why the client should pay anything for them.

1. Accordingly, if one reads that conditions of engagement literally one completely disposes of the copyright case and probably the claim for payment for the report as well. However is a justifiable approach?

1. Lewison and Hughes, The Interpretation of Contracts in Australia (Law Book Co, Sydney, 2012) paragraphs 2.05 and following, deal with the problem where the court is presented with a contract made with a commercial person which on its literal interpretation has many problems.

1. A word of caution must be inserted here. Although the plaintiff is a commercial enterprise, the defendant is not. The defendant has no part in the construction industry nor the field of providing expert advice for litigation. Accordingly authorities and dicta as to how one approaches the construction of commercial contracts must be read sub modo.

1. There are some indications in the various extracts from leading cases which are digested in that work that it is the obligation of the court, if at all possible, to make sense of these contracts. This is because it is rather implausible that parties, when making a contract with a purpose seriously in mind, would intend that their attempts should come to naught.

1. The purpose of the contract if it can be ascertained must be a very important consideration when construing the words which the parties have used.

1. Notwithstanding this as a general rule, the parties having used words must be taken to have meant something by them. If not Rule 2.07 in Lewison & Hughes on page 40 is "if the words of the contract are clear, the court must give effect to them even if they have no discernable commercial purpose". It quotes Kirby P in Hyde & Skin Trading Pty Ltd v The Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313 to 314:

It is the fundamental rule, that the court should give the words of a written agreement the natural meaning that they bear. Subject to that rule, in giving meaning to the words of an agreement between commercial parties, courts will endeavour to avoid an instruction which makes commercial nonsense or is shown to be commercially inconvenient. This is because courts will infer that commercial parties would not themselves normally agree in such away.

1. In Gloria Jean's Coffee v Western Export Services Inc. [2011] NSWCA 137 at [55] Macfarlan JA said (and Tobias AJA and I agreed with him):

If after considering the contract as a whole and the background circumstances known to both parities, a Court concludes that the language of a contract is unambiguous, the Court must give effect to that language unless to do so would give the contract an absurd operation. In the case of absurdity, the Court is able to conclude that the parties must have made a mistake in the language that they used and to correct that mistake. A court is not justified to disregarding unambiguous language simply because the contract would have a more commercial than businesslike operation if an interpretation different to that dictated to the language adopted.

1. Accordingly, it is difficult where a person proffering a fee agreement sets out terms of engagement which obviously cannot apply to the contract in question to say that a mistake has been made. Especially as here when the plaintiff keeps asserting that it is entitled to enforce the words used in the contract, particularly clause 7, according to their literal terms.

1. There are situations where a court rejects words in order to make sure that the principal purpose of the contract is able to be carried out see e.g. Glynn v Margetson & Co. [1893] AC 351 at [357] per Lord Halsbury. The main purpose of the contract here was for the defendant to have an expert report which it could use to pursue the builder or its insurer.

1. Did it get such a report?

1. To answer this question, one must consider what sort of report was bespoken.

1. I have already rejected the plaintiff's suggestion that initially the defendant asked for a defects report and later amended that to a detailed litigation report. The evidence points against this as I have already noted.

1. The plaintiff's internal documents show that a defects litigation report was to be prepared without Scott Schedule. Mr Nash-Smith's correspondence shows that he was to group common defects.

1. There was some debate in the evidence as to the point at which a draft Scott Schedule should be prepared. In the early days of the Scott Schedule, they were prepared after the case had been set down for trial. The reason was that most building cases settle at an early stage making the preparation of the Scott Schedule otiose and, in any event, the document cannot be prepare on a final basis until the defendant to the building case indicates what parts of the plaintiff's claim it denies.

1. Some of the evidence in this case suggests that the present custom is to prepare the Scott Schedule at an early stage. This would seem to me just to increase costs. However, I do not need to pursue this matter. It is relevant as indicating that it is not necessarily unethical to produce a draft Scott Schedule at an early stage. However, in the instant case, there was no warrant to prepare it as the plaintiff's own internal documents clearly show.

1. To return to the question, "Did the defendant get the report it sought?" if it were not for Clause 7 of the Conditions of engagement I would have thought the answer was clearly "yes". The defendant did get a document which, although over verbose and over detailed, was a defects report that could be used in litigation in the sense of being deployed to see what the answer was of the builder, and if necessary reformulated to be put in evidence.

1. However, Clause 7 suggests that even though the client may have paid for the report (of course the plaintiff keeps saying that it did not on the instant case) the defendant could only use the documents itself and was not to hand them over to any other person including solicitor, accountant, insurer etc.

1. For a person who is seeking a report to pursue a builder, this would make the report virtually useless. Unless the report can be shown to the opposition there is no hope of their getting any settlement and there is great difficulty in getting lawyers to draft statements of claim.

1. In all the circumstances I do not consider that I should read Clause 7 other than literally. Literally it does not apply to the present case at all because there is no project. Accordingly Clause 7 does not prevent the defendant from showing the report to others or making substantial use of the report.

1. This does not mean that the defendant can make as many copies as it likes and distribute the copies to whomsoever it pleases. If Clause 7 does not apply one is thrown back on the general law. This is set out by Jacobs J in Beck v Montana Constructions Pty Ltd [1964-5] NSWR 229 that is that there is an implied consent by the copyright owner to the use of the material by the person engaging him in the manner in which, and for the purpose for which, it was contemplated by the parties at the time of the engagement that it would be used, see page 235 and see also the decision of the Court of Appeal in Torpey Vander Have Pty Ltd v Mass Constructions Pty Ltd (2002) 55 IPR 542 at 556 and following as well as Ng v Clyde Securities Pty Ltd [1976] 1 NSWLR 443 and Gruzman Pty Ltd v Percy Marks Pty Ltd (1989) 99 FLR 116.

2(c). Was there a total failure of consideration?

1. Although there is little actual material put in evidence on this it is quite clear from the background that the intended use was to deploy the material in putting to the builder the defects and to proceed if necessary to the CTTT and that requiring solicitors and other experts to look at the material produced by the engineer.

1. If clause 7 were applicable there would seem to me that there is a fair argument that there was a total failure of consideration. One must be careful with this phrase. As the Victorian Court of Appeal held in Haxton v Equuscorp Pty Ltd (2010) 28 VR 499 at 525 and following one must ask what was it that the "purchaser" intended to receive under the contract and has he or she received that benefit.

1. Accordingly if one is in the situation of the car purchaser in Rowland v Divall [1923] 2 KB 500, where one buys a stolen car and uses it for 6 months before the police repossessed it, there is still a total failure of consideration because what was bargained for was to get title to the car and the incidental use of it for 6 months is no part of that consideration.

1. If Clause 7 had applied I would consider that there is a strong argument for saying that there is a total failure of consideration. However, as that clause is meaningless and does not have the effect claimed by the plaintiff, this point does not arise.

2(d). Is the plaintiff entitled to succeed and, if so, for how much?

1. Accordingly, there was a contract which supplies the plaintiff to pay for the report. It had an estimate given by the plaintiff of between $7,500 and $8,500, with an indication that not only was that an estimate but the figure was approximate, and that it did not include GST, and that if circumstances change the figure may be more. Furthermore, there was some indication that the figure was likely to be more and at least Mr Jones recognised this by his email of the 18th of December.

1. The word "approximately" means that a small latitude of variation is permitted, Wimble, Son & Co v Lillico & Son (1922) 38 TLR 296. Thus in Bellotti v Chequers Development [1936] 1 All ER 89 where "approximately 35" appeared in a document, the court held that 36 was approximately 35, but not 40. One could not by any stretch of imagination consider that $53,500.00 was an approximation of $8,500.00.

1. Professor Carmichael assessed the value of the report at $9,085.00.

1. On the plaintiff's side a Dr Smith assessed the claim made by the plaintiff as a fair and reasonable charge for the work that had been done. However, I found two major problems with Dr Smith's evidence.

1. First, Dr Smith headed his report by saying that he took no responsibility for it. This made it valueless as a piece of evidence. The plaintiff had the opportunity of calling Dr Smith to verify his report but it never did so.

1. Secondly, the work done by the plaintiff was clearly over servicing what it was required to do so under the contract. Despite Mr Nash-Smith saying that he would group defects he did not do so, even though the internal memorandum said that this was to be a litigation report without Scott Schedule it was presented in Scott Schedule form at a considerably increased cost.

1. Although the defendant kept asking for the up to date costs of the report and was fobbed off, it did receive a series of progress accounts so that it did have some idea of where the costs were accumulating.

1. There is no doubt that the defendant obtained some benefit from the plaintiff's report. Before the plaintiff asserted that the licence to use the report was revoked, the defendant had provided the report to its lawyers and Vero.

1. When the defendant was advised to cease using the report, it obtained a substitute report from another company. That substitute report cost approximately $20,000.

1. On the assumption, which is the most likely scenario, that the substitute report covered the same ground as the original report should have done, one would be inclined to think that the value of the original report was more than $9,085.

1. There does not appear to be any criticism of the content of the original report, rather the complaint is one of over servicing: the report was too detailed.

1. The evidence on quantum is unsatisfactory. Partly this is because the plaintiff insisted on being paid the whole of its claim, though it's counsel in final addresses asked me to consider a contractual quantum meruit claim as well. However, when that is the case, the judge is still obliged to do the best he or she can to produce a fair figure.

1. Whilst there was no challenge to Professor Carmichael's assessment, his figure was more a throw away line as the focus of his report was on other issues. The cost of the report suggests that the real value of the report, were it not for the plaintiff's conduct which rendered it of little use, was perhaps $17,500 or so.

1. Thus, were it not for the plaintiff's conduct in preventing the defendant from using the report, I would have found a verdict for the plaintiff for $9,000.

1. However, that conduct prevented the defendant from making use of the report except for a short period after its delivery. That use had some value, but in the absence of evidence, only nominal value.

1. If I accepted that the proper cost is what Professor Carmichael assessed it at, $9,085.00 or if I find the nominal value of the report at about $500.00, this leads me to find that apart from the claim for interest there should be a verdict for the plaintiff for $585.00.

2(e). Is the plaintiff entitled to claim 18% interest?

1. The plaintiff claims 18% interest. It does so under Clause 5.3 of the Conditions of Engagement which I set out earlier in these reasons.

1. There are various problems with this claim. The first is; that the 18% is only to apply if there is a failure to pay money when they are due. There was never any claim for $585.00 there was only an excessive claim for $49,000.00 extra.

1. The second answer is that the provision in the Conditions of Engagement allowing for 18% interest is void as a penalty.

1. The law clearly differentiates between a situation where there is a breach of contract and person in the contract makes a genuine pre-estimate of the damages that will be caused to it if there is a breach, and the situation where a penalty is imposed if there is a breach. The first is quite kosher and the court will award damages in accordance with the agreement, with the second the court will disregard the penalty and award damages if it considers appropriate as to what is fair and reasonable.

1. Historically, what happened was that at Common Law the injured party could sue for the amount set out in the contract. However equity would grant an injunction against that claim but would order an issue to be tried as to what the true damages were because of the breach and then would grant a perpetual injunction against the penalty on the condition that the real damages were paid. See Young, Croft and Smith on Equity (2009, Thomson Reuters) at par [5.960] and following. However, in more modern times the equitable relief has been taken over by the Common Law so that now the penalty is considered to be void and the true damages only awarded

1. There is some evidence from Mr Demlakian that his company runs on an overdraft and that it is costly to send out reminders, not only for the actual preparation of the reminder letters but also the executive time in looking to see who hasn't paid and preparing the figures to be included in the letter. I am not at all sure that it is relevant that one runs on an overdraft unless there is some indication to the other contracting party that that is the case when the contract is made.

1. However, it does not seem to me to matter very much. The fact that there is a flat 18% charge in itself shows that there cannot be a genuine pre-estimate of damage. To give a clear example if a person owes $10,000.00 18% would be $180.00 if on the other hand the debt was $100,000.00 it would be $18,000.00 for the same default. Furthermore the interest is charged if there is any default. Although in the instant case the alleged default was on payment of the bill any minor default would cause the same consequence. The 18% is clearly a penalty. The court interest is sufficient compensation. Accordingly there should be a verdict for the plaintiff for $585.00 plus interest from the date when those monies should have been paid.

2(f). Conclusion on the First Issue

1. Thus, on the first issue, the plaintiff succeeds, but only for $585.00.

3. The cross-claim as to false and misleading conduct.

1. Here one must be particularly careful to consider the pleadings. This is because there is to my mind clear material to suggest that, to put it mildly, the plaintiff was guilty of unethical conduct vis a vis the defendant.

1. Professor Carmichael says that an experienced engineer should have been able to give a far better estimate of the cost of the report than was given. This leads me to find that the continued protestations when asked on more than one occasions for a revised estimate that it could not be done were just so much hypocrisy. This thought is reinforced by the fact that the plaintiff never called Mr Nash-Smith to give evidence.

1. Further, the giving of an estimate that appears to be far too low, and the resistance to the client's request for a revised figure, and the presence of clause 7 which would make the report valueless, smacks of false and misleading conduct.

1. Indeed, the scenario has many of the indications of being part of a scheme between a firm of solicitors (whose fee estimate was rejected by the defendant) the strata managers and the plaintiff to have strata owners in trouble with their builder submit to obtaining an overpriced expert's report.

1. Mr Di Francesco submits that the evidence is not present to make such a serious finding. He is correct in that submission. I have written the previous three paragraphs to point out to the defendant that had the pleadings been differently framed there may well have been a case of false and misleading conduct. However, the court is restricted to trying the case that was pleaded.

1. The Cross Claim pleads, so far as is relevant to the present matter as follows:

6. The cross-defendant made representations to the Cross-claimant that:

(a) it had inspected strata plans;

(b) it had based its estimated cost of the report based upon the inspection of the strata plan and on its extensive experience in this area of consulting

(c) that the cost of the report would be in the region of approximately $2,700-$8,500 plus GST

1. It is put that each of these representations was false and misleading, that the cross-claimant relied on them to its detriment in that it paid moneys to the cross defendant and then had to commission another report.

1. The pleading goes on to put that these representations were made in trade and commerce. This is not denied, and it is clear that the plaintiff is involved in interstate trade and commerce.

1. The correspondence at about the time that the fee proposal was accepted shows that the plaintiff had made it quite clear that it was giving an estimate, and that it would need to do further work before giving a binding quote.

1. The evidence also shows that, before giving the estimate in the fee proposal, the plaintiff did give consideration to what was a proper fee in the likely circumstances. It is not a case where a trader simply made a puffing statement hoping to deceive the customer.

1. There is some evidence of reliance on the apparent skill of the plaintiff, but very weak evidence of reliance on the three alleged representations.

1. I am not satisfied that the representations pleaded are established, nor that they were false or misleading, or that it was these representations on which the defendant acted to enter into the contract with the plaintiff.

1. Accordingly I find a verdict on the cross claim for the cross defendant.

4. The defendant's cross-claim for a refund of monies paid and for damages for breach of contract.

1. Although I considered from the closing addresses that this was an independent cross claim, on re-examination of the pleadings this claim is actually only a statement of the damages that arise out of the alleged misleading and deceptive conduct.

1. As I have found that matter against the defendant nothing is to be gained by further consideration of this point.

5. The copyright claim

1. In view of what I have said about clause 7 of the Conditions of Engagement this claim cannot succeed. However, I should briefly deal with the claim in case I am proved to be in error about clause 7.

1. The plaintiff complains that the defendant has made unauthorised use of the report it furnished and it has suffered detriment.

1. Mr Ken Demlakian in the box was quite upset that another consultant had used part of his report word for word and that he had not even been paid for the report.

1. I was furnished with evidence which analysed other documents, and this showed quite convincingly that substantial copying of the report had been made by other consultants and probably by the insurer Vero.

1. Although the defendant made the report available which was a Causa sine que non to any breach of copyright by the other consultant or Vero, the fact that there was substantial copying by persons other than the defendant does not on the pleadings entitle the plaintiff to any relief by way of injunction or damages against the defendant.

1. In any event, there is no current threat by the defendant to produce any further copy of the plaintiff's report so it would be inappropriate to grant any injunction.

1. A defence was also raised under s 43 of the Copyright Act, 1966 (Cth). This section provides (ss 1) that it is not a breach of copyright to deploy someone else's copyright material for the purpose of a judicial proceeding and (ss 2) that a fair dealing with a work does not does not constitute infringement of copyright if it is done in order to obtain professional advice from a legal practitioner, a patent attorney or a trade marks attorney. Sub-section (2) cannot be relevant in this case as the alleged breach does not relate to any dealing with the copyright material by any of the classes of person named in the section, but rather to the use of the material by another engineering consultancy firm and/or the insurer Vero.

1. This means that the only possible defence under s 43 must arise out of sub-section 1. Strangely, neither counsels' research nor my own have discovered any authoritative guidance as to the scope of this sub-section. In particular what there is suggests that sub-section (1) protects the parties to proceedings rather than the court itself, as there is no clear intention anywhere else in the Act to interfere with the doctrine of judicial immunity, see eg Ogawa v Spender (2006) 152 FCR 228 [12-17].

1. It is not strictly necessary to decide this issue, but, prima facie it seems that the conduct of the plaintiff would enjoy the protection of sub-section 1. In passing the document onto their lawyer, who in turn passed it onto Vero and the consultancy firm who prepared the second report, the plaintiff was taking steps to obtain an expert report to be used as part of it's case in a judicial proceeding. This would seem to fall well inside the broad terms of sub-section 1 which makes permissible "anything done for the purpose of a judicial proceeding".

1. However, for the reasons set out earlier, clause 7 not having any operation and the defendant having a general law licence to use the plaintiff's report for the purpose which both parties had in mind, there is no breach of copyright.

1. Accordingly the copyright claim fails.

6. The Result

1. It follows that there should be a verdict for the plaintiff for $585.00. The Cross Claim should be dismissed and the copyright claim also dismissed.

1. I will publish these reasons and stand the case over until next week for there to be submissions on costs and the form of the orders. I would note, however, that my preliminary view is that there should be no order for costs save that the plaintiff should pay the defendant's costs of the copyright issue.

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Decision last updated: 11 April 2014