Tincknell v Duthy Homes Pty Ltd; Duthy Homes Pty Ltd v Tincknell
[2020] SASCFC 24
•17 April 2020
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
TINCKNELL & ANOR v DUTHY HOMES PTY LTD & ANOR; DUTHY HOMES PTY LTD & ANOR v TINCKNELL & ANOR
[2020] SASCFC 24
Judgment of The Full Court
(The Honourable Justice Peek, The Honourable Justice Parker and The Honourable Justice Doyle)
17 April 2020
APPEAL AND NEW TRIAL - APPEAL - GENERAL PRINCIPLES - INTERFERENCE WITH DISCRETION OF COURT BELOW
CONTRACTS - BUILDING, ENGINEERING AND RELATED CONTRACTS - PERFORMANCE OF WORK - REMEDIES FOR BREACH OF CONTRACT - DAMAGES
TRADE AND COMMERCE - COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION - CONSUMER PROTECTION - MISLEADING OR DECEPTIVE CONDUCT OR FALSE REPRESENTATIONS
APPEAL AND NEW TRIAL - APPEAL - GENERAL PRINCIPLES - INTERFERENCE WITH DISCRETION OF COURT BELOW - PARTICULAR CASES - OTHER MATTERS - COSTS
Appeal against a decision of a Judge of the District Court concerning the construction of a residential home at Mannum. The contract price of the house was $2.3 Million.
The Builder commenced proceedings against the Owners seeking payment of the final progress claim. The Owners cross-claimed claiming that the Builder was in breach of contract and statutory warranties. They sought the cost of remedial works, as well as damages for pain and suffering, delay, and breach of the Trade Practices Act. They sought damages against the Builder’s director, in his personal capacity, for negligence and as an accessory to the Builder’s breach of the Trade Practices Act. They asserted that the works were not practically complete.
The Judge found that the house was practically complete on 26 February 2013. The Judge made remedial orders where she found it appropriate and where remedial orders were not appropriate, her Honour awarded the Owners compensation. Her Honour found that certain rectification costs claimed by the Owners were unreasonable and on that basis the Owners were not entitled to damages for breach of contract or breach of statutory warranty. The Judge dismissed the Owners’ claim for delay damages, pain and suffering and breaches of the Trade Practices Act. The Judge awarded the Owners the sum of $32,106.07 in back charges and dismissed the remainder of the Owner’s claims for back charges. The Judge held that the Builder was entitled to the final progress claim, plus the difference between the ‘float’ for variations, less those items where a remedial work order was inappropriate. The Judge awarded the Builder the sum of $173,049.41 plus interest. The Builder was awarded 60 per cent of its costs on a party/party basis.
On appeal, the Owners contend that the Judge erred, inter alia, by:
1. dismissing the claims for defective waterproofing, termite protection and tiling on the external balcony;
2. dismissing the claims for delay damages and damages for breach of the Trade Practices Act;
3. finding that the works had reached practical completion on 26 February 2013;
4. finding that the Builder be permitted to carry out remedial work in respect of the hot water system in accordance with the recommendations of the Builder’s expert rather than the Owners’ expert; and
5. dismissing the claims for back charges in relation to pre-cast concrete panels, engineering fees and Prime Cost items.
The Builder seeks permission to appeal against the costs orders made by the Judge. The Builder asserts that the award of costs was unreasonable and unjust and the Judge should not have departed from the ordinary rule that the successful party is entitled to the costs of the proceedings. Both appeals were heard together.
Held Parker J (with Peek and Doyle JJ agreeing):
1. The risk of water damage was insubstantial. The proposed remedial works would not constitute a reasonable response to the deficiency in the waterproofing. The Judge did not err in dismissing the claim for defective waterproofing.
2. Termite protection has been applied, albeit not to the full extent required by the contract, there is no evidence of termite presence and the risk can be managed by appropriate inspections. The Judge was correct to conclude that there is a lack of proportionality between the remedial work and the benefits that would be gained.
3. The Judge correctly found that there was insufficient evidence to establish that the tiling on the first-floor balcony had not been carried out in accordance with the Owners’ instructions or that the balcony tiles had been laid without the appropriate fall.
4. The Owners’ failure to move into the house after practical completion was the reason why the Mannum holiday home was not sold and the proceeds invested. The Judge did not err in rejecting the Owners’ claim for delay damages.
5. It has not been established that the length of the piping loops exceeds 60 meters. Upon the piping being insulated as recommended by the Builder’s expert, it may be inferred that the marginal difference in energy costs should be further reduced. The Judge did not err in ordering the plumbing work be rectified in accordance with the recommendations of the Builder’s expert.
6. The Judge did not err in finding that practical completion occurred on 26 February 2013. The evidence indicates that the lack of hot water to the house could have been resolved in February 2013 if that defect had been included in the lists of defects.
7. Upon the Owners assuming responsibility for meeting the cost of the pre-cast panels, the Builder ceased to be entitled to the allowance of the 10% profit and overheads. The Owners are entitled to a back charge of $20,000 against the amount payable to the Builder.
8. Pursuant to the contract the Builder accepted the liability for additional engineering fees. The Owners are entitled to a back charge of $30,940.80 against the amount payable to the Builder.
9. The contract entitles the Owners to receive, as a credit, the Builder’s profit on a prime cost item that it did not supply. The Owners are entitled to a back charge of $31,614 against the amount payable to the Builder.
10. Whilst there were clearly problems with some of the work performed by the Builder, the evidence is insufficient to establish that the representation as to the skill and expertise of the Builder was actually misleading or deceptive at the time it was made.
11. There will be a reduction in the award made by the Judge to the Builder from $173.049.41 to $90,494.61.
12. The cost order made by the Judge is varied, such that the Owners are to pay 50% of the costs incurred by the Builder on a party/party basis.
Trade Practices Act 1975 (Cth) s 52; Building Work Contractors Act 1995 (SA); Supreme Court Civil Rules 2006 (SA), referred to.
Bellgrove v Eldridge (1954) 90 CLR 613; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; Stone v Chappel (2017) 128 SASR 165, applied.
Badge Construction Pty Ltd v Penbury Coast Pty Ltd [1999] SASC 6; BHP Billiton v Parker (2012) 113 SASR 206; Built Environs Pty Ltd v Tali Engineering Pty Ltd [2013] SASC 84; Chan Huan Kei v Hong Kong Construction (Hong Kong) Ltd [2014] HKEC 590; Hadley v Baxendale (1854) 9 Ex 341; Hutchinson v Ellis [2010] SASCFC 71; Kavanagh v Blissett [2001] NSWCA 79; Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd (1970) 69 LGR 1; Rasch Nominees Pty Ltd v Barthomaeus [2013] SASCFC 105; Stubing v Halling [2012] SASCFC 123; Wheeler v Ecroplot Pty Ltd [2010] NSWCA 61, considered.
TINCKNELL & ANOR v DUTHY HOMES PTY LTD & ANOR; DUTHY HOMES PTY LTD & ANOR v TINCKNELL & ANOR
[2020] SASCFC 24Full Court: Peek, Parker and Doyle JJ
PEEK J: I would allow the appeal to the extent indicated in the orders proposed by Parker J. I agree with his Honour’s reasons.
PARKER J: Beth Terise Tincknell, as executrix for the late Michael Stuart Tincknell and in her own capacity (together, the Owners), appeal from orders delivered by a judge of the District Court on 1 December 2017 in proceedings between them and Duthy Homes Pty Ltd (the Builder).
The Owners and the Builder entered into a contract for the construction of a very large house over three levels at 9 River Lane, Mannum (the Contract). The contract price was $2.3 Million.
The Builder instituted proceedings for recovery of the final progress payment of $271,434.65, payment in respect of a number of variations to the Contract made by the Owners and return of a bank guarantee. The Builder also sought remedial work orders in respect of defective work such that it would be entitled to the whole of the unpaid contract sum once the defects were rectified.
The Owners denied liability and pursued a cross-claim. The principal of the Builder, Mr Chris Duthy, was joined as a defendant to the cross-claim. The Owners alleged that the Builder had breached the Contract and also breached statutory duties. They sought compensation for allegedly defective work by the Builder and also damages for delay, pain and suffering and breaches of the Trade Practices Act 1975 (Cth) (the TPA). They sought damages against Mr Duthy in his personal capacity for breach of his duties of care as supervisor for the performance of the Contract and as an accessory to breaches of the TPA. The Owners sought damages in the order of $2 Million, of which about $1 Million related to the delay claim. They also claimed credit against any sum owed to the Builder for work they asserted was not done and for expenses they incurred.
The Judge found that the house was practically complete on 26 February 2013. Her Honour found that the Builder was entitled to a payment of $173,049.41 but also ordered that it rectify certain defective work. In some instances, where it was not appropriate to order rectification, the Builder was ordered to pay compensation. Her Honour dismissed the Owners’ claim for damages for delay, pain and suffering and breaches of the TPA.
By way of their Second Notice of Appeal, the Owners complain of the following orders made by the Judge:
1Judgment for the Builder in the sum of $167,437.58.
2Dismissal of the Owners’ claims in respect of defects in the waterproofing, termite protection, cracking to the garage floor, tile placement on the external stairs, the ceiling exhaust system, colour and pattern of the tiles on the first and second floor balconies, water pooling on the external balconies, paving to the front of the house, the valley gutters and internal stairs.
3Dismissal of the Owners’ claims for delay damages, damages for pain and suffering and breach of the TPA.
4Dismissal of the Owners’ claims for back charges in relation to legal advice, grated sumps to rear patio core holes, concrete panels, reworking of the engineering designs, Prime Cost items, tiling credits and work done concerning gas leaks.
5The orders permitting the Builder to carry out remedial work in relation to the hot water system, box gutters, downlights and the work identified by Mr Trenorden’s determination; and
6The order allowing the Builder to retain the “float” of $4,380.10.
It should be noted that a number of other findings made by the Judge adversely to the Owners have not been appealed. In addition, a number of the matters encompassed by the grounds listed above were not pursued on appeal.
The Owners seek an order for “[a] balanced judgment for the Appellants for a sum to be determined once the Court has resolved each of the grounds of appeal”. They also seek that the respondents pay the Owners’ costs of the appeal and at first instance.
The Builder has sought permission to appeal against the costs orders made by the Judge. The Builder complains that the award of costs was unreasonable and unjust and the Judge should not have departed from the ordinary rule that the successful party is entitled to the costs of the proceedings. The substantive appeal and the costs appeal were heard together.
Background
The appellants/Owners, Mr and Mrs Tincknell, own land at 9 River Lane, Mannum.[1] The first respondent/Builder is a building company. The second respondent, Mr Chris Duthy, is the director of the Builder.
[1] Mr Tincknell passed away after the conclusion of the trial but before the appeal was heard.
The house comprises three floors facing the banks of the Murray River. The ground floor comprises a garage, rainwater tank holding area, bathroom and study, lift well and an entrance foyer. The first floor comprises four separate units, each containing a bedroom/living area, kitchen and ensuite. The second floor comprises the main bedroom, ensuite, meal area, living room, kitchen, formal lounge bar area, storeroom, laundry and bathroom and large outdoor patio area.
At the time of entering into the Contract, the Owners lived in a house they owned at Dernancourt. They also owned a holiday home at 84 River Lane, Mannum. The Owners intended to reside in the newly built home at 9 River Lane upon its completion. They contend that they intended to sell both their Dernancourt house and the holiday home and invest the net proceeds of those sales. By the time the building works commenced, the Owners were living permanently at the holiday home, i.e. very close to the building site.
Prior to engaging the Builder, Mr Tincknell engaged Artec Building Designers (Artec) and engineers Trevor John & Associates (the engineers) to draw up preliminary designs and plans. These designs and plans were approved by the local council and provided to Mr Duthy for tender.
In March 2010, Mr Duthy provided a quote to the Owners together with the Builder’s specifications. Mr Tincknell accepted the quote and provided a second version of the specifications incorporating his handwritten amendments. Mr Duthy later provided Mr Tincknell with a third version of the Builder’s specifications dated 30 August 2010 which incorporated only those amendments he agreed to.
The Owners entered into a preliminary works contract with Mr Duthy in his personal capacity in July 2010. The preliminary contract provided for the commencement of earth works. The work performed under that contract is not the subject of dispute between the parties.
The Owners and the Builder entered into the Contract on 7 October 2010. The Contract consists of the Housing Industry Association (HIA) Building Specification, the HIA Building Schedule and the Builder’s Building Specification dated 30 August 2010.
The contract price included the sum of $38,132 as a ‘float’ to provide for future variations to the works.[2] At trial, the Builder accepted that its claim for variations against the Owners was confined to the sum of $33,301.90. An issue remained as to which party was entitled to the balance of the float.
[2] “The works” is defined at cl 1.1.11 of the Contract as “the construction works shown in the contract documents”.
Under the Contract, the Owners were entitled to a bank guarantee provided by the Builder in the amount of $115,000. The bank guarantee was intended to secure the Builder’s proper performance of the Contract. The bank guarantee was to remain in place for a 12 months defect period following the date of practical completion as defined by the Contract. A judge of this Court stayed the return of the Guarantee to the Builder pending the outcome of this appeal.
The Contract provided for the building works to commence on 5 July 2010 and be completed by 29 September 2011. The Owners granted the Builder an extension of time to 20 October 2011.
Mr Tincknell had previously owned a large and successful building company before taking early retirement due to ill health. He was frequently on site and closely observed the building works as they proceeded. There was regular written communication between Mr Tincknell and the Builder as well as 33 formal site meetings.
On 18 December 2012, the Builder issued the last progress claim to the Owners. On 20 December 2012 Mr Tincknell and Mr Duthy attended the house to inspect the works. The Builder asserted that the building works had reached practical completion. The Owners asserted, and continued to assert at trial, that the building works are not practically complete. Mr Tincknell provided Mr Duthy with a list of defects on 7 January 2013.
On 8 February 2013, the Owners served the Builder with a “Notice to Remedy Breach” enclosing a handwritten list of defects (the February 2013 defects list). Following receipt of that defects list the Builders undertook certain remedial works.
On 26 February 2013, the Builder issued a revised notice of practical completion. On 4 March 2013, the Owners served the Builder with a notice to the effect that due to its failure to remedy, the Owners would engage others to perform that remedial work.
On 27 March 2013, the Owners informed the Builder that they had taken possession of the site and that the Builder was no longer permitted on the site without permission. Police action was threatened if the Builder entered the site. In April 2013, the Owners issued a revised defects list (the April 2013 defect list).
As at the date of judgment in the District Court, the Owners had never lived at the house. It was conceded at trial that no hot water had been available at the house and that this was the only real issue preventing occupation of the house at the date of possession. As at the date of judgment that issue had been resolved and hot water connected.
As previously noted, in April 2013, the Builder commenced proceedings in the District Court seeking payment in the sum of $271,434.65 plus interest. That being the last progress claim less the variations to the contract abandoned by the Builder in the sum of $17,436.37. The Builder sought remedial work orders under the Building Work Contractors Act 1995 (SA), such that the whole of the unpaid contract sum would be payable once the defect work was completed. It also sought the return of its bank guarantee.
In June 2013, the Owners filed a defence and cross-action. The Owners claimed:
·that the Builder was in breach of contract and in breach of statutory warranties in that the building works were defective;
·that the Builder failed to comply with the Notice to Remedy issued pursuant to cl 23.2 of the Contract dated 8 February 2013;
·credit for the differences between the cost of the variations and the $38,132 that had been allowed for possible variations;
·the cost of remedial work. They opposed any remedial work order as they asserted a loss in confidence in the Builder; and
·that the works were not practically complete as at 18 December 2012 and were still not complete.
They also sought damages for pain and suffering, breach by the Builder of the TPA by way of misleading or deceptive conduct, and for the delay in the investment of funds from the sale of their Mannum holiday home. They sought damages against Mr Duthy in his personal capacity for breach of his duties of care as supervisor for the performance of the Contract and as an accessory to the misleading or deceptive conduct of the Builder.
Prior to the trial, certain defect issues were referred for binding expert determination by Mr Brenton Trenorden. Mr Trenorden determined that the Builder was liable to the Owners in the sum of $17,436.37 and $2,010.23 for work which the Builder was not liable but agreed to do. He determined that the works reached practical completion on or about 18 December 2012.
Mr Trenorden expressed the view that “the quality of the building work generally was well above that considered to be the level of finish found broadly in the housing industry in South Australia”. In his view, the Owners were fully engaged in the process on a day-to-day basis. He took the view that the Owners had significant knowledge about the building process and building practices, and that this knowledge and involvement should have enabled them to mitigate losses incurred throughout the building process.
Joint position papers were prepared by all experts and made available to the parties prior to trial. After a trial extending over 24 sitting days, the Judge found that the house was practically complete on 26 February 2013. The Judge made remedial orders where she found it appropriate and where remedial orders were not appropriate, her Honour awarded the Owners compensation. Her Honour found that certain rectification costs claimed by the Owners were unreasonable and that on this basis the Owners were not entitled to damages for breach of contract or breach of statutory warranty.
The Judge dismissed the Owners’ claim for delay damages, pain and suffering and breaches of the TPA. The Judge awarded the Owners the sum of $32,106.07 in back charges and dismissed the remainder of the Owner’s claims for back charges.
The Judge held that the Builder was entitled to the sum of $173,049.41 plus interest. The Builder was entitled to the final progress claim, plus the difference between the ‘float’ for variations, less those items where a remedial work order was inappropriate.
Each of the parties sought orders for costs. The Builder was awarded 60 per cent of its costs on a party/party basis.
Grounds of appeal
The Owners agitate 12 grounds of appeal. On 28 February 2019, the Court made orders directing that Grounds 2, 3, 7, 9, 13, 21 and 22 be dealt with by outlines of submissions and oral argument and that Grounds 12A, 16, 17, 18 and 27 be dealt with by written argument.
The primary grounds
Grounds of Appeal 2, 3, 7, 9 and 22 concern defect claims. The Owners approached those grounds by first, identifying the Owners’ performance interest under the Contract which they contend has been breached by the Builder, secondly, addressing whether the Builder has achieved the contractual objective of the work that had been carried out and, thirdly, by addressing whether cost of rectification is disproportionate to the benefit to be achieved by the repairs or the remedial work.
Ground 2: Waterproofing
Ground 2 asserts that the Judge erred in dismissing the Owners’ claim for defective waterproofing and in finding that there was a lack of proportionality between the proposed rectification work and the benefit it would achieve. Under this Ground the Owners assert that the Judge should have found that they were entitled to damages of $198,913, based on the cost estimate of Mr Sale.[3]
[3] Christopher Sale is a quality surveyor retained by the Owners to provide an opinion on “the amount that it would cost to carry out remedial work so as to bring the work into compliance with the Contract”.
Reasons for judgment
The Judge noted that the waterproofing claim was the focus of much of the evidence at trial. There was a divergence in the opinions expressed by the two experts, Mr Prider[4] and Mr Goldfinch.[5] There was also a dispute as to whether the engineer’s original waterproofing design was achievable.
[4] Philip Prider is an engineer engaged by the Owners to inspect the works and provide a report concerning ‘any and all engineering work that you consider to be defective and incomplete’.
[5] John Goldfinch is an engineer and a director of FMG Engineering, engaged by the Builder to respond to Mr Prider’s report.
The Judge noted that the requirements relevant to waterproofing were incorporated into the original drawings. The original design provided for a high‑density polyethylene (HDPE) sheet to be installed beneath the ground floor footings, to be lapped and taped with heat welded joints up the external walls and for a Nylex strip drain to be installed to collect and dispose of groundwater. Amendments were made to the design after the works commenced. The Owners asserted that the amendments were to accommodate the Builder’s alleged non‑compliance with the installation of the Nylex strip drain.
The Owners contended that the waterproofing was not carried out in accordance with the new design in that there is a weakness at the interface between the Fortecon and HDPE membranes through which water can enter. The Owners contended that the external walls of the house were not adequately waterproofed to prevent uncontrolled water entry. They contended that there has been entry of water into the ground floor through the northern and western sides of the house. The Owners sought the cost of remedial work in the sum of $198,913.
The Builder contended that there were deficiencies in the original design which made amendments necessary. The waterproofing work was done in accordance with the new design. It contended that the waterproofing treatments were extensive and completely done. The Builder also asserted that there had been no entry of water through the walls and there was no independent evidence of any water leaks. An occasion when there was water on the garage floor was unrelated to waterproofing. Minor departures from the design specification were de minimis. The Builder further asserted that waterproofing is guaranteed by Nova, the company that installed the system and provided a warranty for the waterproofing treatment.
The Judge noted that waterproofing the house was beset with difficulties. There were problems with the original design. There were significant difficulties in gaining safe access to enable the work to be carried out. The Builder had proceeded to pour the footings without council approval, there were faults in the work performed by Nova, and most relevantly, the HDPE did not extend over the joint between the footing and upright panel, which in the opinion of both experts, allowed a potential point of water entry.
Her Honour noted Mr Tincknell’s evidence that he had numerous conversations with Mr Duthy about waterproofing. He could not recall specific dates. He asserted that from at least August 2011, Mr Duthy was aware of the issues with the northern side of the property where moisture appeared on the floor of the garage. Mr Tincknell stated in evidence that during a downpour of heavy rain in July 2012, water had entered a bedroom on the north side of the house and into the garage. He stated that he told Mr Duthy the water appeared to be coming from an area under the lower tiled roof.
Mr Tincknell referred the Judge to a number of photographs. Some of those photographs showed water on the ground floor. Mr Tincknell was unable to say exactly when the photographs were taken but asserted that it was before December 2012. Mr Tincknell asserted that the MDF joinery on the northern wall had to be replaced and remedial work was necessary to replace the water damaged kick boards along the western and northern walls.
Mr Tincknell stated that since 18 December 2012 he had observed the entry of water into the garage floor on numerous occasions. Mr Tincknell asserted that he took steps to resolve the problem himself by pouring lean mix concrete across the rear of the property and a “swell” down the northern side on his neighbours’ property. He asserted that there have been no issues since.
Mr Tincknell agreed that as at 15 October 2010, his neighbours on the northern side did not agree to an agricultural drain being placed on their property. He agreed that the revised engineering design for waterproofing were received on 11 March 2011 and that he authorised a contract variation from the Builder in relation to waterproofing on 12 March 2011.
Mr Tincknell conceded that in relation to the progress claim he received on 4 September 2012, waterproofing is noted as 100% complete and paid as charged. He agreed that neither the February 2013 defect list nor the April 2013 defect list made mention of defective waterproofing. Mr Tincknell agreed that it was 11 months after the discussions with Mr Duthy in January/February 2013 before he retained Mr Prider to advise him about waterproofing issues in respect of the house.
Mr Tincknell conceded that the reason for the design change for waterproofing of the southern wall was because of difficulties with the site. He agreed that despite difficulties with waterproofing the southern wall, it had not leaked.
The Judge found it difficult to assess whether the waterproofing work was carried out in accordance with the ultimate design because no one who actually performed the waterproofing work was called to give an account of the work undertaken.
Her Honour noted that Mr Duthy gave evidence of a 10-minute meeting with Mr Tincknell in the garage in mid-December 2012. He recalled water on the garage floor which had come from the rainwater tank room. Mr Duthy asserted that he and Mr Tincknell discussed how the water entry had occurred and what could be done to rectify the problem. Mr Duthy also asserted that at the time of the meeting all the linings, insulation and cornices were installed against the inside of the northern wall and Mr Tincknell was installing cabinets in the garage. Mr Duthy asserted that if there was a free flow of water because of inadequate waterproofing treatment in the joints of precast panel on the northern wall, the wall linings would have shown some water damage.
Mr Duthy contended that the first he learned of complaints regarding the waterproofing treatment was when he saw Mr Prider’s report. In Mr Prider’s opinion, having regard to the waterproofing treatment installed, the risk of there being uncontrolled water entry into the house ‘was not zero’. Mr Prider was of the view that if the remedial work proposed was done, this would still not reduce the risk to zero.
Mr Prider and Mr Goldfinch agreed that despite ongoing difficulties in waterproofing the southern wall, it had not yet leaked. However, Mr Prider noted that this did not mean that water will never enter, as it has along the northern and western sides in the past.
The Builder contended that given that water had not entered since practical completion and given that the Owners had installed mitigation measures to the soil surface adjacent to the western and northern walls, there was no demonstrated need to undertake any further waterproofing. That was particularly the case in light of Nova’s warranty with respect to those walls.
The Judge was not satisfied that the original engineering design for the waterproofing could be achieved. Her Honour was unable to distinguish between the contributions of the Owners and the Builder to the delay in resolving the issues. Her Honour was satisfied however that the Builder had breached the Contract as measured against the ultimate design (at [183]).
The Judge addressed the question of whether any further work was reasonably required. Her Honour considered that the warranty given by Nova did not provide an answer to the issue and reliance on it by the Builder was misconceived.
The Judge noted the Owners’ contention that, consistent with authorities, a finding that remedial work is unreasonable is an exceptional finding in the context of a breach of a building contract, especially in circumstances where the alleged defect concerns significant aspects of construction, such as waterproofing.
The Judge found Mr Tincknell’s evidence of water entering the house to be unconvincing. On the Judge’s assessment of the evidence there had been no entry of water as alleged by Mr Tincknell. Her Honour considered that Mr Tincknell’s decision to have the cabinetry work done, with knowledge that waterproofing work was incomplete or unsatisfactory, was inexplicable. The Judge found that a lack of complaint by Mr Tincknell after practical completion was telling as to the true nature of the Owners’ loss.
Her Honour noted the evidence of Mr Prider, that the risk of uncontrolled water entry into the house was not currently zero, nor would it be if remedial work is carried out. Whilst Mr Goldfinch had accepted that there had been a failure to comply with the design, that fact did not change his opinion that no further work was necessary. In her Honour’s view, this was a case where a departure from the contractual standard did not compromise the functionality or value of the building.
The Judge concluded at [191] that although there had been a breach of the Contract in relation to the issue, there was a lack of proportionality between the cost of the proposed remedial work and the benefit it would achieve. Her Honour therefore dismissed the Owners’ claim at [192] in relation to waterproofing.
The Owners’ submissions
The Owners contend that the decision of Wheeler v Ecroplot Pty Ltd is directly applicable to the waterproofing and termite claims in this case.[6] That case concerned defects to a new domestic building. The owners claimed, inter alia, that the builder failed to construct footings to the depths specified in the engineering drawings. At first instance, the Judge found that the builder had breached the contract by, inter alia, founding the footings too shallow. The Judge held however, that whilst the builder had breached the contract, the breaches were not causally related to the owners’ loss. The Judge found that underpinning was unnecessary and the owners were not entitled to any rectification costs.
[6] [2010] NSWCA 61.
The NSW Court of Appeal upheld the owners’ appeal and the claim for the costs for underpinning was allowed. Macfarlan JA (with Basten and McColl JJA agreeing) noted that the appellant had a home which did not conform to the stability requirements considered appropriate by the consulting engineer or by the relevant Australian Standards. His Honour saw no reason in the circumstances why the cost of underpinning should not be regarded as a reasonable measure. His Honour rejected observations made by the expert called by the builder about the nature of the work and whether there was any utility in the rectification work. His Honour rejected the observation of the expert that “underpinning is a very expensive option that has the potential to be ineffective”. His Honour said that the view of the expert is not a matter that the respondent in that case could rely upon to deny the appellants the benefit of their bargain. The question of whether the costs is disproportionality too high is a matter for the court. His Honour reemphasised the need to meet the performance interest in that particular case. Counsel for the Owners contend that Wheeler is on all fours with their case on waterproofing and termite protection.
Performance interest
Counsel for the Owners referred the Court to relevant contractual terms in respect of the waterproofing issues. Pursuant to cl 2 of the Contract, the Builder was to carry out the works under the Contract “properly and skilfully” and “in accordance with the contract documents”. Pursuant to cl 1.1.1(b), the contract documents included the engineering plans and specifications. Pursuant to cl 6.2, if there was any inconsistency in the contract documents the Contract was to have precedence and the engineering plans and specifications take precedence over all other contractual documents.
Clause 2 of the HIA Building Schedule provided that the engineers’ recommendations as to the footings are to be provided by the Owners as per the engineering drawings and its amendments. Clause 6 of the HIA Building Schedule relates to footings. That clause directs the Builder to the engineers’ details for all footings and slabs, subject to engineer’s site inspection upon completion of the excavation.
Counsel for the Owners referred to the engineers’ drawing as at the time the Contract was signed on 7 October 2010. The drawing notes that “Xypex was to be applied in strict accordance with the manufacturers specifications to provide a watertight structure”. The drawing refers to a strip drain that was intended to sit back from the footings slightly. The day before the footings were to be poured the engineer instructed the Builder not to pour the footings. However, the Builder proceeded to do the work without including the strip drains. The Owners contend that this action ultimately led to the amended engineers’ design.
In respect of the work to the southern side of the house, the Owners contend that the undisputed evidence was that the work required by the original drawings was only done to the first three of seven concrete panels because of access issues. They assert that this was a further instance of non-compliance with the engineering drawings which lead to the amended design.
The original design consisted of a single drawing to apply to all of the perimeter footings. The amended design consisted of three drawings referring to the southern, western and the northern sides of the property. The western side included an agricultural drain.
Counsel for the Owners asserts that in respect of the work on the northern side of the house, the stand-up concrete panels had control joints between the panels. The footing and the lap was meant to come down the face of the stand-up concrete panel over the joint between the footings and the panel and then to a depth of 200mm below that point using an adhesive form of HDPE to ensure a watertight seal. They assert that it was conceded at trial that there was no overlap at the joint. In no instance does the HDPE project over the joint to the minimum depth of 200mm as required by the engineer’s drawings.
The Owners further assert that it was conceded at trial that, in respect of the southern wall, the Builder did not comply with the requirement that the relevant joints be filled from the footing to the ground level with Xypex.
Counsel for the Owners contends that compliance with the engineering instructions in respect of waterproofing was a key functional requirement of the works to be carried out by the Builder.
The Owners contend that the Builder tendered for the project knowing that it was to build a strip drain footing on a site which was built to the boundaries and where there was no guarantee of access from neighbouring properties. They contend that the Builder proceeded to do the work in the way that the Builder wanted to do it. The Owners then had to work out a way to try and protect the property.
Whilst the Builder’s evidence was that the work was done in conformity with the engineer’s design, Mr Duthy ultimately conceded that it was not. Both experts acknowledged that there had not been compliance with the requirements of the engineering design.
Achieving the contractual objective
Counsel for the Owners refer to the evidence of Mr Prider at paragraph 6.19 of his report dated 9 May 2014. In his opinion:
[A]s a result of the waterproofing deficiencies, the owner will be likely to have to accept either the risk of ongoing leakage with the consequential damage to internal fixtures and finishes that would cause, or a reconfiguration of the garage interior to provide access to the interior of the external walls so that sealing from the inside can be attempted.
The experts agree that the appropriate means to remedy the defects is to work from the inside of the garage area. The joinery will need to be removed, the relevant points will need to be accessed and certain gels and additives can be added to remedy the defects.
The Owners challenge her Honour’s findings at [186] that “the lack of complaint by Mr Tincknell after the Builders practical completion, was telling of the true nature of the loss to the Owners”. The Owners contend that the Judge erred in determining the issue of loss based on whether a complaint was made at the date of alleged practical completion. They contend that the matter should have been assessed by reference to the expert opinion.
The Owners contend that the Judge erred in concluding that because Mr Prider gave evidence that the proposed remedial work would not achieve the absolute zero chance of prevention of uncontrolled water entry into the house, that the breach of contract did not “compromise the functionality or value of the building in a way which would be remedied by the suggested work”. They contend that the Judge should have accepted Mr Prider’s evidence that there is a weakness at the interface between the Fortecon membrane and the HDPE membrane and that this is an area through which water could enter.
The Owners contend that the fact that water had not entered the southern walls of the house at the date of trial did not mean that during the lifetime of the house, water will not so enter, as it had previously along the northern and western walls. The Owners further contend that the contract specifications never called for the Builder to construct the house in a way that had zero risk in those express terms.
Mr Goldfinch acknowledged that there would be increased protection if the works had been performed in accordance with the engineers’ design. The Judge concluded at [190] that whilst Mr Goldfinch had accepted that the Builder’s failed to comply with the engineers’ design, that fact did not alter his ultimate position as regard to the need for any further work. The Owners challenge this finding.
The Owners contend that the Judge erred in her consideration of Mr Goldfinch’s evidence at [189] in the following ways:
·An answer given by Mr Goldfinch was not responsive to the question. The question was directed to the HDPE system (namely the use of HDPE in and around the footings) in a manner specified by the engineers. Mr Goldfinch’s response addressed the fact that the HDPE membrane could not fail. The question put was not whether the membrane would fail but whether the absence of the membrane over the footings was a potential point of failure of the system.
·Mr Goldfinch conceded that “[the Owners would] get better protection from the joint if you’ve actually got adhesion of the HDPE sheet on the footing face itself and then the continuous sheet running over the joint”.
The Owner’s contend that the Judge failed to take this concession of a further failure of the Builder in the method of application of the HDPE sheets into account. The Owners contend that this evidence demonstrates that the contractual objective had not been achieved in the work performed.
Whether the cost of repairs is disproportionate to the benefit
The Judge found that the cost of repair was $166,007, being the midway point between the sums provided by the two experts.
Counsel for the Owners contend that the cost of doing the work ($166,000), relative to the cost of the house ($2.3 Million) is not disproportionate, having regard to the significance of the work and the contractual importance that the Owners placed on the work being done properly. In those circumstances, the Owners contend that the Judge should have found that it was reasonable to award damages for the breach by the Builder in failing to complete the works in accordance with the engineers’ design. The Owners contend that the Judge should have found that the Owners were entitled to damages of $198,913 in respect of the claim.
The Builder’s submissions
The Builder contends that Wheeler does not assist the Owners. In every contract dispute the circumstances of that dispute are bespoke in that they depend on the terms of the particular contract between the parties. Wheeler is no more than an application of accepted principles and the outcome is dependent upon the bespoke circumstances. The case is not of general application.
Apart from that submission, counsel for the Builder sought to rely on the written outline in respect of the waterproofing aspect of the appeal. Those submissions are similar to that advanced at trial. The Builder continues to assert that the engineer’s design in relation to the waterproofing treatment to the southern wall was amended due to the deficient design.
The Builder also continues to assert that the concrete cladding and waterproofing was done mostly in accordance with the contract documents. They assert that there are minor departures from the design specification, but which are de minimis, and especially on the criteria of effectiveness and functionality.
The Builder asserts that the work has been effective as there has been no water in sight. The engineers have not observed any waterproofing failure. Water on the garage floor was unrelated to waterproofing. The claim is speculative and unproven. The Builder asserts that the Owners’ criticisms of the waterproofing are unrealistic and pedantic and disingenuous. The waterproofing treatments are extensive and completely done. The Builder contends that the Owners have failed to make any consistent or unequivocal allegations of a specific leak on a specific date and the photograph example of water on the garage floor is a result of the water tanks overflowing. It asserts that the Owners took possession of the house six years ago and there was no independent evidence of any water leaks anywhere.
The Builder asserts that the Owners knew, because they had watched the house being built, the construction methods and the waterproofing. If there is any waterproofing defect it is latent. The work is not defective and no remedial work is necessary. The Builder asserts that the Judge’s application of the principles described is orthodox and well-reasoned.
Consideration
The key question in relation to the issue of waterproofing is whether the Judge erred by dismissing the claim for damages because of her Honour’s conclusion that there was a lack of proportionality between the cost of the proposed remedial work and the benefit that it would achieve. The decision in Wheeler does not assist the Owners as the case was decided on the particular facts.
The question is whether the Judge correctly applied the principles stated by the High Court in Bellgrove v Eldridge.[7] In that case a builder had constructed a house with defective foundations. The issue before the High Court was whether it was appropriate to award damages assessed by reference to the cost of rectification, which would involve the demolition and re‑erection of the house. Alternatively, should damages be assessed in recognition of the cost that would be incurred in rectifying the defective foundations by underpinning. A further alternative was whether damages should be assessed by reference to the diminution in value of the house caused by the defective foundations.
[7] (1954) 90 CLR 613.
The High Court stated the following principles:
·The prima facie position is that where building work is defective and remedial work is required so as to ensure conformity with the specification, the measure of damages will be the cost of the remedial work required to put the plaintiff in the same position as if the contract had been properly performed;
·In some cases that may require demolition of the building and its re‑erection;
·Not only must the work be necessary to conform with the specifications but the performance of that work must also be a reasonable course to adopt;
·Where remedial works are required to conform with the specifications but would not constitute a reasonable response to the deficiency, the true measure of the owner’s loss will be the diminution in value of the building;
·Whether remedial work is necessary and reasonable is a question of fact.
The High Court found in Bellgrove that because the defective foundations were a serious risk to the stability of the house, the demolition and re‑erection of the building was both necessary and reasonable.
The Judge referred to the observation made by the High Court in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd to the effect that the test of “unreasonableness” will only be satisfied by “fairly exceptional circumstances”.[8]
[8] (2009) 236 CLR 272 at [17].
In Stone v Chappel Doyle J (with Kourakis CJ and Hinton J agreeing) suggested that if the unreasonableness qualification is justified in part by reference to the unfairness of the burden to be imposed upon the defendant, it may be that this permits consideration of the nature or quality of the breach by the defendant.[9] Doyle J suggested if the defendant’s conduct was “intentional, sharp, cynical, profit-driven or opportunistic, then it would be more difficult for the defendant to satisfy a court that the burden sought to be imposed upon it was unreasonable”.[10] Doyle J went on to suggest that while there was merit in this approach to the unreasonableness qualification, this approach had not been expressly adopted in the Australian authorities. The matter had been left to be resolved as a question of fact and degree to be decided in light of the circumstances of the individual case.
[9] (2017) 128 SASR 165.
[10] Ibid at [253].
Approaching the matter consistently with those observations, the evidence did not establish that the actions of the Builder were “intentional, sharp, cynical, profit-driven or opportunistic”.
The key finding by the Judge is that the failure to adhere to the Contract had not compromised the functionality or value of the building in a way which would be remedied by the suggested work. The Judge also noted that in the future (which I understand to mean when negotiating the sale of the building) the Owners may be required to disclose the advice of Mr Prider concerning the deficiencies in waterproofing. However, her Honour also observed that Mr Goldfinch had expressed a contrary view in his report. Her Honour concluded that this issue could not determine whether there should be an order to remedy the breach.
The effect of the Judge’s finding was that the evidence did not go beyond establishing that there was a slight risk that water may enter the ground floor of the building at some time in the economic life of the building.
The Owners sought compensation of $198,913 based on the cost of rectification. If these proceedings concerned an average or typical suburban house an award of that size might potentially appear disproportionate and unreasonable unless the shortfall in performance was particularly egregious. However, when assessing unreasonableness, regard must be had to the fact that the contract price was some $2.3 Million. Rather than the quantum of the claim, the more significant consideration in the circumstances of this particular case is the extent of the benefit that would be achieved by undertaking the remedial works sought by the Owners.
While the ground floor has been loosely described as a “garage”, part of this floor comprises a study and entrance foyer and is carpeted and fitted with built-in furniture. Thus, if water was to enter this area, the level of damage is likely to be greater than in the case of a conventional garage.
Notwithstanding that observation, I do not consider that the Judge erred in finding that there is a lack of proportionality between the cost of the proposed remedial work and the benefit that it would bring. The risk of water damage was insubstantial. In those circumstances, the proposed remedial works would not constitute a reasonable response to the deficiency in the waterproofing.
If a different approach had been taken by the Owners to the pleading of their case and the conduct of the trial, it is possible that they may have been entitled to damages based upon the diminution, if any, in the value of the building caused by the deficiency in the waterproofing. However, the case was not conducted on that basis. Thus, there is no evidence to indicate whether there was a diminution in the value of the house caused by the deficiencies in the waterproofing work and, if so, the extent of any such diminution.
I would dismiss Ground 2.
Ground 3: Termite control
Ground 3 asserts that the Judge erred in dismissing the Owners’ claim for termite protection. The Owners contend that the Judge erred in finding that there was no compromise to the functionality or value of the building, that any remedial work would be unreasonable and that there is a lack of proportionality between the proposed remedial works and the benefit to be gained. If Ground 2 (the waterproofing claim) is allowed, the Owners assert that Judge should have found that the Owners were entitled to damages of $90,629 in respect of Ground 3. However, if Ground 2 is not allowed, the Judge should have found that the Owners were entitled to damages of $245,993.
Reasons for judgment
At trial, the Owners contended that the termite treatment as certified by the Builder’s subcontractor, Complete Pest Control, is in breach of Australian Standards AS3660 and AS3600.1 in that it failed to treat the walls of the house below ground level. The Owners contended that the works are defective because a physical termite barrier was not installed by the Builder. They further contended that the Builder failed to address the fact that the walls of the house are in direct contact with the ground and that the joints between the panels provide a clear point of entry for termites.
The Owners contended that only the underfloor was sprayed and that Complete Pest Control installed the termite barrier but not in accordance with the Australian Standards.
The evidence in respect of the claim for termite treatment was as follows. The HIA Building Schedule required the Builder to provide termite treatment in accordance with the HIA Building Specifications and the Australian Standard 3660. The Building Specification provided that termite barrier systems were to be installed in accordance with the Building Code Australia (BCA) “and comply and/or with the AS3660.1”. The HIA Building Specification also stated that “supplementary termite barrier systems shall be installed and comply with AS3660.1.” The Building Schedule provided for termite treatment as “Kordon or equal approved treatments to penetrations only”. The Owners also requested a spray treatment be used in addition to the physical barrier.
The Builder conceded that, during the course of the building works, Mr Tincknell requested that both a spray treatment and a physical barrier be used. Mr Duthy acknowledged that he did not provide a physical barrier system to the northern, western or southern walls of the house in accordance with the Owner’s instructions. He acknowledged that Xypex was not installed in the joints below ground level. He also acknowledged that the perimeter walls were directly in contact with the earth and provided a potential entry point for termites.
The Builder contended that pursuant to the BCA no termite protection was necessary because the house is made of steel and concrete. Accordingly, nothing further needed to be done.
The certificate of installation provided by Complete Pest Control indicated that a chemical barrier was applied to 300m2 of the under-slab area of the house. This work was completed on 13 April 2011. Inspections were recommended at 12 monthly intervals.
Mr Tincknell received the Owner’s Handbook on 18 December 2012. This included installation certificates, certificates of compliance and a termite control warranty certificate issued on 13 April 2011. Mr Tincknell admitted that he did not go through the warranty document.
The Judge noted that the Owners had not arranged for termite inspection within 30 days of taking ownership of the house so as to comply with the warranty. They also did not take advantage of the handover service offered by Complete Pest Control, nor did they fill in and complete the warranty activation form in the Owner’s Handbook. The Owners also did not arrange for Complete Pest Control, or any other company, to do an annual inspection. From the time they took possession, the Owners had not done anything to protect their home from termite attack.
Mr Tincknell said that when he went through the Owner’s Handbook he realised that the termite treatment was not done in accordance with the Builder’s obligations. He accepted that he did not raise the issue of termite protection with Mr Duthy at the inspection of the house in December 2012. However, he had referred to the issue in the February or April 2013 defects list. Mr Tincknell was unable to explain why it had taken over two years to pursue the issue of termite treatment.
Mr Prider opined in his report dated 12 March 2015 that because the wall panel joints below ground level do not incorporate a termite barrier, they do not comply with AS3660.1. A termite resistant sealant needs to be applied so that the joints are protected from risk of entry by termites. The notes to cl 1.5 of AS3660 require that if it is not possible to incorporate termite barriers in accordance with the Standard, “full documentation on the limitations of the barrier system should be provided to the building owner”. In Mr Prider’s opinion, the termite treatment installation certificates and warranty documents supplied to the Owner do not provide sufficient notification of the limitations of the barrier system.
Mr Prider accepted that the BCA prevails over the Australian Standards and that the BCA provided that no termite barrier was necessary. He also agreed that the Australian Standard does not address termite treatment of the vertical joints between the precast panels above the slab on the ground or for vertical wall construction of the type used in this building. Mr Prider further accepted that the chemical barrier was not expressly provided for in the Contract.
Mr Prider considered that to make the joints termite proof it would be necessary to remove internal wall and ceiling linings adjacent to the walls, and also to remove some floor coverings, so as to provide sufficient access. After installing barrier gel, the wall linings, ceilings, skirtings, fixtures, tiles and other finishes would require reinstatement. He recommended that when reinstating the ceilings, hatches be installed to allow for regular inspection.
Mr Goldfinch was critical in his report dated 15 May 2015 of the lack of detail in the building plans dealing with termite protection. He opined that:
[T]he vertical joints between abutting external precast concrete wall panels buried below ground level do not expose the building to any significant risk of concealed termite entry. I say this on the basis that these joints have their gaps filled with a Xypex cementitious grout infill between the hydro-reactive swellable waterproofing strips at the front and back of the joints. In my opinion, the cementitious grout forms an effective seal between the wall panels without any gap exceeding 1mm.
Mr Goldfinch went on to say that “the buried wall panel joints with their cementitious infill within the gaps between abutting panels does comply with the normative requirements of AS3660.1-2000.” However, he conceded that if Xypex had been placed within each of the joints up to ground level there would be a low risk of termite entry through the joint. He also acknowledged that the risk of termite entry would increase if the Xypex concentrate was not placed in the joints as originally depicted in the drawings. He conceded that although the HDPE membrane is not an absolute barrier to prevent termite entry, it would be unlikely that termites would want to attack that membrane because, unlike timber, there is no cellulose material. He contended that the Owners ought to have been aware of the risk of building boundary to boundary, and that special knowledge of itself constitutes sufficient notice of a particular weakness.[11]
[11] I understand the reference to building “boundary to boundary” to refer to the fact that three of the four ground floor walls are built immediately against the earth in the excavated area.
Mr Prider and Mr Goldfinch agreed in their joint report that, inter alia, the house does not require termite barriers to comply with the BCA and that where boundary situations prevent the installation of complying treatments, the owner must be advised of the limitations. They disagreed as to whether the Builder provided sufficient notice of the limitations to the Owners.
Mr Sale estimated the costs of additional work relating to the termite treatment to be $245,993. Mr Fuss estimated the cost to be in the range of $123,000 to $150,000.
The Judge found that pursuant to the BCA the house did not require protection. Her Honour found that whilst the BCA did not apply, the Contract required the Builder to comply with AS3660. Her Honour also found that the Contract provided for Kordon collars and that these had been competently fitted. Complete Pest Control has given a 10-year warranty for the Kordon collars and spray treatment. Her Honour found that there is no evidence of the presence of termites and that termite protection treatment appears to be effective.
The Judge found that the Builder breached the Contract by failing to ensure that Xypex was injected into the wall panel joints where they extend below ground level. However, her Honour was not satisfied that remedial work was necessary to correct the defect. This is because the house is built of concrete and steel and does not require any termite protection (at [241]).
The Judge took into account the view of Mr Goldfinch that termite activity was manageable on the proviso that regular inspections are carried out. Her Honour considered that Mr Prider presented an overly cautious and conservative approach to the issue. His primary concern was whether the Owners had been properly informed of the limitations. Even if the work that he recommended is carried out, termite inspections will still be necessary.
In the Judge’s view, the departures from the Contract had not compromised the functionality or value of the building. Remedial work would be unreasonable given that termite protection has been applied to the house, there are no termites, and, with appropriate inspections, the risk of termites is manageable. In her Honour’s view, there was a lack of proportionality between the remedial works and the benefit to be gained. Accordingly, her Honour dismissed the claim relating to termite protection (at [247]).
The Owners’ submissions
Counsel for the Owners contend that by reason of AS3660 and the way the parties had expressed themselves under the Contract, termite protection was a matter of significance to the Owners. The Judge had found that the Builder breached the Contract in failing to ensure that Xypex was injected into the wall panel joints where they extend below the adjacent ground level. Her Honour found that due to the lack of Xypex filling, the vertical wall panel joints do not prevent concealed termite entry. Her Honour noted the admission of Mr Duthy that this work had not been done. Those findings are not challenged by the Builder on appeal. The Owners contend that this a performance interest under the Contract and the Builder did not meet this contractual objective.
Counsel for the Owners contend that the reasoning underlying the Judge’s assessment about whether the remedial work was reasonable does not provide any basis for her Honour’s finding that the absence of Xypex in the joints does not compromise the functionality or value of the building.
The Owners contend that the Judge’s finding that termite protection was not required under BCA is a misapprehension by her Honour about the process which she was required to undertake. Her Honour’s task was to identify the performance interest under the Contract. The fact that the BCA does not require termite protection did not mean that the Owners were not entitled to the performance interest to have termite protection work completed in accordance with the Standard.
The Owners contend that the Judge placed too much weight on the fact that risk of termite activity was manageable if there were regular inspections carried out by appropriately trained and experienced inspectors.
Counsel for the Owners conceded at the hearing of the appeal that because the structure of the house is constituted of concrete and steel, an attack would not affect the structural integrity of the house. Rather, the concern is that the spaces between the upright panels provide a pathway for the termites to enter and attack the internal fixtures and fittings of the house.
The Owners contend that if the Court allows the appeal in respect of waterproofing, the additional cost of the termite protection work is $66,437. A sum that the Owners submit is reasonably modest. They contend that the lack of adequate termite protection will be a relevant consideration in the context of disclosure to a subsequent purchaser. However, the Judge did not deal with the impact of such a disclosure in her judgment.
The Owners assert that in the circumstances, the Judge’s finding that it was unnecessary or unreasonable to carry out the termite protection work is one that is not supported by evidence. The Judge should have found that it was reasonable to award damages for the breach by the Builder in failing to complete the works in the manner specified by the Owners’ engineers.
The Builder’s submissions
The Builder essentially repeats the arguments presented at trial. It contends that AS3600 does not provide for termite barrier for a house of this construction. The Contract provides for Kordon collars which were supplied and competently fitted. The Owners requested spray treatment which was supplied by the Builder. The termite treatment has been effective as there is no termite in sight. The Kordon Collars and the spray treatment are subject to a ten-year warranty. The Owners have not done what was required to maintain the termite treatment warranties or to manage the risk of termites. They also took possession of the house without claiming a lack of termite treatment as a defect.
The Builder further contends that the Owners have not proved a breach of contract or a relevant standard. They have also not established that the treatment is not effective; that the guarantees from Complete Pest Control do not suffice; that there is a real risk of termite entry; and that it is necessary for anything else to be done. The Builder submits that the rectification work proposed by the Owners is not needed and is unreasonable.
Consideration
The issues arising from the failure to undertake termite treatment measures in accordance with the contract are similar to those relating to the waterproofing issue. I have found that the finding of the Judge that the Owners are not to be compensated for the waterproofing deficiencies should not be disturbed. In light of that finding, the cost of the additional work relating to termite treatment has been estimated by Mr Short to be $245,993. Mr Fuss estimates the cost to be in the range of $123,000 to $150,000.
I am not persuaded that the Judge erred in finding that the Builder had breached the Contract by not installing a termite resistant barrier between those wall panels that were below ground level. While neither the Australian Standards or the BCA required a physical termite barrier because the house was constructed of steel and concrete, the Contract required a barrier system. That is the performance standard that the Builder was required to meet.
The further question is whether the Judge erred in concluding that remedial work would be unreasonable under the Bellgrove v Eldridge test. In reaching that conclusion her Honour was influenced by her finding that Mr Prider adopted an overly cautious and conservative approach to the issue of termite protection. That evidential finding has not been challenged on appeal. However, the appellants do challenge her Honour’s finding that the failure to provide Xypex protection below ground level did not compromise the functionality or value of the building. In reaching that conclusion her Honour took into account the fact that the BCA did not require termite protection. Furthermore, Kordon collars had been supplied and competently fitted and Complete Pest Control had given a 10‑year warranty covering both the Kordon collars and the spray treatment performed beneath the concrete slab. Mr Goldfinch also considered that the risk of termite activity was “manageable” if regular inspections were performed by a competent inspector. An inspection carried out during the course of the trial did not identify any sign of termites but recommended, as had Mr Goldfinch, regular inspections.
I consider that the combination of factors referred to in the previous paragraph provided a proper factual foundation for the Judge to conclude that the proposed remedial work would be unreasonable. Termite protection has been applied, albeit not to the full extent required by the Contract, there was no evidence of termite presence and the risk could be managed by appropriate inspections. In this light, I consider that her Honour correctly concluded that there was a lack of proportionality between the proposed remedial works and the benefits that would be gained.
The failure of Mr Tincknell as an experienced builder to take any of the action required under the warranty provided by Complete Pest Control, and also his two-year delay in taking any action concerning the deficiencies in termite treatment, provide some additional support for the Judge’s conclusion that expensive remedial work was not reasonably required.
I also note that the Owners had neither pleaded nor conducted their case on the basis that the failure to adhere to the terms of the Contract in respect of termite protection had diminished the value of the house. If relief had been sought on that basis, in view of the matters referred to in the previous paragraph there would have been a serious question as to whether the Owners had mitigated their loss.
I would dismiss Ground 3.
Ground 7: First floor tiling
Ground 7 asserts that the Judge erred in finding that there was insufficient evidence to support the Owners’ claim in respect of the tiling on the first floor, which the Owners contend was not carried out in accordance with their instructions. The Owners assert that the Judge failed to have any, or any proper, regard to certain evidence of Mr Tincknell and several exhibits. They assert that the Judge should have found that the Owners were entitled to damages of $29,175.03 in relation to this aspect of their claim.
Reasons for judgment
At trial, the Owners claimed that the first-floor balcony tiles were supposed to be laid in a diamond pattern and in a cappuccino colour, with a terracotta surround. The tiles have been laid in a square pattern and all in terracotta. The Owners sought that the incorrectly laid tiles and those in the wrong colour be removed and replaced. Mr Sale estimated the cost of this work to be $29,175.03. Mr Fuss estimated the cost to be $25,030.
The Judge referred to the evidence of Mr Tincknell. His evidence was that prior to the tiling work, he provided the Builder with a copy of the Artec drawings of the first floor.[12] The drawing included a note in Mr Tincknell’s handwriting indicating the pattern to be used. Namely:
DIAMOND PATTERN TO CENTRE PANEL SIZE
TO BE DETERMINED
ON SITE
CREAM INSERT
TERRACOTTA.
[12] A handwritten note on the document, apparently in Mr Tincknell’s handwriting, records that it was provided to Ms Lewis (an employee of the Builder) at a site meeting on 15 July 2011.
Another version of this document did not contain the words “CREAM INSERT – TERRACOTTA”. The Judge rejected the evidence of Mr Tincknell and found that the version of the document provided to Ms Lewis had not contained those additional words, although this version may later have been given to Mr Duthy after the work was done.
Mr Tincknell gave evidence that he was overseas when the tiling on the first-floor balcony was done. When he returned home and saw the tiling he was horrified. He told the Builder he would accept the mistake but to ensure the second-floor tiling was correct.
A fax from the Builder to Mr Tincknell dated 4 September 2012 confirmed the first-floor balcony tile layout “as discussed” as:
First floor balcony as laid terracotta inserts on diagonal
Second floor to have cream tile inserts as discussed and plan given to Italia tiling.
Patio and rear area to be confirmed.
Mr Tincknell gave evidence that he expressed his concerns with the tiling to the Builder on many occasions. He said that nothing was done about his complaints prior to practical completion.
Mr Duthy asserted that Mr Tincknell was present during the entire tile laying process and made no complaint about the colour of the tiles. Mr Tincknell did not mention the colour or pattern of the tiles at the 20 December 2012 joint inspection. Mr Duthy maintained that the tiles were laid in accordance with Mr Tincknell’s instructions.
Ms Lewis gave evidence that Mr Tincknell had supplied her with a brochure that included a photograph of the tiling at his previous house at Dernancourt. He explained that he wanted the tiles to look exactly as they did in a picture in that brochure, i.e. terracotta outside tiling, a cream coloured border and a terracotta insert laid on the diagonal. There was no note or record made of his instructions. Ms Lewis said that this was how the tiles were laid on the first‑floor balcony.
Ms Lewis accepted that the Artec drawings were received from Mr Tincknell in September 2011 before the tiling work commenced. She used those drawings to give formal instructions to the tiler. Ms Lewis denied that before any work was undertaken on the first floor Mr Tincknell had instructed that cappuccino tiles be laid in the centre of the balcony.
Ms Lewis recalled Mr Duthy telling her that Mr Tincknell told him the first‑floor tiling was incorrect but could not recall when this occurred. She did not recall Mr Duthy relaying a conversation with Mr Tincknell to the effect that whilst the first-floor tiling was incorrect, he was prepared to accept the terracotta tiles and to leave them in place. Ms Lewis was told by Mr Duthy that Mr Tincknell had given him coloured copies of the tiling diagrams on 6 September 2012 and the tiling had not been carried out in accordance with the instructions.
The Judge noted that the Owners’ claim is purely aesthetic but that this did not mean the claim must fail. Her Honour took the view at [406] that if sufficient evidence was provided to establish that the tiles were not laid in accordance with Mr Tincknell’s instructions, she would be minded to make a remedial order. However, her Honour found:
[407] …the instructions at the relevant time show no particular colour for the insert. It is unfortunate that the witnesses were not questioned in more detail about the issue. There was no challenge to Ms Lewis regarding her evidence about Dernancourt, nor was Mr Tincknell cross-examined on the issue. The brochure, said to show the design of the tiling at Dernancourt was not provided nor was there any evidence to show that the tiling differed from Dernancourt. From the evidence I heard, I am unable to decide whether Mr Tincknell was in fact present at the time the tiling on the first floor was being carried out, something which would have been easy to establish. If he was, it would be difficult to accept that he did not speak up about the work that was being done if it did not accord with his instructions. It is relevant that Mr Tincknell did outline his concerns about the pattern and colour of tiling in great detail in the October Site Issues document and the response by the Builder is not what would be expected given the view Mr Duthy took that the tiling was indeed carried out according to instructions. In any event, the details of what went on at the meeting on 12 November 2012 regarding the tiles, was not adequately explored by either party.
Her Honour recorded that she was unable to find that the first-floor balcony tiling was not carried out in accordance with the instructions of Mr Tincknell. Her Honour dismissed the claim (at [409]).
The Owners’ submissions
Counsel for the Owners contend that this ground only requires consideration of the performance requirement of the Contract. This comprises looking at the nature of the instructions given to the Owners in respect of the scope of the works to be carried out by the Builder.
Counsel for the Owners assert that the Judge erred in determining that it was not part of the scope of the works for the tiles to be laid in the configuration that the Owners allege they instructed the Builder. The Owners contend that the Judge erred in finding at [409] that there was insufficient evidence to support their claim. The Owners contend that the Judge erred in her analysis at [407] in the following ways:
1The Judge failed to consider properly the words “Balcony tile configuration. Barossa terracotta and cream inserts/diagonal” that appeared on the instruction given to Ms Lewis on 15 July 2011. They contend that whilst that instruction contemplated there would be further instruction given as to the size of the panel to be laid in a diamond pattern, the size of the panel is not in issue.
2The Judge failed to consider that the Builder did not lead any evidence that it was instructed to use the red terracotta tiles.
3The Judge failed to have any regard to the fact that the second-floor tiling was laid correctly and that there was no logical reason to have different patterns on different floors.
4The Judge failed to give proper weight to events which occurred after the works were done, including the letter of 4 September 2012. The complaints of Mr Tincknell are consistent with his evidence that the work occurred when he was overseas and that it was contrary to his instructions.
5The Judge failed to have any regard to the evidence of Mr Tincknell that he supplied 110m2 of the cappuccino tiles to the site but that the Builder had only used 53.7m2. The size of the order in September 2011 in consistent with the instruction that was given to the Builder prior to the work being carried out.
The Owners contend that the drawing that was the subject of debate at trial did in fact indicate that there would be inserts on a diagonal configuration. In the circumstances, the Judge should have found that the tiles were not laid in accordance with the instructions of the Owners. Her Honour should have found that the Owners were entitled to damages of $29,175.03 in respect of their claim relating to first floor tiling.
The Builder’s submissions
Counsel for the Builder contends that the tiling was done as specified and in accordance with the Owners’ on-site directions and wishes. It asserts that the work is not defective. It contends that Mr Tincknell was regularly on site and, if he was dissatisfied with anything he would raise it. He inspected the tiling work on 20 December 2012 and did not make any complaint. The balcony tiles were not included in the defects lists. The Owners paid the progress claim which included the balcony tile work.
Consideration
Both versions of the annotated Artec plan referred to in paragraphs [141] and [142] contain the words “balcony tile configuration. Barossa terracotta and cream insets/diagonal”. The Judge found that a second version of this document which also included the words “cream inset terracotta” had not been provided to Mr Duthy prior to the tiling work being done.
The photographic evidence shows that the outside portion of the first-floor balcony tiling has been laid in a square pattern, while the tiles in the inner part have been laid diagonally. Apart from two narrow strips of tiles in a light colour (presumably cream), the tiles are in a reddish colour (apparently terracotta). Narrow strips of cream coloured tiles have been laid at the border of the central diagonal area and between the first and second row of tiles at the perimeter of the tiled area.
I do not consider the pattern and colouring shown in the photographic evidence to be inconsistent with the notation “Barossa terracotta and cream insets”. In fact, I consider the preferable reading of the somewhat cryptic instruction to be that the tiles were to be predominantly terracotta with cream insets. That is precisely what was laid. I find the additional reference to “diagonal” in that notation to be inherently ambiguous.
Even if the judge erred in finding that the second version of the annotated Artec plan which also included the words “cream inset terracotta” had not been provided to Mr Duthy before the tiling work was done, I am not persuaded that the additional words would have operated in the manner suggested by the Owners. The words “cream inset terracotta” do not clearly countermand the instruction “balcony tile configuration. Barossa terracotta cream insets/diagonal”. In fact, the addition of those words tends further to reinforce my conclusion that the tiles were laid in accordance with instructions provided.
The Owners contend that the position of Mr Duthy as shareholder, director and supervisor of the Builder, is on all fours with the directors in Kavanagh. In that case, the Full Court determined that the directors were liable for damages for defective work and delay. The Owners rely on the following comments of Brownie AJA where his Honour said:
[23]The appellants say, however, that as a matter of general principle, it is necessary to approach the task of assessing damages under s.82 [of the TPA] in a different way. One should compare the actual position of the respondents with what their position would have been but for the breach of the provisions of s.52, and not by comparing their actual position with what their position would have been but for the breach by [the builder] of its contractual obligations.
[24]There is no doubt that, generally speaking, this is the correct approach: Marks v GIO Australia Holdings Limited (1998) 196 CLR 494. However, this generality is not to be elevated into some absolute rule of law, not justified by the words of the statute and where, as is the case here, the conduct found to have constituted a breach of the provisions of s.52 led the respondents into entering into a contract, it may be that the contract would have produced the very benefit that was the subject of the representation, so that it might be appropriate to assess damages by reference to the contract: Marks at 504.
…
[26]The conduct of the appellants which infringed s.52 consisted of representations that [the builder] would do the work in question in a workmanlike manner, and in a timely manner. The loss or damage suffered by the respondents “by” that breach consisted of the cost of completing the work, and of rectifying the faulty work, $189,676, together with the further sum of $10,640 in respect of the delayed completion of the work. The latter sum represented rent of $190 per week, for 56 weeks: a rent expense incurred by the respondents as the result of the failure of [the builder] to complete the work in a timely manner. That is, in the circumstances of this case, the damages awarded against [the builder] for breach of contract coincided with the damages payable by the appellants, assessed under s.82.
The Builder’ s arguments
The Builder contends that there is no representation relied upon beyond recital C to the Contract. They contend that recital C begets a contract claim and not a TPA claim. A TPA claim is for conduct which has induced the claimant to enter into the contract. It is not a claim for a breach of the contract made by the parties.
The Builder asserts that in any event, the alleged “representation” was reasonably made. Mr Tincknell was impressed by the quality of the Builder’s work that he inspected. Further, the court appointed expert, Mr Trenorden, determined that the quality of the Builder’s work on the house was “well above that considered to be the level of finish found broadly in the housing industry in South Australia”.
Consideration
Recital C to the Contract states:
The builder has represented that it will obtain the requisite licence under the Building Work Contractors Act before commencement of the works and the necessary skill and expertise to carry out the works on the site and the owners have relied upon such representations in entering into this contract.
The accuracy of the recitals is agreed at cl 26.
Section 52 of the TPA (now repealed) mirrors s 18 of the Australian Consumer Law. Section 52 formerly provided:
52 Misleading or deceptive conduct
(1)A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
(2)Nothing in the succeeding provisions of this Division shall be taken as limiting by implication the generality of subsection (1).
It is clear from the decision of the NSW Court of Appeal in Kavanagh that the observation by the Judge that the claim advanced under the TPA was not recognised in law is not correct. However, her Honour specifically questioned counsel as to whether there was any authority dealing with a claim made under the TPA in similar circumstances. She was informed by counsel for the Owners that he had been unable to locate any such authority.
The Owners contend that the Builder represented that it had the expertise to build the particular house on the relevant site. Recital C records that the Owners relied on this representation in deciding to enter the Contract. The Owners submit that the numerous deficiencies make clear that the Builder did not have the expertise necessary to perform the work competently. Thus, the representation is said to be false.
While there was clearly a number of problems with the performance of the Contract, the evidence establishes that Mr Tincknell was impressed by the quality of the work performed by the Builder on previous jobs that Mr Tincknell had inspected. The significance of those inspections is greater than it might ordinarily be because of the fact that Mr Tincknell was himself an experienced builder, and apparently well capable of assessing the competence of the work performed by other builders. Moreover, as the Builder has noted, the independent expert, Mr Trenorden, described the quality of the work performed on the house by the Builder as being well above that ordinarily found in South Australia. The Judge also referred to the apparent high quality of the work observed she at the view.
Whether a representation made in the course of trade and commerce is misleading and deceptive cannot ordinarily be determined by the subjective belief of the person to whom the representation was made. However, in the particular circumstances of this case, Mr Tincknell’s opinion that the Builder had competently performed other work is relevant to the assessment of the accuracy of the representation. That is because of the special knowledge possessed by Mr Tincknell and the fact that he based his opinion on the inspection of other work previously done by the Builder.
While in this case there were clearly problems with some of the work performed by the Builder, I am not persuaded that the evidence is anywhere near sufficient to establish that the representation as to the skill and expertise of the Builder was actually misleading or deceptive at the time it was made. I consider that a more substantial degree of incompetence and lack of capacity to perform the work would need to be demonstrated to prove that the representation as to skill and expertise was misleading or deceptive when it was made. I take that view regardless of whether the representation referred to an existing state of affairs or to future action by the Builder.[27]
[27] In which case the representation would be subject to s 51A of the TPA.
I also note that in Kavanagh, Brownie AJA and Ipp AJA held that the assessment of damages under the TPA would be on the same basis as for a breach of contract. Thus, even if the Owners were to succeed on their claim under the TPA, the damages would not be increased.
I would dismiss Ground 27.
The costs appeal
The Judge awarded the Builder 60 per cent of its costs on a party/party basis. The Builder seeks permission to appeal against that order. It seeks an order that it is entitled to all of its costs on a party/party basis.
The right of appeal provided by s 43(1) of the District Court Act 1991 (SA) is subject to the requirement in s 43(3) that permission be obtained, if required, “according to the rules of the appellate court”. Pursuant to r 288(1)(b) of the Supreme Court Civil Rules 2006 (SA) (the Rules), an appeal to this Court requires permission if the appeal is limited to a question about costs. Accordingly, permission to appeal is required.
The Builder asserts one ground of appeal, namely:
The learned trial Judge erred by unreasonably or unjustly exercising her discretion at [25] of the Reasons in finding that [the first respondent] was entitled to 60% of the District Court action on a party/party basis. The learned Judge failed to have sufficient regard to:
1. The parties’ respective successes in their Claim and Counterclaim in the District Court action, that is to say, the money outcomes in the action;
2. The time spent in the action and during trial on unsuccessful [appellants] Counterclaims (being the most substantial claims);
3. Proper and fair proportionality between the few successful elements of the [appellants’] Counterclaim and the costs order made by the Court;
4. That the [first respondent was] successful overall in the District Court.
The learned Judge ought to have found that the [respondents] were entitled to all of their costs of the action on a party/party basis,
The Court ordered that the costs appeal be dealt with by way of written submission. The parties agree that the issues raised in the appeal are as follows:
1The appropriate order for costs on the judgment.
2As the order was discretionary whether the judge:
2.1 acted upon a wrong principle;
2.2 allowed extraneous or irrelevant matters to guide or affect her;
2.3 mistook the facts; or
2.4 did not take into account some material consideration.
The Owners contend that permission to appeal should be refused and the appeal struck out.
Reasons for judgment on costs
The Judge summarised the principles relevant to the determination of costs issues stated by the Full Court in BHP Billiton v Parker.[28] Her Honour observed that:[29]
· I have an unfettered discretion as to costs, subject to the District Court Civil Rules 2006.
· It will generally be the case that costs follow the event.
· I can award costs on any basis I think appropriate.
(Footnotes omitted)
[28] (2012) 113 SASR 206 at [261].
[29] Duthy Homes Pty Ltd v Tincknell [2018] SADC 30 at [5].
The Judge noted that there were no relevant offers made by either party in relation to their claims.
The Builder asserted that it had been wholly successful in its claim, apart from its claims in relation to variations to the Contract. The latter had been abandoned at trial. Thus, costs should follow the event. It asserted that only a small part of the trial was spent on its claim compared to the Owners. The Owners succeeded on only a small percentage of their claim and set-off. They had claimed to $2 Million whereas their award was less than $100,000.
The Builder relied on Badge Construction Pty Ltd v Penbury Coast Pty Ltd[30] as authority governing the award of costs in construction disputes. Her Honour noted the principles stated by Debelle J:
[11]The overriding principle is that the order for costs is fair and just in all the circumstances. The arbitrator has a broad discretion to ensure such a result. Thus, it will be appropriate when considering what award should be made as to costs to have regard to the conduct of the parties. So, a party may not be entitled to costs if he has advanced an inflated claim or counter-claim with the apparent purpose of frightening the other party by the fear of the costs of proceedings to drop the claim or accept less than the claim: Archital Luxfer Ltd v Henry Boot Construction Ltd [1981] 1 Lloyds Rep. 642.
[12]The reasoning underlying the principles so far as they apply to cases arising out of building contracts are expressed in these terms in Hudson:[31]
“It should be remembered that in building and engineering cases the issue between the parties is almost invariably financial, and that the machinery of the sealed offer is available to protect the position on costs. Though there may be many issues, in legal pleading terms, of claim, set-off, and counterclaim, the parties' eyes will always have been fixed on the final balance owing one way or another. Whoever secures or avoids paying that balance in effect has won. Only in the case of wildly exaggerated claims, or separate and costly issues on which the successful party has failed and which it was wholly unreasonable for him to raise, can there be, it is submitted, any justification for departing from the rule that the party ultimately successful on a final balance of claim and counterclaim should be paid his costs. There are cases in other situations where separate orders for costs on claim and counterclaim are appropriate, but counterclaims on building and engineering contracts arise out of the same transaction and are equitable set-offs, and the basic commercial realities, in the vast majority of cases argue very strongly, it is submitted, for a single award of costs in favour of the party ultimately successful on balance, unless the balance is so small as to justify the view that a party responsible for initiating the litigation and obtaining such a balance can be regarded as having been effectively unsuccessful.”
In this context it is relevant to note that in cases under a building contract, where both the claim and the cross-claim arise under the building contract, the cross-claim constitutes an equitable set-off: Hanak v Green [1958] 2 QB 9 at 25-26 and at 29. That principle will usually have important consequences in respect of costs since, if the cross-claim exceeds the amount of the claim, the claim will be treated as having failed: Hanak v Green (supra) and see also the discussion in Hudson (11th edition) para 8.118.
[13]Given the particular issues which arise when determining costs where both the claim and counter-claim arise out of a building contract and both claim and counter-claim are successful, it might be putting the principle too high to assert that exceptional circumstances are required to justify a departure from the general principles noted above. It is not necessary to decide that issue here. But it can at least be said that there must be good cause for departing from the general principles.
[14]In this case there was a claim and cross-claim or counter-claim. The builder claimed certain items as variations. The building owner cross-claimed for an entirely separate item, namely, the failure of the builder to construct a cross-over, which failure was in breach of the building contract. Since both the claim and the cross-claim arose out of the same building contract, the cross-claim constituted a set-off. In the result, the award substantially favoured the builder. It justified a single costs order in favour of the builder or at least that an order that each party have its costs. If the arbitrator applied settled principles, he would have ordered the building owner to pay the builder's costs on the balance recovered by the builder. The arbitrator should not have made any other order unless there was good reason to depart from that general principle.
[30] [1999] SASC 6 at [11]-[14].
[31] Hudson's Building and Engineering Contracts (10th edition).
The Owners submitted that Badge simply represented one approach to the question of costs. Costs need to be considered in the context of all the facts and circumstances.
The Owners conceded that the Builder was entitled to its costs of the claim, but submitted that the amount should be reduced by 50 per cent because of the variations, which were put in issue by the Builder but not abandoned until trial or until closing address.
The Owners also contended that they should be entitled to party/party costs on the cross-claim, however, it would be appropriate to reduce that amount by 50 per cent to reflect the fact that they were unsuccessful on some of their claim.
The Builder contended that the claim and the cross-claim should not be dealt with as discrete matters as to do so would cause significant issues in taxation.
It is necessary to set out her Honour’s analysis in full:[32]
[32] Duthy Homes Pty Ltd v Tincknell [2018] SADC 30 at [17]-[25].
[17]In Formosa & Anor v Eminent Forms Pty Ltd,[33] Bleby J at [27] accepted that as a general rule, a party who secures a judgement for the balance after arbitration of a series of contested claims and counterclaims, will generally be regarded as the successful party and that generally it may be appropriate for costs to be awarded in his favour, but not necessarily for the full amount which might be expected if there were a single issue in contest.
[18]His Honour said that although the arbitrator in Badge was “obviously influenced by that part of the passage from Hudson,” he did not consider that the passage represented the law in South Australia and that he was comforted in that view by the decision of Hasluck J of the Supreme Court of Western Australia in Miles v Palm Bridge Pty Ltd.[34] His Honour went on to note that the relevant passage was not repeated in the 11th edition of Hudson and that in any event it must be read in the context of what was decided in that case.
[19]While his Honour agreed with Debelle J at [11], he added that the matters to which Debelle J said it was proper to have regard, are not exhaustive. They are merely given by way of example. The error from the passage from the 10th edition of Hudson relied on by the arbitrator is the assertion that only in the circumstances stated, that is, in the case of wildly exaggerated claims, or separate and costly issues on which the successful party has failed and which it was wholly unreasonable for him to raise, can there be any departure from the general rule that the party ultimately successful on the net balance awarded should be paid his costs.
[20]In my view, the Builder is entitled to its costs on the claim on a party and party basis.
[21]In relation to the cross-claim, a good deal of the trial was spent on the issues of whether the contract had been breached as regards waterproofing and protecting the building from termites. In relation to both issues, I found that there had been breaches by the Builder but that there was a lack of proportionality between the cost of the proposed remedial work and the benefit that would be achieved. In relation to the claims concerning the supply of hot and cold water to the house, the Builder acknowledged at trial that certain work should be undertaken and agreed the plumber who installed the system should attend to remedy the defects. I ordered the work as recommended by the Builder’s expert be undertaken.
[22]While I found there was simply no basis for a number of the complaints and claims made, and questioned the genuineness of claims made as regards drainage and the layout of the front pavers, there were in a number of respects complaints made by the Owners that were justified in the sense that the building was defective. On the one hand, I accept Mr Jenner’s submission that the Owners had the support of experts with respect to a number of their claims, however, as Mr Ross-Smith pointed out, those claims ultimately failed.
[23]While in my view the counter-claim was exaggerated in some respects and a great deal of time was taken up by issues that should never have been raised, there should be some adjustment in relation to the costs on account of the merit in a proportion of the Owners’ claims.
[24]I am mindful of the concerns raised by [the Builder] of making any taxation of costs a more laboured and complicated process than necessary.
[25]In all of the circumstances a just award of costs is for the Builder to receive a portion of its costs of the whole action to arrive at a less complicated result. Arriving at an appropriate percentage is difficult however doing the best I can, I find that the Builder is entitled to 60% of its costs of the District Court action on party/party basis, to be taxed or agreed.
[33] [2005] SASC 35.
[34] [2001] WASC 42.
The Builder’s submissions
The Builder asserts that the Judge’s award of costs was unreasonable and unjust. Her Honour should not have departed from the ordinary rule as to costs, being that costs follow the event and that the successful party in litigation receives their costs. The Builder contends that it should not have been awarded merely 60 per cent of its costs.
The Builder submits that the Judge should have applied the four principles set out in Badge, namely:
(1) where (as it was in the case at bar) the trial judgment substantially favoured the Builder;
(2) there should be a single costs order (the learned trial judge here so ordering);
(3) the party ultimately successful on a final balance of claim and counterclaim should be paid its costs (“the general principle”);
(4) there has to be either good cause or exceptional circumstances to justify a departure from the general principle.
The Builder asserts that Badge articulates the principles to be applied in determining an award of costs in construction disputes. It refers to a number of cases which have followed that decision.
The Builder also contends that it succeeded in its claim less variations (which it had earlier abandoned) and only a small part of the trial was spent on the Builder’s claim. In contrast, the Owners succeeded on only a small percentage of their claim and set offs (of the $1,923,802.63 claimed, the Owners were awarded only $68,315.07) and an overwhelming proportion of time and the expense of the trial was spent on those claims.
The Builder contends that the claims by the Owners were inflated and wildly exaggerated and obviously tactical. Those claims were predominantly rejected by the Court. The Builder also asserts that the costs order does not fairly reflect the conduct of the trial and the outcomes of the issues determined.
The Builder does not assert that the Judge has applied the wrong principles, rather it asserts that her Honour has erred in her application of those principles. The exercise of the Judge’s discretion is said to be flawed.
The Builder asserts that the costs order demonstrates that the Judge:
·Failed to apply the general principle; and
·Failed to give sufficient weight to the considerations identified above.
The result suggests that the Judge took into account irrelevant matters.
The Builder’s solicitor/client costs of the proceedings are $598,000 inclusive of GST. The Builder contends that the diminution by 40 per cent of those party/party costs is a significant consequence to a party who succeeded overall and succeeded on most issues and who recovered a significant portion of the final progress claim. It further contends that this consequence justifies a grant of permission. To leave the decision unaltered would perpetuate an injustice.
The Builder further contends that the appeal is an opportunity for the Full Court to restate the principles in Badge and to review the extent to which trial courts should attempt a percentage approach to costs orders when one of the parties is overwhelmingly successful.
The Owners’ submissions
The Owners contend that the Judge was entitled to exercise her discretion in the way she did and that no error of principle has been identified. They assert that the order does not give rise to any injustice.
The Owners rely on the decisions of Stanley J in Rasch Nominees Pty Ltd v Barthomaeus[35] and Gray J in Hutchinson v Ellis.[36] They contend that leave to appeal should be refused. They submit that the Notice of Appeal fails to raise any important question of principle requiring resolution. Rather, the appeal involves the application of settled principles concerning the exercise of the costs discretion to the facts of the case.
[35] [2013] SASCFC 105 at [52] and [55]-[61] (with Gray and Sulan JJ agreeing).
[36] [2010] SASCFC 71 at [17] (with Doyle CJ agreeing).
The Owners assert that the decision is not one attended by sufficient doubt to warrant a grant of permission, nor has the Builder demonstrated that it is sufficiently arguable that the Judge fell into error.
The Owners contend that the quantum of costs expended by the Builder does not of itself provide a basis for the grant of leave. They submit that the precise nature of the injustice is not articulated.
The Owners contend that the Builder has failed to explain the submission that it is timely for the principles in Badge to be restated. They assert that there is no suggestion that Badge has been misunderstood or been subject to differing interpretations in the lower courts.
The Owners further contend that this is not an appropriate case to review the issue of a percentage approach to costs, as it would require the Court to form a view about “overwhelming success” when this was clearly not the view of the Judge as evidenced by her Honour’s findings at [21] and [22] of the costs decision. Those findings have not been challenged on appeal. The Owners contend that this would require the Court to have a detailed understanding of how the case was run at first instance and the timing and extent of the Builder’s submissions during the trial.
The Owners contend that this is not a case where:
·A clear error has been shown of the nature identified in House v The King; or
·There is an identifiable error in the exercise of discretion; or
·The exercise of discretion was so unreasonable that it requires interference from this Court.
The Owners contend that the decisions referred to by the Builder do not establish binding principles for the award of costs in construction disputes. They refer to the decision of Racsh Nominees, where Stanley J said at [60] that “even if guiding rules of principles and practice have developed, the discretion remains unfettered and each case must be decided on its own facts”. The Owners also refer to the decision of Gray J in Stubing v Halling at [26] to [28]. [37]
[37] [2012] SASCFC 123.
The Owners submit that the Judge gave due consideration to the relevant principles at [5], [7] to [9] and [17] to [19] of her reasons, and in particular the legal principles relied upon by the defendants.
The Owners assert that the Builder issued proceedings claiming $271,434.65 and received judgment for $173,049.41. The Builder was ordered to carry out extensive remedial work.
The Owners assert that their claim of $1.9 Million included over $1 Million for delay but that aspect occupied virtually no hearing time. They assert that they succeeded in liability on three very significant issues, being the hot water systems, waterproofing and termite protection. The majority of the hearing on these issues was directed at liability and the Judge made an extensive remedial work order in respect of the hot water systems. They point out that no concession was made by the Builder about liability in respect of these three matters. If the Builder had conceded its breaches, the duration of the trial would have been significantly reduced.
If leave to appeal the costs decision is refused, the Owners seek costs on a solicitor/client basis. They assert that the application for leave to appeal was doomed to fail.
The Builder’s reply
The Builder submits that the Owners’ submission that they succeeded on liability on three significant issues misses the point. All three of those claims were dismissed. It further asserts that detailed evidence was required by the Judge to determine whether the claimed remedial work was necessary and reasonable.
Consideration in relation to costs
I accept the correctness of the submission by the Owners that no important question of principle requiring resolution by the Full Court arises from the Judge’s decision in relation to costs. Her Honour applied settled principles and exercised the broad judicial discretion in relation to costs in light of the conduct and outcome of a complex trial that she well understood.
While, on balance, the Builder succeeded at trial, it did not succeed on all points and was also required to undertake significant remedial work in relation to the hot water services and to a lesser respect in relation to some other defects. In that light, I am not persuaded that the Judge erred in awarding the Builder only 60 per cent of its costs on a party/party basis. If it were not for the result of the substantive appeal, I would have refused permission to appeal on the question of costs.
I have indicated that I would uphold the Owner’s appeal on three of the grounds raised in the substantive appeal. That would result in the reduction by $82,554.80 in the award made by the Judge in favour of the Builder. On that basis, I would award the Builder 50 per cent of its costs on a party/party basis.
Conclusion
I would dismiss the appeal on Grounds 2, 3, 7, 9, 13, 21, 22, 12A and 27.
I would uphold Ground 16 and find that the Owners are entitled to a back charge of $20,000.00 against the amount payable to the Builder.
I would uphold Ground 17 and award the Owners $30,940.80.
I would uphold Ground 18 and order that the sum of $31,614.00 is payable to the Owners.
Thus, I would reduce the order against the Owners by the sum of $82,554.80. That would result in a reduction of the award made by the Judge to the Builder from $173,049.41 to $90,494.61. I would hear the parties as to the effect of that decision on the award of interest.
I would order that the bank guarantee, which is currently the subject of a stay granted by a judge of this Court pending the outcome of the appeal, be released to the Builder.
I would vary the costs order made by the Judge and order that the Owners must pay 50 per cent of the costs incurred by the Builder on a party/party basis. I would otherwise dismiss the costs appeal.
I would hear the parties as to the costs of the appeals.
DOYLE J: I agree with the reasons of Parker J, and with the orders he has proposed.
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