State of SA v McKendrick Ahern Pty Ltd No. Scgrg-97-1462 Judgment No. S6478

[1997] SASC 6478

STATE OF S.A.  v   McKENDRICK AND AHERN PTY LTD

Olsson J (Ex tempore)

The appellant, which was the plaintiff at first instance, appeals against an order of dismissal of its action which was made on 29 September, 1997 by a stipendiary magistrate.

By a claim which was filed in the Civil Division of the Magistrates Court on 22 May, 1997, the appellant sued the respondent in debt for the sum of $22,389.00 being moneys said to be due pursuant to the provisions of a contract made between parties to the action.

Pursuant to that contract the respondent had agreed to construct an activity hall at the Jamestown High School. The contract was dated 26 August, 1986.  It is said that a certificate of practical completion of works was issued on 12 August, 1987.  

Clause 37.2 of the contract was expressed, headed ‘Contractor’s Responsibility’:

“37.2     Contractor’s Responsibility.

Any minor omissions and minor defects of the kind referred to in the definition of Practical Completion in clause 2 which existed at the commencement of a defects Liability Period shall be rectified by the Contractor as soon as possible.

Any omissions and defects referred to in the preceding paragraph of this sub-clause that are not rectified by the Contractor and any other defects which become apparent during a Defects Liability Period under normal use of the Works or of a separable part of the Works and which are due to any cause, including design, workmanship or materials for which the Contractor is responsible shall be rectified by the Contractor when directed to do so by the Superintendent who, in that direction, shall state the minor omissions or minor defects or in what respect the Works or the separable part of the Works are otherwise defective and the date by which rectification shall be completed, but no such direction shall be given by the Superintendent later than fourteen days after the expiration of that Defects Liability Period.

If any omissions or defect is not rectified within the time stipulated in the direction given by the Superintendent the Principal may rectify the omission or defect at the Contractor’s expense but without prejudice to any other rights that the Principal may have against the Contractor in respect of that omission or defect and the cost incurred by the Principal in so rectifying the omission or defect shall be a debt due from the Contractor to the Principal which may be deducted or recovered by the Principal pursuant to clause 46.

Notwithstanding the provisions of this sub-clause, the Contractor shall not be responsible for the effects of fair wear and tear during a Defects Liability Period.”

(The emphasis is mine).

On 9 June, 1988 the appellant notified the respondent in writing, in terms of clause 37.2, that the parquetry flooring of the activity hall was defective in a number of respects which were specified in detail in the notification.  Such notice directed the respondent to rectify the flooring by 29 June, 1988, to meet the specifications which had originally been set out in the contract.  It is not in dispute that the respondent failed to satisfy that requisition.

It was not until 28 May, 1991 that the appellant entered into a contract with an organisation known as Specialised Flooring Services, (which I will call ‘SFS’ for short), for rectification of the floor at a cost of $28,864.00.  SFS duly executed the work and was, I infer, paid the contract sum due to it.  The documentation before me suggests that that sum was paid by instalments on three separate dates, although the basis for that does not clearly emerge.

In its particulars of claim the appellant averred that, pursuant to clause 37.2 of its contract with the respondent, the cost of rectifying defects constituted a debt due by the latter to it, which was recoverable in accordance with clause 46 of the contract. 

Such clause stipulated, under the heading ‘Right of Principal to Recover Moneys’:

“46.                   RIGHT OF PRINCIPAL TO RECOVER MONEYS

Without limiting the Principal’s rights under any other provision in the Contract, any debt due from the Contractor to the Principal under or by virtue of any provision of the Contract may be deducted by the Principal from any moneys which may be or thereafter become payable to the Contractor by the Principal, including any retention moneys then held by the Principal, and, if such moneys are insufficient for this purpose, then from the Contractor’s security under the Contract.  Nothing in this clause shall affect the right of the Principal to recover from the Contractor the whole of the debt or any balance that remains owing after deduction.”

The appellant pleaded that, in February 1996, by virtue of clause 46 of the contract, it deducted from the rectification cost incurred by it an amount of $6,485 from the respondent’s security amount paid under the contract. That therefore left a balance of $22,389 claimed in the current proceedings.  Following service of the present proceedings on it, the respondent applied for an order striking out the claim on the basis that it was said to be statute barred, by reason of the operation of s.35 of the Limitations of Actions Act.

Before the learned magistrate it was contended, on behalf of the respondent, that on or about 27 November, 1990 the Chief Executive Officer of the Department of Building Management, or its predecessor, notified it that, if it did not rectify alleged defective work under the contract, the appellant would proceed to rectify. Thus the respondent contended at first instance that time ran under s.35 of the Limitations of Actions Act from that date.

The riposte of the appellant was that time in fact ran from 28 May, 1991, when the rectification quote was accepted by it.  Thus, it argued, the limitation period did not expire until 28 May, 1997, that being the period applicable to a claim in contract.

The proceedings, were, in fact, issued on 22 May, 1997; that is to say, within the 6 year period contended for by the appellant. 

The learned magistrate reserved his decision on the application, and having done so, by letter dated 25 September, 1997, he requested the supply to him of a copy of an annexure to the contract between the parties. Apparently this was not with the documentation originally put before him.  He drew attention to clause 37.1, which, relevantly, provided that the “Defects Liability Period” under the contract was to commence on the date of practical completion and end on the date prescribed for that purpose in the missing annexure.

A copy of the annexure was supplied to the learned magistrate, presumably by consent.  That clearly stipulated a period of 12 months for the purposes of clause 37.1.  I might mention that the expression “Defects Liability Period” does not appear to have been defined in the contract, but its Principal operation seems to be in the context of clause 37.2.  There does not appear to be any lack of clarity about what is intended.

In reasons for decision ultimately published by him, the learned magistrate reasoned along these lines:

“It is plain that the plaintiff was aware of an alleged defect on 9 June, 1988, and that ordinarily would be the time at which the cause of action arose (at the latest) and proceedings should have been instituted, therefore, prior to 9 June, 1994.  Upon that basis the present action is more than 3 years out of time. 

The papers before me did not reveal what the defects liability period under the contract was. I sought information as to that from the parties, and they kindly provided me with a copy of the annexure to the contract which reveals that the defects liability period was for a period of 12 months.”

The relevant portion of clause 37.2 upon which the plaintiff relies is the paragraph stating that:

"If any omission or defect is not rectified within the time stipulated in a direction given by the Superintendent the Principal may rectify the omission or defect at the Contractor’s expense, but without prejudice to any other rights the Principal may have against the Contractor in respect of that omission or defect and the cost incurred by the Principal in so rectifying the omission or defect shall be a debt due from the Contractor to the Principal which may be deducted or recovered from the Principal pursuant to clause 46".

In his reasons for decision the learned magistrate said:

“The plaintiff’s submission, as I understand it, is this. The plaintiff says that on 28 May, 1991, it accepted a quotation to have the defective work rectified.  It is said by the plaintiff that it was not until that point in time that a debt became due from the Contractor to the Principal. As these proceedings were instituted on 22 May, 1997 the plaintiff contends that it is 6 days within time. 

In my view, the plaintiff’s cause of action pursuant to 37.2 arose upon the plaintiff notifying the defendant of a defect and calling upon the defendant to rectify.  Upon the defendant failing or refusing to rectify the plaintiff’s cause of action pursuant to 37.2 arose.  In their letter of 9 June, 1988 the plaintiff demanded of the defendant that rectification be completed by 29 June, 1988.  At the latest the cause of action pursuant to clause 37.2 arose on that date, and the time limit was 28 June, 1994.”

In my view the defendant’s contention is correct, and the plaintiff’s claim is statute barred and must therefore be dismissed.’

The learned magistrate thereupon dismissed the claim. The appellant challenges the propriety of that reason.  In essence it contends that a cause of action for recovery of a debt does not arise until the debt has crystallised - in this case by the entry, on 28 May, 1991, into the rectification contract.

It is argued that, until that date, no debt arose, because the quantum of rectification of costs had not been established. A distinction must, it contended, be drawn between a cause of action in which damages are claimed for breach of contract, and a contractual claim in debt based on clause 37.2.

It seems to me that the answer to the contention between the parties necessarily lies in the proper construction of clause 37.2.  The critical words in that clause for present purposes are those which I have emphasized earlier in these reasons.  It is the cost incurred by the appellant in rectifying the defects which is constituted a debt recoverable against the respondent.  Until the cost is incurred there is no such debt.

In the instant case no cost was incurred and no debt arose for the purposes of clause 37.2 until the appellant actually entered into a positive contract with SFS, whereby the appellant became contractually bound to pay the agreed contract price for the rectification works which were being performed. As earlier recited, that contract was entered into on 28 May, 1991.

It follows that the present proceedings were in my view, initiated within the 6 year limitation period which was applicable under s.35 of the Limitations of Actions Act.  I consider that the learned magistrate fell into error in concluding, as he did, that the cause of action in debt arose on notification to the respondent of the relevant defects and the expiry of the requisition period.  At that time no debt could be said to have arisen, and have been claimable, because, of course, no cost of rectification had been incurred by the appellant.  The very notion of a debt is the existence of a situation in which, as a matter of law, one party contractually owes a specific sum of money to another.

At the date identified by the learned magistrate, that is to say 28 June, 1994, the appellant had paid nothing.  It was not under any legal obligation in respect of rectification works.  The circumstances postulated by clause 37.2 had simply not come into existence.  One postulates the question “If the appellant had, as at 28 June, 1994, attempted to sue the respondent in debt, what could it have sued for in terms of the clause?”

Inter alia, Mr Meyer, counsel for the respondent, argued that the so-called debt was merely a form of liquidated sum by way of damages and that, in reality, the cause of action was always for damages for breach of contract.  If it were not so, he said, a party in the situation of his client would potentially face what he described as a timeless, open-ended liability situation.

I do not think that this argument is correct.  True it is that the appellant could have elected to sue for damages for breach of contract - that was a remedy patently available to it.  However, as I read clause 37.2, it erects an alternative, quite separate, contractual liability in debt which does not, in fact, crystallise until the event postulated, that is the incurring of a specific rectification cost. 

I reiterate my earlier remark that the essential element of an action of debt is the creation, by contract, of a liability to pay a liquidated sum of money, and that is what we, in fact, have in this case.  It matters not that the debt arises in the future, and only on the occurrence of certain events.  What is important is that there is a clear contractual right to recover a specified amount or an amount calculated in a specific manner in clearly defined circumstances.  It follows, therefore, on that basis of reasoning, that this appeal must be allowed and the judgment against the appellant set aside.  

I will hear counsel as to the precise form of order which ought to be made.