Forlyle Pty Ltd v Tiver & Tiver
[2007] SADC 25
•9 March 2007
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
FORLYLE PTY LTD v TIVER & TIVER
[2007] SADC 25
Judgment of His Honour Judge Tilmouth
9 March 2007
CONTRACTS - BUILDING, ENGINEERING AND RELATED CONTRACTS - THE CONTRACT - LEGALITY
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - ILLEGAL AND VOID CONTRACTS - CONTRACTS ILLEGAL BY STATUTE
Parties settled a building dispute in the course of arbitration. Agreement contained a provision providing for "mutual release and discharge of all and any actions known or unknown".
Held:
1. The Building Works Contractors Act 1995 (SA) applied to the settlement agreement.
2. That part of the agreement purporting to discharge liability for "actions unknown" is void as being contrary to s42 of the Act.
3. Although the offending part could be severed, it was more appropriate to declare the offending portion to be ineffective to exclude statutory warranties provided for in s32 of the Act.
4. The plaintiff has failed to prove damages according to the principle in Hadley v Baxendale.
Building Works Contractors Act 1995 (SA); District Court Act 1991 (SA) s32, referred to.
Bennett v Bennett [1952] 1 KB 249; Felten v Mulligan (1971) 124 CLR 367; Karney v Herbert [1985] AC 301; McPharlane v Daniell (1938) 38 SR (NSW) 337; 55 WN (NSW) 132; Castle Constructions Pty Ltd v Fekala Pty Ltd (2006) 65 NSWLR 648; Hadley v Baxendale (1854) 9 Exch 341: 156 ER 145, applied.
Hungerfords v Walker (1989) 171 CLR 125; Smith v Smith (1986) 161 CLR 217 st 252; Barns v Barns (2003) 214 CLR 169; Walker v Hungerfords (1989) 171 CLR 125, considered.
FORLYLE PTY LTD v TIVER & TIVER
[2007] SADC 25Introduction
Forlyle Pty Ltd is the developer of town houses, specializing in what it considers to be the “blue chip” suburbs of North Adelaide and St Peters, but not so far as the evidence went, the suburb of Gilberton lying between them.
The Company purchased a block of land in Stanley Street, North Adelaide, subdivided it into three allotments and then built substantial town houses on them. They sold one allotment to John and Margaret Tiver sometime before September 2002 and entered into a separate agreement to construct a townhouse for them on it.
The parties subsequently fell into dispute, on the one side over payments said to be owing under the contract to build the home and on the other as to alleged shortcomings in workmanship. This dispute found its way to this Court and was referred to arbitration by order of a Judge. On the second day of the arbitration it settled.
The current action principally concerns the enforcement of the settlement terms. There remain subsidiary issues as to the scope of the agreement and its effect. There is also an additional claim by Forlyle for damages flowing from the failure of Mr and Mrs Tiver to pay the moneys due under the agreement, described by their counsel Mr Hoile, as falling within the principle in Hadley v Baxendale.[1]
[1] (1854) 9 Exch 341: 156 ER 145.
Initial dealings between the parties
It becomes necessary to set out the agreement in full later in these reasons. For the time being it is as well to sketch so much of the history of the matter as is necessary to give it proper context.
Forlyle, through its principal shareholder and director Gregory Packer, purchased the block in Stanley Street and sub-contracted the construction of the three houses to Parletta Constructions. Under the terms of a “Development Agreement”[2] with Mr and Mrs Tiver dated 26 September 2002 to build their property, certain progress payments fell due on the completion of specified building events. For the current purpose the most relevant was a payment of $120,000 due in about December 2003, when the house “second fix carpentry” was substantially completed. This was not paid for reasons that will become apparent.
[2] Exhibit D3.
The McKinnon Parade Property
In the meantime, Forlyle purchased a block of land in McKinnon Parade, North Adelaide on which it planned to build two town houses. Settlement was to take place by 15 February 2004. Mr Packer urgently wanted the money due from the Tivers in order to complete the purchase and development. In the face of persistent refusals to pay, Forlyle instructed solicitors and the proceedings mentioned at the beginning of these reasons were commenced. Additionally Mr Packer instructed loan brokers, Land and Mortgage Systems, to procure finance for the purpose of the McKinnon Parade development.
Over a number of years, a close business relationship was built up between Mr Packer and its principal Mrs Leanne Pryor. It is evident that Mrs Pryor was quite familiar with the business and financial affairs of Forlyle. Of necessity she had a fairly detailed knowledge of its asset backing and existing financial commitments. They formed a very “trusting”[3] business relationship. Consequently Mr Packer delegated loan negotiations to her, in this instance with little more instructions than “get me a loan”.[4]
[3] T89 L30.
[4] T141 L 18-19.
A number of financial institutions were approached and substantial applications were made to Bank SA and the Adelaide Bank, amongst others. A loan of over $2.26m was finally procured from La Trobe Financial Services[5] in approximately late February 2006. In the result that loan was at a higher interest rate than those offered by the other banks. On the plaintiff’s case the earlier loans failed because it could not demonstrate an equity of at least twenty per cent in the McKinnon Parade property.
[5] La Trobe Home Loans of Australia Pty Limited.
It was the evidence of Mr Packer that had he received at least $102,000 of the moneys owed by Mr and Mrs Tiver, it would have put him in a position to borrow enough to develop McKinnon Parade, without having to resort to the costlier facility.[6] Mrs Pryor’s evidence was essentially to the same effect. Forlyle also became committed to the payment of legal expenses incurred in pursuing the moneys owed by the Tivers,[7] not in themselves the subject of any separate claim to damages.
[6] T107 L4-L22.
[7] Exhibit P15.
Demands for money due under the Development Agreement
The disagreement between the parties over the progress payment of the sum claimed to have fallen due under the Development Agreement, was as to what constituted a “second fix”, even though a qualified valuer had apparently certified that stage was completed.[8] It is not necessary to make findings as to this, as the defendants do not base any part of their case on an improperly issued certificate or demand for money during construction. The fact remains that at this point in time Forlyle was “in great need of the money”,[9] so much so that Mr Packer was “desperately trying to find out why the money was not being paid”.[10] He left several messages for Mrs Tiver to ring him in order to try and “sort the matter out” and by sending an email seeking a meeting “sometime in the week commencing 12 January 2004 … to attend to these matters as soon as possible”.[11] A letter was then sent by Forlyle’s solicitors, Grope Hamilton Budini, on 14 January 2004 enclosing a notice of demand.[12] None of these contained any reference to the problem of obtaining finance relating to McKinnon Parade.
[8] T118 L6-12.
[9] T280 L19.
[10] T80 L34-35.
[11] Exhibit P6 dated 2 January 2004.
[12] Exhibit P8.
Mr Packer eventually arranged a meeting with Mrs Tiver at a nearby café, which almost certainly took place on 16 January 2004. On that day Forlyle’s solicitors transmitted a facsimile to her recording a meeting between her and Mr Packer “today”.[13] Mr Packer explained to Mrs Tiver on this occasion:
… that I had purchased a property in McKinnon Parade, North Adelaide and that settlement date was coming up soon and I really needed that $120,000 to assist with the purchase of that property at McKinnon Parade
To that Mrs Tiver retorted:
I’m not giving you any more money. The house is not where I want it to be and you’re just using my money to finance your operation.[14]
[13] Exhibit P9.
[14] T85 L20-27.
He readily conceded under cross-examination that he “did not say anything expressly about the fact that [he was] going to be developing the block, merely that [he] had bought it and needed money for the settlement” and “I just told her I had bought the land”.[15] Neither Mr nor Mrs Tiver gave evidence in these proceedings. It is clear, given the content of the cross-examination that a conversation in substantially the quoted terms is not in dispute. Mr Packer did not claim to have any discussion of relevance with Mr Tiver.
[15] T122 L38 T123 L3.
Court Proceedings
As mentioned, the money not being paid, proceedings were issued by Forlyle on 1 July 2004. The court record is exhibited before this court in the present proceedings.[16] Several file documents were notionally tendered by the plaintiff and referred to during the course of the final addresses. The Particulars of Claim as framed at that time, sue for the balance of the contract price of $150,456.73 and seek to enforce a worker’s lien.
[16] Exhibit P11.
There were a number of interlocutory steps over the course of time, including an application for a stay on 14 July 2004 and an application by the plaintiff Forlyle of 16 July 2004 to restrain the Tivers from taking possession. These came before a Judge of this court on 20 July 2004. On 30 July 2004 the order referring the proceedings to an arbitrator was made and amongst a number of other orders, the sum of $60,456.73 was directed to be paid into the Suitor’s Fund by the Tivers “to abide the event of an arbitration between the parties”. They did not file a defence.
The arbitration proceeded on 4 and 5 April 2005, leading to the agreement on the second of those days to settle the matter. The documents before the arbitrator[17] reveal the issues between the parties as they then stood, related to representations asserted by the Tivers as to the quality of finishing to the house, for which they were prepared to pay “an extra $50,000”. There were also contentions relating to alleged defective work to a brick rendered fence at the front of the property and delay in achieving “practical completion” by the date specified in the Development Agreement, namely 19 December 2003. That did not occur on one view of the pleadings until 11 June 2004. These contentions were denied by Forlyle. Neither the court nor the arbitration documents referred to any claim by Forlyle related to the additional cost of procuring the finance for McKinnon Parade.
[17] Exhibit P2
When it came to settlement, it is apparent that two offers were discussed. One was “an all up settlement resolving all issues between the parties in relation to the building works at North Adelaide”.[18] This option was understood to include “the defects that had been claimed … in the arbitration to the point that Forlyle would not be liable for any further action”.[19] The barrister for Forlyle in the arbitration, Mr C McCarthy, recorded the settlement in his handwriting. It was his evidence that “the parties were seeking to resolve all outstanding issues”[20] including some alleged defects not agitated before the arbitrator. His evidence then continued:[21]
Q.And you were concerned to ensure that those matters were fully resolved if there was going to be resolution.
A. I was wanting to make sure that both parties either knew that the settlement would include the probability of further litigation or, alternatively, they settled with a view to settling all disputes and that is how the settlement negotiations took place; there was two different methods of consideration – two approaches, if you like – one was my client considering the possibility of future litigation, the other one was no further litigation and the Tivers elected, towards the end of the negotiations, to go down the path of full and final settlement.
QIndeed, that’s what the final agreement sought to record, a full and final settlement of all claims, known and unknown.
ACorrect.
… [Forlyle] was giving [Mr and Mrs Tiver] a $20,000 reduction as a way of getting out of this mess and having no further litigation.
[18] T123 L35-37.
[19] T123 L32.
[20] T32 L17-18.
[21] T37 L8-24 and T41 L18-21, respectively.
As a consequence the following agreement was executed by the parties pursuant to this mutual understanding, being annexure B (Exhibit P1) to the amended Statement of Claim:-
Annexure “B”
TRANSLATION BY C.D. McCARTHY OF THE WRITTEN TERMS OF SETTLEMENT.
1. Suitor’s fund money to be paid to Forlyle’s Solicitor’s Trust Account forthwith and Tivers to do all things necessary to effect that payment.
2. The sum of $42,500.00 to be paid by the Tivers to Forlyle’s Solicitor’s Trust Acc or as directed on or before 4.00 pm 5th June 2005.
3. Forlyle to provide to Tivers the landscape lights purchased by Forlyle as soon as reasonably practicable and no later than 5th May 2005.
4. Costs of the arbitration to be borne jointly by each party.
5. Costs of the District Court proceedings shall sic [be] borne by the parties i.e. 1 and 2 above is a settlement inclusive of interest and costs.
6. Deed in usual terms to provide in particular:
· Confidentiality.
· Mutual discontinuance of District Court and Arbitration proceedings upon satisfaction of 1, 2 and 3 above.
· Mutual release and discharge of all and any actions known or unknown by Tivers to Forlyle and Forlyle to Tivers.
7. All proceedings adjourned pending settlement.
(signed) C.D.McCarthy (signed)
Counsel for Forlyle Counsel for Tivers
(signed) G Packer as director of Forlyle (signed) Defendants.
Since the moneys due to be paid pursuant to this agreement were not made, Forlyle proceeded to enforcement by way of an Amended Statement of Claim filed on 19 May 2005. Its application for summary judgment was refused on 16 December 2005. A further Amended Statement of Claim was filed on 16 February 2006. There were interlocutory proceedings relating to discovery and furnishing of expert reports.
The current proceedings
These proceedings to enforce the arbitration agreement eventually went to trial on the further Amended Statement of Claim of February 2007, in addition to an amendment - detailed below - made on the first day of trial on 19 February 2007, by leave. In essence Forlyle claims the $42,500 referred to in paragraph 2 of the settlement agreement, the sums presently remaining in the Suitor’s fund pursuant to paragraph 1, as well as a claim for damages for the extra loan costs by way of interest on the monies raised to complete the McKinnon Parade development. This head of damage has crystallised through the expert reports into a claim of between $44,555.33 and $72,320.67, being the additional interest costs borne by the plaintiff on the loan with La Trobe Financial Services, as compared with the expected costs of the loan with Bank SA, had it proceeded.
The amendment referred to above, read as follows:-
17.4.2… the second defendant was aware in late 2003 or early 2004 that the plaintiff needed funds to assist with the purchase of a property at McKinnon Parade which the plaintiff proposed to develop. In conversation on or about 16 January 2004 between Mr Packer for and on behalf of the plaintiff and the second defendant Mrs Tiver, Mr Packer said words to the effect “he needed the payment then due under the Development Agreement of about $120,000.00 in order to assist with the purchase of a property at McKinnon Parade which the plaintiff proposed to develop”. The second defendant said words to the effect “why should I pay you money just so you can buy another property, you are just using our money to support your business”.
This plea, together with the evidence of Mr Packer on point quoted above, founds the plaintiff’s claim for the Hadley v Baxendale head of damages.
For its part the defendants base their defence around the premise that the Development Agreement of 26 September 2002[22] is a “Domestic Building Works Contract” within the meaning of the Building Works Contractors Act 1995 (SA) (“the Act”). They further plead the statutory warranties imposed by s32 of the Act “cannot be excluded by contract” and this is precisely what the arbitration agreement purports to do when it provides in clause 6 for the “mutual release and discharge of all and any actions known and unknown”. They contend the entire arbitration agreement is “vitiated”, is therefore “void and unlawful” and should not be enforced by the court for reasons of “illegality”. In response the plaintiff contends the Development Agreement does not come within the terms of the Act. It pleads the entry into a domestic building works contract within the meaning of the Act as a licensed builder with Parletta Constructions Pty Ltd, whom it sub-contracted to build the house. According to the plaintiff such rights the defendant had under the Act were validly compromised by virtue of the arbitration agreement.
[22] Exhibit D3.
Application of the Act
The first issue calling for determination then, is whether the Development Agreement comes within the ambit of the Act. The parties are Forlyle Pty Ltd on the one hand and Margaret Tiver and John Tiver or nominee on the other. It is elaborate in its terms and provides for the construction of a house and works “in a proper and workmanlike manner, substantially in accordance with plans”, on various terms and conditions. Progress payments fell due in accordance with a schedule in an appendix. Fifteen percent of the contract sum of $1.1m became payable when “the house second fix carpentry is substantially completed”.
Section 32 of the Act guarantees certain statutory warranties “on the part of the building works contractor in every domestic building work contract”. A “building work contractor” is defined by s3 as meaning “a person who carries on the business of performing building work for others”. “Building work” is defined to include “the whole or part of work of constructing, erecting, underpinning, altering, repairing, improving, adding to or demolishing a building”.
There is no issue between the parties as to this being other than building work. Even so, it is the contention of the plaintiff that Forlyle is not a building work contractor. Mr Packer gave evidence that he was a developer and that he subcontracted the work to Parletta in late 2002. As such in the literal sense he did not perform building in relation to the Stanley Street development.
Two substantial hurdles lie in path of the plaintiff in this respect. The first is that s32 applies three absolute warranties in (ss(a)-(c)) and three conditional warranties (ss(d)-(f)) with respect to the performance of the building work. Section 3 defines “performed” to include causing, organising or arranging building work to be performed. This is precisely what Forlyle did. Secondly, the definition of a “domestic building work contract” specifically excludes “a sub-contractor for the performance of domestic building work” as coming within its terms. That would be Parletta Constructions in this instance. Moreover the statutory warranties are transmitted to a subsequent purchaser (ss32(4) and (5)). It is evident Parliament intended the obligations of builders and the rights of building owners were not to be lost in strict notions of privity. Indeed one important effect of the Act is to erode the contractual notion of privity by deeming a person who merely causes or organises building work to be done, to be a building work contractor, by insulating the subcontractor from the reach of statutory warranties at the suit of the building owner and by extending or assigning the benefit of those warranties to subsequent purchasers.
These considerations strongly combine to suggest that the ambit of the Act is designed to ensure that both builders and those developers who do not themselves undertake building work, but prefer to sub-contract, cannot structure their operations in such a way to avoid its provisions, so that the significant statutory protections apply to both situations. This construction is consistent with second reading speech which refers to “the aim of improving standards of practice within the industry”.[23]
[23] South Australia, Parliamentary Debates, House of Assembly, 21 November 1995, pg 624 (The Hon. S.J. BAKER, Deputy Premier)
In light of these provisions there can be no doubt that the Development Agreement in this matter was a domestic building work contract within the meaning of the Act and that Forlyle was a “building work contractor” according to the definitions therein contained. As such the statutory warranties provided by s32 apply as between the parties to this litigation; they form part of the contract: Giles v GRS Construction Pty Ltd.[24]
[24] (2001) 215 LSJS 121; [2001] SASC 274 at [37] per Lander J.
Exclusion of statutory warranties?
The next question agitated by the parties was whether or not the arbitration settlement excluded or purported to exclude the statutory warranties and if so, whether that was lawfully done. Of course, it does not do so in terms. Nonetheless the expression “all and any actions known or unknown” has the dual effect of compromising both kinds of actions to which s32 might otherwise apply.
There is no difficulty with the compromising of known actions as the law has long recognised the ability of parties to settle a genuine dispute by compromise agreement binding them not to litigate the dispute any further: Lieberman v Morris.[25] Therefore no problem arises from the words “actions known”. It is perhaps curious that the expression “actions” was chosen, rather than “defects” for example. Nevertheless on its face the third point in Clause 6 of the agreement does appear to prevent future actions being brought, whether related to defects then known or not, by the words “actions unknown”.
[25] (1944) 69 CLR 69 at 80.
It is a well-known principle of law that terms of a contract, contrary to public policy, purporting to oust the jurisdiction of the courts, or preventing parties from enforcing statutory rights, may be declared invalid.[26]
[26] Davies v Davies (1919) 26 CLR 348 at 356, 362, 365, Lieberman v Morris (1944) 69 CLR 69 at 91-92, Smith v Smith (1986) 161 CLR 217 at 249, Brooks v Burns Phillip Trustee Co Ltd (1969) 121 CLR 432 and Barns v Barns (2003) 214 CLR 169.
In this case there is no need to resort to questions of public policy because s42 of the Act is explicit in terms, as it is “an important piece in the armory of the legislation”: Leunig v Henley Arch Pty Ltd.[27] It provides:-
42 No exclusion etc of rights, conditions or warranties
Any purported exclusion, limitation, modification or waiver of a right conferred, or contractual condition or warranty implied, by this Act is void.
[27] (2000) 207 LSJS 394; [2003] SASC 81 at [26], per Martin J.
Two observations may be made at once about this provision. The first is that the “contracting out” which it seeks to prohibit, is not limited to building work contracts as such. It applies broadly to any “purported exclusion” of any kind and by any means. Secondly it is caste in extremely wide language. From these observations it may be inferred that Parliament intended the rendering void of any such term to apply to contracts at large and to any form or expression which may happen to be employed.
Accordingly it matters not that the arbitration settlement agreement may not fall within the statutory definition of a “building work contract”. Putting aside for a moment the precise ambit of its terms, it can be said that the expression “mutual Release and Discharge of all and any actions … unknown …” with respect to what might presently be called “latent defects”, would otherwise remain available to Forlyle as a complete defence to any such action. In that respect then, the purported comprise of unknown actions offends s42 of the Act and is rendered void.
Is the arbitration agreement wholly or partly invalid?
The next and rather more difficult question is what is the effect of such a conclusion? As mentioned the defendants contend the whole agreement must necessarily fail, whereas the plaintiff says that it represents no more than a valid compromise of all actions by competent contracting parties, which it is the policy of the law of contract to uphold. Alternatively, if contrary to these submissions, the plaintiff contends the offending parts are severable; in order to cure the problem, no more is needed than to sever the words “or unknown”.
The position cannot be as contended by Mr Riggall for the defendants. An agreement containing a prohibited term is not, for that reason alone, bad Nelson v Nelson,[28] Fitzgerald v F J Leonhardt Pty Ltd.[29] The situation is that described by Denning LJ in Bennett v Bennett :[30]
The question then arises: What is the effect of this on the deed as a whole?, and, in particular: What is the effect on the husband’s covenant to pay the annuity?
In solving this problem, a useful analogy may be drawn from the covenants in unreasonable restraint of trade. Such covenants offend public policy just as the covenants of a wife may do. They are not “illegal”, in the sense that a contract to do a prohibited or immoral act is illegal. They are not “unenforceable”, in the sense that a contract within the Statute of Frauds is unenforceable for want of writing. These covenants lie somewhere in between. They are invalid and unenforceable. The law does not punish them. It simply takes no notice of them. They are void, not illegal. That is how they were described by the full Court of Exchequer Chamber in Price v Green (9) 16 M. & W. 353), and by the Court of Appeal in Joseph Evans & Co. v. Heathcote (10) ([1918] 1 K.B. 426, 431, 436). The presence of a void covenant of this kind does not render the deed totally ineffective. That has been well shown by PROFESSOR CHESHIRE and MR. FIFOOT in their book on THE LAW OF CONTRACT, 2nd ed., pp. 242, 243. The party who is entitled to the benefit of the void covenant, or rather who would have been entitled to the benefit of it if it had been valid, can sue on the other covenants of the deed which are in his favour, and he can even sue on the void covenant if he can sever the good from the bad: Goldsoll v Goldman (5); even to the extent of getting full liquidated damages for a breach of the good part: Price v Green (9). So, also, the other party, that is, the party who gave the void covenant and is not bound by its restraints, can himself sue on the covenants in his favour, save only when his void covenant forms the whole, or substantially the whole, consideration for the deed: Wyatt v Kreglinger & Fernau (11) ([1933] 1 K.B. 808).
[28] (1995) 184 CLR 538, 604-605, 613
[29] (1997) 189 CLR 215, 229-230, 248-250.
[30] [1952] 1 KB 249 at 261.
The same conclusion, albeit in relation to a slightly different subject matter, was reached in Felten v Mulligan[31] per Windeyer J (footnotes omitted):
There is no doubt a common law principle expressed by the aphorism that an agreement to oust the jurisdiction of the courts--or, as it was put in the earlier cases, to oust the courts of their jurisdiction--is unlawful and void as being contrary to public policy: that, said Pollock C.B. in Horton v. Sayer, was "the rule which has been acted on for above a century". The earliest enunciations of it were, so far as I have noticed, in Kill v. Hollister; Wellington v. Mackintosh; and Thompson v. Charnock. These were all cases upon agreements to refer disputes to arbitration, a disputable topic until the law was settled in Scott v. Avery. But the grandiloquent phrases of the eighteenth century condemning ousting of the jurisdiction of courts cannot be accepted in this second half of the twentieth century as pronouncement of a universal rule. It is simply not correct to say that all agreements foregoing a right to have the adjudication of a court are void or unenforceable. Claims for redress for breach of contract or for a remedy for tortious damage can be settled out of court; and actions and suits of many kinds can be compromised by agreement, after they have been commenced, provided that each of the parties is sui juris. As Latham C.J. said in Lieberman v. Morris:
"It certainly cannot be said generally that covenants not to take particular legal proceedings are necessarily void--the case of the ordinary covenant not to sue provides a sufficient answer to any such suggestion."
[31] (1971) 124 CLR 367 at 385-386
The application of these principles dictates the conclusion that the arbitration agreement itself is not contrary to public policy, despite the presence of a partially void covenant. The question then arises whether it can survive with that covenant. In that connection it was submitted for the plaintiff that the benefit conferred by s32, as protected by s42, is a personal or private one and could therefore be waived by the party to whom its protection was directed: Great Eastern Railway Co v Goldsmid,[32] Wilson v McIntosh,[33] Toronto City Corporation v Russell,[34] Equitable Life Assurance Society of the United States v Reed[35] and Davies v Davies,[36] Martin v Australian Guarantee Corp Ltd. [37]
[32] (1884) 9 App. Cas 927.
[33] [1894] AC 129.
[34] [1908] AC 493.
[35] [1914] AC 587.
[36] (1919) 26 CLR 342.
[37] (1988) 50 SASR 222 at 232-233.
Whilst no doubt the Act confers benefits on individuals in private capacities, as has been seen it also imposes industry wide standards to the building profession as a whole importing obligatory conditions into building work contracts, enforceable by building owners against all building work contractors. In that respect the legislation is clearly for the benefit and protection of the wider public. Whether s32 is properly so characterised, Parliament has made it clear in s42 that it is not competent for parties to contract out or to waive their rights. The Act is designed to protect the interests of the building owners concerned: David Securities Pty Ltd v Commonwealth Bank of Australia (Swiss Franc Case).[38] Although it was an entirely valid exercise to compromise the known or existing defects or actions, it was not so with respect to those which were not. There is no parallel between this case and Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd.[39]
[38] (1992) 175 CLR 353 at 367 and 388.
[39] (1978) 139 CLR 410.
Severance?
Nevertheless it remains to be seen if the contract may be validly severed. The test of severance is that propounded by the Privy Council in Karney v Herbert:[40]
First, as a matter of construction the lawful part of the contract can be severed from the unlawful part, thus enabling the plaintiff to sue on a promise unaffected by any illegality,
Secondly, whether, despite severability there is a bar to enforceability arising out of the nature of the illegality.
[40] [1985] AC 301 at 311.
This principle was expressed by Jordan CJ in McFarlane v Daniell[41] in these terms:
When valid promises supported by legal considerations are associated with, but separate informed from, invalid promises, the test of whether they are severable is whether they are in substance so connected with the others as to form an indivisible hole which cannot be taken to pieces without altering its nature … . If the elimination of the invalid promises changes the extent only but not the kind of the contract, the valid promises are severable … . If the substantial promises are all illegal or void, merely ancillary promises would be inseverable.
[41] (1938) 38 SR (NSW) 337; 55 WN (NSW) 132, at 132 and 345 respectively.
It could be put another way, as did Lord Denning in Bennett v Bennett[42]:
If the void covenant goes only to part of the consideration, so that it can be ignored and yet leave the rest of the deed a reasonable arrangement between the parties, then the deed stands and can be enforced in every respect save in regard to the void covenant.
[42] Above at 367.
The arbitration agreement is clearly divided into separate subject matter, clause by clause. The offending covenant is one relating to a discrete and readily identifiable subject, capable of being determined by the parties with some precision. As such, by severing, if that is to be done, the offending portion “or unknown”, there is no resultant difficulty with the parties understanding, carrying out or enforcing the remaining valid terms. Severance of this limited kind does not affect the integrity of any of them or the agreement as a whole.
As a consequence, it may or may not be that Mr and Mrs Tiver become entitled to apply for restitution of the benefits transferred under the agreement; that is to say to “disgorge” them: re London County Commercial Re-Insurance Office Ltd.[43] But that is another matter, not possible of resolution in the current proceedings. Firstly because such consequences have not been pleaded by them and secondly because no evidence was directed to the value of the benefit forgone by them in reaching the compromise agreement. As noted, the money otherwise due to Forlyle was reduced by $20,000 on account of the promises to end litigation, but that sum was not allocated as between known and unknown actions.
[43] [1922] 2 Ch 67.
Damages for failure to honour agreement
A lengthy argument was advanced relating to the plaintiff’s entitlement to damages under the Hadley v Baxendale principle. There are countless authorities applying the principle in Australia, not the least of which are the decisions of the High Court in Burns v M.A.N. Automotive (Aust) Pty Ltd[44], Hungerfords v Walker,[45] Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd[46] and Kenny and Good Pty Ltd v MGICA (1992) Ltd,[47] not to mention the decision of the Full Court in Pooraka Holdings Pty Ltd v Participation Nominees Pty Ltd& McAuley[48] and of Murray CJ in Pascoe and Co Ltd v Holdens Motor Body Builders Ltd.[49]. In Hadley v Baxendale Alderson B laid down the now entrenched principle[50]:
Now we think the proper rule in such a case as the present is this:-
Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e, according to the usual course of things from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of the parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants and thus known to both parties, the damages resulting from the breach of such a contract which they would reasonably contemplate, would be the amount of injury which would ordinarily flow from a breach of contract under the special circumstances so known and communicated. But, on the other hand, if the special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them.
[44] (1986) 161 CLR 653.
[45] (1989) 171 CLR 125.
[46] (1998) 192 CLR 603.
[47] (1999) 199 CLR 413.
[48] (1991) 58 SASR 184.
[49] [1931] SASR 180.
[50] At Ex at 354 – 355, ER 151.
In Hungerfords v Walker[51] Mason CJ and Wilson J express the second limb of Alderson B’s judgment ‘on the footing that it is a foreseeable loss, necessarily within the contemplation of the parties, which is directly related to the defendant's breach of contract or tort’.
[51] Above at CLR 149
It is contended by the plaintiff that the discussion between Mr Packer and Mrs Tiver in January 2004 provided the foundation for the special knowledge necessary to bring the situation within this principle. The argument suffers initially from the fact that the knowledge could not be proved against Mr Tiver. That part of the action as against him, must fail simply for that reason.
It suffers anyway from the fact that the relevant knowledge was gained in early in 2004, whereas the settlement agreement was formed in April 2005. It is not reasonable to impute continuing knowledge in the mind of Mrs Tiver at that time, of the details relating to McKinnon Parade – as scant as they were. There is simply no evidence that the question of the McKinnon Parade finances was one of the special circumstances known to them in that later context or which the parties provided for in reaching the agreement. That subject had nothing to do with the settlement contract. The loss, if any, flowed from the failure to make the payment due at the time of the second fix. On the evidence, it is not a factor that could have reasonably affected the settlement negotiations and therefore the contractual terms almost eighteen months later.
Still further, the consequences of the purchase of McKinnon Parade were not readily apparent to the defendants, as they had no idea for what purpose the acquisition was being made or what was intended for the property: Castle Constructions Pty Ltd v Fekala Pty Ltd,[52] Diamond v Campbell-Jones[53]; compare Cottrill v Steyning & Littlehampton Building Society.[54] As a matter of fact the evidence was that two town houses were built there, one sold and the other occupied by Mr Packer as his private residence.
[52] (2006) 65 NSWLR 648 at [34-38].
[53] [1961] Ch 22
[54] [1966] 2 All ER 295; [1966] 1 WLR 753
Accordingly the plaintiff has failed to prove circumstances bringing it within either limb of the Hadley v Baxendale principle, as it has not been shown to have been in the contemplation of the parties at the time they made the contract.
Causation
The defendant argues the failure to secure finance owes to other considerations rather than to the failure of Mr and Mrs Tiver to pay the money due. The evidence was that a loan application was submitted to the Bank of SA[55] around 9 August 2005 for a facility of $2.26m. As the plaintiff understood it, this failed because it could not bring the “hard costs” associated with McKinnon Parade within at least twenty per cent of equity. It was refused according to lending policy on that account.
[55] Exhibit D18
On the evidence of Mrs Pryor, the shortfall was in the vicinity of $80,000. It was put to her that the loan stumbled for a number of other reasons to do with the non-provision of financial information sought by the bank itself.[56] It is impossible to accept that this is the case. Mrs Pryor impressed as a person both canny and professional in her line of business and as a “can do” person. There can be no doubt that if the bank was in need of further information, it would have been provided immediately.
[56] For example see the items in Exhibit D20
That application having fallen through, another was made to the Adelaide Bank on 25 November 2005.[57] That also foundered, according to her evidence, on account of the “loan to cost ratio” being greater than eighty per cent.
[57] Exhibit P12.
When the La Trobe loan was advanced in the principal sum of $2.26m at an interest rate of 9.5 per cent – as compared to 6.62 per cent with Bank SA – a further secondary loan was required, in effect to create a sinking fund or “off-set” account of $160,000 at a relatively high interest rate of eighteen per cent. It is the interest rate differentials which produce the sums referred to above, being the higher interest paid during the course of the loan from March 2006 to 2 November 2006, when it was said on the plaintiff’s initial case to have been discharged.
The defendants argued the loan would have failed with Bank SA in any event because it required interest of $160,000, in practical terms up front. It was also contended that the loan was made necessary, not by the defendants failing to pay the sum due under the contract but by reason of other investments, principally in Toowoomba, Queensland.
It must be said that the evidence presented by the plaintiffs in proof of this head of damage was unsatisfactory in several respects. In the first place no evidence was called from the financial institutions themselves in order to establish the precise terms of the loans they did in fact put forward, to prove what their equity requirements actually were or to establish precisely why they were not approved. Furthermore, the documentary materials were very incomplete, although it should be acknowledged that Mr Packer tried hard to obtain original documents from La Trobe. Even so, neither party issued third party subpoenas of any kind. Discovery by the plaintiff also proved deficient in several respects.
The documents that are before the court prove there were negotiations with the Adelaide Bank concerning a loan for $2.195m at interest rates between 7.18% and 7.22% over 12 months, on the basis that the “loan to cost ratio [was] no greater than 80%”.[58] Mrs Pryor gave evidence that Forlyle “couldn’t come up with the 20% in equity … at the end their policy didn’t allow it to go through because they could not show 20% in hard cost”.[59] She thought however the $102,500 owing by the Tivers “would have made the difference”.[60] This was based on her calculation that a further $80,000 was required to bring it within the loan to costs ratio.[61] Otherwise there is no evidence that a loan in those or any other terms was actually offered, or as to Forlyle’s ability to service such a loan on those or any other conditions.
[58] Exhibit P12.
[59] T212 L31 – T213 L11.
[60] T213 L17-18.
[61] Exhibit P21.
When it comes to Bank SA negotiations, the picture is much the same. The Exhibits prove an application was made on 9 August 2005 for $2.63m. The point of most concern was demonstrating “20% equity in the cost price”.[62] The subsequent correspondence shows the anticipated interest cost “over the construction and selling period is expected to be $160K (plus) details and evidence of how this will be met is required”. Just what the period in question was, is unspecified and the loan application itself is silent on the proposed term. Mrs Pryor could not herself recall the terms of the loan,[63] however she did volunteer “once I actually realised that we weren’t going anywhere with Bank SA, I approached Adelaide Bank”.[64]
[62] Exhibits D18 and D19.
[63] T241 L16-23.
[64] T218 L3-4.
Mrs Pryor gave evidence of her dealings with all three institutions and what she was told by them. This evidence was admitted on the basis of Mrs Pryor being the agent of Forlyle in connection with negotiating and securing finance. It concerns what she – and hence Forlyle – did and why: Walton v The Queen,[65] Benz v The Queen[66], Subramanian v DPP,[67] R v Hendrie.[68] In the words of the Chief Justice in the latter case:[69]
It is well established law that a person's state of mind may be proved by contemporaneous statements made by that person. Such statements are not hearsay because they are not adduced for the purpose of proving the truth of the statements. They are original circumstantial evidence tending to establish the state of mind. Their evidentiary value is derived from experience of human behaviour which indicates that people tend to express their intentions or their states of mind. For that reason what a person says is some evidence of what he is thinking. It is circumstantial evidence which may form a basis for an inference as to his intention or other state of mind.
[65] (1989) 166 CLR 283,
[66] (1989) 168 CLR 110.
[67] [1956] 1 WLR 965.
[68] (1985) 37 SASR 581.
[69] SASR 585.
In this instance it was the evidence that there was a $70,000 shortfall,[70] based on interest of $80,000. Obviously Forlyle could not have transacted or sustained a loan if the interest required was $160,000.[71] As Mrs Pryor’s evidence unfolded it became clear that she was unable to say what amount of interest was in fact specified by Bank SA and to the extent that she did so, her evidence was based on hearsay or alternatively on the course that the loan historically took rather than on the conditions actually placed on lending by Bank SA at the critical time, or both.[72] She also accepted, after being directed to Exhibit D20, that Bank SA “told [her] its interest requirement is not $80,000 but $160,000”.[73]
[70] T219 L15-20.
[71] T240 L31-35.
[72] T338 L19 – T340 L2, T343 L1-33.
[73] T240 L18-20.
When it comes to the package offered by La Trobe, the evidence proves two loans were approved, one of $2.26m at 9.5% pa over one year and the other of $160,000, also over one year at 18% pa. These were drawn down on 1 April 2006 and paid out on either 30 June 2006 or 3 October 2006. The evidence is imprecise as to which is more likely; the documentary evidence suggests the former[74] whilst the oral evidence suggests the latter.[75]
[74] Exhibits 24-27.
[75] T312 L1-21.
In order to prove the loss on the basis of the higher interest costs Mr Crase, a chartered accountant, provided calculations which, so far as the arithmetic went, were not disputed by the defendant.[76] His methodology was criticised by another chartered accountant Mr Orfanos,[77] but in light of the findings to follow, there will be no need to consider these further. On that footing the additional loan costs were $44,555.33, assuming the loan was extinguished by 30 June 2006, and $65,379.33 as of early October. Should it have become necessary to make a finding, the plaintiff could only prove the former, on the balance of probabilities.
[76] Exhibits 22 and 22B.
[77] Exhibit D28.
However a more fundamental problem is the basis on which the comparison was made. There is no obvious reason why Bank SA, as opposed to the Adelaide Bank, was chosen for this purpose. More significantly, the premise on which it was made, namely two loans in the same principal sums as were approved by La Trobe, at respective interest rates of 6.62% each, has not been established by the evidence. That being the situation, the underlying facts or assumptions on which it is based not being proved, the damages it purports to record cannot be sustained: Ramsay v Watson,[78] Trade Practices Commission v Arnott Ltd & Ors (No 5),[79] Paric v John Holland (Constructions) Pty Ltd.[80]
[78] (11961) 108 CLR 642.
[79] (1990) 21 FCR 324.
[80] (1985) 62 ALR 85; 59 ALJR 844.
It must follow that the plaintiffs claim for Hadley v Baxendale damages fails, not only because they have not been proved to be in the reasonable contemplation of the parties but also because they are too remote to the arbitration settlement. They have not been proved to have been caused by the failure to honour that agreement and the footing on which they were calculated has not been born out by the evidence.
What order should the court make?
The Court has already determined that a small portion of the settlement agreement is contrary to s42 of the Act and that it is possible to sever the offending portions.
There is another alternative and that is by way of declaratory judgment pursuant to s37 of the District Court Act 1991 (SA), which provides:
DECLARATORY JUDGMENTS
37. The court may, on matters within its jurisdiction, make binding declarations of right whether or not any consequential relieve is or could be claimed.
The defendant was opposed to this course because of its view that the whole contract failed. The plaintiff was not keen to embrace it either, in light of its position that this was a bargain permitted by the statute. The court has determined otherwise.
It is clearly a discretionary power to be exercised judicially. It may be readily accepted that the court should not make such a declaratory order in purely hypothetical circumstances, as Mr Hoile put it often: Santos Ltd v American Home Assurance Co[81] or was for that matter lacking in utility: Neeta (Epping) Pty Ltd v Phillips.[82]
[81] (1986) 4 ANZ Ins Cas 60-795.
[82] (1974) 131 CLR 286.
As discussed towards the commencement of these reasons, this action concerns the enforcement of the settlement agreement, the validity of which the defendants have attacked as being contrary to the Act on the basis of illegality and public policy. The plaintiff in its reply responded extensively to these contentions, so that they are truly live rather than hypothetical issues as between them. Furthermore, a declaration has the capacity to supply some certainty to the parties so far as these extant issues are concerned.
Such declarations are not unknown in this type of context. For instance in Smith v Smith[83] an order was made in terms that ‘(T)he release comprised in cl 7 of the deed … was not effective for the purposes of s 31(3) of the Family Provision Act 1982 (NSW), notwithstanding the approval of the deed by the Family Court’ and in Barns v Barns[84]the court declared a Deed ‘does not operate to render incompetent an application … for an order for provision out of [an] estate’ pursuant to the Inheritance (Family Provision) Act 1972 (SA).
[83] (1986) 161 CLR 217 at 252.
[84] (2003) 214 CLR 169 at 228.
On balance and in the exercise of discretion, it is preferable to grant a declaration in order to try and resolve all live issues as they presently stand between the parties to this long running dispute. This is particularly so given the intimation by the defendants that they wish to avoid the settlement and re-litigate the issues that were before the arbitrator, as well as those he refused leave to include. As to these, they made a conscious decision to settle with full knowledge of the facts.
Accordingly it is proposed to make an order declaring the settlement agreement of 4 April 2005 does not operate to exclude statutory warranties effected by s32 of the Act with respect to breaches of those warranties by Forlyle Pty Ltd that were not known by Mr and Mrs Tiver on or after 4 April 2005 with respect to the domestic building work contract dated 26 September 2002. A declaration in those or similar terms therefore leaves it open to the plaintiff in the event of any such “unknown action”, to rely upon the defences permitted by s32(7) of the Act, should they be applicable.
Orders of the Court
Accordingly there will be orders:-
1. That there be judgment for the plaintiff in the sum of $42,500.
2.That there be a direction that the sum presently held in the Suitor’s Fund pursuant to the order of 30 June 2004, together with the interest earned thereon, be paid out of that fund to the credit of the plaintiff, forthwith.
3. That the plaintiff’s claim for damages is otherwise dismissed.
4.It is proposed to declare the settlement agreement of 4 April 2005 does not operate to exclude statutory warranties effected by s32 of the Act with respect to potential breaches of those warranties by Forlyle Pty Ltd that were not known by Mr and Mrs Tiver on or after 4 April 2005 with respect to the domestic building work contract dated 26 September 2002.
5.That the parties are to be heard on the issues of time to pay, the final terms of the proposed declaration, interest and costs.
6. That the parties are at liberty to apply on short notice.
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