Pugwall Pty Ltd v Arthur McKenzie Investments Pty Ltd
[2021] VCC 2053
•15 December 2021
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
GENERAL LIST
Case No. CI-19-00779
| Pugwall Pty Ltd (ACN 073 554 453) | Plaintiff |
| v | |
| Arthur McKenzie Investments Pty Ltd (ACN 089 248 082) & Anor | Defendants |
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JUDGE: | Her Honour Judge Burchell | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 26 October 2021 to 28 October 2021, written submissions dated 16 November 2021, 30 November 2021 and 7 December 2021 | |
DATE OF JUDGMENT: | 15 December 2021 | |
CASE MAY BE CITED AS: | Pugwall Pty Ltd v Arthur McKenzie Investments Pty Ltd & Anor | |
MEDIUM NEUTRAL CITATION: | [2021] VCC 2053 | |
REASONS FOR JUDGMENT
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Subject:CONTRACTS – JOINT VENTURE
Catchwords: Building – joint venture – the respective liabilities of the joint venturers for the losses incurred – whether implied terms – good faith – exercise reasonable care and skill – whether capital contribution or loan – whether second defendant liable as guarantor
Legislation Cited: Instruments Act 1958 (Vic) ss126 and 127; Civil Procure Act 2010 (Vic) ss7–9; Planning and Environment Act 1987 (Vic) s72
Cases Cited:Aon Risk Services Pty Ltd v ANU (2009) 239 CLR 175; BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; Codelfa Construction Pty Ltd v State Railway Authority(NSW) (1982) 149 CLR 337; Astley & Ors v Austrust Limited (1999) HCA 6; Grocon Constructors (Victoria) Pty Ltd v APN DF2 Project 2 Pty Ltd [2015] VSCA 190; Byrne v Australian Airlines Ltd (1995) 185 CLR 410; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; Commonwealth Bank of Australia v Barker (2014) 312 ALR 356; Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54; Bhasin v Hyrnew [2014] 3 SCR 494; Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45; Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228; Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15; Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558; Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184; Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; Clark Equipment Credit of Australia Ltd v Kiyose Holdings Pty Ltd (1989) 21 NSWLR 160; Harris v Burrell & Family Pty Ltd [2010] SASCFC 12; Alonso v SRS Investments (WA) Pty Ltd [2012] WASC 168; Sleaford v Worthing & Saunders [2020] NSWDC 231; B & D Gippsland Investments Pty Ltd v Lay [2021] VCC 993
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr T Greenway | Shayne Daley & Associates |
| For the Defendants | Mr E Cinar (solicitor) | Erol Cinar Lawyers |
HER HONOUR:
Introduction
1This proceeding involves an unprofitable joint venture (“JV”) of a 19-unit development located at 211–212 Nepean Highway, Seaford (“Development”).
2The parties are the plaintiff, Pugwall Pty Ltd (“Pugwall”), a company controlled by Martin Clark, and the first defendant, Arthur McKenzie Investments Pty Ltd (“AMI”), a company controlled by Arthur Charles McKenzie, the second defendant.
3The Development was to be undertaken as a JV between Pugwall and AMI, subject to a written 2016 JV Agreement (“JVA”), which was signed in around April 2016 but undated. Ponza Nominees Pty Ltd (“Ponza”) was identified as the manager of the development. Messrs Clark and McKenzie are both directors of Ponza and their respective companies own one ordinary share each.
4The registered builder and construction manager was Ausbuild Constructions Pty Ltd (“Ausbuild”), a company controlled by Mr Clark. The site foreman/project manager was AMI.
5In this proceeding, it was common ground that AMI is liable for 50% of the development’s loss under the JV, however, there was a dispute as to quantum. Pugwall further alleges that AMI has breached the JVA due to conduct including:
(a) failing, refusing or omitting to make a further capital contribution of $251,210.00 or contribution of any further sum.
(b) failure to act, pursuant to an implied term, in good faith and with due skill and care by:
(i)failing to complete the development on time or within a reasonable time;
(ii)carrying out building work not authorised by building permits; and
(iii)failing to carry out building work to an acceptable standard.
6As a result, Pugwall claims that it has suffered loss and damage. Pugwall further claims that Mr McKenzie provided a personal guarantee under the JVA and seeks relief pursuant to that guarantee.
7AMI denies the allegations and says further that:
(a) the parties are only obliged to pay Development Costs to Ponza upon demand, and not by demand of Pugwall (clause 3.5 of the JVA);
(b) if a party is in default of payment of monies due and payable to Ponza or the JV, then Ponza shall provide seven days’ notice of such default, and Ponza has not issued such a notice upon the defendants (clause 12 of the JVA);
(c) Pugwall has not made its capital contributions pursuant to the JVA;
(d) Pugwall was expressly obliged to obtain all necessary permits for the development (clause 6.1 of the JVA);
(e) Ausbuild was the builder (clause 3.9 of the JVA).
8Mr McKenzie denies that he is liable under the guarantee as he was not personally a party to the JVA and it did not satisfy the requirements of s127 of the Instruments Act 1958 (Vic).
9In my judgment, I agree that the guarantee against Mr McKenzie is not made out. The proceeding against the second defendant is dismissed. My reasons are set out below.
10Otherwise, the agreed summary of issues for determination are answered as follows:
(a) Is AMI liable to contribute fifty per cent (50%) of the losses of the joint venture? Yes, this was common ground between the parties pursuant to clauses 2.2, 2.3 and 4.2 of the JVA;
(i)how much is AMI liable to pay? $1,258,335.46.
(b) Under the JVA, which entity/entities were responsible for the construction of the development? Ausbuild as construction manager in the back of office/named registered builder for the purposes of insurance/licence and AMI as project manager/foreman onsite overseeing the day-to-day build.
(c) Further and alternatively, is AMI liable for more than fifty per cent (50%) of the loss of the joint venture? Yes, for items (a) to (h) set out below.
(i)how much is AMI liable to pay? $210,959.00.
(d) Is Mr McKenzie personally liable as guarantor under the JVA? No.
11The total liability is $1,258,335.46 for 50% of the JV loss. Further, AMI is liable to the JV in the sum of $210,959.00 for specific losses arising from a failure to exercise reasonable care and skill. Accordingly, there will be judgment for Pugwall against AMI in the sum of $1,469,294.46 plus interest. I invite the parties to prepare draft orders to give effect to these reasons. I will determine any issue concerning costs on the papers.
The relevant facts
12The JVA provided for Ponza to have the authority to make decisions concerning the Development, including (but not limited to):
(a) Appointment of builders, surveyors, consultants, architects, engineers, lawyers and accountants.
(b) Financing.
(c) Sales.
(d) Insurance (clause 3.5 of the JVA).
13A separate bank account would be established for the JVA in the name of Ponza, with all costs of the Development to be processed through that account (clause 9 of the JVA).
14Under clause 1.9 of the JVA, Development Costs were defined to include:
…all costs incurred in the construction of the Development including, but not limited to:
a)Costs to build and develop the Apartments, including any moneys advanced by a financier with or without security over the Property or any part thereof;
b)Any insurance premiums;
c)All architect, engineering and building works required to complete working drawings and pay the agreed charges deemed part of the contractor’s costs;
d)Any interest payable on construction funding;
e)Any legal or accounting costs related to the Development;
f)Any surveying fees, costs and fees to any authority;
g)All costs of refinancing and servicing Pugwall’s Mortgage loan secured against the Property during the period of the Joint Venture;
h)Interest at 10% per annum paid on the value of Pugwall’s contribution to the Joint Venture…commencing from the time the Property is vacant, until such time, Pugwall shall be entitled to retain all rental income therefrom;
i)All other fees, expenses, liabilities and costs associated with the Development or incurred by the Manager or the Joint Venture.
15AMI to be employed as site foreman and Project Manager at a rate of $65.00 per hour (incl GST) (clause 3.7 of the JVA).
16Ausbuild to be employed as Construction Manager and Builder at a rate of $65.00 per hour (incl GST) (clauses 3.8 and 3.9 of the JVA).
17Jennifer Clark to be appointed as JV accountant, for a fee of $20,000.00 (unless unanimously agreed by the Joint Venturers to change accountant (clause 35 of the JVA).
18The JVA provided that the Joint Venturers would contribute equally to the costs of the Development and that the proceeds from sale of the apartments and any subsequent profits (or losses) would be divided equally between the Joint Venturers (clause 2.2 of the JVA).
19Pursuant to clause 2.1 of the JVA, it was acknowledged that Pugwall would contribute the Land to the JV, representing a contribution of $480,000.00 (being the equitable value of the Land). Under the JVA, Pugwall was to be paid the above capital contribution plus interest, from monies obtained from the sale of Apartments and prior to the calculation of profits from sale (clause 2.3 of the JVA).
20On 14 August 2017, Pugwall obtained construction funding for the Development, by executing a Facility Agreement with Australian Securities Limited (“ASL”) up to a limit of $5,552,000.00 (“ASL Loan”).
21Both parties made an initial capital contribution of $150,000.00 to cover consultants or designs that the funder would not fund.
Pugwall’s claim
22Pugwall relied on the special referee audit reports of Mr Hockley, the JVA and the reports of Mr Buchanan and contended that the JV made a significant loss of $3,251,121.00 as the Development went overtime and over budget.
23Pugwall said that works were carried out on units 17 and 19 without valid planning and building permits. Due to these illegal works, a building notice and then a stop work notice were issued. The planning permit expired in December 2018 and no further work could be undertaken. The top floor had to be removed as required by the Frankston City Council and the parties had to apply to VCAT for a building permit.
24The second failure was due to the project management of the time and cost of the Development which resulted in delay and cost overruns.
25Pugwall submits that under the JVA, the project manager role, including organising permits and fulfilling council responsibilities, fell to the defendants.
26Pugwall says that the additional funds were contributed by Ausbuild, a related entity of Pugwall.
27The first part of the claim is the 50% share of the Development’s loss which equates to $1,649,811.00 for each joint venturer.
28The second part of the claim is the alleged interest component on the Ausbuild finance in the sum of $782,952.00.
29In addition to that, Mr Buchanan examined the documents and invoices of the Development and calculated that AMI is responsible for a $3,251,121.00 loss. He says that due to mismanagement of the construction as project manager, the loss in its entirety is due to AMI.
30The third part of the claim is that Mr McKenzie is personally liable for the debt of AMI, whether it is a liability of 50% of the loss as calculated pursuant to the Hockley report, or more under Mr Buchanan’s assessment. Pugwall wishes to engage the guarantee obligations under the JVA.
31Each of the contentions are dealt with below.
Is AMI liable to contribute 50% of the losses of the JV?
32Pugwall said that the parties should not cavil with the Hockley report as it is an independent audit of the JV finances. The defendants agree that the loss is set out in the first Hockley report, save for an adjustment on the market value of unit 19 which was ultimately not pressed at trial, but says that the liability is limited to 50% as set out in clause 2.3 of the JVA.
33AMI says that the real loss came from the 1 July 2018 mutual decision when AMI was convinced by Pugwall to continue with the build on unit 19, notwithstanding there was no building permit for a theatre room on level 4.
34AMI says that Mr Buchanan fails to take into account the roles set out in clause 3.8 and 3.9 such that Ausbuild has no responsibility as the named “builder” on the Development. AMI further submitted that the JVA envisaged that the JV partners would not profit from their services to the Development and therefore it was not open to Ausbuild to charge interest on its outstanding payment claims on the completion works.
35The parties rely on the special referee audit reports of Mr Hockley.
36It was common ground that AMI was liable to contribute fifty per cent (50%) of the losses of the JVA pursuant to cl 2.2, 2.3 and 4.2 of the JVA.
37The only point of difference in relation to quantum was the sum of $150,000.00, being the difference of the defendants’ alleged market value of unit 19 and its discounted purchase price paid, the interest on the Ausbuild progress claims and the losses the JVA claimed incurred due to the demolition of unit 17 on the basis that at the material time:
(a) The second level constructed on the fourth floor of unit 17 had an approved building permit with endorsed plans;
(b) AMI was no longer a party to any agreement with Pugwall; and
(c) Pugwall’s decision was unilateral.
Special Referee Report
38In order to undertake a forensic audit of the books and records of Ponza, Mr Hockley considered source documents and information, including the bank statements, invoices and other primary documents (e.g. loan statements). He used these source documents to independently verify the profit (loss) of the JV and balance sheet as reported in MYOB and externally prepared financial statements.
39In the first Hockley Report, Mr Hockley noted that the JVA provided that the Joint Venturers would contribute equally to the costs of the Development and that the proceeds from sale of the apartments and any subsequent profits (or losses) would be divided equally between the Joint Venturers (clause 2.2). He also noted that the JVA provided that the Joint Venturers would permit the encumbrance of the Land and the Development “in the ordinary course” for the purpose of obtaining finance (clause 4.10).
40It was acknowledged that pursuant to clause 2.1 of the JVA, Pugwall would contribute the Land to the JV, representing a contribution of $480,000.00 (being the equitable value of the Land).
41On or around 10 August 2017, the NAB loan had a balance of $1,170,298.30. The NAB loan was extinguished on 16 August 2017 by payment of the following amounts in the preceding days:
(a) Payment of $250,000.00 on 10 August 2017 from Mrs Clark’s NAB bank account;
(b) Payment of $7,904.49 on 14 August 2017 from Pugwall’s NAB bank account 822161102; and
(c) Payment of $914,534.32 on 16 August 2017 from the Pugwall Bank Account. On 16 August 2017, $914,884.32 was deposited into the Pugwall Bank Account, with the narration “Settlement Proceeds 211 & 212 Nepean Hwy Seaford.” It appears this payment was an advance by ASL.
42On or around 14 August 2017, Pugwall obtained construction funding for the Development by executing a Facility Agreement with ASL up to a limit of $5,552,000.00 (“ASL Loan”). The ASL Loan was secured by a first ranking mortgage over the Land, in favour of ASL. Under the ASL facility agreement, the ASL Loan fell due on 15 August 2018.
43Based on an email thread between Mr Clark and ASL between 13 June 2018 and 25 June 2018, Pugwall sought to rollover the ASL facility agreement but this request was declined due to alleged breaches of the ASL Loan conditions.
44Pugwall obtained further construction finance from Darnel Pty Ltd (“Darnel”) on 13 September 2018, for a facility limit of $6.5m. An initial advance of $3.5m was advanced by Darnel to extinguish the ASL Loan. From 17 September 2018 to 7 October 2019, Pugwall made total drawdowns of $2,776,083.00 to fund the payment of progress claims issued by Ausbuild for the completion of the Development.
45The Darnel facility was extinguished by receipt of proceeds of sale from the apartments.
46The Joint Venturers each made a capital contribution of $150,000.00. Mr Hockley was able to substantiate the contributions by both parties.
47Mr Hockley noted that when goods or services were provided to the Development, a Supplier would issue an invoice to Ausbuild. Ausbuild would then recover these costs by issuing a progress claim to Ponza. Ponza would then record the claim as a Construction Cost Asset.
48Mr Hockley noted that the progress payments are paid by Ponza to Ausbuild, financed by construction funding from a third party financier. Up until September 2019, ASL provided construction funding to the Development, being replaced by Darnel in September 2018.
49Mr Hockley notes that Pugwall is the largest creditor recorded on the Ausbuild Creditor Report with total invoices of $1,530,572.08 to 31 March 2021. To make a payment, a drawdown request was made, with those funds generally remitted to Ponza (usually from either Pugwall or CB Maintenance (another Clark related entity) as recipients of the drawn down funds from the financier) to allow Ponza to pay Ausbuild’s progress claims. As Pugwall was named as the Borrower on the ASL and Darnel Loans, the drawdowns are recognised as a loan to Pugwall in Ponza’s accounts.
50In relation to the $480,000.00, being the equitable value of the land as at the date of the commencement of the JV, Mr Hockley has calculated the interest payable on Pugwall’s contribution, using 1 April 2016 as the assumed start date of the JV, and 26 March 2021 as the end date — this being the date it appears Pugwall was repaid their initial capital contribution from the sale of unit 3. Mr Hockley performed a simple interest calculation, calculated monthly, to arrive at total interest payable of $231,584.00.
51The interest on Mrs Clark’s loan of the $250,000.00 advanced to extinguish the NAB loan was calculated at $88,082.00.
52Mr Hockley noted that Pugwall was on-charging Ponza via the Ausbuild Progress Claims, for interest on outstanding Ausbuild progress claims. The Loan Document contained calculations of the interest on outstanding Ausbuild progress claims. Mr Hockley initially found that as Ausbuild was to be engaged by Ponza (and not Pugwall) under clause 3.8 of the JVA. It is not clear how (if at all) Pugwall was entitled to on-charge interest on outstanding progress claims to Ponza.
53Mr Hockley said that if it is found that such entitlement exists, the calculation of interest on the outstanding Ausbuild Progress Claims was the sum of $677,841.00, compared to the total of $1,304,423.00 invoiced by Pugwall using a simple interest calculation using a rate of 10% per annum. to calculate monthly interest on the outstanding Ausbuild progress claim balance at the end of each month, for the period February 2018 to 31 March 2021 as he was not then aware of any entitlement to charge a default interest rate of 14% per annum calculated monthly.
54Mr Hockley concluded that the FY2021 Profit and Loss Statement according to the account balances prior to the completion of apartment sales, and post-completion of apartment sales, was $2,516,671.00.
55In the first Hockley Report, he did not allow for the Ausbuild interest of $677,841.00 on its unpaid progress claims. He included it in the supplementary report after a Judicial Registrar made orders that Mr Hockley make a supplementary report limited to setting out a calculation of interest charged by Ausbuild on an alternative (compounding) basis and correcting any errors identified by him. This resulted in the calculation of $782,952.00 on a 10% interest rate and 14% default rate for the debt.
Oral evidence of Mr Hockley
56Mr Hockley said that he was instructed to undertake a forensic audit which was twofold. First, to verify and review the invoices provided by Ausbuild for the Development. Second, he then reconstructed the profit and loss and balance sheet of the JV based on the JVA and the material provided to him. He completed the audit with some limitations where some materials were not then available, but he was confident that it is reasonable, true and accurate.
57The balance sheet is effectively a reconstruction immediately prior to the sale of the properties from the jointly appointed instructions. The jointly appointed instruction was to reconstruct what the construction costs were for the project, subject to the JVA. This included build cost plus interest cost, which under the JVA were defined as construction costs.
58Mr Hockley said that there was recognition of:
(a) the Land as part of the JVA as being an agreed value of $1.73m.
(b) the actual Ausbuild invoices issued as progress claims. (The reference to creditors is Ausbuild as the builder for their cost to the JV and progress payments).
(c) the J Clark entry is the $250,000.00 contribution made when NAB was rolled to a facility to ASL. The interest owed to her is a 10% interest rate at simple interest based on the same interest rate under the JVA. Where there is no agreement as to interest, Mr Hockley defaulted to simple interest.
(d) the $480,000.00 as the Pugwall loan on the original purchase of the land provided for at clause 2.1(a) of the JVA. No cash was contributed, it was the Land contribution.
(e) the Pugwall and Darnel loans were verified.
(f) the $150,000.00 capital contribution each was verified.
(g) the capital contribution allowed for an interest rate of 10% per annum.
59The post completion balance sheet immediately after the disposal from the sale of the units discloses that the first amounts went towards sale costs, repayment of the Darnel loan and Pugwall as part of their capital loan repayment. Some further payments were made to Ausbuild to reduce the creditors, but after that, there was a net asset shortfall in interest on the Pugwall capital with $190,000.00 still owing, the J Clark loan of $88,000.00, the capital amount on the J Clark loan and the balance of the creditors owed to Ausbuild as the builder of the construction works. The loss shared by the joint venturers was then found to be $1,258,335.00 each.
60The interest calculation set out in the report was, as at 31 March 2021, in relation to Pugwall and the J Clark loans. Mr Hockley said that the interest on the outstanding progress payments for Ausbuild was replaced in the supplementary report. He initially excluded interest in respect of the Ausbuild progress claims, the $250,000.00 loan contributed by J Clark for the NAB loan facility in relation to the third party loan funds and the $480,000.00 capital contribution at the 10% rate in the sum of $677,841.00. He then revised the calculations in his supplementary report.
61The Ausbuild interest claim in the second report factored in some adjustments to the progress claims for invoices determined to be not in the definition of construction costs. Mr Hockley said that the first report’s calculation as to interest should be disregarded and replaced with the interest calculation in the sum of $782,952.00. Mr Hockley said that he had been asked to assume that interest on the Ausbuild progress payments accrued using an initial rate of 10% and a default rate of 14%, calculated monthly compounding on balances at the end of each month. Should the Court agree that the Ausbuild progress payments attract interest, then this is the amount that should be adopted.
62Pugwall was on-charging Ponza via the Ausbuild Progress Claims, for interest on outstanding Ausbuild progress claims. It claims that it is entitled to charge interest on the same basis as interest of a third party financier (such as NAB, ASL and Darnel) using an initial interest of 10% and then a default interest rate of 14% compounding monthly. I agree with the defendants that where Ausbuild is engaged by Ponza under clause 3.9 of the JVA to act as the Builder of the Development, Ausbuild was to charge at cost. As such, Ausbuild is not entitled to on-charge interest on outstanding progress claims to Ponza. Further, and in the alternative, it was not established on the evidence before the Court, on a balance of probabilities, that there was an agreement between the joint venturers to establish an entitlement to charge interest on a compounding basis and with a penalty rate. The terms of the JVA contemplated that the joint venturers were to provide their contributions to the JV at cost only.
63Mr Hockley noted that the MYOB report of the balance sheet of Ponza claimed a loss of the JV in the sum of $5,037,284.00 according to their balance sheet as at 30 June 2021. However, the defendants emphasised that Mr Hockley found a loss of $2.5m.
64The defendants claimed that unit 19 had been sold for under market value. Mr Hockley conceded that in the event of an under-market value sale of a unit to Mr Clark in the amount of $150,000.00, being the JVA loss, he would adjust the value by another $150,000.00 to $2.35m. The defendants relied on a marketing projection by the real estate agents for the value of $610,000.00 based on a per square meterage calculation. Mr Clark said that he believed that value was unit 19 with the top floor. There was no independent expert valuation to otherwise support the contention and no leave granted to file such a report on the last day of trial, taking into account the principles set out in Aon Risk Services Pty Ltd v ANU[1] and ss7–9 of the Civil Procedure Act 2010 (Vic). Ultimately, the under-market value ground was not pressed by the defendants. They otherwise relied on the findings of Mr Hockley in his report.
[1] (2009) 239 CLR 175.
65In my view, each of the joint venturers have a share of the JV loss in the sum of $1,258,335.00.
Under the JVA, who is responsible for construction?
66Mr Clark said that Mr McKenzie advised him that he could not be the registered builder on site as he did not have a current building licence or a sufficient level of insurance to cover the amount required of the Development. He said that Mr McKenzie asked Mr Clark whether his building company, Ausbuild, could be the registered builder and Mr McKenzie would develop the property — i.e. organise trades, sub-contractors and permits. Mr Clark agreed. As Mr McKenzie/AMI did not have the capacity to handle the trade accounts/creditors, it was agreed that Ausbuild/Mr Clark would handle this aspect of the project.
67Originally, the joint venturers contemplated that AMI/Mr McKenzie was to be the builder. Mr Clark said that it was not planned for him or his entities to be the builder. When Mr McKenzie could not obtain finance for the Development, he came to Mr Clark with the proposal. Mr Clark said that Mr McKenzie would have needed to reacquire his licence for a building of this size. The parties then agreed that Mr McKenzie/AMI use Ausbuild/Mr Clark’s licence and build. Mr Clark delegated responsibility to AMI as a registered builder. When Ausbuild/Mr Clark’s licence was in jeopardy, that was when Mr Clark stepped into the project.
68Mr McKenzie agreed that he has been a registered builder for commercial and residential developments since 1999. He agreed that he had some experience in constructing such developments. Mr McKenzie said that he initially was going to develop the site himself and there were plans for 19 units. He approached the agent for the property, and he signed a contract to purchase the Land, subject to finance. The finance fell through and so he came to Mr Clark with a proposal for a JV. Mr McKenzie had not entered into a JVA before.
69Mr McKenzie agreed that he asked Mr Clark to contribute the Land and that they would both develop the property. Mr McKenzie said they agreed that Ausbuild was to be the builder and AMI would be the site manager. His licence did not cover to building of this size, so he suggested using Ausbuild’s licence. Mr McKenzie agreed he organised the trades, day managing, and project managing of the site and was involved in the amended permits after the initial permit was obtained by Pugwall.
70Mr Clark said he and his entities were commercial and industrial builders, not a domestic builder, so he relied on Mr McKenzie/AMI who was experienced with these types of projects and he said that he trusted his joint venturer at the time.
71Mr Clark said that originally there was not going to be a “construction manager” under the JVA, however, the label was given to the role by the solicitor who drafted the JVA. The defendants contend that the construction manager is higher up in the hierarchy for the project, being construction manager at the top of the chain of command, then builder, then the project manager and then the site foreman (or supervisor). Mr Clark said that the project manager was higher up as they had control over the project. Messrs Clark and McKenzie agreed that Ausbuild took on the accounts management role by collating and putting invoices in the accounting software and paying them.
72Mr Clark claimed that AMI was in charge of the Development. AMI organised and retained the subcontractors to work at the Property and the invoices were to the attention of AMI/Mr McKenzie. Mr McKenzie called for the tenders and then forwarded the invoices for the Development to Mrs Clark as the JV accountant for payment. Mr McKenzie said that he was on site every day. He did all the programming and used Ausbuild’s licence to undertake the work.
73Mr Clark said that Ponza was incorporated at the request of Mr McKenzie. He said that it was a management vehicle that the joint venturers could make decisions “fifty-fifty”.
74Pugwall said that the parties did not follow the strict terms of the JVA and Mr Clark says that the defendants took over the role of obtaining the necessary planning and building permits on behalf of Pugwall. Mr Clark said that AMI organised the building permit dated 17 October 2016 and nominated Daniel Rea as the relevant building surveyor. The stage 2 building for the basement excavation and piling is the amended building permit on 15 December 2019.
75Mr Clark said that he was like silent partner for the JV in that he provided the licence, insurance, was the contact for the funders and provided the Land. He said that Ausbuild did the accounts for the Development.
76The defendants claimed that ASL only dealt with Mr Clark and had no idea of the role of AMI/Mr McKenzie. There is correspondence on 21 August 2018 claiming that Mr Clark had not disclosed a joint venturer. Mr Clark said that he found this surprising as he claimed that he and Mr McKenzie went to see ASL in the beginning and was part of the meetings with the brokers. Mr McKenzie agreed that they spoke with ASL through one of his contacts. Mr Clark said that he and Mr McKenzie both agreed to go with ASL. Mr Clark said that ASL wanted to sign up with Pugwall because that was where the security was, being the Land. Mr McKenzie agreed that this was why Pugwall ended up signing all the finance documents.
77Mr Buchanan said that Pugwall instructed him that Mr McKenzie was instrumental to obtaining finance for the Development. He accepted that none of the ASL letters were addressed to Mr McKenzie. Mr McKenzie said that he was involved in one meeting with ASL. Mr Clark said that ASL was concerned that works were being carried out without relevant building permits in place. ASL also said that overclaiming had occurred in charging for works twice. Mr Buchanan did not refer to this issue.
78Mr Buchanan said that the paperwork on behalf of ASL was not done very well. He said that ASL noted that the JV partner had not been disclosed to ASL. Mr Buchanan was not able to discern why the JV partner was not disclosed to ASL at the time of funding.
79Mr Buchanan agreed that all of ASL’s correspondence was with Pugwall and not Mr McKenzie.
80Mr Buchanan concludes that the loss and damage suffered is $3,251,121.00 by reason of AMI’s conduct, but there remains $1,495,577.22 of additional costs. Mr Buchanan said that he did not know where these additional losses should be allocated for the construction over run. It is therefore a JV cost.
81Mr Clark says that all the subcontractors were engaged on the Development by AMI. Invoices were sent to Ausbuild in its accounts management role where it proceeded to record and pay them. Mr Clark produced a feasibility study for the Development to see if the project should proceed. The study projected a profit of $2,650,849.41. It was common ground that Mr McKenzie’s response was that he could build the project cheaper using his trades and methods.
82Around August 2017, Mr McKenzie instructed Jardine Johnstone to make an application to amend the permits to Frankston City Council dated 17 August 2017. The changes included “Removed roof gardens, decks, roof balustrades, stair and lift access and replaced with roof deck/BBQ area over Unit 17”. Mr McKenzie said that he initially bought unit 17 without the top level and the amendment for the roof deck/BBQ was subsequently made by both joint venturers.
83Mr Clark liaised with the quantity surveyor for ASL. He contacted Mr McKenzie for estimates on quantum.
84Mr Clark conceded that he was the contact on site for the building surveyor. There are a series of emails between Mr Clark and Marty Sadlier of MCG Quantity Surveyors from 16 to 22 May 2018 in relation to building programs, progress payments and delays.
The quantity surveyors’ evidence
85Mr Buchanan said he prepared his first report following a review of a cache of documents provided to him by Mr Clark. They provided a history of invoices, emails, plans, drawings and correspondence in relation to the Development. He reviewed the documents and tried to identify what steps had been taken and how the project reached the position it did before the dispute occurred. In appendix J, he lists the folders of information provided by Mr Clark to Mr Buchanan. They formed the basis for the report. Mr Buchanan said that he was to be provided with documents from AMI pursuant to a court order made on 13 December 2019 but he never received anything from them. He said he would have looked at the material if they had provided documents.
86Mr Buchanan identified works from invoices and included figures regarding interest charges from spreadsheets provided by Mr Clark and he defers to the accountant in relation to the charges and interest. Mr Buchanan checked all invoices that referred to this Development.
87Mr Buchanan opines that AMI was carrying out the role of the builder and did so badly, resulting in the loss.
88Mr Stewart is the expert for the defendants. He joins issue with the responsibilities, and he relied heavily on what the JVA says, whereas Mr Buchanan and Pugwall say the parties did not strictly comply with the provisions of the JVA as borne out by the source documents.
89Pugwall relies on the first Buchanan report of 30 September 2020. Mr Buchanan notes that he has been instructed to accept that AMI was the Site Foreman and Project Manager and that Mr McKenzie performed these roles. The JVA does not set out the scope of the Project Manager and Site Foreman’s role.
90The defendants rely on the report of Mr Stewart. Mr Stewart noted that Mr Buchanan had been provided with more documents than him. Mr Stewart noted that he replied to what was provided to him at the time and stated:
Whist we have endeavored to identify all salient issues in the following sections, we advise that given the limited documentation provided to us that a full and thorough context of understanding of all matters arising to this dispute and subsequently may not be understood by just a review of one expert report prepared by one side of the dispute action. …
[N]o reference is made in the a 'responsibility matrix' or similar format which party of the JVA is responsible for the management and completion of the construction documentation. However, in Section 6 of the JVA Building Insurance and Planning Permits are mentioned, so I find it highly irregular that other critical pieces of approval such as building permits and completed construction documentation is not mentioned at all.
Further, I am concerned that the RBS would even no [sic] of another building company owned and operated by Pugwell, nor why such a change would be made without direction by Pugwell. It is both highly unusual and irregular for such to occur without the parties knowledge.
91It is common ground that the JVA does not set out definitions for “construction project manager”, “builder”, “project manager” and “site foreman”. Mr Buchanan did not specify the general scope of services of a builder or construction manager. Mr Buchanan said that the hierarchy is construction manager, being the licence holder, and then builder. However, a project manager could sit outside of the builder and act on behalf of the client as a liaison between the client and builder, or work for the builder and operate on more than one project. The project manager could be above the builder or construction manager if they are external.
92The construction manager was the licensed builder on this project. Mr Buchanan said that Ausbuild was the licensed builder who also holds the construction manager’s position and in the “normal way of things” would be in charge of the build, but he was instructed that this was not what occurred on site.
93Mr Buchanan agreed that in modern times, a builder can maintain supervision of a site with technology and only attend on site every couple of weeks.
94Every worksite and development is different but Mr Stewart said that it was standard practice for the construction manager to be at the top of the hierarchy. He noted there was no clear and concise definition of the roles contained in the JVA specific to the project. He said that:
Unfortunately based on the information provided to me for review, I cannot be certain about my assumption in the above paragraph, nor the actual roles each entity were undertaking and responsible for on this project. I am left with being solely directed by the organizational hierarchy as mentioned throughout this report with respect to a responsibility matrix.
95Mr Stewart said that if Ausbuild did not issue an invoice until September 2018, it would be a worry, as a builder would need to be included in any progress payment.
96Mr Stewart said that a construction manager would be working for the builder and the builder would establish the invoicing. In the present case, Ausbuild was the builder and the construction manager. They are two separate roles. A project manager is usually an employee of the builder.
97Mr Stewart said he understood that AMI was a project manager and site foreman. He said that usually a project manager is not onsite day to day. From his view of the documents, Mr Stewart said that the role of AMI was more of a site foreman than a project manager. He questioned why there was both a site foreman and project manager for a project of this scale. Mr Stewart agreed it was a question of definitions.
98In my view, the titles used in the JVA are mere labels with no definitions contained in the agreement as to their position descriptions. The Court must look to the evidence as to what the joint venturers each undertook on a day-to-day basis for each item claimed.
99I find that the JVA records Ausbuild as the “builder” because it was the entity that had the necessary insurances and building licence. It delegated the actual role of construction of the Development to AMI. This, however, did not change the ongoing liabilities of Ausbuild in relation to the ongoing defect liabilities and warranties which would fall onto Ausbuild as the named “builder”.
100On the evidence before the Court, AMI’s contribution to the JV was to construct the Development and be on the ground day to day. Ausbuild was the construction manager, operating predominantly from its office space. In my view, the joint venturers in this instance had distinct and complimentary skill sets in relation to onsite and back of office work, but in other areas where the directing minds of the corporate entities were managers of the JV and where the JVA required the joint venturers to agree on decision making that affected their liabilities under the joint venture, they had some duplication of their respective contributions.
101The practical consequence of this reinforces the lack of control of Pugwall over certain defects claimed in relation to the construction site up until September 2018 when Mr Clark said he took more of an active role given the problems experienced on the project and the joint venturer’s dispute over the equalisation of “capital contributions”. However, given the lack of role clarity, the joint venturers are at risk in relation to other items in which there was overlap.
102For the reasons set out below, in my judgment, Pugwall relied on AMI and its appropriate skill in discharging their obligation under the JVA as project manager and site foreman in relation to the following items:
(a) costs to the neighbour’s property due to excavation works and spoil located on their property;
(b) concrete slab incorrectly laid and its removal;
(c) water meter and tapping installed in the wrong location;
(d) power pole wrongly located;
(e) render block working;
(f) incorrect balcony work;
(g) council fines; and
(h) additional foreman.
103The balance of the items claimed by Pugwall are shared losses. In the present case, in order to determine which entity was responsible for the items complained of, an analysis needs to be undertaken on a case-by-case basis.
Is AMI liable for more than 50% of the loss of the JV?
104Pugwall alleges that there is an implied term of the JVA that AMI would act in good faith and exercise reasonable skill and care in carrying out its obligations under the JVA. It claims that in breach of the implied terms of the JVA, AMI failed to carry out its obligations under the JVA in good faith and with due skill and care.
105Pugwall says that if the Court finds that the defendants were responsible for the build and they breached their implied duty, then AMI ought to be liable for 100% of the JV’s loss.
106The conditions for implying a term into the agreement are set out in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (“BP”)[2] and interpreted by Mason J in Codelfa Construction Pty Ltd v State Railway Authority (NSW).[3] The term must:
(a) be reasonable and equitable;
(b) be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
(c) be so obvious that it goes without saying;
(d) be capable of clear expression; and
(e) not contradict any express term of the contract.
[2] (1977) 180 CLR 266 at 283.
[3] (1982) 149 CLR 337 at 347.
107In adopting the BP test, Mason J stated that “courts are slow to imply a term” and observed that “the more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the questions at issue”.[4]
[4] Ibid 246 [6].
108In Astley & Ors v Austrust Limited,[5] the High Court found that contracts for services contain an implied promise to exercise reasonable care and skill in the performance of the relevant services. This implied contractual duty is not affected in any way by the parallel tortious duty to take reasonable care and skill.
[5] [1999] HCA 6.
109That case involved persons who had given consideration for the provision of professional services and as such expected that those services be provided with due care and skill pursuant to their contract. The present case involves a JV.
110A JV is, in law, nothing other than a contract. The parties are bound by the express and implied terms of the agreement between them. Such obligations or duties may require the parties to act with due care and/or in good faith towards each other. The defendants deny that there was an implied term to act with due care and/or in good faith towards each other.
111In Grocon Constructors (Victoria) Pty Ltd v APN DF2 Project 2 Pty Ltd (“Grocon”),[6] the Court of Appeal observed that:
(a) The BP test conditions are cumulative and import different considerations.
(b) The High Court refused to imply a term that would operate in a partisan fashion as it “must be reasonable and equitable”.[7] This will require a consideration of the matrix of facts in which the contract was agreed.[8]
(c) The Court must consider whether the term is necessary for the purpose of “giving to the transaction such efficacy as both parties must have intended that at all events it should have”, making the agreement work or avoiding an unworkable situation so that an implied term “must be necessary to give business efficacy to the contract”.[9] The High Court in Commonwealth Bank of Australia v Barker noted that “[i]mplications which might be thought reasonable are not, on that account only, necessary”.[10]
(d) The condition that an implied term “must be so obvious that ‘it goes without saying’” requires consideration of whether, at the time that the parties were making their bargain, the suggestion of insertion of the implied term into the agreement by an “officious bystander” would have been met “with a common, ‘Oh, of course’ from the parties”.[11]
(e) Gibbs J in Ansett Transport Industries (Operations) Pty Ltd v Commonwealth,[12] observed that the “width and lack of precision” of a term supplied an argument against implying it under the condition that an implied term “must be capable of clear expression”.[13]
(f) Their Honours held that conflation of the “reasonable and equitable” and the “necessity” conditions of the BP test may lead a court into error.[14]
[6] [2015] VSCA 190.
[7] Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 442.
[8] Grocon (n 6) [141].
[9] Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 66.
[10] (2014) 312 ALR 356 at 365–6 [28]–[29]; Grocon (n 6) [142].
[11] Grocon (n 6) [143], quoting BP (n 2) 283–284.
[12] (1977) 139 CLR 54 at 62.
[13] Ibid [144].
[14] [2015] VSCA 190 at [145].
112It is not settled under Australian law that an obligation to use good faith when entering and performing a contract will always be implied.[15] There is no general principle in Australian contract law to use good faith when negotiating a contract, in the absence of an express term.[16] A requirement to negotiate a contract in good faith has been imposed by law in select circumstances. For example, the Franchising Code of Conduct requires the parties to a franchise agreement to act in good faith towards each other, including in negotiating the franchise agreement.
[15] Bhasin v Hyrnew (2014) 3 SCR 494 at [568] per Cromwell J.
[16] Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45 at 156.
113Australian Academia has recently made observations in relation to the enactment of codes of conduct which promote good faith and has provided some certainty in some commercial dealings as to whether the duty of good faith applies to the transaction. However, it is commented that the business community needs further regulation on the doctrine of good faith and on fair dealing more generally.[17]
[17] Jessica Viven-Wilksch, ‘Good Faith in Contracts: Australia at a Crossroads’ (2019) 1 Journal of Commonwealth Law 273, 304.
114The doctrine has also been recognised in Victoria: see, for example, Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL.[18] In that case, Buchanan JA accepted that an obligation of good faith could be implied into some contracts. However, his Honour at [25] expressed reluctance “to conclude that commercial contracts are a class of contracts carrying an implied term of good faith as a legal incident... so that an obligation of good faith applies indiscriminately to all the rights and power [sic] conferred by a commercial contract”.[19]
[18] [2005] VSCA 228.
[19] Ibid.
115His Honour did recognise, in the same paragraph, that it might “be appropriate in a particular case to import such an obligation to protect a vulnerable party from exploitive [sic] conduct which subverts the original purpose for which the contract was made”.[20] In that case, his Honour did not need to consider whether such a term should be implied into the agreement under consideration because, “even if such an obligation was imposed… it was not breached”.[21]
[20] Ibid [25].
[21] Ibid [27].
116In the same case, Warren CJ noted at [2] that “there has been clear recognition of the doctrine of good faith”.[22] However, her Honour pointed out, “courts have, more often than not, decided these matters on other bases and thereby avoided the conceptual difficulty that can attend a concept of a duty of good faith”.[23]
[22] Ibid [2].
[23] Ibid.
117In Far Horizons Pty Ltd v McDonald’s Australia Ltd,[24] Byrne J in the Victorian Supreme Court held that an implied duty of good faith existed in franchise agreements. Good faith was understood as “the reasonable exercise of powers: not capriciously or for some extraneous purpose”.[25]
[24] [2000] VSC 310.
[25] Ibid [119].
118If a term is not expressly provided in a contract, it may be implied, however, only if such term is not inconsistent with the express terms of the contract.[26]
[26] Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 at [194] and [208].
119In Burger King Corporation v Hungry Jack’s Pty Ltd (“Burger King”),[27] a duty of good faith and reasonableness ensures powers under a contract are only exercised to the extent necessary to achieve the parties’ legitimate contractual interest. The Court found this (or a similar) duty could be implied by law in certain classes of contract. In Burger King,[28] an obligation of good faith and reasonableness was implied into the performance of a franchise agreement. As a result, such obligations may be implied if they are reasonable and necessary for the effective operation of that type of contract, particularly standard form contracts.
[27] (2001) 69 NSWLR 558.
[28] Ibid.
120The New South Wales Court of Appeal in Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd observed that the content of an implied duty of good faith requires:[29]
(a) the parties to cooperate in achieving the contract’s objectives;
(b) honest conduct;
(c) reasonable conduct, having regard to the parties’ interests; and
(d) parties to have regard to their own legitimate interests as well as those of the other party. This does not require parties to act in the other party's interests or to subordinate their own legitimate interests to those of the other party.
[29] [2012] NSWCA 184 at [144].
121In my view, the issue of whether there is an implied duty of good faith does not arise in the present case as clause 4.7 of the JVA expressly provides that each joint venturer has such a duty. It states:
The Joint Venturers shall be honest, faithful and act in good faith in all activities and dealings with each other and make decisions that are in the best interests of the Joint Venture and the carrying on of the Development as a commercial venture.
122Although pleaded, at trial the allegations in relation to the duty to act in good faith were not pressed, but rather, the submissions were directed to the implied duty to act with reasonable care, skill and professionalism. I find that, given the JV involves the performance of services, applying the principles set out above, it is an implied term of the JVA that the parties would exercise reasonable skill and care in carrying out their obligations under the JVA.
Cost of illegal works/permits
123Mr Stewart said a site foreman manages the trades but does not usually engage trades. This is done by the builder. He said that there could be confusion due to a lack of role clarity between the joint venturers, given the absence of definitions in the JVA. He said that there is a hierarchy with a construction manager and builder and within that structure they would be aware of what is happening on site. Mr Stewart said in relation to working outside of the permit:
I cannot ascertain how Buchanan can imply that costs attributable to this item can be as a consequence of failures by AMI to manage the planning application process and building permit process adequately. It was not his role, but rather the role and responsibility of Pugwell [sic].
124Mr Stewart said that under clause 6.1 of the JVA, Pugwall was to obtain all necessary permits. This is not just the original permit, but all permits. The question is whether AMI subsequently applied for the amended permit as a site foreman/project manager or as a manager of the JVA. Mr Stewart agreed that parties may go outside of their roles under the JVA but there is risk in doing so and such risk is on both parties.
125Mr Buchanan said that the document trail shows that AMI was closely involved in the planning application and building permit process. Mr Stewart said that he was not clear if Mr McKenzie undertook this task in his role as a manger or as site foreman to be a party to the building permit process. He did not see how a manager could engage subcontractors and trades instead of the builder.
126Mr Buchanan notes that one of the most significant factors in this matter relates to the addition of construction above roof level on the east end of the building which extended units 17 and 19 beyond the scope of the original planning approval. Pugwall says that unit 17 was purchased by Mr McKenzie in March 2017 and many of the changes to the design of the building appear to be directed towards improving unit 17 by increasing its size. Unit 19 was sold to a non-related third party which withdrew in late 2018, after which date Mr Clark (Pugwall) purchased the unit (in December 2019) as part of refinancing the completion works. Changes to the design which increased the size of unit 19 were made more than 12 months before Mr Clark (Pugwall) took over the purchase.
127Mr Buchanan says that AMI was to ensure delivery of a completed development on time, on budget and at an acceptable level of quality. The Development has not been completed on time. The Development has not been completed on budget. The quality of the works was not completed to an acceptable standard at the time that Pugwall took over following the stop work notice.
128On 24 September 2018 Lorenzini (RBS) issued a “Written Direction To Fix Building Work” notice to Mr Clark and to Pugwall to demolish the top floor structure related to unit 19 which had been constructed without a planning or building permit. Also, the builder was to carry out various fire rating works to comply. The notice identifies the compliance deadline as 15 October 2018.
129On 19 October 2018, Frankston City Council issued a refusal of the amended planning application. The refusal includes:
apparent changes to levels at rear of property (and potentially neighbouring properties) through placement of fill within the floodplain area. Extension of dwelling 17 to north not accepted. Internal changes to 17 & 19 accepted. Addition of theatre room to dwelling 19 not supported because it exceeds height limit. Roof deck extending into set back not accepted.
130By delegate report for application for amendment of permit under s72 of the Planning and Environment Act 1987 (Vic), Frankston City Council determined that unit 17 setbacks had been reduced from what had been approved — the building had been made bigger and the council could not check the dimensions. It was not acceptable and the additional bulk did not accord with the overlay of the character of the area. As such, the works were not allowed.
131In relation to unit 19 and the addition of the theatre room, Mr Clark said that it exceeded the maximum height of the building. When he got the original permit in 2010, the top floor had to be removed because it could not fit onto the building. When Mr McKenzie suggested the addition, Mr Clark claimed that he questioned whether it could be done.
132When Mr Clark asked Mr McKenzie to build the external walls and put the roof up for unit 19, it was discovered to be too high, so Mr McKenzie cut down the studs to lower the roof. However, the building surveyor said that the room was illegal and was too low by reference to the permits. Mr Clark concluded that the height requirements meant that the parties should not have contemplated these works in the first place.
133The “as built” drawings for unit 17 show the boundaries that go beyond the approved plans. The raised concrete platform area was an outside fireplace that is a floor higher than permitted. The neighbours complained about the elevation and the council required this to be removed.
134On 11 December 2018, Lorenzini (RBS) issued a stop work notice on units 17,18 and 19 following a site inspection on 17 September 2018. The notice also states “Nil” in relation to works exempt from stop work notice. The notice clearly states that no further works are permitted. This caused significant problems for the Development.
135Mr Buchanan said that the documents disclosed that Mr McKenzie had day to day control of all of the works. Most of the correspondence is between Mr McKenzie and the architect, engineer, planning consultants and building surveyor.
136Mr McKenzie said that he liaised with Mr Clark and all their surveyors and the architects to finalise the s 32 contracts in mid-February 2016. Mr McKenzie agreed that he was directing the communications. Mr McKenzie was also organising the fee proposals for the plan of subdivision around that time.
137By email dated 6 February 2018, Mr Clark gave instructions to Mr McKenzie to push out the theatre room and also plumb and sneak in a shower so it has an ensuite. The email instructs Mr McKenzie to “[m]aybe do not show on the drawings but build it in”. Mr Clark said that this was for the design work for unit 19 and the application had not been processed yet. At this point, Mr Clark had not purchased unit 19 for himself and he said that unit 19 was “for the project” and not for his own personal benefit.
138Originally the permit allowed for a three-level construct. Mr Clark said that this was amended in respect of unit 17 to a fourth level. The original permit was issued by VCAT. Mr Clark said that he thought they would have to go back to VCAT to amend the permit. He said Mr McKenzie told him that he could speak with the council and get the approvals. Mr Clark said that there was no adding of value to the JV in increasing the level of unit 17 to the JV — it was for Mr McKenzie’s benefit as he was to then own that unit.
139By email dated 25 March 2017, Mr McKenzie informed Mr Clark that he decided to take unit 17 as part of his moneys for the job. The email refers to changes to the plan. Mr McKenzie said that Mr Clark was going to take unit 19. Clause 18 of the contract provides that the purchaser has the right to increase the size of the Lot subject to no extra cost affecting the amendments to be borne by the purchaser and no amendment shall materially affect any other Lot. In Mr Clark’s evidence, Mr McKenzie said it had been agreed that Mr McKenzie would take unit 17 for himself. Mr McKenzie also suggested that Mr Clark take unit 19 as a set off.
140Mr McKenzie said that it was also a mutual decision to amend the roof so that it would not have an effect on Mr Clark’s insurance level. Mr McKenzie signed a contract of sale for unit 19 around 2 January 2017. He said that he signed early to save on stamp duty.
141Once the unit 17 deck was approved, Mr McKenzie said that they put in an amended application to the council via town planners, Jardine Johnstone. By letter dated 26 June 2018, Jardine Johnstone wrote to Frankston City Council in relation to an amended application for units 17 and 19 works. Mr Clark said that he was not involved in engaging Jardine Johnstone — Mr McKenzie used Chris Johnstone as his town planner. Mr McKenzie agreed that he gave instructions to Chris Johnstone but he got Mr Clark’s “ok”. Mr McKenzie said that he drafted an amendment to increase the sizes of units 17, 18 and 19.
142The amended planning permit for the Development dated 26 June 2018 was lodged by Chris Johnstone and Mr McKenzie and they were described at item 7 as “applicant and owner details”. Mr McKenzie agreed that he put his name down as the main contact and as a joint venturer. He said it involved the architect, engineer, town planner and the joint venturers over some many months.
143Mr Clark said that he was not aware of the issues with unit 17 until the neighbours and the Kananook Creek Association complained that there had been construction beyond the planning permit. He thought this was around August 2018.
144This application was refused in around October 2018.
145Mr McKenzie said that he was instructed by Mr Clark to build to increase the sizes for units 17, 18 and 19 during the time that the council was deliberating on its decision.
146The reasons for the refusal included the extended unit 17 balcony. Mr McKenzie said that it was because of the unit 19 roof which had to be taken down. He said that they knew unit 19 was going to be more difficult, which was why they separately lodged his amendments in relation to unit 17.
147Mr McKenzie did not agree that the council refused the application on the basis of the unit 17 raised concrete platform. He said that it was the bulk of unit 19 that was the main issue for the council.
148By email dated 15 May 2018, Warren J Foster Architects informed Mr Clark that they were not involved in the submission by Jardine Johnston to VCAT and he was not involved in any of the discussions. The draft drawings were sent to Jardine Johnston at Mr McKenzie’s instructions.
149Lorenzini Group (the building surveyor) issued to Pugwall, as the owner of the land, a “show cause notice” that building work had been carried out without a proper permit. There was then a stop work order for units 17, 18 and 19 for building outside of the scope of the building permits.
150By email dated 5 March 2018, Mr Clark wrote to ASL advising that they had two pours scheduled for the following week. The email further relevantly stated that:
I was waiting until these are done so it’s a substantial improvement in the project status.
We have done a lot of low level work and car parking whilst we have been awaiting a planning permit amendment for a 4th floor on the back 2 units it also changes the fire overlay requirements and gives us a significant saving in the glazing requirement which has all now been approved
The amended permit is meant to come through in the next couple of days. This also removes the need for warranty insurance for the project according to the building surveyor.
We cant [sic] pour until we have this, …
151Mr Clark agreed that by constructing the fourth floor, it was a departure from the planning permit. However, he said Mr McKenzie wanted the changes for himself and said that Mr McKenzie would get the approvals.
152By email dated 22 May 2018, ASL sent an email to Mr Clark in which ASL raised some concerns of the Quantity Surveyor in relation to the site, such as the delays, the variations, changes to the site without ASL consent and that unit 19, previously sold to a third party, is now being retained by Mr Clark. These issues were raised with Mr Clark, however, he said that he would forward these concerns onto Mr McKenzie.
153By email dated 22 May 2018, ASL informed Mr Clark that they looked forward to hearing from Mr McKenzie in relation to floor plans for units 17 and 19 to meet all the information sought. Mr Clark responded to the email in relation to delays that “Apart from weather there has been minimal delays some permit changes and adjustments only”, and in relation to the changes on site without ASL consent, “I’m not aware of this apart from… revised planning adjustment and the upper floor units being bigger adding value”.
154Mr McKenzie claimed that the plaintiff breached the ASL facility, and it was Pugwall’s responsibility, as Pugwall was the party to the loan agreement and did not advise ASL of the joint venturer or about the changes for a fourth level. Mr Clark did not agree. He said that he did not think it would be an issue and that Mr McKenzie was supposed to pay for the changes.
155By email dated 14 June 2018, Mr Clark wrote to ASL requesting a copy of the building permit and endorsed plans for the fourth floor. The email states that:
Its awaiting the cfa letter confirming this. just need the certification and that gets it all approved up until the next planning permit as I mentioned earlier. That’s not holding up the project or works as we are ok to fit everything off and complete everything. [sic]
156Mr Clark said that he was forwarding information given to him by Mr McKenzie. Mr Clark thought that the paperwork was in place but ASL was pointing out to him that the permits had not been approved at that time. The change of level meant that the building category changed and the fire rating needed signing off by the fire engineers. This email relates to the building beyond the scope of the original planning approval for the level 4 theatre room.
157By email dated 19 June 2018, Mr Clark wrote to ASL advising that “This is a normal process for this type of development where we are the developer as well as the builder”. The defendants claimed that this is a reference to Pugwall. Mr Clark said he was referring to the JVA. However, this email pre-dated ASL’s knowledge of the existence of AMI (set out in the correspondence of 21 August 2021). As at 19 June 2018, ASL was only aware of Pugwall as the developer and builder on the Development.
158The defendants claim that the email shows Mr Clark’s willingness to build beyond the original planning approval and permits in being “flexible and point of difference”. Mr Clark disputed this and said that he was reporting what Mr McKenzie had told him and he was referring to the JV and not to Pugwall. Mr McKenzie agreed that he used language of being “flexible”.
159By email dated 28 June 2018, Mr Clark sent an email to ASL in relation to the amended plans for the last stage of the building permits.
The building surveyor will issue the final section of the staged building permit once he receives the councils consent [sic]
This has no impact on the site progress which has picked up momentum with the inside walls rough in and plastering commencing
I will have an up dated detailed program for you early next week
160Mr Clark agreed that the project was progressing without the amended permits. He said that works can progress as long as they are not affected by the planning permits. He wrote that “it’s a staged thing and only an amendment so really has no bearing on what were doing, and progress its just a formality [sic].” Again, Mr Clark said that he was just relaying what Mr McKenzie told him. Mr Clark said that they had the permit for the unit 17 theatre room but not outside the theatre room or other changes to unit 17.
161Mr McKenzie said that the council took a long time to approve the plans. Mr McKenzie kept building without stamped plans. The building permit had not been stamped because landscaping had to be changed and further work was needed. The building inspector then put a stop work order. Every level had moved up 300mm and it had not been stamped by the council.
162By email dated 27 November 2017, the senior statutory planner of the council sent a copy of the approved letter and amended planning permit to Chris Johnstone and noted that at that stage, the plans had not been endorsed as the landscape plans did not reflect the existing conditions. She had advised Mr McKenzie of this when he came into the office earlier that day.
163On 1 July 2018, there was a telephone call between the joint venturers in which Mr Clark discussed that water proofing of the building could continue. Mr Clark said to build the walls and the roof and to get approval at a later stage. Mr McKenzie said he could get approval for the heights. They then agreed to go ahead with the walls and roof to waterproof the building. This was confirmed by an email of the same date attaching the unauthorised plans for unit 19. Mr Clark agreed that he wrote that the “program and pushing job is a must”. The project was severely delayed at this stage. Unit 17 had been built outside requirements and the plans had not been provided. He was hoping to minimise holding costs. Mr Clark said that the project was under financial strain from the beginning because Mr McKenzie would not make his matching capital contributions.
164By email dated 24 July 2018, Mr Clark wrote to ASL in relation to permits. He advised that the permits had not been processed yet.
165By email dated 12 August 2018, Mr Clark wrote to ASL stating that:
there has been a lot of progress with the roof finally going on considering we have had so much wind its been a problem keeping the water out for the past month , services rough in mostly completed tiling of wet areas commencing this week all windows are in and the units are locked up , plastering is well under way as is the external finishes are proceeding and we have started dropping the scaffold the front entrance and cross over are under way. …
We are resolving the permit problems as quick as possible its not easy when you have council offers on holidays and they don’t treat it as a priority as its such a minor thing to them. [sic]
166Mr Clark rejected the defendants’ contention that he treated permits as a “minor thing”. That statement was a reference to the council as it was an amended permit.
167By email dated 16 August 2018, Mr Clark wrote to ASL in relation to repayment calculation approval. The email provided that:
I was told we would have this all sorted a week ago a lot of the issues are trivial like drawings have the incorrect stamp on them etc I was hoping for further advise today to provide you with and are still waiting but will do so asap. …[sic]
The approval and permit process is what’s pretty normal now days as I have 3 other jobs with similar issues all since the government review of the RBP for building surveyors and town planning processors.
168The problem for the project was that they built beyond the permit on level 4. Mr Clark said that the three other projects had problems because of the building surveyors. Mr Clark said he was relying on Mr McKenzie to apply for the amended planning permits. He said that Mr McKenzie did all the leg work when it came to the building and planning permits. The defendants claim that Mr Clark saw each application and he exercised final judgment on whether applications were to proceed. Mr Clark denied this and said that he did not see all the drawings.
169On 28 August 2018, Mr Clark wrote to ASL stating that the application for the building permit had been made a month before the email sent by Mr McKenzie on 18 July 2018. He said that they had to go to VCAT to fix the council’s errors, but with follow up and investigation, he said that it became clear that the wrong drawings had been provided. The council did not approve the build and he said that the threat from the council was that they would require the building to be demolished. Mr Clark said that he and his father sat down with the CEO and town planner and tried to resolve it with the council. Mr Clark claimed that they had to go to VCAT to resolve the issues and trade off some of the matters.
170On 6 September 2018, the ASL representative informed Mr Clark that she had made enquiries with the council. The council advised “the planning permit application for the new proposed partially constructed increased height for apartments 18 & 19 was received approx… 12 weeks ago.” They were still considering the application and it would take a further 1–2 weeks for them to complete their review. ASL received an update on the status of their unconditional refinance, noting the default notice served on Pugwall had expired the day before.
171On 5 September 2018, the council endorsed the plans. Mr McKenzie went outside the permit of units 17, 18 and 19 to increase the size of all units. He said that he built what was discussed and agreed between the joint venturers.
172By email dated 6 September 2018, Mr Clark replied to ASL:
… yes that's correct on the back unit. it's only the top floor (Theatre room) of the rear unit being mine that is the latest application which they have had for 14 weeks as of monday.
The other units are all sorted.
I believe.
We have had advise on it The council have not give us any writtern response or querries on anything. but verbally said they will likley knock back due to political reasons . We are ready for vcat but can't go until we get there grounds of refusal that we believe they are struggling with. …
We have had a planning barrister look at all he is fine with it .
This dosnt stop us completing the balance of the job. [sic]
173Mr Clark said that the response was incorrect because the other units had not been sorted. Unit 17 had approval for a theatre room on level 4 and the actual construction was beyond the approval. The council was requiring a peer review. Mr Clark said that he was eager to go to VCAT because the job had stopped, pending a decision.
174Mr Clark did not agree that the entirety of unit 17 had to be demolished. The biggest problem with unit 17 was that the neighbours raised the issue that they were going to sue the council for not advertising the application. At VCAT, there was no option but to pull unit 17 down as it was the only way it would be accepted. The way the stairs had been built could not comply with the planning permit. Mr Clark denied that they pulled unit 17 down out of spite because it was to belong to Mr McKenzie.
175By email dated 9 December 2018, Mr Clark wrote to the planning prosecutions/investigations officer at Frankston City Council and copied to his architect, Warren J Foster Architects, and to Buckmaster Town Planners and said that he had to step in. Mr Clark engaged Warren Foster to take over all the permit and council liaison requirements from Mr McKenzie. Mr Clark was seeking to negotiate with the council as the Development had breached the planning permit and built outside of the requirements. The email relevantly states:
I believe I have explained this previously but to recap, Arthur is the Project Manager and a 50% JV partner in the development. I unfortunately only took on the building as the builder as Arthur did not have his commercial license up to date as he had let it lapse.
Arthur is responsible for the building, liaising with council and the building surveyor, obtaining all permits, compliance, all under the JV agreement. He is a registered builder in his own right.
He bought unit 17 for himself and applied to get a permit for the roof top to enhance his unit. It is well documented as to what went on here regarding the endorsed plans mess up. Arthur informed me that he had plans for unit 19 and was putting a submission in for the roof top extension of this unit similar to unit 17. He used his own town planner for this. I made it quite clear that it must be within the guide lines and that he needed to ensure he had councils in principle consent prior to this proceeding. He assured me that it all complied and there wasn’t an issue, it may just need to be advertised. He needed to make the building watertight and it was on this basis that I agreed with him to build the unit 19 structure on the belief we may need to pull it down if there were planning issues.
What has come as a big surprise is that he has not even followed the approved planning drawings but taken it upon himself to extend and change unit 17 (his own unit) and therefore constructed it outside the approved plans…
Arthur has partly tried to rectify this issue in the unit 19 planning submission which has currently been refused, even though the rejection has noted and agreed to some of the issues. We have also discovered that Arthur has even undertaken work beyond what was in this submission. To the best of mine and Warrens Foster’s knowledge we have picked up the discrepancies between the asbuilt and planning drawings
Warren has prepared documents for a resubmission to correct these issues and is seeking guidance and agreement with the council so as these issues can be addressed. …[sic] [Emphasis added]
176By email dated 11 December 2018, the planning prosecutions/investigations officer wrote to Mr Clark, copied to the architect, that the planning permit had expired. This meant that they were unable to build. The parties had to go to VCAT. They had a mixed outcome from VCAT and were reissued with a planning permit and were able to complete the project. Mr Clark then got the VCAT endorsed plans 19 June 2019 revision for units 17, 18 and 19. The process of obtaining the VCAT amended permit added about three months to the program. Mr Clark said that the VCAT approval was necessary for works to continue.
177There was a trade off with unit 18 and they did not have to pull it down.
178For unit 19, they had to pull the frame in and pull the roof sheeting off. The roof had to be pulled down and reconfigured.
179For unit 17, they were allowed to keep the walls on the perimeter where the bi-fold doors were located, but they had to pull the roof out, re-modify and re-lay the room and remove the stairs. The shower was moved to where the stairs used to be. The roof also had to be reinstated at level 3, not level 4.
180They had to pull the top floor of unit 17 down, get the engineer to redesign trusses, put in new roof sheeting, and the whole upper floor was demolished and put to waste. The stairs were removed and the robes in the bedrooms reconfigured to make it useable.
181The report of Mr Buchanan sets out the nub of the dispute between the experts. It notes that Mr Stewart relies on the JVA terms at clause 6, which provides that Pugwall must obtain all necessary planning and building permits and arrange for the insurance.
182Mr Buchanan identified that there were significant periods of time when works were being carried out on site without an appropriate building permit in place. Mr Buchanan said that he could see the amended planning permit dated 20 November 2017 but the drawings are not endorsed because the landscaping plans do not reflect the existing conditions. He said the fact that AMI did not follow this up to arrange for revised landscaping plans and obtaining endorsement of the plans is part of the management failure of AMI.
232Mr McKenzie said that there was an issue with the flood plain when they excavated for the sewer. The council inspected and said that they could not increase the level of the backyard without approval, and it had to be removed. The neighbours were not happy with the removal of the fence and the building up of the backyard. The neighbour asked for 100mm of soil and plants on top to rectify. Mr McKenzie said Mr Clark was in discussions with her.
233Mr Buchanan said that correspondence between the owners and the neighbours indicate that Mr McKenzie was involved in the southern boundary fence. The drawings identified Mr McKenzie as the client in relation to the demolition of the southern boundary fence works. Mr Buchanan said that this shows that Mr McKenzie directed the structural engineer in relation to these works.
234By email dated 31 August 2017, Ms Milne emailed Mr Clark attaching the correspondence she had with Mr McKenzie, together with photographs of “the mess/damage at the rear of my property and the quotation I have had done to repair and reinstate this damage.”
235Mr McKenzie said that they refilled the depression after the sewer works with sand. Ms Milne wanted soil, not sand. She provided a landscaping quote for $15,000.00 which Mr McKenzie submitted improved her pre-existing garden. Mr McKenzie told her that they could do the landscaping for her instead.
236Mr McKenzie conceded that the issue with the neighbour’s property as a result of the excavation works and spoil located on her property was due to his conduct. As such, the cost of the neighbour’s property due to excavation works and spoil located on their property in the sum of $36,710.00 was due to AMI failing to carry out its project management and site foreman’s duties with reasonable care, skill and professionalism.
237This ground is made out.
238As a consequence of this finding, the items claimed by Pugwall under the claim for additional consultants fees being invoice 11026603 in the sum of $1,936.00 dated 19 January 2017 in relation to the failure to support the neighbour’s property following demolition work and the follow up invoice 11026604 in the sum of $418.00 dated 2 March 2017 for inspection to check that compliance had been achieved are as a consequence of AMI not managing the construction properly in its role as project manager/foreman.
Power pole
239It was common ground that the power pole was erected in the wrong location. Mr Clark said they had to pay to get it relocated. Mr Clark signed off on the paperwork, however, he claimed that he relied on Mr McKenzie telling him that all was in order. He said that AMI set out the power pole on the old cross over and not the new cross over pursuant to the drawings.
240Mr Buchanan said that Mr McKenzie was responsible for the power pole wrongly being located as he met with the authority and power provider and agreed on site where the pole was to be located. The defendants claim that the power provider looked at the drawings and determined where it was to be installed. Mr Buchanan said there was some confusion set out in the correspondence as to where the pole should be located, and Mr McKenzie made the decision on where it would be installed. Mr Buchanan agreed that Mr Clark signed the original document for the pole, but the final sign off was by Mr McKenzie.
241Mr McKenzie said all the paperwork was sent to the company and the pole was close to the driveway. The power provider gave a dispensation and Mr Clark signed it off. The council said that it needed to be further away from the driveway. Mr McKenzie thought that the dispensation would cover it but that was not the case.
242By email dated 9 January 2020, the power provider emailed the site foreman:
The original plan from MacCormacks on 3/2/17 indicated they wanted the pole relocated approximately 3.5-4m ( based on original plan and scale of 1.200).
I had a site meeting with Arthur just prior to 6/6/17 after which I sent him an email advising we would be relocating the pole 3.2m North of its existing location. This was the distance agreed to on site.( see second attached email)
Also attached is an email from Arthur where he advises me the pole is 1.5m from crossover and I send him a letter to forward to council advising a 1.5m clearance is acceptable.
243Mr McKenzie said that he went off the plan. He claimed that the power provider advised him that she would get the council to approve the relocation of the pole. He said that he relied on the power provider and she was supposed to be the professional.
244Mr McKenzie said that the crossover was on the drawings but he was not part of the subsequent discussions. The email dated 14 January 2020 from Mr Clark to Mr McKenzie states:
We can’t believe how this has occurred
From the paperwork supplied you have signed of for the pole to be in the incorrect location (How could this happen )
We have meet [sic] with the power authority which have shown us what they sent you and the paper trail and there offer which you signed off.
We have know [sic] options but to have this pole relocated to the correct position as its in the concrete and needs 1.5 m clearance as per the planning permit
The … issue is likely to delay the completion of the project further as we cant [sic] get sign off on the permits from council that allows apartments to settle
245In my view, the cost of the power pole wrongly located, in the sum of $31,220.00, was due to AMI failing to carry out its project management and site foreman’s duties with reasonable care, skill and professionalism.
246This ground is made out.
Water meter
247The plumber told Mr Clark that he put the water meter where Mr McKenzie told him to put it. The plumber was there on an hourly rate. By email dated 22 January 2020, the plumber on site said that Mr McKenzie instructed him to put the water meter in the basement. Mr McKenzie said that the plumber is trying to “pass the buck” to him and it was not his responsibility as he discussed the location with the licensed plumber, and he relied on his expertise.
248Mr Buchanan said that in relation to the water meter issue, the plumber’s invoice stated that he placed the water meter and tapping in the location at the instruction of Mr McKenzie. Any trade working on site will be working under the direction of the foreman and supervisor on site. The plumber may very well raise a question, but the relevant trade here stated he was directed by Mr McKenzie to place the water meter in the wrong location.
249Mr McKenzie said that there was no room for the water meter and tapping except in the basement. The water board then said that it was installed in the wrong spot. Mr McKenzie said that he agreed with the plans and that the plumber said to put it in the basement instead.
250In my view, the cost of the water meter and tapping installed in the wrong location in the sum of $4,889.00 was due to AMI failing to carry out its project management and site foreman’s duties with reasonable care, skill and professionalism.
251This ground is made out.
VCAT proceedings
252Mr Buchanan said that the VCAT process ran from early 2019 to May 2019. This followed on from the stop work and the complaints made by the neighbours. He said that the 3–4 months delay could have been saved if the VCAT proceeding had not occurred. The question would then be what form the building would need to be returned to. The VCAT application addressed the top-level works outside the scope of the permit but also the issues relating to the set out of the building and the floor levels as constructed and neighbourhood disputes. He said that time would still need to be expended to obtain an outcome.
253Mr Buchanan said that there was an amended permit issued in mid-2018 allowing for some increase in the space at the top level to unit 17, but the outcome of the VCAT process was substantially less than what had been an approved permit. There was a requirement that the building be taken down from the last permit. The stop work notice and the direction to fix notice issued in late 2018 was for works outside the permit. The amended permit allowed some construction on the upper level of unit 17 but the final permit from the VCAT process removed that whole level and required a flat roof directly above unit 17. Mr Buchanan agreed that the position with the council was a better position than the negotiated outcome with VCAT and approved stamped drawings were made at VCAT. There was no VCAT order made to compel demolition for unit 17.
254The demolition of the top level of units 17 and 19 is the sum of $74,987.00 to take them down to the roof level. The two areas are roughly similar in size, so the cost is 50:50, being $37,493.50.
255Once the demolition was carried out, the roof had to be reconstructed over the exposed framing. This cost $79,394.00 for units 17 and 19. That includes work on levels 2 and 3. The cost for units 17 and 19 was $44,038.00 and again it is split 50:50. Reforming for unit 17 was therefore $22,019.00 (excluding GST).
256From late December 2018 and the end of the VCAT process, there are multiple drawings with markups and notes. Mr Buchanan’s costing was based on the fact that the roof on unit 17 was removed and it was outside the scope of his expertise as to whether it was required to be removed as he is not a town planner.
257AMI says that both parties were responsible for the construction works and thus are each 50% responsible for the losses. The defendants said that the parties made last minute changes or flouted the planning regulations to the permit, and it would be inevitable that the project would not be delivered on time or on budget. If the parties agreed to the changes, then that is one matter. If this occurred towards to end of the project, then Mr Buchanan said it would likely affect timing and cost.
258I have previously found that the joint venturers agreed to the changes, were being “flexible” with the approved planning permit in which they both considered permits applications to be “just a formality”, they wanted to push on with the project and they both agreed to building outside the permit in the knowledge that they might be required to pull it down if there were planning issues. The VCAT process arose as a result of this joint conduct.
259I further find that the demolition works on unit 17 following the VCAT process was not due to spite on the part of Mr Clark, but rather, I accept the evidence of Mr Buchanan that there were several issues on the table relating to the set out of the building, the floor levels and neighbourhood disputes which required an outcome. As part of the compulsory conference process, the Pugwall compromised on unit 17 to resolve these other disputes.
260This ground is not made out.
Concrete
261There was an issue in relation to the concrete slab being incorrectly laid and the cost of its removal. Mr Buchanan said that concrete had to be cut away and removed. He said that Mr McKenzie was running the site and appointed the trades to do the work. He was setting out works and it was incorrectly set out. Mr McKenzie agreed that he organised all the trades and was on site every day. Mr McKenzie agreed that he instructed the trades to put the concrete in the incorrect area.
262By email dated 13 August 2018, Mr Clark wrote to ASL about the footpath at the entry of the building because it was too narrow for people to walk into the entrance. They made the entrance wider. This was a different matter to the one relied on by the defendants in which the council required removal of part of the footpath. Mr Clark said that this was required because the concrete had been poured outside the permit and was in a different location to that referred to in the email. The defendants claim that the email shows Mr Clark was reporting to ASL that the development was going along “swimmingly” and that the changes were cost neutral. Mr Clark denied this and said that he had otherwise advised of the amendments.
263Mr McKenzie agreed that they had to increase the size of the front walkway for disability access so that it was more usable, however, they had decreased the garden bed. The council required the removal of part of the footpath to reinstate the garden bed.
264This ground is made out.
Council fines
265Mr Clark said that two trees had not been correctly protected and there were three fines issued by the council. Two in relation to tree protection removal and one in respect of Mr McKenzie being on site without a permit. Mr Clark said he was disappointed with Mr McKenzie as these fines should not occur. The trees were protected, then they were removed. There was a warning, and it was still not reinstated. The last fine was in early 2019 when Mr McKenzie had left the site. Mr Clark said that Mr McKenzie was on site in January 2019.
266Mr Buchanan said that Mr McKenzie was responsible for the 23 January 2019 fine as the council officer found him working on site doing work. The council officer found Mr McKenzie working on site after the expiry of the planning permit and he was fined.
267Mr McKenzie said that he and Josh Spittal (the additional site foreman) were responsible for keeping the site safe and he “missed” the tree protection requirement, resulting in an infringement dated 17 August 2018.
268Considering the above, I find that AMI did not carry out its project management and site foreman’s duties with reasonable care, skill and professionalism and it is liable for the council fines in the sum of $2,954.00.
269This ground is made out.
Additional site foreman
270Mr McKenzie agreed he was in charge on the ground and if things were out of left field or required a hard decision, he went to Mr Clark. He said that he was working hard and long hours on site. Mr Clark was in the office with 4–5 staff. Mr McKenzie agreed he was building the job with his trades and was looking after everything on site and directing the trades on site. He later hired a site foreman, Josh Spittal, to assist him. I find that AMI unilaterally decided to hire a foreman because it was unable to fulfil the role as the job was too big for Mr McKenzie. AMI was required under the JVA to fulfil the role as foreman. As such, AMI is liable for 100% for the cost of the additional site foreman in the sum of $54,334.00.
271This ground is made out.
272Further, Mr McKenzie left the site on 11 December 2018 and Mr Spittal continued to work as the site foreman to complete the works. Pugwall claims an additional amount of $81,010 for Mr Spittal as site foreman during the period January to August 2020. This ground is rejected .
273I accept Mr McKenzie’s evidence that Mr Clark excluded him from the site and would only agree to AMI’s return on condition that Mr McKenzie balance out the JV contributions. As set out above, Mr McKenzie had no obligation under the JVA to make a further capital contribution of approximately $250,000.00. As such, the defendants were wrongly excluded from the site by the plaintiff and the cost of the additional site foreman is not directly attributable to AMI’s alleged failures.
Rendering blockwork
274Mr Buchanan stated that the finish to the exposed blockwork in the common area did not meet the standard expected of a good quality multi-unit development. His uncontested cost to improve the appearance by providing a rendered finish was the sum of $20,672.00.
275Given AMI was responsible for the build and the blockwork was of poor quality, it has breached its implied duty to carry out its work with reasonable care, skill and professionalism. AMI ought to be liable for 100% of the loss for the rectification of the blockwork.
276This ground is made out.
Incorrect balcony work
277Pugwall claims that because of the incorrect set-out and construction of balconies and terraces, they did not drain properly, which caused water ingress to the apartments. There were defects to the rear of unit 7 in the concrete which required waterproofing and tiling to rectify. The balconies to units 13, 14 and 18 and 19 did not drain properly. Tiling rectification works were required.
278Mr Buchanan estimated that the cost to rectify the balcony defects was the sum of $48,636.00.
279Given AMI was responsible for the build and the balcony work was defective, it has breached its implied duty to carry out its work with reasonable care, skill and professionalism. AMI ought to be liable for 100% of the loss for the rectification of the balconies to units 7, 13, 14, 18 and 19.
280This ground is made out.
Additional finance costs
281Mr Clark said that the ASL funding fell through because the building permit was not valid, which was in breach of the conditions of the loan. They were also concerned about the delays and ASL called in their loan. By letter dated 17 August 2018, Mr Clark received a notice of default on behalf of ASL. ASL did not process the progress claims while the dispute was on foot until new finance was in place. Ausbuild stepped in to cover the payments during this period.
282Mr McKenzie agreed that ASL called in the loan and issued a notice of default dated 17 August 2018. The principal reason ASL pulled the funding was because they built outside the permits. Mr McKenzie said that he did not deal with the books and ASL. He sent hourly rate bills to Mr Clark. Mr McKenzie agreed that he discussed with Mr Clark work relating to progress claims and informed him where the job was up to. Mr Clark would attend the site with the quantity surveyor and assessment would then go to ASL.
283When ASL would not fund the development, Ausbuild then picked up the cost. Mr Clark said that he discussed with Mr McKenzie that if Ausbuild put in money, then AMI had to match that amount. He said they also agreed that the interest rates would also be covered by the JV as though it was a third party financier. Mr Clark said that there was an email that said AMI should pay to decrease the interest calculation. He said that Ausbuild was to be paid an all-in rate no less than what was charged by independent funders.
284Mr McKenzie denied that Mr Clark discussed with him Ausbuild taking over the funds like any other third party lender and that it would be part of the costs of the JV. He did not recall Mr Clark saying that Ausbuild would provide finance to the JV.
285By email dated 19 August 2018, Mr Clark wrote to Mr McKenzie as follows:
You have missed the point we need to get the costs up otherwise I can’t afford to carry the on costs
going forward . at the moment you will see via the project costs im out of pocket 2.5 miilion and the
short or amount we can clain agaianst the direct building cost is only around 1.6 miilion any funder
will pick up on the cost when doing for our selves …
We nned to ensure we have enough to finish the project as I have no extra funds and need to get some money in the keep my other prjects going [sic]
286Mr McKenzie said that he knew Mr Clark was funding the project because he said he could write it off on his tax. Mr McKenzie did not protest Mr Clark funding the project to finish it. He agreed that it was a cost of the JV to pay extra money to keep it rolling. He denied that he agreed to pay interest similar to the ASL Loan on the Ausbuild funds.
287Mr Clark said that Mr McKenzie was able to contact Darnel to agree to lend funds to complete the Development. Mr McKenzie agreed that he contacted James Melzak at Darnel to help them out. He said that Mr Clark had “stuffed up” on the ASL Loan by not informing them of the JVA. They paid out ASL by refinance. On 22 August 2018, Connect Capital proposed the letter of offer with a loan of $6.5m for six months with an interest rate of 9.5% per annum with a default of 14.5% per annum (“Darnel Loan”). Messrs Clark and McKenzie provided personal guarantees for the Darnel Loan.
288Mr McKenzie said that he gave a personal guarantee for the Darnel Loan because they required it for the refinance.
289Around September 2018, the VBA sought a response in relation to the Development on behalf of some neighbours by failing to advise the neighbours. Mr Clark was involved in the investigation. Work had to be done to rectify the problems. He got involved at that stage because of his builder’s licence.
290By email dated 25 October 2018, Mr Clark wrote to Mr McKenzie about the interest costs and requested that he make a contribution. The $51,000.00 per month or $1,700.00 per day was Ausbuild’s interest and at that particular time, the amount overdrawn was $1.6m. Mr Clark did not recall whether Mr McKenzie responded to the email. Mr Clark claimed that at the end of the month, he provided all creditors’ reports and the loan accounts to Mr McKenzie so he could see the costings for the Development. Mr McKenzie said that in his view, Mr Clark had “stuffed up” the ASL Loan, so this cost was to be borne by Mr Clark.
291By email dated 31 October 2018, Mr Clark sent an email to Mr McKenzie after receipt of stop work notices. The interest and holding costs running at $53,000.00 per month and the late completion meant that the council would not issue a permit unless all units were complete. As such, Mr Clark suggested pulling down the internal and external walls of unit 17 to comply with the endorsed plans, as VCAT would take too long to approve the variations.
292Mr McKenzie denied that he agreed to Mr Clark’s proposal. He said that unit 17 did not have to be pulled down because it had a permit. Mr McKenzie said Mr Clark took it on himself to pull it down as he was the builder, and it was on his licence. Mr McKenzie said that Mr Clark made the decision to pull unit 17 down and have the discussions with the council.
293By email dated 11 November 2018, Mr McKenzie wrote to Mr Clark stating that he needed his accountant to check the JV finances as he could not believe that they were then making a loss of about $1.5m.
294By email dated 16 November 2018, Mr McKenzie said that he was having difficulty doing the paperwork on site with so many trades and workers taking up his time.
295By email dated 26 November 2018, Mr McKenzie said that he was asking for help on site.
The email stated:
will continue to push as hard as I can as I wish my life back and want this completed asap.
all my trades are working good and know what is expected. they all put in 100%..
j.v says 20K for jenny.. I think she dose deserve what she is getting and her interest %10 for moneys.
I would b interested in seeing were I agreed to change the J.V as I have no recollection of this. [sic]
296Mr McKenzie said that he had asked for help onsite prior to that time. It was the reason why he hired his site foreman to assist him. Mr McKenzie denied that he took on a job that was too big for him. He said that everyone said that the work was flying along on site.
297Given my previous findings in relation to the construction outside of the approved planning permits, because the ASL funding fell through by reason of the joint venturers building outside of the permits and Pugwall had not disclosed the existence of AMI; development costs are to be borne 50:50 between the joint venturers; budgeting; and Ausbuild was to charge for its services at cost, this ground is not made out.
298Accordingly, for the reasons set out above, I find that AMI failed to discharge its obligations under the JVA with reasonable care and skill. AMI is liable for a total amount of $210,959.00, consisting of:
(a) costs to the neighbour’s property due to excavation works and spoil located on their property in the sum of $36,710.00 plus invoice 11026603 in the sum of $1,936.00 dated 19 January 2017 and invoice 11026604 in the sum of $418.00 dated 2 March 2017 in respect of additional consultant’s fees;
(b) concrete slab incorrectly laid and its removal in the sum of $9,190.00;
(c) water meter and tapping installed in the wrong location in the sum of $4,889.00;
(d) power pole wrongly located in the sum of $31,220.00;
(e) council fines in the sum of $2,954.00;
(f) render block working in the sum of $22,739.00;
(g) incorrect balcony work in the sum of $48,636.00; and
(h) hiring an additional site foreman in the sum of $54,334.00.
299The balance of the items sought by Pugwall are the joint venturers’ equal responsibility and do not arise because of a failure on the part of AMI to carry out its duties with reasonable care, skill and diligence. The remaining claims flow on from my anterior finding that the joint venturers agreed to build outside of the permits.
300The increased costs set out above (due to the building defects) were as a result of the actions of AMI in discharging its contribution to the JV, which in the case of AMI, was the day-to-day build. AMI’s JV contribution was not discharged with appropriate due care and skill. As such, Pugwall ought not be penalised for the failure of AMI to fulfil its contribution with reasonable care and skill in relation to items (a) to (h) above.
Is McKenzie liable as guarantor under the JVA?
301Pugwall says that objectively construed, it does not matter that the JVA did not include an execution clause for the individuals to sign. When construed as a whole, the intention of the JVA is that the parties were each liable for 50% of the liabilities of the JVA.
302Pugwall asserts that Mr McKenzie is personally liable for the liabilities of AMI. In this regard, Pugwall relies upon the following facts:
(a) Mr McKenzie is the sole director and shareholder of AMI;
(b) Mr Clark is the sole director of Pugwall;
(c) Messrs McKenzie and Clark are directors and equal shareholders of Ponza/the Manager;
(d) “Guarantor” means either Messrs Clark or McKenzie in respect of their respective guarantees of the obligations of the Joint Venturers (clause 1.10 of the JVA);
(e) the Joint Venturers shall assume severally the Development Costs relating to the Development, or the Manager in their respective ownership proportion. In the event that the mortgagee of the Property requires that the Joint Venturers and/or Guarantors provide joint and several guarantees, the Joint Venturers and/or Guarantors indemnify one another for their respective percentage interest as set out in clause 2.2 (clause 4.2 of the JVA);
(f) Mr Clark guarantees the obligations of Pugwall under the Agreement. Mr McKenzie guarantees the obligations of AMI under this Agreement (clause 19.1 of the JVA);
(g) If at any time default shall be made by the respective Joint Venturer (the Defaulting Joint Venturer) in payment to the Manager or to a third party of a required payment, under this Agreement, and such default shall continue for the period of seven (7) days after the date provided by the Manager for payment thereof, the Guarantor will forthwith pay to the Manager or to the required third party such moneys owing in respect of which default shall have been made by the Defaulting Joint Venturer and the Guarantor shall indemnify and keep indemnified the other Joint Venturer against all losses and other moneys payable by the Defaulting Joint Venturer under this Agreement and also against all losses, costs, charges and expenses whatsoever which the other Joint Venturer may suffer or incur by reason of any default or breach or in the observance of performance by the Defaulting Joint Venturer of the agreements and obligations of the Defaulting Joint Venturer made under this Agreement (clause 19.2 of the JVA);
(h) the liability of the Guarantor shall not be abrogated by:
(i)the granting of item credit or indulgence or other concession to the Defaulting Joint Venturer;
(ii)any other person or corporation giving a guarantee of the Defaulting Joint Venture’s [sic] obligations to the Joint Venturers;
(iii)the liability of the Defaulting Joint Venturer ceasing for any cause. (clause 19.3 of the JVA)
(i) The guarantee hereby given shall be a principal obligation and shall not be treated as ancillary or collateral with any other obligation howsoever created to the intent that the guarantee shall be enforceable by the remaining Joint Venturer without first taking any steps or proceedings against the Defaulting Joint Venturer and notwithstanding the loss by the remaining Joint Venturer of any security and notwithstanding any laches, acts or omissions on the part of the Defaulting Joint Venturer (clause 19.4 of the JVA);
(j) This guarantee shall not prejudicially affect or be prejudicially affected by any other security or moneys in respect of which this Guarantee has been given but such other security or Guarantee shall be deemed to be collateral herewith (clause 19.5 of the JVA).
303Mr McKenzie says that he is not bound by the guarantee for the following reasons:
(a) it does not comply with s126 of the Instruments Act 1958 (Vic);
(b) the only signatures that the parties placed on the JVA were in the execution block for their respective companies. There was no block for execution as guarantors or in their personal capacities. That alone manifests an unequivocal objective intention that Mr McKenzie did not intend to be bound by the terms of the JVA or the guarantee and indemnity in his personal capacity;
(c) Messrs McKenzie and Clark are not named in their personal capacities as parties to the JVA;
(d) there is no privity of contract between Messrs McKenzie and Clark;
(e) the law distinguishes between a company and its directors and shareholders.
304Mr Clark said that the JV was between three corporate entities, but he claimed that they were sole directors and the JVA bound them in their personal capacities. Mr Clark agreed that the execution clause only set out the companies. Mr Clark said that they each represented as directors of their companies and as individuals.
305The primary question for the Court to address in relation to the proceeding against Mr McKenzie is whether, in spite of not being named as a party to the JVA and the absence of an execution block for Messrs Clark and McKenzie, the second defendant somehow otherwise evinced an intention to be bound personally as a guarantor of AMI’s obligations under the JVA. The onus of proof lies on Pugwall.
306The question of intention relevant to the present dispute is in light of “the subject matter of the agreement, the status of the parties to it, their relationship to one another, and other surrounding circumstances”.[30] The parties were in agreement as to the applicable legal principles.
[30] Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 at [105]–[106].
307In Clark Equipment Credit of Australia Ltd v Kiyose Holdings Pty Ltd,[31] Giles J stated:
In the result, I conclude that the proper approach is to inquire whether there is to be found an intention that the signatory be personally bound to the contract evidenced in the document, meaning thereby not a subjective intention but an intention to be found objectively, notwithstanding a qualification attached to the signature. That intention, or lack thereof, is to be found upon the construction of the document as a whole, including but not being limited to the qualification attached to the signature, in the light of the surrounding circumstances to the extent to which evidence thereof is permissible. The inquiry is not limited to consideration of the signature and its qualification in order to determine whether or not the signature indicates an assent to be personally bound (emphasis added).
[31] (1989) 21 NSWLR 160 at 174.
308In Harris v Burrell & Family Pty Ltd,[32] Doyle CJ, Bleby J and Sulan J agreeing, discussed the relevant considerations as follows at [19]:
It is a matter of considering what the parties did, in the light of the surrounding circumstances, and then considering what that would have led a reasonable person in the position of the other party to believe.
[32] [2010] SASCFC 12 at [19].
309In Alonso v SRS Investments (WA) Pty Ltd (“Alonso”),[33] Edelman J found that a guarantee was still effective despite the absence of the director's signature in the guarantee block. Relevantly, his Honour noted at [50]:
The absence of signature does not preclude a finding that there is a manifest intention to be legally bound by the instrument. Indeed, most contracts are binding without signature. And even if a signature is omitted from a place where it might have otherwise appeared an intention to create legal relations can nevertheless be manifest.
[33] [2012] WASC 168 cf Sleaford v Worthing & Saunders [2020] NSWDC 231 at [37].
310In Alonso,[34] the lease in that case contained guarantee provisions and made specific reference to Ms Elliot as guarantor of the lessee’s obligations under the lease.
[34] [2012] WASC 168.
311There was an execution page which included separate execution clauses for the lessee and the guarantor. The execution clause for the lessee was signed by Ms Elliot above the word “Director” and her full name was printed above the words “Full Name”. The guarantor’s name was printed next to the words “Signed as a deed by” in the guarantor’s execution clause. There was no signature next to the guarantor’s printed name and the guarantor denied having printed her name next to the words “Signed as a deed by”. However, the witness signed his signature and printed his name and address below the handwritten words “Signed as a Deed by Sara Sandford”.[35]
[35] Ibid [59]–[61].
312The lease required all parties to initial any changes to the documents and Ms Elliot did this. She left the guarantee and indemnity provision unaffected.[36]
[36] Ibid [62].
313Two days before the Alonso lease was expressed to commence,[37] Ms Elliot wrote to Mr Alonso stating that the lease had been signed on the condition of the completion of the purchase of a business. The letter was signed with her unqualified signature without distinction as to whether she was signing in her capacity as a director or a guarantor. There was no suggestion that she did not agree to the term of the lease that she be a guarantor.[38]
[37] [2012] WASC 168.
[38] Ibid [63]–[65].
314Given the cumulative factors, Edelman J held that the guarantee was effective despite the absence of Ms Elliot’s signature in the guarantee block.
315In B & D Gippsland Investments v Lay & Anor (“B & D v Lay”),[39] the defendants were found to have evinced an intention to be bound by the guarantee in circumstances where the execution clause for the guarantee had been witnessed but not signed by them. The Lease in that case was headed “Lease of Real Estate with Guarantee & Indemnity” and contained specific extensive guarantee and indemnity provisions. Item 3 of the Schedule to Lease also named each of the defendants as parties to the Lease in their capacities individually as guarantors under the Lease in accordance with clause 15, and their addresses had been updated in a previous draft by their representative.
[39] [2021] VCC 993.
316Mr McKenzie accepted that the responsibility for the JVA was 50:50 for the two corporations and not the individuals. He said that the guarantees were given by the corporate entities.
317I accept the submissions of Mr McKenzie and find that the cases of B & D v Lay and Alonso can be distinguished on the present facts.[40] Although clause 19 of the JVA expressly deals with guarantees, the alleged guarantors were not named as parties in the written JVA and no personal execution block is provided. Messrs McKenzie and Clark are not personally a party to the JVA and signed solely in their capacity as directors of their respective companies. There is no privity of contract between the individuals. Objectively construed, Mr McKenzie did not intend to be personally liable to 50% of the liabilities of the JVA. As such, he is not personally liable for any breach under the JVA by AMI.
[40] Ibid; Alonso (n 38).
Conclusion
318For the foregoing reasons, there is judgment for Pugwall in the sum of $1,258,335.00, being half of the JV losses plus $210,959.00 for losses attributable to AMI’s conduct together with interest and costs.
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Certificate
I certify that these 68 pages are a true copy of the judgment of Her Honour Judge Burchell delivered on 15 December 2021.
Dated: 15 December 2021
Andrea Ko
Associate to Her Honour Judge Burchell
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