Stone v Chappel - [2016] SASC 32

Supreme Court of South Australia
(Civil)
STONE & ANOR v CHAPPEL & ANOR
[2016] SASC 32
Judgment of The Honourable Justice Stanley
4 March 2016
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH
TRADE AND COMMERCE - COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION - CONSUMER PROTECTION - MISLEADING OR DECEPTIVE CONDUCT OR FALSE REPRESENTATIONS
DAMAGES - MEASURE AND REMOTENESS OF DAMAGES IN ACTIONS FOR TORT - MEASURE OF DAMAGES
The plaintiffs are a retired couple who contracted with the defendants to construct the shell and framework of an apartment in a retirement village. The apartment was to be custom made. The contract provided for a base price of $1,458,120 subject to deduction. Pursuant to the terms of the contract the defendants were to construct only the shell and framework of the apartment and the plaintiffs would fit out the apartment at their cost. The deduction from the base price was to be calculated on the basis of the costs of the finishes and appliances usually provided by the defendants and included in the calculation of the base price but which were to be met by the plaintiffs pursuant to the special conditions to the contract. The project architects for the retirement village retained by the defendants were Pruszinski Architects. The plaintiffs decided to retain Pruszinski Architects to undertake the fit-out work on their apartment. The defendants constructed the shell and framework of the apartment. The plaintiffs’ case is that in breach of contract and representations made the defendants did not construct the shell and framework in accordance with plans forming part of the contract, including in particular with respect to the height of the apartment’s ceiling. The plaintiffs further allege that, in addition to the misrepresentation in relation to ceiling height, the defendants also misrepresented the basis upon which the base price was calculated.
The contract provided for periodic payment of the base price. Apart from the payment in advance of a deposit, the contract provided for payment of a sum of $500,000 at handover of the completed shell, payment of a further $480,000 60 days after handover and payment of the balance after the contemplated deduction within 14 days of a completed fit-out. The contract does not define what “completed” means in this context. The plaintiffs allege that they were not required to pay anything other than the deposit because the triggering event for the payment of the other contracted sums is the completion of the shell. They allege the shell has not been completed because various defects, including the height of the ceiling, have not been rectified. The defendants’ case is that construction of the shell and framework was complete within the meaning of that expression in the contract when the project architect certified that the shell and framework were complete, or, in the alternative, when the plaintiffs took possession of the apartment and commenced occupation. The plaintiffs paid the sum of $500,000 under protest on 29 September 2010. They paid the sums of $480,000 and $457,120, representing the balance of the base price, under protest on 26 July 2011. The plaintiffs claim damages for the loss of use of the moneys paid under protest. Correspondingly, the defendants claim a set-off by way of interest due pursuant to the contract for the failure to pay a sum when it fell due.
Held:
1. The specification in the plans of a ceiling height of 2,700 mm in the plaintiffs’ apartment formed a term of the contract (at [56]).
2. The ceiling was not constructed to the specifications in the plans. The defendants in constructing the ceiling breached the contract (at [62]).
3. I am not satisfied that Mr Smallacombe made any representation to the plaintiffs at any relevant time that the ceiling height in their apartment was to be at least 2,700 mm (at [72]).
4. The statement made by Mr Girolamo that he understood that the ceiling heights in the apartments constructed in the retirement village varied between 2,400 mm and 2,700 mm was not made with the actual or ostensible authority of the defendants. The statement has not been proved to be misleading or deceptive (at [85] - [92]).
5. I am not satisfied that the plaintiffs were presented with drawing 06375-06-26. Accordingly, there can be no question of them relying on any representation contained in that drawing for the purpose of entering into the contract (at [101]).
6. The evidence does not establish that either of the defendants understood at any time prior to the execution of the contract that the ceiling in the apartment could not be constructed to the specified height. Accordingly, the premise of the plaintiffs’ claim in reliance on a misleading and deceptive conduct by silence fails (at [111]).
7. The base price representations as alleged are not false and misleading (at [122]).
8. The plaintiffs are entitled to an award of damages for breach of contract. However, they are not entitled to an award of damages that reflects the costs of rectifying the ceiling height (at [159]).
9. The appropriate basis for the primary award is damages for disappointment and loss of amenity (at [168]).
10. The plaintiffs are also entitled to an award of damages by way of interest on the sums of $500,000 and $480,000 that were paid prematurely as the event conditioning the obligation to pay, namely, handover of the completed shell, had not occurred when those payments were made (at [170]).
11. In addition, the plaintiffs are entitled to an award of damages to reflect the terms of the expert determination made by Mr Walsh QC (at [172]).
12. The plaintiffs are entitled to an award of damages that reimburses them for the fire inspection fee (at [175]).
13. The plaintiffs’ claim succeeds. I award the sum of $81,046.68 by way of damages after allowing the defendants’ entitlement to a setoff of $6,092.51 for the costs of variation (at [177]).
Retirement Villages Act 1987 (SA); Fair Trading Act 1987 (SA) s 56, s 84, s 85; Competition and Consumer Act 2010 (Cth) s 18 of Schedule 2, referred to.
Electricity Generation Corporation v Woodside Energy Ltd & Ors (2014) 251 CLR 640; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 89 ALJR 990; Watson v Foxman (1995) 49 NSWLR 315; International Harvester Co of Australia v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644; South Sydney Rugby League Football Club v New Limited [2000] FCA 1541; Alliance Craton Explorer v Quasar Resources (2013) 296 ALR 465; AMP Society v Chaplin (1978) 18 ALR 385; Tonto Home Loans Australia v Tavares [2011] NSWCA 389; Compare CML Assurance Society v Producers and Citizens Cooperative Assurance Co Australia (1931) 46 CLR 41; Leipner v McLean (1909) 8 CLR 306; Egyptian International Foreign Trade Co v Soplex Wholesale Suppliers Ltd [1985] 2 Lloyd’s Rep 36; New Zealand Tenancy Bonds Ltd v Mooney [1986] 1 NZLR 280; First Sport Ltd v Barclay’s Bank plc [1993] 3 All ER 789; Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82; Bill Acceptance Corp Ltd v GWA Ltd (1993) 78 FLR 171; Consolo Ltd v Bennett [2012] FCAFC 120; Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; Demagogue Pty Ltd v Ramensky (1992) 29 FCR 31; Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477; Warner v Elders Rural Finance Ltd (1993) 41 FCR 399; General Newspapers Pty Ltd v Telstra Corp (1993) 45 FCR 164; CCP Australian Airships Ltd v Primus Telecommunications Pty Ltd [2004] VSCA 232; Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184; Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; Sargent v ASL Developments Ltd (1974) 131 CLR 634; Bellgrove v Eldridge 1954) 90 CLR 613; Tabcorp Holdings Limited v Bowen Investments Pty Ltd (2009) 236 CLR 272; Wheeler & Anor v Ecroplot Pty Ltd [2010] NSWCA 61; PSI @ Mawson Lakes v Land Management Corporation [2006] SASC 185; Patrick Stevedores v Maritime Union of Australia (1998) 195 CLR 1, applied.
Willshee v Westcourt Ltd [2009] WASCA 87; Unique Building Pty Ltd v Brown [2010] SASC 106, distinguished.
Ruxley Electronics and Construction Ltd v Forsyth [1995] 3 All ER 268; Farley v Skinner [2001] UKHL 49, considered.

STONE & ANOR v CHAPPEL & ANOR
[2016] SASC 32
Civil
STANLEY J:
Introduction

The plaintiffs are a retired couple who contracted with the defendants to construct the shell and framework of an apartment in a retirement village. The defendants built and operate the On Statenborough Retirement Village (“the retirement village”) at Leabrook. The parties entered into a Residents Agreement on or about 22 December 2009 (“the contract”) by which the plaintiffs acquired a licence to occupy an apartment on the northwest corner of the top floor of building 4 in the retirement village, namely, apartment 107. The contract provided for a base price of $1,458,120 subject to deduction. At the time the contract was made building 4 was under construction. The apartment was to be custom made. Pursuant to the terms of the contract the defendants were to construct only the shell and framework of the apartment and the plaintiffs would fit out the apartment at their cost. The deduction from the base price was to be calculated on the basis of the costs of the finishes and appliances usually provided by the defendants and included in the calculation of the base price but which were to be met by the plaintiffs pursuant to the special conditions to the contract. The plaintiffs claim that sum is $556,026.
The project architects for the retirement village complex retained by the defendants were Pruszinski Architects. The principal of that firm is Mr Paul Pruszinski. The plaintiffs decided to retain Pruszinski Architects to undertake the fit-out work on their apartment. Mr Stone decided that course would be most convenient notwithstanding he had previously engaged another architect to undertake work on the design and fit-out of other houses he had built. Mr David Girolamo was the architect the plaintiffs dealt with from Pruszinski Architects.
The defendants constructed the shell and framework of the apartment. The plaintiffs’ case is that in breach of contract and representations made the defendants did not construct the shell and framework in accordance with plans forming part of the contract, including in particular, with respect to the height of the apartment’s ceiling. The plaintiffs claim for breach of contract and misleading and deceptive conduct. The plaintiffs claim that the contract provided for a ceiling height of 2,700 millimetres (“mm”). The plaintiffs further claim that the defendants made a number of representations concerning the ceiling height. First, Mr Smallacombe, during a meeting at the plaintiffs’ residence in Malvern in late 2006, represented the height of the ceiling as constructed in the apartment would be not less than 2,700 mm. Second, the defendant’s architect, Mr Girolamo, during a meeting at the plaintiffs’ residence in the same period, made representations to the same effect. Third, Mr Girolamo provided to the plaintiffs pre-agreement plans which specified a ceiling height of 2,700 mm. Fourth, the defendants made representations by silence in not informing the plaintiffs of their decision, made prior to 29 September 2010, to reduce the ceiling height by an average of approximately 40 mm. The plaintiffs allege these representations constitute misleading and deceptive conduct. The plaintiffs’ case is that they relied on these representations as to ceiling height and would not have entered into the contract had they known that the ceiling would not be constructed to a height of 2,700 mm.
The defendants accept that the height of the ceiling constructed is less than 2,700 mm by somewhere between 32 and 57 mm[1]. However, the defendants dispute that it was a term of the contract that the ceiling height was 2,700 mm. The relevant term of the contract required the defendants to construct the shell and framework of the apartment generally in accordance with plans attached to the contract. The defendants submit that there were no plans attached to the contract or otherwise incorporated into the contract which specified a ceiling height of 2,700 mm. In the alternative, they submit that if plans specifying a ceiling height of 2,700 mm were incorporated into the contract, they have satisfied this term as the ceiling has been constructed to a height which allowing for an acceptable tolerance has been constructed to a height which is generally in accordance with the specification in the plans. Further, the defendants deny that Mr Smallacombe or Mr Girolamo made any representation that the ceiling height would be 2,700 mm or any other height. In the alternative, they submit that if any representation was made by either of them in relation to ceiling height, the representation amounted to no more than that the ceiling height of all apartments in the retirement village was nominally 2,700 mm. In the further alternative, the defendants submit that if Mr Girolamo made any representation it was not made with the authority of the defendants. The defendants further submit that if Mr Girolamo made the representation alleged, it did not, in the circumstances, constitute misleading or deceptive conduct. Finally, they submit that even if there was misleading or deceptive conduct, it was not causative of any loss suffered by the plaintiffs.
[1] Subject to whether you measure the height of the ceiling from the underside of the gyprock or somewhere else.
The contract provided for periodic payment of the base price. Apart from the payment in advance of a deposit,[2] the contract provided for payment of a sum of $500,000 at handover of the completed shell, payment of a further $480,000 60 days after handover and payment of the balance after the contemplated deduction within 14 days of a completed fit-out. The contract does not define what “completed” means in this context. The plaintiffs allege that they were not required to pay anything other than the deposit because the triggering event for the payment of the other contracted sums is the completion of the shell. The plaintiffs submit that a completed shell means a shell constructed in conformity with the plans and if there are material deviations from the plans, the shell has not been completed. They allege the shell has not been completed because various defects, including the height of the ceiling, have not been rectified. The defendants’ case is that construction of the shell and framework was complete within the meaning of that expression in the contract by 3 September 2010 when the project architect certified that the shell and framework were complete, or, in the alternative, by 1 October 2011 when the plaintiffs took possession of the apartment and commenced occupation.
[2] A deposit of $21,000 was paid by payments of $1,000 on or about 30 September 2006 and $20,000 on 23 October 2007. The $1,000 was paid as consideration for an option to purchase a licence over a different apartment and was subsequently treated as part payment of the deposit.
The plaintiffs paid the sum of $500,000 under protest on 29 September 2010. They paid the sums of $480,000 and $457,120, representing the balance of the base price, under protest on 26 July 2011.
The plaintiffs further allege that, in addition to the misrepresentation in relation to ceiling height, the defendants also misrepresented the basis upon which the base price was calculated. Initially the plaintiffs were looking to acquire a right to occupy a different apartment in the north-eastern corner of the top floor of building 4. On 24 November 2006 there was discussion between the plaintiffs and Mr Smallacombe as to price, during which Mr Smallacombe provided the plaintiffs with two documents setting out the basis upon which the price of the apartment was calculated. The defendants were offering the plaintiffs a choice between two apartments. There was a smaller and a larger apartment. The documents indicate that the price of each was based on a square metre calculation derived from the asking price of apartments in another building in the retirement village, building 3. One document[3] was a table of proposed prices for the apartments in building 3 setting out calculations of the square metres of total area, living area and deck/yard area in each apartment. In addition, the document nominated a price per square metre of living area derived from the proposed price for each apartment. The document provided an average figure for the price per square metre of living area for all apartments in building 3. This figure was $4,951. The second document[4] sets out price calculations for each of the two apartments being offered to the plaintiffs calculated on the average figure for the price of square metreage, $4,951, plus decking at 50 per cent of that figure. Subsequently, in late 2009 when the plaintiffs agreed to acquire a right to occupy a different apartment in the north-western corner of the top floor of building 4, the base price in the contract for this new apartment, namely, $1,458,120.00, was calculated on $4,951 per square metre of the interior area of the apartment and 50 per cent of $4,951, namely, $2,476 per square metre of the deck area. The plaintiffs allege that the representations made by Mr Smallacombe in November 2006 as to the basis of the calculation of the price of the right to acquire their apartment constitutes misleading and deceptive conduct. The plaintiffs claim that they were misled and deceived by Mr Smallacombe’s conduct in producing to them the two documents and telling them that they set out the basis of the calculation of the price to acquire the right to occupy an apartment in building 3. They were misled and deceived into believing that purchasers of apartments in building 3 were paying a price calculated on the basis of a price per square metre of the interior area and 50 per cent of that price for the decking/yard area of the apartment when, in fact, purchasers of apartments in building 3 were offered a price calculated solely on the basis of a price per square metre of the interior area of the apartment. The plaintiffs claim they were misled and deceived by Mr Smallacombe’s failure to explain to them that the price he was asking for the apartment which they acquired was calculated on a different basis from the basis upon which the price was calculated for the purchase of apartments in building 3, namely, a price calculated on the square metreage of both the interior and exterior areas of the apartment rather than the interior area only. The plaintiffs allege that they relied on Mr Smallacombe’s representations in entering into the contract. They say that had they understood the true position, they would not have entered the contract, or not for $1,485,120.
[3] Exhibit P2, p 101.
[4] Exhibit P4, p 691.
The plaintiffs claim damages for breach of contract and misleading and deceptive conduct. The plaintiffs seek the cost of rectifying the construction work by raising the ceiling to a height of 2,700 mm. In addition, they seek damages for the loss suffered as a result of their reliance on the misrepresentation as to the calculation of the base price. In the alternative, they seek an order setting aside the contract.
The defendants submit that if they are in breach of the contract or guilty of misleading and deceptive conduct, because the ceiling is not 2,700 mm high, damages should not be assessed based on the cost of rectification because rectification is not reasonable. They submit rectification is not reasonable in all the circumstances because it is now not feasible to raise the ceiling or is not practical to do so having regard to the cost, the engineering difficulty involved, the consequential construction work that would be required in the adjoining apartment and the serious disruption to the quiet enjoyment and amenity of the other residents of the retirement village that would result. Mr Chappel does not consent to the work necessary to rectify the ceiling height being done. Mr Smallacombe defers to Mr Chappel’s position on this matter. The defendants submit that in these circumstances any entitlement to damages on the part of the plaintiffs is to be assessed on the basis of the loss of amenity they suffer from the lower ceiling and/or any resulting diminution in value of the apartment. Any reduction in the value of the apartment falls to be assessed by reference to the terms of the contract which provides for payment of an adjustment amount pursuant to a formula which reflects the changed value of the apartment over the period of the plaintiffs’ occupancy upon termination of the plaintiffs’ rights of occupancy of the apartment.

In addition the plaintiffs claim damages for the loss of use of the moneys paid under protest. Correspondingly, the defendants claim a set-off by way of interest due pursuant to the contract for the failure to pay the sum of $480,000 when it fell due. Both the plaintiffs’ and the defendants’ claims result from the dispute over whether the work in relation to the shell was complete as required by the contract.
Referral of matters to Mr Walsh QC
The parties agreed to refer a number of other issues in dispute for expert determination by Mr Walsh QC. The parties agreed that his determination would constitute agreed facts upon which I could proceed.
Trial issues
The issues for determination are:
Ceiling height as a contractual term
1.Was it a term of the contract between the plaintiffs and the defendants that the ceiling height in the apartment would be 2,700 mm high?
2.If yes, on a proper construction of the contract, was the obligation upon the defendants modified by the words “… Operator shall be responsible to construct the shell and framework of the Apartment generally in accordance with the plans as attached (“the Plans”)”?
3.What building tolerance (if any) was allowed in respect of a nominated ceiling height of 2,700 mm?
4.If some tolerance was permitted, was the ceiling height as constructed within or outside that tolerance?
5.How much lower than 2,700 mm was the ceiling constructed?
Misrepresentation as to ceiling height
6.Were there representations made by or on behalf of the defendants that the ceiling height would be a minimum of 2,700 mm? Were representations made on behalf of the defendants that the plaintiffs would receive a ceiling height of 2,700 mm arising out of the approved plans, discussions with Mr Smallacombe, and discussions with Mr Girolamo? In respect of Mr Girolamo, was he the agent of the defendants insofar as work relating to the shell and framework of the apartment was concerned?
7.Were those representations misleading and deceptive because:
7.1    prior to the signing of the contract, the defendants had, without consulting with the plaintiffs, made a design change to the roof framework which, based on the steel shop drawings, disclosed that a ceiling height of 2,700 mm would not be achieved?
7.2    prior to the signing of the contract, the defendants’ contractors were aware of the problem but had not rectified the problem, seeking to implement a solution which was ineffective, without notifying the plaintiffs?
7.3    there was a departure from the representations?
8.Is intention to mislead in that context relevant, or is it enough that the representation was in fact misleading? Insofar (and if) the representations were honestly made at the time they were made, is the departure from the same misleading?
9.Would the plaintiffs have entered into the contract if they knew they would not receive a ceiling height of 2,700 mm?
10.Did the plaintiffs suffer loss and damage as a consequence of any misleading and deceptive conduct?
11.If yes, is the appropriate remedy:
11.1 damages, (and if so, how are they assessed)? or
11.2 setting aside the contract? or
11.3 some other order?
Misrepresentation as to the calculation of the base price
12.Was there misleading and deceptive conduct in relation to the calculation of the base price?
13.Did Mr Smallacombe, on behalf of the defendants, make the representations as to how the base price for apartment 107 would be calculated?
14.Did the alleged implied representations arise from the documentation provided by Mr Smallacombe to the plaintiffs?
15.If yes, were the representations false and misleading in a material way?
16.If yes, did the plaintiffs rely on the representation to their detriment in agreeing the base price?
17.If yes, have the plaintiffs suffered loss and damage as a consequence?
18.If yes, is the appropriate remedy:
18.1 damages, and if so, how are they assessed?
18.2 setting aside the contract? or
18.3 some other order?
Completion
19.On a proper construction of the word “completed” in the Resident’s Agreement, does it mean:
19.1 “complete in all respects”?
19.2 “complete save as to minor defects which can be rectified without interference to the plaintiffs”?
19.3 “practically complete”? or
19.4 some other meaning?
19.5 was completion not achieved by reason either of the ceiling height as constructed, or the set back of the doorframes as found by Mr Walsh QC?
19.6 was completion achieved when the architect certified that the shell and framework of the apartment were complete?
19.7 was completion achieved by reason of the plaintiffs taking possession of the apartment and commencing occupation in October 2011?
20.Having regard to the question in paragraph 19:
20.1 when were the plaintiffs obliged to pay the instalments required under the Residents Agreement?
20.2 did the plaintiffs pay earlier than they were obliged to do so?
20.3 were those payments made “at the behest of” the defendants?
20.4 are the plaintiffs entitled to claim interest on those payments and, if so, in what amount?
20.5 did the plaintiffs pay their instalments later than they were obliged to do so under the Residents Agreement?
20.6 if so, what amount of interest are the defendants entitled to set‑off against the plaintiffs’ claims?
Measure of damages
21.Insofar as the ceiling height as constructed did not meet the contractual requirements, did the plaintiffs suffer any loss or damage as a result of the specified ceiling height not being achieved?
22.If there is a breach of contract, is the proper measure of damages to be assessed by reference to:
22.1 the cost of rectification? or
22.2 diminution in value? or
22.3 loss of amenity? or
22.4 some other measure?
23.In particular, would damages based on rectification costs be reasonable in all the circumstances, including:
23.1 the feasibility and/or practicability for the ceiling in the plaintiffs’ apartment to be reconstructed to the height of 2,700 mm?
23.2 the building methodology that would be needed to achieve that outcome?
23.3 could that work be undertaken without serious detriment to the quiet enjoyment and amenity of other residents in building 4 and the retirement village generally?
23.4 would the cost of that work be unreasonable and out of all proportion to the defect complained of?
24.Does the defendants’ assertion that they are entitled to refuse to allow the plaintiffs to carry out rectification work disentitle the plaintiffs to the award of damages Mr Walsh QC would have allowed for rectifying the doorframe detail? Does it disentitle the plaintiffs to an award of damages for the cost of rectification of the ceiling height?
Findings of fact relating to the plaintiffs’ apartment
I make the following findings. In 2006 Mr and Mrs Stone were living in a house in Austral Terrace, Malvern. The house had won an award for design. Next door they had constructed a similar house. It too had won an award for design. The plaintiffs were understandably proud of these houses. At that time Mr Stone suffered a serious illness. He became anxious about his future and the situation in which Mrs Stone would be left in the event of his death. In these circumstances Mr Stone decided they would look to acquire accommodation in a retirement village suitable to their needs and tastes. It was Mr Stone’s desire that this be achieved quickly so that he could have the comfort of knowing that if the worst was to occur, Mrs Stone would not be left in a position of having to move and sell their home without him.
By 2006 the defendants had acquired the old Coopers Brewery site at Leabrook and successfully undertaken the development on that site of the On Statenborough Retirement Village. This was a substantial development involving the construction of a number of multi-storey apartment buildings and individual villas in a leafy garden setting. The apartments were marketed as luxury retirement accommodation. The development was undertaken in stages. The defendants would erect one building and use the proceeds from the sale of apartments in that building to finance the construction of the next building. Mr Smallacombe’s role in the defendants’ partnership was the marketing and sale of the apartments and villas. Mr Chappel’s role in the defendants’ partnership was the supervision of the construction of the apartment buildings and villas.
Mr Stone was aware of the retirement village development. He knew Mr Smallacombe. In 2000 and 2001 the plaintiffs had retained Mr Smallacombe to act as their agent in selling the adjoining property in Malvern off the plan. Mr Stone contacted Mr Smallacombe to discuss acquiring an apartment in the retirement village in August 2006. He visited the retirement village and met Mr Smallacombe. The plaintiffs inspected an existing apartment. The plaintiffs were interested in acquiring an apartment larger than the standard design, with superior fittings and finishes to those in existing apartments. At this time the defendants were planning to construct building 4 in the retirement village. The plaintiffs wished to acquire the right to occupy a large apartment in the north-western corner of the top floor of building 4. Someone else had taken an option over this apartment. Mr Smallacombe explained to Mr Stone that location was unavailable. Mr Stone attempted to persuade Mr Smallacombe somehow to cancel the option. Mr Smallacombe would not do so. The plaintiffs undertook negotiations to acquire the right to occupy a large apartment in the north-eastern corner of the top floor of building 4. The defendants used the services of Pruszinski Architects as the project architects for the retirement village. There was a discussion between Mr Stone and Mr Smallacombe about whether the plaintiffs could use their architect, Mr Con Bastiras, for the apartment design but Mr Stone decided to retain the services of Pruszinski Architects. Mr Pruszinski chose one of the architects employed in his firm, Mr Girolamo, to undertake the design work on the fit-out of the plaintiffs’ apartment. Mr Pruszinski had previously assigned another member of the firm, Mr Tom Jarrett, to undertake the design work on building 4. On 29 September 2006, at the plaintiffs’ invitation, Mr Smallacombe attended at their home to introduce the plaintiffs to Mr Girolamo. On 30 September 2006 Mrs Stone executed an option over this apartment. She paid an option fee of $1,000 on 3 October 2006.
In October and November 2006 there were further discussions between Mr Stone and Mr Smallacombe. The plaintiffs wanted to fit out the shell of a large apartment which was to be constructed by the defendants. Mr Smallacombe, after discussion with Mr Chappel, indicated to the plaintiffs that this was possible. On 22 November 2006 Mrs Stone advised Ms Helen Bishop, an employee of the defendants, that she would exercise her option in respect of the north-eastern corner apartment. On 23 November 2006 the defendants confirmed this in writing. On 24 November 2006 the plaintiffs met Mr Smallacombe. There was a short discussion over the calculation of the price to acquire the right to occupy the apartment. At this stage Mr Smallacombe was offering the plaintiffs a choice between two differently sized apartments in that position. He presented Mr Stone with two documents setting out the basis upon which the price was calculated. On 29 November 2006 Mrs Stone sent a letter to the defendants advising that the plaintiffs would be proceeding with the larger apartment. That same day there was a meeting between the plaintiffs and Mr Girolamo at the plaintiffs’ residence in Malvern.
The plaintiffs instructed their solicitor, Mr Arthur, to prepare a contract embodying the terms of the agreement between the parties. In May 2007 Mr Arthur forwarded draft special conditions to the defendants. They were accepted by the defendants.[5] Those special conditions provided for the works to be performed by the defendants and the plaintiffs and prescribed a formula by which the agreed base price for the apartment was to be adjusted for the fit-out of the apartment by the plaintiffs. On 9 August 2007 the defendants presented to the plaintiffs a Residents Agreement incorporating the special conditions drafted by Mr Arthur on behalf of the plaintiffs. The Residents Agreement was executed by the parties on or about 31 August 2007. On 23 October 2007 the plaintiffs paid a deposit of $20,000. Mr Girolamo undertook various design work in relation to the apartment in close consultation with Mr Stone.
[5] The special conditions were incorporated into a standard contract which had been drafted by Paul Stanton, an employee of the defendants.
In May 2008 the defendants advised the plaintiffs that an apartment in the north-western corner of the top floor of building 4 had become available. The plaintiffs accepted the defendants’ offer of the north-western apartment and instructed Mr Girolamo to prepare an amended floor plan for what became apartment 107. Mr Girolamo prepared a series of drawings, including one showing different ceiling heights in the apartment between 2,400 mm and 2,700 mm. In November 2008 Mr Stone met Mr Girolamo and advised him that the plaintiffs wanted an uniform ceiling height of 2,700 mm in their apartment. By January 2009 construction work on building 4 was underway. Mr Girolamo wrote to the plaintiffs confirming that the windows on the northern façade of their apartment would be 2,700 mm high. On 26 February 2009 Mr Girolamo met with Mr Stone and confirmed that there would be “no lowered ceilings” in their apartment. Subsequently Mr Girolamo produced further design drawings. They were submitted to Mr Stone for his approval. Amongst the drawings he prepared was drawing no. 06375-06-26 dated 30 October 2009 including a ceiling plan for apartment 107 showing a uniform ceiling height of 2,700 mm and drawing no. 06375-02-04 dated 9 November 2009 showing a floor plan of the top floor of building 4.
On 4 November 2009 the plaintiffs’ solicitor, Mr Arthur, wrote to Mr Smallacombe with a new draft of proposed special conditions for apartment 107 based on the special conditions previously agreed. The letter proposed a base price for the right to occupy apartment 107 of $1,458,120. The letter set out a calculation of the base price on the basis of $4,951 per 244 square metres[6] of internal area and $2,476 per 101 square metres of decking area. The letter further proposed a payment schedule of $500,000 to be paid on the handover of the completed shell, $480,000 to be paid within 60 days thereafter and the balance to be paid within 14 days of the adjustment provided in the special conditions, namely, a reduction in the base price by a sum representing the costs of the finishes and appliances not provided by the defendants but which were included in the base price. The plaintiffs’ solicitor asked the defendants to prepare a new Residents Agreement. By 22 December 2009 the parties had executed the contract.
[6] The letter incorrectly referred to this area as 2,444 square metres.
At some point, probably in 2009, prior to the completion of the construction of the apartment shell, the defendants’ building supervisor, Mr Bowie, became aware that the position of one of the erected main supporting horizontal steel beams in building 4, RB5, would prevent the construction of the ceiling in apartment 107 to the specified height of 2,700 mm. He discussed the problem with the project manager, Mr Peake. Eventually they resolved to rectify the problem by cutting off part of the beam. This was done. Mr Peake and Mr Bowie thought that this modification to the steel beam would result in the ceiling in apartment 107 being constructed close to the specified height of 2,700 mm.
At about this time Mr Peake told Mr Chappel that there was a problem with the beam which was too deep. Mr Peake believes he would have told Mr Chappel that the beam was modified but cannot recall doing so. Mr Chappel gave evidence that he was not told of any modification. I find Mr Peake did not tell Mr Chappel that the depth of the beam would prevent the ceiling being built to a height of 2,700 mm. This matter was not brought to the attention of the plaintiffs.
In February 2010 the defendants granted the plaintiffs access to the building site to enable the plaintiffs’ fit-out works to commence. Mr Stone became dissatisfied with particular aspects of the building works undertaken by the defendants. He raised his complaints with Mr Girolamo and Mr Bowie.
On 26 August 2010 the defendants’ general manager, Mr Paul Stanton, wrote to the plaintiffs advising that building 4 was nearing completion. He referred to the payment schedule in the contract set out above. He wrote that he would advise in due course the balance to be paid for the completed fit-out once the appropriate adjustments had been made. In the meantime, he sought payment in accordance with the agreed schedule. On 3 September 2010 Mr Pruszinski sent an email to Mr Stanton confirming that the shell of the plaintiffs’ apartment was complete. On 27 September 2010 Mr Girolamo sent an email to Mr Stanton referring to an inspection he and Mr Stone had conducted of the plaintiffs’ apartment on 24 September 2010 and advising that the shell of the apartment had reached practical completion, although there were outstanding defects in the shell that needed to be addressed. On 29 September 2010 the plaintiffs paid the defendants $500,000 under cover of a letter stating that the payment was made on a without prejudice basis as the shell clearly was not yet complete. Thereafter Mr Stone continued to complain about various defects. On 29 December 2010 the defendants wrote to the plaintiffs requesting payment of the instalment of $480,000. On 24 January 2011 the plaintiffs wrote to Mr Stanton in response to the request for payment. They said that the apartment was not complete as it was not free of defects. They sought confirmation as to when they could expect handover of a completed shell to occur. On 11 March 2011 Mr Stone prepared a list of outstanding defects and proposals for rectification work to be undertaken by the defendants. This was given to the defendants. It included a complaint that the ceiling height was not 2,700 mm in accordance with the plans. It asserted the ceiling was 40 mm under specification resulting in permanent loss of amenity. It did not propose any rectification work in relation to this matter. The discrepancy in relation to the height of the ceiling in apartment 107 had come to the attention of the plaintiffs some time earlier after joinery was installed and the plaintiffs noticed that something was wrong in relation to the space between the top of cupboards and the ceiling. I refer to this in more detail later in these reasons. On 15 March 2011 there was a meeting between the defendants and the plaintiffs to address the plaintiffs’ complaints. It quickly became acrimonious. The defendants agreed to address some of the plaintiffs' complaints. There was no agreement to undertake any rectification works in relation to the ceiling height. In examination-in-chief Mr Stone said he raised the defect in the ceiling height but “it went through to the keeper”. However, in cross-examination Mr Stone gave evidence that Mr Chappel said “We’re not doing anything”[7] in relation to the ceiling height. I cannot accept that evidence. It is not consistent with the evidence Mr Stone gave in chief. Mr Chappel had no recollection of saying such a thing. I find that Mr Stone did not ask that anything be done in this regard. On 5 April 2011 Mr Stone wrote to Mr Stanton threatening to refer the dispute in relation to defects for dispute resolution under the contract.
[7] Transcript 295.21.

On 18 April 2011 the project architects certified that the works in relation to building 4 had reached completion. Mr Stanton wrote to the plaintiffs asking them to finalise the transaction in accordance with the contract. In May 2011 the defendants withdrew the plaintiffs' access to the building site because of their failure to make the payments due under the payment schedule in the contract. On 11 July 2011 the defendants, by their solicitors, issued to the plaintiffs a notice to remedy breach due to their failure to pay the sum of $480,000. On 26 July 2011 the plaintiffs paid by separate bank cheques the sums of $480,000 and $457,120 to the defendants under protest. A few weeks later the defendants permitted the plaintiffs access to the building to complete the fit-out of apartment 107.
On 1 October 2011 the plaintiffs took up residence in apartment 107.
On 16 November 2011 the plaintiffs issued to the defendants a notice to make good in relation to particular defects they alleged existed. The notice did not refer to the reduced ceiling height.
I make further findings of fact throughout these reasons.
The contract
The contract is entitled the Residents Agreement. It is dated 11 December 2009. The parties to the contract are the plaintiffs as Resident and the defendants as Operator. I find that the contract was executed by 22 December 2009. Pursuant to the contract the Operator grants to the Resident a licence to occupy apartment 107 and use of common areas on terms. The right to occupy is personal to the Resident. The Resident does not have a right to sub-let other than by written agreement with the Operator. The Resident has a right to quiet enjoyment of the apartment subject to a right of the Operator to enter at any time in the case of emergency or upon reasonable notice to inspect or carry out repairs and maintenance. The contract refers to a plan of the apartment and of the property showing the location of the apartment set out in an annexure to the contract. Two plans of apartment 107 are included in the contract. One of those plans cross-references a drawing WD02-04. There is a further plan of the property attached to the contract showing the location of the building in which apartment 107 is located, namely, building 4. The contract provides that the Resident’s right of occupancy will terminate on the earliest of the death of the Resident or the survivor, the Resident giving the Operator 14 days notice in writing that they wish to terminate or the Operator terminating the Resident’s right of occupation in any of the circumstances entitling it to terminate pursuant to the Retirement Villages Act 1987 (SA). In consideration of the right to occupy apartment 107, the Resident agrees to pay the Operator an interest-free loan. In the case of the plaintiffs that loan was $1,458,120 payable by instalments on a periodic basis as set out earlier in these reasons. Part 5 of Schedule 1 of the contract provides for payment of the loan. It includes a provision that in the event of a failure by the Resident to pay the loan the Operator is entitled to interest on the amount not paid at a prescribed interest rate.[8] An important aspect of the contract is the obligation to repay the loan. The obligation to repay the loan is subject to specified adjustments set out in the contract. The obligation on the Operator to repay the loan varies depending on whether upon termination the Operator elects to re-licence the apartment or not. In the usual course, it would be expected that the apartment would be relicensed. If the apartment is re-licenced the Operator is to repay the loan within 12 calendar months of the apartment being vacated or ten business days after receipt of the next loan, whichever is the earlier. If the Operator elects not to re-licence the apartment it is to repay the loan within 60 business days of notice to the Resident of that decision. The contract provides for offsets and adjustments to the amount of the loan to be repaid. The offsets include a deferred management fee as well as repayment deductions. The deferred management fee is calculated as follows:
(i)If the period of occupation is not more than 90 days after occupation – nil;
(ii)If the period of occupation is more than 90 days but not more than 1 year – 10% of the loan;
(iii)If the period of occupation is more than 1 year but not more than 2 years – 15% of the loan;
(iv)If the period of occupation is more than 2 years but not more than 3 years – 20% of the loan; and
(v)If the period of occupation is more than 3 years – 25% of the loan.
[8] Exhibit P1, schedule 1, part 5, item 1, clause 3.
In addition to the repayment of the loan, the contract prescribes a mechanism for assessing the value of the apartment at the time of termination and making payments between the parties based on movement in the value of the apartment over the period of occupancy. The mechanism involves what is described as a value adjustment supplement or deduction. A value adjustment supplement is to be paid to the Resident or a value adjustment deduction may be deducted from monies otherwise payable to the Resident. The supplement or deduction is calculated in accordance with a formula prescribed in the contract. The formula provides that if the value of the apartment has increased over the term of the occupancy, the operator will pay the Resident a supplement on a sliding scale depending upon the period of occupancy. If the period of occupation is not more than 90 days, the Resident is not entitled to any of the increase in value. If the period of occupation is more than 90 days but not more than one year, the Resident is entitled to 90 per cent of the increase in value. If the period of occupation is more than one year but not more than two years, the Resident is entitled to 85 per cent of the increase in value. If the period of occupation is more than two years but not more than three years, the Resident is entitled to 80 per cent of the increase in value. If the period of occupation is more than three years the Resident is entitled to 75 per cent of the increase in value. Conversely, if the value of the apartment has decreased over the term of the occupancy, a deduction will be made by the Operator in accordance with a similar sliding scale, so that, for example, if the period of occupation is more than three years the Operator will deduct 75 per cent of the decrease in value from the monies repayable to the Resident upon termination.
The contract provides certain covenants by the Resident, including an agreement by the Resident not to make any alteration to the apartment without the prior written consent of the Operator. That covenant is reinforced by a provision that Residents shall not damage any structure nor make any alteration or addition to any apartment without written approval of the Operator. The contract also provides that the Resident is not to use any part of the property in a manner which may unreasonably interfere with the use and enjoyment of any other Resident.
Importantly, the contract includes special conditions found in Annexure 1 to Schedule 9 which were drafted by solicitors for the plaintiffs. Those special conditions apply to the construction of the plaintiffs’ apartment. They include:[9]
[9]    Exhibit P1, Schedule 9, Annexure 1.
The Operator and the Resident agree that the following shall apply in respect to the construction of the Apartment:
1.That the Resident has agreed to purchase a specifically designed Apartment and finish it to a higher standard than that offered by the Operator and in finalising the Apartment the Resident will use the services of the project architect Pruszinski Architects.
2.To achieve the intention in paragraph 1 the Operator shall be responsible to construct the shell and framework of the Apartment generally in accordance with the plans as attached (“the plans”). The parties agree that without limiting the generality of the preceding paragraph the Operator shall be responsible to provide an unpainted finished shell which shall include all walls and doorframes in position, finished slab floors, electrical and gas plumbing penetrations all as detailed in the plans, all specified air conditioning plant and ductwork, ceiling and wall insulation, hot and cold water penetrations and all outside aluminium windows and sliding doors (“the Works”).
3.The parties acknowledge that it is the intention of the parties that the Resident will fit out the Apartment at their costs and propose to use fixtures, finishes and appliances not normally provided to the Owner. The Resident agrees to use Pruszinski Architects to design and oversee the fit out to be carried out by the Resident.
4.The Resident will be directly responsible for all of the Architect’s costs in respect to the design and supervision of the fit out by the Resident.
5.The Operator shall execute or cause to be executed all the works.
(a)     in accordance with the plans; and
(b)     in a proper and workmanlike manner and to Australian Best Practice Standards; and
(c)     under the control and supervision of a licensed builder.
6.The Operator shall allow the Resident and/or their authorised agents in the presence of the Architect or Project Manager access to the Apartment as and when reasonably required by the Resident during the course of construction of the Works to view the progress of construction.
7.(a)     The parties further acknowledge that the price quoted by the Operator for the Apartment (being the Loan under this Residents Agreement) to be completely finished to the Operator’s normal specifications and using its normal selections is $1,458,120.00 (“the base price”). The parties further agree that on the basis that the Resident will be completing the fit out of the Apartment at their costs, and that the price to be paid by the Resident shall be the base price less the costs of the finishes, and appliances that are not provided by the Operator but which have been included in the base price including but not limited to the costs of carpets, tiling, cupboard painting, light fittings and air conditioning vents.
(b)     The parties shall endeavour to agree the amount of the relevant costs that are to be deducted from the base price and to assist in this process the Operator shall provide the Resident with a detailed Schedule setting out what costs the Operator considers should be deducted from the base price.
(c)     If there is a dispute as to what the costs are to reduce the base price, the costs shall be determined by a quantity surveyor approved by Pruszinski Architects and such Quantity Surveyor shall be deemed to be an expert.
(d)     Part 4 of the Summary Information is amended to reflect this paragraph the intention being that the Loan amount shall be the base price less the deductions referred to in paragraph 5 plus the costs incurred by the Resident in completing the upgraded fit out and as certified by Pruszinski Architects.
Assessment of witnesses
The plaintiffs were each 77 years of age at the commencement of the trial. Mr Stone has had a lengthy career in real estate and property development. Both plaintiffs have a keen interest in building and interior design. I find that Mr Stone is a person of fastidious and exacting standards. He expects those he deals with to meet those standards. I find that while Mrs Stone shared her husband’s interest in design, generally she left negotiations over the apartment with architects and builders to Mr Stone.
By 2006 Mr Smallacombe had known Mr Stone for some years. I accept that he respected his experience and reputation. I find that he was flattered that Mr Stone was interested in acquiring an apartment in the retirement village. Partly for this reason he was prepared to accommodate the plaintiffs’ requirements. In addition, I accept Mr Smallacombe’s evidence that his principal role in the defendants’ partnership was marketing and sales for the project. To this end, he saw it as part of his role to keep customers satisfied. That included the plaintiffs. Nonetheless, I find that he did not involve himself in dealings over building design and the progress of construction work except to the extent of convening and chairing a meeting on 15 March 2011 to address Mr Stone’s complaints of defects in the building work. I accept he did so as he saw this as fulfilling his role in keeping customers satisfied.
Mr Chappel had no dealings with the plaintiffs prior to the formation of the contract. Thereafter, he had some dealings with Mr Stone to do with the state of the construction work of the plaintiffs’ apartment. I find that he came to consider Mr Stone to be a problematic customer. I find that this attitude influenced his dealings with Mr Stone.
In assessing the evidence of the parties, it is important to recognise that significant aspects of the evidence concern discussions that occurred many years ago. A number of those discussions occurred in 2006. The rest occurred in the subsequent years. Particularly with respect to the question of ceiling height, this did not become a matter of controversy until early 2011. By that time, the relevant discussions relied upon by the plaintiffs had occurred more than four years earlier. In these circumstances, there is a real risk of reconstruction. It is perfectly understandable that in giving evidence in 2015 witnesses’ memories of discussions that occurred nearly nine years earlier would be vague, uncertain or non-existent. That difficulty is particularly acute for the defendants and their witnesses such as Mr Girolamo. For them, the plaintiffs were two of dozens of people, if not more, who were interested in acquiring an apartment in the retirement village. I recognise, of course, that the plaintiffs may be more memorable because their apartment was custom-built and they may have proved more demanding than others. Nonetheless, the difficulties in recalling the particulars of conversations from years ago are obvious. I accept Mr Girolamo as an honest witness doing his best to recall events from many years ago.
I find that the plaintiffs did not become aware that the ceilings in their apartment were lower than 2,700 mm until early 2011. I find that they were upset that the ceiling was lower than they expected. I reject the submission of the defendants that Mr Stone realised the discrepancy in mid-2010 when the carcasses of the kitchen cupboards were installed. No complaint in relation to this matter was made at this time by the plaintiffs. The first complaint made by them was in early 2011. I am satisfied that the plaintiffs would have complained earlier if they had been aware of the discrepancy. The absence of a complaint evidences their lack of knowledge of the problem. I find that the subsequent conflict between the parties over this, and other matters, of which the plaintiffs complain in relation to the construction of their apartment, has affected their memories of those early discussions regarding ceiling height. This is demonstrated by inconsistencies in their accounts of those discussions. I find the plaintiffs have unconsciously reconstructed the detail of conversations with Mr Smallacombe in 2006. I will come back to this in more detail later in these reasons.
In making findings of fact I have taken a cautious approach to relying on evidence of conversations based exclusively on a witness’ recollection. Generally, I have made findings in relation to conversations on the basis of inferences I have been able to draw from contemporaneous documents and surrounding circumstances.
I heard evidence from a number of expert witnesses. I consider all of them did their best to assist the court in giving their evidence. That does not result in me accepting unhesitatingly all their evidence. Some of it is in conflict. Nonetheless I am satisfied they were honest and doing their best to render objective opinions within their fields of expertise.
Evidence in relation to the nature and feasibility of rectification works to raise the ceiling to a height of 2,700 mm above floor level was adduced from two engineers. The plaintiffs called Mr David Hayden. The defendants called Mr Ronan Whelan. Each produced a series of reports. Before they gave evidence they conferred. That resulted in a significant narrowing in the divergence of their opinions.
They agree that there are at least two obstacles to raising the ceiling in the plaintiffs’ apartment to the specified height of 2,700 mm. First, even after it was cut back, the beam RB5 is still too deep to permit the ceiling to be reconstructed to a height of 2,700 mm. Second, the steel beam SB7 is deeper than RB5 and, accordingly, it also prevents the ceiling being raised to the specified height. Both Mr Hayden and Mr Whelan agree that it is theoretically possible for RB5 and SB7 to be cut and suitably reinforced, so as to ensure the roof has the necessary stability and strength to create sufficient space to allow the ceiling to be raised to a height of 2,700 mm. Of course, this can only occur after the existing ceiling has been removed. The modification to RB5 requires cutting and the installation of inverted T-sections which would provide the requisite stiffness for the beam. Also a supporting column would have to be inserted into the party wall between the plaintiffs’ apartment and the adjoining apartment. The T-section would be stitch welded to the cut beam. Mr Whelan, however, harboured some doubts about the practicability of undertaking the work on the beams. He was sceptical whether a tradesperson could obtain sufficient access to effectively undertake the modification work on the beams because of the lack of necessary work space as the underside of the beams would limit the height at which the tradesperson could undertake the work. However, he ventured the view that it was possible for the work to be undertaken. Mr Whelan and Mr Hayden, however, continued to disagree as to whether the fire risk that the work would create could be effectively managed. Mr Hayden thought it could be done with the use of fire blankets. Mr Whelan doubted that the risk could be effectively managed. He considered there was a real risk of sparks flying into the ceiling. He thought overcoming the risk would be extremely difficult.
There was also some difference in emphasis between Mr Hayden and Mr Whelan in relation to the amount of noise and dust that would be generated by the works required for rectifying the ceiling height and the potential for disruption to other residents from this work.
Both agreed that the full extent of the works required could not be known until the ceiling was demolished. Both agreed that the extent of any tolerance for the construction of a ceiling height of this type was plus or minus 20 mm, although Mr Hayden suggested a tolerance of 13.5 mm was not inappropriate having regard to the Victorian Building Commission Guide to Standards and Tolerances. Mr Hayden accepted that the guide did not apply to building work in South Australia. There is no equivalent guide applicable in South Australia.
I heard evidence from Mr Chris Watkins. He is an architect called by the defendants. He gave evidence that a 20 mm tolerance represented the extreme end of the permissible tolerance for the construction height of the ceiling specified at 2,700 mm. He considered that modern building methods are capable of achieving closer compliance with specifications, say within five to 10 mm. He considered that a discrepancy of 20 mm in ceiling height would be impossible to determine visually. He also considered that in determining the height of the ceiling by reference to site dimensions, as opposed to plans, the relevant dimension is to measure from the final finished floor level to the underside of the structure that will be supporting the ceiling itself. He gave evidence that he was unaware of any standards described as “Australian best practice standards”.

Mr John Deans, a quantity surveyor, gave evidence of the cost of rectification if works were now undertaken to raise the ceiling to the height of 2,700 mm above floor level. His evidence is that the cost is $331,188. His estimate was based on the opinion of the required works stipulated by Mr Hayden.
The plaintiffs called evidence from a valuer, Mr William Fudali. He valued the plaintiffs’ apartment at $1,500,000 as at 11 December 2009, at $1,575,000 at 1 October 2011 and at $1,650,000 at 11 March 2015. He agreed under cross-examination that the base price of $1,458,120 represented fair market value in 2009.
The defendants relied on a report from a valuer, Mr Jeremy Carter. Mr Carter concluded that a 40 mm differential on the ceiling height of the plaintiffs’ apartment would have no conscious effect on a potential consumer’s outlook and therefore the consumer’s value judgment on the space or area of the apartment would not be affected. He considered that the design of the apartment was such that a person’s view is taken northwards out to the balconies such that a discrepancy in ceiling height is unnoticeable. Consequently, the discrepancy in ceiling height would not have an impact on its value. This opinion was based on his view that the difference of 40 mm in a ceiling with a height of 2,660 mm compared to 2,700 mm would not be perceivable to the average purchaser.
Ceiling height as a contractual term
The critical question is whether it is a term of the contract that the ceiling height in apartment 107 would be 2,700 mm.
In construing the contract, the Court adopts the objective theory of contract to determine the rights, duties and obligations of the parties. In Electricity Generation Corporation v Woodside Energy Ltd & Ors[10] French CJ, Hayne, Crennan and Kiefel JJ said:[11]
The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties … intended to produce a commercial result”. A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.
[Citations omitted].
[10] [2014] HCA 7, (2014) 251 CLR 640.
[11] [2014] HCA 7 at [35], (2014) 251 CLR 640 at 656 – 657.
More recently in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd[12] French CJ, Nettle and Gaudron JJ said:[13]
The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption “that the parties … intended to produce a commercial result”. Put another way, a commercial contract should be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.
[Citations omitted].
[12] [2015] HCA 37, (2015) 89 ALJR 990.
[13] [2015] HCA 37 at [46] – [51], (2015) 89 ALJR 990 at 998 - 999.
Kiefel and Keane JJ, with whom Bell and Gageler JJ agreed, said:[14]
That regard may be had to the mutual knowledge of the parties to an agreement in the process of construing it is evident from Codelfa Construction Pty Ltd v State Rail Authority (NSW). Mason J, with whom Stephen and Wilson JJ agreed, accepted that there may be a need to have regard to the circumstances surrounding a commercial contract in order to construe its terms or to imply a further term. In the passages preceding what his Honour described as the “true rule” of construction, his Honour identified “mutually known facts” which may assist in understanding the meaning of a descriptive term or the “genesis” or “aim” of the transaction. His Honour had earlier referred to the judgment of Lord Wilberforce in Prenn v Simmonds, where it was said that:
[t]he time has long passed when agreements … were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations.
In a passage from DTR Nominees Pty Ltd v Mona Homes Pty Ltd, to which Mason J referred, it was said that the object of the exercise was to show that “the attribution of a strict legal meaning would ‘make the transaction futile’”. In Electricity Generation Corporation v Woodside Energy Ltd, French CJ, Hayne, Crennan and Kiefel JJ explained that a commercial contract should be construed by reference to the surrounding circumstances known to the parties and the commercial purpose or objects to be secured by the contract in order to avoid a result that could not have been intended.
The “ambiguity” which Mason J said may need to be resolved arises when the words are “susceptible of more than one meaning”. His Honour did not say how such an ambiguity might be identified. His Honour’s reasons in Codelfa are directed to how an ambiguity might be resolved.
[Citations omitted].
[14] [2015] HCA 37 at [108] – [110], (2015) 89 ALJR 990 at 1006 - 1007.
The crucial provisions of the contract relevant to the issue are the special conditions found in Annexure 1 to Schedule 9 as set out earlier in these reasons.
Clause 2 defines “the works” to be performed pursuant to the contract. It defines the works as the construction of the shell and framework of the apartment to be “purchased” by the resident “generally in accordance with the plans as attached (“the plans”)”. The defendants were obliged to provide an unpainted finished shell which would include all walls and doorframes in position, finished slab floors, electrical and gas plumbing penetrations all as detailed in the plans, all specified air conditioning plant and duct work, ceiling and wall insulation, hot and cold water penetrations and all outside aluminium windows and sliding doors.
Clause 5 imposes an obligation on the defendants to execute or cause to be executed all the works, inter alia, in accordance with the plans, in a proper workmanlike manner and to Australian Best Practice Standards.
No plans were attached to the contract. As I have observed, there were three plans or drawings included in the contract document. They were two floor plans of apartment 107 and a plan of the property showing the buildings in the retirement village, including building 4 in which apartment 107 was to be constructed. As I have noted, one of the floor plans of apartment 107 included in the contract cross-references another plan, namely, WD02-04, “for builder’s scope of work”. WD02-04 is a drawing of the floor plan of level 2 of building 4. It includes the floor plan for apartment 107. It includes certain notes relating to apartment 107. One of those notes refers to drawing WD06-26 “for final plan showing extent of appliances and sanitaryware for service provisions”. The plan is dated 9 November 2009. Drawing WD06-26 is dated 30 October 2009. It includes a ceiling plan for apartment 107. The legend to the ceiling plan contained in that drawing indicates that ceiling heights throughout apartment 107 are to be flush finished plasterboard 2,700 mm above floor level.
The plaintiffs’ case is that drawing WD06-26 was incorporated into the contract by this series of cross-referencing. In the alternative, the plaintiffs submit that it was the common intention of the parties that all the plans relevant to the construction of apartment 107 form part of the contract and the mere failure to attach them to the written document cannot result in the contract being construed to exclude the specifications contained in those plans from forming part of the agreement made by the parties.
In my opinion, the specification in the plans of a ceiling height of 2,700 mm in the plaintiffs’ apartment formed a term of the contract. Consideration of the terms of Annexure 1 to Schedule 9 makes clear that the works the parties agreed were to be performed by the defendants were to be undertaken in accordance with plans. Clause 2 provides that the defendants were to construct the shell and framework of the plaintiffs’ apartment generally in accordance with specified plans. The defendants were to provide an unpainted finished shell which was to include all walls and doorframes in position, finished slab floors, electrical and gas plumbing penetrations all as detailed in those plans. Significantly, Clause 2 provides that the works for which the operator shall be responsible include all ceiling and wall insulation. In my view, that necessarily implies that the ceilings and walls form part of the works which the operator is to construct in accordance with the plans. It follows that the parties evinced an objective intention that the apartment was to be constructed in accordance with detailed plans. The works the subject of the contract were to be performed in accordance with the plans and specifications which formed part of it. Certainly the parties expressed an intention that those plans were to be attached to the contract. While three drawings were included in the document no plans were attached to the contract. The concept of attaching plans to the contract connotes the proposition that the attached plans exist separately from the document. The three drawings included in the document do not satisfy the description of being “attached”. I consider the parties in referring to plans in Clauses 2 and 5 of Annexure 1 to Schedule 9 intended thereby to make it a term of the contract that the apartment be constructed in accordance with the specifications in the plans drawn in relation to its construction. That is all the plans that were issued for construction of the shell of apartment 107. It is unnecessary to identify all of the plans. I am satisfied that the reference to “the plans as attached” was intended by the parties to include the ceiling plan in drawing WD06-26. That plan specified a ceiling height of 2,700 mm above floor level. That was one of the plans issued for construction prior to the execution of the contract. In my view the Court would not be adopting a businesslike approach to deny the parties the construction of the contract they intended, by interpreting the contract in a way which deprives it of the commercial purpose it was intended to secure, merely because of a failure to physically attach the relevant plans to the contract. There is no evidence to explain the failure to attach any plans to the contract. I infer that it was a matter of oversight. There is no suggestion that it was the result of a deliberate decision by one or both of the parties. That seems unlikely.
I do not accept the plaintiffs’ submission that drawing WD06-26 was incorporated into the contract by a process of cross-referencing commencing with a reference in the drawing of the floor plans of apartment 107 to drawing WD02-04. The flaw in this submission is that the cross-reference to drawing WD06-26 in drawing WD02-04 is limited to the purpose of showing the extent of appliances and the sanitaryware for service provisions. It does not refer to a ceiling plan or ceiling heights. In any event, given my conclusion in relation to the alternative submission, this does not matter.
However, having found that the parties intended that the ceiling plan drawing WD06-26 forms part of the contract, the question remains what is meant by the reference in Clause 2 of Annexure 1 to Schedule 9 to the obligation on the defendants to construct the shell and framework of the plaintiffs’ apartment “generally in accordance with the plans”. Does the use of “generally” qualify the obligation imposed on the defendants to construct a shell and framework of the plaintiffs’ apartment in accordance with the plans?
The plaintiffs submit that the expression “generally” does not qualify the contractual obligation on the defendants to construct a ceiling in accordance with the specified height of 2,700 mm. They submit that the contract must be read as a whole. While there may be some tension between the language of Clause 2 and Clause 5 of Annexure 1 to Schedule 9, the surrounding circumstances, including in particular, the fastidiousness expressed by the plaintiffs in relation to the design of their custom-built apartment, means the contract should be construed to require the defendants to execute the works in accordance with the plans, in a proper and workmanlike manner and to Australian best practice standards. They submit that the use of “generally” in Clause 2 was intended by the parties to reflect the fact that the plans included features that were the responsibility of the plaintiffs to construct. The expression “generally” qualifies the obligation imposed on the defendants only to that extent. It merely signifies that the defendants were not under an obligation to perform all the construction work evident in the plans.
The defendants submit that “generally” qualifies the obligation in the contract to construct the shell and framework of the plaintiffs’ apartment in accordance with the plans. The contract does not require the defendants to construct the shell and framework strictly in accordance with the plans. Specifically, they were not required to construct the ceiling of the apartment to a height of 2,700 mm. They submit that their contractual obligations were satisfied if they constructed the apartment with a ceiling that was generally in the vicinity of 2,700 mm. They submit they did this.
In my view, the proper construction of the contract is that the defendants were required to construct the plaintiffs’ apartment in accordance with the specifications set out in the plans issued for construction. The expression “generally” only qualified the obligation imposed on the defendants to the extent that they were not required to perform all the construction work specified in the plans. Some of that work was to be undertaken by the plaintiffs. But to the extent the defendants were obliged by the contract to perform building work they were obliged to do so in accordance with the specifications in the plans. The defendants were obliged to perform the work in a proper and workmanlike manner and in accordance with accepted Australian construction standards. Clause 5(b) of Annexure 1 to Schedule 9 of the contract refers to the obligation on the defendants to execute or cause to be executed all the works, inter alia, to Australian best practice standards. There was no evidence of the existence of Australian best practice standards. I consider, however, that the parties intended that term of their agreement to be meaningful. I am satisfied that their intention was to agree that the works would be undertaken in accordance with accepted Australian construction standards. Importantly, I am satisfied that the construction of the ceiling in a proper and workmanlike manner permitted some departure from the specified height in the plans in accordance with accepted Australian construction standards. Those standards recognise that there can be some tolerance in meeting specifications in undertaking building work. The evidence is that accepted construction standards in Australia recognise that specifications cannot always be met precisely. There is room for some tolerance. The evidence suggests that the extent of those tolerances can vary from jurisdiction to jurisdiction and are not always precise. There is no specific established industry standard tolerance for ceiling height. I am satisfied on the evidence that accepted Australian construction standards permit a departure of up to plus or minus 20 mm in the construction of a ceiling to a specification of 2,700 mm high. I make that finding in reliance on the evidence of Mr Hayden and Mr Whelan. While Mr Watkins gave evidence to the same effect, I note that his opinion was a matter of speculation. No doubt builders attempt to build to specification. Mr Hayden and Mr Whelan suggested that it is possible to construct a ceiling that is closer than 20 mm to specification. However, I do not consider that the requirement in the contract that the shell be constructed to Australian best practice standards imposed an obligation to build to some stricter tolerance. Given there are no recognised Australian best practice standards it is impossible to give the term any prescriptive meaning.
In my view, in determining the height of the ceiling the relevant reference point is the distance between the top of the concrete floor slab and the underside of the plasterboard ceiling. I reject any contention that some other reference point is appropriate. I particularly reject any suggestion of measuring the height of the ceiling by reference to any point higher than the underside of the ceiling. The height of the ceiling is relevant to the internal space of the apartment. Common sense dictates that it is the underside of the ceiling which determines the highest point of the interior space. Likewise, I would not accept that the height of the ceiling is to be measured from the top of the floor coverings. The builder constructing the shell cannot be expected to know what the depth of floor coverings might be in fixing the ceiling. The parties agree that the height of the ceiling in the plaintiffs’ apartment is somewhere in the range of 32 to 57 mm below the specified height of 2,700 mm as measured from the top of the concrete slab to the underside of the plasterboard ceiling. That is an average of 48 mm below the specified height.[15] At no point does the ceiling reach the specified height. The height of the ceiling is outside the range of acceptable tolerance in accordance with accepted Australian construction standards. The contract required that the ceiling be constructed to a height of 2,700 mm above the floor level. Given the construction I favour and the evidence as to accepted tolerances, that required that the ceiling be constructed to a height within the range of 2,680 mm to 2,720 mm. That did not occur. It follows that the ceiling was not constructed to the specifications in the plans. Accordingly, I find that the defendants in constructing the ceiling breached the contract.
[15] See Exhibit P16.

I will address the consequences of these conclusions later in these reasons.
In that context it is necessary to address the defendants’ submission that the shell and framework were complete, at the latest, by 1 October 2011 when the plaintiffs took possession of the apartment and commenced occupation.
In my view, the decision of the plaintiffs to take up occupation notwithstanding their position that the shell was not complete by reason of defects, including the ceiling height, is not relevant to the question of whether the shell was complete within the meaning of the contract. Rather, the conduct of the plaintiffs in taking possession of apartment 107 and commencing occupation goes to questions of waiver and election.
Waiver and election
In Agricultural and Rural Finance Pty Ltd v Gardiner[68] the High Court considered the doctrine of waiver. The joint reasons of Gummow, Hayne and Kiefel JJ[69] considered three different principles that may be invoked by the concept of waiver, namely, election, forbearance and abandonment or renunciation.[70]
[68] [2008] HCA 57, (2008) 238 CLR 570.
[69] Heydon J agreeing.
[70] [2008] HCA 57 at [55], (2008) 238 CLR 570 at 588.
In Gardiner the majority judgment analysed the basis of a claim of waiver of contractual rights in those three categories. The majority judgment rejected the operation of any general concept of waiver. They said that properly analysed the categories of forbearance and abandonment or renunciation are properly understood as mere statements of conclusion. The authorities said to support these principles are examples of the application of recognised common law principles and equitable doctrines of promissory estoppel, estoppel by conduct, variation of contract and release of contractual rights. That leaves the doctrine of election.
In Gardiner, their Honours observed that an intentional act, done with knowledge, whereby a person abandons a right by acting in a manner inconsistent with that right had earlier been described by the High Court as the waiver of that right. But such cases are the application of the common law doctrine of election between inconsistent rights.[71]
[71] Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57, (2008) 238 CLR 570.
For example, a breach of contract by one party, if sufficiently serious, gives the innocent party the right to rescind. But the innocent party need not accept the repudiatory breach and rescind. The innocent party may choose to insist upon further performance. The exercise of rights available only if the contract subsists, despite the knowledge of a breach entitling one party to rescind, constitutes an election to maintain the contract on foot.
The High Court considered election in Sargent v ASL Developments Ltd.[72]In Sargent, Stephen J explained that the doctrine only applies if the rights are inconsistent the one with the other and it is the concurrent existence of inconsistent rights which explains the doctrine. The enjoyment of one right must result in the extinction of the other inconsistent right.[73] He said that for the doctrine to operate there must be both an element of knowledge on the part of the elector and words or conduct sufficient to amount to the making of an election as between the two inconsistent rights. The words or conduct ordinarily required to constitute an election must be unequivocal in the sense that it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other.[74] Mason J said the right of election arises when events occur which enable a person to exercise alternative and inconsistent rights i.e. when he has the right to terminate a contract for breach and the alternative right to insist on the performance of the contract. It matters not whether the right to terminate the contract is conferred by the contract or arises at common law for fundamental breach.[75] An election can be made without a conscious choice by the party enjoying the right to elect. It can be constituted by conduct to which the law attributes the character of an election. Once an election is made it cannot be retracted.[76]
[72] [1974] HCA 40, (1974) 131 CLR 634.
[73] [1974] HCA 40, (1974) 131 CLR 634 at 641.
[74] [1974] HCA 40, (1974) 131 CLR 634 at 646.
[75] [1974] HCA 40, (1974) 131 CLR 634 at 655.
[76] [1974] HCA 40, (1974) 131 CLR 634 at 656.
At no time did the plaintiffs expressly give up their claim that they were entitled to completion in accordance with their interpretation of the contract. That is to say, the construction of the shell in accordance with the plans, in a proper and workmanlike manner and in accordance with established Australian construction standards. However it is the case that in various complaints about defective works after it came to their attention that the ceilings had not been constructed to the specified height they failed to refer to this matter. When in March 2011 the plaintiffs first brought to the attention of the defendants the fact that the ceiling in their apartment was lower than specified in the plans, they characterised this defect as constituting a permanent loss of amenity. They did not seek rectification. I do not accept the submission that this was because they did not know how this could be achieved. Mr Stone had no reason to think that the ceiling could not be demolished and rectified at that time. He was unaware of the problems posed by the beams RB5 and SB7. The complaint of permanent loss of amenity and the failure to seek rectification cannot be considered in isolation from the plaintiffs’ conduct in taking up residence in the apartment.
In my view, notwithstanding the continued insistence of the plaintiffs that the defendants had failed to complete the shell because the ceiling had not been constructed to the specified height, their conduct in taking possession of the apartment, completing the fit-out and commencing residential occupation on 1 October 2011 constituted an election, by them. The nature of the election in my view, was two-fold. First, they elected not to rescind the contract and to confine their remedy for breach to a claim for damages. Secondly, they elected to abandon any right to claim specific performance of the contract by way of requiring the defendants to rectify the defect by raising the height of the ceiling to meet the specifications in the plans. There is an inconsistency between taking up residential occupation of the apartment and insisting that the defendants raise the height of the ceiling. I form this view notwithstanding the plaintiffs’ insistence that the court should award damages based on the costs of rectification of the ceiling height and order the defendants to permit the plaintiffs to undertake such work. Once the plaintiffs had commenced occupation of the premises, the defendants had no practical means of rectifying the ceiling height had they been so inclined (which they were not).[77] Nonetheless, the commencement of occupation of the apartment by the plaintiffs prevented the defendants from completing the works in accordance with the contract.
[77] See Exhibit P6, p 1363.
In my view, the occupation of the apartment by the plaintiffs in circumstances where for more than six months they had not included in their lists of defects any reference to ceiling height, or, for that matter, demanded the defendants rectify the ceiling height, is relevant to whether they had abandoned any claim that the defendants were obliged to perform the contract by rectifying the ceiling height. The conduct of the plaintiffs in taking up residence in the apartment is inconsistent with the maintenance of the claim that the defendants were obliged to perform the contract by raising the ceiling height to conform with the specifications in the plans. That conduct constitutes an election to abandon any claim for specific performance by completing the works in accordance with the contract. They cannot approbate and reprobate by asserting an entitlement to have the ceiling rectified while acting in a manner that renders that work impossible in practice.
The conduct of the plaintiffs in occupying the apartment on 1 October 2011 constituted an election by them that was inconsistent with any continued claim that the defendants were obliged to complete the works by raising the ceiling height in their apartment. That conclusion has the result that the obligation to pay the sum of $500,000 fell due by the date of the plaintiffs taking up residency in October 2011 and the obligation to pay the sum of $480,000 fell due 60 days later.
Moreover, given that election, I consider the plaintiffs are precluded from claiming damages on the basis of rectification. There is an inconsistency in conduct by them in preventing the defendants from rectifying the ceiling height and claiming damages on the basis of the costs of that rectification work.
Measure of damages for breach of contract
In any event, I consider that the plaintiffs are not entitled to an award of damages for breach of contract assessed by reference to the costs of the rectification work required to raise the ceiling height in their apartment to 2,700 mm.
In Bellgrove v Eldridge[78] and the more recent judgment in Tabcorp Holdings Limited v Bowen Investments Pty Ltd[79] the High Court considered the measure of damages for breach of a building contract. In Tabcorp the High Court cited with approval the statement of the relevant principle by Dixon CJ, Webb and Taylor JJ that:[80]
… [T]he respondent was entitled to have a building erected upon her land in accordance with the contract and the plans and specifications which formed part of it, and her damage is the loss which she has sustained by the failure of the appellant to perform his obligation to her… her loss can, prima facie, be measured only by ascertaining the amount required to rectify the defects complained of and so give to her the equivalent of a building on her land which is substantially in accordance with the contract.[81]
[78] [1954] HCA 36, (1954) 90 CLR 613.
[79] [2009] HCA 8, (2009) 236 CLR 272.
[80] TabcorpHoldings Limited v Bowen Investments Pty Ltd [2009] HCA 8 at [15], (2009) 236 CLR 272 at 87.
[81] Bellgrove v Eldridge [1954] HCA 36, (1954) 90 CLR 613 at 617.
Their Honours went on to explain that the rule is that the measure of damages recoverable by a building owner for the breach of a building contract is the difference between the contract price of the work or building contracted for and the cost of making the work or building conform to the contract. However, they said that the rule is subject to the qualification that, not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt.[82]
[82] Bellgrove v Eldridge [1954] HCA 36, (1954) 90 CLR 613 at 617 – 618.
Bellgrove and Tabcorp are authority for two propositions. First, that the measure of damages recoverable by a building owner for breach of a building contract is the difference between the contract price of the work contracted for and the cost of making the work substantially conform to the contract, together with consequential loss. Secondly, that this principle is subject to the qualification that the works undertaken to produce conformity must be necessary and in the circumstances reasonable. That is a question of fact. Whether the works are necessary is to be decided by what is required to bring about conformity between whatever was constructed and the specifications in the plans. Whether the works are reasonable is to be decided by whether it would be unreasonable to undertake the works required to achieve compliance with the specifications in the plans.
In Tabcorp French CJ, Gummow, Heydon, Crennan and Kiefel JJ explained the operation of the qualification, citing the example of unreasonableness given by the High Court in Bellgrove:[83]
“No one would doubt that where pursuant to a building contract calling for the erection of a house with cement rendered external walls of second-hand bricks, the builder has constructed the walls of new bricks of first quality the owner would not be entitled to the cost of demolishing the walls and re-erecting them in second-hand bricks.” That tends to indicate that the test of “unreasonableness” is only to be satisfied by fairly exceptional circumstances. The example given by the Court aligns closely with what Oliver J said in Radford v De Froberville, that is, that the diminution in value measure of damages will only apply where the innocent party is “merely using a technical breach to secure an uncovenanted profit”. It is also important to note that the “reasonableness” exception was not found to exist in Bellgrove v Eldridge.
[83] [2009] HCA 8 at [17], (2009) 236 CLR 272 at 288-289.
In Wheeler & Anor v Ecroplot Pty Ltd[84] Macfarlan JA, with whom McColl and Basten JJA agreed, identified another example of unreasonableness as the situation where the costs of the proposed rectification is out of all proportion to the benefit to be obtained.
[84] [2010] NSWCA 61 at [81].
At issue is whether this case falls into the unreasonableness qualification identified in Bellgrove and explained in Tabcorp and Wheeler. Since Tabcorp the application of the unreasonableness test has been considered in decisions of three intermediate appellate courts: Willshee v Westcourt Ltd,[85] Unique Building Pty Ltd v Brown[86] and Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd.[87]
[85] [2009] WASCA 87.
[86] [2010] SASC 106.
[87] [2012] NSWCA 184.
In Willshee Martin CJ, with whom Buss JA and Newnes AJA agreed, upheld an appeal from a judgment where the trial judge had rejected a claim for damages for breach of contract, in failing to construct a house with high quality limestone cladding, assessed on the basis of the cost of rectification, which required the removal of the entire limestone cladding of the house and its replacement with high quality limestone blocks, because he found the circumstances fell within the qualification in Bellgrove. That judgment at first instance was delivered prior to the High Court’s judgment in Tabcorp. In Willshee there was a contractual obligation to supply limestone of high quality for use as external cladding on the house. The builder used a significant quantity of limestone of inferior quality, with the result that it deteriorated rapidly necessitating significant remedial work. Even though the deterioration did not adversely affect the structural soundness of the house, it was nevertheless material to the calibre and quality of the building supplied when compared to the calibre and quality of the building for which the appellant contracted. On appeal the court held that the trial judge erred in concluding that the case came within the qualification of “unreasonableness” referred to in Bellgrove and Tabcorp. It held that it could not be said that the respondent’s breach of contract was, in any sense, “technical”. It was a serious and significant breach, which had a significant impact upon the rate at which the external cladding of the house weathered and deteriorated, and which had a significant impact upon the appearance of the house (emphasis added).
In Unique Building the Full Court of this State dismissed an appeal from a judgment where the trial judge had assessed damages in a case of defective building works on the basis of the cost of rectification, which required the demolition and rebuilding of four townhouses. Layton J, with whom Sulan and Vanstone JJ agreed, rejected the submission that the judge’s approach to assessing damages was in error on the basis that the defects were minor as a result of which an assessment based on the costs of demolition and rebuilding was out of all proportion to the nature of the defects.
The defects involved the encroachment of the building slab onto an adjoining property by somewhere between 12 and 23 mm and a deflection in the slab layout up to 217 mm. The deflection reduced the size of the laundry by 81 mm out of a total of 2,900 mm, as a consequence of which there was no longer enough room to allow a shower, as planned, and required the repositioning of cross-walls. The encroachment meant that two of the exterior walls of the premises would be on the adjoining land. In addition, there was a defect in the slab height. This had three consequences. First, ramps to the garages were steeper with the result that one car in 20 would have been unable to get into the garage at all. Second, a side door of one townhouse was unusable. Third, a step to the side door in one of the townhouses was 320 mm high instead of 225 mm. The Court held that there was no error in the trial judge’s findings that these constituted substantial defects. Layton J considered the measure of damages is the difference between the contracted works and the cost of making the works conform to the contract. This requires consideration of the reasonableness of what is necessary to conform to the contract. If the only reasonable way to bring about conformity with the contract is by demolition and rebuilding because rectification and repair in itself would not be adequate to bring about conformity with the contract, and if such a course is reasonable, then the cost of demolition and rebuilding will be the measure of the damages. Layton J held there was no error in the judge’s conclusion that demolition was not out of all proportion to the nature of the defects. In the circumstances, there was nothing disproportionate in the judge’s approach to the assessment of damages.
In Cordon Investments the New South Wales Court of Appeal dismissed an appeal from a judgment where the builder had undertaken defective building works pursuant to a joint venture agreement with the registered proprietor of the land. Subsequent to the works being undertaken, the registered proprietor transferred ownership of the property to a strata title owner’s corporation. The trial judge rejected a claim for damages to be assessed on the basis of the costs of rectifying the defective works. The judge did so on the basis that the rectification work would never be undertaken, at least by the former owner, and, as such, there was no loss. Bathurst CJ, with whom Macfarlan and Meagher JJA agreed, said that the combination of the lack of intention to carry out the rectification work, the transfer of the property from the former owner to the strata title owner’s corporation, and the absence of any evidence that the defects were affecting the use and occupation of the building, led to the conclusion that it would be unreasonable to carry out the work and damages for the cost of rectification should therefore not be awarded.
The plaintiffs are entitled to an award of damages for breach of contract. However, they are not entitled to an award of damages that reflects the costs of rectifying the ceiling height. I reach this conclusion on two bases. First, I do not consider the plaintiffs’ case falls within the rule in Bellgrove. Second, if it does, this is one of the fairly exceptional cases that falls within the qualification to the rule in Bellgrove. It would be unreasonable to undertake the work necessary to raise the ceiling to the specified height in the plans of 2,700 mm.
The basis of the rule expounded in Bellgrove is that damages are to be assessed by ascertaining the amount required to rectify the defects complained of and so give the equivalent of a building which is substantially in accordance with the contract (emphasis added). The height of the present ceiling is between 2,643 mm and 2,668 mm above floor level.[88] As I have found, it is between 12 and 37 mm outside of the specifications, allowing for accepted tolerances. In my view while the ceiling height does represent a breach of contract, the ceiling constructed is still substantially in accordance with the contract given the average departure from the specification, allowing for tolerance, is 28 mm. That is marginally more than one per cent of the specified height of 2,700 mm. For these reasons I consider that the existing ceiling is substantially in accordance with the contract.
[88] Exhibit P16.

In any event, this is a case which falls within the qualification to the rule in Bellgrove. I come to this conclusion for five reasons.
First, because the work requires the demolition of the apartment ceiling and the balcony windows, and the cutting of the steel beams in the roof of building 4, together with the insertion of a supporting column in the party wall between the plaintiffs’ apartment and the adjoining apartment, before undertaking the reinstatement of the ceiling and windows. This is to rectify the height of a ceiling which now is between 2,643 mm and 2,668 mm above floor level. The extent of the discrepancy is between 32 and 57 mm below the specified height of 2,700 mm. Once allowance is made for the accepted tolerance of plus or minus 20 mm, the extent of the breach is between 12 and 37 mm from the specification in the plans. The departure from the specification does not have a significant impact upon the appearance of the apartment’s interior. In forming this view I do not reject the evidence of the plaintiffs that the discrepancy in height was noticed by them by reference to the lack of space above cupboards and paintings, but that does not alter my view that the breach does not have a significant impact upon the appearance of the interior living space of the apartment. There is an impact but it is not significant. I accept the opinion of Mr Carter that the design of the apartment is such that when you are standing inside the apartment, a person’s eye is drawn naturally to the external balcony areas. Most people would not be able to detect the reduction in the height of the ceiling from 2,700 mm.[89] This conclusion is relevant to the question of proportionality. Mr Dean’s evidence is that it would cost at least $331,188 to raise the height of the ceiling by the average of 48 mm. Unlike in Willshee, the breach in this case has not had a significant impact upon the appearance of the apartment. In my view, the cost of rectification is disproportionate to the benefit to be obtained.
[89] Exhibit P3 p 312 and p 428.
Second, the apartment is located on the second floor of a building which is part of a retirement village. There is an adjoining apartment on the same floor and other apartments on the two floors below. There are elderly people resident in these apartments. The proposed rectification works are expected to take between five weeks and two months. Of course, it is a matter of notoriety that building works frequently take longer than anticipated. The works would generate noise and dust, tradespeople coming and going through the building, the removal of substantial waste material and the transport into the apartment of new building materials. The work generating the most noise would be demolition of the existing ceiling, the cutting of the steel work, the drilling to create the supporting column between the party wall with the adjoining apartment and the reinstallation of the balcony windows. While this noise may be transient, I accept that there will be noise while building work is being performed which will be noticeable to residents in the immediate vicinity and which will detract from their peace, comfort and amenity. The works may involve the use of a crane outside the building and perhaps a chute from the plaintiffs’ balcony to the ground. Building waste and materials may be conveyed to and from the building over the top of the courtyards of the ground floor apartments. I am satisfied that this could breach the contractual obligations the defendants owe to their residents, which includes a right on the part of residents to use their apartment without interference by the defendants except, inter alia, to carry out repairs and maintenance;[90] and an obligation on the defendants not to interfere with the reasonable peace, comfort or privacy of the residents,[91] and to take all reasonable steps to enforce the obligations of other residents not to interfere with the reasonable peace, comfort or privacy of the residents.
[90] Exhibit P1, Clause 1.7.
[91] Exhibit P1, Schedule 4.
Third, the rectification works require the cutting of the steel roof beams. This creates a fire risk. Mr Hayden considers that the risk is manageable with the use of fire blankets such that there is not a level of unacceptable risk in performing the work. To say that the risk is manageable, however, is not to say that it can be eliminated. Mr Whelan is sceptical on this matter. I prefer the evidence of Mr Whelan that the risk of fire due to the combustible materials present in the roof cannot be eliminated by the use of fire blankets when cutting and welding steel beams.[92] Mr Hayden was unfamiliar with any of the hot work requirements of AS1674.1-1997.[93] I consider this undermined the strength of his opinion on this topic. Further, while Mr Hayden considered the fire risk manageable, the damage that could result if the risk eventuated is a significant consideration in deciding whether the rectification works are unreasonable. It must be borne in mind that the building, to all intents and purposes, consists of the residence of retired persons. A fire risk is a risk not only to property but to the persons occupying that property. In assessing the question of proportionality, it is relevant that if this work was to cause a fire, the result could be catastrophic to persons and property. In my view, a precautionary approach should be adopted. Given my view that notwithstanding the breach the ceiling is still substantially in accordance with the contract, incurring the risk of a catastrophic fire is disproportionate to the benefit to be obtained.
[92] Transcript 1002.
[93] Exhibit D39.
Fourth, the nature of the defect in this case is readily distinguishable from the defects considered in Unique Building where the building encroached onto an adjoining property, doors could not be used, a step was at an unsafe height, cars could not use a garage and a shower could not be installed. Neither is the defect comparable to Willshee’s case where, while the comparison is closer, this is not a case, as in Willshee, where the inferior limestone cladding had deteriorated rapidly necessitating significant remedial work. As the discrepancy in the ceiling height does not have a significant impact on the appearance of the interior of the apartment, I consider the defendant’s breach of contract is in that sense “technical”. I accept there is a loss of amenity to the plaintiffs but the loss is small and, as I have said, the impact is not significant.
Fifth, apart from the disproportion between the detriment rectifying the ceiling height would cause, and the benefit it would confer, I consider that it is undesirable the Court should make orders requiring the work to be undertaken as this would require orders in the nature of a mandatory injunction necessitating the continued supervision of the works by the Court. I consider that is undesirable. It could lead to further applications being made to the court during the course of the remediation works if issues or disputes arose in relation to the conduct of the plaintiffs or their contractors, in undertaking such work on site. It might also occasion hardship to the defendants by placing them in breach of the agreements they have made with existing residents in terms of the residents’ entitlement to quiet possession.[94]
[94] PSI @ Mawson Lakes Pty Ltd v Land Management Corporation [2006] SASC 185 at [42]; Patrick Stevedores v Maritime Union of Australia [1998] HCA 30 at [65] – [66] and [77] – [80], (1998) 195 CLR 1 at 41 – 43 and 46 – 47.
I accept the evidence of the plaintiffs that they want to undertake the rectification of the ceiling height. I accept that if the Court made orders requiring the rectification work to be undertaken the plaintiffs would do so. But for the reasons I have given, it would be unreasonable. It follows that they are not entitled to damages assessed on the basis of the costs of rectification. Accordingly, the plaintiffs are not entitled to damages for any consequential loss such as relocation costs.
Given the conclusion that this is one of the fairly exceptional cases that falls within the qualification to the rule in Bellgrove, I turn to the basis for assessing damages for breach of contract. In my view, the appropriate basis for the primary award is damages for disappointment and loss of amenity in accordance with the approach in Ruxley Electronics and Construction Ltd v Forsyth.[95]I accept that in terms of amenity and aesthetic satisfaction the plaintiffs have lost something. The basis for an award to compensate for such an intangible loss is necessarily problematic and, to a degree, subjective. In Ruxley the court awarded £2,500 in 1993. In Farley v Skinner[96] an award of damages of £10,000 was made in 1999 for discomfort and loss of amenity in a somewhat different case. In Farley a surveyor was sued for negligent advice in advising a prospective purchaser of a property that it was unlikely the property would suffer greatly from aircraft noise. This proved not to be the case.
[95] [1995] 3 All ER 268.
[96] [2001] UKHL 49.
Doing the best I can, allowing for changes in the value of money and exchange rates,[97] and endeavouring to fairly compensate the plaintiffs for their loss, I would award them $30,000 for disappointment and loss of amenity.
[97] £10,000 in 1999 now would be worth £15,900. At an exchange rate of £1 sterling equals AU$2.06 that equates to $32,634.18.
Damages for premature payment
The plaintiffs are also entitled to an award of damages by way of interest on the sums of $500,000 and $480,000 that were paid prematurely as the event conditioning the obligation to pay, namely, handover of the completed shell, had not occurred when those payments were made. Necessarily this conclusion involves a rejection of the defendants’ claim for interest owing for late payments pursuant to the contract. There is no entitlement to damages in respect of the payment of the further sum of $457,120 as the plaintiffs volunteered this payment without any demand by the defendants. With respect to the payments of $500,000 and $480,000, for the reasons discussed earlier, the liability of the defendants to pay the plaintiffs’ damages is limited to a lump sum representing the interest on each payment from the time they were made to the date the plaintiffs took up residency on 1 October 2011.
On the sum of $500,000, paid on 29 September 2010, I would award a lump sum by way of interest to 1 October 2011 in the amount of $30,676.85. On the sum of $480,000, paid on 26 July 2011, I would award a lump sum by way of interest to 1 October 2011 in the amount of $5,535.39.
Damages following from the determination of Mr Walsh QC
In addition I consider that the plaintiffs are entitled to an award of damages to reflect the terms of the expert determination[98] made by Mr Walsh QC. Mr Walsh found for the plaintiffs in an amount of $19,942.45,[99] being the cost to rectify the breach in relation to set back of the internal doorframes, and an amount of $445.50[100] being the cost to replace the missing window seals.
[98] Exhibit P27.
[99] $18,129.50 plus GST.
[100] $405 plus GST.
From these figures must be deducted the sum of $6,092.51 representing the amount of variations found by Mr Walsh[101] by way of set-off.
[101] $5,538.65 plus GST.
I note Mr Walsh found that it was possible to undertake the rectification works in relation to the doorframes and that in all the circumstances it is reasonable and practicable that the defect be rectified. However, the extent to which such rectification works might disrupt the comfort and convenience of the other residents of the retirement village was not explored in evidence before me. I am unclear whether it was considered by Mr Walsh in reaching his conclusion that the rectification works were reasonable and practicable. Certainly he does not refer to it, except perhaps obliquely when he observed that it is the plaintiffs who would be most inconvenienced by the work. In the circumstances I am prepared to make an award on the basis of those costs but I am not prepared to make any orders requiring the defendants to permit the works to be undertaken. If the plaintiffs wish to undertake the rectification works it will be a matter for the defendants whether they permit this to occur. I am not prepared to make any orders requiring them to permit the works to occur for the reasons referred to earlier requiring the supervision by the Court of the works, uncertainty as to the scope and duration of the work, and the inconvenience and discomfort it might occasion other residents, raising the risk of the defendants being in breach of their obligations to them.
Fire inspection fee
The plaintiffs claim reimbursement of the amount of $539 charged to them for a fire inspection fee incurred by the defendants as a result of the Metropolitan Fire Service having to attend twice to complete an inspection which was unable to be concluded when the MFS first attended because the plaintiffs’ apartment was not yet complete. The reason the apartment was not complete at the time of the first inspection was that the plaintiffs had been locked out by the defendants for some months over the dispute in relation to the payments due on the completion of the shell. As I have found, the plaintiffs were not contractually obliged to make those payments at the time. Accordingly, the defendants were not entitled to lock them out. It follows that the need for the MFS to return to complete the inspection was the fault of the defendants. The plaintiffs are entitled to an award of damages that reimburses them for the fee charged in the sum of $539.
Total damages award
Accordingly, I would award damages as follows:
Loss of amenity:  $30,000.00
Interest on the premature payment of $500,000:      $30,676.85
Interest on the premature payment of $480,000:      $5,535.39
Costs of rectifying doorframes:  $19,942.45
Costs of window seals:  $445.50
Fire Inspection fee:  $539.00
Subtotal:  $87,139.19
Less costs of variations:  $6,092.51
TOTAL:  $81,046.68
Conclusion
The plaintiffs’ claim succeeds. I award the sum of $81,046.98 by way of damages after allowing the defendants’ entitlement to a setoff of $6,092.51 for the costs of variation.
Annexure 1