Shafston Avenue Construction Pty Ltd, in the matter of CRCG-Rimfire Pty Ltd (subject to deed of company arrangement) v McCann (No 3)
[2021] FCA 938
•10 August 2021
FEDERAL COURT OF AUSTRALIA
Shafston Avenue Construction Pty Ltd, in the matter of CRCG-Rimfire Pty Ltd (subject to deed of company arrangement) v McCann (No 3) [2021] FCA 938
File number: QUD 683 of 2018 Judgment of: REEVES J Date of judgment: 10 August 2021 Catchwords: INSOLVENCY – where multiple property development corporations lodged Proofs of Debt in the administration of a construction company (CRCG) under Schedule 2 to the Corporations Act 2001 (Cth) (the Insolvency Practice Schedule) – where those Proofs of Debt were wholly rejected by the administrators on various grounds – where the plaintiffs sought orders under s 90-15 of the Insolvency Practice Schedule that their Proofs of Debt be allowed in full – whether certain documentary evidence was admissible per ss 69 and 79 of the Evidence Act 1995 (Cth) – whether the first plaintiff (Shafston) entered into a binding contract with CRCG, such that it was entitled to damages related to alleged non-completion of that contract – whether CRCG was required, per the Letters of Intent it signed with Shafston and the second plaintiff (Baxter) to provide confirmation that those plaintiffs could use the intellectual property in work performed under those Letters of Intent – whether the third plaintiff (Lincoln) was entitled to claim costs relating to the rectification of defects under the contract between it and CRCG – whether Lincoln had proved the existence of defects, or the cost of their rectification – where the Court must be satisfied that the plaintiffs had discharged their onus to prove that the Administrators were wrong to reject their Proof of Debt – where it was agreed that Lincoln was entitled to damages under the contract between it and CRCG for the failure of CRCG to provide certain warranties – what was the correct valuation methodology for the assessment of those damages – where the proper approach to valuation of such damages was to evaluate the probability of hypothetical future loss – applications partially allowed with regard to certain sums relating to the Lincoln defects and warranties claim Legislation: Corporations Act 2001 (Cth)
Evidence Act 1995 (Cth)
Federal Court of Australia Act 1976 (Cth)
Cases cited:
Ansett Transport Industries (Operations) Pty. Limited v The Commonwealth of Australia (1977) 139 CLR 54
Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540
Baltic Shipping Company v Dillon (1992) 176 CLR 344
Bellgrove v Eldridge (1954) 90 CLR 613
BP Refinery (Westernport) Pty Limited v Shire of Hastings (1977) 180 CLR 266
Clark v Macourt (2013) 253 CLR 1; [2013] HCA 56
Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; [2014] HCA 32
Commonwealth of Australia v Amann Aviation Pty. Limited (1991) 174 CLR 64
Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; [2002] HCA 8
Hopcroft & Edwards v Edmunds (2013) 116 SASR 191; [2013] SASCFC 38
In the matter of Azmac Pty Limited (2020) 146 ACSR 113; [2020] NSWSC 204
Lederberger v Mediterranean Olives Financial Pty Ltd (2012) 38 VR 509; [2012] VSCA 262
Lithgow City Council v Jackson (2011) 244 CLR 352; [2011] HCA 36
Malec v J.C. Hutton Proprietary Limited (1990) 169 CLR 638
Mann v Paterson Constructions Pty Limited (2019) 267 CLR 560; [2019] HCA 32
Masters v Cameron (1954) 91 CLR 353
Nationwide News Pty Ltd v Rush (2020) 380 ALR 432; [2020] FCAFC 115
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35
Re Galaxy Media Pty Ltd (In Liq) [2001] NSWSC 917
Re: Castleplex Pty Ltd (in liq) [2010] QCA 59
Sellars v Adelaide Petroleum N.L. (1994) 179 CLR 332
Shafston Avenue Construction Pty Ltd v McCann [2020] FCAFC 85
Shafston Avenue Construction Pty Ltd, in the matter of CRCG-Rimfire Pty Ltd (subject to deed of company arrangement) v McCann [2019] FCA 1426]
Shafston Avenue Construction Pty Ltd, in the matter of CRCG-Rimfire Pty Ltd (subject to deed of company arrangement) v McCann (No 2) [2020] FCA 1444
Sino Iron Pty Ltd v Mineralogy Pty Ltd (2019) 55 WAR 89; [2019] WASCA 80
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8
Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332
Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165; [2004] HCA 52
Tomko v Palasty [2007] NSWCA 258
Wren v Mahony (1972) 126 CLR 212
Division: General Division Registry: Queensland National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 189 Date of last submissions: 3 March 2021 Date of hearing: 31 August, 1 and 2 September 2020 Counsel for the Plaintiffs: Mr P Dunning QC and Mr L Copley Solicitor for the Plaintiffs: Macpherson Kelley Counsel for the Defendants: Mr DM Turner and Mr AG Psaltis Solicitor for the First, Second and Third Defendants: Clayton Utz Solicitor for the Fourth Defendant: Baker McKenzie ORDERS
QUD 683 of 2018 IN THE MATTER OF CRCG-RIMFIRE PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 611 557 852
BETWEEN: SHAFSTON AVENUE CONSTRUCTION PTY LTD ACN 169 409 705
First Plaintiff
28 BAXTER STREET CONSTRUCTION PTY LTD ACN 611 160 215
Second Plaintiff
LINCOLN STREET CONSTRUCTION PTY LTD ACN 603 876 651
Third Plaintiff
AND: MICHAEL GERARD MCCANN
First Defendant
SAID JAHANI
Second Defendant
CRCG-RIMFIRE PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 611 557 852 (and another named in the Schedule)
Third Defendant
ORDER MADE BY:
REEVES J
DATE OF ORDER:
10 AUGUST 2021
THE COURT ORDERS THAT:
1.By close of business on 20 August 2021, the parties are to prepare and submit to my Chambers a draft set of orders to reflect the contents of these reasons and to address the question of costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
REEVES J:
INTRODUCTION
This matter concerns three construction projects undertaken in Brisbane by CRCG-Rimfire Pty Ltd (CRCG), a building and construction company. The plaintiffs, Shafston Avenue Construction Pty Ltd (Shafston), 28 Baxter Street Construction Pty Ltd (Baxter) and Lincoln Street Construction Pty Ltd (Lincoln), are three related special purpose companies that was each incorporated to undertake one of these projects. The three companies are, in part, related because each possesses the same sole director, Mr Murray Thornton. He is also the Managing Director of Devcorp Pty Limited (Devcorp), another related company which acted as the management entity for all of the projects. Each of the plaintiffs entered into an agreement, or agreements, with CRCG between May 2016 and early 2017 related to the particular development project in which it was involved. In due course the agreement relating to each project was terminated.
CRCG entered voluntary administration on 16 November 2017, when Mr Said Jahani and Mr Michael McCann, the first and second defendants, were appointed its joint and several administrators (the Administrators). Subsequently, Shafston, Baxter and Lincoln each lodged an original and two amended Proofs of Debt in the administration claiming monies due under its agreement with CRCG. The final amended version of each of those Proofs of Debt was subsequently rejected by the Administrators.
In this proceeding, Shafston, Baxter and Lincoln have applied for orders that their Proofs of Debt be allowed in full under s 90-15 of Schedule 2 to the Corporations Act 2001 (Cth) (the Insolvency Practice Schedule).
FACTUAL BACKGROUND
As may be expected, each of the projects has a separate and unique history, the pertinent details of which are set out hereunder.
Shafston
On or about 17 May 2016, Mr Thornton, on behalf of Shafston, and Mr Adam Moore, CRCG’s Construction Director, on behalf of CRCG, signed a Letter of Intent relating to the design and construction of the Lume Project, a residential apartment complex situated at 25 Shafston Avenue, Kangaroo Point, in inner city Brisbane, intended to comprise 119 apartments. That Letter of Intent recorded, among other things: that Shafston and CRCG had “discussed entering into a contract” for the design and construction of the Lume Project “for the target lump sum price of $48,400,000 plus GST” (cl 1.1); that the purpose of the Letter of Intent was “to confirm the mutual intent of [Shafston] and [CRCG] to negotiate in good faith and use reasonable endeavours to agree” that contract (cl 1.2); that CRCG was authorised “to commence preliminary works which consist primarily of design and reasonable preliminary costs” (cl 1.4); and that the works “shall be designed and further detailed but that the Contract Sum shall not vary” (cl 2.1).
Clause 3.1 of the Letter of Intent provided that, “[i]n the event that [CRCG] and [Shafston] proceed to contract, the form of contract that will be entered into will be a Design and Construct Contract”. Further, cl 3.3 of the Letter of Intent provided that the parties would “use all reasonable endeavours to negotiate in good faith the terms of the Contract and agree its terms by 31 May 2016[.] If the contract is not executed by 30 June 2016, then [CRCG] may claim for design costs incurred on a monthly basis until the execution of the contract takes place”. Relatedly, cl 11.2 of the Letter of Intent provided that, if the parties had not entered into a contract by the date nominated in cl 3.3, then the Letter of Intent would “automatically terminate unless an extension is agreed in writing by both parties”. In that event, cl 11.4 of the Letter of Intent provided that:
Upon termination or expiry of this Letter, the Contractor will provide to the Principal all materials, designs, models, drawings, prints, samples, specifications, reports, documentation, manuals, software, or any other similar items produced by the Contractor or obtained from others pursuant to this Letter …
Following the signing of the Letter of Intent, CRCG undertook preliminary design works and other preparatory design and construction works in connection with the Lume Project. Shafston paid CRCG the total sum of $1,468,656.02 for those works.
Between 29 June 2016 and 31 May 2017, Mr John Petrie, Shafston’s Project Manager, sent letters to Mr Moore of CRCG on 14 occasions in the same format giving notice “[i]n accordance with Clause 11.2, we are extending the letter of intent automatic termination date to … [a particular date]”. Each letter went on to request a response in writing to confirm acceptance of the extension concerned. There is no evidence that CRCG responded to any of these letters so the parties seem to have proceeded on the footing that this process met the requirement of cl 11.2 for any extension of the Letter of Intent to be agreed in writing by both parties. The last of these extensions was from 31 May 2017 to 31 July 2017.
In the meantime, during November 2016, three meetings were held (on 10, 23 and 29 November) between representatives of Shafston and CRCG to conduct further negotiations to finalise the contract for the Lume Project. Thereafter, a Heads of Agreement (HOA) document was prepared by CRCG and executed by Mr Moore of CRCG. That document was then delivered to Shafston on 10 January 2017. In cl A of the introductory Background section, it contained a statement that CRCG “has or intends to enter into a Building Contract with [Shafston]” and, in cl D, that the parties “have agreed to be bound by this agreement and to execute all such other agreements or documents as reasonably required to give effect to this agreement”. However, it later emerged that this HOA document had not been properly executed as required by s 127 of the Corporations Act 2001 (Cth) (the Act), as it was said to have been. The deficiency was that it had only been signed by one director of CRCG, namely Mr Moore. Consequently, on 24 January 2017, Mr Thornton of Devcorp sent an email to Mr Moore requesting that one of CRCG’s other directors also sign the document. This was never done.
Between early January 2017 and early March 2017, a series of letters or emails passed between representatives of CRCG and Mr Petrie of Devcorp concerning different aspects of the Lume Project. They included: warnings about “cost creep” associated with design changes to the Project (letter dated 9 January 2017); a requirement that the balconies on the Project have flush thresholds (letter dated 16 January 2017); proposed amendments to the Principal Project Requests (letter dated 16 January 2017); a requirement for smoke exhausts to be installed in the lobbies of the building (letter dated 19 January 2017); clarification being sought as to whether air-conditioning had to be installed in the building’s foyers (letter dated 23 January 2017); and revised pricings being provided for the basement plans (letter dated 3 February 2017).
Soon after the last letter above, Mr Moore sent a letter (on 22 February 2017) to Mr Thornton enclosing a tender submission for the design and construction of the Lume Project. Among other things, Mr Moore stated in that letter: “Our offer is a conforming tender based on the Design Development to date … for a total lump sum price of $50,499,463 (ex GST), for a nominated build duration of 25 months from commencement on site to handover of site” (bold in original).
Apparently unaware of that letter, on 2 March 2017, Mr Cameron Kirkwood of CRCG sent a letter to Mr Petrie headed “LUME DEVELOPMENT – Design and Construct Contract – Outstanding Contract Terms and Conditions Reminder” (bold in original) which concluded with the statement “[w]e again request a meeting between Devcorp & [CRCG] to agree the final terms”.
On 6 March 2017, Shafston and CRCG entered into a Construction Management Agreement, under which CRCG was engaged as “Construction Manager” to “review the design and manage and control the construction and completion of the building” (cl 2). Under cl 3 of that agreement, CRCG’s duties were described as:
(a)In conjunction with [Shafston] produce a builder’s estimate of cost for construction of the project.
(b) In conjunction with [Shafston] produce a builder’s budget for the project.
(c)In conjunction with [Shafston] produce a building methodology for the project which will include site staffing, materials handling, craneage and programming to completion.
…
Further, cl 6(a) of that agreement provided: “[CRCG] shall commence construction of the building as soon as practicable after execution of the building contract”. The expression “Building Contract” was defined in cl 1.1 as follows: “The building contract to be made between [CRCG] and [Shafston] for the construction of the Building as varied from time to time”. Finally, under cl 8 and Item 4 of the Schedule to that agreement, CRCG was entitled to be paid a construction management fee of $1,755,000 as follows:
Payment No. Date Amount 1 31 July 2017 $300,000 2 31 August 2017 $400,000 3 30 September 2017 $400,000 4 31 October 2017 $655,000
On 14 March 2017, an employee of St.George Bank Limited advised Mr Thornton of Shafston by email that St.George Bank was not willing to support CRCG as the builder for the proposed development. Among the reasons given were that:
1.Proposed project is very large and [CRCG] have no consistent track record for projects of this size or nature;
2.[CRCG] has only been in operation for 2 years and therefore has a relatively short term track record in the building industry;
3.[CRCG’s] rapid growth into large scale projects in such a short period of time;
4.Wider Westpac Group’s exposure to [CRCG] on other projects currently being funded by the Banking Group[.]
Similarly, on 26 April 2017, an employee of National Australia Bank Limited (NAB) advised Mr Thornton by email that: “Our discussion internally indicate that [CRCG] would not be considered acceptable for the project of this scale and as such we could not proceed on that basis”.
In early June 2017, through his involvement in the Lincoln on the Park Project, Mr Thornton became aware that one of CRCG’s “related entities [e.g. Rimfire Constructions (Qld) Pty Ltd] has experienced financial difficulty, and as a result, Subcontractors that are working on the Lincoln on the Park Project are owed money outside of payment terms”.
On 13 June 2017, a meeting was held between representatives of Devcorp (including Mr Thornton and Mr Petrie) and representatives of CRCG (including Mr Li Gangnan, its Managing Director, and Mr Zhao Dapeng, its Vice-Chairman). At that meeting, among many other things, the resignation of Mr Moore as General Manager of CRCG was discussed along with a number of items connected with the Lume Project. After that meeting, Mr Petrie sent an email to Mr Li and Mr Zhao in which he stated, among other things:
…
o30 May 2017 was the first time CRCG was advised about the financial difficulty of Rimfire Construction Qld Pty Ltd (RCQ)
oThere will be an announcement tomorrow regarding Adam’s [Moore] resignation to all staff
…
Lume
oAlex [Mr Zhao] and Charlie [Mr Li] have not reviewed the contract sum amount for Lume yet
oMurray [Thornton] proposed to change the approved 10% performance guarantee to be 5% and lower the pre-sales guarantee (Heads of Agreement) from 20% to 10%. The 5% removed from the performance to then be assigned to the pre-sales guarantee. So performance guarantee to be 5% and pre-sales guarantee 15%.
o[Mr Zhao] advised that as these numbers are now lower the approval is not as high level and so will seek an approval to this within 2 weeks from today
Lume Action Items
1. [Mr Zhao] will speak to Mr Lin regarding the 20% heads of agreement and have Mr Lin get it approved by the relevant party
2.If the 20% guarantee as approved by [Mr Moore] is not acceptable, then the reviewed 5% building contract performance guarantee and 15% heads of agreement will be proposed and seek approval to ensure construction of Lume can proceed shortly
3. [Mr Li] will speak to lawyer regarding security requirements from Devcorp.
…
(Bold and underlining in original)
On 16 June 2017, Mr Thornton sent a letter to Mr Li giving notice of the termination of the Letter of Intent in the following terms:
…
In accordance with Clause 11.1, we are terminating the letter of intent effective today, 16 June 2017. [CRCG] is to provide all information and documents in accordance with Clause 11.4.
[CRCG] is to cease with the early (civil connections) works and also retract the operational works and construction management plan approvals from Brisbane City Council. [CRCG] is to remove all site sheds and other equipment from the Site within two weeks.
(Emphasis added)
Part of the present dispute concerns the emphasised part of the first paragraph above and the operation of cl 11.4.
Soon after the termination of the Letter of Intent, Shafston circulated an Invitation to Tender with respect to the Lume Project. In response to that Invitation, on 28 August 2017, J Hutchinson Pty Ltd trading as Hutchinson Builders (Hutchinson) submitted a tender to Shafston. Shafston accepted that tender and subsequently entered into a contract with Hutchinson on 20 October 2017 to design and construct the Lume Project.
As already mentioned, CRCG entered voluntary administration and the Administrators were appointed on 16 November 2017. On 19 March 2018, the company entered into a Deed of Company Arrangement and the Administrators were appointed Deed Administrators.
Shafston lodged its original Proof of Debt on 24 November 2017 in the sum of $7,054,234.68, particularised as follows:
After the Deed of Company Arrangement was entered into, Shafston lodged two amended Proofs of Debt – one on 23 April 2018 in the sum of $8,483,086.32 and the other on 24 August 2018 in the sum of $9,273,771.28. The details of these amended claims were set out in two letters from Macpherson Kelley, lawyers for the plaintiffs, to Clayton Utz, lawyers for the Administrators, one on 23 April 2018 and the other on 7 August 2018.
The Administrators initially allowed Shafston’s original Proof of Debt in the sum of $1 for voting purposes only. Ultimately, Shafston’s second amended Proof of Debt was wholly rejected by the Administrators on 17 September 2018. The Notice of Rejection document listed the correspondence passing between the lawyers for the parties in the period from 11 January 2018 to 7 September 2018 and noted that, in the last of these letters, Shafston indicated that it would “not be providing further information in support of its proof of debt” (italics in original). That Notice then summarised Shafston’s claims in support of its final amended Proof of Debt as follows:
(i)[CRCG] repudiated the [Letter of Intent]. That repudiation gives rise to:
A.a damages claim against [CRCG] for the additional costs to be incurred by Shafston to complete the construction of the development in the amount of $5,556,778 (Escalation Damages); and
B.a damages claim against [CRCG] arising from the delay of the completion of the development, being the cost of additional finance, in the amount of $2,248,337 (Delay Damages).
(ii)it was unable to obtain permission to use the Shafston Documents and it suffered loss as a result of a need to have new material prepared in the amount of $1,468,656 (Construction Costs).
Lastly, the Notice provided the following reasons for rejecting Shafston’s claim and disallowing the Proof of Debt:
…
Escalation Damages ($5,556,778) and Delay Damages ($2,248,337)
(g)Shafston’s proof of debt is based on an allegation that [CRCG] breached or otherwise repudiated the [Letter of Intent]. The [Letter of Intent] was terminated by Shafston in accordance with its terms, as outlined in the letter of termination dated 16 June 2017.
(h)The [Letter of Intent] was not a legally binding contract between Shafston and [CRCG] for the construction of the project. The obligations imposed by the [Letter of Intent] were largely limited to:
(i)an obligation on the parties to use all reasonable endeavours to negotiate and agree on the terms of a contract for the construction of the project; and
(ii)an obligation on [CRCG] to perform the preliminary works.
(i)Given the [Letter of Intent] did not give rise to an obligation to construct the project, the alleged escalation and delay damages are rejected.
(j)Even if a repudiation had occurred, which is denied, it would not have entitled Shafston to the amounts claimed in its proof of debt.
Construction Costs ($1,468,656)
(k)Shafston asserts that it has been unable to use the Shafston Documents as it could not be satisfied that it had authority to use the intellectual property existing in those documents.
(l)Given the terms of the [Letter of Intent] (clause 9.1), all intellectual property existing in the Shafston Documents was owned by Shafston. It did not require [CRCG’s] authority or permission to use the Shafston Documents.
(m)[CRCG] had no contractual obligation to satisfy Shafston as to its rights in respect of the intellectual property existing in the Shafston Documents. In any event, [CRCG] was permitted to, and did, transfer all intellectual property rights existing in the Shafston Documents to Shafston.
(n)Shafston had (and continues to have) the authority to use the Shafston Documents.
(o)[CRCG] has received no evidence that:
(i)Shafston did not, in fact, use the Shafston Documents;
(ii)new material was recommissioned and paid for to replace the Shafston Documents; and
(iii)requests were made to [CRCG] for permission to use the Shafston Documents.
Set-Off
(p)In addition to the above and assuming [CRCG] was indebted to Shafston, Shafston remains indebted to [CRCG] in the amount of $262,927.56 for work performed by [CRCG] pursuant to the [Letter of Intent]. The Deed Administrators are entitled to set off that amount against any debt or claim of Shafston.
…
(Italics and underlining in original)
Baxter
At the same time as CRCG signed the Letter of Intent for the Lume Project (17 May 2016), it signed a similar Letter of Intent with Baxter for the design and construction of a residential apartment complex situated at 28 Baxter Street, Fortitude Valley in Brisbane. The pertinent terms of that Letter of Intent mirrored those of the Shafston Letter of Intent set out above (at [5]). The Baxter Letter of Intent was also extended in the same manner as the Shafston Letter of Intent (see at [8] above), but only on four occasions, with the last being to 28 October 2016. On that date, it automatically terminated under cl 11.2 of the Letter of Intent, rather than being terminated by a notice under cl 11.1 as the Shafston Letter of Intent was.
Following the signing of the Letter of Intent, CRCG undertook preliminary works primarily related to the design of the apartment building. Baxter paid it $411,077.66 for those works.
Baxter lodged its original Proof of Debt with the Administrators on 24 November 2017 in the sum of $4,538,575.97, particularised as follows:
As with the Shafston Proof of Debt, the Administrators initially allowed Baxter’s Proof of Debt at $1 for voting purposes only. Further, as occurred with Shafston’s Proof of Debt, Baxter lodged two amended Proofs of Debt – one on 23 April 2018 and the other on 24 August 2018. Both were in the sum of $411,077.66 corresponding to item 5 “Additional construction cost”
above.
The Notice of Rejection of the Baxter Final Proof of Debt followed the same format as the Shafston Notice of Rejection. First, the same chain of correspondence was referenced; secondly, the same refusal to provide further information was cited; and, thirdly, Baxter’s claim was summarised as follows:
Baxter asserts that it has been unable to use any of the Baxter Documents as it does not have authority to use the intellectual property existing in them. As a result, it claims damages of $411,077.66.
Finally, the Notice provided the following reasons for wholly rejecting that Proof of Debt:
…
(g) The Deed Administrators have:
(i)provided Baxter with a copy of all Baxter Documents held by the Deed Administrators; and
(ii)confirmed that Baxter has authority to use the intellectual property in the Baxter Documents.
(h)The Deed Administrators have received no evidence from Baxter in relation to:
(i)whether it made requests to [CRCG] for permission to use the Baxter Documents;
(ii)whether Baxter proposes to advance the works the subject of the [Letter of Intent]; or
(iii)if the works are proposed to be advanced, whether it proposes to utilise the Baxter Documents (ie. whether it proposes to construct a development with the same or similar specifications).
(i) It is the Deed Administrators’ view that:
(i)Given the terms of the [Letter of Intent] (clause 9.1), all intellectual property existing in the Baxter Documents was owned by Baxter.
(ii)[CRCG] had no contractual obligation to satisfy Baxter as to its rights in respect of the intellectual property existing in the Baxter Documents. Even if it did have such an obligation, [CRCG] was permitted to, and did, transfer all intellectual property rights existing in the Baxter Documents to Baxter.
(iii)Baxter has authority to use the Baxter Documents.
Set-Off
(j)In addition to the above and assuming [CRCG] was indebted to Baxter, Baxter remains indebted to [CRCG] in the amount of $7,557.11 for work performed by [CRCG] pursuant to the [Letter of Intent]. The Deed Administrators are entitled to set off that amount against any debt or claim of Baxter.
Lincoln
On 27 May 2016, Lincoln entered into a contract with Rimfire Constructions (Qld) Pty Ltd, a company related to CRCG, for the design and construction of a residential high rise apartment complex called “Lincoln on the Park” located at 48-54 Lincoln Street, Greenslopes in Brisbane (the Lincoln contract).
On 13 March 2017, the Lincoln contract was novated to CRCG and thereafter CRCG took over the role of contractor. As required by the novated Lincoln contract, on 10 April 2017, CRCG provided two bank guarantees to Lincoln totalling $2,150,000.
In the meantime, CRCG, and, before it, Rimfire Constructions, proceeded with the constructions of the Lincoln on the Park Project. As mentioned earlier, in early June 2017, Mr Thornton became aware that some of the subcontractors on that Project were not being paid (see at [16]) above. The primary concern at that time was to ensure that the construction works on the Lincoln on the Project were completed. That concern was reflected in the following passages in the email Mr Petrie sent to Mr Li and Mr Zhao on 13 June 2017 (see at [17] above)
Lincoln on the Park
oMurray advised that with Progress Claim 14 unless confirmation is given on payment of debt before payment due date, Devcorp will hold money to pay subcontractors directly
oMinter Ellison has advised CRCG that they are not obligated for the outstanding debt from [Rimfire Constructions]
oAdam [Moore] has shares and Adam [Moore] has proposed to sell shares to pay subcontractors, however, legal advice is that cannot be done
oCRCG priority is to keep site ongoing to finish on time
oCRCG board members have not approved to pay out the debts owed to the creditors
oCRCG (Alex [Mr Li] and Charlie [Mr Zhao]) advised that they will tomorrow start communication with creditors
oCharlie [Mr Zhao] advised that the plan is for CRCG to not pay the outstanding debts but speak to all of the creditors face to face
oMurray advised he believes [Rimfire Constructions] has deadline of June 22 for voluntary administration and so resolution of the creditors needs to happen immediately
Lincoln on the Park Action Items
1.CRCG to provide tomorrow signed letter advising of the General Manager position and also the action CRCG will take to ensure the Lincoln project will continue unaffected
2.CRCG to provide tomorrow written resolution nominating Charlie [Mr Zhao] as the General Manager
3.CRCG to provide tomorrow revised organisation chart nominated Charlie [Mr Zhao] as General Manager/Director
4.CRCG to provide tomorrow [CRCG] aged creditors report for the Lincoln project
(Bold and underlining in original)
On 24 August 2017, CRCG served a Notice of Anticipated Practical Completion of the Lincoln on the Park Project. In response, Mr Thornton, as Managing Director of Lincoln, sent a letter dated 4 September 2017 to Mr Kirkwood as CRCG’s Contractor’s Representative notifying him that “in accordance with clause 44.6(b) the Principal’s Representative will be inspecting Site 8am Tue 5 Sep 2017 to further inspect the works, to which the Contractor’s Representative is requested to attend” (underlining in original). It appears from Mr Thornton’s letter that the process of attending to defects in the building had commenced by agreement between the parties with onsite inspections from 29 June 2017. This puts in context the following paragraph of the letter:
Please be advised the defect reports issued to date & moving forward will continue to be considered Punchlists for the specific areas inspected. To date, the majority of items within the Units being inspected are minor in nature, however the items below are considered Punchlist A items that are required to be completed prior to Practical Completion on or before 5 October 2017.
(Underlining in original)
Under the heading “Punchlist A items - as at 4 Sep 2017 (all previously raised under separate cover)” (bold in original), the letter went on to list the following eight items:
- Eastern façade rectification (re; jointing, render, workmanship, windows)
- Automatic irrigation installation to all garden beds
- Basement storage cages installation
- Roof Top Pergola – workmanship, finishing & sagging issues
- Roof Top Pool – sharp step edges, compliance & safety concerns
- Kitchen sink scratches requiring rectification or sink replacement
- Unit 102 – Rectification of exposed plumbing drain through façade of building- Lift – Compliance re weather protection (warranties, longevity, maintenance)
On 19 October 2017, CRCG made a formal request that a Certificate of Practical Completion be issued for the Project. In response, on 24 October 2017, Mr Thornton, as Principal’s Representative and Managing Director of Lincoln, sent a letter to Mr Kirkwood which stated, in part:
…
In accordance with clause 44.6(c)(ii) of the Contract, the Principal’s Representative advises that Practical Completion has not been achieved in accordance with the requirements of the Contract.
Accordingly, the Principal’s Representative gives the Contractor a Punchlist identifying the Punchlist A Items that must be completed and Punchlist B Items that the Principal’s Representative considers require rectification or completion by the Contractor (see Annexure [A] for Punchlist A Items and Punchlist B Items).
The Principal’s Representative further advises that Practical Completion has not been achieved for the following reasons:
1all Units are not fully complete with no defects remaining to be rectified which could in any way affect the ability of the Principal to complete the Sales Contracts;
2the Contractor has not complied with clause 36 of the Contract;
3the Contractor has not provided to the Principal all Completion Documents which, in the opinion of the Principal’s Representative, are essential for the immediate use, operation, occupation and maintenance of the Works (see Annexure B for outstanding Completion Documents), and
4all rubbish, debris, wrappings, containers and residual materials resulting from the Works have not been removed from the Site;
Further, the Principal’s Representative refers to its Notice – Defects Inspection & Punchlist – Clause 44.6(b) dated 4 September 2017 which sets out a number of Punchlist A Items which required rectification by the Contractor and which remain outstanding.
Punchlist A items (all previously raised under separate cover):
-Eastern façade rectification (re; jointing, render, workmanship, windows)
-Automatic irrigation installation to all garden beds
-Basement storage cages installation
-Roof Top Pergola – workmanship, finishing & sagging issues
-Roof Top Pool – sharp step edges, compliance & safety concerns
-Lift – Compliance re weather protection (warranties, longevity, maintenance)
In accordance with clause 44.6(d), the Contactor is required to rectify all Punchlist A items and complete all outstanding works detailed in this letter for the purposes of achieving Practical Completion under the Contract.
Terms capitalised but not otherwise defined in this letter have the same meaning as set out in the Contract.
The Principal reserves all its rights under the Contract and at law.
…
It is to be noted that the list of Punchlist A items above does not include the sixth (kitchen sink) and seventh (unit 102) items in the similar list in the 4 September 2017 letter above at [35].
Attached to this letter at Annexure A was a document headed “Punchlist A items & Punchlist B items” (bold in original) as follows:
Notes:
- Attached documents are noted as ‘A’ or ‘B’ to reflect the above Punch list category
- Punchlist A items are reasonably requested for completion by 14 Nov 2017
- Punch list B items are reasonably requested for completion by 28 Nov 2017
- In addition to the attached Punchlist items;
othe Landscaping has significant areas in poor condition, dying &/or in need of immediate maintenance. Given the living nature of this item, immediate repair is required by 31 Oct 2017 to avoid replacement of large areas of the Works.
…
There followed two reports by Better Building Group Qld Pty Ltd (BBG) – one prepared on 5 October 2017 listing 203 items and the other prepared on 19 October 2017 listing 250 items. The top of each of those reports contained the handwritten notation “A – Entire report Punchlist A due to the volume of defects impacting occupation”. As well, there were attached an email dated 15 October 2017 and several lists variously dated 25 August 2017, 15 September 2017, 5 October 2017, 9 October 2017, 15 October 2017 and 20 October 2017, some of which were marked “A” and others “B”.
Notwithstanding the contents of the letter above, two days later, on 26 October 2017, Mr Thornton, as Principal’s Representative and Managing Director of Lincoln, sent a letter to Mr Kirkwood notifying him that he had decided to issue the Certificate of Practical Completion as follows:
We refer to the following correspondence:
oletter from the Principal’s Representative to the Contractor dated 4 September 2017 (ref Notice – Defects Inspection & Punchlist);
oletter from the Contractor to the Principal’s Representative dated 19 October 2017 (ref Lincoln on the Park – Design and Construct Contract – Certificate of Practical Completion – Formal Request); and
oletter from the Principal’s Representative to the Contractor dated 24 October 2017 (ref Certificate of Practical Completion – Rejection of Formal Request).
In accordance with clause 44.6(f)(i) of the Contract and notwithstanding that Practical Completion has not been achieved by the Contractor under the Contract, the Principal’s Representative in its absolute discretion hereby issues to the Contractor the Certificate of Practical Completion. The Date of Practical Completion is 26 October 2017.
In accordance with clause 44.6(f)(i), the Principal’s Representative advises the Contractor that there are a number of Defects (including Punchlist A Items) which the Con tractor is required to rectify. These Defects are set out in Annexure A and include the incomplete and defective works that were notified by the Principal’s Representative to the Contractor on 24 October 2017 and 4 September 2017.
The Contractor is required to rectify the Defects within the corresponding time frames specified in Annexure A. In the event that the Contractor is either unwilling or unable to rectify the relevant Defects in the time required by this Certificate of Practical Completion, the Principal reserves all its rights under the Contract and at law, including its rights under clause 44.6(f)(i) to rectify such Defects itself and to reduce the Contract Sum by the cost of rectifying those Defects.
…
With one insignificant exception, the documents annexed to this letter were identical to those annexed to the 24 October 2017 letter above at [36]. The exception was that the notes at the beginning of the annexures included the six Punchlist A Items whereas they had been listed in the body of the earlier letter.
On 8 November 2017, Mr Wentao Gao of CRCG sent an email to Mr Mark Gaskin-Harris of Devcorp in which he agreed to undertake certain defects in the Lincoln on the Park building, but disputed CRCG’s liability for others as follows:
…
Please find attached an update on our internal tracking sheet for internal defects in the apartments and lobbies. Please also find attached our Basement defect tracking sheet. As mentioned yesterday we are working to close out any defects outstanding (that we do not dispute). We are also working through the basement defects provided by BBG and will notify of any defects we dispute In the coming days.
We have sufficient site resources to manage the defects that are not in dispute. We currently have 1 site manager , 1 foreman, 1 site engineer, 1 administrator and any required labour to complete defects not in dispute.
In response to the Defects raised in the Practical Completion dated the 26 October 2017 we dispute pursuant to clause 56.1. Consider this correspondence a Notice of Dispute.
In reference to the alleged Defects in your correspondence of the of the 24 October 2017 – “Certificate of Practical Completion – Rejection of Formal Request”.
We have marked up your correspondence with paragraph numbers “Mark-up of Correspondence dated 24 October” and provide the following details as to why we dispute these Defects:
Para 3 – Refer items 16 to 19 below which relates to the Principal’s Annexure A;
Para 4 – We dispute this statement – we have closed out all 3rd party defects by A Plus Property Inspections as at the 24 October 2017 which are representing the Principal for defect inspections of the
Internals of each unit as documented at this date other than minor items that are contained in the attached Outstanding Defects – Lincoln on the Park tracking register. We note that 26 units have settled successfully on the 27 October 2017. These
items are not affecting the ability for the Principal to settle units. Further have settled since this date;
Para 5 – We dispute this statement - we have issued all warranties that we are reasonably aware via drop box, USB and hardcopy as at COB 25/10. (drop box link attached)…
Para 6 – We dispute this statement - As per paragraph 5 above;
Para 7 – We dispute this statement – The Site was cleaned and all rubbish removed by 27th October 2017;
Para 8 – Refer to our dispute of the item 9 to 14 below;
Para 9 – We dispute this statement - Eastern Façade is within tolerances and any rectification works are purely cosmetic and has no effect on the functionality of the building;
Para 10 – We dispute this statement - We previously responded via letter dated 11/9/17 disputing this item and have had no response to date;
Para 11 – We dispute this statement - We previously responded via letter dated 12/9/17 disputing this item and have had no response to date;
Para 12 – We dispute this statement – The Workmanship, Finishing & Sagging issues have now been rectified to within tolerances and have no effect on the functionality of the building;
Para 13 – We dispute this statement - We have form 16 and form 11 for the pool so it has been deemed safe and has been installed strictly in accordance with Devcorps design;
Para 14 – We dispute this statement - We have form 16 and form 11 for the Lift and the Lift contractor has inspected the final product and installation and the Lift contractor
Has provided all warranties;
Para 15 – We dispute this statement as per the reasons stated above and below;
Para 16 – These documents have never been provided nominated as punch list category ‘A’ or ‘B’. Notwithstanding we have attended to any defects that
were provided in these documents that we consider are defective and have not disputed.
Para 17 – All Punchlist ‘A’ items that are not disputed above and below will be completed by this date;
Para 18 – All Punchlist ‘B’ items that are not disputed above and below will be completed by this date;Para 19 – We dispute this statement - the Principal has taken over these works – refer attached email 26 September 2017.
In summary we dispute the statements as set out above we do class the items disputed as defects.
A copy of this Notice will be hand delivered to the Principal’s Office.
(Errors and typography in original)
Four days after CRCG was placed into voluntary administration, Lincoln terminated the Lincoln contract by letter dated 20 November 2017 under cll 52.11(a)(v)(A) and 52.3(a)(vi), reserving its rights under cl 52.10. On the same day, Lincoln called on the bank guarantees mentioned earlier (at [32]) and subsequently received the sum of $2,150,000.
In lodging its Proofs of Debt in the administration, Lincoln followed the same pattern as that described for the other two projects above. Its original Proof of Debt was lodged on 24 November 2017. That was followed by two amended Proofs of Debt – one on 23 April 2018 and the other on 24 August 2018. Its original claim was for $4,016,201.55, particularised as follows:
In the period before Lincoln’s first amended Proof of Debt was lodged, it obtained two assessments relating to the estimated costs of rectifying the defects in the Lincoln on the Park Project – one by Gleeds Australia (East) Pty Ltd (Gleeds) on 20 November 2017 and the other by BBG on 29 March and 4 April 2018. A later report was prepared by Mitchell Brandtman on 19 April 2020 estimating the value of the trade warranties that were not provided for the Project.
The first amended Proof of Debt on 23 April 2018 was in the sum of $2,627,116.44. This claim took into account the $2,150,000 that Lincoln had received from calling on the guarantees provided by CRCG, as the following letter from Macpherson Kelley to Clayton Utz of the same date explained:
Defects report claim: $1,276,721.00
In or about late August or early September 2017, as the scaffolding for the Lincoln on the Park building works was being removed, it became apparent that several critical defects were present in the Lincoln on the Park works. On 4 September 2017, Murray Thornton of Lincoln sent a letter to [CRCG] outlining these defects and calling for their immediate rectification. A copy of that letter is attached.
On 26 October 2017, in accordance with 44.6(f)(i) of the Lincoln Agreement, Lincoln:
(a)Issued [CRCG] with a certificate of practical completion (PC Certificate); and
(b)Notified the Company, by way of a comprehensive defect report compiled by [BBG] (BBG Report), of a large number of Punchlist A and B defective items present in the building.
A copy of the certificate of practical completion and the BBG Report is attached.
On 20 November 2017, on the basis of the BBG Report and a further inspection of the defects by [Gleeds], Lincoln received a preliminary defects rectification estimate from Gleeds (Gleeds Report). The Gleeds Report calculated the cost of rectification in respect of the defects identified in the works to be $1,276,721.00. A copy of the Gleeds Report is attached.
In the premises, Lincoln has a claim against [CRCG] for the cost of rectification of the defects identified in the BBG Report and the Gleeds report in the sum of $1,276.271.00 (Lincoln Defects).
Further defects: $1,295,260.00
Subsequent to the receipt of the Gleeds Report, the following further defects have been identified in the works:
1. Air Conditioning installation defects; and
2. Defective balcony tiling; and
3. Water ingress into fire stairs.
Please find attached:
1.A report from [BBG] … dated 29 March 2018 estimating that the cost to rectify the Air conditioning installation defects and defective balcony tiling amounts to $1,260,260.00 (excluding GST); and
2.A further report from BBG dated 4 April 2018 estimating that the cost to rectify the water ingress into the fire stairs amounts to $35,000.00 (excluding GST).
The total cost to rectify the above defects therefore amounts to $1,295,260.00.
Warranties: $2,205,135.44
Clause 44.8 of the Lincoln Agreement relevantly required that upon practical completion being reached, [CRCG] was to provide to Lincoln all Completion Documents, being “those operation and maintenance manuals, as built design documents, warranties and other documents described as such in the Principal’s Project Requirements …” (emphasis added).
Clause 15.8 of the Principal’s Project Requirements for Lincoln on the Park relevantly required that the Contractor provide to the Principal warranties for the works to be performed as set out in the below table.
Item Warranty period Glazing Manufacturer’s warranty Roof sheeting 7 years workmanship, materials to manufacturer’s warranty Waterproofing 7 years workmanship, materials to manufacturer’s warranty Carpet Manufacturer’s warranty Landscaping 12 weeks maintenance, weeding and watering Electrical 7 years workmanship, materials to manufacturer’s warranty Mechanical 7 years workmanship, materials to manufacturer’s warranty Fire systems 7 years workmanship, materials to manufacturer’s warranty Hydraulics 7 years workmanship, materials to manufacturer’s warranty Lift services 7 years workmanship, materials to manufacturer’s warranty
12 months’ maintenance includedPool 7 years workmanship, materials to manufacturer’s warranty Other Manufacturer’s warranty (together, the Warranties)
Subsequent to the issue of the PC Certificate, [CRCG] has refused or otherwise failed to provide Lincoln with all of the Warranties to the satisfaction of Lincoln in accordance with the Principal’s Project Requirements.
After Lincoln received the BBG Report, Gleeds Report, and the builder’s handover package, the Development Manager of Devcorp, Mark Gaskin-Harris identified that [CRCG] had failed to provide satisfactory warranties in accordance with the Principal’s Project Requirements.
Lincoln has since received a report dated 19 April 2018 from Mitchell Brandtman estimating the cost to provide the Warranties which have not been provided by [CRCG] to be $2,205,135.44.
Security: ($2,150,000.00)
Pursuant to Clause 5.2 of the Lincoln Agreement, as amended by Clause 4(g) of the Novation Deed, [CRCG] was required to supply bank guarantees in favour of Lincoln the sum of $2,150,000.00 as security for performance of [CRCG’s] obligations under the Lincoln Agreement (the Guarantees).
On 20 November 2017, in accordance with Clause 5.7 of the Lincoln Agreement, Lincoln instructed the Bank of China to make payment to Lincoln pursuant to the terms of the Guarantees. Lincoln received such payment on or about 8 December 2017.
Lincoln asserts claims against [CRCG] in the sum of $4,777,116.44 and acknowledges an offset in the sum of $2,150,000.00.
In the premises, Lincoln’s total claim against the company in the sum of $2,627,116.44 is calculated as follows:
Lincoln Defects: $1,276,271.00 Further defects: $1,295,260.00 Warranties: $2,205,135.44 LESS Security: ($2,150,000.00) Total Claim: $2,627,116.44 …
The second amended Proof of Debt lodged on 24 August 2018 was in the same amount as above. It referred to the letter from Macpherson Kelley dated 23 April 2018 above and a further letter from that firm dated 7 August 2018. The latter letter contained further details about the defects and warranties claims as follows:
RECTIFICATION DEFECTS
4.Please find enclosed a defects matrix prepared by our client as at 20 July 2018. On 9 July 2018, we provided your office with a copy of all relevant invoices for rectification works completed to date. The defects matrix shows the entirety of construction defects identified and not rectified.
5.To the extent the defects have not yet been rectified, Lincoln is taking steps to rectify those defects and continues to receive requests from occupants to rectify same. We reserve our client’s rights to enlarge its claim should more defects be identified such that our client’s estimate of further defects is insufficient.
6.However, as an indicative sum in order to enable the Administrators to adjudicate our client’s proof of debt, the costs of the defects as at April 2018 have been independently assessed by a third party, that being [Gleeds] and [BBG], whose reports in relation thereto have been provided to you on 23 April 2018.
7.We note that our client has had extreme difficulty in seeking assistance from subcontractors of [CRCG] in rectifying construction defects. For example, we are instructed that our client has contacted [CRCG’s] air conditioning subcontractor, with such subcontractor refusing to provide assistance on the basis that it remained a creditor of [CRCG].
WARRANTIES
8.The warranties were required to be provided pursuant to the terms of the Construction Contract between Lincoln and Rimfire Constructions (Qld) Pty Ltd dated 27 May 2016. Being that [CRCG] is unable to provide warranties as required, Lincoln must source alternative warranty arrangements.
9.The value of such warranties has been independently verified by way of report completed by Darryl Bird of [Mitchell Brandtman] dated 19 April 2018. A copy of that report together with various instructions and documents referred to was provided to your office on 9 July 2018.
10.At this stage, it is not our client’s intention to utilise further resources in obtaining a further report from [Mitchell Brandtman].
11.Lincoln’s basis for asserting that the Lift installation is non-compliant is as identified in the Gleeds report dated 20 November 2017, which was provided to your office on 23 April 2018 (Gleeds Report).
12.We disagree with your observation in respect of the double counting of the cost of the Lift replacement and the costs of repairing the water penetration into the fire stairs. To that end, please see the attached email communication from Darryl Bird of Mitchell Brandtman clarifying this part of his report. We are instructed that our client continues to press the entirety of its claim in this regard on that basis.
13.The rectification work required to the east façade, existing pergola and pool tiling are all as identified and verified in the Gleeds Report.
14.In respect of the automatic irrigation and basement locker installation, we note that the requirement for [CRCG] to provide these items is as follows:
(a)section 10.4 of the Principal’s Project Requirements at Annexure C of the Design and Construct Contract between Lincoln and Rimfire Constructions Pty Ltd and later novated to [CRCG] (the Principal’s Requirements) required [CRCG] to install an automatic irrigation system; and
(b)section 6.11 of the Principal’s Requirements required [CRCG] to install a basement locker.
To assist your client in properly adjudicating Lincoln’s proof of debt, please find enclosed a spreadsheet setting out the calculations used in calculating Lincoln’s claims.
…
(Bold and underlining in original)
As with the other two projects, the Administrators initially allowed Lincoln’s original Proof of Debt at $1.00 for voting purposes only. The Administrators then wholly rejected Lincoln’s Proof of Debt on 13 December 2018. The Notice of Rejection of the Proof of Debt was in similar, but not identical, terms to that for the other two projects. It listed a different chain of correspondence passing between the lawyers for the parties, but referred to the same indication in Macpherson Kelley’s letter dated 7 September 2018 that Lincoln would “not be providing further information in support of its proof of debt” (italics in original). The Notice then summarised the claims Lincoln made as follows:
h)Lincoln claims the following amounts as against [CRCG]:
I.damages for the rectification of alleged defects in the amount of $2,571,981.00; and
II.damages for an alleged failure by [CRCG] to provide it with warranties in the amount of $2,205,135.44.
i)The above claim has been reduced by the amount of the guarantee called and paid to Lincoln resulting in a total claim of $2,627,116.44.
Lastly, the Notice contained the following reasoning for wholly rejecting Lincoln’s Proof of Debt:
Rectification of Defects
j)Lincoln relies on the following in order to establish the alleged defective works and the costs required to remedy those defects:
oreport prepared by [Gleeds] dated 20 November 2017 identifying defects totalling $1,276,721.00;
oreport from [BBG] dated 29 March 2018 identifying air-conditioning and balcony tiling defects which were estimated to cost $1,260,260.00 to complete; and
oreport from [BBG] dated 4 April 2018 identifying water ingress defects which were estimated to cost $35,000.00 to complete.
k)The Deed Administrators have requested access to Lincoln on the Park in order to inspect the alleged defects and obtain an independent assessment of the costs to remedy those defects. Lincoln has not responded to those requests for access. As a result, the Deed Administrators have not been able to verify the defects and they cannot be accepted.
l)Further, the Deed Administrators have no evidence (with the exception of that set out below) that the alleged defects have been rectified, noting that Lincoln holds the funds paid to it as a result of its call on the bank guarantees. In addition, a number of the alleged defects listed in the Gleeds Report indicated that they are “closed”. Despite request, Lincoln has not confirmed whether it maintains those defect claims.
m)The Deed Administrators have been provided with the following identifying the costs incurred by Lincoln it alleges is associated with defects or incomplete works:
oRetention Tracking Summary from October to December 2017 (with relevant invoices) totalling $5,188.03 (excluding GST);
oRetention Tracking Summary from January 2018 (with relevant invoices) totalling $4,585.85 (excluding GST);
oRetention Tracking Summary from February 2018 (with relevant invoices) totalling [$]25,860.42 (excluding GST);
oRetention Tracking Summary from March 2018 (with relevant invoices) totalling $71,816.29 (excluding GST);
oRetention Tracking Summary from April 2018 (with relevant invoices) totalling $90,444.00;
oRetention Tracking Summary from May 2018 (with relevant invoices) totalling $175,542.11;
oFurther Retention Tracking Summary from May 2018 (with relevant invoices) totalling $139,676.24.
n)We set out in Annexure 1 the invoices accepted as being payable by [CRCG] in the amount of $409,945.22.
o)The Deed Administrators do not have sufficient information to accept any of the further defect claims and they are hereby rejected.
p)The value of the defects accepted by the Deed Administrators does not exceed the security held by Lincoln, which security has been applied to remedy the defects as outlined in the Retention Tracking Summary.
Warranty Claims
q)Lincoln alleges that [CRCG] did not provide warranties to Lincoln as required by clause 15.8 of the Principal’s Project Requirements forming Attachment 1 to the Novation Deed.
r)Lincoln has obtained a report of Mitchell Brandtman dated 19 April 2018 on which it seeks to rely in order to quantify its loss as a result of the alleged failure of [CRCG] to provide the stated warranties. The report quantifies the value of the work provided under the contract with respect to each trade and values the failure to provide the warranty for the first year as 5% of the total value of work performed. The value of the warranty then diminishes over the course of 7 years.
s)The Deed Administrators do not accept that this is the correct methodology for determining any loss suffered by Lincoln as a result of any failure to provide a warranty.
t)In any event, the Deed Administrators’ investigations indicate that:
owarranties were obtained and provided to Lincoln;
oon 8 November 2018 Wentao Gao of [CRCG] sent an email to Mark Gaskin-Harris for Lincoln indicating that [CRCG] had provided all warranties of which it was reasonably aware via USB, hard copy and drop box; and
oLincoln was listed a Beneficiary under each Subcontract Agreement entered into with Subcontractors of [CRCG] and Rimfire. As a Beneficiary, Lincoln is entitled to enforce the warranties contained in those Subcontractor Agreements;
u)An officer of Lincoln, Murry [sic] Thornton, has signed an affidavit in which he stated “Lincoln has been required to source alternative warranty arrangements”. Despite request, Lincoln has not provided details of those alternative warranty arrangements of the cost to Lincoln of sourcing those arrangements.
v)On the information available to the Deed Administrators, they are not able to accept this claim.
Set-Off
w)In addition to the above Lincoln remains indebted to [CRCG] in the amount of $36,543.69 for work performed by [CRCG] pursuant to the Contract and Novation Deed but not paid. The Deed Administrators are entitled to set off that amount against any debt or claim of Lincoln.
(Italics in original)
Annexure 1 to this Notice was in the following form:
PROCEDURAL HISTORY
The plaintiffs’ originating application in this proceeding was filed on 18 September 2018. On 31 October 2018, the plaintiffs obtained leave to amend that document to seek an order to terminate the Deed of Company Arrangement that CRCG entered into on 19 March 2018. From that point, that application became the plaintiffs’ primary focus in this proceeding. It proceeded to hearing on 1 April 2019 and judgment was delivered on 30 August 2019 dismissing the plaintiffs’ application (Shafston Avenue Construction Pty Ltd, in the matter of CRCG-Rimfire Pty Ltd (subject to deed of company arrangement) v McCann [2019] FCA 1426]). The plaintiffs then filed an appeal against that judgment, which was heard by the Full Court on 14 February 2020 and dismissed on 22 May 2020 (Shafston Avenue Construction Pty Ltd v McCann [2020] FCAFC 85).
In the meantime, on 8 October 2019, the balance of the proceeding, namely the plaintiffs’ present challenges to the rejection of their Proofs of Debt, was tentatively set down for hearing for three days commencing 24 March 2020 and trial programming orders were made directed to achieving those trial dates. On 17 December 2019, because the plaintiffs had failed to comply with various aspects of those orders, they were amended, but the tentative trial dates were retained. Under that amended trial program, the plaintiffs were to file any expert evidence upon which they intended to rely by close of business on 9 January 2020. No such material was filed. Instead, on 15 January 2020, Macpherson Kelley sent a letter to Clayton Utz stating, in part:
We refer to the above matter and note that our clients’ expert reports were due to be filed on 9 January 2020.
As previously advised, it was our clients’ initial intention to simply put in the reports contained in the affidavit of Murray Thornton (that being [BBG], Gleeds, and Mitchell Brandtman) formally in as expert evidence.
Whilst we made attempts with our client’s experts at the end of last year to convert the reports into a format that they can be filed as expert evidence, we have been contacted by two of those experts, namely Gleeds and [BBG], who have advised that they no longer wish to be involved in any litigation against [CRCG]. Despite asking for further information from those experts, they will not provide us with any further details. We are still waiting to hear back from Mitchell Brandtman.
In the circumstances we are making enquires in relation to alternative experts for the purposes of obtaining reports to the same matters to those reports initially obtained by our clients. However, as you would appreciate, this will take some time. In the circumstances, we will be likely be seeking an adjournment of the hearing date which is currently set for March 2020 …
Approximately seven weeks later, on 2 March 2020, the plaintiffs’ lawyers filed an interlocutory application seeking to vacate the March trial dates, as foreshadowed in the final paragraph of their 15 January 2020 letter above. In his affidavit in support of that application, Mr Benjamin Rooks, the plaintiffs’ solicitor, set out two reasons for that course. The first was that he had attempted to obtain reports from the persons who had assisted Lincoln to prepare its Proofs of Debt in respect of the Lincoln on the Park project, namely Gleeds, Mitchell Brandtman and BBG, but had been informed by Gleeds and BBG that “they are now conflicted out of the matter and can no longer be part of the proceedings”. Accordingly, Mr Rooks said that Lincoln needed additional time “in which to engage new experts, to prepare expert reports on items which they had previously already had reports prepared” and that those new experts “will be briefed within the next seven days”. It will be noted that these statements are to substantially the same effect as those contained in the plaintiffs’ lawyers’ 15 January 2020 letter above (at [51]).
The second reason Mr Rooks provided for the adjournment was that 30 boxes of documents had recently been discovered in a property formerly occupied by CRCG which appeared to be relevant to the Lume and Lincoln on the Park Projects. In view of the steps both parties needed to take to examine and analyse those documents, Mr Rooks said that it would be “unlikely that the Plaintiffs will be in a position to proceed with the hearing on 24 March 2020”.
Because of the latter development and somewhat fortuitously for the plaintiffs given their dilatory approach to obtaining their replacement expert evidence, the March trial dates were vacated by consent and new trial dates were fixed for three days commencing on 7 July 2020. As a part of the amended trial program, Lincoln was ordered to file the expert evidence upon which it intended to rely by the close of business on 31 March 2020. No materials were filed by that time.
During April/May 2020, following the onset of the Corona Virus Disease 2019 (COVID-19) pandemic, the July hearing dates were initially treated as provisional and eventually vacated. Subsequently, new trial dates were proposed for early October 2020, but eventually they were fixed for the three days commencing 31 August 2020.
On 25 June 2020, the matter was listed for a pre-trial case management hearing because of concerns about the plaintiffs’ continuing non-compliance with the trial programming orders. At that hearing, the defendants relied on an affidavit by their solicitor, Mr Scott Sharry, which outlined in some detail the history of that non-compliance. It included:
·not responding to the defendants’ objections to the plaintiffs’ affidavit materials;
·not filing their opening submissions;
·not providing a draft Index to the Court Book;
·prevaricating in respect of the expert evidence they intended to rely upon.
As to the last of these items, during that case management hearing, the defendants’ counsel said that he had recently been informed by the plaintiffs’ lawyers that they intended to revert to their original proposal of relying upon the reports annexed to the affidavit of Mr Thornton dated 18 September 2018 (see the letter of 15 January 2020 at [51] above) and to seek the issue of subpoenas to those three persons. In response, the plaintiffs’ counsel confirmed that they had adopted that course to avoid incurring the additional expense associated with obtaining replacement expert evidence. Because this issue was likely to have an adverse effect on the preparations for trial, the parties were ordered to exchange materials outlining their positions with respect to it and a hearing date was fixed to resolve the issue. On the day before that hearing, the parties filed consent orders. The resulting orders made on 9 July 2020 provided that the plaintiffs could apply to issue subpoenas to the three persons concerned, namely: Mr Andrew King (Gleeds); Mr Steve Franklin-Bull (BBG) and Mr Darryl Bird (Mitchell Brandtman). Those orders also confined the evidence-in-chief which the plaintiffs could seek to adduce from those witnesses to the contents of the following reports:
(a)Mr King (being document 13 of Annexure MT-1 to the Affidavit of Murray John Thornton sworn 5 September 2018 and filed 18 September 2018 (the Thornton Affidavit);
(b)Mr Franklin-Bull (being documents 14 and 15 of Annexure MT-1 to the Thornton Affidavit); and
(c)Mr Bird (being document 16 of Annexure MT-1 to the Thornton Affidavit).
As well, Order 8 of those Orders also gave the plaintiffs leave to, by close of business on 17 July 2020:
… file and serve further lay evidence given by a suitable officer of the third plaintiff concerning the ongoing defects in the property at 54 Lincoln Street, Stones Corner in the State of Queensland and limited to the matters identified in [11] of the Affidavit of Mark Gaskin-Harris (unsworn) served on 6 July 2020.
The identified matters in question were:
(a)the nature of the particular Remediation Works which have been completed to date;
(b)the actual costs which Lincoln has incurred to date in performing the Remediation Works;
(c)the expenditure and depletion of the Guarantee Funds; and
(d)the nature of the Defects which have not yet been remediated to date, and which Lincoln is still required to remediate.
Finally, on 20 July 2020 (three days late, but an unsworn copy was filed on 17 July 2020), the plaintiffs filed an affidavit by Mr Gaskin-Harris as provided for in the order above. I will return to this affidavit later in these reasons when I come to consider the Lincoln defects issue (see below at [100]).
THE ISSUES
At the conclusion of the evidence at the trial and before they prepared their closing submissions, the parties agreed that some, or all, of the following issues fell to be determined in this matter, noting that issue 1(b) was ultimately not pressed:
Admissibility issue
1.Are the following admissible such that they should be received in evidence in the proceeding:
(a)the email from Matthew Molony to Mark Gaskin-Harris dated 2 August 2017; and
(b)the section headed “Rectification works” in the letter from Climatech to Steven Franklin-Bull dated 8 February 2017 (being an attachment to the Report of Steven Franklin-Bull dated 29 March 2018)?
Shafston construction contract claim
2.Did CRCG and Shafston enter into a binding contract for the construction of the Lume development, by way of:
(a)a partly written and partly oral agreement arising out of the Letter of Intent, three meetings on 10 November 2016, 23 November 2016 and 29 November 2016, and the Heads of Agreement?
(b)an agreement partly in writing and partly by conduct, consisting of the Letter of Intent, the Heads of Agreement and a course of conduct by CRCG performing works?
3. As to either alleged binding contract:
(a)Did CRCG and Shafston agree on a price of $48.4 million for the construction of the Lume development?
(b)Did CRCG and Shafston agree on the scope of works for the construction of the Lume development?
(c)Was the Heads of Agreement binding and enforceable against CRCG requiring it to provide bank guarantees to Shafston in connection with the Lume development?
(d)Did CRCG perform works in connection with the Lume development which were outside of the scope of works in the Letter of Intent, and if so, what were those works?
4.Has Shafston suffered any actual loss and damage in the sums alleged by reason of CRCG’s alleged non-completion of any binding construction contract in respect of the Lume development? As to these matters:
(a)Had Shafston secured funding for construction of the Lume development to proceed in accordance with a contract for the construction of that development with CRCG by the time of the purported termination in June 2017?
(b)Was the price for the construction of the Lume development under the contract which Shafston (or its related entity) entered into with Hutchinson Builders $53.9m?
(c)Was there a completion date for construction of the Lume development?
Shafston and Baxter intellectual property claims
5.On the proper construction of clause 11.4 of the Shafston and Baxter Letters of Intent, was CRCG required to provide Shafston and Baxter with confirmation that Shafston and Baxter could use the intellectual property in work undertaken by or on behalf of CRCG under the Letters of Intent?
6.Should a term be implied into the Shafston and Baxter Letters of Intent which required CRCG to provide permission to Shafston and Baxter to use and have the benefit of the intellectual property in the work undertaken by or on behalf of CRCG under the Letters of Intent (the Implied Term)?
7.Did CRCG fail to comply with clause 11.4 of the Shafston and Baxter Letters of Intent on its proper construction?
8.Did CRCG fail to comply with the Implied Term?
9.As to [7] and [8], if any obligation of CRCG arose:
(a)on what date did each of Shafston and Baxter request the provision of the intellectual property?
(b)on what date was the intellectual property provided?
10.Is the effect of clauses 9.1 and 9.2 of the Shafston and Baxter Letters of Intent that CRCG in fact complied with its obligations under clause 11.4 of Letter of Intent and the Implied Term?
11.Did any breach of contract on the part of CRCG cause either Shafston or Baxter to suffer loss? As to this, had either of Shafston or Baxter already incurred expense in relation to the intellectual property by the time it was provided?
12.What is the value (if any) of the loss or damage suffered by Shafston and Baxter?
Lincoln defects claim
13.What is the proper construction of the Lincoln contract in respect of the rectification of defects? As to this:
(a)Are subclauses 44.6(b) and (c) of the Lincoln Contract applicable to the claim made by Lincoln for the costs of rectifying defects in the Lincoln development?
(b)If subclauses 44.6(b) and (c) are applicable, on their proper construction, do they operate so that if they apply and have been complied with, Lincoln need not prove that defects identified in the Punchlist schedules are Defects within the meaning of the Lincoln contract?
(c)Is subclause 44.6(f) applicable to the claim made by Lincoln for the costs of rectifying defects in the Lincoln development?
(d)If subclause 44.6(f) is applicable, on its proper construction, does it operate so as to require CRCG only to rectify those identified defects in the Lincoln development which are Defects within the meaning of the Lincoln contract?
14.Has Lincoln proved that it has suffered loss and damage by reason of defects in the Lincoln development? In particular:
(a)Has Lincoln proved that there are defects in the Lincoln development?
(b)Has Lincoln proved that those defects are Defects within the meaning of the Lincoln contract?
(c)Has Lincoln proved what work is required to rectify the defects in the Lincoln development which are outstanding and the value of that work?
(d)Has Lincoln proved that there is work which has been undertaken by it or on its behalf to rectify defects in the Lincoln development and the value of that work?
(e)What is the total value of the work done or work required to be done to rectify defects in the Lincoln development which Lincoln can prove?
Lincoln warranties claim
15.What warranties was CRCG obliged to procure for Lincoln under clause 44.8 of the Lincoln contract and clause 15.8 of the Principal’s Project Requirements (Annexure C to the Lincoln contract)?
16.What warranties did CRCG in fact procure for Lincoln under clause 44.8 of the Lincoln contract and clause 15.8 of the Principal’s Project Requirements?
17.What is the appropriate methodology for valuing warranties which ought to have been procured under clause 44.8 of the Lincoln contract and clause 15.8 of the Principal’s Project Requirements? In particular, is it appropriate to:
(a)Take as a starting point the subcontract price for the value of the works the subject of the required warranties?
(b)Apply as a percentage for the value of the required warranties in their first year the retention amount stipulated in the Lincoln contract as required to be held by the principal for the first year after practical completion?
(c)Value the warranties in the years after their first year on the basis that only a warranty for workmanship would be provided and not a manufacturer’s warranty?
(d)Apply as a percentage for the value of the warranties in the years after the first year following practical completion, a diminishing compound factor with or without an increase for cost escalation?
(e)Add a component to the total value of the required warranties for builder’s preliminaries?
(f)Take into account when valuing the warranties which ought to have been, but have not been, procured for Lincoln, the benefit which Lincoln has received from warranties which have been procured on more favourable terms than those required by the Lincoln contract?
18.What is the value (if any) of the warranties which have not been procured by CRCG to Lincoln?
(Bold and error in original; underlining added)
Since the admissibility issue is connected with the Lincoln defects claim, that matter will be considered in conjunction with that issue. With that exception, these issues will be considered in turn below. However, first, it is convenient to say something about the nature of this proceeding and the plaintiffs’ onus of proof.
THE NATURE OF THIS PROCEEDING AND THE PLAINTIFFS’ ONUS OF PROOF
The principles bearing on the nature of this proceeding were helpfully summarised recently by Rees J in In the matter of Azmac Pty Limited (2020) 146 ACSR 113; [2020] NSWSC 204 (Azmac) at [41]-[44] where her Honour explained that this proceeding is properly brought under s 90-15 of the Insolvency Practice Schedule; that it proceeds as a hearing de novo; and that the critical question is whether the debt concerned is a true liability of the company, as follows:
41An appeal to the Court challenging the decision of a liquidator with respect to a proof of debt was previously brought under section 1321 of the Corporations Act 2001 (Cth), now repealed, and, as explained by Gleeson JA in Hill v Esplanade Wollongong Pty Limited (subject to a deed of company arrangement), appeals are now made under section 90-15 of Schedule 2 Insolvency Practice Schedule (Corporations), Corporations Act: at [21]. The case law in respect of the earlier provision is, however, of continuing relevance: Re ACN 096 281 542 Limited (in liq) per Randall AsJ at [6]; El-Saafin v Franek (No 3) per Lyons J at [63]; see, for example, Hill v Esplanade Wollongong Pty Limited.
42An appeal against a liquidator’s rejection of a proof of debt is a hearing de novo and thus the Court may make its decision on evidence that was not before the liquidator: Tanning Research Laboratories Inc v O’Brien at 340-1 per Brennan and Dawson JJ. As their Honours explained, when the liquidator is called upon to consider a proof of debt, the relevant consideration is whether the alleged debt is a “true liability of the company” or “is not legally enforceable” (at 339, 341) but, on an appeal, at 341: (emphasis added)
The liquidator may defend [the company’s] assets against the creditor’s claim on any ground on which the company may have defended the claim had it been sued by the creditor. … The issue in the proceeding is whether the liability referred to in the proof of debt is a true liability of the company enforceable against it.
43As further explained in Tanning Research Laboratories v O’Brien at 339-341, in determining whether the debt is “a true liability of the company enforceable against it”, ordinarily the general law applies including statutes of limitation and equitable principles. There are some exceptions, however, where the liability, though enforceable against the company, is founded merely on some act or omission on the part of the company which unjustly prejudices the interests of the creditors or contributories in the assets available for distribution. For example, there may be a judgment debt against the company but there is some good reason why there ought not be such a judgment; the circumstances may tend to show that the judgment was obtained by collusion or an absurd compromise. In such circumstances, the liquidator is armed with grounds for rejecting the proof of debt additional to grounds available under the general law: at 340. Likewise, on an appeal, the liquidator is entitled to rely on this special defence which allows him, for example, to go behind a judgment in order to ascertain the true liability of the company: at 341. There is no suggestion that any of these additional grounds arise here.
44Nor is the creditor, on such an appeal, strictly confined to each allegation and proposition by which it originally sought to advance the proof of debt, “As long as the claim remains the original claim, some change in the explanation of the way in which it is said to be a true liability of the company enforceable against it is permitted”: Johnston v McGrath at [26] per Barrett J citing Re Jay-O-Bees Pty Limited; Rosseau Pty Limited v Jay-O-Bees Pty Limited per Campbell J; Re St Gregory's Armenian School Inc per Black J at [34]-[35].
(Citations omitted)
As well as the matters mentioned by Rees J above, in Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332 at 340, Brennan and Dawson JJ emphasised that “[t]he occasions when it is right to reject a proof of debt in respect of what is not a true liability of the company may not be susceptible of exhaustive definition”. However, their Honours did suggest that some guidance may be obtained from the observations of Barwick CJ in Wren v Mahony (1972) 126 CLR 212 as follows:
“Circumstances tending to show fraud or collusion or miscarriage of justice or that a compromise was not a fair and reasonable one, in the sense that even if not fraudulent it was foolish, absurd and improper, or resulted from an unequal position of the parties (see In re Hawkins; Ex parte Troup) offer occasions for the exercise by the Court of Bankruptcy of its power to inquire into the consideration for the judgment.”
(Footnote omitted)
As for the onus of proof, in Re Galaxy Media Pty Ltd (In Liq) [2001] NSWSC 917 (Galaxy Media), Santow J explained, by reference to several authorities, how it remained firmly on the plaintiffs and that a liquidator’s (Administrators in this matter) rejection of a proof of debt should not be upset unless the Court is properly satisfied that they have discharged that onus. In particular, his Honour said (at [25]-[26]):
25Thus the notion of “appeal” is not so much directed at the nature of the review but to the onus lying upon the “appellant” who challenges the liquidator’s decision. Thus in Westpac Banking Corporation v Totterdell (at 154), Ipp J concluded:
“Although the issue before the court on the appeal is whether the liability referred to in the proof of a debt is a true liability of the company, enforceable against it (Tanning Research Laboratories Incorporated v O’Brien (at 341)), it remains incumbent on an appellant to show that the liquidator was wrong in admitting the proof of the debt. As Kennedy J said in Bradshaw v Medical Board (WA) at 328:
‘An appeal in the nature of a re-hearing under the [Medical Act 1984] remains an appeal and the court “must recognise the onus of the appellant to satisfy it that the decision below is wrong”: Powell v Streatham Manor Nursing Home at 255 per Lord Atkin.
Although Bradshaw v Medical Board (WA) concerned different legislation, the nature of an appeal under s 1321 is the same as that considered in that case and the rule mentioned by Kennedy J is equally applicable.”
26More recently, in Lewis v Notrex Pty Ltd, Young CJ in Equity affirmed that the applicant has the onus “to establish the facts that would enable the proof of debt to be allowed” and “when one is trying a separate issue of fact, the same person bears the onus of proof as would have borne it had the question been tried with the rest of the questions at the final trial”: see at [15].
(Citations omitted, bold added)
He added (at [33]-[34]):
33Thus I agree with the submissions of the plaintiffs that the Court’s task in approaching the question de novo, is to bring to bear a proper rigour in reviewing all the relevant facts in their context, to determine whether indeed the debt should have been admitted or rejected, doing so by applying legal principle to those facts afresh. However, the onus still remains on the party challenging the liquidator's determination. The Court will not upset the liquidator's determination unless properly satisfied that that onus has been discharged, though there may well come a point where the onus shifts in an evidentiary sense.
34In carrying out such a de novo review, 1 therefore so approach the matter, in determining whether the onus upon the parties challenging the liquidator’s decision has been discharged. If I am unable to conclude either way (as to whether the proof should be admitted) then the liquidator’s decision must stand.
(Bold added)
See also Re: Castleplex Pty Ltd (in liq) [2010] QCA 59 at [4] per McMurdo P, Fryberg and McMeekin JJ.
SHAFSTON CONTRACT CLAIM – ISSUES 2 TO 4
Introduction
Finally, Mr Bird set out his calculations with respect to the three components of the warranty claims. The first was his calculation of the value of the 1 year / default Trade Warranties that had not been provided. He calculated that to be $45,717.30 (excluding GST). The second was his calculation of the 7 year Trade Warranties that had not been provided. He calculated that at $1,547,418.14 (excluding GST). The third and final component related to the lift installation. He calculated that component at $612,000.00 (excluding GST).
In the concluding paragraphs of his report, Mr Bird estimated the total value of the Trade Warranties that had not been provided at $2,205,135.44 (excluding GST) and expressed the following qualification:
…
We note that this report and valuation herein has been prepared within a short time frame and is therefore based on a desktop review of the documentation provided. The information and commentary herein should be reviewed when further and more detailed information is available.
…
Mr Bird annexed a table to his report which set out the details of his calculations. Lincoln provided an amended version of that table in its closing submissions stating that it had been amended to remove any reference to those items in respect of which warranties had been provided in accordance with the Lincoln contract. That amended table was in the following form:
At this point, it is worth noting the following features of this table:
(a)the items relating to glazing, waterproofing and carpets have been excluded from the table at [150] above because full contractual warranties were provided for them;
(b)despite being treated as items where no warranties were provided, partial warranties were in fact provided for the items: hydraulics, electrical and mechanical (see at [177] below]);
(c)the items for landscaping and pool have been excluded from the table at [150] above apparently because of the short warranty period involved with the former and the substantial compliance in the provision of warranties with respect to the latter; and
(d)given the inclusion of the items for fire and hydraulics above, I presume the indication in the table at [150] above, that full warranties were provided for those items, is an error.
Mr Sanig’s report
Clayton Utz, the Administrators’ lawyers, requested Mr Sanig to prepare his report. Since it was expressly provided for the purpose of the present proceeding, at paragraph 2.24, it contained the following statement: “I have been provided with and read r.23.13 of the Federal Court Rules 2011 (Cth) (“Contents of an expert report”) together with a copy of Expert Evidence Practice Note GPN-EXPT and agree to be bound by them”. At paragraph 1.10 of the Executive Summary to his report, Mr Sanig set out the matters upon which he had been asked to provide his opinion. They were:
…
a.First, on the assumption that no warranties have been provided as required by the relevant parts of the Contract.
b.Secondly, on the assumption that warranties contained in the subcontracts that I have been provided with, have been provided.
I am also asked to comment on the methodology and some assumptions made by Lincoln’s quantity surveyor report prepared by Mitchell Brandtman …
As to the opinion sought in (a.) above, at paragraph 1.11 of the Executive Summary to his report, Mr Sanig summarised the opinions he had expressed in the body of his report as follows:
… I agree with [Mitchell Brandtman’s] overall methodology of how they have valued the warranties which I consider aligns with industry practice. However, I disagree with some of the assumptions and additions they have made to their calculation as follows:
a.I agree with [Mitchell Brandtman] that it is appropriate to use the retention amount as the cost of the warranty in year 1 because that figure represents the parties’ view of the chance that the warranty will be called upon. However, I disagree with the figure used. [Mitchell Brandtman] uses a baseline percentage of 5% for the value of the warranties in year 1 after the Date of Practical Completion (presumably because they were instructed that up to the Date of Practical Completion there was a retention value of 10%), however I consider that it is appropriate to adopt as the starting point for valuing the warranties the actual retention value for the period after the Date of Practical Completion as disclosed in the Contract. I explain this in more detail in Section 10.
b.[Mitchell Brandtman] has added figures to its warranty calculation for escalation costs and builder’s preliminaries. In my opinion those matters should not be added to the warranties as industry practice. I explain my reasons for this in Section 10.
c.Furthermore, [Mitchell Brandtman] has valued the warranties on a holistic basis for both workmanship and manufacturer supplied items for the entire duration of each warranty. However, in my opinion, warranties for manufacturer supplied items would generally never be given for more than 1 year. I have therefore calculated the value of the warranty for the period after year 1 on the basis that they are only for workmanship.
With respect to the retention value matter addressed in (a.) above (at [160]), Mr Sanig provided the following explanation in the body of his report:
10.10.6
The amount of 5% which [Mitchell Brandtman] has adopted is consistent with the instructions that they were given. However, it is not consistent with the actual contractual documents. I have used, in my analysis in Spreadsheet B, the actual retention amount for the year following the Date of Practical Completion (i.e. 2.5%), because that is the amount in the contract.
10.10.7
To identify that amount, I have considered the following documents:
a.
The original building contract dated 27 May 2016 which shows that 5% overall security retention will be held and 2.5% will be released upon reaching the Date of the Date of Practical Completion. Therefore, the retention security to be held for the Defects Liability Period (i.e. the year following the Date of Practical Completion) is 2.5%. See Clause 5.4 of the Contract and Item 11 in Annexure ‘A’.
b.
The original contract superseded by the Deed of Novation dated 13 March 2017 which shows that 10% overall security retention will be held and 7.5% will be released upon reaching the Date of Practical Completion. Therefore, the retention security to be held for the Defects Liability Period is 2.5% (i.e. 10% less 7.5%). See Clause 4 (g) – (i) of Novation Agreement which includes an Amended Item 11 of Annexure ‘A’.
c.
The original Trade Subcontracts which show that the 5% overall security retention will be held and 2.5% will be released upon reaching the Date of Practical Completion. Therefore, the retention security to be held for the Defects Liability Period is 2.5%. (See Clauses 4.1, 4.2 and 4.7 of Lift Installation Subcontract Agreement)
(Errors and bold in original)
With respect to the matters of escalation costs and builder’s preliminaries addressed in (b.) above (at [160]), Mr Sanig provided the following explanation in the body of his report:
[Escalation costs]
10.9.4
Whilst I agree with the methodology, I do not adopt the numbers or percentages to which [Mitchell Brandtman] has had regard. Nor do I adopt the additional components of the calculation, being, the construction escalation and builder’s preliminaries. I also do not agree with [Mitchell Brandtman’s] treatment of the warranties on a holistic basis. In my view, they should be split into the cost of labour and the cost of plant and equipment. I address my reasons for this disagreement in paragraph 10.10.9 below.
[Builder’s preliminaries]
10.10.14
[Mitchell Brandtman] has adjusted each warranty by a 20% mark-up to allow for Builder’s Preliminaries (i.e. the builder’s non-productive overheads on site such as toilets, site office etc.). However, I do not consider that it is appropriate when valuing future warranties to take this figure into account because, the Builder’s Preliminaries should not be part of the trade subcontractors warranty cost (as a cost which the subcontractor would allow for in its pricing of future warranties). If such a provision was to be made, I would expect that it would have been included in the builder’s initial contract price.
10.10.15
Further, in my more than 40 years’ experience in the construction industry it is highly unlikely that the Builder would be involved in warranty work years into a warranty period. It is therefore highly unlikely that any builder’s preliminaries would be required for such warranty work. For these reasons, I have not included this mark-up in my calculations.
(Bold in original)
With respect to (c.) above (at [160]), in their closing submissions, the Administrators stated that they did “not press for the warranty claim to be reduced by 50% in years 2 and following, for it is acknowledged that the Lincoln contract does not contemplate that reduction”. To address this change of position, the Administrators attached to their closing submissions a recalculated version of Spreadsheet C which was attached to Mr Sanig’s report. That amended spreadsheet was in the following form:
Next in the Executive Summary to his report, Mr Sanig addressed the opinion sought in (b.) above (at [159]). In respect of that matter, he stated (at paragraphs 1.13-1.14):
1.13In terms of the second basis I have adopted the same considerations as I did for the first basis. In addition, I have departed from the Value Assumption made by [Mitchell Brandtman] because in my opinion that assumption which was made based on a trade breakup cannot, from the material available, be verified as representing the actual costs incurred. I have therefore used the contract sums in the various subcontracts as the best available information as to the value of the works.
1.14To arrive at a value on this basis I have valued the warranties as required by the contract in accordance with my assumptions, and I have valued the warranties which I am instructed have been provided by or on behalf of [CRCG], to determine a value for the balance of warranties that were not provided. I explain this calculation in Section 10.
With respect to the value assumption matter addressed in paragraph 1.13 above, Mr Sanig explained in the body of his report that he had:
10.11.15
… adopted the subcontract amounts in my calculations not by reason of any difference in methodology or principle (because as I describe above, I agree with [Mitchell Brandtman] that it is appropriate to value the warranties starting with the value of the works for which that warranty is provided), but, rather, because, practically, it is not possible on the material I have been provided with to verify whether the trade break-up relied upon by [Mitchell Brandtman] is accurate and represents the true amounts paid for the various subcontract works. I can however be satisfied that the values disclosed in the subcontracts were at least, at the time they were entered into, contemplated to be fair and reasonable value for the works. I therefore consider that those figures should be adopted in the absence of information to the contrary.
In the penultimate paragraph to the Executive Summary of his report (1.15), Mr Sanig came to the following conclusion with respect to (b.) above (at [159]): “Based on my calculations the value of the warranties on this basis is $108,353.44 being the values calculated in Spreadsheets C and D which are attached to Annexure D”. With respect to the latter, in addition to annexing the recalculated version of Spreadsheet C to their closing submissions (see at [163] above), the Administrators also annexed a recalculated version of Spreadsheet D. It was in the following form:
Finally, at paragraph 1.16 of the Executive Summary to his report, Mr Sanig said that he had not included the lift “at its claimed replacement cost”, but had rather “valued the lift warranty in accordance with my approach to all of the warranties”.
Contentions
Lincoln contended that most of the warranties required by the table in cl 15.8 were for a seven year period and, to the extent that they had not been provided by CRCG, it “did not get what it paid for and CRCG [was] in breach of the [Lincoln] contract”. It claimed that Mr Bird’s method of calculating the value of the loss of those warranties was valid and should be accepted. On the other hand, it contended that Mr Sanig’s valuation was “fundamentally flawed”, essentially because it made no allowance for years 2 to 7 of the workmanship warranties.
The Administrators contended that both Mr Bird and Mr Sanig had adopted a similar methodology for valuing the loss of those warranties and both had agreed that the purpose of the valuation was to value the risk of failure in the materials or workmanship supplied for the Lincoln on the Park Project. They contended that an allowance should be made for the full value of those warranties that CRCG had provided because the intention was to put Lincoln in the same position as it would have been if the contract had been performed. It contended that the following aspects of the methodology used by Mr Sanig should be adopted in preference to that of Mr Bird essentially because Mr Sanig’s report was prepared as an expert’s report and Mr Bird’s was not:
(a)the percentage amount applied to the value of the warranties in year 1 (which then also forms the basis for subsequent years) ought to be 2.5%, being that actual contract retention amount for the Defects Liability Period;
(b)the starting value for the warranties should be the actual subcontract amounts, rather than the unverified trade break-up summary used by Mr Bird;
(c)builders’ preliminaries should not be included, for they are not always likely to be needed when warranty works are undertaken, are often costs which a builder would factor in when pricing the work to be done under the building contract, and would not usually be taken into account by a subcontractor as the cost of providing a warranty;
(d)an escalation amount (for inflation) should not be included, for while it may be taken into account by a subcontractor when pricing a warranty, the subcontractor may also bear the increase in costs for inflation itself.
(Footnotes omitted)
Applying this approach and based on the amended spreadsheets attached to their closing submissions, they contended that the value of the warranties not provided by CRCG to Lincoln should be assessed to be in the total net sum of $262,486.32. This figure was obtained by deducting from the final figure shown in the recalculated version of Spreadsheet C (at [163] above), the final figure shown in the recalculated version of Spreadsheet D above (at [166]).
Consideration
One of the main principles pertinent to these issues has already been identified with respect to the previous issues (at [105] above). It is that Lincoln is entitled to a monetary sum by way of damages for CRCG’s breach of contract that puts it in the same situation “so far as money can do it, as it would have been in had the broken promise been performed”, or, put differently, “the monetary value of faithful performance” (see Macourt at [106] and [107] respectively per Keane J). That sum is intended to provide “reasonable compensation for the breach ‘without imposing a liability upon the other part exceeding that which he could fairly be regarded as having contemplated and been willing to accept’” (see Baltic Shipping Company v Dillon (1993) 176 CLR 344 at 380 per Deane and Dawson JJ).
On the other hand, as was made clear in Tabcorp and, before it, in Bellgrove, the proper measure of damages is not the difference in value between what the plaintiff paid and what it received or, in a building contract context, the value of the building actually constructed compared to its value had it been constructed in accordance with the contract (see Tabcorp at [15] and Bellgrove at 617, set out at [105] above). For this reason, I reject the Administrators’ contentions that Lincoln’s damages should be calculated by deducting the value of the warranties that CRCG actually provided to Lincoln from the value of those warranties that were contractually required to be provided. That contention is even more untenable where it concerns the warranties that CRCG provided for periods longer than the seven year period provided for in cl 15.8. That is so because it entirely ignores cl 36(a) of the Lincoln contract which expressly stated that “such additional warranties shall be provided to [Lincoln] by [CRCG] at no cost and expense to [Lincoln]”. It follows from these conclusions that the approach outlined by the Administrators above (at [169]) of deducting the total figure in Amended Spreadsheet D from that in Amended Spreadsheet C is fallacious and cannot be adopted. I will return to the question whether any deduction should be made to Lincoln’s damages for this factor later in these reasons.
That issue aside, the parties appear to have approached the assessment of Lincoln’s damages on a number of unstated, but nonetheless valid, mutual assumptions. They were:
(a)that there had been a breach of cl 44.8 of the contract and cl 15.8 of Schedule C thereto;
(b)that, as a result, there was more than a negligible chance of Lincoln suffering future loss, that is the future loss associated with being required to remedy faulty materials and/or workmanship in the Lincoln on the Park Project without having the ability to call on the trade warranties; and
(c)that the methodology used by Mr Bird and Mr Sanig to evaluate Lincoln’s loss was appropriate in the circumstances.
It should be noted that the assumption in (c) is valid because that methodology is properly directed to evaluating damages of this kind by assessing the probability of an event of the kind described in (b) above occurring (see Sellars v Adelaide Petroleum N.L. (1994) 179 CLR 332 at 350 per Mason CJ, Dawson, Toohey and Gaudron JJ and Malec v J.C. Hutton Proprietary Limited (1990) 169 CLR 638 at 643 per Deane, Gaudron and McHugh JJ). In respect of this approach to assessment, it is also worth noting the caution expressed by Brennan and Dawson JJ in Malec at 640 that “[d]amages founded on hypothetical evaluations defy precise calculation”. This caution serves as a convenient reminder that calculations of this kind are not intended to dictate a precise figure for Lincoln’s damages, but rather to provide an aid in assessing the fair and reasonable amount to be awarded for those damages.
Having regard to these principles and assumptions, it is necessary to turn to the calculations undertaken by Mr Bird and Mr Sanig. The methodology they employed was summarised in the body of Mr Sanig’s report as involving the following five factors (at 10.9.3):
a.Identify the warranties in the Contract to be valued and the relevant period for which those warranties were to be provided;
b.Establish the value of the work actually performed by the relevant subcontractors whose works are being warranted (i.e. in this case the component described in my instructions as the Value Assumption);
c.Identify, the value for the warranty in year 1 after the Date of Practical Completion by taking the relevant retention percentage for the period between the Date of Practical Completion and the completion of the Defects Liability Period (which amount is typically in the industry half of the retention percentage applicable from commencement of the contract to the Date of Practical Completion). This percentage is adopted because it is likely, in the majority of cases, that that amount would be sufficient to cover the likely costs of any defects that could arise in the year after the Date of Practical Completion. In my opinion it is appropriate to adopt that amount because it is the parties’ best estimate of the likelihood of those defects arising. In my opinion, such an approach is consistent with industry practice.
d.Identify the value of the warranties for years 2 to 7. To do this, [Mitchell Brandtman] starts with the year 1 percentage (i.e. specified in step c above) and reduces it on a compound basis, annually, for the following 6 years. This is done by reducing it each year by a further 1/6th (being the amount of time already elapsed since the Date of Practical Completion). For example, in year 2, the relevant percentage would be 5/6th of the percentage identified in year 1, then in year 3, the relevant percentage would be 5/6th of the percentage identified in year 2 etc.
e.The value of the warranty is then the total of the amounts assessed for each of years 1 to year 7.
Of these five factors, (a.) has already been addressed above (see at [149], [150] and [158]) and Mr Bird and Mr Sanig were agreed on factors (d.) and (e.). The areas of difference between them therefore concerned factors (b.) and (c.). As well, there were two additional components not mentioned in the methodology above. They were: escalation costs and builder’s preliminaries. There was also a third additional component upon which they were agreed, namely that a 10% allowance should be included for consequential work provisions.
Turning, then, to factor (b.) above (at [174]), the differences between Mr Bird and Mr Sanig with respect to that factor were described by Mr Sanig in the body of his report in the following terms:
10.11.5
I have adopted the subcontract amounts in my calculations not by reason of any difference in methodology or principle (because as I describe above, I agree with [Mitchell Brandtman] that it is appropriate to value the warranties starting with the value of the works for which that warranty is provided), but, rather, because, practically, it is not possible on the material I have been provided with to verify whether the trade break-up relied upon by [Mitchell Brandtman] is accurate and represents the true amounts paid for the various subcontract works. I can however be satisfied that the values disclosed in the subcontracts were at least, at the time they were entered into, contemplated to be fair and reasonable value for the works. I therefore consider that those figures should be adopted in the absence of information to the contrary.
This use by Mr Sanig of trade values, instead of the subcontractor values Mr Bird used, resulted in the following major differences with respect to the commencing figures each used in their calculations in relation to the following seven warranty items (including the lift item) as set out in Lincoln’s table at [157] above and the Administrators’ table at [163] above:
Warranty Item Mr Bird Mr Sanig Tiling 596,005.00 596,005.00 Hydraulics 1,351,348.73 1,351,348.73 Electrical 1,568,000.00 1,568,000.00 Fire 85,165.00 248,971.00 Mechanical 980,682.00 679,500.00 Roofing 387,256.00 287,256.00 Lift 510,000.00 285,750.00 TOTAL $5,478,456.73 $5,016,830.73
It can be seen from this table that about a half of the difference between the total commencing figures is accounted for by the lift item. In that respect, as appears above (at [154]), the figure Mr Bird adopted for that item was based on it being a “non-compliant installation”. This information was provided to him by someone at Devcorp. Given the rejection of the tender of the Molony email (see at [144] above) and the state of the evidence with respect to the Lincoln’s defects claim issues discussed earlier, there is no evidence to support that assertion. That being so, I consider the approach adopted by Mr Sanig in his report should be adopted, namely that the lift item should be included with the other seven year trade warranty items using his figure of $285,750 (see at [166]-[167] above). That item aside, it is convenient to adopt Mr Bird’s commencing figure noting, again, the point made earlier about the general assistance, rather than precision, that these calculations are intended to provide.
Turning, next, to factor (c.) above, namely the appropriate retention percentage figure, it can be seen at [154] above that Mr Bird used a retention percentage figure of 10%. On the other hand, as appears at [161] above, Mr Sanig used a retention percentage figure of 5%. On this factor, having regard to the provisions of the contract that Mr Sanig has referred to at 10.10.7 of his report (see at [161] above), I accept his evidence that the appropriate figure to be used is 5%. Since both witnesses agree that that gross figure should be reduced by 50%, the final appropriate figure therefore is 2.5%.
Turning, next, to the first additional component: escalation costs, Mr Bird’s position on that matter is set out at [153] above, namely that the provision of a 2.5% per annum escalation allowance was considered reasonable. While Mr Sanig mentioned this matter in the body of his report at 10.9.4 (see at [162] above), he gave no explanation as to why he disagreed with its inclusion as an additional component. Having regard to the fact that some amount of price inflation is ever present in the Australian economy and in the absence of any explanation from Mr Sanig, I accept as reasonable Mr Bird’s allowance at 2.5% per annum for this component.
The second additional component concerns builder’s preliminaries. Mr Bird’s position on that item is set out at [153] above. It is that a provision of 20% of the costs of the subject works was not an unreasonable allowance. On the other hand, Mr Sanig’s position is set out at [162] above. It is that, based on more than 40 years’ experience in the construction industry, he did not consider it was reasonable to include such an allowance. On this matter, I am persuaded by Mr Sanig’s views and, accordingly, I consider no allowance should be included for builder’s preliminaries.
This review of the methodology and calculations used by Mr Bird and Mr Sanig results in the following changes being necessary to Mr Bird’s calculations in the table at [157] above:
(a)the “Retention, etc Provisions” should be reduced to 2.5%. As a result, the totals of $29,800.25, $1,013,445.26 and $121,613.35 should be reduced to $14,900.13, $506,727.63 and $60,806.67 respectively;
(b)the builder’s preliminary allowance should be deleted;
(c)the construction escalation allowance of 2.5% should be retained. As a result, the diminishing/compound calculation factor of 14.17% should also be retained;
(d)the consequential works allowance of 10% should be retained; and
(e)the lift item should be reduced to $285,750 and included in, and treated in the same manner as, the seven year trade warranty items.
By my calculation, if these changes are made, the resulting total warranty allowance in the table at [157] above should be $610,000 (rounded), assuming an allowance of approximately $30,000 is made for the lift item.
Finally, it is necessary to return to the question of the allowance the Administrators contend should be made for the partial warranties that were provided. For the reasons discussed earlier, I do not agree that Lincoln’s damages should be calculated according to the comparative values approach reflected in Spreadsheets C and D attached to the Administrators’ closing submissions. Nonetheless, I do consider some allowance should be made for this factor in calculating the probabilities of Lincoln’s future loss. That is so because those warranties do have the potential to reduce, to some extent, the risk of Lincoln suffering that loss.
Unfortunately, on this aspect, the calculations performed by Mr Bird and Mr Sanig do not provide me with a great deal of assistance. They approached this question from opposite extremes. Mr Bird focused on the fact that the Lincoln contract had been breached by the non-provision of the warranties and assumed that the partially provided warranties were not provided at all. On the other hand, Mr Sanig based his calculations on the comparative values approach, which I have rejected above, and he also took account of the additional warranties that were provided in contradiction of the express provisions of the Lincoln contract (see at [171] above). Nonetheless, this lack of assistance does not relieve me from the responsibility of making some estimate of this deduction (see Commonwealth of Australia v Amann Aviation Pty. Limited (1991) 174 CLR 64 at 83 per Mason CJ and Dawson J). That is to say, I am left to do the best I can “even if a degree of speculation is involved, and a broad brush approach has to be taken” (see Nationwide News Pty Ltd v Rush (2020) 380 ALR 432; [2020] FCAFC 115 at [578] per White, Gleeson and Wheelahan JJ, and the cases there cited).
Of the seven items included in the calculations of Mr Bird at [177] above, those items for which partial warranties were provided and the periods concerned were as follows:
Item Period for which warranty provided Value Hydraulics 1 year $1,351,384.73 Electrical 1 year $1,568,000.00 Mechanical 1 year for vent and 5 years for air conditioners $980,682.00 TOTAL $3,930,066.73 Having regard to the relatively short periods for which these warranties were provided (with the exception of the “5 years for air conditioners” in respect of which there is no information as to what proportion of the mechanical item they comprised) and that these warranties affect only three of the seven warranty items above, I consider a fair deduction for the ameliorating effect of these partially provided warranties on Lincoln’s future loss would be in the vicinity of 6% to 8%. Applying that deduction to the figure at [183] above, I consider $570,000 to be reasonable compensation for the effect of CRCG’s breach of the Lincoln contract.
Conclusion
For these reasons, the answer to the ultimate question posed by these issues above, namely Issue 18, is $570,000. Since the answers to the questions posed by Issues 15 to 17 appear from my reasoning above, I do not consider it is necessary to provide individual answers to those questions. It follows that, on this issue, I consider Lincoln has discharged its onus to prove that the Administrators were wrong to reject its Proof of Debt. Instead, I consider this component of its Proof of Debt should be allowed in the sum of $570,000.
OVERALL CONCLUSION
For the reasons set out above, except to the following extent, I do not consider the plaintiffs have discharged their onus to prove that the Administrators were wrong to reject their amended Proofs of Debt:
(a)on the Lincoln defects claim, the amended Proof of Debt should be allowed in the sum of $409,945.22; and
(b)on the Lincoln warranties claim, the amended Proof of Debt should be allowed in the sum of $570,000.
The above items are exclusive of Goods and Services Tax. The parties did not provide any submissions with respect to the allowance, if any, that should be made to these two items to take account of the effect of taxation.
Finally, since allowance will need to be made in the final orders for the fact that Lincoln has exercised the guarantee with respect to the Lincoln on the Park Project, I direct the parties to prepare and submit to my Chambers a draft set of orders to reflect the contents of these reasons and to address the question of costs. If agreement cannot be reached as to the form of the costs order, those draft orders should contain a program for the exchange of submissions on that issue, which will thereafter be determined on the papers.
I certify that the preceding one hundred and eighty-nine (189) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Reeves. Associate:
Dated: 10 August 2021
SCHEDULE OF PARTIES
QUD 683 of 2018 Defendants
Fourth Defendant:
CHINA RAILWAY CONSTRUCTION GROUP CO LTD
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