Eliana Constructions and Developing Group Pty Ltd v Sidrak

Case •

[2014] VSC 418

•

3 September 2014
IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

JUDICIAL REVIEW AND APPEALS LIST

S CI 2014 00386

ELIANA CONSTRUCTIONS AND DEVELOPING GROUP PTY LTD Plaintiff
v  
AMGAD SIDRAK Defendant

---

JUDGE:

DIXON J

WHERE HELD:

MELBOURNE

DATE OF HEARING:

16 JUNE 2014

DATE OF JUDGMENT:

3 SEPTEMBER 2014

CASE MAY BE CITED AS:

ELIANA CONSTRUCTIONS AND DEVELOPING GROUP PTY LTD v SIDRAK

MEDIUM NEUTRAL CITATION:

[2014] VSC 418

---

ADMINISTRATIVE LAW – Appeal under Victorian Civil and Administrative Tribunal Act 1998 (Vic) s 148 – Application by owner for judgment on terms of settlement of a domestic building dispute - Dispute settled by parties returning to varied performance of the building contract with an agreement to engage an expert to perform certain assessment functions – Judgment entered for owner – Whether owner entitled to a money judgment for the expert’s assessed sum – Whether VCAT properly construed the terms of settlement and building contract - Whether ambiguity between terms of settlement and building contract about calculation of final payment on termination – Whether ambiguity affects orders that may be made on expert’s determination – Whether VCAT in error when ambiguity of contract not argued before it – Whether concession made by counsel at VCAT remains binding.

BUILDING CONTRACTS – Expert determination – Assessment of costs to complete and rectify defects – Assessment included value of variations - Whether expert’s report met the contractual description of his function – Whether assessments that did not form part of expert’s function are severable.

BUILDING CONTRACTS – Contract varied by terms of settlement – Contract deemed terminated by expert’s notice assessment that works were not being carried out in a timely proper or workmanlike manner – Terms of settlement provided that contract deemed terminated under cl 43 - Whether ambiguity between terms of settlement and building contract about calculation of final payment on termination – Whether ambiguity affects orders that may be made on expert’s determination – HIA Victorian New Homes Contract (January 2008) cls 44.0, 44.1

---

APPEARANCES:

 Counsel Solicitors
For the Plaintiff Mr I Percy Yianoulatos Lawyers
For the Defendant Mr K Oliver David Naidoo & Associates

TABLE OF CONTENTS

Introduction................................................................................................................................... 1

The status of the building contract............................................................................................. 1

Background events....................................................................................................................... 3

The issues....................................................................................................................................... 5

Was the proper construction of the TOS in issue in VCAT?......................................... 9

The ‘assessed amount’...................................................................................................... 11

Entitlement on termination.............................................................................................. 14

The presumed intended use of the expert’s determination........................................ 16

Error in VCAT’s assessment of the final payment on termination............................ 18

Grounds 1 to 3 - Did the Tribunal err in the proper construction and application of clauses 28 and 29 of the TOS?.......................................................................................................................... 23

The reasoning of VCAT.................................................................................................... 23

The builder’s contentions on appeal.............................................................................. 24

The owner’s submissions................................................................................................. 27

Resolution of grounds 1 – 3............................................................................................. 30

Grounds 4 & 5 - Was it within the Expert’s discretion to obtain and rely upon independent expert reports and certifications without the consent of the parties or on prior notice to them and at their cost when neither the TOS nor the Expert’s terms of appointment so provided?    31

The reasoning of VCAT.................................................................................................... 31

The builder’s contentions................................................................................................. 32

The owner’s contentions................................................................................................... 34

Resolution of grounds 4 – 5............................................................................................. 35

Grounds 6 & 7 – Did VCAT err in accepting and giving effect to the Expert’s determination that the assessed cost to complete the works of $78,537 was payable by the builder to the owner pursuant to the TOS when the owner had not paid or incurred such cost?............. 37

The order of VCAT............................................................................................................ 37

The owner’s contentions................................................................................................... 37

Resolution of grounds 6 & 7............................................................................................ 38

Grounds 8 & 9 – Did VCAT err in determining that the expert was not required to assess variations and that the builder released the owner in respect of any claim for payment for variations carried out by the builder?............................................................................................... 42

The reasoning of VCAT.................................................................................................... 42

The builder’s contentions................................................................................................. 43

The owner’s contentions................................................................................................... 44

Resolution of grounds 8 & 9............................................................................................ 45

Conclusions.................................................................................................................................. 47

HIS HONOUR:

Introduction

  1. The plaintiff seeks leave to appeal, and if leave is granted, appeals the order made on 20 December 2013 by VCAT that the plaintiff pay the defendant $286,828.98. VCAT reserved costs with liberty to apply. The application for leave and the appeal were heard together. Initially, the proceeding at VCAT was a domestic building construction dispute, commenced by the builder, which the parties settled during the trial. The plaintiff was the builder and the defendant was the owner pursuant to a building contract dated 28 September 2009 for construction of a home on the owner’s land in East Doncaster. The parties signed Terms of Settlement (TOS) on 25 February 2013. The settled dispute raised issues of defective work by the builder that required rectification, incomplete work by the builder, and variations to the contract work claimed by the builder. The owner applied to enforce the TOS. This application is for leave to appeal against VCAT’s judgment in favour of the owner on the TOS and raises issues flowing from the performance of the settlement agreement.

The status of the building contract

  1. The TOS did not novate the building contract, but had the effect of modifying its terms. It is convenient to set out the relevant applicable terms that governed the relationship of builder and owner following the TOS, before explaining the contentions of the parties on this appeal and the tribunal’s reasoning.

  1. The building contract between the parties continued to govern the relationship between the parties in respect of the construction project but its operative effect was, in substance, varied by the TOS. On 25 February 2013, by the TOS - 

(a)   the builder released the owner from all claims made by the builder in the VCAT proceeding [cl. 38];

(b)   the builder agreed by 12 August 2013 to complete the ‘works’ commencing by 12 March 2013 [cl. 2];

(c)    the ‘works’ were defined by the TOS as the ‘building works’ and the ‘rectification work’, themselves defined terms [cl. 1(d)] with ‘building works’ being:

(i)     the uncompleted work under the building contract as identified in the plans and specifications and in Appendix B of the report of a building consultant (McLennan); and

(ii)  the work the subject of a variations claimed by the builder in the proceeding [cl. 1(b)]

and ‘rectification work’ being the work identified in Appendix C of the McLennan Report [cl. 1(c)]. The ‘works’ were not limited to agreed variations but extended to all variations claimed by the builder in the VCAT proceeding;

(d)  the owner agreed to pay the builder $250,000 to complete the works with $25,000 to be paid by 5 March 2013, and the remaining $225,000 to be paid by way of progress payments [cl. 3]; and

(e)   an expert was to be appointed to independently perform contractual functions, particularly to assess the claims made by, and the quality and completeness of the work of, the builder.

  1. The particular functions of the appointed expert included –

(a)   assessing claims by the builder for progress payments [cl. 4(c)];

(b)   notifying the parties (a first notification) if the expert was of the opinion that the builder was not carrying out the works in a timely, proper or workmanlike manner [par. 23];

(c)    issuing a second notification to the builder if the expert remained of that opinion after a period of not less than 7 days after the date of the first notification [par. 25 (a)]; and

(d)  assessing the reasonable cost of completing and rectifying the works [par. 25 (e)] (‘the assessed costs of completion’) if the expert issued a second notification.

  1. It was the last of these functions that was in issue before VCAT. The expert issued a second notification. The building contract was deemed terminated by the owner. The builder became liable to account to the owner for the reasonable cost of completing and rectifying the works and the expert assessed those costs. The owner moved for judgment on the TOS before VCAT in respect of that assessment.

Background events

  1. After striking the TOS, the owner paid the initial $25,000 and on 7 March 2013, John Anderson accepted appointment as the expert under the TOS. The works were to be commenced by 12 March 2013 and completed by 12 August 2013. The builder’s first progress claim was due on or after 25 March 2013 and the second progress claim was due on or after 15 April 2013. There was delay.

  1. On 22 April 2013, Mr Anderson asked the builder to identify the dates for completion of the rectification of ‘Appendix C’ items. On 15 May 2013, the builder submitted its first progress claim in the sum of $124,500. Mr Anderson immediately requested further information from the builder in order to assess the first progress claim. On 21 May 2013, Mr Anderson assessed the first progress claim at $49,500.

  1. Mr Anderson inspected the site on 28 May 2013. The same day the builder wrote to him. As this letter is material to the builder’s argument, I will set out its material parts.

Item 1: Structure

Pursuant to clause 29 (sic) of the terms of settlement we confirm there isn’t any steel beam located higher than the balcony floor level therefore there is no need for engineering redesign or engineer alternative solution which means, the floor level for balcony is no higher than the floor level.

Referring to Australian Standard 4654.1 and 4654.2 Water proofing membrane systems for exterior use, above ground level Part 1: Material Design and Installation and Part 2: Design installation, we strongly believe we comply with the Australian Standards.

In our meeting with our Building Surveyor, Vince Arborea, yesterday, he guided us to the above Australian Standard and the BCA and we found that we complied with the required standards.

Furthermore, due to the above, we kindly request the payment of the full claimed amount as per our submitted claim dated 15/5/2013 totalling $9,500.

Item 2: Alfresco

All members of Alfresco roof has been chosen carefully according to Australian Standard 1684 which has been submitted to building surveyor.  The Design is carried out according (sic) Australian Standard 1684 which does not require an engineering certificate.

Therefore, due to the above, we kindly request the payment of the full claimed amount as per our submitted claim totalling $24,000 (70%).

Item 4: External Walls Render

Pursuant to clause 29 note 2 – ‘e.g. because the engineer has provided a certificate under section 238 of the Building Act 1993 or the building surveyor has accepted the work is an alternative solution under the building code of Australia.’

A photo of the extra flashing being installed over the soaker (Z flashing) installed by screws and silicon which was accepted by the Building Surveyor as an alternative solution.

We will forward the written acceptance from the surveyor upon receiving it.  

Once sent, (sic) kindly request the payment of the full amount claimed as per our submitted claim totalling $11,250 (75%).

Item 5: Roof

All Compliance certificates will be submitted to you with Occupancy permit, before the final claim.

Pursuant to clause 38 of the building contract, “when the owner pays the final claim, the builder must handover possession of the Land to the Owner together with all keys, certificates and warranties in the builders position” and pursuant to clause 8–3- ii [sic] terms of the settlement “when should all be certificates to be handed over [sic]”

We kindly request to review your decision of holding 50% ($20,000 of total completed job) until you receive the compliance certificate, which we shouldn't be handing over now but at the end.

Although, we in good faith, hand over to you the compliance certificate of the roof plumbing correction carried out on site to prove all work carried out is certified [sic].”

[emphasis in original]

  1. On 3 June 2013, Mr Anderson issued a First Notification to the builder under cl. 23 of the TOS. On 17 June 2013, Mr Anderson assessed the second progress claim at zero. The same day he issued a Second Notification to the builder under cl. 25 of the TOS. On 19 August 2013, he issued his Building Report, which was his assessment of what he believed he was required to determine by the TOS, which included the costs of completion and rectification under cl. 25. Mr Anderson varied his assessment on 30 August 2013 and 3 September 2013.

First Report
19 Aug 2013 		Amended Report
30 Aug 2013 		Second
Amended Report
3 Sep 2013 		VCAT Order
Estimated cost of rectification $174,514.60 $174,514.60 $174,514.60 $174,514.60
Estimate cost of completion $78,537.00 $78,537.00 $78,537.00 $78,537.00
Variations ($94,051.00) ($94,051.00) ($275,496)
Refund of 1st progress claim ($49,500) ($49,500)
Total payable by the builder $159,000.60 $208,500.60 $27,055.60 $253,051.60
Expert’s costs $33,777.38 $33,777.38
Total $286,828.98

  1. Mr Anderson assessed the cost of completion and rectification at $253,051.60. He assessed ‘variations’ at $275,496 and allowed the builder a credit for the paid first progress claim. Neither Mr Anderson nor VCAT gave any credit for the unpaid balance due from the owner to the builder under the TOS. On 20 December 2013, VCAT ordered that the builder pay to the owner $286,828.98, comprising the assessed cost of completion and rectification of $253,051.60, plus the expert’s costs of $33,777.38, making a total of $286,828.98.

The issues

  1. The builder contended, by written submissions, for four errors of law that vitiated VCAT’s order. VCAT erred -

(a)   in its construction of clauses 28 and 29 of the TOS and in its assessment of whether the expert complied with his contractual obligations thereunder (grounds 1 – 3);

(b)   in determining that it was within the expert’s discretion to obtain and rely upon independent expert reports and certifications (without the consent of the parties or on prior notice to them and at their cost) when neither the TOS nor the expert’s terms of appointment so provided (grounds 4 – 5);

(c)    in accepting and giving effect to the expert’s erroneous determination in his First Building Report dated 19 August 2013 that his assessed cost to complete the works of $78,537 was properly payable by the builder to the owner pursuant to the TOS when the builder had not paid or incurred such cost (grounds 6 – 7); and

(d)  in determining that:

(iii)             the expert was not required to assess variations under the TOS (and the building contract); and

(iv)             the builder released the owner, pursuant to cl. 38 of the TOS, in respect of any claim for payment for variations carried out by the builder. (grounds 8 – 9)

  1. In oral submissions, the builder contended that the critical issue, raised by grounds 6 – 9, was whether the expert properly understood what the terms of settlement required him to do and whether VCAT properly construed the terms of settlement in holding the builder bound by the expert determination. Two broad points were emphasised by the builder’s counsel. It was necessary for me to construe the plain words of the terms of settlement to see:

(a)   in the first instance whether the builder asked the expert to certify that completion of items of work was neither reasonable nor necessary under cl. 28;

(b)   whether the TOS required that the expert’s assessment of the reasonable costs to complete properly included variations.

The builder’s counsel contended that I must look carefully at the interaction between the TOS and the building contract to determine whether the expert was entitled to make no allowance whatsoever for unpaid contact price under the building contract.

  1. The builder contended that by including the estimated costs of completion assessed at $78,537, VCAT ordered that the builder bear the costs to complete the construction of the owner’s house when the owner had not paid the balance owing under the building contract. The builder submitted that the owner’s loss was his actual costs of completion less the costs he would have been liable to pay the builder. This accords, it submitted, with the common law’s approach to damages for loss of bargain  and was the approach adopted by the parties as set out in the TOS and the building contract.

  1. The TOS relevantly provided that:

(a)   the expert determined the ‘assessed amount’ that the builder must pay the owner on termination (Cl. 25);

(b)   the assessed amount was the reasonable cost of completing those items of the building works and rectification works (Cls 12 and 1 (b)&(c)); and

(c)    the assessed amount was deemed to be the negative balance the owner would have paid under clause 44.1 of the building contract and the amount payable by way of damages for repudiation of the building contract (Cl. 16(a)).

  1. The builder contended that the negative balance was the unpaid balance of the contract price minus the reasonable costs to complete. Put differently, this amount ws the difference between what the owner bargained for under the building contract and the actual completion costs equating to common law damages for loss of bargain. The builder submitted that this construction was made clear by the second limb of cl 16.

  1. Properly construed as a commercial contract given a businesslike interpretation, the builder submitted that the deeming effect of cl. 16 was that the assessed amount must be the same as the owner’s loss of bargain damages. In cl. 12 of the TOS, the ‘assessed amount’ referred to an amount in the context of the works having reached completion. Because clause 14 made that clear by mandating that if there were any unpaid progress payments (as properly assessed) those amounts must be deducted from the assessed amount, cl. 12 proceeded on the footing that all progress payments had already been made. This may be contrasted with the report required by cl. 25, which was given when the works were incomplete and not all payments had been made.

  1. Alternatively, the builder submitted that including the costs to complete ($78,537) amounted to an unenforceable penalty. On no objective basis could it be said that the provisions of the TOS permitting the inclusion of that sum constituted a genuine covenanted pre-estimate of damage.

  1. Each of the parties contended, in my view wrongly, that there was no ambiguity in the building contract as varied by the TOS and no issue of ambiguity or uncertainty arose on the appeal. Counsel for the builder submitted –

Your Honour, we say, and my learned friend concedes in his outline, that there’s no ambiguity, so there’s no need to go too far in looking at extrinsic materials about that. What’s plain is that the parties were in dispute, they have settled the common terms. It’s a matter of plain interpretation what those terms meant.

The builder’s counsel also had to grapple with a ‘concession’ made by his predecessor in VCAT.

  1. Broadly, the owner submitted that I should refuse leave to appeal, or dismiss the appeal on two grounds. First, the builder based its appeal on arguments that were not raised below. The owner contended that the issue of ambiguity in the construction of what the TOS required of the expert when determining the ‘assessed amount’ was not raised before VCAT. That issue required some consideration of matters not in evidence, namely the surrounding circumstances to the TOS as known to the parties.

  1. Secondly, the owner contended that no arguable error of law was disclosed. The owner contended that the TOS were in very clear terms. Clause 25(c) operated to deem the building contract terminated by the owner under clause 43 of the building contract. The parties had agreed that the assessed amount (which includes the cost of completion) was deemed the amount that the builder would have been liable to pay to the owner if the owner had ended the building contract under clause 43 of the building contract. 

  1. The owner contended that I was being invited to ‘construe the contract on appeal’ in circumstances when the point was not raised below and I could not be convinced by the builder that evidence would not have been required if the point had been raised in the first instance.

Was the proper construction of the TOS in issue in VCAT?

  1. Before turning to the particular grounds argued, I reject the contention that the proper construction of the TOS was not a live issue before VCAT. The construction of the TOS arose in at least two contexts. VCAT needed to identify the expert’s assessment task that the parties had, by their agreement, accepted as final and binding on them. The second context was that VCAT had to precisely identify the order that the owner was entitled to, based on the expert’s work. I will explain that the expert’s determination was not the proper basis for the judgment, which the owner received, although it was relevant. The proper construction of the TOS, and necessarily the building contract, was critical in each context.

  1. VCAT appreciated the significance of the first context. The Deputy President stated in argument –

DEPUTY PRESIDENT: No, because you bring your application on the basis of the terms of settlement.

COUNSEL FOR OWNER: Yes.

DEPUTY PRESIDENT: So really you say that if your application succeeds and theirs fails then the terms of settlement contemplate judgment will be entered for the amount of the assessment… and really the interpretation of the terms of settlement therefore becomes fundamental…

  1. VCAT correctly identified its task to include assessing the expert’s determination for compliance with the parties’ agreement and determining the judgment contemplated by the TOS. Under a heading, ‘Are the Parties Bound by the Expert’s Assessment?’, VCAT reasoned –

80.The owner contends that I should enter judgement for the sum assessed as the cost of completion and rectification: $253,051.60 plus the expert’s costs of $33,777.83. Further, that the amount assessed by the expert for variations should be severed from the Final Report, as this is a task the expert was not required to carry out under the terms of his appointment, as set out in the TOS.

81.Despite having made orders for the filing of further submissions by the builder, during the reinstatement hearing, counsel for the builder submitted for the first time that if the owner’s application was successful that the proceeding should be reinstated and judgement entered for the amount of the expert’s final assessment (after taking into account the variations...)

83.The builder contends I can have no confidence in the amounts assessed for completion and rectification works given the apparent failure of the expert to understand the terms of his appointment in relation to the assessment of the variations. Further, that the expert has ignored the certifications provided by the builder, which he was required to consider under paragraphs 28 and 29 of the TOS.

84.I reject this.

85.Under paragraph 35[1] of the TOS, the parties specifically agreed that the assessment by the expert of the costs to complete and/or rectify the works in the event of termination pursuant to paragraph 25, would be final and binding as if it was a determination by a special referee appointed under s95(1) of the VCAT Act.

[1]This reference may be a typographical error, as cl 33 of the TOS is to the effect described.

  1. The Deputy President then quoted from the judgment of Nettle JA in AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd[2] and continued -

88.The parties clearly agreed in the TOS that, in the event the expert issued a second Notification, the TOS and the building contract would be at an end save for the assessment by the expert of the cost of any outstanding rectification and completion works. The parties agreed that the assessment of the expert would be final and binding and that they would be bound by the assessment.

[2][2006] VSCA 173, [51].

  1. I am not satisfied that VCAT erred in failing to analyse and explain the expert’s contractual function in order to determine whether the parties were bound by his Second Report. A further reason why that task was critical was that the parties agreed that the expert had wrongly included in his Second Report a credit to the builder of the first progress payment but were in dispute as to whether the value of ‘variations’ was properly included in Mr Andersons’ Second Report.

  1. These issues were plainly raised before VCAT, and required VCAT to properly construe the TOS and the expert’s determination before the primary question of whether the parties were contractually bound by the expert’s determination of the ‘assessed amount’ could be resolved. Once VCAT determined that the parties had agreed to accept the expert’s determination, or part of it, as final and binding, it faced the second context in which the proper construction of the TOS was critical.

  1. Clause 15 was the key provision of the TOS that the owner was seeking to enforce. It provided that if the builder failed to pay the owner the assessed amount within 14 days of receiving the Second Report, the owner could reinstate the VCAT proceeding and ‘obtain an order against the builder (by consent) for the assessed amount’, the expert’s costs of producing the first and second reports, and the owner’s reasonable legal costs of obtaining the order. Identifying the order that the owner was entitled to obtain on termination by way of final payment also involved issues about the proper construction of the varied contract. The TOS required that the expert assess an ‘assessed amount’ but there is conflict between clause 44 of the building contract and clauses 26, 15 and 16 of the TOS about the application the assessed amount.

The ‘assessed amount’

  1. Clauses 1 and 2 of the TOS define the work to be completed by the builder. Clauses 3 and 4 define how much and when the owner must pay for the works. In this process, the parties allocated to the expert the task of receiving and assessing progress claims. Clauses 5 and 6 deal with delay in completion of the works. The parties also allocated to the expert the task of receiving and assessing extension of time claims. Clauses 7 – 11 define obligations when the works reached completion, which did not happen. Clauses 12 – 16 apply where, on being notified by the builder of completion, the expert considers that there are defective or incomplete items of the works. Again, those provisions were not engaged in the present dispute, but two matters may be noticed. In the ordinary course to completion as declared by the builder, it is likely to have claimed most, if not all of the balance due from the owner by progress claims under cl. 4. Second, cl. 16 is nonsensical in this context. Because the building contract has not been terminated under clause 43, to deem the assessed amount to be the cl. 44.1 negative balance has no impact on the rights of the parties under cl. 44 which has not been engaged. The clause is otiose.

  1. Clause 23 operates prior to completion and deals with the failure of the builder to carry out the works in a timely, proper, or workmanlike manner. The expert makes that assessment and may respond to a failure with a First Notification. That is what Mr Anderson did. If the expert remains of the opinion that there is a relevant failure by the builder, cl. 25 applies. The expert may give a Second Notification and such a notice is deemed to terminate the contract under cl. 43. This is what occurred and the expert’s function under cl. 25(e), which Mr Anderson discharged, was to assess the costs to complete and rectify. However, Mr Anderson went further and I will return to what he actually did. The function of assessing the costs to complete and rectify is described in similar terms to the function under cl. 12, which determination is defined as the ‘assessed amount’, a definition that is not adopted in cl. 25(e).

  1. Clause 25 reads –

If, after a period of not less than 7 days after the date of the first notification, the expert remains of the opinion that the builder is not carrying out the works in a timely, proper or workmanlike manner:

(a) the expert shall notify the builder and the owner accordingly forthwith (“the second notification”);

(b) the builder shall forthwith cease carrying out the works;

(c) the building contract will be deemed to have been validly terminated by the owner under clause 47 of the building contract;

(d) the expert shall inspect the works within 7 days after the date of the second notification; and

(e) the expert shall, within 14 days of inspecting the works, provide a report to the owner and builder setting out those items of the building works and the rectification works that, in the opinion of the expert, have not been completed or rectified by the builder, together with the expert’s assessment of the reasonable cost of completing and rectifying those works.

  1. Clause 26 provided that the expert’s cl. 25(e) report be treated for the purposes of the TOS as if it was the expert’s Second Report [the report under cl. 12]. In this way, the cl. 25(e) assessment became the ‘assessed amount’, but there was no requirement that the expert allow a credit either for ‘variations’ or for the unpaid contract price, or the cl. 14 offset for assessed, but unpaid, progress payments. Clauses 15 and 16 were in the following terms –

15.If the builder fails to pay the owner the assessed amount within 14 days [of receiving the second report], the owner may reinstate the VCAT proceeding and obtain an order against the builder (by consent) for:

(a)     the assessed amount;

(b)     the experts’ costs of producing [the first and second reports]; and

(c)     the owner’s reasonable legal costs of obtaining the order...

16. The assessed amount is deemed to be:

(a)     the amount that the builder would have paid to the owner under clause 44.1 of the building contract (referred to in that clause as the “negative balance”) if the owner had brought the building contract to an end under clause 43 of the building contract; and

(b)     the amount that the builder would have been liable to pay to the owner by way of damages for repudiating the building contract.

  1. Clause 44 of the building contract read –

44.0If the Owner brings this contract to an end under clause 43, then the Owner’s obligations to make further payments to the Builder is suspended for a reasonable time to enable the Owner to find out the reasonable cost of completing the Building Works and fixing any defects.

44.1 The Owner is entitled to deduct that reasonable cost calculated under clause 44.0 from the total of the unpaid balance of the Contract Price and other amounts payable by the Owner under this Contract if this contract had not been terminated and if the deduction produces:

a negative balance – the builder must pay the difference within 7 days of demand; and

a positive balance – the Owner must immediately pay the difference to the Builder.

  1. Clauses 15 and 16 of the TOS cannot be sensibly read with cl. 44.1 of the building contract because the ‘assessed amount’ under cl. 16 is not equated with the amount assessed under cl. 44.0 which is plainly what the parties should be presumed to have had in contemplation. Moreover, in the case of termination before completion, cl. 14 does not apply and any unpaid assessed progress payment is not deducted from the ‘assessed amount’. Rather, the combined effect of cls 25(e), 26, and 16 (ignoring cl. 44) is that the expert’s assessment of the costs to compete and rectify is not adjusted for any unpaid progress payments or the balance of the contract sum but that unadjusted amount is deemed the negative balance under cl. 44.1.

  1. That had the practical effect of depriving the builder of the credit to which he is entitled under cl 44.1, an entitlement well recognised in the concept of loss of bargain damages. Under cl. 44.1, the negative balance is conceptually different to the assessed amount under cl. 25(e). It is the difference between the unpaid contract price and the cl. 44.0 assessment. The cl. 44.0 assessment correlates, on a fair assessment of the commercial purpose of the TOS with the assessed amount. The deeming provision is nonsensical. In its literal sense, it conflicts with the most basic principle of contract damages.[3] A reasonable businessman seeking a commercial result would not expect that consequence when contemplating what rights the parties would have on termination of the agreement by breach. He would contemplate that the innocent party be placed in the position he would have been in had the contract been performed.

    [3]Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1, 11-12.

Entitlement on termination

  1. Under the building contract, the following provisions operated. Clause 43 of the building contract provided for the owner’s right to terminate the contract where the builder is in substantial breach and when that right was exercised, cl. 44 permitted the owner to get another builder to finish the work with the costs of completion and fixing defects offset against the unpaid contract price to determine the final payment due. The contractual effect of the deeming provision in cl. 25(c) of the TOS was to enliven operation of cl. 44.

  1. Clause 44 governed the owner’s obligation to make further payments to the builder after termination. The owner’s obligation to make further payment to the builder was suspended, never released. As cl. 44 makes clear, the commercial purpose in suspending that obligation was to allow a reasonable time for the owner to ascertain the reasonable cost of completing the building works (now the ‘works’ as defined by the TOS) and fixing any defects. The parties had agreed by cl. 25 (d) and (e) of the TOS that a reasonable period was 21 days and agreed by cl. 25 (e) that the reasonable cost of completing the ‘works’ and fixing defects would be determined by the expert. That assessment was all that was required of him.

  1. The final payment on termination of the building contract was calculated under cl. 44.1. A simple formula was contractually agreed. The reasonable cost of completing the ‘works’ and fixing defects was deducted from the unpaid balance of the contract price and either the builder must pay a negative balance to the owner or the owner must pay a positive balance to the builder.

  1. Mr Anderson assessed that reasonable cost at $253,051.60 and his costs for undertaking that assessment were $33,777.38, a total of $286,828.98. However, that was only part of his assessment made in the Second Report. Nonetheless, as I have elsewhere said, it was open to VCAT to sever the parts of his determination that did not meet the contractual description. The expert’s Second Report thus provided one of the variables needed to assess the final payment.

  1. The other variable was the unpaid contract price. ‘Contract price’ was a defined term in the building contract. Although the TOS obliged the owner to pay the builder $250,000 for carrying out the works, the TOS did not specifically re-define the contract price. Of that sum, $175,500 was unpaid at the time of termination. There was a definition of ‘unpaid balance’ which was the sum of $250,000 less amounts paid under the TOS, but the term ‘unpaid balance’ was not used in cls 25, 26, 15 or 16 of the TOS. A reasonable business person, having regard to the context of the TOS and the commercial purpose or objects to be secured by it would have understood the TOS to mean that the contract price payable by the owner under the building contract was varied to $250,000. Counsel did not allude to any aspect of the surrounding circumstances that might point towards an alternative construction in argument. It is difficult to conceive what circumstance might have had that consequence for the particular identified ambiguity or conflict. The issue was not considered by VCAT because it did not consider how the final payment on termination of the contract was calculated, assuming, wrongly, that the expert’s assessed amount was the final payment. Neither Mr Anderson not VCAT brought the unpaid balance of the contract price to account.

The presumed intended use of the expert’s determination

  1. It is well established that parties to a contract who, by the terms of that contract, agree to submit a question to an independent expert, are bound by the determination of that expert of the question acting honestly and in good faith. VCAT identified the proper principle, referring to AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd,   where Nettle JA said:

51 I agree with the judge that the question of whether it is open to review an expert determination on the ground of error is in the first place to be decided according to whether the determination answers the contractual description of what the expert was required to determine. I also agree with the judge that the question of whether an error in determination deprives the determination of compliance with the contractual description of what the expert was required to determine is in the first place to be answered according to whether the error occurred in respect of a task which the contract entrusted to the expert. As Mason, P. explained in Holt v. Cox, although mistake is not itself a ground for vitiation of a final and binding expert determination, a mistake may still be of such a nature that the resultant determination is beyond the realm of contractual contemplation – beyond anything which the parties may be supposed to have intended to be final and binding – and therefore susceptible to review.

53 Therein lies the distinction drawn in some of the authorities, and observed by the judge in this case, between an error in the exercise of a judgment, opinion or discretion entrusted to an expert, and an error which involves objective facts or a mere mechanical or arithmetical exercise. Subject to the contract in question, it is easier to suppose that parties to a contract contemplate that an error of the former kind be beyond the realm of review than it is to think that they intend to be fixed with errors of objective fact or in processes of mechanical calculation.

54 As this case demonstrates, however, matters are likely to be more complex where error occurs in the course of an exercise which is partly comprised of discretion, judgment or opinion and partly constituted of objective fact or mechanical calculation. In some such cases, the overriding discretionary or judgmental character of the exercise may so inform each step in the determination as to put even those steps which are matters of objective fact or mere mechanical calculation beyond the scope of permissible review. In other instances it may appear that, despite the overall character of the exercise, the various steps in the determination are severable, according to whether they are essentially discretionary or judgmental or simply matters of objective fact or mechanical calculation, and that those steps which are of the latter kind are within the scope of permissible review. The question in each case is what the parties should be presumed to have intended, and that is to be determined objectively from the terms of the contract, bearing in mind the context in which it was created. (Emphasis added in VCAT reasons)

  1. The first question for VCAT was what the parties should be presumed to have intended as Mr Anderson’s function, determined objectively from the terms of the contract and bearing in mind the context in which it was created. The Deputy President identified the question correctly; because she added emphasis to that very sentence from Nettle JA’s judgment and observed that the TOS and the building contract would be at an end, save for the assessment by the expert of the cost of any outstanding rectification and completion works. The answer to this question required a careful analysis of the building contract as varied by the TOS. VCAT’s analysis in this respect, which I will later set out, was free of error.

  1. The expert’s function under cl. 25(e) was limited to assessing the costs of completion and defects. That is the extent of his assessment task and it is evident that although he did just that, he undertook an additional and different assessment of which his cl.25(e) assessment formed part.

  1. Mr Anderson’s Second Report does not answer the contractual description of what he was required to determine under the TOS, because it was not Mr Anderson’s function to determine the final payment that was due on termination from one party to the other and it was not his task to value variations. Perhaps, Mr Anderson found the TOS conflicting or ambiguous, I do not know.

  1. Although Mr Anderson’s Second Report did not meet the contractual description of his assessment function, his error was not a matter of judgment or application of his expertise. The failure of the Second Report to answer the contractual description of the expert’s function lay in the assumption of additional tasks (the valuation of variations and the credit for the paid first progress claim). This was not a case where the overriding discretionary or judgmental character of the exercise for the expert so informed each step in the determination as to put even those steps which were matters of objective fact or mere mechanical calculation beyond the scope of permissible review. Neither party contended that it was.

  1. Were the additional tasks undertaken by Mr Anderson that fell outside of the contractual description in the TOS severable from the assessment that he was required to make? The parties agreed to disregard the credit to the builder of the progress payment as an inappropriate allowance. That was plainly reviewable error appropriately corrected by consent. The parties did not agree that the valuation of variations was severable. The owner persuaded VCAT to rely on Mr Anderson’s assessment of completion and rectification costs alone as the performance of the assessment required of him by cl. 25(e), ignoring or severing from the Second Report all other matters. The builder contended that in doing so, VCAT fell into error. I reject the builder’s contention, in part, for reasons that I will later explain.

Error in VCAT’s assessment of the final payment on termination

  1. As cl. 15 constituted consent to an order informed by the assessed amount, how that assessment properly informed the calculation of the final payment to which the owner was entitled under cl. 15 of the TOS and cl. 44.1 of the building contract was central to VCAT’s determination of the proper relief to be granted on the owner’s application. I now turn to that issue. What on a proper construction of the contract as varied, was the owner’s entitlement by way of final payment on termination?

  1. The provisions for quantifying the final payment under the building contract on the one hand and the TOS on the other are in conflict, producing ambiguity in the documented agreement between the parties. Irrespective of whether the parties contended that the TOS were frustrated, or not ambiguous, or were clear and certain in their terms, the owner sought an order for his contractual entitlement on termination and while it was not the expert’s function to properly assess that sum, it was necessary for VCAT to do so.

  1. In Electricity Generation Corporation v Woodside Energy Ltd,[4] the High Court stated:

The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties ... intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".

[4][2014] HCA 7, [35] (citations omitted).

  1. Looking objectively at the terms of the contract bearing in mind the context in which it was created, the parties intended that the expert’s determination, properly described, was merely to provide one of two variables needed to calculate the final payment that a party was entitled to on termination under cl. 43 of the building contract. The parties had agreed by the TOS that Mr Anderson should assess the costs to complete and rectify the works after the builder’s dismissal, but no more. The other variable was, as noted above, the unpaid balance of the contract price.

  1. By the TOS, the parties varied the contract price as defined in the building contract. The builder agreed to complete the ‘works’ for the sum of $250,000. The owner was obliged to make that further payment under cl. 3 of the TOS. It was not in dispute that the owner had not made that further payment in full. He paid the initial payment of $25,000. Clause 4 of the TOS specified a procedure for progressive payment of the balance of $225,000. The owner was, subject to the TOS, obliged to make further payment(s) of the contract price. That obligation was never released.

  1. The unpaid balance due to the builder was payable by progress payments while the building contract remained operative. Clause 4 provided for assessment of progress payments and in the period between 25 March 2013 and termination of the building contract, the builder claimed a progress payment that was assessed at $49,500. There were no further successful progress claims against the unpaid balance before the Second Notification. Except in respect of accrued claims, the builder could not make progress claims under cl. 4 after termination, but, on termination, the owner’s obligation to pay the unpaid balance was suspended.

  1. Clause 25 provided for the expert to assess the costs of completion and rectification but it was silent about unpaid progress payments or the balance of the unpaid contract price. On the other hand, cl. 44.1 expressly obliges the owner on termination to bring the unpaid contract price to account.

  1. When cl. 15 provided that the owner ‘may obtain an order for the assessed amount’, that clause did not necessarily entitle the owner to an order that the builder pay the owner the assessed amount as the final payment under cl. 44.1 of the building contract. Clause 15 does not provide that the owner be entitled to an order for payment of the assessed amount. It speaks of an order for the assessed amount Having declined to give the expert the function of determining the final payment in accordance with the building contract as varied by the TOS, the parties should be presumed to have intended that the owner was entitled to declarations by consent as to the assessed amount and costs, which declarations would enable the calculation of the final payment due under cl. 44.1.   

  1. The owner contended that cl. 16 precluded that interpretation but I disagree. I am unable to see what sensible interpretation cl. 16 might bear in this circumstance. It is nonsensical to deem the assessed amount to be the amount that the builder would have been liable to pay to the owner by way of damages for repudiating the building contract under cl. 16(b). That was not this case. The contract was terminated under cl 43, not by acceptance of repudiation, and that would always be the case with an assessment made under cl. 25(e). Repudiation of a contract may entitle the innocent party to damages for loss of its bargain that might require the innocent party to bring the unpaid purchase price to the accounting but termination under cl. 43 expressly obliged the owner to account for the unpaid contract price.

  1. Properly construed as a commercial contract given a businesslike interpretation, and determined objectively from the terms of the contract, bearing in mind the context in which it was created, the presumed intention of the parties was that the assessed amount was deemed the costs of completion and rectification contemplated by cl. 44.0. It was nonsensical to deem that the expert’s assessment subsumed the unpaid balance of the contract price and other amounts payable by the owner under the contract if it had not been terminated. That assessment could not sensibly stand as the negative balance resulting from a deduction that is never made. The expert was only authorised to undertake part of the task and was not required to consider the unpaid contract price or to assess proper final payment due. There is nothing in the balance of either the TOS or the building contract that warrants a different conclusion. The genesis of the TOS was resolution of a dispute in which the builder claimed that the unpaid contract price should be varied in its favour and the owner sought completion and rectification, not release from his obligation to pay the contract price.

  1. In my view, cl 16 is devoid of meaning and I am unable to see any sensible operation for its deeming provision, in either the circumstance of termination under cl. 43 of the building contract as here occurred or on completion of the works under cls 7 – 12 of the TOS where it primarily was intended by the parties to apply. A businesslike interpretation of the building contract as varied by the TOS requires that cl. 16 be ignored as meaningless and that in cl. 15 ‘an order against the builder for the assessed amount’ not be construed as confined to an order for payment.

  1. However, VCAT did not consider cl. 16 at all. Nor did it consider cl. 44, or determine the proper calculation of the final payment to which the owner was entitled after it adjusted the determination of Mr Anderson by deleting the variations and the credit to the builder. The fact that a building expert such as Mr Anderson assumed that his task was to assess the final payment and that the task involved assessing the credits that the builder might have been entitled to ought to have alerted VCAT to its legal obligation to construe with care the provisions for final payment on termination. I am satisfied that VCAT fell into error when it ordered that the builder pay to the owner $286,828.98. The builder had not agreed that the expert assess the final payment due to the owner, or that it would be calculated without offsetting the unpaid contract price. Nothing in the TOS, and a fortiori, the building contract released the owner from the obligation to account for the unpaid contract price. The proper order to which the owner was entitled under cl. 15 was a declaration that the costs of completion and rectification were -

Expert’s cl. 25(e) report assessment  $253,051.60
Expert’s costs   $  33,777.38

$286,828.98

  1. The contractual arrangements between the parties, if cl. 16 is read literally, were ambiguous, as the provisions that govern the final termination payment are in conflict. The nature and extent of that conflict is evident on contextual analysis of the agreement as varied. I do not accept the submissions of each party that the agreement between the parties, as varied by the TOS, is unambiguous. More significantly, I do not accept the submission put by the owner that no arguable error of law is disclosed.

  1. Under the building contract, the proper question for VCAT to determine, in assessing the final payment on termination, was: what sum represented the difference between the value of the completion and rectification costs and the unpaid balance of the contract price? VCAT did not consider this question and erred in its order that the builder pay $286,828.98. Mr Anderson’s assessment of the completion and rectification costs was binding. The amount of the unpaid contract price was not the subject of a finding by VCAT. However, that sum appears not to be in dispute and on the evidence, VCAT could hardly have made any other finding. The proper assessment of the final sum due to the owner appears to be - 

Unpaid contract price   ($175,500.00)
Completion and rectification costs (cl.44.1)  $253,051.60
Negative Amount (i.e. payable by builder) (cl.44.1)  $77,551.60
Expert’s costs (cl. 15(b), cl. 26)  $33,777.38
Total  $111,328.98

  1. For these reasons, I would propose to grant leave to appeal and allow the appeal. However, the parties put other submissions that I must consider and to which I now turn.

Grounds 1 to 3 - Did the Tribunal err in the proper construction and application of clauses 28 and 29 of the TOS?

  1. Clauses 28 and 29 of the TOS provide:

28       If, at any time prior to the date for completion, the builder believes that it is neither reasonable nor necessary to carry out any item of the works or part thereof,1 [footnote reproduced below] the builder may notify the expert in writing. If, after receiving such a notice from the builder, the expert considers that it is neither reasonable nor necessary to carry out the said item of the works (or part thereof), the expert shall notify the owner and the builder in writing of his decision and that item of the works (or part thereof) is therefore deemed to have been completed under these terms of settlement.

1 eg because an engineer has provided a certificate under section 238 of the Building Act 1993 or the relevant building surveyor has accepted that the work is an Alternative Solution under the Building Code of Australia. In particular the builder submits that any items of the works relating to the staircases, wall cladding and rendering systems, brickwork, installation, steel and subfloor structure are items which may be suited to this type of certification.

29       To avoid doubt, as part of his consideration of the matter under paragraph 28, the expert will consider an engineer’s, manufacturer’s or building surveyor’s certification that any item of the works (or part thereof) are neither reasonable nor necessary.

The reasoning of VCAT

  1. VCAT stated -

90.  …. There is simply no evidence that the expert did not perform his task in accordance with the contract - the TOS as incorporated into his retainer by his letter dated 7 March.

91.  The builder contends the expert did not perform his task in accordance with the contract because he failed to have regard to the certifications provided by the builder. I understand these to mean the certificates forwarded to the expert by the builder on 11 June.

92.  However, this is to ignore the process set out in paragraph 28 of the TOS. If the builder believes it is neither reasonable nor necessary to carry out any items of the works or part of the works then:

(i) the builder may notify the expert in writing,

(ii) if, after receiving notice from the builder, the expert agrees, the expert is to notify the owner and the builder in writing of his decision, and such item would be deemed completed.

Paragraph 29 requires that in determining whether works are neither necessary nor reasonable, the expert will consider an engineer’s, manufacturer’s or building surveyor’s certifications.

93.  There is no evidence before me of the builder having notified the expert in writing that it believed any of the works were neither reasonable nor necessary. The submission on behalf of the builder that it would not have entered into the TOS if the alternative certification was to be the subject of the expert’s acceptance is to ignore the very clear process set out in paragraph 28, which anticipates the expert making a decision having considered the notice from the builder, including any of the certifications as set out in paragraph 29. Paragraph 29 requires the expert to consider a certification from an engineer, manufacturer or building surveyor as part of his consideration under paragraph 28 as to whether an item of the works are neither necessary nor reasonable. It does not require the expert to accept such certifications as conclusive evidence that such works are neither necessary nor reasonable.

94.  A consideration of the correspondence from the expert set out above, and noting that notwithstanding the clear process set out in paragraph 28, reveals the expert invited the builder to provide him with such certification. Despite those requests, as noted in the Assessments of the Builder’s Second Claim, and in the Final Report, the builder has failed to provide any certification from the manufacturer in relation to the foam cladding.

95.  Further, in preparing his Final Report the expert sought reports from an expert building surveyor and an expert engineer, and relied on their certifications to determine that certain works were not necessary nor reasonable. If any party is prejudiced by this it is the owner, not the builder.

The builder’s contentions on appeal

  1. The builder contended that he gave written notice to Mr Anderson by a letter dated 28 May 2013 that it believed that it was not necessary to carry out certain items of the works. Clause 28 requires the expert in that circumstance to consider the notice and determine whether he accepted that the item(s) of work ought to be ‘deemed to have been completed’ under the terms of settlement. He was required to notify the parties of his determination.

  1. The builder’s 28 May 2013 letter to Mr Anderson, headed “Assessment of first claim”, “Re Builder’s Response”, is set out above, at [8]. The builder submits that the letter is clearly a notice to the Expert under cl 28 of the TOS.

  1. The builder submitted that Mr Anderson made no relevant decision on the matters raised by the letter of 28 May 2013. The builder contended that there was no evidence that Mr Anderson replied to the letter of 28 May 2013 or that he applied his mind to the relevant requirements of cls. 28 and 29 which required him to ‘consider’ first whether it was ‘neither reasonable nor necessary’ for further work to be carried out, alternatively whether it was appropriate to deem the works referred to in each item to be completed. 

  1. The builder also contended that Mr Anderson failed to comply with the obligation to notify the parties of his ‘decision’ under cl. 28. That must logically follow if he did not make a relevant decision. Mr Anderson acknowledged receipt of the letter of 28 May 2013 in his First Notification of 3 June 2013. The builder contends that in the First Notification there was evidence before the tribunal that Mr Anderson was not directing his mind to the relevant issue as identified in cl. 28. Mr Anderson ignored the objective function of cls 28 and 29, which was to provide a mechanism for the builder to have work already performed deemed satisfactory, where appropriate. If Mr Anderson had decided, despite the builder’s belief to the contrary, that an item of work should be carried out, then he needed to notify the builder in writing so that the builder could take steps to do the work.

84.I reject this.

85.Under paragraph 35 of the TOS, the parties specifically agreed that the assessment by the expert of the costs to complete and/or rectify the works in the event of termination pursuant to paragraph 25, would be final and binding as if it was a determination by a special referee appointed under s95(1) of the VCAT Act. In my view, it matters not that formal orders were not made for Mr Anderson to be appointed as a special referee under s95 – the parties agreed that his appointment was to proceed as if he had been appointed under s95.

…

107.The expert has assessed the completion and rectification costs as he was required to do, and the variations which he was not required to assess, and in respect of which the builder has released the owner in the TOS. As the expert’s assessments for the completion and rectification works are clearly identifiable I am satisfied that judgement can and should be entered for the assessed amounts for those works.

The builder’s contentions

  1. The builder submitted that VCAT erred in determining that Mr Anderson’s function did not include the assessment of variations that were excluded or released by the TOS. The release in cl. 38 reads:

The builder hereby releases and forever discharges the owner from all claims, suits and costs whatsoever related to the VCAT proceeding and the builder’s claims made in that proceeding.

The builder contends that clause must be read down to accommodate the working provisions of the TOS, which relevantly include the functions and obligations of the expert. The variations are nowhere specifically excluded or released. Accordingly, variations were to be assessed as part of the ‘assessed amount’. 

  1. The builder submitted that Mr Anderson was correct when realising his first assessment report failed to bring variations into account. The builder submitted that the amended Second Report was the final corrected report on which VCAT ought to have acted. The issue of whether variations under the building contract, which had been agreed to by the parties, were ‘caught’ as part of the TOS was squarely in issue before the Tribunal.

  1. The proper determination, the builder submitted, was that $22,444.40 was payable by the owner to the builder. That sum was calculated by subtracting the value for variations of $275,496 (which is to the builder’s credit) but ignoring the value of the first progress claim ($49,500) from the sum of the cost of rectification and the cost of completion (i.e. $174,514.60 + $78,537.00). If the Expert’s determinations were allowed to stand, the builder submitted that this was the order that should have been made by VCAT (together with an appropriate order for costs in favour of the builder).

  1. The evidence of the builder - that it incurred direct cost of approximately $83,000 on external contractors and materials in connection with the works under the TOS - was inferentially supported by the magnitude of the variations assessed by Mr Anderson. The builder submitted that it would suffer a substantial injustice if the assessed variations were not brought into account.[24]

    [24]Any force in this submission evaporated when I concluded that VCAT ought to have brought the unpaid contract price to account when making orders for the final payment.

The owner’s contentions

  1. The owner contended that in VCAT the builder, by its counsel, conceded that the value of the variations was compromised in the TOS and the builder is bound by that concession. The following exchange took place in the context of a submission about the effect of AGL Victoria Pty Ltd v SPI Networks Pty Ltd[25] and what in this case the expert had been jointly appointed to undertake.

    [25][2006] VSCA 173.

DEPUTY PRESIDENT: However, as I understand it under the terms he’s jointly appointed in the event of the work not being completed to assess the costs of completion rectification. Do you agree with that?

BUILDER’S COUNSEL: I agree with that but I don’t agree with when that trigger was …

DEPUTY PRESIDENT: Forget about the trigger. But he wasn’t appointed to assess the value of the variations was he?

BUILDER’S COUNSEL: The value of the variations was compromised.

DEPUTY PRESIDENT:  That’s right.

BUILDER’S COUNSEL: In the context of the whole agreement, I’ll accept that.

DEPUTY PRESIDENT:  Yes.

  1. The owner contended that Mr Anderson was not required to assess the value of the variations. The only relevance of the builder’s variation claim in the VCAT proceeding was that it formed part of the ‘works’ that the builder was required to complete and identified, in part, the cost of completion that Mr Anderson was required to assess. The owner agreed that the first progress payment was irrelevant to the calculation of the assessed costs of completion.

Resolution of grounds 8 & 9

  1. The terms of the release granted to the owner by cl. 38 are not directly relevant to the question of whether Mr Anderson was required to assess the value of the variations. The release is only operative in respect of such claims, suits and costs made in the proceeding that are not preserved by the operative effect of the TOS. As I have elsewhere explained the ‘works’ that the builder agreed to complete were not limited to the building work defined by the building contract when made but extended to the work that was the subject of all variations claimed by the builder in the original proceeding. The builder released its claim to adjust the contract price due to variations, whether under clause 23 of the building contract or otherwise, but accepted the obligation to complete, or rectify, as required the variation work. What Mr Anderson was required to assess was specified by cl. 25(e) and was the reasonable cost of completing and rectifying work that formed part of the ‘works’ under the TOS, which had not been completed or rectified by the builder. That assessment did not include valuing variations to the scope of the building works from the original building contract to the date of termination.

  1. Further, the evidence before VCAT about the variations was primarily found in schedule 10 to Mr Anderson’s Second Report. That schedule makes clear that Mr Anderson was seeking to identify variations from the specifications, architects drawings, and engineers’ drawings that formed part of the building contract and that he had trouble in objectively determining the scope and particulars of the variations. Counsel confirmed that there was no evidence before VCAT that there were variations to the ‘works’ after the TOS were struck. The valuation exercise undertaken by Mr Anderson related to the variations claimed by the builder in the original proceeding.

  1. As submitted by the owner, the liability to pay for these variations was released by the TOS and, as I have explained above, it was in consideration of the obligations assumed by the owner, particularly payment of $250,000, that the builder agreed to complete the works. The valuation of the variations was never to be brought to account by Mr Anderson who, I suspect, misconceived his function to be to assess the final payment due on termination of the contract. He may have assumed that he had to bring the variations to the account in the builder’s favour to avoid an injustice to the builder. 

  1. The Deputy President referred to observations of Gillard J in Commonwealth of Australia v Wawbe Pty Ltd & Pinebark Park Pty Ltd,[26]  a case where the expert was a valuer.

The parties to a contract agree that the value is to be determined by an expert acting as such and using his own skill, judgement and experience. He is not a lawyer. His authority derives from the contract. The terms of the contract are to be considered by him. It would be contrary to the parties’ common intention to expect the valuer to construe the contract and apply it as a court would. The parties have entrusted the task to an expert valuer, not a lawyer. They must be taken to accept the determination “warts and all” and subject to such deficiencies as one would expect in the circumstances. The parties put in place the procedure, they must accept the results unless it was contrary to their common intention.

And his Honour later added:[27]

The trend of the authorities establish that the mistake must be of a kind which demonstrates that the valuer did not perform his task as required by the contract making allowance for the fact that the valuer in construing the agreement, where necessary, is a valuer not a lawyer.

[26][1998] VSC 82, [17].

[27]Ibid, [44].

  1. Mr Anderson was required to consider the terms of the contract and it is unsurprising that he was mistaken in the conclusions that he drew about his function. However, ultimately nothing turned on that mistake because Mr Anderson’s error, when evaluating the variations, was to do more than was required of him. He did perform the task required of him but the parties did not consent to excising from his Second Report the evaluation of the variations.  As I have stated, there was no error by VCAT in excising those parts of the amended Second Report that, objectively determined, were not part of the expert’s function.

  1. VCAT was correct to disregard the variations and there was no error in its reasoning for doing so. Grounds 8 and 9 must fail.

Conclusions

  1. Leave to appeal is granted and the appeal is allowed. Paragraph 2 of the order of VCAT made 20 December 2013 is set aside. As a matter of consequence rather than error, paragraph 3 of that order will also be set aside.

  1. In the circumstances, I would propose remitting the proceeding to VCAT for hearing and determination in accordance with my reasons and for resolution of the outstanding issue of costs. The builder’s counsel submitted that resolution of the construction point, which I have done, might obviate the need for a further hearing. The parties can determine the figures and, based on my reasons, the parties may agree on matters that would allow me to make final orders. Some consensus may be necessary for the matter to be finally resolved by this court rather than remitted and I will hear further from counsel on that issue and on the question of the costs of the appeal.

---


Actions
Download as PDF Download as Word Document
Cases Citing This Decision

0