Silent Vector Pty Ltd v COM-AL Windows Pty Ltd - [2006] WADC 192

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL

LOCATION: PERTH

CITATION: SILENT VECTOR PTY LTD -v- COM-AL WINDOWS PTY LTD [2006] WADC 192

CORAM: COMMISSIONER ELLIS

HEARD: 17-18 OCTOBER 2006

DELIVERED : 30 NOVEMBER 2006

FILE NO/S: CIV 2132 of 2004

BETWEEN: SILENT VECTOR PTY LTD (ACN 09 179 168)
Plaintiff
AND
COM-AL WINDOWS PTY LTD (ACN 009 233 041)
Defendant

Catchwords:

Agreement to indemnify as to costs - Tort - Limitation period for hidden defects - Contract - Limitation period for hidden defects

Legislation:

Commercial Arbitration Act 1985
Limitation Act 1935

Result:

Plaintiff successful as to liability

Representation:

Counsel:

Plaintiff: Mr P A Monaco
Defendant: Mr J R Ludlow

Solicitors:

Plaintiff: GV Lawyers
Defendant: Kitto & Kitto

Case(s) referred to in judgment(s):

Brambles Constructions Pty Ltd v Helmers (1966) 114 CLR 213
Pullen v Gutteridge Haskins and Davey Pty Ltd [1993] 1 VR 27

Case(s) also cited:

Astley v Austrust Ltd (1999) 197 CLR 1
Australian Woollen Mills v Commonwealth (1954) 92 CLR 424
Bagot v Stevens Scanlon & Co Ltd [1966] 1 QB 197
Bosma v Larsen [1966] 1 Lloyd's Rep 22
Cartledge v E Jopling & Sons Ltd [1963] AC 758
Davie v New Merton Mills [1959] AC 604
Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co (1974) 130 CLR 1
Lancashire and Cheshire Association of Baptist Churches Inc v Howard & Seddon Partnership (a firm) [1993] All ER 467
McGillivray v Hope [1935] AC 1
Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363
Rosenberg v Percival (2001) 205 CLR 434
State Government Insurance Commission v Teal (1990) 2 WAR 105
Summit Chemicals Pty Ltd v Vetrotex Espana SA [2004] WASCA 109
Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514

COMMISSIONER ELLIS:

Introduction

These proceedings arise out of the construction of a house in City Beach, Perth. The plaintiff was the builder. The defendant was a sub‑contractor who supplied powder coated aluminium window frames, sub‑frames and trims ("windows") for the house pursuant to a sub‑contract agreement entered into between the plaintiff and the defendant on 27 January 1995 ("sub‑contract"). The defendant conceded that it breached the sub‑contract: the windows did not receive appropriate "chromate conversion" treatment prior to powder coating. The windows corroded. There were lengthy arbitration proceedings between the plaintiff and the owners of the house ("owners"), which the plaintiff eventually lost. The windows have now been replaced, primarily (but not entirely) by the defendant. The parties remain in dispute concerning liability for the aftermath.
The plaintiff's claim is for:
(a)$20,261.61, being the costs of the plaintiff for work done by or on its behalf in connection with replacing the windows ("additional work costs"); and
(b)$166,939.20 being the costs and expenses associated with arbitration proceedings ("arbitration expenses") between the plaintiff and the owners relating to the adequacy of the windows.
The principal basis on which the plaintiff put its case was that there was an oral agreement ("indemnity agreement") pursuant to which the defendant agreed to:
(a)abide by the result of the arbitration proceedings between the plaintiff and the owners; and
(b)indemnify the plaintiff for its losses if the plaintiff unsuccessfully contested the arbitration.
The defendant denied that there was any such agreement.
The plaintiff also alleged that the defendant had breached the sub‑contract agreement and that the defendant had been negligent in supplying the defective windows. The defendant said that both these claims were statute barred under the Limitation Act 1935. The defendant also denied that it had been negligent, although it admitted that it was under a duty of care to the plaintiff. As well, the defendant argued that the plaintiff’s loss was really caused by the failure of the plaintiff to properly challenge the award of the arbitrator in the arbitration proceedings.
The arbitration proceedings did not deal only with the adequacy of the windows. Other issues were raised and dealt with in the arbitration. The parties agreed that, if the plaintiff was successful on the question of liability, the defendant should only be responsible for the expenses of that part of the arbitration which related to the windows. They also agreed that this could most readily be determined by a Registrar in proceedings akin to the taking of an account or a taxation of costs.

Background

The bulk of the factual circumstances were not in dispute.
On 7 February 1995, the plaintiff entered into a contract ("head contract") with the owners to construct a two storey home in City Beach, Perth. After some negotiations, the plaintiff and the defendant entered into the sub-contract, pursuant to which the defendant agreed to supply and install the windows for $76,900. Express terms of the sub‑contract were that the defendant would carry out the sub‑contract works in a proper and workmanlike manner using good and proper materials and to the total satisfaction of the architect. The defendant also admitted that it was an implied term of the sub‑contract that the defendant would ensure that materials used in the course of completing the sub‑contract works would be fit for their intended purpose.
The plaintiff started work on construction of the house in February 1995. Practical completion of the house occurred on 1 May 1996. Although no specific evidence was given about when the windows were supplied and installed, the windows must have been supplied and installed prior to practical completion.
The defendant manufactured the windows, in the sense of cutting the powder coated extruded aluminium to the correct lengths and assembling it into the windows and other fittings required by the specifications for the work. However, the defendant did not itself powder coat the aluminium. It engaged two specialist powder coating firms to do this work.
On 2 May 1996, the day after practical completion, the architect provided a defects list which identified problems with the powder coating of the windows. The defects list required sections of the windows to be removed and replaced. Rather than removing these sections, the defendant proposed and subsequently carried out remedial work on the windows. This was done during the period from December 1996 to 22 May 1998.
This remedial work did not fix the problem with the windows. Further cracking and blistering occurred. Investigations were carried out. A sample from the windows was taken. On 18 November 2000, Capral Aluminium Limited ("Capral"), a supplier of aluminium products, provided a report on the windows. The report concluded that the powder coating was losing adhesion because there was no "conversion coating". This was a reference to chromate conversion, a process which treats the surface of aluminium, removing grease and other contaminants, before it is powder coated. A further report was provided by Capral on 24 November 2000 to the same effect.
In December 2000, the defendant supplied a report from a different company, Paintronics Services, which indicated that the remedial work had been largely effective. Subsequently, the defendant adopted this position and maintained that any remaining defects could be fixed by additional remedial work on site. The defendant indicated that it was not prepared to replace the windows. The position of the defendant was set out in a facsimile from the defendant to the plaintiff dated 7 February 2001, a copy of which was forwarded to the architect by the plaintiff at or about that time.
The plaintiff alleges that Mr Sizer, the principal of the plaintiff met with Mr Bolt, the principal of the defendant, and the two companies entered into the indemnity agreement at about this time. The defendant denies that this occurred. This issue is dealt with below.
On 24 April 2001, the owners commenced arbitration proceedings under the head contract. The defendant was not a party to the arbitration as it was not a party to the head contract.
The arbitration proceedings had a somewhat tortuous history. The arbitrator handed down an initial interim award on 17 June 2002 ('Initial Award"). The owners appealed to the Supreme Court of Western Australia and were successful. The proceedings were referred back to the arbitrator to reconsider the matter. He delivered a "Reconsidered Interim Award" on 2 July 2003 and a "Further Interim Award" on 23 December 2003. On 12 March 2004, the plaintiff made an application to the Supreme Court ("ARB 4 of 2004") for an extension of time within which to appeal the Reconsidered Interim Award and Further Interim Award. ARB 4 of 2004 also sought to set aside those awards on the grounds of misconduct. ARB 4 of 2004 was dismissed on 16 May 2005. The arbitrator subsequently made an "Interim Award of Costs" dated 14 June 2005 and a "Final Award" dated 7 August 2006.
Prior to the trial in this matter, the windows were replaced. The primary work of replacing the windows was done by the plaintiff, although some work associated with this task was done by employees of or sub-contractors to the plaintiff. The plaintiff sent two invoices to the defendant in respect of the plaintiff's work. The invoices were dated 26 July 2004 and 19 June 2006. Although Mr Sizer, the principal of the plaintiff, was cross‑examined about some of the prices charged for this work, there was no evidence led on behalf of the defendant to contradict his evidence that the amounts claimed represent the cost to the plaintiff of performing the additional work.
As part of the claim for the arbitration expenses, the plaintiff initially sought reimbursement from the defendant of half of the fees of counsel in ARB 4 of 2004. This was Item 3(h) in the Plaintiff's Schedule of Damages dated 5 July 2006. This part of its claim was abandoned by the plaintiff during the course of argument.

The Indemnity Agreement

In its statement of claim, the plaintiff alleged that in or about February to May 2001 it entered into the indemnity agreement with the defendant at the plaintiff's premise. The defendant denies it entered into the indemnity agreement. However, the defendant conceded that, if I found that the parties did enter into the indemnity agreement, then the plaintiff was entitled to payment of the additional work costs and the relevant portion of the arbitration expenses.
The plaintiff alleged the indemnity agreement was made orally between Mr Sizer, and Mr Peter Bolt, the principal of the defendant. Both of them gave evidence.
The evidence of Mr Sizer appears at par 66 to 71 of his proof of evidence dated 17 October 2006, which he read as his oral evidence and which was subsequently tendered:
"66About this time, I had a meeting with Peter Bolt at the Plaintiff's offices. This was before the matter was referred to Arbitration and would have been some time between February to April 2001.
67At that meeting I told Bolt that I had the Architect screaming down my neck to replace the windows. I had told the Architect we would replace the windows because Peter Bolt had previously said if the second lot of remedial works was not successful, the Defendant would replace the windows.
68Peter Bolt said the Defendant was not going to replace the windows because in his opinion there was nothing wrong with those windows.
69I said that if they were not going to replace those windows it would be necessary to have the matter go to Arbitration and Peter Bolt agreed with that and said he wanted to proceed down that path.
70I told Peter Bolt that if we take the windows issues to Arbitration and lose, the defendant would be responsible for payment of all the costs incurred and other losses which the Plaintiff may suffer as a result of that Arbitration.
71Peter Bolt said that he agreed to meet those costs and to 'pick up the tab' if we referred the windows issues to arbitration and lost."
The evidence of Mr Bolt on behalf of the defendant was that there was a meeting attended by him and Mr Sizer on or about 23 February 2001. This meeting was also attended by a Mr Dean, an employee of the plaintiff, and a Mr Adams, who was the architect engaged by the owners. Mr Bolt said this meeting took place at the offices of the plaintiff. During the course of that meeting Mr Bolt on behalf of the plaintiff informed those present that the defendant was prepared to repair the remaining areas of concern to the owners under the supervision and direction of Paintronics, and that after completion and inspection, there would be no further liability. His evidence was that he stated that the builder (ie the plaintiff) would take the issue to arbitration if the proposal was not acceptable to the owners. The defendant tendered handwritten notes of a conversation to this effect. Mr Bolt was not sure that the notes were prepared on 23 February 2001. The notes do not appear to be notes prepared during the course of the meeting itself. Mr Bolt gave evidence that was no discussion at this meeting about an indemnity agreement between the plaintiff and the defendant, and no agreement was made.
Whether the indemnity agreement was entered into as alleged by the plaintiff is essentially a question of credibility. Neither witness significantly modified his evidence on this issue during the course of cross‑examination. Counsel for the defendant put to Mr Sizer the assertion that there was no indemnity agreement. Mr Sizer did not agree. Counsel did not, however, specifically put to Mr Sizer that there had been a meeting on 23 February 2001. However, the fact that a meeting occurred on 23 February 2001 is not fundamentally inconsistent with the case of the plaintiff. The meeting of 23 February 2001 was a meeting attended by the owners' representative attended. The parties to these proceedings were negotiating with the owners at that time. It is not surprising that an indemnity agreement between the plaintiff and the defendant would not be discussed in these circumstances.
It was put to Mr Bolt in cross‑examination that the meeting at which the indemnity agreement was entered into was a different meeting to that of 23 February 2001. Mr Bolt stated that he did not recall a meeting involving just him and Mr Sizer. However, he reiterated that he did not agree to indemnify the plaintiff.
Both witnesses gave evidence in a forthright manner. Both witnesses appeared prepared, in relation to other aspects of their evidence, to make concessions contrary to their interest.
There are a number of other factors which impact upon the present issue. The defendant drew attention to the fact there was no written record of the indemnity agreement. The defendant also pointed to the large number of written communications which, although not tendered, were referred to in Mr Sizer's witness statement. It was submitted that, if there had been an indemnity agreement, one would have expected to find it noted or recorded in written communications and that I could draw an adverse inference from the lack of any written record.
However, there was some documentation which evidenced an agreement between the plaintiff and the defendant about the arbitration. On 6 March 2001, the plaintiff sent a facsimile to the defendant:
"Following up from a meeting in our office with Grant Adams, Darren Deen and myself, Mr Adams has taken of the back to [the owner] and he confirms that [the owner] does not wish to enter into any further discussion and requires the windows to be replaced.
As per our telephone conversation, we have decided that we should have an arbitrator to arbitrate on this matter. Can you please confirm that this is to your acceptance."
On 7 March 2001, the defendant sent a facsimile to the plaintiff. The relevant portion reads:
"We refer to your fax of 06/03/01 and confirm our earlier advice that we are in agreement to have this matter arbitrated under the terms of the contract."
While the facsimiles do not specifically refer to an indemnity in relation to the costs of the arbitration, the facsimiles show that the reference to arbitration had been discussed between the parties and that they had reached an agreement about it. The notes of the meeting of 23 February 2001 do not refer to any agreement about arbitration, so there must have been some other occasion at which the agreement referred to the correspondence of 6 and 7 March 2001 was made.
The defendant also pointed to the letter of 7 February 2001 from the defendant to the plaintiff. In this letter the defendant stated that it was not prepared to replace the windows. The letter of 7 February 2001 was received after the time Mr Sizer said in oral evidence the indemnity agreement had been entered into. However, the letter contains no reference to arbitration or any agreement about it. It was put to Mr Sizer that this was surprising if there had been discussions about an indemnity agreement between the parties. Mr Sizer said that the letter of 7 February 2001 was a letter to send to the architect, the implication being that there need be no reference to this "private" indemnity arrangement between the two of them in correspondence created for this purpose.
The defendant also relied on an alleged inconsistency between the terms of the indemnity agreement and a subsequent agreement in relation to counsel's fees in proceedings ARB 4 of 2004. It was common ground that a specific agreement was reached that each party would pay half of counsel's fees for ARB 4 of 2004. The defendant has paid its half. The defendant suggested that the specific agreement about counsel's fees on ARB 4 of 2004 would have been unnecessary had the indemnity agreement been made. However, the indemnity agreement as pleaded refers only to the costs of the arbitration. It may have been thought that a further specific agreement was necessary to deal with the costs of a separate application in the nature of an appeal. No evidence was led by either side of the events surrounding the subsequent agreement about counsel's fees. Each of the parties to the proceedings was a party to that agreement. I am not prepared to draw an inference adverse to the plaintiff in these circumstances.
The commercial context between the parties suggests that it was mainly to the defendant's advantage that the issue of the adequacy of the windows be arbitrated. It was an express term of the sub‑contract that the defendant supply and install aluminium windows "to the total satisfaction of the architect". It appears from par 63 of Mr Sizer's witness statement that the owners' architect had given instructions that the windows be replaced. This was not denied by the defendant. If the plaintiff did not dispute the architect's direction by means of the arbitration, the defendant would have been contractually obliged to replace the windows. Conversely, if the arbitration was successful the defendant would avoid this liability. Of course, the plaintiff would also have been liable to replace the windows in the first instance under its contract with the owner. As a result, it too had a commercial interest in a favourable outcome from the arbitration. However, the primary commercial interest in arbitration was that of the defendant.
A further factor is that the defendant had a significant involvement in the arbitration, even though the defendant was not formally a party to the arbitration. In cross‑examination, Mr Bolt conceded that the defendant had paid an expert witness called in the arbitration and had assisted prosecution of the arbitration by identifying other witnesses. On 31 October 2001, the defendant wrote to the plaintiff's solicitors providing an expert report on powder coating of the windows, requesting the opportunity to remove a further piece of aluminium window framing and seeking permission to replace other suspect fittings and trims. The letter notes that Mr Bolt had inspected the site in the presence of the arbitrator. The letter had a postscript: "We are awaiting your advice on the new date for the arbitration so we can inform our witnesses." The degree of involvement evident from this letter is akin to that of a party to the arbitration proceedings.

It is also relevant that the defendant eventually replaced the windows, as determined by the arbitration, even though the defendant was not directly bound by the outcome of the arbitration and counsel for the defendant suggested in argument that it was wrong.
On balance, and for the reasons set out in par 26 to 29 and 32 to 34 above, I accept the evidence of Mr Sizer. I am satisfied that the parties did enter into the indemnity agreement.
The defendant argued that there was no consideration for the indemnity agreement. However, the plaintiff participated in the arbitration proceedings, and incurred a liability in respect of the costs of that arbitration in circumstances when it would have been open to the plaintiff to simply concede liability to replace the windows and rely on the architect's directions against the defendant. This conferred a benefit on the defendant sufficient to amount to consideration.
In light of my conclusions in respect of the indemnity agreement it is not necessary to determine whether the plaintiff is entitled to succeed on the other grounds it put forward. However, I will deal shortly with those issues.

Breach of the sub‑contract

The plaintiff alleges that it is entitled to succeed on the basis that the defendant breached the sub-contract agreement. The only defence raised to this claim was that the proceedings had been commenced outside the relevant limitation period under the Act.
The proceedings were commenced on 22 September 2004. The relevant limitation period under s 38 of the Act is six years. Consequently, if the plaintiff's cause of action for breach of the sub‑contract arose before 22 September 1998, the plaintiff's claim for breach of the sub‑contract cannot be maintained.
A cause of action for breach of contract arises at the time the contract is breached.
The primary breach pleaded by the plaintiff was that the defendant failed to complete the works in a workmanlike manner and that the windows were not fit for their intended purpose. The defect in the windows was that they were not chromate treated. Whether the parties were aware of it or not, this breach must have occurred when the windows had been installed, which happened before 1 May 1996.
Paragraphs 10, 11 and 12 of the statement of claim plead a second breach of contract. It is an allegation that remedial work carried out by the defendant between 20 December 1996 and 22 May 1998 was "inadequate, inappropriate and did not remedy the defects to the satisfaction of the owner's architect". This breach must also have occurred no later than the end of the defendant’s remedial works, 22 May 1998.
The plaintiff contended that the limitation period ran from the date on which there was a "definitive" requirement that the windows be removed. The plaintiff dated this event at November 2001 (when the reports from Capral were received) or alternatively, 6 March 2001 (when the plaintiff told the defendant that the architect had informed the plaintiff that the owner did not "wish to enter into any further discussion and [required] the windows to be replaced") or alternatively, 17 June 2002. 17 June 2002 was the date of the Interim Award in the arbitration proceedings. Counsel for the plaintiff suggested that it was the Interim Award which first definitely established that there had been a breach of the sub‑contract. These arguments are not correct, in my opinion. The sub‑contract agreement was not an indemnity. The cause of action arose when the defective goods were supplied or when the defendant failed to remedy the defects, rather than the date the extent of the plaintiff's loss became clear.

Negligence

The plaintiff alleged that the defendant owed a duty of care to the plaintiff to exercise a level of skill and care befitting a specialist power coated aluminium windows contractor in completing the works. The defendant did not dispute this.
The plaintiff alleged that the defendant breached its duty by failing to ensure that the works were undertaken in a workmanlike manner using good and appropriate materials and failing to supply and install windows that were fit for their intended purpose. The defendant argued that it did not manufacture the aluminium itself and had discharged its duty of care by engaging apparently competent powder coating contractors and by a visual inspection of the powder coated aluminium on receipt. The defect was not one that could be identified by means of a visual inspection.
There was no evidence before me which established that the steps taken by the defendant were not standard practice for persons in the defendant's position in the industry or that additional steps could reasonably have been taken to identify or prevent the defects. In particular, although testing subsequently demonstrated that the aluminium had not received proper chromate treatment prior to the powder coating, it was not shown that it was reasonable to test the chromate treatment.
As a consequence, I am not satisfied that there was any breach of the defendant of its duty of care to the plaintiff.
The defendant argued that the limitation period for the claim in negligence expired before commencement of the proceedings. The limitation period for negligence actions is also six years. Time runs from the date on which damage occurs, rather than the date of any breach of duty. Where a hidden defect causes damage to property, time runs from the time when the damage first becomes known or manifest (see Pullen v Gutteridge Haskins and Davey Pty Ltd [1993] 1 VR 27). In the present case, blistering and flaking away of the powder coating was apparent by the time the defects list was issued by the architect in 1996. There were subsequent discussions between the parties about the defects at which the defendant agreed that it would take steps to remedy the blistering and flaking. The defendant did remedial work during the period up to May 1998. Had this remedial work been successful, the plaintiff would not itself have suffered any loss and would not have come under any liability to the owners. However, by this time, the effects of the defect had clearly manifested themselves.
The plaintiff also argued in this context that time did not run until liability had been established against it. It relied on Brambles Constructions Pty Ltd v Helmers (1966) 114 CLR 213. However, Brambles involved a claim for contribution under the New South Wales equivalent of the Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Act 1947.However, the plaintiff did not plead or establish the commission of a joint tort by the plaintiff and the defendant. Given that plaintiff and defendant did not act jointly in the supply of the windows, it does not appear that a joint tort was committed.
I should also note that the plaintiff contended that the house was located in a "marine environment" (ie near the beach) and that special steps should have been taken to protect the windows from the marine environment in which the house was constructed. There was, however, no evidence that the problems with the windows were related to the marine environment, rather than the chromate conversion.
An alternative argument of the defendant was that the claim of the plaintiff for the costs associated with the arbitration was not a reasonably foreseeable consequence of its negligence. The defendant argued that the real reason the plaintiff became liable for the arbitration expenses was that it lost proceedings ARB 4 of 2004. It was suggested that, had the appeal been lodged in time, the overall outcome of the arbitration proceedings would have been different and the owners would have been responsible for most, if not all, of the arbitration expenses. However, the plaintiff was not under an obligation to mitigate its loss by commencing litigation in respect of the arbitration, such as ARB 4 of 2004. In dismissing ARB 4 of 2004, Commissioner Braddock SC emphasised the delay in bringing those proceedings. This was certainly a substantial factor in her reasons for decision. However, she also considered the substance of the grounds, and commented adversely upon them in her judgment. I am not prepared to conclude, on the basis of the material before me, that there was a real prospect that a timely appeal would have succeeded and that the chain of causation in respect of the arbitration costs was broken by the delay in initiating ARB 4 of 2005.

Summary

My conclusions may be summarised as follows:
(1)The plaintiff and the defendant entered into the sub-contract agreement pursuant to which the defendant agreed to abide by the arbitrator's findings in respect of the windows and to indemnify the plaintiff for its losses if it unsuccessfully defended the arbitration.
(2)The defendant has breached that agreement and, as a consequence, the plaintiff is entitled to:
(a)$20,261.61 together with interest; and
(b)Payment of that part of the arbitration expenses which relates to the windows.
(3)The plaintiff is not otherwise entitled to succeed on the causes of action for breach of the sub‑contract or negligence. These claims were commenced outside the relevant limitation period. In addition, I am not satisfied that the defendant was negligent in supplying the windows.
Counsel for the parties should bring in minutes of proposed orders reflecting these reasons and dealing with the further inquiry before a Registrar.