McKenzie v Miller - [2006] NSWCA 377

No judgment structure available for this case.

New South Wales

Court of Appeal

CITATION: McKenzie & Anor v Miller [2006] NSWCA 377

HEARING DATE(S): 30 November 2006, Friday 1 December 2006

JUDGMENT DATE:
20 December 2006

JUDGMENT OF: Handley JA at 1; Tobias JA at 2; Basten JA at 116

DECISION: (a) Appeal allowed; (b) Set aside the orders made by Judge Balla on 14 December 2005; (c) Judgment for the appellants against the respondent on liability in respect of his breaches of (i) the Agreement between the appellants and the respondent dated 27 May 2001 of clause B1.01 in respect of the provision of the services referred to in par.A3 and of clause B1.04, (ii) s.42(1) of the Fair Trading Act 1987, (iii) his duty of care both under clause B1.01 of the Agreement and at common law with respect to the provision in his letter of 21 August 2001 of his estimate of the probable construction cost of the building works the subject of the plans and specifications submitted to and approved by Orange City Council on 18 September 2001 and his failure to provide such an estimate after 18 September 2001 and the date upon which the appellants entered into the building contract with Mr Chase; (d) Remit the proceedings to the District Court for the assessment of damages only before a judge other than her Honour Judge Balla; (e) The respondent to pay the appellants’ costs of the proceedings before Judge Balla and of the appeal but to have with respect to the latter a certificate under the Suitors’ Fund Act, 1951 if otherwise qualified

CATCHWORDS: CIVIL CLAIMS – alleged breach of agreement arising from delay in the building and construction of a dwelling – costs of construction varied significantly from original estimate – whether breach of contract – whether negligence – whether breach of Fair Trading Act 1987 – weight to be given to expert evidence

LEGISLATION CITED: Fair Trading Act 1987
Suitors’ Fund Act 1951

CASES CITED: Accounting Systems 2000 (Developments) Pty Ltd v CCH (1993) 42 FCR 470
Fox v Percy (2003) 214 CLR 118
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640
I&L Securities v HTW Valuers (2002) 210 CLR 109
MGICA (1992) Ltd v Kenny & Good Pty Ltd (1996) 140 ALR 313
Minister for Immigration and Multicultural Affairs v Wang (2003) 215 CLR 518
Northern NSW FM Pty Ltd v Australian Broadcasting Tribunal (1990) 26 FCR 39
Steedman v Baulkham Hills Shire Council [No. 2] (1993) 31 NSWLR 562

PARTIES: David McKenzie
Danuta McKenzie
Mikel Miller

FILE NUMBER(S): CA 40038/06

COUNSEL: A: G Inatey SC / A Henskens
R: N A Nicholls

SOLICITORS: A: Cheney Wilson & Law, Orange
R: Turnbull Bowles Laywers Pty ltd, Sydney

LOWER COURT JURISDICTION: District Court

LOWER COURT FILE NUMBER(S): DC 2621/04

LOWER COURT JUDICIAL OFFICER: Balla DCJ

LOWER COURT DATE OF DECISION: 14 December 2005

CA 40038/06
DC 2621/04

HANDLEY JA
TOBIAS JA
BASTEN JA
Wednesday 20 December 2006

DAVID McKENZIE & ANOR v MIKEL MILLER

Judgment

1 HANDLEY JA: I agree with Tobias JA.

2 TOBIAS JA: In 2001 the appellants owned and occupied a Californian bungalow residence with a detached garage located at 22 Kite Street, Orange (the existing dwelling) which they desired to extend to provide further accommodation. They engaged the respondent, a duly qualified architect of some 40 years experience, to advise them.

3 After various discussions and negotiations between the parties, the respondent provided a set of schematic drawings which met with the appellants’ approval. As the work involved alterations and extensions to what was an existing dwelling of some age, the respondent recommended that the work be carried out pursuant to a cost plus building contract rather than a lump sum building contract. He further advised that the total estimated construction cost would be about $202,000 inclusive of GST but excluding council fees, insurance, architect’s and engineer’s fees. He submitted final building plans and specifications to Orange City Council which were duly approved.

4 The respondent in the meantime had introduced the appellants to some builders but recommended a Mr Dave Chase. In due course, a cost plus contract was entered into between the appellants and Mr Chase.

5 After parts of the existing dwelling and other outbuildings were demolished, construction work commenced. By April 2002 the respondent advised the appellants that his estimated construction cost had increased to between $280,000 and $285,000 including GST but excluding fees and council charges. This caused the appellants significant financial embarrassment as a result of which part of the proposed and approved work had to be abandoned which was costed at $33,600. The truncated work reached the practical completion stage on 23 July 2002 and the builder left the site around September 2002. It was common ground that the appellants paid $265,655.33 to the builder and $39,565 for other materials and tradesmen, a total of $305,220.33. The appellants paid $13,245 to the respondent for his professional fees. Had the abandoned works been constructed the total payable would have increased to $338,820.33.

6 On 22 June 2004 the appellants commenced proceedings against the respondent in the Building and Construction List of the District Court claiming damages for breach of contract, negligence and breach of the Fair Trading Act 1987 (NSW). Her Honour Judge Balla heard the proceedings and on 14 December 2005 found in favour of the respondent on all causes of action. She therefore dismissed the appellants’ claim with costs. It is against that decision that the appellants now appeal to this Court.

The relevant facts

7 The first meeting between the appellants and the respondent was on 17 May 2001 when they informed him that they wished to extend the existing dwelling in a number of respects. According to the first appellant, he told the respondent that he and his wife were willing to spend $90,000 which, according to the respondent, would be totally inadequate for the scope of work they had in mind. The respondent then forwarded a letter to the appellants dated 18 May 2001 noting their priorities in relation to accommodation and the factors which would restrict construction, such as the location of the site (on a corner) and its narrow width.

8 The respondent indicated that he could see possibilities of greatly improving the existing dwelling at various levels of expenditure which he would explore and that he would come up with a scheme to best suit the appellants’ needs and budget. He enclosed with that letter for approval by the appellants what was referred to as a short form Client/Architect Agreement issued by the Royal Australian Institute of Architects (the Agreement). The Agreement was duly signed by all parties and dated 27 May 2001.

9 As certain of the terms of the agreement were critical to the issues debated on the appeal and which form the context for some of the correspondence between the parties which followed its execution, it is appropriate at this point in the narrative to set out its relevant provisions.

10 The first page of the Agreement sets out the details of the parties and stated that it was made in respect of alterations and extensions to the existing dwelling which was thereafter called “the project” at 22 Kite Street, Orange. The Agreement then provided as follows:

“It is hereby agreed that the Architect will provide to the Client services in respect of the project and the Client will pay the Architect for these services all in accordance with the terms of this Agreement”.

11 The second page of the document was headed “SERVICES TO BE PROVIDED BY THE ARCHITECT”. It was in the following terms:

“The services to be provided by the Architect to the client under this Agreement are as follows:

Schematic Design/Development Application/Planning Stage

Preparation of schematic design, illustrated by preliminary sketch drawings and/or reports, and provision of an opinion of probable construction cost.

Design Development/Development Application/Planning Stage

Preparation of developed design including, as appropriate, developed sketch drawings, reports, advice on preliminary designs of engineering and other specialist services and opinions of probable construction cost and project time program.

Contract Documentation Stage

Preparation of documents sufficient for the calling of tenders and lodging Building Application including, as appropriate, co-ordination and integration of consultants’ work and reviewing opinions of probable construction cost and project time program.

Contract Administration Stage

Calling and Reporting on tenders

Administering the Contract

Administration of the contract and inspection of the works, including, as appropriate, supplying information, checking claims and issuing certificates, negotiating Variations and cost adjustments and dealing with claims for extensions of time and other matters including in the building contract.”

12 In the Agreement signed by the parties the respondent had circled and bracketed the services A1 and A2 and written in the margin “DESIGN STAGE”.

“The services to be provided and the bases of payment are as listed in the Appendix.”

13 The Appendix then set out a “SUMMARY OF PAYMENTS” and provided as follows:

Service	Basis of Payment
A1	Schematic Design/Development Application/Planning Stage	3½ % of estimated cost
A2	Design Development/Development Application/Planning Stage
A3	Contract Documentation Stage	3½ % of estimated cost
A4	Contract Administration Stage	3½ % of estimated cost

14 After setting out the services to be provided by the Architect in the manner recorded above, the document then provided the conditions of the Agreement, of which the following are presently relevant:

ARCHITECT’S RESPONSIBILITY AND AUTHORITY

Service

The Architect shall perform the services referred to in this Agreement. In the performance of those services, the Architect shall exercise reasonable skill and care in conformity with the normal standards of the practice of architecture.

Variations to Cost or Time

The Architect shall inform the Client within a reasonable time if the Architect has reason to believe that the authorised expenditure or the approved time program (if any) for the project is likely to be varied significantly.”

15 The only other condition of possible relevance is Condition B2.01 under the heading “CLIENT’S RESPONSIBILITIES” which provide as follows:

Client’s Instructions

The Client shall give to the Architect instructions adequate to define the Client’s requirements, including program and budget.”

16 By letter dated 14 June 2001 the respondent wrote to the appellants indicating that once agreement had been reached on the basic design principles, he would provide scale drawings of the scheme with “a rough estimate of costs”. He enclosed an outline of his observations including his design approach and building cost variables.

17 Under the heading “BUILDING COST” and after noting that the main costs in a house were in wet areas, the respondent wrote in this outline:

“Besides building area, the considerations affecting costs are complexity and design, quality of materials and quality of workmanship. Generally, you get what you pay for – the important thing is to get good value for money. … Building costs are not an exact science, as there can be considerable variations in costs of both materials and labour, and expected profit margins.

unless you have a very definite fixed budget limit

18 It was common ground that the appellants did not inform the respondent that they had a “very definite fixed budget limit”.

19 By letter dated 30 June 2001 the respondent wrote to the appellants with respect to what was referred to as Scheme 1 Design. The respondent’s estimate of the order of costs of that scheme provided for what he referred to as a “Total Budget requirement, about $205,000”. Of that amount, $188,100 comprised construction costs plus GST. The letter continued:

good, medium standards of finishes

20 The letter concluding by indicating that if the first floor was deleted a saving of about $40,000 could be effected but that if the appellants decided to proceed with the full Scheme 1, the respondent would be prepared to cap his total fees at $15,000 being $5,000 for each of the three Stages of service.

21 In response the appellants wrote to the respondent on 1 July 2001 indicating their pleasure at the proposed plans but observing that the “price tag is rather sobering (luckily we were already sitting down when we read that bit)”. They then indicated that they needed several weeks to absorb the respondent’s ideas and “to think carefully about our financial plans”.

22 The appellants next communicated with the respondent by letter dated 20 July 2001 informing him that they had decided to pursue most of the concepts he had proposed. They added

“Because the estimated cost is about double our original budget we have had to give everything a great deal of thought. There are still some aspects that we are unsure about, for example, rebuilding the garage.”

23 The parties next met on 24 July 2001. According to the primary judge, they initially discussed the type of contract to be entered into with the builder. According to the appellants, the respondent indicated that he was not interested in using a lump sum contract as he believed that they would obtain much better value using a cost plus contract. He explained that he would administer the contract which meant that he would look at the builder’s requests for payment, assess them and certify them.

24 According to the first appellant, he told the respondent at this meeting that the latter’s estimate of $205,000 contained in his letter of 30 June 2001 was very close to their financial limit. When cross-examined, the first appellant agreed that he and his wife did not exactly know what their financial limit was and did not give the respondent an exact figure as to that limit. However, he maintained that he informed the respondent that $205,000 was very close to that limit.

25 The respondent was cross-examined on this issue in the following exchange:

“Q. Mr Miller, I suggest to you that that comment by Mr and Mrs McKenzie in the letter of 1 July is totally consistent with Mr McKenzie saying to you at a meeting on 24 July, amongst other things, please remember that your cost estimate of 30 June is very close to our financial limit?

A. Yes, and what is the financial limit?

Q. Mr Miller, I suggest to you that on 24 July Mr McKenzie said to you that the estimate that you had given them on 30 June, that is the figure of $202,000 was very close to their financial limit. He said that, didn’t he?

A. He might have said it, yes, but he knew --

Q. I’m not suggesting --

HER HONOUR: Could you let him finish, please?

DWYER: Q. Mr Miller, please?

HER HONOUR: Q. Have you finished your answer?

A. Well, it’s no point elucidating because we’ll leave it at that, yes. No, no, whatever it was I’ll say, no.”

26 Having agreed that he was not suggesting that the appellants had no budget limit, the following further exchange occurred:

“Q. I suggest to you that that is consistent with Mr McKenzie saying to you on 24 July, ‘Please remember that your cost estimate of 30 June is very close to our financial limit.’ He said that to you, didn’t he?

A. Yes, but he didn’t set a limit.

Q. No, he mightn’t have set a limit but he said what I just quoted to you, didn’t he?

A. You’re implying things that shouldn’t be implied.

Q. Mr Miller, you agree with me that he said the words that I just put to you, didn’t he?

A. Did he? Is that in the letter?

Q. Mr Miller, what are you looking at?

A. I just thought that their letter had that.

Q. No, what I’ve suggested to you occurred in a conversation on 24 July between yourself and --

A. No, no, in that case, no.

…

DWYER: Q. Mr Miller, on the meeting of 24 July 2001 I suggest to you that Mr McKenzie said to you words to the effect, please remember that your cost estimate of 30 June is very close to our financial limit?

A. No.

…

Q. Notwithstanding your rejection of what I put to you about the meeting that occurred on 24 July you knew very well that the June estimate was close to their budgetary limit, didn’t you?

A. No.”

27 It is apparent from the foregoing exchanges that the respondent was blowing somewhat hot and cold in relation to the cross-examiner’s attempt to obtain his agreement to the proposition that at the meeting of 24 July 2001 the appellants had told him that his cost estimate of 30 June 2001 was very close their financial limit. One would have thought that his evidence on this issue, particularly when read with the exchange at Black 194X-195E would not have impressed her Honour. There was clearly a deal of prevarication.

28 This notwithstanding, her Honour never resolved the factual dispute in question except to the extent to which she ultimately concluded, in a manner which I find quite unsatisfactory, that she preferred

“the evidence of the defendant to the evidence of the plaintiffs where they conflict. This finding is based in part on the demeanour of the witnesses.”

29 Her Honour did not in any way particularise those aspects of the demeanour of the appellants on the one hand and those of the respondent on the other which influenced her finding that she preferred the evidence of the latter to that of the former where they conflicted.

30 It is true, as her Honour noted, that that finding was based only in part on demeanour. The problem is that she did not identify any factors, other than demeanour upon which she relied in reaching her conclusion on credit. I shall return to this issue below.

31 Nevertheless, it seems to me that a consideration of the exchanges to which I have referred above with respect to the cross-examination of the respondent, enables one to conclude that he conceded that the first appellant indicated that the respondent’s estimate of $202,000 was, in fact, very close to their financial limit – although he did not identify what that precise limit was.

32 By letter dated 21 August 2001 the respondent wrote to the appellants advising that he had completed the drawings generally in accordance with Scheme 1 and noting that the documentation would be ready for submission to the Council the following week. The letter continued:

“I have done a more detailed estimate (copy enclosed), with a very similar result to the estimate given in letter of 30 June, i.e. Construction Cost of about $175,000, plus GST, plus fees and insurances.”

33 Attached to the letter was a breakdown of that cost estimate. It was broken up into four main categories. The first related to alterations to the existing dwelling which totalled $37,000 (incl of GST), the second was in respect of what were referred to as “new extensions” and was estimated at $136,000 (incl of GST) and provided for ”contingencies” in an amount of $5,000 (excl of GST). The third category for external works estimated at $9,000 (incl of GST) and the fourth category was a new garage estimated at $20,000 (incl of GST). Those amounts totalled $202,000.

34 On 18 September 2001 a development application containing the plans and specifications were submitted by the respondent to Orange City Council for approval which was granted on 1 November 2001. In the meantime the appellants met with Mr Chase and the respondent on 12 October 2001 when the latter explained to the appellants each clause of the proposed cost plus building contract. After a discussion concerning cost, according to the primary judge Mr Chase informed the appellants that it was impossible to assess the final cost of the project as he was unable to tell what condition the existing dwelling house was in and he did not know how the site restrictions would affect him, and it was for that reason that it was appropriate to use a cost plus contract. A construction certificate was issued by the Council on 7 November 2001 and demolition work commenced on 21 November 2001. Construction work commenced on 14 January 2002.

35 The specification which accompanied the development application and which was the subject of the construction certificate was a document prepared by the respondent, and dated September 2001 and comprised 17 pages. An issue arose as to whether the specification provided for “good, medium standards of finishes” upon which the respondent’s estimate of $205,000 was based as per his letter to the appellants dated 30 June 2001 (see [19] above), or whether it provided for a high standard of finishes, given that the evidence was that the building works were in fact completed to that standard.

36 On 19 January 2002 the respondent issued to the appellants Progress Certificate No.1 in the sum of $33,889.41 (incl. GST). Enclosed with the certificate was the builder’s breakdown of the amount claimed. Relevantly, it detailed the number of hours in which the builder and two labourers were engaged with respect to demolition and the excavation of footings. Based on the hourly rates charged for each of those persons, the total amount (incl. GST) for that work came to $5,116. The respondent’s estimate for demolition/excavation as per the details enclosed with his letter of 21 August 2001 was $3,300 (incl. GST): those figures indicate an increase in the actual cost of demolition and excavation over the estimated cost by the respondent of 55%.

37 In her affidavit sworn 21 December 2004, the second appellant referred to the receipt on 19 January 2002 of the Progress Certificate No.1. She deposed in par.8 of that affidavit that she

“expressed concern to the [respondent]. I said ‘Mikel, David and I are quite worried about the costs in the certificate. The costs of demolition and site preparation are much higher than indicated in your estimate of costs’. He said ‘I am the architect on this project and it is my job to take care of the accounting. Do you want to do it yourself, seeing that you’re such an expert? Things will work out OK’."

38 Although it was put to the second appellant in cross-examination that no such conversation with the respondent took place, she affirmed that it did. In his affidavit sworn 31 January 2005, the respondent denied the conversation. In cross-examination the conversation as deposed to by the second appellant was put to him and he again denied that it had occurred. The following exchange then took place:

“Q. See even when Mrs McKenzie was concerned about it and asked you about it --

A. I just said, no, so don’t persist, please.

Q. Mr Miller, you answer the questions and I ask them?

A. I’ve answered the question.

Q. I suggest to you that Mrs McKenzie said that to you and you responded to her in that way?

A. No.

Q. Mr Miller, when you checked the progress claims for payment, did you analyse them against your estimate to check to see how your estimates were shaping up?

A. No, I analysed them against the claims and what was done on the job.

Q. So you didn’t have any system in place to monitor the costs as they were coming in to do any forecasting?

A. No, that’s not part of my – forecasting is not something that I – was part of my duties as far as I’m concerned, I had to ensure that the job gets built properly and monitor that the costs are all valid and the claims are valid.”

39 Regrettably, her Honour did not refer to this conflict with the second appellant’s testimony except to the extent to which, by implication, it was covered by her general conclusion that she preferred the respondent’s evidence to that of the appellants where they conflicted. Yet “forecasting” in the sense of providing or reviewing opinions as to the probable construction cost of the project at the contract administration stage was mandated by clause B1.01 of the Agreement.

40 By letter dated 2 February 2002 the appellants wrote to the respondent regarding his latest suggestions for the design of the garage. This came about as a consequence of complaints by the neighbours as to the height of the garage and whether it was being constructed in accordance with the approved plans. Having referred to the options suggested by the respondent, the letter concluded in these terms:

“The current combination of escalating building costs and a greatly reduced work output in the home business is very unsettling.”

41 On 18 February 2002 the respondent issued Progress Certificate No.2 in the sum of $45,016.70 noting that the total amount certified to date was $78,906.11 (incl. GST). Progress Certificate No.3 was issued on 30 March 2002 in the sum of $40,076.25 and noted that total construction cost certified to date was $118,978.90. Progress Certificate No.4 was issued on 15 April 2002 in the sum of $33,287.54 and noted that the total amount certified to date was $152,266.44 (incl. GST).

42 In his affidavit sworn 21 December 2004 the first appellant referred in par.33 to a letter from the respondent dated 15 April 2002 advising of a projected final cost of the work at about $280,000-$285,000. The respondent replied to that paragraph in par.21 of his affidavit of 31 January 2005 asserting that the first appellant had requested him to estimate how much it would cost to complete the works, to which he had responded:

“At this stage it is impractical to estimate the cost because the work is in the process of being done and I don’t know what has been spent until the accounts come in.”

43 However, as the first appellant insisted that the respondent provide an estimate, he deposed that he made the calculation and advised the appellants that the projected final cost would be between $280,000 and $285,000.

44 The respondent’s letter of 15 April 2002 was headed “CONSTRUCTION COST UPDATE” and was somewhat revealing. It relevantly stated:

As we have been aware for some time, the actual costs for the project are considerably higher than originally anticipated

In summary, the figures are (details are on attached handwritten pages);

Projected final cost, about $280,000-$285,000

This is about $80,000 more than my Design Stage estimate and is understandably outside your budget provisio

45 The handwritten details of that estimate were attached to the letter and were divided into three categories being the new extensions and garage, external works and alterations to the existing dwelling. The total of outstanding costs came to $129,000 although there is nothing in the estimates to indicate that that amount was inclusive of GST.

46 Allegedly because he had not had a response from the appellant to his letter of 15 April 2002, the respondent followed up with a further letter dated 21 April 2002 which is even more revealing. It relevantly stated:

As apparently this cost substantially exceeds your budget expectations

…

actual

During construction we can only work with estimates, which may not be accurate, due to numerous unknown factors, such as delays due to the weather, site conditions as found, unavailability of Sub-Contractors or materials when needed, etc

47 There then followed two paragraphs of which those parts that I have emphasised were heavily relied on by the appellants as containing damaging admissions by the respondent. I therefore set out these paragraphs in full.

this ‘best price’ is well beyond your budget expectations, which were based on my Design Stage estimates given before documentation was implemented. On analysis, these estimates were optimistically low and incomplete, and did not include for contingencies for special site conditions, neighbours, scaffolding, delays etc., which have become a major cost component. At the time this estimate was given in good faith. With agreement that construction was to be based on a Cost-plus basis this was never revised for the documented scheme. In retrospect, I can understand why you used this estimate to fix your budget (as you had no other to go by),

on account of my misreading the situation

Your other reaction that you would not have proceeded with the project had you known the full cost implications, is probably true

48 It is to be noted that the respondent suggested in this letter that, for instance, his original estimate did not include contingencies for special site conditions. Nevertheless, when cross-examined with respect to his suggestion that there was limited access to the site (it being a corner block), he responded in the following terms:

“It’s a corner block that takes up – there’s no access through it, it’s narrow, so machinery couldn’t get in and out. Nowhere to store rubbish, so they had to have skips in the street, which fortunately it’s a quiet street and council allowed the skip, so they – for the whole period of the job there were skips in the street. The proximity of buildings to the boundary, I had no way of measuring what impact that would have on – because scaffolding cannot be, on a limited site, you cannot move scaffolding around like you can on an open site, where you can move scaffolding from one section to another. We were demolishing parts of the existing building, the laundry/toilet got demolished so I had no idea what’ll – what’s going to support the roof when that’s demolished. Where the beam could go, the supporting beams go under or over the existing rafters, they’re all – there are so many things that you can only estimate as it was being done, or see what’s needed that couldn’t – so, that’s why they’re unknowns, there are so many.”

49 Upon the basis that that evidence was accepted by her Honour, one asks, rhetorically, why the factors referred to were not taken into account by the respondent in his estimate of 21 August 2001 in which the only allowance for contingencies was with respect to the new extensions in the sum of $5,000 with no allowance for contingencies with respect to the proposed alterations to the existing dwelling let alone for the “so many” unknowns to which he referred in the pleading paragraph and which he must, or at least ought to, have been aware at the time he formed his estimate of cost.

50 It would appear that the respondent’s letter of 21 April 2002 crossed with a letter of the same date from the appellants to him in which they stated the following:

“We are still deeply shocked (and extremely annoyed!) by the budget ‘bombshell’ that you dropped on us last week. Our early correspondence clearly stated that our initial budget was about $90,000. the design that you prepared last July had a price tag of about $188,000 * [Including GST but not counting your fees and council/engineer charges]. It had great appeal, and could almost be justified in terms of expected re-sale value if we decided to sell the house (as a result of unforeseen circumstances), so we chose to proceed with the project even though it required the sale of our investment unit in North Parramatta. The updated estimate of $202,000* just before the project commenced was on the verge of being genuinely unaffordable and we were uneasy about overcapitalising our home. Your latest estimate ($280,000-$285,000*, i.e. , over 3 times the proposed original budget) – which arrived well after the ‘point of no return’ with our building project, and after you had received most of your fees can only be described as outrageous and humiliating. We definitely would not have proceeded with the project in the first place if we had known that it was going to cost this much.”

51 This letter was followed by a further letter from the appellants to the respondent dated 27 April 2002 in which, after referring to disagreements regarding costs associated with the project, they stated:

“You mentioned in recent communications that finances for the rest of the project are our responsibility. However, our financial plans are only as good as the estimates you have given us, so we expect regular and accurate updates on costs for our assessment.”

52 The respondent replied to this letter on 29 April 2002 in which he stated the following:

“There is still some obvious misunderstanding about the Architect’s financial role in the Cost-Plus contract. The concept is that the work is carried out as required to most effectively achieve a building of your desired quality, for the best possible price. Though the Architect is the Clients’ agent, he needs the Client’s approval for every (major) decision in the process – I do not believe that any of the work has been done without your prior knowledge or approval (except that you, understandably, wish it had not cost as much).

As there are a dozen or more different trades on the job, involving probably over 40 staff, costs updates are only possible when progress claims are submitted. At this stage, we accurately know what the finished items have cost, but still have to estimate what has not yet been claimed or completed. Until all accounts come in and are added up, even the Builder would have only an approximately idea of his costs. The Architect’s job is to check that all claims are valid and that the work claimed for has been satisfactorily carried out, i.e. that the work cost only what was actually needed to be spent. As your budget expectations have been exceeded, I will do my best to update you with my estimates (not a firm quote) of the ‘order of cost’ you may expect, with the next Progress Certificate. As the Architect for the job I am its financial checker, perhaps even forecaster, but not manager, which is still your responsibility.”

53 Progress Claims Nos.5, 6 and 7 were issued by the respondent on 3 May 2002, 6 June 2002 and 10 June 2002 respectively – the last of which certified that the total amount certified to date was $256,349.35 (incl. GST). On 23 July 2002 the works reached the stage of practical completion and on 20 August 2002 Progress Claim No.8, being the final certificate, certified total construction costs of $265,864.12 (incl. GST).

54 As I have observed in [5], the appellants not only paid that amount to the builder, but also a further $39,565 for materials and other tradesmen resulting in total construction costs, excluding fees, of $305,220.33 which exceeded the respondent’s 21 August 2001 estimate of $202,000 by $103,220 or 51%.

The expert evidence at the trial

55 Expert evidence was given at the trial by a Mr Rendell on behalf of the appellants and by a Mr Wilkinson, architect, on behalf of the respondent. Her Honour rejected Mr Rendell’s evidence and dealt with that of Mr Wilkinson in the following paragraph:

“Mr Wilkinson is an architect. He has worked on developments in the Orange area. He concluded that the extension was built to a very high standard rather than the ‘good to medium’ standard on which the estimate [being a reference to the estimate of 21 August 2001] was based.”

56 Given that Mr Wilkinson was called on behalf of the respondent, his evidence is of some significance and, certainly, of greater significance than was attributed to it by the primary judge. In a report dated March 2005 attached to his affidavit sworn on 4 April 2005, Mr Wilkinson answered a number of questions, of which the following are presently relevant.

57 Instructing Question 9 was as follows:

Does it appear that the estimate of cost given in the manner in which it was given was incorrect or negligently prepared?

guesstimates

58 Instructing Question 10 was in the following terms:

What was the reasonable cost of constructing the works shown in the original plans (i.e. the plans which were current in August 2001) and specifications to a ‘good, medium standard of finishes’ in 2001 in Orange?

good, medium standard of finish

59 It is clear from this evidence that the indicative budget estimate he was referring to was that contained in the respondent’s letter of 21 June 2001 which is probably a reference to the letter of 30 June 2001. As he was instructed that that estimate did not include an upstairs deck as depicted on the Scheme 1 sketches, he said that he would therefore revise his estimate of total cost upon removal of the upstairs deck to between $192,000 and $222,000.

60 Instructing Question 11 was as follows:

Whether the cost estimate by MM was accurate, within range (say within 10%) mildly inaccurate or wildly inaccurate?

“Accurate estimating from sketch design drawings is extremely difficult and variations in either direction by 20-25% should be expected.”

61 Instructing Question 18 was as follows:

“Is it possible to identify any differences in the level of finish between good to medium and those which have been constructed? In particular, in a letter dated 23 June 2002, McK refer to a modification of the covering of a fuse box and say ‘We realise that this modification to the current situation will cost maybe $1400 extra but feel that it is necessary’. In another letter dated 21 April 2002 McK refer to ‘our choice of living room tiles is about $1200 more expensive than more basic tiles’. "

good to medium

a good to medium

62 Having again consulted the cost guide publications, Mr Wilkinson stated in par.85 of his report that he had prepared an indicative budget based on the sketch design drawing but finished to a “high standard” which he estimated to be between $280,000 and $320,000. This was up to $115,000 more than the respondent’s 21 August 2001 estimate provided only weeks before the documentation was submitted to the Council for approval on 18 September 2001. I shall refer to Mr Wilkinson’s evidence in cross-examination after relating the findings of the primary judge to which I now turn.

The primary judge’s findings

63 The primary judge noted that the appellants relied on three causes of action namely, breaches of the Agreement; breach of s.42 of the Fair Trading Act and negligence.

64 The first breach relied upon was a breach of clause B1.01 of the Agreement which alleged that the respondent had failed to exercise reasonable skill and care in conformity with the normal standards of the practice of architecture. It was alleged that his construction cost estimate contained in the 21 August 2001 was 61.85% less than the actual cost of the building works. In this respect it was submitted to her Honour that the 21 August 2001 estimate constituted the respondent’s opinion “of probable construction costs” within the meaning of services A1 and A2, which I have set out in [11] above. Her Honour’s response to that submission was to make the following findings:

probable construction cost

2. the estimate related to the set of schematic drawings and the scope of work was still at the design/development stage without construction details;

3. the [respondent] relied on one of the standard industry costing guides to price the works on a square metre construction only basis using a good, medium standard.

4. the plaintiffs have not shown that the [respondent’s] measurements were incorrect or that they did not apply that guide correctly;

5. I am not persuaded that the [appellants] have shown that the [respondent] prepared the estimate without reasonable care and skill.”

65 In their submissions on the appeal the appellants submitted that her Honour’s findings in [1] and [2] above was that the respondent had not provided an “opinion of probable construction cost” within the meaning of services A1 and A2 of the Agreement. The respondent, on the other hand, submitted that her Honour did not make a finding that the 21 August 2001 estimate was not such an opinion, but merely observed that in the language of the correspondence it was described as an “estimate”. Certainly, the terms of [1] and [2] of her Honour’s findings are ambiguous in this regard. Nevertheless, the issue then before her was whether the estimate was prepared in breach of the obligation to exercise reasonable skill and care in conformity with the normal standards of the practice of architecture.

66 Her Honour found that the appellants had not established that that was the case. Her reasoning is, to say the least, spare and confined to whether or not the respondent had properly applied the industry costing guide upon which she said he had relied in making his estimate. No recognition was given by her Honour to the fact that the estimate did not, on her own findings, take account of the large number of unknowns acknowledged by the respondent in his evidence to which I have referred in [48] above.

67 A number of other particulars of breach of clause B1.01 pleaded by the appellants were referred to by her Honour but which have no bearing on the issues in the appeal and which do not relate to the provision by the respondent of his opinion as to the probable construction cost of the project. However, it is to be noted that, contrary to Mr Wilkinson’s evidence, the respondent had not provided a range. Further, her Honour seems to have ignored the contents of the respondent’s letters to the appellants of 15 April 2002 and, in particular, 21 April 2002, important matters to which I shall return later in these reasons.

68 The next relevant breach as alleged by the appellants with which her Honour dealt, was that the respondent had breached clause B1.04 of the Agreement by failing to inform the appellants within a reasonable time

“if the Architect had reason to believe that the authorised expenditure … for the project was likely to be varied significantly.”

69 She then referred to the particulars of that breach being the respondent’s 21 August 2001 estimate of $202,000, his April 2002 estimate of $280,000-$285,000 and the actual completed cost of $326,928.

70 Her Honour dealt with that breach by noting that she had accepted the respondent’s evidence and had found that he had given a reasonable estimate based on preliminary drawings in June and August 2001. She referred to the fact that the appellants had been warned in the respondent’s letter of 14 June 2001 that “Building costs are not an exact science” and his further warning at the meeting of 24 July 2001 that there were many unknowns because of the restricted site and the age of the house. (I have already referred to the respondent’s evidence as to those unknowns and the fact that in his 21 August 2001 estimate, the only amount specifically provided for contingencies was $5,000 – a matter her Honour seems to have overlooked given the many unknowns he had identified.)

71 The primary judge then found that the parties had met regularly on site during the building work and that as the work progressed difficulties were encountered and by mutual agreement changes were made to the plans. The cost implications of those changes were, she found, discussed by the respondent with the appellants at the time those decisions were made. In those circumstances, she was not persuaded that the Agreement imposed an additional obligation upon the respondent to make additional information available to the appellants.

72 It is appropriate to observe at this point that her Honour’s finding that the cost implications of the changes “were discussed” (a finding of actual fact) with the appellants at the time the decisions were made, is to be contrasted with an earlier finding that she accepted that

would have been

73 Her Honour’s finding in this respect was based on the following evidence of the respondent given in cross-examination:

“Q. Although you used those progress [claims], you just checked those progress certificates to see if the cost was right, you did not analyse them against your estimate, it is something that you could’ve easily done, couldn’t you?

A. No, it’s not. It’s not applicable in this type of work.

Q. But you see, Mr Miller, part of your job is to advise Mr and Mrs McKenzie if the cost is going up, isn’t that right?

A. They were fully aware of the cost escalations.

Q. You never told them?

A. Of course, we discussed it on – a couple of times a week we met on site and every cost rise was known to them. I don’t have to give them a note when I’m talking to them or reconfirm it. I don’t see that I’d have to.”

74 Earlier in his cross-examination and after being referred to items A1, A2 and in particular A3 of the Agreement, the following exchange took place:

“Q. I suggest to you that you did not provide to Mr and Mrs McKenzie an estimate reviewing your opinion of probable cost construction cost?

A. Not in one piece but they had it all bit by bit for each addition to the original estimate.

Q. Mr Miller, I suggest to you that you did not inform Mr and Mrs McKenzie the total impact of these changes that resulted from the specification and working drawings?

A. Untrue.

Q. You certainly didn’t provide an updated estimate, did you?

75 The appellants submitted, and it is correct to say, that nowhere in his written or oral evidence in chief did the respondent suggest that he had provided the appellants during site meetings with any overall idea of the extent of the cost escalations which were obviously occurring as the work progressed. In the exchange from his evidence last referred to, it is clear that the respondent accepted that he did not provide the appellants, at any time after 21 August 2001 until 15 April 2002, with any updated opinion as to the probable construction cost of the project. At best, he had informed the appellants at site meetings “bit by bit” that there would be a cost in respect of each addition or variation to the works.

76 Furthermore, in his letter of 21 April 2002 the respondent acknowledged that he had never revised his 21 August 2001 estimate for the “documented scheme”, a clear reference to the scheme depicted in the plans and specifications approved by the Council and which formed the basis of the building contract. Furthermore, in the same letter he acknowledged that he had understood why the appellants had used the 21 August 2001 estimate to fix their budget “as you had no other to go by”.

77 Her Honour then dealt with the respondent’s alleged breach of s.42(1) of the Fair Trading Act in that, in trade or commerce, he had engaged in conduct that was misleading or deceptive or was likely to mislead or deceive. Having noted that the appellants’ claim that before entering into the building contract in October 2001, the respondent had represented that the probable costs would be as per his letter of 30 June 2001 as revised in his letter of 21 August 2001 and that those estimates constituted representations which were misleading and deceptive, her Honour disposed of this claim in the following sentence:

“Based on my findings I decline to find that the [respondent] represented that the probable costs would be the initial estimate and the amended estimate”

78 It is apparent from the manner in which her Honour dealt with this issue that she had found, consistent with her findings referred to in [1] and [2] of that part of her judgment that I have recorded in [65] above that the estimates contained in those letters did not constitute an “opinion of the probable construction cost” of the project within the meaning of services A1 or A2 or, for that matter, A3 of the Agreement, although it is clear that such a finding was unnecessary for the purposes of any breach by the respondent of s.42(1).

79 Whether or not the estimates in question constituted an “opinion of probable construction cost” within the meaning of the Agreement, it is clear that they constituted a representation that the respondent estimated that the total construction costs would be the amounts referred to in the letters in question, the issue then being whether those representations were misleading or deceptive, an issue which her Honour simply did not address.

80 Her Honour then turned to the appellants’ cause of action based on the respondent’s negligence. She dealt with this issue by reference to her finding that there was no breach by the respondent of clause B1.01 of the Agreement. Her conclusion on this issue was expressed as follows:

“I am not persuaded:

· For the reasons I have already given, that the estimates provided by the defendant were calculated negligently

· That the defendant was negligent in failing to provide revised estimates. I accept the evidence of Mr Wilkinson in relation to usual practice and am satisfied that it was sufficient for the defendant to provide a revised estimate when requested to do so by the plaintiffs.”

81 As I understand the second of her Honour’s reasons for rejecting this claim, it was simply contrary to Mr Wilkinson’s evidence, a matter to which I shall refer below. Accordingly, the primary judge found that the appellants’ action against the respondent failed.

The resolution of the issues on the appeal

82 The respondent’s obligation to perform the services referred to in the Agreement was to be found in clause B1.01. For convenience, I set it out below:

“The Architect shall perform the services referred to in this Agreement. In the performance of those services, the Architect shall exercise reasonable skill and care in conformity with the normal standards of the practice of Architecture.”

83 Clause B1.01 contains two obligations. The first is to mandate that the Architect shall perform services A1, A2, A3 and A4 and, relevantly, those referred to in A3 which, I shall also for convenience repeat:

Contract Documentation Stage

reviewing opinions for probable construction cost

84 It was not in contest on the appeal that although not pleaded, at the trial the appellants alleged a breach of both obligations set out in clause B1.01 and, in particular a breach of the obligation in service A3 that at the contract documentation stage the respondent was required to review his previous opinions of probable construction cost which he had given at the design stage being services A1 and A2. As I have indicated above, it was common ground at least on the appeal that, firstly, the 21 August 2001 estimate constituted an opinion by the respondent of the probable construction cost at the design/development stage being a combination of services A1 and A2. It was also common ground that at the contract documentation stage (A3) the respondent had not reviewed his opinion of probable construction cost that he had provided at the design/development stage in his letter of 21 August 2001.

85 The basis upon which the respondent submitted that he was not required to comply with the terms of service A3 was that what was proposed was a costs plus contract and not a lump sum contract as a consequence whereof there was no necessity for the preparation of documents sufficient for the calling of tenders. From this it followed, so it was submitted, that none of the services referred to in A3 were required to be performed. In my opinion, such a construction of service A3 must be rejected.

86 That provision refers to the “Contract Documentation Stage” without differentiating between different types of building contracts. Certainly, if a lump sum contract is proposed then that part of the services referred to in service A3 requiring the preparation of documents sufficient for the calling of tenders was required to be performed. However, the fact that a cost plus contract was proposed did not obviate the necessity referred to in service A3 for the preparation of documents sufficient for the lodging of a building application which in fact occurred. Nor, in my view, did it obviate the obligation of the respondent to review his previous opinions of probable construction cost in the light of the building application documentation. This he did not do.

87 In my opinion it is therefore clear that there was a breach of the respondent’s obligations with respect to service A.3. Furthermore, the fact that tenders were not called and it was a cost plus contract made it all the more important from the appellants’ point of view that they should be provided with an updated opinion as to the probable construction cost of the project as proposed in the plans and specifications approved by the Council and which became the subject of the contract entered into with Mr Chase.

88 Based upon his inspection of the building works and the sketch design drawings and the standard of finish revealed by the constructed building works, Mr Wilkinson in par.85 of his report opined that a reasonable indicative budget estimate would have been between $280,000 and $320,000. At par.113 of his report, he stated that the project had increased in cost because a “good medium standard of finish” as budgeted for was not pursued. Rather, a very high standard of finish was sought and “no adjustment made to the desired built area to accommodate that shift as it affected the budget”.

89 In cross-examination Mr Wilkinson agreed that subsequent to the 21 August estimate, the specification and final drawings had been prepared for submission to the Council. The following question and answer then occurred:

“Q. If there were significant changes caused by those documentation, would you agree with me it would be prudent for the architect in the circumstances that I put to you, to revise the estimate?

A. In hindsight – with hindsight, it would be prudent. I believe, yes, that’s the case.”

90 After being referred to the provisions of Service A3 in the Agreement and, in particular, to the requirement to review opinions of probable construction cost, the following exchange occurred:

“Q. I suggest to you not only, as you say with hindsight it would have been prudent, it also appears to be required there in the contract doesn’t it?

A. Yes, but in fairness I think at this stage it had already been decided that the job was going to be pursued by a cost plus contract and not a – not by traditional tender, so it’s less in that regard.

Q. But the contract [the Agreement] hasn’t been varied to reflect that, has it?

A. No, it hasn’t.”

91 I have already referred to her Honour’s acceptance of Mr Wilkinson’s evidence that it was sufficient for the respondent to provide a revised estimate only when requested to do so by the appellants (see [81] above). That finding seems to have been based upon that part of the cross-examination of Mr Wilkinson when he was asked whether it would have been prudent for the respondent, when he saw that the costs were going up by looking at the progress claims, to revisit his 21 August estimate. His response was that he should only revisit the estimate if asked by the client to do so. He said:

“I don’t think an architect would ever do it unless requested specifically to do it.”

92 The witness was then referred to clause B1.04 and to the requirement of the Architect to inform the client within a reasonable time if he had reason to believe that the authorised expenditure for the project was likely to be varied significantly. When asked whether the respondent, when he saw the figures increasing, should have provided the information in accordance with that provision, Mr Wilkinson responded:

“It is my understanding that they held regular discussions on site and they were all aware that the job was slightly over cost in the early stages.”

93 Mr Wilkinson’s response was no doubt based upon the respondent’s evidence to which I have referred in which he agreed that, as variations were made, the appellants were advised that there would be an increased cost “bit by bit” but that no overall estimate of the final cost was ever provided to them. In my opinion, it is clear from the provisions of clause B1.04 that firstly, the respondent did have reason to believe that the authorised expenditure for the project was likely to be varied significantly in terms of the overall final cost and, secondly, that he was required by that provision not to merely indicate that each variation might involve an extra cost, but to provide an updated estimate of the overall effect of the variations on the final construction cost of the project.

94 I should note in this regard the respondent’s submission that clause B1.04 had no application as there was no “authorised expenditure”. It was submitted that there could only be such expenditure in respect of a lump sum contract. I disagree. The words “authorised expenditure” are clearly intended by their breadth to incorporate not only the price provided for by lump sum contract but also any estimated expenditure of a construction project in respect of which the client has authorised the works to proceed on the basis of that expenditure pursuant to a cost plus contract.

95 It is clear in my view that the expenditure authorised by the appellants in the present case was in accordance with the estimate set out in the 21 August 2001 letter. It follows that in my opinion there was a breach of clause B1.04.

96 I have already referred to Mr Wilkinson’s indicative budget estimate based upon the sketch design drawings but finished to a “high standard” as in fact occurred in the range of $280,000 to $320,000. That estimate was based upon what Mr Wilkinson reference in par.65 of his report to the obvious differences between what had been constructed and what was contemplated in the pricing guides by the description of “good to medium”.

97 In pars.66-82 of his report, Mr Wilkinson set out various aspects of the construction work which constituted a high standard of construction. The issue which then arose was whether all or any of those items were included in the specification approved by the Council. Notwithstanding her Honour’s suggestion that counsel should not spend a lot of time on cross-examining the witness to establish that the specification did include each of the items to which he had referred in pars.66-82 of his report upon the basis that “the specification post-dates the August letter”, nevertheless the cross-examiner rightly persisted. This resulted in Mr Wilkinson agreeing that most if not all of the items that he had identified as increasing the construction standard from “good to medium” to “high” were contained within the specification.

98 During the course of this cross-examination, Mr Wilkinson sought, as he said, to short circuit the matter by saying:

“…the point I was trying to make was that this pricing guide when it provides square metre figures is allowing for your typical project home like house that you would find anywhere on the western plains of Sydney and that the inclusions allowed in this are nowhere near the inclusions that were allowed eventually in that house. Therefore someone that used this to budget price – to formulate a budget for the job at 22 Kite Street, Orange was never going to go anywhere near in terms of establishing a budget what the final cost of the building was. Radically different was the point I was trying to make, that’s all.”

99 Mr Wilkinson was then asked to assume that each of the items to which he had referred were included in the specification. He agreed that on that basis what was proposed was different to the 21 August 2001 estimate. The following exchange then occurred:

“Q. Would you agree with me that if all these changes are in the specification then and they are different from 21 August estimate it would have been prudent for the architect to review the estimate to include them all and review the price because your figure, if I’m right, would have meant that the architect would have revised the estimate to the order of $280,000 to $320,000 and Mr and Mrs McKenzie would have been in a better position to judge what the estimate would have been at that time?

A. I would have expected it to have come out in a later estimate, yes, I mean this new information to have been applied to any estimate that was prepared afterwards.

Q. But you see I’m suggesting to you that this information is all in the specification dated September 2001?

A. Yes, which is after the original estimate.

Q. Yes, but before any work was done, and if the cost of the works you say estimated at $280,000 and only a month before they were in the order of $220,000 or you say $280,000 to $320,000, and that has occurred because of a specification that’s been provided shortly after 21 August, that is in September 2001 before anything has gone to the council?

A. Mm.

Q. Would you agree if the effect of it is to rise the price from $220,000 to between $280,000 to $320,000 it would have been prudent for the architect to advise of a revised estimate?

A. I would have expected discussions to have been carried out between the client and the architect with regard to the fact that anything – that some of these high level finishes were going to increase the budget, increase what was allowed originally in the budget, and if the clients had said, please run the budget again or given an instruction to run the budget again then I would have expected the architect obviously to have done it. But I wouldn’t expect an architect – architects quite frankly avoid preparing these estimates wherever possible. So an architect would not do it unless they were specifically asked to prepare a budget by the client.

Q. Mr Wilkinson, if I am correct and Mr Miller had done a revised estimate based on his specification the figure would have been in the order of $280,000 to $320,000. Is that correct?

A. I don’t actually know the answer to that but that may well be correct.”

100 The difficulty with Mr Wilkinson’s penultimate answer to the effect that in the circumstances postulated, an architect would not prepare an estimate unless specifically asked to do so by the client, overlooks the respondent’s obligation pursuant to clause B1.01 to do just that in accordance with the provisions of service A3 of the Agreement and to inform the appellant within a reasonable time if he had reason to believe that the authorised expenditure for the project was likely to be varied significantly, (which it was) pursuant to clause B1.04.

101 The coup de grace, however, came in the following exchange:

“Q. Mr Wilkinson, you’re not suggesting, are you, that the architect providing a specification for a client after he’s provided them with an estimate a short time earlier and that specification has the effect of raising, if I’m right, in your opinion the cost between $280,000 to $320,000 from $220,000 it would be prudent for him, almost obligatory for him to inform the client of that and put in an advised estimate?

A. I would expect it to have been discussed with the client, yes.

Q. You have not heard anyone tell this Court of such a discussion, have you?

A. I don’t believe so.”

102 The primary judge referred to none of this evidence. She should have: it was critical to her decision. It established, in my opinion, the following:

(a) The respondent was in breach of the obligation imposed upon him by the first sentence of clause B1.01 of the Agreement to provide the service in A3 of reviewing his previous opinions of probable construction cost at the contract documentation stage, that is, prior to the contract with the builder being entered into and after the Council had approved the plans and specifications.

(b) In failing to do so, the respondent did not exercise reasonable skill and care in conformity with the normal standards of practice of architecture and was thus in breach of the second sentence of clause B1.01 of the Agreement as well as his general duty of care to the appellants as an architect. The latter finding follows inevitably from Mr Wilkinson’s evidence referred to in [101] above.

(c) The respondent was also in breach of clause B1.04 of the Agreement. This is so, given that in his letter of 15 April 2002 he commenced with the observation that “ we ” (which obviously included himself) had been aware for some time that the actual costs of the project were considerably higher than originally anticipated. This triggered his obligation under that provision to inform the appellants that he had reason to believe that his last estimate of the construction cost of $202,000 was likely to be varied significantly. In my opinion, he was required to do this well before 15 April 2002. It was clear from Progress Claim No.1 dated 19 January 2002 that there was a significant difference between the actual costs being incurred on the one hand and his estimate on the other with respect to the same work. This was so with respect to the very first part of the project, namely, the demolition and excavation for footings.

(d) By his estimate of construction costs of $202,000 contained in his letter of 21 August 2001, the respondent represented that unless and until that estimate was changed, the works would cost in or around that amount. Furthermore, that representation was a continuing one and applied to the works depicted in the plans and specifications approved by the Council in September 2001 upon which the appellants relied in entering into the building contract in October 2001 and thereby committing themselves to the project. By the time (in April 2002) the respondent informed them of the true position with respect to the cost, the project had generally passed the point of no return. In my opinion, that representation was both misleading and deceptive as a consequence whereof there was breach of s.42(1) of the Fair Trading Act .

103 Although it was submitted by the respondent that his remarks in his letter of 21 April 2002 that his estimates were “optimistically low and incomplete” and involved his “misreading the situation”, were based on hindsight and therefore not an admission, I would accept the appellants’ submission that the views so expressed by the respondent (and in the absence of any evidence from him to explain those remarks) were held by him at the time that he gave the estimate contained in the 21 August 2001 letter.

104 In par.10 of his affidavit of 31 January 2005 when referring to the meeting of the parties on 24 July 2001, the respondent, when recommending a cost plus contract as no builder would be interested in providing a lump sump tender for the job, deposed as follows:

“… Because it is a restricted site and because of the age and unknown condition of the building, any tenderer would have to load his price by between 20-50% to be reasonably sure to come out without a loss. This loading is an allowance for risks that cannot be quantified and it still applies and has to be paid for no matter what form of contract is used. If you were to use a cost plus contract, that loading is absorbed in the cost of the work that needs to be done to achieve the desired result. … Your job has many unknowns, the restricted site and the age of the house, you do not know what you are going to find in old buildings and sometimes problems you find quadruple the cost of the job.”

105 In my opinion this evidence of the respondent merely emphasises the necessity for him to have provided, as opined by Mr Wilkinson, a range in terms of any estimate of construction costs which clearly catered for the contingencies to which he had referred as a consequence of the “unknowns” and “the restricted site and age of the house” which he acknowledged could well “quadruple the cost of the job”. Given that those observations were made on 24 July 2001, the appellants were entitled, as the respondent conceded in his letter of 21 April 2002, to rely on fixing their budget on his estimated construction cost contained in the letter of 21 August 2001 and were further entitled to assume that that estimate catered for the unknowns to which the respondent had referred at the 24 July 2001 meeting.

106 The foregoing further supports my opinion that not only was that estimate in terms of what it represented, misleading and deceptive but also that it was negligently made.

107 The primary judge considered none of the evidence to which I have referred. With respect, I find her reasoning (such as it was) entirely unsatisfactory and inadequate in terms of not only her reasoning process but also her lack of consideration of the evidence of both the respondent and Mr Wilkinson, witnesses whose evidence she apparently accepted. Her reliance “in part on the demeanour of the witnesses” in rejecting the evidence of the appellants where it conflicted with that of the respondent was unconvincing in the terms in which it was expressed, being a bare assertion or incantation, and was unreliable: cf Fox v Percy (2003) 214 CLR 118 at 128-129 [36]-[31], 163 [142].

Conclusion

108 In my opinion, the primary judge’s reasons were inadequate; she failed to properly consider the evidence and, in particular, that of the respondent and Mr Wilkinson; she further failed to deal with the evidentiary onus on the respondent to establish that the significant admissions contained in his letter of 21 April 2002 were made with the benefit of hindsight and did not represent his views at the time that he provided his estimate of construction costs on 21 August 2001.

109 Accordingly, on the basis only of the evidence of the respondent and Mr Wilkinson together with the documentary evidence to which I have referred, her Honour’s findings are flawed and should be set aside.

110 At the end of the day, the respondent’s case on appeal was that there was no requirement, either contractual or otherwise, for him to update his 21 August 2001 estimate as at all material times the building contract was to be a cost plus contract under which the appellants were required to pay only the actual cost of the work which was constructed.

111 For the reasons to which I have referred, in my opinion this submission is misconceived. It involves a misconstruction of the relevant services which the respondent was obligated to perform under the Agreement and failed to give recognition to the concession by the respondent in par.34 of his written submissions on the appeal that he always had a contractual duty to provide accurate estimates of costs and a duty of care to exercise reasonable care and skill in providing those estimates. He certainly had those duties but he failed to comply with each of them.

112 In the foregoing circumstances there was a clear breach by the respondent to provide his opinion as to the probable construction cost of the project after the Council had approved the plans and specifications and before the building contract was entered into. There was therefore a breach by the respondent of the service he was required by the first sentence of claims B1.01 to perform as set forth in A3 of the Agreement as well as a breach of his obligations under the second sentence of clause B1.01 and B1.04.

113 Furthermore, the respondent’s estimate of construction costs contained in his letter of 21 August 2001 was made at a time when, according to the opening paragraph of that letter, the final design and documentation had reached a point when it was ready to be submitted to the Council “the following week”. In these circumstances, the estimate contained in that letter conveyed more than that the estimate of the construction costs referred to was no more than an opinion held by the respondent: it conveyed the representation that that estimate related to the plans and specifications which were about to be submitted to the Council and that, as the respondent himself admitted in his letter of 21 April 2002, could be relied upon by the appellants in fixing their budget for the proposed work.

114 Again, as the estimate was given after the conversation on 24 July 2001 with the appellants referred to by the respondent in his affidavit, it constituted a representation that it had taken into account the many “unknowns” to which the respondent had referred. That estimate was, upon the onus to which I have referred, so far removed from being a true estimate as to be misleading or deceptive: cf MGICA (1992)Ltd v Kenny & Good Pty Ltd (1996) 140 ALR 313 at 356-357. As it was common ground that the conduct can be such as to give rise to both liability for breach of contract on the one hand and for misleading and deceptive conduct under the Fair Trading Act on the other, there is no impediment to a finding that the conduct of the respondent not only was in breach of the Agreement but also in breach of s.42(1) of the Fair Trading Act: see Fair Trading Act, 1987 s.4(4); Accounting Systems 2000 (Developments) Pty Ltd v CCH (1993) 42 FCR 470; HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 at 649 [13]; I&L Securities v HTW Valuers (2002) 210 CLR 109 at 173 [205].

Proposed orders

115 It follows from the foregoing that the primary judge was in error in rejecting the appellants’ claims and dismissing their action. I would therefore propose the following orders:

(a) Appeal allowed;

(b) Set aside the orders made by Judge Balla on 14 December 2005;

(i) the Agreement between the appellants and the respondent dated 27 May 2001 of clause B1.01 in respect of the provision of the services referred to in par.A3 and of clause B1.04

Fair Trading Act

(iii) his duty of care both under clause B1.01 of the Agreement and at common law with respect to the provision in his letter of 21 August 2001 of his estimate of the probable construction cost of the building works the subject of the plans and specifications submitted to and approved by Orange City Council on 18 September 2001 and his failure to provide such an estimate after 18 September 2001 and the date upon which the appellants entered into the building contract with Mr Chase;

(d) Remit the proceedings to the District Court for the assessment of damages only before a judge other than her Honour Judge Balla;

(e) The respondent to pay the appellants’ costs of the proceedings before Judge Balla and of the appeal but to have with respect to the latter a certificate under the Suitors’ Fund Act , 1951 if otherwise qualified.

116 BASTEN JA: The principal issue in this appeal concerns the failure of the defendant (“the architect”) to provide an adequate estimate of the probable construction cost of a home renovation undertaken for the Appellants. The case was pleaded as a breach of contract, a breach of s 42 of the Fair Trading Act 1987 (NSW) and as the tort of negligence. It is sufficient, however, to deal with the question whether there was a breach of contract.

117 This question raised both legal and factual issues. The primary judge dealt with the several allegations of breach of contract as involving either a complaint of a failure to call for tenders, pursuant to cl A4.1 of the Client/Architect Agreement (“the agreement”), or, in the alternative, as a breach of the architect’s obligation to “exercise reasonable skill and care in conformity with the normal standards of the practice of architecture”, in contravention of cl B1.01 of the agreement. Although some reliance was placed on the latter provision, neither was central to the argument for the Appellants on the appeal.

118 A third provision in the agreement which was relied upon was cl B1.04:

B1.04 Variations to cost or time

The Architect shall inform the Client within a reasonable time if the Architect has reason to believe that the authorised expenditure or the approved time program (if any) for the project is likely to be varied significantly.”

119 The architect argued that because the arrangement for the construction was contained in a “cost-plus contract for building works”, (“the construction contract”) which specified the works to be undertaken, but no final price, there was no “authorised expenditure” and that the concept had no practical content in relation to such a building agreement.

120 That argument should not be accepted. As will be seen, the architect was obliged to provide “an opinion of probable construction costs”, prior to execution of a construction contract. Under the construction contract, certain works were authorised for which a payment obligation would arise. The “authorised expenditure” under the construction contract was the expenditure necessary to cover the authorised work. That could involve expenditure that was “likely to be varied”, a state of affairs which could arise under a lump sum construction contract or under a cost-plus construction contract.

121 It is clear that there is no “authorised expenditure” until the contract is signed. With a lump sum contract, a figure will be included in the contract. That figure can be subject to variation and thus would engage cl B1.04. In relation to a cost-plus agreement, the variation must involve a departure from the opinion of probable construction costs, rather than departure from a figure for authorised expenditure contained in the contract as executed. On a literal reading of cl B1.04, it can be argued that the obligation is not engaged in the latter case. However, it is clear that the obligation to give an opinion as to probable construction costs will arise before the execution of the contract and the purpose of cl B1.04 would have equal (if not greater) importance in relation to such a construction contract. A construction of the agreement which gives effect to that purpose should be preferred over one which does not. For that reason, it should be accepted that the obligation under cl B1.04 existed in the present case in relation to circumstances where the relevant “reason to believe” arose.

122 The highest estimate of probable construction cost given before the execution of the building contract was a figure of $202,000 in August 2001. The actual completed cost of the work, as pleaded in the amended statement of claim, was a fraction under $327,000. However that figure did not include all of the work originally covered by the contract. There had clearly been a significant variation between the August opinion of probable construction cost and the actual cost of the work. That variation was not identified in formal terms by the architect until a letter of 15 April 2002. The Appellants’ letter in response, dated 21 April 2002, stated, amongst other things:

“We are still deeply shocked (and extremely annoyed!) by the budget ‘bombshell’ that you dropped on us last week.”

123 There was, accordingly, clear evidence that the significant variation had not been the subject of information supplied to the Appellants. There was also evidence that it had not been supplied within a reasonable time, based, for example, on the progress claims made by the builder.

124 In relation to this complaint of breach, the trial judge stated (at Judgment, p 23):

“The defendant then met regularly with the plaintiffs on site during the building work. As the work progressed difficulties were encountered and, by mutual agreement, changes were made to the plans. The cost implications of the changes were discussed with the plaintiffs at the time the decisions were made.

In these circumstances I am not persuaded that the contract imposed an additional obligation on the defendant to make additional information available to the plaintiffs.”

125 More detail of the evidential background to this finding is set out in the judgment of Tobias JA. As his Honour notes, there were conflicts between the evidence of the architect and that of the Appellants. In respect of those conflicts, the trial judge stated, in a conclusory fashion at p 17:

“I prefer the evidence of the defendant to the evidence of the plaintiffs where they conflict. This finding is based in part on the demeanour of the witnesses.

However I am also satisfied that the contemporaneous documentary evidence is more consistent with the evidence of the defendant.”

126 If what follows this quotation in the judgment is said to be an illustration of the latter point with regard to ‘contemporaneous documentary evidence’, it is singularly lacking in persuasive content. In order to decide the case on the evidence, the trial judge was required to consider the critical conflicts in evidence, and make findings with respect to particular facts, sufficient to support whatever inferences were to be drawn. This was not done. Although it may be said that her Honour failed to give adequate reasons for reaching a particular conclusion, the better view is that the critical issues were not properly addressed.

127 The obligation in cl B1.04, with its reference to “authorised expenditure”, can only apply to post-contractual variations. Before execution of the construction contract there was no authorised expenditure. At the earlier stage, cls A1-3 applied. Clause A1 required “an opinion of probable construction cost”, based on preliminary sketch drawings. That was given. It may have been inaccurate, but the opinion was not shown to be other than a reasonably held opinion. Mr Wilkinson supported the view that that estimate was reasonable.

128 However, cl A3 was engaged upon the preparation of contractual documentation and particularly the specification. The clause read:

“A3 Contract Documentation Stage

Preparation of documents sufficient for the calling of tenders and lodging Building Application including, as appropriate, co-ordination and integration of consultants’ work and reviewing opinions of probably construction cost and project time program.”

129 According to Mr Wilkinson, whose evidence was noted and not rejected by the trial judge, this documentation involved a change from the basis of the initial cost opinion, namely from a “good, medium standard of finishes”, to a “high standard”: see report of Colin Wilkinson, attached to affidavit of 4 April 2005, at pars 55 and 85. That change, Mr Wilkinson said, increased the probable construction cost from between $192,000 and $222,000 to a range from $280,000 to $320,000. No further opinion was provided by the architect in accordance with cl A3. Based on Mr Wilkinson’s evidence, called for the architect, a reasonably competent architect, who had prepared the specification, would have had reason to believe that the specification would lead to a significantly higher construction cost: accordingly, a failure to review the earlier opinion of probable construction costs constituted a breach of cl A3, which was in turn a service to be performed in accordance with cl B1.01.

130 The architect resisted this conclusion on two bases. First, he said that cl A3 was not pleaded. That was true, but the clause was relied upon during evidence and referred to in submissions without objection during the trial. Secondly, the architect said that all work was done in accordance with the Appellants’ instructions. The contrary was not asserted. However, the issue is whether the Appellants were informed of the overall cost consequences of their choices of finishes. This Court was not taken to evidence which established that they were. The trial judge made the finding referred to at [124] above which related to a period during which the contract was being executed, and not the date at which the specification was provided, prior to signing the construction contract. Accordingly, it does not provide an adequate finding of fact to permit the architect to uphold the judgment below.

Appropriate orders

131 There is a question as to whether this Court would be able to make findings of fact necessary to complete the task, for the purpose of establishing liability on the part of the architect. There is a further question as to whether this Court would be able to assess damages on the material available to it.

132 In relation to liability, I agree with Tobias JA that the evidence demonstrates that the architect breached the agreement by failing:

(a) to provide a revised opinion of probable construction costs, after preparing documentation for Council approval and before the construction contract was signed, and

133 The Appellants did not suggest that damages available for general law negligence or for breach of the Fair Trading Act would differ significantly from those for breach of contract. Nor is it possible to identify the content of either the statutory or general law duties without reference to the contractual context. That exercise is unnecessary.

134 So far as damages are concerned, the Appellants claim that they suffered financial and other forms of hardship, as a result of the construction costs substantially exceeding their budgeted expenditure. On the other hand, the Appellants are not entitled to ignore the additional value of the house, resulting from the renovations. That additional value was itself the subject of evidence, one concern being that the renovated premises were “over-capitalised”, in the sense that the additional costs were not fully reflected in the additional value of the premises. All the evidence with respect to valuation was given at the trial, but was not addressed by the trial judge. No findings were made as to loss.

135 Given that the amounts in issue in this case are probably less than the costs expended so far, it is unfortunate that the matter cannot be finally resolved by this Court. However, neither party invited the Court to make its own findings as to damages, if error were found on the part of the trial judge. Accordingly the judgment and orders below should be set aside and the matter should be remitted to the District Court for assessment of damages.

136 Tobias JA proposes that this Court should order that the assessment of damages should not be undertaken by the trial judge. I would not make such an order. The circumstances in which such an order is appropriate are limited. The parties did not seek such an order. As Kirby J said in Minister for Immigration and Multicultural Affairs v Wang (2003) 215 CLR 518 at [107]:

Steedman v Baulkham Hills Shire Council [No. 2]

Northern NSW FM Pty Ltd v Australian Broadcasting Tribunal

137 An order prohibiting a judge from deciding a case is an interference with the listing processes of the District Court and, if based on a reasonable apprehension of bias, removes the judicial officer’s power and duty to determine a disqualification application herself. This diminishes the judge’s authority and should not be done without reference to the purpose for which the power is exercised.

138 I would make the following orders:

(1) Allow the appeal.

(2) Set aside the judgment and orders made by the District Court on 14 December 2005.

(3) In lieu thereof, enter judgment for the plaintiffs in an amount to be assessed;

(4) Order the defendant to pay the plaintiffs’ costs of the first trial in the District Court.

(5) Remit the matter to the District Court for assessment of damages.

(6) Order the Respondent to pay the Appellants’ costs in this Court.

(7) Grant the Respondent a certificate under the Suitors’ Fund Act 1951 (NSW) in relation to the costs of the appeal.

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Citations

McKenzie v Miller [2006] NSWCA 377

Most Recent Citation

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1

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Statutory Material Cited

2

Re Hillsea Pty Ltd [2019] NSWSC 1152

Fox v Percy [2003] HCA 22

MGICA (1992) Ltd v Kenny & Good Pty Ltd [1996] FCA 766

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CITATION:	McKenzie & Anor v Miller [2006] NSWCA 377
HEARING DATE(S):	30 November 2006, Friday 1 December 2006
JUDGMENT DATE:	20 December 2006
JUDGMENT OF:	Handley JA at 1; Tobias JA at 2; Basten JA at 116
DECISION:	(a) Appeal allowed; (b) Set aside the orders made by Judge Balla on 14 December 2005; (c) Judgment for the appellants against the respondent on liability in respect of his breaches of (i) the Agreement between the appellants and the respondent dated 27 May 2001 of clause B1.01 in respect of the provision of the services referred to in par.A3 and of clause B1.04, (ii) s.42(1) of the Fair Trading Act 1987, (iii) his duty of care both under clause B1.01 of the Agreement and at common law with respect to the provision in his letter of 21 August 2001 of his estimate of the probable construction cost of the building works the subject of the plans and specifications submitted to and approved by Orange City Council on 18 September 2001 and his failure to provide such an estimate after 18 September 2001 and the date upon which the appellants entered into the building contract with Mr Chase; (d) Remit the proceedings to the District Court for the assessment of damages only before a judge other than her Honour Judge Balla; (e) The respondent to pay the appellants’ costs of the proceedings before Judge Balla and of the appeal but to have with respect to the latter a certificate under the Suitors’ Fund Act, 1951 if otherwise qualified
CATCHWORDS:	CIVIL CLAIMS – alleged breach of agreement arising from delay in the building and construction of a dwelling – costs of construction varied significantly from original estimate – whether breach of contract – whether negligence – whether breach of Fair Trading Act 1987 – weight to be given to expert evidence
LEGISLATION CITED:	Fair Trading Act 1987 Suitors’ Fund Act 1951
CASES CITED:	Accounting Systems 2000 (Developments) Pty Ltd v CCH (1993) 42 FCR 470 Fox v Percy (2003) 214 CLR 118 HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 I&L Securities v HTW Valuers (2002) 210 CLR 109 MGICA (1992) Ltd v Kenny & Good Pty Ltd (1996) 140 ALR 313 Minister for Immigration and Multicultural Affairs v Wang (2003) 215 CLR 518 Northern NSW FM Pty Ltd v Australian Broadcasting Tribunal (1990) 26 FCR 39 Steedman v Baulkham Hills Shire Council [No. 2] (1993) 31 NSWLR 562
PARTIES:	David McKenzie Danuta McKenzie Mikel Miller
FILE NUMBER(S):	CA 40038/06
COUNSEL:	A: G Inatey SC / A Henskens R: N A Nicholls
SOLICITORS:	A: Cheney Wilson & Law, Orange R: Turnbull Bowles Laywers Pty ltd, Sydney
LOWER COURT JURISDICTION:	District Court
LOWER COURT FILE NUMBER(S):	DC 2621/04
LOWER COURT JUDICIAL OFFICER:	Balla DCJ
LOWER COURT DATE OF DECISION:	14 December 2005