Scott Carver Pty Ltd v SAS Trustee Corporation - [2005] NSWCA 462

No judgment structure available for this case.

CITATION:
Scott Carver Pty. Ltd. v. SAS Trustee Corporation (formerly State Authorities Superannuation Board) & Ors., Ace Ceramics Pty. Ltd. v. SAS Trustee Corporation (formerly State Authorities Superannuation Board), Rightway Roofing Pty. Ltd. v. SAS Trustee Corporation (formerly State Authorities Superannuation Board) & Ors. [2005] NSWCA 462
This decision has been amended. Please see the end of the judgment for a list of the amendments.

HEARING DATE(S):
23, 24 and 25 November 2005

JUDGMENT DATE:

21 December 2005

JUDGMENT OF:
Hodgson JA at 1; Ipp JA at 110; Bryson JA at 129

DECISION:
1. Appeal by Carver and cross-appeals by SAS and Nubra dismissed with costs. 2. Appeal by Ace allowed in part. ; 3. The Master’s order that Ace pay 7.5% of SAS’s costs of the proceedings set aside, and in lieu thereof no order as to the costs of the proceedings as between SAS and Ace. 4. No order as to the costs of Ace’s appeal. 5. Appeal by Rightway dismissed with costs.

CATCHWORDS:
BUILDING & CONSTRUCTION - CONTRACT - DAMAGES - Defective building work - Damages awarded on basis of reasonable cost of rectification - Finding of fact that value of property not affected by defects - Property sold - Whether right to damages affected - COSTS - Recovery in Supreme Court from one defendant of less than $75,000 - Finding that reasonable to include this defendant in proceedings involving other defendants - Whether Part 52A rule 33(2)(e) of Supreme Court Rules applied.

LEGISLATION CITED:
Supreme Court Rules Part 52A rule 33

PARTIES:
Scott Carver Pty. Limited - appellant
Ace Ceramics Pty. Limited - appellant
Rightway Roofing Pty. Limited - appellant
SAS Trustee Corporation (formerly State Authorities Superannuation Board) - respondent
Nubra Constructions Pty. Ltd. - respondent
O'Brien Glass Industries Ltd - respondent
O'Brien Glass Holdings Pty. Ltd. - respondent
Spacetech Pty. Ltd. - respondent

FILE NUMBER(S):
CA 40801/04; 40761/04; 40810/04

COUNSEL:
S.R. Donaldson SC with A. Crossland for Scott Carver
M.R. Gracie for Ace Ceramics
S.A. Kerr for Rightway
F. Corsaro SC with R. McKeand SC for SAS
H.J.A. Neal for Nubra
Submitting appearance for O'Brien Glass Industries and O'Brien Glass Holdings
No appearance for Spacetech

SOLICITORS:
Ebsworth & Ebsworth, Sydney for Scott Carver
Whitfields, Drummoyne for Ace Ceramics
Henry Davis York, Sydney for Rightway
Clayton Utz, Sydney for SAS
Colin Biggers & Paisley, Sdyney for Nubra
David Campbell-Williams for O'Brien Glass companies
McDonald Slater & Lay, Mentone, Vic for Spacetech

LOWER COURT JURISDICTION:
Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S):
SC55052/98

LOWER COURT JUDICIAL OFFICER:
Master Macready

CA 40801/04
CA 40761/04
CA 40810/04
SC 55052/98

HODGSON JA
IPP JA
BRYSON JA
Wednesday 21 December 2005

SCOTT CARVER PTY. LIMITED V. SAS TRUSTEE CORPORATION (formerly STATE AUTHORITIES SUPERANNUATION BOARD) & ORS

ACE CERAMICS PTY. LIMITED V. SAS TRUSTEE CORPORATION (formerly STATE AUTHORITIES SUPERANNUATION BOARD)

RIGHTWAY ROOFING PTY. LIMITED V. SAS TRUSTEE CORPORATION (formerly STATE AUTHORITIES SUPERANNUATION BOARD) & ORS.

Judgment

1 HODGSON JA: The judgment appealed from was given in proceedings in which SAS Trustee Corporation (SAS) had sued Scott Carver Pty. Limited (Carver), Nubra Constructions Pty. Limited (Nubra), Rightway Roofing Pty. Limited (Rightway), Ace Ceramics Pty. Limited (Ace) and other parties for damages in connection with a building project undertaken for SAS at Chatswood, and in which a number of cross-claims had been brought.

2 Pursuant to reasons given on 28 November 2003, 12 May 2004 and 4 August 2004, Master Macready adopted in part a Referee’s report dated 3 April 2003, and made orders which dealt separately with different claims by SAS, identified as the waterproofing claims, the paving claims, and the pergola steelworks claims.

3 In respect of the waterproofing claims, the Master ordered that judgment be entered for SAS against Carver, Nubra and Rightway for $450,957.50, and against Nubra and Rightway for a further $150,319.17; and found that, of the total sum of $601,276.77, Carver was liable to contribute 15%, Nubra 25.5%, and Rightway 59.5%.

4 In respect of the paving claims, the Master ordered that judgment be entered for SAS against Nubra and Ace in the sum of $85,854.14 ($53,608.00 plus interest of $32,246.14); and found that Nubra was liable to contribute 30% of this and Ace 70%.

5 In respect of the pergola steelworks claim, the Master ordered that judgment be entered for SAS for $104,843.32 against Nubra.

6 The Master otherwise dismissed the claims of SAS and the cross-claims. He made various costs orders, including an order that Nubra and Ace pay 7.5% of SAS’s costs of the proceedings.

7 Carver, Ace and Rightway have each appealed from these orders. SAS and Nubra have put on cross-appeals. At the hearing of the appeal, Ace also filed a summons for leave to appeal, because the judgment against it was for less than $100,000.00. In my opinion, it is appropriate to grant that leave.

CIRCUMSTANCES

8 In 1989, the Zenith Centre, an office development comprising two towers at 821 Pacific Highway, Chatswood, was owned by two companies, SAS (70%) and Pritpro Pty. Limited (30%). A decision was made to join the two towers by means of a glazed pavilion. Carver won the design competition for the work.

9 The project manager, Colin Ging & Partners Pty. Limited (Ging) confirmed Carver’s appointment as architects on 19 January 1990, subject to execution of the Architect’s Contract. Although this contract was not signed until September 1990, and not delivered by Carver to Ging until 22 March 1991, all terms had been agreed by February 1990 and (according to the Referee’s report) the contract was probably on foot at this time. Carver’s role in the design phase was to provide schematic design, detailed design and specifications for the contract. Nubra was the construction manager.

10 Site establishment for the construction commenced in July 1990. Carver provided “limited but still significant” services in the construction phase, although after 30 September 1991, Pritpro took over the role of quality control. Practical completion was achieved on about 21 November 1991. The total project expenditure was about $9.9 million.

11 The waterproofing claims were founded on water penetration of the pavilion due to a combination of factors. Carver had specified a membrane to prevent water penetration between glass panels of the pavilion structure and the hob on which they were placed. Part of that membrane had been cut away by mistake before installation of the glass; but the glass contractor, namely O’Brien Glass Industries Limited and O’Brien Glass Holdings Pty. Limited (collectively O’Brien), had gone ahead and installed the glass on the defective membrane. Carver devised remedial measures, but these were not adequately carried out by Rightway under Nubra’s supervision.

12 The paving claims were founded on defects in the external paving. Ace was the paving contractor. Its contract was originally to include works associated with a concrete sub-bed; but these works were omitted before the contract was entered into, and they were performed by another contractor. After practical completion, on about 2 September 1992, a Deed of Guarantee was entered into between SAS and Ace, containing inter alia a promise by Ace to rectify defects notified to it during a ten-year period from the date of the deed.

13 On 4 July 1996, Pritpro transferred its 30% interest in the Zenith Centre to SAS, including any rights against any person engaged in the development of the centre.

14 On 13 June 1997, SAS commenced proceedings against Carver, Nubra, Rightway, Ace and other defendants including O’Brien.

15 In October 1998, SAS sold the Zenith Centre to a trust of which Perpetual Trustee Co. Limited was the trustee. This was not an arm’s length sale, and SAS held a 50% interest in the trust which acquired the property. It was in fact part of a sale by SAS of six major properties, with a combined value in excess of $1 billion. The purchaser obtained a valuation of the property at $170 million, and this was the sale price. However, the parties agreed to certain deductions from the price, including $2,352,752.00 for rectification of the pavilion. No funds were expended by SAS on rectification before or after the sale, and there was no obligation under the contract of sale for SAS to undertake any rectification works.

16 SAS’s claims were heard by a Referee, Mr. Geoffrey Markham, over thirteen days in April and May 2002. The claim against O’Brien was settled during the hearing, and Carver was a party to the agreement by which that claim was settled.

17 The Referee’s report was filed on 3 April 2003.

18 In relation to the waterproofing claims, the Referee found Nubra and Rightway each liable for $375,442.00; and he would have found Carver also liable in respect of these claims but for a limitation clause in the Architect’s Contract, which the Referee found protected Carver from these proceedings. However, the Referee also found that the terms of settlement with O’Brien meant that Carver would have been entitled to a 25% reduction in its liability in respect of the waterproofing claim. The Referee made findings as to the proportions which each should contribute: 70% and 30% as between Rightway and Nubra and, if Carver was also liable, Carver’s proportion to be 20% less 25% due to the O’Brien settlement.

19 In relation to the paving claims, the Referee found there were defective works performed by Ace totalling $53,608.00, for which Nubra was also liable; but he found SAS was estopped from pursing its claims against Ace by reason of the Deed of Guarantee, because it did not give any notice requiring Ace to rectify the defects. The Referee found the appropriate proportions which Nubra and Ace should contribute if Ace were liable, to be 30% Nubra and 70% Ace.

20 The Referee dealt with a general submission that SAS should recover no damages, because it had not performed any rectification, because the defects did not result in any diminution in value of the property, and because SAS had sold the property.

21 He noted that the sale price was based on an October 1998 valuation prepared for the purchaser by JLW Advisory Services Pty. Limited (JLW). He went on to make the following comments and findings:

“The property is presently in a good state of repair, having regard to its present age and its utilisation as a multi-tenanted commercial office complex.

We were not instructed to carry out a structural surveyor to test any of the services, but in the course of our inspection, we did not note any items of disrepair which we regard as serious, we are not, however, able to give any assurance that the property is free from defect."

Without being notified, I think JLW can be excused for not noting defects in the pavilion glass which were latent, however, I think it is reasonable to infer that JLW saw nothing in the pavilion and surrounds which it regarded as serious and which impacted on the value of the property.

414. Although Mr Huolohan would not concede it, there can be no serious doubt that, if SAS wished to discount the sale price of the property by an amount which reflected its diminution in value, Morgan Grenfell would have asked JLW to assess the impact of the defects. Mr Norris, an expert valuer, gave evidence that the proper way to determine the value of the property, taking into account the defects, was to determine when the rectification expenditure would occur and to then insert the amounts into the discounted cash flow, which is the basis of such a valuation. I accept Mr Norris' evidence on this matter, which was not inconsistent with the evidence of another valuer, Mr Blackwell. The effect of his evidence was that the value of such a property is dictated by the income stream that can be maintained with allowance for the costs necessary to maintain that income stream, whether by rectification or general maintenance.

415. As the asset manager both prior to and after the sale, Morgan Grenfell did not choose to expend any funds on rectification. It managed the problem of spontaneous failure in the toughened glass panels in the pavilion by applying safety film to the glass in 1998 and replacing any panels that failed.

416. Following the sale, a number of other independent valuations of the Zenith Centre were prepared, the latest of which was in 2001. None of the valuations apparently regarded the staining of the pavilion floor, the condition of the paving and the granite cladding, and the corrosion of the bases of the pergola columns as impacting on the value of the property.

417. From what has been said above, I am of the view that there was no diminution in value of the property resulting from the subject defects. When this position became apparent, SAS argued there was a diminution in value of the works and that, in this case, the works were only a very small part of the whole building.

418. In this situation, one is referring to the valuation of a property comprising land and improvements. The improvements include the office towers, theatre, retail outlets, car park, the pavilion, pergolas, paving and planter boxes. The works, the subject of this inquiry, cost about $10 million and form part of the improvements. There is no diminution in value of the property based on income stream; and, in these circumstances, can there be a diminution in value of the works being the pavilion and surrounds? I think this question can be answered in the affirmative in a situation where any diminution in value of the works (due to defects) does not impact on the income stream. To illustrate this, had only $5 million been spent on a less ambitious pavilion and surrounds, the value of the property would probably have remained at $170 million assuming that the income stream remained unaltered, which I consider to be the likely case.

419. In my opinion, therefore, the value of the completed contract works must be diminished as a consequence of the defects. In a situation where the valuation of the works, carried out in accordance with the contract, can reasonably be regarded as the contract sum paid by SAS, I think the diminution in value can be taken to be the cost of the necessary rectification. This approach is consistent with assets being valued following capitalisation of expenditure.

420. Mr Huolohan also said that the decision to enter into a contract of sale for the property for a specified amount with a stated discount for paving and pavilion defects was made in order to reserve the value of the cause of action for SAS. I accept that this was what was attempted, although it was not really conceded by SAS.

22 He considered some authorities, and concluded that SAS was entitled to damages in accordance with Bellgrove v. Eldridge (1954) 90 CLR 613.

THE MASTER’S DECISION

23 The hearing for the adoption of the Referee’s report took place before the Master on 29 and 30 September 2003, and the main judgment was given by him on 28 November 2003.

24 On the waterproofing claims, the Master adopted the Referee’s finding, except that he found that Carver was not protected by the limitation period in its contract. Because he adopted the Referee’s findings that Carver was entitled to a 25% reduction in its liability because of the terms of settlement with O’Brien, he found that Carver was liable for 25% less than Rightway and Nubra; and he adjusted the contributions accordingly. The amounts in the ultimate judgment included interest.

25 On the paving claims, he adopted the Referee’s findings, except that he found that Ace was not protected by the Deed of Guarantee. Again, the amount for which judgment was given included interest.

26 On the general submission to the effect that SAS was not entitled to any damages, the Master agreed with the Referee’s conclusions.

27 The Master dealt with questions concerning costs in two later judgments on 12 May 2004 and 4 August 2004.

28 He considered an application for indemnity costs by SAS, based on an offer of compromise and a Calderbank letter, each dated 25 October 2000; and he rejected that application.

29 He also considered submissions by Ace. First, he considered a submission that, because the amount recovered against it was less than $75,000.00, there should be no costs ordered against it; and he rejected that submission. He considered a submission based on a Calderbank letter from Ace dated 30 October 2000, offering to settle the proceedings for $30,000.00 plus costs; and he held that this was irrelevant for costs purposes. Ultimately, he held that Ace was liable to pay 7.5% of SAS’s costs of the proceedings, a percentage which was said to be one-quarter of the costs of the proceedings referable to the paving claims.

ISSUES ON APPEAL

30 The various appeals and cross-appeals raise the following seven issues, which I will deal with in turn.

1. Whether SAS can recover any damages, having regard to the Referee’s finding as to value, and the sale of the property.
2. Whether Carver is protected by the limitation provision in its contract.
3. Whether the damages recoverable from Carver should be reduced by 25% because of the O’Brien settlement.
4. Whether damages ordered against Ace were appropriately related to breaches found against Ace.
5. Whether the Deed of Guarantee protects Ace from these proceedings.
6. Whether SAS is entitled to indemnity costs from 25 October 2000.
7. Whether the costs order made against Ace is correct.

DAMAGES GENERALLY

31 In his judgment, the Master noted the Referee’s finding that there was no diminution of value of the property resulting from the subject defects, and noted that this was not challenged. He considered a number of cases, including Bellgrove, Director of War Service Homes v. Harris [1968] QdR 275, De Cesare v. Deluxe Motors Pty. Limited (1996) 67 SASR 28, Ruxley Electronics & Construction Limited v. Forsyth [1996] AC 334, and Commonwealth v. Amann Aviation Pty. Limited (1991) 174 CLR 64. He held that SAS was entitled to the costs of rectification of the defects, because rectification for those costs would be reasonable, and it did not matter that the defects did not reduce the value of the property or that the property had been sold.

Submissions

32 Mr. Donaldson SC for Carver submitted that the fundamental principle in relation to the award of damages for breach of contract was that the plaintiff should be awarded such sum as would put it in the same position as if the contract had been performed (Amann at 116), and that other sub-rules were to be disregarded if they would produce disconformity with this principle (Rentokil Pty. Limited v. Channon (1990) 19 NSWLR 417 at 432). Although Bellgrove showed that quantification of damages for breach of contract for building work was the cost of rectification, that was subject to the requirement that rectification must be a reasonable course to adopt; and although the High Court there stated that it was immaterial that the plaintiff in that case may or may not do the rectification works, it did not say that it would have been immaterial if it had been actually found that the plaintiff would not have done them, or if the property had been sold. The same comment applied to the application of Bellgrove in Brewarrina Shire Council v. Beckhaus Civil Pty. Limited [2005] NSWCA 248 at [169]-[176] (and [1] and [230]).

33 Mr. Donaldson relied on statements in Central Coast Leagues Limited v. Gosford City Council (Giles CJ CommD, 9/6/98) at 215-7 and Hyder Consulting (Australia) Pty. Limited v. Wilh Wilhelmsen Agency Pty. Limited [2001] NSWCA 313 at [99] per Giles JA (and at [25] per Sheller JA) to the effect that, if it is found that the rectification work will not be carried out, the cost of the rectification work should not be included in the damages.

34 Mr. Donaldson submitted that Harris and De Cesare did not decide otherwise, although in both cases the cost of rectification was treated as the measure of damages, despite sale of the property with defects still unrectified. In Harris, the owner had subsequently rectified the defective work out of a moral not legal obligation; and in De Cesare, although no rectification had been undertaken before or after sale, and although there was no evidence of the effect of the defective work on the price for which the property had been sold, the Court inferred that the defect had depressed the value and therefore presumably the price of the property. In the present case, it was established that the defects did not affect the value of the property, so to give SAS damages after sale would give it a windfall.

35 Mr. Neil for Nubra submitted that SAS’s decision to sell for an under-value, by agreeing to reduce the price, was the cause of any loss it suffered. Where this was done, as found by the Referee, in order to preserve the value of SAS’s cause of action, it could not improve its position on damages. Mr. Neil also referred to Chocolate Factory Apartments Limited v. Westpoint Finance Pty. Limited [2005] NSWSC 784.

36 Mr. Kerr for Rightway submitted that the valuation report showed that there was nothing in relation to the pavilion that caused concern to the valuers, and nothing had in fact been done to rectify the defects over many years. The sale itself had been for commercial advantage, and involved no loss to SAS.

37 These submissions were supported by Mr. Gracie for Ace.

Decision

38 I accept that Bellgrove does not require that damages for breach of contract by reason of defective building work must in all cases include the cost of rectification, so long as rectification would be a reasonable course to adopt. If by reason of subsequent events, the owner has suffered a different loss or no loss, then the underlying principle expressed by Deane J in Amann at 116 does mean that the damages must be measured by the loss actually suffered.

39 In Central Coast Leagues Club, orders made by the Land & Environment Court required more extensive work on the property than rectification of the defective work; and Giles CJ CommD held to the effect that the club’s damages should not include the cost of work that would not be done because of the need to comply with the court orders. In Hyder, the owner had not carried out rectification in accordance with tenders it had obtained, but instead undertook a redevelopment of the premises in a way that meant the actual cost of rectification was less than the amount of tender; and Giles JA (Sheller JA agreeing) held that the actual cost of the rectification was the correct measure.

40 In my opinion, both results are correct; but in the course of his judgment in the latter case, Giles JA said at [99] that in Central Coast Leagues Club he had “held that, if it is found that rectification work will never be carried out, no damages should be awarded”. I have some reservations about that proposition, if it is taken unqualified and out of context.

41 In De Cesare, property had been sold with defective work unrectified, and the owner did not intend to carry out rectification work; and it was not established by evidence that the price obtained was less than would have been obtained if the building work had been completed in accordance with the contract. Doyle CJ in the Full Court of the South Australian Supreme Court noted at 32 that the sale of the property did not suggest that it would be unreasonable to carry out the work, and that there was no reason to think that the defective work had no effect on the value of the property. Damages were awarded on the basis of the cost of rectification work, even though it was clear that the rectification work would not be carried out by plaintiff.

42 In my opinion, that case is to be explained on the basis that the circumstances were not sufficient to displace the cost of rectification as the measure of damages. It was found reasonable to undertake the rectification work, and it was appropriate to infer that the defects depreciated the value of the property; and there was nothing to suggest that the price obtained on sale was not affected by that depreciated value. Accordingly, the result is consistent with Amann, while not being consistent with the unqualified application of the proposition stated by Giles JA in Hyder.

43 It is also to be remembered that valuation is not an exact science, and indeed, the very notion of what a willing but not over-anxious purchaser would pay and a willing but not over-anxious seller would accept is a hypothetical construct and not a simple matter of fact. In those circumstances, the costs of rectification which it would be reasonable to undertake can often be a more reliable indication of the effect of defects on the value and sale price of a property, than evidence from valuers based on comparative sales or income stream, or even evidence as to negotiations at the time of an actual sale. In the present case, the Referee found that the defects did affect the value and utility of the works, as well as finding that it would be reasonable to rectify the defects, albeit that he also found, on the basis of valuation evidence based on income stream, that the defects did not affect the value of the property.

44 Another respect in which I would have reservations concerning the proposition stated by Giles JA is that it could be taken to suggest it can be a fact in issue in every case, where rectification work has not been carried out, whether rectification work will or will not be carried out in the future; whereas in my opinion generally that question would be one as to a future fact, which according to Malec v. J.C. Hutton Pty. Limited (1990) 169 CLR 638 should generally not be decided in an all or nothing manner on the balance of probabilities. Bellgrove establishes that damages can be recovered on the basis of cost of rectification where the owner may or may not carry out the rectification, so long as it would be reasonable to do so; and in my opinion that result will be displaced only if there are supervening circumstances that show with substantial certainty that this will not happen, as occurred in Central Coast Leagues Club and Hyder.

45 In the present case, what is said to displace the Bellgrove measure is the finding that the value of the property was not affected by the defects, coupled with the sale of the property.

46 The finding as to value was not challenged before the Master or before us, and must be accepted by this Court; although I must say that, having regard to the considerations set out above, I would not myself have reached such a conclusion on evidence of value based on income stream, particularly where the valuation evidence did not even address the question whether the defects made a difference to the value of the property. However, a finding that defects do not affect the value of the property does not of itself displace the Bellgrove measure: the example is sometimes given of the building of a folly on a property which does not increase the value of the property, but in respect of which the owner is entitled to have the contract performed and may recover the cost of rectifying defects, so long as it would be reasonable to expend that cost in having the defects rectified. A finding that defects do not affect the value of the property may go towards supporting a finding that it would be unreasonable to rectify the defects, but in the present case the Referee found that it would be reasonable to rectify the defects.

47 The sale of the property of itself does not displace the Bellgrove measure, as illustrated by De Cesare and Harris. If it were shown that the price received on a sale was unaffected by the defects, or that it was reduced by an amount less than the cost of rectification, this could displace the Bellgrove measure. But this was not shown in this case. On the contrary, the price was reduced by an amount in excess of the cost of rectification, by reason of the defects. The Referee found that this was done, in a sale not at arm’s length, to preserve the value of the cause of action; but while I accept that such a consensual reduction could not give rise to damages claimable by SAS, I see no reason why it cannot prevent the sale from displacing the Bellgrove measure of damages.

48 For those reasons, in my opinion the Referee and the Master were correct to award damages on the basis of the cost of rectification.

CARVER LIMITATION ISSUE

49 This issue depends on the construction of the following provisions of Part 4 of the Architect’s Agreement:

4.1 professional indemnity insurance
The architect shall effect insurance under a professional indemnity policy in the amount specified in item 7 of the schedule upon such terms and conditions, including extensions, exclusions and excesses (if any) as may be agreed between the client and the architect or, failing agreement, as shall be reasonably required by the client and the architect shall provide satisfactory evidence thereof to the project manager within (7) days thereof and thereafter shall provide such certificates of currency as may be requested in writing by the project manager from time to time.

4.2 Period of Policy
The Architect shall maintain the policy of insurance referred to in Clause 4.1 for the period specified in Item 8 of the Schedule.

4.3 Duration of Liability
The Architect shall be deemed to have been discharged from all liability in respect of the Services, whether under the law of contract, tort or otherwise, at the expiration of the period specified in Item 8 of the Schedule and the Client (and persons claiming through or under the Client) shall not be entitled to commence any action or claim whatsoever against the Architect (or any employee of the Architect) in respect of the Services after the expiration of that period.

50 Clause 8.5 of this contract provided that the headings had been inserted for guidance only, and do not form part of the agreement.

51 The Referee considered that it was implied that the insurance cover would run from the commencement of the services or shortly after, which he found to be early February 1990; and that accordingly the obligation of the cl.4.2 was to maintain the insurance until early February 1996. He considered that, because cl.4.3 was linked along with cl.4.2 to Item No.8 and the common period of six years, this indicated that the duration of liability was to coincide with the period for which the insurance was to be maintained. On that basis, the referee held that Carver’s liability was discharged under cl.4.3 before these proceedings were commenced in June 1997.

52 The Master considered that the period of duration of liability need not necessarily coincide with the duration required for the insurance policy, because the liabilities dealt with in cl.4.3 and 4.4 were wider than the liabilities that would be covered by professional indemnity insurance, and because the period covered by professional indemnity insurance may be in respect of claims made rather than the occurrence of liability. He considered that the selection of six years for Item No.8 suggested rather that the parties did not intend to shorten the statutory limitations period, except in respect of the indeterminate limitation period for tort. He held that the six year period ran from the completion of the services, and thus did not protect Carver from liability.

Submissions

53 Mr. Donaldson submitted that the Referee’s approach was correct. The intention disclosed by cl.4.1 and 4.2 was that the insurance be in place at about the time the services commenced, and the clear requirement was that it then be maintained for six years. The Referee found that the intention was that the insurance be in place at about the time the services commenced, and there was no challenge to this finding; so the time of commencement was not delayed by a need for agreement as to terms or as to the communication of the requirements of the client. Mr. Donaldson submitted that the intention disclosed by cl.4.3 was that liability was to continue for the same period. He submitted that cl.8.5 meant that one could not take account of the heading of Item No.8 so as to characterise the six years as indicating an outer limit for the maintenance of insurance rather than the total period of insurance as indicated by cl.4.2.

54 Mr. Corsaro SC for SAS submitted that the Master was correct, and that if there were any ambiguity, the clause should be construed against Carver contra proferentem.

Decision

55 In my opinion, Item No.8 is to be construed as setting an outer limit to the period of liability, whether or not one has regard to its heading; and in my opinion, in any event, cl.8.5 does not prevent use of the heading for guidance if construction is doubtful. I agree with the Master that the selection of six years suggests that the parties did not intend to abridge the limitation period of liability for contract, but rather to remove indeterminacy concerning the period of liability for tort, for example in the case of pure economic loss.

56 There is force in the contention that an intention is disclosed that insurance be on foot for the same period as liability continues, and that the parties intended that the period of cover commence at about the time services commence; although the latter element could be considered doubtful because of the requirement that the terms of the insurance be agreed or as reasonably required by the client. In any event, the period of six years is correctly regarded as setting an end point to the duration of the policy, not as specifying the whole period during which the policy is to be in force.

57 There is some question whether the six years is to run from the conclusion of the services, as found by the Master, or from each breach of contract, so as to coincide precisely with the statutory limitation periods for contracts. It is not necessary to decide between those two alternatives, because in either case the limitation would not avail Carver.

58 In coming to this view, I do not rely on contra proferentem. In any event, I think contra proferentem is not necessarily applied against the party relying on the clause, but rather it is applied against the party (if any) who procured insertion of the clause in the contract. In a case concerning the effect of a standard clause in an insurance policy extending liability to some circumstance additional to the basic cover, in my opinion contra proferentem would apply, if at all, against the insurance company, even though it is the insured seeking to rely on the clause. In the present case, there is no evidence as to who procured the insertion of cl.4.1 to 4.4 into this contract.

59 So in my opinion, Carver fails on the limitation point.

O’BRIEN SETTLEMENT

60 SAS challenges the Master’s decision that Carver’s liability should be reduced by 25%, because O’Brien was responsible to that extent for the damage the subject of the waterproofing claims.

61 The Master set out the factual basis for this issue as follows:

62 He noted SAS’s contention that O’Brien’s breach was not an operative cause of SAS’s loss, because the subsequent conduct of Carver, Nubra and Rightway negatived any causal connection between’s O’Brien’s breach and that loss. He referred to a number of cases, including Medlin v. State Government Insurance Commission (1995) 182 CLR 1; and he continued:

60 In this case, of course, the question is whether the subsequent negligence of the architects and the others involved was the very kind of thing which was likely to happen when a contractor charged with installing external windows in a building which obviously would have to be water proof, did so negligently. O’Brien created a situation which would cause there to be a breakdown in the waterproofing. That may or may not be able to be rectified by some other contractors but it clearly opened the way for there to be an ultimate problem if it was not able to be fixed or if it was sought to be fixed improperly.

61 It is notorious that many waterproofing problems occur in glass walled buildings and as it worked in the area O’Brien would appreciate this fact. Great care is needed in design and execution of work in order to ensure that waterproofing measures are effective. The fact that there may be any variety of further problems when attempting to fix O’Brien’s faulty workmanship indicates that this possibility is one of the very kind of things which was likely to happen. The need to fix it would obviously be very likely because the problem existed. The fact that the work to “fix” the problem may not be appropriate is, I would have thought, something that should have been foreseen given the care that is needed in respect of waterproofing work.

Submissions

63 Mr. Corsaro submitted that the Master’s findings did not justify the conclusion that O’Brien’s breach was an operative cause of SAS’s loss, because it was not reasonably foreseeable to O’Brien that performing a revised hob detail would be done so negligently as to allow water penetration. There was no finding that revising the detail was difficult or involved risk of failure. Indeed, he submitted, the defects in the revision work involved simple neglect. Mr. Corsaro submitted that there was no evidence to support the Master’s finding that negligent design and construction of the revised hob detail was the very thing likely to happen due to O’Brien’s breach.

64 Mr. Corsaro also submitted that, in any event, judgment should have been given against Carver for the full amount, because the O’Brien settlement required only that the “amount payable under any judgment obtained by SAS against [Carver]” was to be reduced by an amount representing O’Brien’s liability to contribute.

Decision

65 In my opinion, the question here is whether, notwithstanding the intervening acts of Carver, Nubra and Rightway, O’Brien’s breach is, as a matter of common sense and experience, properly to be seen as having caused SAS’s loss: Medlin at 6. In my opinion, the view of the Referee and the Master that it could be so seen should not be overturned. As put by Mr. Donaldson for Carver, O’Brien’s breach impeded the performance of works intended to waterproof the pavilion, and the fact that the efforts of others to overcome the problems created by O’Brien were, because of their negligence, not fully effective, is insufficient to destroy the causal connection between O’Brien’s breach and the waterproofing problems. The negligence of persons attempting to deal with the situation created by O’Brien’s negligence is not something so unusual or unforeseeable as to have that effect.

66 Accordingly, this aspect of SAS’s cross-appeal fails.

67 As to the form of the order, in my opinion it was open to the Master to formulate his order as he did, rather than rely on a contractual promise by SAS not to enforce a judgment to the full. In any event, I do not think there is any consequence requiring appellate intervention, as to costs or otherwise, which flows from the Master’s choice as to the formulation of his order.

ACE DAMAGES

68 In order to determine issues concerning Ace, both in relation to damages and in relation to costs, it is necessary to have regard to the claims made by SAS against Ace and of the way that they were determined by the Referee and the Master.

69 In its original Statement of Claim, filed on 12 June 1997, SAS alleged against Ace breaches of its contract, particularised as follows:

Particulars

(a) Flashing/Water Stops:

· Ace Ceramics failed to build adequate or any water stops at the perimeter of the atrium and adjoining lobby areas.

· Ace Ceramics failed to ensure that the water stops were not damaged by following trades.

Stone Flooring:

· Ace Ceramics injected incorrect adhesive to the stone flooring following construction which caused the discolouration of the stone flooring.

· Ace Ceramics laid tile stone cladding panels in such a manner that they were unable to move, leading to an unacceptable appearance.

· Ace Ceramics failed to lay the stone cladding panels in such a way as to allow for sufficient movement capacity at the junction between the paving and the cladding.

· Ace Ceramics selected an inappropriate proprietary joint in the stone paving.

· Ace Ceramics installed proprietary joints for tile stone paving with insufficient capacity for building movements.

· Ace Ceramics incorrectly installed tile proprietary joints in the stone paving.

70 By an amendment filed on 24 November 1998, SAS amended its claim against Ace so as to rely in addition on breaches of the Deed of Guarantee of 2 September 1992, and it gave different particulars of the breaches, as follows:

Particulars

The Paving and Concrete Works undertaken by Ace did not accord with the Specification in the following respects:

(a) steel reinforcing mesh was not installed in the sub-beds and mortar beds in accordance with the Specification (see: section 6, parts 2.04(2) and 3.07); and/or

(b) proprietary latex additives were not used in the sand-cement sub-bedding, mortar bedding and slurry coats in accordance with the Specification (see: section 6, parts 2.04(i) to (iv) inclusive); and/or

(c) plastic slip sheets were not laid over the waterproof membrane in accordance with the Specification (see: section 6, parts 2.04(1) and 3.06); and/or

(d) cement mortar was not used to bed the stone paving to the concrete hob at the perimeter of the pavilion in accordance with the Specification (see: section 15, part 2.05(3); detail 2 of drawing GD 73); and/or

(e) the movement joints did not incorporate:

(see: Specification section

parts 2.06(ii), 2.07

(i)

(ii); details

to

and 10 to

inclusive of drawing

30; details

to

inclusive of drawing

31);

(see: Specification section

parts 2.06(ii), 207(1)(i)

(ii); details

to

and 10 to 12 inclusive of drawing

30; details

to 12 inclusive of drawing

31).

71 On 30 October 2000, solicitors for Ace wrote to the solicitors for SAS making a Calderbank offer to settle SAS’s claim for $30,000.00 plus costs. The letter made the following points:

Plaintiff's Pleadings and Evidence
1. There has been an extremely long period of time available to the plaintiff and its legal representatives in which to assess the merits of the present litigation. This has now allowed for an amendment of its original claim and the benefit of expert assessments and preparation of expert reports. Not only have many years passed since the defects allegedly first occurred (allegedly, we understand, some time in June 1993 - which we do not admit, other than for present purposes) but many years have also elapsed since the proceedings were originally commenced and the Statement of Claim amended (the latter on 23 November 1998).

2. The plaintiff has now finalised all its evidence in support of its case in chief by affidavit material and expert technical reports. This was confirmed before his Honour Justice Einstein on 4 August 2000 with the making of Consent Orders for the filing and service of all the defendant's evidence.

Mediation Process
3. A complex and extremely thorough mediation process was conducted with the involvement of the plaintiff and all current defendants over a three day period on the 1st, 2nd and 3rd of August 2000. There was also a view of the Project which was attended by all parties and the mediator, on 28 July 2000.

4. Part of the significance of the mediation process was that it expressed a willingness on the part of Ace to genuinely participate in an attempt to resolve the dispute without recourse to litigation. To that end, Ace engaged counsel, Mr Malcolm Gracie, to attend the mediation for the full three days together with a solicitor of this firm, Mr John Whitfield, and a director of our client, Mr Frank Peronace.

5. Mr. Wal Mercer, an expert architect of the Rice Daubney Group, also attended the mediation and was at all times available to provide expert assistance and instructions to the Ace legal representatives and to offer his expert insight for the benefit of the plaintiff's legal representatives, its client and its expert, Mr Peter Hartog.

Expert's Consensus

Response by Ace
7. We respond to the above points as follows:
i) We confirm our position at the mediation: Ace did not perform the sub-bed works. The sub-bed works were performed by another subcontractor - Pedy Concrete Pty Ltd - who we understand are now in liquidation. Your client has not denied this fact nor offered any evidence or suggestion to the contrary.

ii) Similarly, we confirm that our client did not perform the granite cladding works. Those works were performed by CTI Marble Pty Ltd. That company is also (we understand) now in liquidation. Again, you have not challenged or offered any evidence contrary to that position.

b) The replacement of sealant would again not assist the rectification works sought by your client. Our client's experts agree that the sealant specified by the architect was inadequate and inappropriate. To that extent, any workmanship performed by our client relating to the application of the sealant is irrelevant. The problems identified in relation to the sealant would have occurred irrespective of the manner of its application. Rectification of the sealant of itself will not resolve any problems the subject of the claims in relation to the defective paving.

Summary of Ace's Position as to the Defects
8. Our client's contention in relation to the installation of the sealant and foam backing rods is that, irrespective of its work in relation to those two items, the defects identified and complained of by your client in relation to the paving and cladding would have always existed. Any rectification of works for which our client may be liable will have no utility unless the underlying cause of the problem is resolved.

Our clients' respective experts are unanimous in agreeing that the underlying cause of that problem is the failure to install proprietary joints in the sub-bed. Our client did not perform the sub-bed works and to that extent must be absolved from any liability associated with that serious defect in construction.

Similarly, our client did not perform the granite cladding works and cannot be held liable for any problems associated with the ingress of water behind the granite cladding and/or the failure to apply a proper mortar base behind the granite cladding to assist in the granite cladding withstanding normal movement of the paving.

9. Further, as your client is aware, your client's expert Mr Hartog contends that the design of the movement joints in the paving was so ineffective that the movement joints could never have performed their intended purpose. A similar problem exists in relation to the absence of any movement joint where the paving meets the granite cladding. Our client clearly is not responsible for those defects in design. To that extent, any defects occasioned by the defective design could not involve our client in liability or payment of damages. Our client would also be absolved from any apportionment of liability to the extent that no matter how our client performed its works, the defects in the paving would have always occurred.

72 SAS made a further amendment to its Statement of Claim on 15 March 2002, relevantly by adding further particulars of breach, as follows:

73 The Referee made the following findings in relation to defects in the paving installation:

"Many of the external paving joints are less than optimal in width and in some areas the installation has been quite defective. I think in an overall sense it can be said that the original construction contained a significant number of defects. Some of the sealant failure, which is not as widespread as one would perhaps anticipate, is probably due to the lack of strain capacity in the specified sealant in relation to the joint width and the spacing of joints."

for

"Joint Report

Paving Issues".

Table 1 - Defects in Paving Installation

Ref	Description	Evidence	Referee’s Comment/Finding
(d)	Sealant too thin	The effect of the Experts’ evidence was that generally the sealant was not applied so thinly that the backing rods were visible through the seals. Messrs Mursa and Poiner reported only isolated instances, whereas Mr Hartog claimed that about 10% of the joints had splits during his earlier pavement inspections which, from his photographs, were in 1998 and 1999, but they had now been covered over by repairs. Only a quite limited amount of sealant repair was obvious during the view, and there was no evidence indicating when this was done.	This installation defect is established but only in isolated instances.
(e)	Excessive bubbles in sealant	The Experts agreed that excessive air bubbles did occur in the sealant but that it was not widespread.	This installation defect is established, however, it is not widespread. Where joint sealant failure has resulted from this defect, rectification of the sealant is necessary.
(f)	Backing rods of diameter less than the joint width	The Experts agreed that this defect did occur in some joints, but not generally.	This installation defect is established on some joints, however, it does not generally occur. Rectification is necessary.
(g)	Omission of backing rods	Mr Hartog was the only Expert to observe this defect which he said occurred in some instances where there was excessive sealant depth. He stated that the extent of this defect is unknown. Mr Simpson’s 29 January 1992 inspection recorded an instance of the omission of a backing rod. There was no evidence of joint failure where Mr Hartog observed this defect.	Whilst this non-conformance is established, it seems likely that this occurrence has not caused failure of the sealed joint after about 10 years of services. Rectification is not necessary.
(h)	Irregularity of joint profile	Mr. Hartog’s photographs illustrate sealant profiles which do not conform to the specified square cross-section. Messrs. Poiner and Mursa agreed that there was irregularity in width. Mr. Poiner was not satisfied that the irregularity made the joints inadequate for their purposes.	This installation defect is established where it occurs. Where joint sealant failure has resulted from this defect, rectification of the sealant is necessary.
(i)	Irregular and excessively narrow joint widths	The effect of the Experts’ evidence was that there was some irregularity in width. Some excessively narrow joints were noted by Mr Mursa and observed at the view. There was no persuasive evidence that excessively narrow joints were having a deleterious effect on the paving or surrounds.	This installation defect is established in some loactions. Where joint sealant failure has resulted from this defect, rectification of the sealant is necessary.
(j)	Continuity of aluminium angles across intersecting joints	The Experts all agreed that this defect occurs intermittently in the paving.	This installation defect is established and it occurs intermittently. Rectification is necessary.
(k)	Discontinuity of aluminium angles at inappropriate locations	The Experts all agreed that this defect occurs intermittently in the paving. The defect has the potential to lock-up intersecting joints.	This installation defect is established and it occurs intermittently. Rectification is necessary.
(l)	Inadequate mixing of sealant	By a letter dated 21 October 1991, Ciba-Geigy informed its distributor Meury that problems with a sample supplied from the site indicated that the missing of the resin and hardener was insufficient. There was no direct evidence indicating whether or not the joints from which the samples were taken was subsequently rectified. Joint resealing was carried out early in 1992 and these joints may have been rectified at that time or earlier.	There is insufficient evidence to make a finding on this claim and, therefore, it must fail.

The Consequences of the Paving Defects
220. Relying of Mr Hartog's report, SAS submits that defects in the paving have caused:
(a) cracking and displacement of the paving;
(b) heaving within paving bays and overriding of the edges of bays;
(c) efflorescence staining of the paving and stairs;
(d) cracking of grouted joints around granite setts; and
(e) cracking and displacement of the vertical stone wall cladding panels around the pavilion.

Cracking, Displacement and Heaving
221. The Experts all agreed that the cracking and displacement of the paving was intermittent and dispersed, and I accept this evidence. Mr Hartog's view was that this resulted from the failure of the paving system to accommodate expansion and contraction, and to accommodate that strain at movement (expansion) joints. He also referred to the failed joints having filled with sand and organic matter, thereby reducing their capacity to compress.

222. Messrs Poiner and Mursa attributed cracking and movement to the performance of the concrete sub-bed. They attributed movement at the edge of the paving to settlement of the underlying pavements on grade.

223. From what was shown to me at the view, I accept the opinion of Messrs Poiner and Mursa in preference to that of Mr Hartog. The limited cracking in the paving is probably reflected cracking from the concrete sub-bed below. At isolated sections of the perimeter, there is evidence of the likely settlement of the underlying slab on grade.

224. In relation to cracking in the grouted joints of the paving, Messrs Poiner and Mursa attributed this to commonly experienced behaviour after 10 years service. Whilst I generally agree that dispersed defects of this type are common after service of 10 years or so, in this case, I think the root cause is probably reflected cracking from the sub-bed as previously discussed.

Efflorescence
225. The Experts all agreed that the efflorescence was intermittent and dispersed, and resulted from the movement of water through lime-bearing mortar. I accept this evidence. It is clear that, where missing or fractured sealant occurs, this is permitting water entry into the bedding system which then seeps out causing efflorescence staining.

74 In quantifying damages payable by Ace in consequence of its breaches, the referee said this:

Paving
352. In general terms, Mr. Hartog’s method of rectifying the pavement involves:
(a) removing a 300mm wide strip of paving along the centre of all expansion joints;
(b) saw cutting the sub-bed down to the membrane and inserting a new self-expanding cork strip;
(c) in reconstructing the joint, replacing the originally specified aluminium angles with stainless steel angles;
(d) making good the surface paving;
(e) inserting new backing rods between the new angles and elsewhere, as required;
(f) resealing the joints with a polyurethane elastomeric sealant suitable for pedestrian traffic; and
(g) ancillary work such as rectifying uneven settlement at the perimeter.

353. Similarly, Mr Mursa's solution can be summarised as:
(a) cutting out unserviceable sealant from expansion joints, including backing rods;
(b) repairing damaged paving adjacent to metal forms of expansion joints and opening up joints;
(c) inserting new backing rods into existing angles and as required elsewhere;
(d) resealing the joints in accordance with the manufacturer's requirements;
(e) repairing cracks around granite setts; and
(f) re-levelling and repairing settled paving by grout jacking.

354. Earlier I have found that there is insufficient evidence to make a finding that self-expanding cork filler board was not generally used in the sub-bed works. Further, even if the self-expanding cork was omitted in some locations, there is no evidence that this caused consequential damage to the paving or the stone wall cladding panels. (Refer Paragraphs 305 and 307).

355. Also, I have found that the only consequence of the paving defects is intermittent and dispersed efflorescence.

356. Mr Hartog's proposal also includes an element of betterment in replacing the originally specified aluminium angles with stainless steel angles. In addition, it is likely that the 300 mm bands of rectification would be visually obvious. These two matters are not in themselves decisive and are observations on Mr Hartog's specification.

357. Mr Mursa's paving rectification proposal addresses all the defects listed in Table 1 except items (i) and (j), which relate to the aluminium angles that I have found to require rectification in some locations.

358. From what I have said above, I am of the view that the necessary and reasonable method of rectification is that generally proposed by Mr Mursa. In addition, it is necessary to allow for additional minor work items of re-bedding or re-grouting some stair treads, cutting aluminium angles which are continuous through joints, and some removal of efflorescence.

359. Mr Mursa gave oral evidence that medium pressure water-blasting should remove the efflorescence and that acid cleaning would be a last resort. I accept this evidence.

360. I think the effect of Mr Fisher's evidence was that not all efflorescence removal was covered in the items for cleaning identified in his estimate. Each of these items was a sum of $550. I think a further sum of $550 should be added to his estimate for additional cleaning. Mr Fisher also estimated a rate of $25 per lineal metre for re-bedding or re-grouting stair treads and $10 per cutting of aluminium angles which are continuous through joints. I think that additional sums of $400 for stair tread re-bedding and $500 for cutting aluminium angles should also be added to Mr Fisher's estimate.

$ 500.00

$11,602.00

Total Rectification Cost for Paving

as at May 1998: $53,608.00

Williams v

75 The Master adopted the Referee’s figure of $53,608.00, and rejected a de minimis submission by Ace.

Submissions

76 Mr. Gracie submitted that the Referee never took up the question he posed in par.[226] as to the extent to which efflorescence was due to defects, as opposed to lack of maintenance; and he made no finding that the expenditure he specified was reasonable. He also failed to make factual findings which could support a finding of reasonableness, in circumstances where the substantial defects in the paving were due to defects in sub-bed works for which Ace was not responsible.

77 Mr. Corsaro submitted that the Referee did find that the rectification work he costed was necessary and reasonable: see Table 1, Items (e), (f), (h), (i), (j) and (k), and also par.[358].

Decision

78 There is force in Ace’s submission that the expenditure of $53,608.00 in rectifying defects which caused only increased efflorescence, without addressing the sub-bed defects which have more serious effects, would seem unreasonable; while if the sub-bed issues were addressed, the correction of the superficial paving defects for which Ace was responsible would surely require at most marginal additional expenditure.

79 However, the Referee in substance adopted evidence given for Ace by Mr. Mursa and Mr. Fisher, and did find that what he was costing was “the necessary and reasonable method of rectification”. In my opinion, there is insufficient material before this Court to establish error by the Referee, by way of deficiency of reasons or otherwise, which would justify appellate intervention in the Master’s decision to adopt the report in this respect.

ACE DEED OF GUARANTEE

80 The Deed of Guarantee of September 1992 relevantly contained the following provisions:

WHEREAS
A. The Board and Pritpro are the joint registered proprietors of the property and buildings known as Zenith Centre, 821 Pacific Highway, Chatswood, in the State of New South Wales.

B. By contract dated 28 August 1990, between the Board and Pritpro; the registered proprietors, and ACE; the contractor, ACE agreed to pave and concrete the works to the project in strict accordance with the current Architectural drawings by Scott Carver Pty Limited and Specification, all to the complete satisfaction of the architect, all relevant authorities and the Project Manager, Colin Ging and Partners Pty Limited.

C. The works reached practical completion on or about 1990.

a) The slip sheet material referred to in item of the Specification and on construction drawings numbered has not been installed in all areas.

NOW THIS DEED WITNESSES
IN CONSIDERATION FOR the Proprietors not commencing an action against the Contractor and at the request of the Contractor that the Proprietors enter into this deed, the Contractor HEREBY UNDERTAKES, AGREES AND WARRANTS for a period of ten (10) years from the date of Practical Completion, as follows:

1. All Contract Works (and the above-mentioned deviation from contracts Works) which have been supplied, installed and performed, and all materials, items, systems and part of any of all of them which are supplied by on (sic) on behalf of the Contractor in their completed state, shall be in all respects completed in accordance with the respective qualities, standards, tests and requirements specified in the Contract Documents or if not specified or referred to in the Contract Documents in the case of a deviation from the Contract Documents, implied by the Contract Documents.

…

81 The Referee found that SAS was estopped by the deed from proceeding against Ace, because it was unconscionable to commence proceedings without giving the notice to Ace contemplated by paragraph 2 of the deed.

82 Ace did not rely on estoppel before the Master or before this Court. The Master found that the deed did not preclude SAS from taking proceedings without giving notice under paragraph 2.

Submissions

83 Mr. Gracie submitted that the consideration for Ace’s promises in the deed was SAS’s forbearance to sue; and that the deed required that, in lieu of court proceedings, SAS should utilise the procedure in paragraph 2; and that there be no court proceedings unless and until this procedure was followed and Ace had failed to comply.

Decision

84 In my opinion, the deed contains no promise by SAS not to sue. The recital of forbearance to sue does no more than record the fact of forbearance up to and including the time of entry into the deed. In my opinion, there was no error by the Master in this respect.

CLAIM BY SAS FOR INDEMNITY COSTS

85 On 25 October 2000, the solicitors for SAS sent to the solicitors for Carver, for Nubra and for Rightway two documents. The first was an offer of compromise, in the following terms:

Legal Profession Act

86 The second was a Calderbank letter in the following terms:

SAS Trustee Corporation v. Scott Carver Pty. Ltd. & Ors. – Proceedings No.55052 of 1998
You have received from us an Offer of Compromise dated 25 October 2000 in respect of the Membrane Works at the Zenith Centre.

This letter contains an offer to settle our client's claim in respect of the Membrane Works separate from and additional to the offer contained in the Offer of Compromise.

The Offer
You will recall that at the mediation of 1, 2 and 3 August 2000, we stated that our client's costs to date were $694,074.38. Since that time, our client's costs (excluding the costs of the mediation) have increased by approximately $25,000. This brings our client's total costs to date to approximately $720,000.

87 None of these defendants accepted either offer.

88 The Master found the offer of compromise was meaningless, because, while purporting to offer to settle the membrane claims, it also purported to preserve them from being affected by the settlement. He found that the Calderbank letter was not less favourable to SAS than the result achieved against Carver, and that SAS was not entitled to indemnity costs.

Submissions

89 Mr. Corsaro submitted that the offer of compromise contained an obvious error, and would be understood by any reasonable reader as purporting to preserve the claim for the glazing works and not the claim for the membrane works, particularly in the light of the associated Calderbank letter. In any event, he submitted, unless the Carver judgment is reduced by reason of the O’Brien settlement, the result achieved against all defendants was more favourable to SAS than the Calderbank offer, and furthermore, SAS should in any event get indemnity costs against Nubra and Rightway.

90 Mr. Donaldson referred to Clancy v. Prince [2001] NSWSC 164 at [18], and submitted that a party seeking the severe result of indemnity costs should leave no ambiguity in its offers of settlement. He also submitted there was no error of principle by the Master in finding the offer of compromise meaningless.

Decision

91 This case raises the question of how rules concerning offers of compromise apply where an offer is made by a plaintiff to a number of defendants who may all be liable to the plaintiff, but who are independent and at arm’s length from each other. I note that Part 22 rule 9 of the Supreme Court rules provides as follows:

22.9 Multiple defendants

92 This indicates that the rules concerning offers of compromise do apply in such cases, and that it is not incumbent on a plaintiff to include in its offer any basis on which contribution issues between such defendants might be resolved. But it also suggests that issues concerning contribution as between defendants make it inappropriate for separate offers to be made to individual defendants, and that an offer to a number of defendants in such cases should be such as to contemplate acceptance by all defendants rather than by one and not others.

93 The application of the rules concerning offers of compromise could produce hardship on a defendant who did not accept a reasonable offer from a plaintiff because other defendants unreasonably refused to join in acceptance, or else required unreasonable terms as to contribution as a condition of joining in acceptance. However, it would be open to a defendant in that position to lead evidence of those difficulties when the question of costs arises, and an application is made for an order for indemnity costs against it.

94 Turning to the offer of compromise, in my opinion the question of whether it was sufficiently clear to base an order for indemnity costs is a matter of degree which the Master has resolved in a way not calling for appellate intervention. That is, in my opinion reasonable minds may differ on whether or not the error is sufficiently plain that a reasonable recipient of the letter would correct the error and treat the letter as expressing an offer as so corrected.

95 As regards the Calderbank letter, I have found that Carver is entitled to the benefit of a 25% reduction in the amount it is liable to pay to SAS by reason of the O’Brien settlement; and even if the correct application of the terms of that settlement left SAS with a judgment which was nominally for an unreduced amount, subject to a contractual obligation not to enforce it to the full, the question of the result of the case is to be determined as a matter of substance. Accordingly, SAS is not entitled to indemnity costs against Carver.

96 Where SAS has not achieved a better result against Carver, in my opinion it cannot rely on an offer made to all three to support an order for indemnity costs against the other two. In my opinion, this follows from the above discussion concerning offers made to multiple defendants, which should be appropriate to be accepted by all defendants, not just some of them.

ACE COSTS

97 Before the Master, Ace relied on its Calderbank letter, and also on Part 52A rule 33(2)(e), which is as follows:

52A.33 Claims for money

98 In relation to that rule, the Master said this:

44 The relevant rule relied upon by Ace in its first submission would appear to be Part 52A Rule 33(2)(e) not that to which it referred. This provides that where the amount recovered is not more than $75,000.00 the plaintiff shall not be entitled to payment of his or her costs of the proceedings unless, it appears to the court that the plaintiff had sufficient reason for commencing and continuing proceedings in the court.

99 The Master found the Calderbank letter was irrelevant to costs.

Submissions

100 Mr. Gracie submitted that the Master erred in his application of Part 52A rule 33(2)(e), because he treated the circumstance that it was reasonable for SAS to join Ace in the proceedings against other parties as being conclusive against the application of that rule; whereas that circumstance was merely a necessary factor giving rise to a discretion as to whether or not to make an order for costs in favour of SAS.

101 Next, Mr. Gracie submitted that Ace should get costs up to 6 March 2002, on an indemnity basis, because the whole of SAS’s claim up to that time was in respect of sub-bed defects on which it failed, and because Ace’s offer in its Calderbank letter was far more favourable to SAS than the result in the proceedings concerning SAS’s claim as it was at that time.

102 Finally, Mr. Gracie submitted that the proportion of costs ordered against Ace was wrong. SAS had succeeded only on a very small part of its paving claims against Ace, and had caused Ace to incur costs not only in respect of the majority of the paving claims on which SAS failed, but also in being present during the other 70% of the case that did not concern claims against Ace at all.

103 Mr. McKeand SC for SAS submitted that Nubra was also responsible for paving defects, so that the claim against Ace had to be brought together with the claim against Nubra, which in turn was intertwined with claims against other parties concerning other defects. He submitted that some of the claims against Ace in the original Statement of Claim and in the amendment of 24 November 1998 had succeeded, in particular an allegation of incorrect installation of proprietary joints in the original Statement of Claim, and the allegation that movement joints did not incorporate foam backing rods of the specified diameter in the 1998 amendment. He submitted that no error was shown by the Master in the exercise of his discretion.

Decision

104 Subject to what I say below in relation to Part 52A rule 33(2)(e), in my opinion Ace is not assisted by its Calderbank letter. Plainly some of the costs of SAS and of Ace incurred prior to the date of that letter concern matters on which SAS ultimately succeeded; and even if SAS’s success depended on matters introduced by the subsequent amendment, the general rule is that later amendments are taken as relating back to the commencement of the proceedings. Unfortunately for Ace, it never made an offer which exceeded the amount recovered against it, so an order that recognises SAS’s costs in respect of matters on which SAS ultimately succeeded, while also reflecting its failure on other matters, would not be inappropriate.

105 Furthermore, although an order which leaves Ace bearing its own costs concerning the 70% of the case that did not concern it, as well as the whole of its own costs of the 30% of the case that did concern it, notwithstanding failure of SAS on most of that case, as well as liable for one-quarter of SAS’s costs of that 30%, seems harsh, I cannot say (apart from the effect of Part 52A rule 33(2)(e)) that it involves a discretionary error.

106 However, in my opinion the Master did make an error in applying Part 52A rule 33(2)(e). There was no appellable error in deciding that SAS had sufficient reason for including Ace in proceedings in the Supreme Court; but in my opinion that of itself did not make the rule inapplicable, but merely activated a discretion to award costs in favour of SAS. Since the object of the rule is to encourage litigants to initiate proceedings in the most appropriate court, the basic principle that costs follow the event would generally mean that the discretion would be exercised in favour of an award of costs to a successful plaintiff; but there is still a discretion to be exercised whether or not to award costs notwithstanding the rule.

107 In the present case, there are factors supporting the exercise of this discretion against SAS. It was not shown, in terms of Part 52A rule 33(3), that SAS ever had reasonable grounds for expecting that it would recover in excess of $75,000.00 (disregarding interest from May 1998). For the sake of obtaining an extra sum of about $7,000.00 from Ace, over and above what Nubra was liable for and ultimately paid, and what Ace had offered on 30 October 2000, SAS continued to include Ace in proceedings so as to cause it to incur costs not only in defending the majority of claims brought against it on which SAS failed, but also in being involved in the other 70% of the case which did not concern Ace. In those circumstances, in my opinion to award SAS costs, notwithstanding Part 52A rule 33(2)(e), simply because it was reasonable from SAS’s point of view to add this small claim against Ace to its larger claims against the others, may not be a correct exercise of discretion.

108 Accordingly, the Master’s failure to recognise the discretion was a material error justifying this Court’s re-considering the matter. Substantially for the reasons I have given, I would not order Ace to pay any of SAS’s costs.

CONCLUSION

109 For those reasons, I propose the following orders:

110 IPP JA: I have had the benefit of reading the reasons to be published by Hodgson JA and Bryson JA.

111 I agree with the orders proposed by Hodgson JA. Save in respect of the matters set out below I agree with the reasons of Hodgson JA. I agree with the last two paragraphs of the reasons of Bryson JA.

112 In Bellgrove v Eldridge (1954) 90 CLR 613 the High Court (Dixon CJ, Webb and Taylor JJ) was concerned with the proper measure of damage where a builder had substantially departed from the specifications and had constructed an unstable building with defective foundations. The Court said at 617:

upon her land

113 The Court (also at 618) expressed one qualification to this way of measuring loss in circumstances where a building has been erected otherwise than in accordance with the contract. The qualification was:

“… not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt.”

114 The builder in Bellgrove v Eldridge argued that, if the proprietor retained her judgment and it were to be satisfied, she might or might not demolish her existing house and re-erect another. The builder pointed out that if the proprietor did not demolish the existing house she would still have a house together with the cost of erecting another one. The Court (at 620) dealt with this argument by saying:

“To our mind this circumstances is quite immaterial, and is but one variation of a feature which so often presents itself in the assessment of damages in cases where they must be assessed once and for all.”

115 Bellgrove v Eldridge remains binding authority. I would reiterate that the the High Court in that case held:

116 In Director of War Service Homes v Harris (1968) Qld Reports 275 Gibbs J (with whom the two other members of the Full Court of the Supreme Court of Queensland agreed) said at 278:

Bellgrove v Eldridge

117 Gibbs J emphasised that a subsequent sale by the owner of a defective building before remedying the defects is “nothing to do with the builder, whose liability to pay damages has already accrued” (at 279).

118 In my respectful view Gibbs J accurately stated the legal principles applicable.

119 It is true that in Bellgrove v Eldridge the High Court observed that the fact that the building had been sold might be one of the circumstances that would have to be considered in relation to the question whether it would be reasonable to carry out the remedial work. But the High Court said that, if it were reasonable to do the work, it would not be material, in assessing damages to which the proprietor would be entitled, whether the proprietor had made a profit or a loss on the sale of the building. The rationale expressed was, “the builder has no concern with the details of any contract that the owner might make with a third party”.

120 In my view, the qualification expressed in Bellgrove v Eldridge at 618 (namely, that the rectification work must be a reasonable course to adopt), is aimed at determining whether the cost of remedying the defect is out of proportion to the achievement of the contractual objective. As Lord Jauncey said in Ruxley Electronics Ltd v Forsyth (1996) AC 344 (at 358):

“[I]n taking reasonableness into account in determining the extent of loss, it is reasonableness in relation to the particular contract and not at large.”

121 In my view (and with respect to those who have expressed contrary views), the details of any contract that the proprietor might make for the sale of the building defectively constructed is collateral to the issue of the proprietor’s loss, or, as it used to be described, res inter alios acta.

122 Were this not to be the rule, the builder in breach of contract would obtain a windfall, depending on coincidence (the proprietor’s whim in selling), that would not be deserved.

123 More extreme situations, consistent with Scott Carver’s argument that a subsequent sale by the proprietor is relevant to loss, illustrate the possible consequences of such an approach. Assume that a building is constructed otherwise than in accordance with the contract and for that reason is defective. Assume that the proprietor sues the builder for damages based on the cost of rectifying the defect. Assume then, before judgment in the proprietor’s case is delivered, the building burns down (through nobody’s fault), is totally destroyed, and the proprietor constructs a new but entirely different building on the site. In these circumstances, on Scott Carver’s argument (as Mr Donaldson SC rightly accepted), the proprietor would fail (even if – prior to the fire and its decision to re-build - it would have succeeded). In my view, that postulated result would be anomalous and contrary to Bellgrove v Eldridge.

124 The other issue with which I wish to deal is that referred to by Hodgson JA under the heading “Carver Limitation Issue”. This issue depends on the construction of the following provisions of Part 4 of the Architect’s Agreement:

“4.1 professional indemnity insurance
The architect shall effect insurance under a professional indemnity policy in the amount specified in item 7 of the schedule upon such terms and conditions, including extensions, exclusions and excesses (if any) as may be agreed between the client and the architect or, failing agreement, as shall be reasonably required by the client and the architect shall provide satisfactory evidence thereof to the project manager within (7) days thereof and thereafter shall provide such certificates of currency as may be requested in writing by the project manager from time to time.

4.2 Period of Policy
The Architect shall maintain the policy of insurance referred to in Clause 4.1 for the period specified in Item 8 of the Schedule.

4.3 Duration of Liability
The Architect shall be deemed to have been discharged from all liability in respect of the Services, whether under the law of contract, tort or otherwise, at the expiration of the period specified in Item 8 of the Schedule and the Client (and persons claiming through or under the Client) shall not be entitled to commence any action or claim whatsoever against the Architect (or any employee of the Architect) in respect of the Services after the expiration of that period.

4.4 Architect’s Liability for Damages
The Architect shall be liable to pay damages to the Client for any breach by the Architect of his professional duty under this Agreement, Libel and Slander, Breach of Copyright, Loss of Documents, Fraud and Dishonesty.

Item 8 of the Schedule provided as follows:

125 In my view the periods referred to in cl 4.2 and cl 4.3 (the 6 years referred to in Item 8) commence from the same date. This is to be inferred from the phrase “the period specified in Item 8” in both clauses. The question is: what is that date?

126 Clause 4.1 requires the architect to effect insurance under a “professional indemnity policy” in the terms and conditions “as may be agreed between the client and the architect” or, failing agreement, “as shall be reasonably required by the client”. The architect would not be able to effect such a policy until an agreement under clause 4.1 had been arrived at or until the client had reasonably required the architect to effect insurance under such a policy.

127 It must follow, in my view, that the period of six years commences from the date of an agreement under cl 4.1 or from the date on which the client reasonably requires a policy of the kind referred to in cl 4.1 to be obtained. That is because before such date it would not be possible to know the terms of the policy the architect is required to effect.

128 No evidence was led as to the existence of such an agreement or that the “client” reasonably required a particular insurance policy to be effected. For that reason, in my view, the period of six years under Item 8 of the Schedule did not commence to run and Scott Carver is not able to place any reliance on Part 4.

129 BRYSON JA: I agree with the conclusions of Hodgson JA and with his Honour's reasons except that I would state the matter in Paras 31 to 48 in a different way.

130 It is an oversimplification to treat the transaction of October 1998 in which SAS sold the Zenith Centre to Perpetual Trustee Co. Ltd as a sale. It was a rearrangement of trust affairs, not an arms-length sale. The sums involved were huge and the amounts involved in this litigation, while significant sums in everyday terms, would have been so minimal in relation to the transaction overall as to have next to no claim for influence on the price. Other properties as well as Zenith Centre were involved and SAS continued to be interested after the transaction. The transaction was, I would not doubt, carefully based on valuation advice but it was not a test of the market. It is established by a finding which is not challenged and is not open to reconsideration by me that the unrepaired defects in the Zenith Centre did not influence its value. I am constrained to accept that this is so: I find this difficult because valuing principle suggests that hypothetical reasonable sellers and buyers would take repair costs into account in arriving at agreement on price, but I attribute their lack of influence to the scale of the transaction overall and the nature of the valuing process, in which the margin for reasonable differences of opinion is far wider than the repair costs. There were also limits on what the valuers were asked to consider. Accept it I must and I do. There is also a finding, not open to challenge, that it would be reasonable to carry out the repairs. I have no difficulty in understanding this, as the owner of an imperfectly repaired building would, in my understanding, act reasonably if he made good the imperfect repairs even if doing so did not improve the value of his building: it is better to have a building without water coming in than a building with water coming in, even if it is worth the same either way: especially better if someone else has to pay damages to cover the repair costs.

131 In my opinion the transaction spoken of as the sale of the building does not constitute a reason of any kind for concluding that SAS did not suffer a loss. The situation is much the same as if SAS had continued to own the building, left it unrepaired and decided to spend its damages on something else. The situation is quite unlike situations in which a building becomes useless or repairs would achieve nothing because of some supervening change in planning law or some administrative decision. Senior Counsel for Scott Carver contended that SAS would enjoy a windfall if it sold the building at a price unaffected by the need for repairs, received damages and did not carry out repairs. The reference to a windfall was unfortunate: it can readily be applied to the case of a builder whose liability for defective works is said to end when the owner sells the building at a good price.

132 In my opinion the Master disposed of this issue correctly in accordance with the authority of Bellgrove v Eldridge (1954) 90 CLR 613 at 617 and 619, and the argument of Scott Carver was an invitation to depart from that authority which I should not accept.

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21/12/2005 - - Paragraph(s)

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Citations

Scott Carver Pty Ltd v SAS Trustee Corporation [2005] NSWCA 462

Most Recent Citation

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CITATION:	Scott Carver Pty. Ltd. v. SAS Trustee Corporation (formerly State Authorities Superannuation Board) & Ors., Ace Ceramics Pty. Ltd. v. SAS Trustee Corporation (formerly State Authorities Superannuation Board), Rightway Roofing Pty. Ltd. v. SAS Trustee Corporation (formerly State Authorities Superannuation Board) & Ors. [2005] NSWCA 462 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	23, 24 and 25 November 2005
JUDGMENT DATE:	21 December 2005
JUDGMENT OF:	Hodgson JA at 1; Ipp JA at 110; Bryson JA at 129
DECISION:	1. Appeal by Carver and cross-appeals by SAS and Nubra dismissed with costs. 2. Appeal by Ace allowed in part. ; 3. The Master’s order that Ace pay 7.5% of SAS’s costs of the proceedings set aside, and in lieu thereof no order as to the costs of the proceedings as between SAS and Ace. 4. No order as to the costs of Ace’s appeal. 5. Appeal by Rightway dismissed with costs.

CATCHWORDS:	BUILDING & CONSTRUCTION - CONTRACT - DAMAGES - Defective building work - Damages awarded on basis of reasonable cost of rectification - Finding of fact that value of property not affected by defects - Property sold - Whether right to damages affected - COSTS - Recovery in Supreme Court from one defendant of less than $75,000 - Finding that reasonable to include this defendant in proceedings involving other defendants - Whether Part 52A rule 33(2)(e) of Supreme Court Rules applied.
LEGISLATION CITED:	Supreme Court Rules Part 52A rule 33
PARTIES:	Scott Carver Pty. Limited - appellant Ace Ceramics Pty. Limited - appellant Rightway Roofing Pty. Limited - appellant SAS Trustee Corporation (formerly State Authorities Superannuation Board) - respondent Nubra Constructions Pty. Ltd. - respondent O'Brien Glass Industries Ltd - respondent O'Brien Glass Holdings Pty. Ltd. - respondent Spacetech Pty. Ltd. - respondent
FILE NUMBER(S):	CA 40801/04; 40761/04; 40810/04
COUNSEL:	S.R. Donaldson SC with A. Crossland for Scott Carver M.R. Gracie for Ace Ceramics S.A. Kerr for Rightway F. Corsaro SC with R. McKeand SC for SAS H.J.A. Neal for Nubra Submitting appearance for O'Brien Glass Industries and O'Brien Glass Holdings No appearance for Spacetech
SOLICITORS:	Ebsworth & Ebsworth, Sydney for Scott Carver Whitfields, Drummoyne for Ace Ceramics Henry Davis York, Sydney for Rightway Clayton Utz, Sydney for SAS Colin Biggers & Paisley, Sdyney for Nubra David Campbell-Williams for O'Brien Glass companies McDonald Slater & Lay, Mentone, Vic for Spacetech

LOWER COURT JURISDICTION:	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):	SC55052/98
LOWER COURT JUDICIAL OFFICER:	Master Macready