Hughes Bros Pty Ltd v The Trustees of the Roman Catholic Church for the Archdiiocese of Sydney

[1994] HCATrans 301

.,	...
~

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S113 of 1993

B e t w e e n -

HUGHES BROS PTY LTD

Applicant

and

THE TRUSTEES OF THE ROMAN
CATHOLIC CHURCH FOR THE

ARC~DIOCESE OF SYDNEY

First Respondent

and

KEVIN J. CURTIN & PARTNERS

(ARCHITECTS) PTY LIMITED

Second Respondent

Application for special leave

to appeal

Hughes 1 22/4/94

MASON CJ DAWSON J

TOOHEY J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 22 APRIL 1994, AT 2.11 PM

Copyright in the High Court of Australia

MR P.M. BISCOE, QC: If the Court pleases, I appear with my

learned friend, MR M. DEMPSEY, for the applicant.

(instructed by Clayton Utz)

MR C.J. STEVENS, QC:  If the Court pleases, I appear with my

learned friend, MR I.G. HARRISON, on behalf of the

first respondent. (instructed by Makinson &

D'Apice)

MR B.W. WALKER, SC:  May it please Your Honours, I appear

for the second respondent. (instructed by

Colin Biggers & Paisley)

MASON CJ:  Mr Biscoe.

MR BISCOE: If the Court pleases, this application, in our

submission, raises important questions concerning a

Draconian power in a widely used standard form

building contract. The contract is NPWC3. The

power is that of a principal to take over building

works at what might, broadly speaking, be called

"the slightest hint of insolvency".	The power is
in c-lause 44.7.	Your Honours, that is to be found
in the application book at page 75.	The relevant
provision is subclause (b).	Your Honours, it says
that _if the .c..ontractor:

being a company, takes or has taken or

instituted against it any action or proceeding

whether voluntary or compulsory which has as

an object or may result in the winding up of

the company, other than a voluntary winding up

by members for the purpose of reconstruction

or amalgamation, or is placed under official

management or enters into a compromise or

other arrangement with its creditors or a

Receiver or Receiver and Manager is appointed

to carry on its business for the benefit of

its creditors or any of them;

the Principal may exercise the power conferred

on him by sub-paragraph (a) or (b) of

sub-clause 44.1 as he may elect -

Subclause 44.1 is set out at page 73.

Your Honours, that confers a power, in certain

circumstances, to take over the whole of the works

or to cancel the contract. That appears in

subclauses (a) and (b). But may I invite

Your Honours to consider the whole of those terms,

because I will be needing to refer to this "show

cause" procedure, which appears in clause 44.1

during the course of my submissions.

Your Honours would see that the heading is

"Default or Bankruptcy of Contractor" and it

provides that:

Hughes 2 22/4/94

If the contractor defaults in the performance

or observance of any covenant, condition or

stipulation in the Contract or refuses or

neglects to comply with any direction -

and so on, then:

the Principal may suspend payment under the

Contract and may call upon the Contractor, by

notice in writing, to show cause within a

period specified in the notice why the powers

hereinafter contained in this clause should

not be exercised -

and then there is a provision as to what this

notice has to say:

The notice in writing shall state that it is a

notice under the provisions of this clause and

shall specify the default, refusal or

neglect -

and then:

If the Contractor fails within the period

specified in the notice in writing to show

cause to the satisfaction of the Principal why

the powers hereinafter contained should not be

exercised -

then "without prejudice" et cetera, the Contractor

may, first of all:

take over the whole or any part of the work

remaining to be completed and for that

purpose ..... exclude from the site the

Contractor and any other person concerned in
the performance of the work under the

Contract: or

cancel the Contract -

and, Your Honours, I will be taking Your Honours to

a couple of other provisions later on, which

indicate the terrible consequences of that to a principal. Basically, those clauses are to the effect that the principal can complete the contract

himself at his own cost and require the contractor

to pay the difference. And not only that, but he

can also take over all the plant and equipment of

the contractor on the site, and use it without

compensation.

TOOHEY J: But you have a finding in your favour that that

power must be exercised reasonably.

MR BISCOE: Yes, Your Honour.

Hughes 3 22/4/94

TOOHEY J:  So clearly you seek to take that requirement

further.

MR BISCOE:  Indeed, Your Honour, yes, we do. As Your Honour

points out, a majority of the Court of Appeal held

the principal was under an implied obligation to

exercise the power in clause 44.7 reasonably.

They followed the Court's earlier decision in

the Renard Constructions case, which was concerned

with clause 44.1. They held, however, against us

that there was no breach of that implied obligation

by the principal. The trial judge and

Mr Justice Meagher who had dissented in the

Court of Appeal, on the issue of whether there was that implied obligation, did not consider breach because they both held that there was no such

implied obligation. So the issue that we are

seeking leave to appeal in respect of concerns the

breach.

MASON CJ: Whether or not the building owner acted

reasonably.

MR BISCOE: Yes, Your Honour.

MASON CJ:  It does not seen a likely issue to attract

special leave.

MR BISCOE: Could I approach that point, Your Honour, in two

ways: the first is that issue concerning breach of

this implied obligation has not come before this

Court before, and - - -

MASON CJ: That is always the weakest of grounds.

MR BISCOE: But it is only my first one, Your Honour, and it

is of great importance to the industry, because

this standard form of contract is used widely in

the industry. For example, there is evidence

before Your Honours that in New South Wales alone

in the current financial year it is estimated that

over $2 billion of public works will be carried out

using NPWC3. Could I just refer Your Honours, in

that regard, to page 95 of the appeal book,

line 21.

TOOHEY J:  Mr Biscoe, I am not clear as to the precise basis

upon which you put the application, seeing from

what you just said to the Chief Justice that it is

a question of fact .whether the Court of Appeal was

right in concluding that the principal acted

reasonably in the circumstances.	Now, is that all
that there is to it?

MR BISCOE:  No, Your Honour, and I apologize if I conveyed

that impression. I wish to develop my submission

Hughes 4 22/4/94

by then going to my next point which was that in

deciding that there was no breach the majority, in

my submission, fell into an error of law or

principle. Can I just approach that point with

this one preparatory remark: Their Honours were

true to the dictum of Mr Justice Priestley in the

Renard Constructions case that the commencement of

the winding up proceedings, and nothing more, is

not sufficient to justify the exercise of power

under clause 44.7.

So, in other words, if all you have is the

fact that somebody has filed a winding up

application, it is not reasonable just to go ahead

and to exercise its power, take over the works,

perhaps cancel the contract and so on. Might I

just briefly refer Your Honours to that one

passage.

TOOHEY J: That is, presumably, not because there is no

breach, because on the face of it there is a

breach, but that the power is not activated, or the

power cannot be exercised other than reasonably.

MR BISCOE: Yes, yes. It would be a breach, it is said, of

that implied obligation to exercise the power

reasonably, to do so, if there was no more in it

than the fact that a winding up application would

have been filed.

TOOHEY J: There must be a breach to start with, in a sense.

There must be a contravention of whatever the

relevant provision is, in clause 44.7 in this case.

MR BISCOE: Subject to that caveat, yes. If one likes, to

put it that way, the power had been triggered but,

subject to this, that it was subject to the

break that it can only actually be exercised if it

was reasonable to do so.

MASON CJ:  Once a triggering event occurs, then there is an

obligation to act reasonably, hence the exercise of

the powers.

MR BISCOE: Yes, that is the way - - -

TOOHEY J:  You see, your draft notice of appeal asserts that

the Court of Appeal:

erred in not finding that it was an implied

term of the contract that the principal should

give bona fide, proper and due consideration

as to whether to exercise its powers under

Clause 44.7.

Hughes 22/4/94

On one view, that saying no more than that the

court should have found that the principal acted

unreasonably.

MASON CJ:  It is a different point, is it not? I have

always thought, particularly if you look at the

context of the discussion in Renard, that the

suggestion is that not only is there an obligation

to act reasonably in the exercise of the powers,

but you have got to act bona fide as well;

"bona fide" connoting some other additional

limitation, purposive limitation on the exercise of

the power. Now, that is not the point you are

arguing to us at the moment.

MR BISCOE:  Not at this precise moment. We had, as

Your Honours might recall, sought leave to amend

our notice of appeal to add as a ground that there

was also an implied obligation to act bona fide,

et cetera, because in the Renard case,

Mr Justice Meagher had given his support, and he

was the dissentient in that case, to the view that

that was the only implied restraint on the exercise

of the power, rather than the restraint that you

had to exercise it reasonably.

Now, that application for leave was declined.

But, as Your Honour points out, that is not the

precise point I am arguing just at the moment.

MASON CJ:  No, and you would have great difficulty in

persuading us that we ought to take that on board,

when in fact you were refused leave to amend your

notice of appeal in the Court of Appeal to raise

that point.

MR BISCOE:  I acknowledge that difficulty. The point that I

am addressing, however, in the context of whether

or not Their Honours fell into error in deciding

whether there was a breach of the obligation to

exercise the power reasonably, is this: that	having identified, if you like, the springboard or	the base from which one proceeds, one acknowledges
that implied obligation which is the restriction
referred to by Mr Justice Priestley in Renard at
260A - and I will not take Your Honours to it
unless you wish me to - namely, that the mere fact
that the commencement of the winding up proceedings is not sufficient to say, "You have acted reasonably in exercising the power", having
established that as the launching pad if you like,
Their Honours, the majority, were true to that and
they looked for matters which were additional to
that when asking the question, "Was the power
exercised reasonably or not?" And they relied upon
two or three matters, which I now propose to
identify and to seek to persuade Your Honours that

Hughes 6 22/4/94

the matters that they had regard to they fell into

error.

Now, the first of those matters - and

incidentally their reasons are in the

application book at pages 39 and 54. The

President, Mr Justice Kirby's reasons are at page

39, and Mr Justice Priestley's are at page 54. Can

I first of all take Your Honours to the President's

reasons at page 39. It was said at line 6:

Having considered the evidence, I have reached

the same conclusion as Priestley JA. Most

relevant to my conclusion is the fact that

nominated subcontractors had not been paid by

the appellant -

so that is his first reason. Second:

statutory demands had been served upon it -

that is his next reason. And then he says:

winding up proceedings were on foot -

that is the point for which, it has been said, is

not sufficient by itself. Then His Honour said:

These seem to me to be precisely the kinds of

circumstances which the NPWC contract

contemplated as reasonably permitting a

principal to terminate its arrangements with a

contractor. Otherwise -

he says:

the principal's concern (which is to secure a
building completed as quickly and economically

as possible) may become caught up in the

contractor's financial difficulties -

Then he makes the interesting statement, which we

submit shows clear error, that the NPWC contract -

I am sorry, I withdraw that last sentence.	He
makes the interesting statement that:

The NPWC contract gave the principal the

right, after affording the contractor the
opportunity to show cause within a specified

period, to act as the principal acted here -

Now, if that proposition be correct, then we should

have, in His Honour's judgment, succeeded because

it is common ground that there was no "show cause"

notice given.

Hughes 7 22/4/94

•

TOOHEY J:  I know your written argument refers to this

notion of "show cause", but it seems to have

emerged in the course of argument now simply as an

aspect of acting reasonably. In other words, you

do not appear to be asserting that on the proper

construction of clause 44.7 the principal is under

an obligation to give the contractor an opportunity

to show cause before exercising any of the powers. That would be a difficult argument probably to run

because of the express provision in clause 44.1.

MR BISCOE:  Yes. We do press the view that there should

have been some opportunity, as a matter of

construction, of the obligation to exercise the

44.7 power reasonably, some obligation given to the contractor to address the matters of concern. That

is a different point from giving a "show cause"

notice, that is referred to in 44.1. But we, faced

with this view of the President's that it was

necessary to give that notice, naturally embrace

it. And His Honour, to have reached that

conclusion, must have thought, it seems, that as a

matter of construction of clause 44.7 the "show

cause" procedure was incorporated.

.	TOOHEY J: Was that argument put to the Court of Appeal?
MR BISCOE:  No.
MASON CJ:  By the way, was the petition to wind up filed?

MR BISCOE: Yes, Your Honour, two days before they took over

the works, Your Honour, and without any notice to

us they took over the works.

MASON CJ:  I must say the fact that a petition to wind up

was filed strikes me as an extraordinarily

significant occurrence. Because if a winding up

subsequently ensues, then it affects transactions

that take place after the lodgement of the

petition.

MR BISCOE: Yes. All we say though, Your Honour, is, in the

context of, "Was it reasonable to exercise the

power" - purely by reason of that fact alone, we

say "No." Now, to take an example, which actually

applies in this case, as I hope to persuade

Your Honours, in this very case the party that

brought that winding up application was doing so on

the basis of an alleged amount owing to it from a

delay claim and, yet, under the subcontract, by

which it was bound, it could not recover delay or

prolongation costs except to the extent to which we

recovered them, that is the contractor recovered

them, from the principal.

Hughes 22/4/94

Now, if you ask the question, answering

Your Honour the Chief Justice's point, "Is it not

an extraordinary significant event?" Yes, we

acknowledge it is a significant event. But all

they had to do in this case, we suggest, was to say
to the contractor, "What about this winding up

application? Can you say anything at all in your

favour about it?" Answer, "Yes, here is the

subcontract. They cannot recover."

Now, Your Honours, what did the court rely

upon, in support of their conclusion, is set out in the passage that I have just referred you to in the

President's judgment. In Mr Justice Priestley's

judgment, at page 54, he also referred, around

about line 15, to the "nominated subcontractors"

and to the "statutory demands", and he also

referred to a letter of 11 September which is a

letter written after the event and which is found
at page 84 of the application book, which really

just, I think he said, indicated that there was no

lack of bona fides by the Church.

Your Honours, can I take up the first point,

that is non-payment of nominated subcontractors,

and ask Your Honours, as it were, to put oneself in

the shoes of this principal on the date that it

exercised the power.

Now, the fact was this, that there was some

evidence that as at that date there had been some

non-payment of nominated subcontractors.

Your Honours, non-payment of nominated

subcontractors, under this contract, is a breach of

clause 10.4. We have not got in the application

book that clause. Might I, with Your Honours'

leave, hand up copies. We have given copies to my

friends. Could I just invite Your Honours just to

glance at clause 10.4, which provides that:

Where a payment to the Contractor

includes an amount for materials or goods

supplied and fixed, or supplied or fixed, or

work carried out by a Nominated

Sub-Contractor, the Contractor shall, within

seven days after receiving that payment, pay

to the Nominated Sub-Contractor an amount

equal to the amount included -

Now, there was some evidence before the court that

that had not been done. But, Your Honours, that

was a matter which fell under clause 44.1 of the

contract, that is, it was a breach of the contract

and it was imperative for the principal - if it

wanted to take this drastic step of taking over the
works, it was imperative for it to give a "show

cause" notice under clause 44.1 in that event.

Hughes 9 22/4/94

TOOHEY J: Yes, but if you go to 44.7, would it not be

relevant to take into account that the winding up

proceedings were initiated by nominated

subcontractors?

MR BISCOE: It was not a nominated subcontractor,

Your Honour.

TOOHEY J:	Was it not?
MR BISCOE:	No, Your Honour.
TOOHEY J:	The statements appear to run together, that - - -
MR BISCOE:	I am sorry, yes.
TOOHEY J:	- - - there were non-payments to the nominated

subcontractors.

MR BISCOE: Yes.

TOOHEY J: But the winding up proceedings were taken by

someone else?

MR BISCOE:  By a subcontractor, not a nominated

.subcontractor, and I foreshadowed that I would take

·Your Honours to a provision in a moment which would

show that that was a claim that was based upon

prolongation, and there was a provision in the

subcontract which says you could not recover.

MASON CJ:  Mr Biscoe, your time has elapsed. So you need to

conclude your submissions.

MR BISCOE:  Thank you, Your Honour. So my first point is

that this matter of a non-payment of nominated subcontractors could only be availed of by the principal by giving a "show cause" notice.

The second thing they relied upon was the fact

that statutory demands had been served on the
builders.	Now, Your Honours, we make these

submissions about that: first of all, at the date

of exercise of the power those statutory demands

had been paid, save for two which had not matured

and which were subsequently paid before the

hearing, and one which was disputed. I will hand

up to Your Honours just an extract from what was in

the Court of Appeal appeal book which -

MASON CJ:  You will bear in mind what I said to you a couple

of minutes ago that your time has expired?

MR BISCOE: Yes, may I have just a couple of more minutes,

Your Honour?

Hughes 10 22/4/94

MASON CJ: Very well, but I mean counsel must understand the

limits are to be observed.

MR BISCOE:  Yes, Your Honour.

MASON CJ: They are not there just so that the Court grants

extensions of time.

MR BISCOE:  Yes. I am grateful to Your Honour. I will hand

that up, but I suspect that that is not a

controversial matter. The other thing that we

would say about that statutory demands,

Your Honour, is that of course they are not any

evidence of insolvency and, indeed, their payment

is consistent with the evidence of insolvency.

And the final thing we say about it is that they

only came to the attention of the principal at the

hearing when all but one of the disputed demands

had been paid, and that appears from the appeal

book at page 4, line 25. So that raises the

question of principle of whether, in judging
reasonableness, you can have regard to matters

which are found out after the event.

Your Honours, essentially for those reasons,

we submit that the.Court of Appeal fell into error

and, otherwise, we rely on our written submissions.

If the Court pleases.

MASON CJ:  Yes, thank you, Mr Biscoe. The Court need. not

trouble counsel for the respondents.

The Court is of the view that the decision in

this case turns on its own particular facts and

raises no question of general principle.	The
application for special leave to appeal is therefore refused.

You do not oppose costs, Mr Biscoe?

MR BISCOE:  No, Your Honour.

MASON CJ:  The application is refused with costs.

AT 2.35 PM THE MATTER WAS ADJOURNED SINE DIE

Hughes 11 22/4/94