Walker Group Constructions Pty Ltd v Tzaneros Investments Pty Ltd

[2017] NSWCA 27

Court of Appeal

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:

Walker Group Constructions Pty Ltd v Tzaneros Investments Pty Ltd [2017] NSWCA 27

Hearing dates:

8 August 2016

Date of orders:

01 March 2017

Decision date:

01 March 2017

Before:

Bathurst CJ at [1]; Beazley P at [241]; Gleeson JA at [242].

Decision:

(1) Appeal dismissed.
(2) Order that the appellant pay the first respondent’s costs of the appeal.

Catchwords:

CONTRACT – building and construction contracts – defects in concrete pavements at container terminal at Port Botany – breach of warranty admitted – breach arose prior to acquisition by first respondent of leasehold over terminal – whether accrued cause of action for breach assigned to first respondent – whether reference to surrounding circumstances permissible in construction of deed of assignment – whether first respondent acquired terminal with knowledge of defects and therefore suffered no loss as a consequence of them – whether first respondent entitled to recover damages for cost of full replacement of concrete pavement – whether damages awarded to first respondent ought to have been reduced for betterment

  PROCEDURE – costs – whether costs should not have been awarded on an indemnity basis

Legislation Cited:

Conveyancing Act 1919 (NSW), s 12
Home Building Act 1989 (NSW) s 18B
Trade Practices Act 1974 (Cth)
Uniform Civil Procedure Rules 2005 (NSW), r 42.14

Cases Cited:

260 Oxford Street Pty Ltd v Premetis [2006] NSWCA 96
Aberdeen Asset Management Ltd v Challenger [2002] NSWCA 245
Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd [2009] NSWCA 224
Bannister & Hunter v Transition Resort Holdings (No 3) [2013] NSWSC 1943
Bellgrove v Eldridge (1954) 90 CLR 613; [1954] HCA 36
British Westinghouse Electric and Manufacturing Company Ltd v Underground Railways Company of London Ltd [1912] AC 673
Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187
Calderbank v Calderbank [1975] 3 WLR 586
Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; [1982] HCA 24
Coombes v Roads & Traffic Authority (NSW) (No 2) [2007] NSWCA 70
Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184
De Cesare v Deluxe Motors Pty Ltd (1996) 67 SASR 28
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7
Esso Australia Ltd v Australian Petroleum Agents’ & Distributors’ Association (1999) 3 VR 642
Ettinghausen v Australian Consolidated Press Ltd (1995) 38 NSWLR 404
Gee Dee Nominees Pty Ltd v Ecosse Property Holdings Pty Ltd [2016] VSCA 23
Geroff & Ors v CAPD Enterprises [2003] QCA 187
Hyder Consulting (Australia) Pty Ltd v Wilhelmsen Agency Pty Ltd [2001] NSWCA 313
Lambert v Lewis [1982] AC 225
Linden Garden Trust Ltd v Lanester Sludge Disposals [1994] 1 AC 85
Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37
Offer-Hoar v Larkstore Ltd [2006] 1 WLR 2926; [2006] EWCA Civ 1079
Pacific Brands Sport and Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395
Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368
Renold Australia v Fletcher Insulation [2007] VSCA 294
Righi v Kissane Family Pty Ltd [2015] NSWCA 238
Scott Carver Pty Ltd v SAS Trustee Corporation [2005] NSWCA 462
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8
Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333
Tzaneros Investments Pty Limited v Walker Group Constructions Pty Limited [2016] NSWSC 50
Tzaneros Investments Pty Ltd v Walker Group Constructions Pty Ltd (No 3) [2016] NSWSC 526
UI International Pty Ltd v Interworks Architects Pty Ltd [2008] 2 Qd R 158; [2007] QCA 402
Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253

Category:

Principal judgment

Parties:

Walker Group Constructions Pty Ltd 
(ACN 097 303 716) (Appellant) 

Tzaneros Investments Pty Ltd (ACN 114 879 524) (First Respondent) 

AMT Engineers Pty Ltd formerly Alan L Wright & Associates Pty Ltd (ACN 001 582 029) (Second Respondent)

Representation:

Counsel:
IM Jackman SC; MR Hall SC / FC Hicks; EE Whitby (Applicant)
M Dempsey SC / J Hogan-Doran (First Respondent)

Solicitors:
Squire Patton Boggs (Appellant)
Sarvaas Ciaparra Lawyers (First Respondent)
Norton Rose Fullbright (Second Respondent)

File Number(s):

2016/91552

 Decision under appeal 

Court or tribunal:

New South Wales Supreme Court

Jurisdiction:

Equity Division

Citation:

[2016] NSWSC 50

Date of Decision:

12 February 2016

Before:

Ball J

File Number(s):

2009/298899

HEADNOTE

[This headnote is not to be read as part of the judgment]

The appellant, Walker Group Constructions Pty Ltd (WGC) was responsible for the design and construction of a container terminal at Molineux Point, Port Botany (the terminal).

The container terminal was built in 2003 and 2004 on land owned by Sydney Ports Corporation, which, at the time, was leased to P&O Trans Australia Holdings Ltd (P&O). A contract for the design and construction of the terminal (the D&C Contract) was entered into between WGC and P&O. Walker Corporation Ltd, of which WGC was a wholly owned subsidiary, engaged the second respondent, AMT Engineers Pty Limited, formerly known as Alan L Wright & Associates Pty Limited (AMT) to design the concrete pavement that formed part of the terminal.

On 1 April 2004, P&O transferred its leasehold interest in the land to a subsidiary, Smith Bros Trade and Transport Terminal Pty Ltd (Smith Bros), and on 2 December 2005, Smith Bros transferred its leasehold interest to Tzaneros. On the same day, by a deed between P&O, Tzaneros and Smith Bros, P&O purported to assign to Tzaneros the warranties given by WGC in connection with the construction of the terminal. WGC provided a letter of consent to the assignment.

The D&C Contract provided for the construction of five warehouses and the laying of various types of pavement. Following the laying of the pavement, cracks and spalling began to develop in some pavement types. Tzaneros claimed from WGC and AMT the cost of replacing the defective pavement.

The issues raised by the notice of appeal were:

1.   Whether on a proper construction of the terms of the Deed of Assignment and the letter of consent from WGC, there was an assignment by P&O to Tzaneros of any accrued cause(s) of action for breach of the building warranties.

2.   Whether construction of the relevant documents by reference to the surrounding circumstances was permissible.

3.   Whether Tzaneros acquired the terminal with knowledge of the defects and therefore suffered no loss as a consequence of those defects.

4.   Whether Tzaneros was entitled to recover damages for the cost of full replacement of the pavement.

5.   Whether a reduction in the sum of damages awarded to Tzaneros for betterment should have been made.

6.   Whether costs should not have been awarded on an indemnity basis.

The Court held (Bathurst CJ, Beazley P and Gleeson JA agreeing), dismissing the appeal:

Assignment

(i)   The meaning of the terms of a commercial contract is to be determined by what a reasonable business person would have understood those terms to mean, taking into account the language, surrounding circumstances and commercial purposes of the contract: [96]-[97] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA).

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7; Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37 applied.

(ii)   These principles apply equally to the assignment deed as to any other contractual provision. On its face, the express assignment of all the benefits of the building warranties in cl 3.1 of the assignment deed would include a right to sue for an existing breach as well as any future breaches. This construction is consistent with the recitals to the assignment deed and the terms of the consent given by WGC. A construction which excluded the right to sue for past uncompensated breaches would produce an uncommercial result: [97]-[103] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA).

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7; Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37 applied.

(iii)   While debts have an existence at law independent from the underlying transaction, the same cannot be said for breaches of contractual warranties. To recover for such breaches it is necessary to sue on the contract. The ultimate question is whether or not as a matter of construction the right to sue for past breaches has been assigned: [105], [111] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA).

Geroff & Ors v CAPD Enterprises [2003] QCA 187 distinguished.

Construction

(iv)   Recourse may be had to deleted words or clauses in a contract for the purpose of construing ambiguous language. The fact of the deletion of words can only be used to negative an inference sought to be drawn from the surrounding circumstances, where the evidence shows the parties mutually concurred in rejecting that meaning: [117]-[118] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA).

Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; [1982] HCA 24; Gee Dee Nominees Pty Ltd v Ecosse Property Holdings Pty Ltd [2016] VSCA 23; 260 Oxford Street Pty Ltd v Premetis [2006] NSWCA 96; Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187; Esso Australia Ltd v Australian Petroleum Agents’ & Distributors’ Association (1999) 3 VR 642 applied.

(v)   Clause 3.1 of the assignment deed considered in context is not ambiguous. However, even if it was, for the exception in Codelfa to apply it would be necessary to show that the parties to the deed had mutually concurred in rejecting a construction that the assignment extended to past breaches. There is no such suggestion of mutual concurrence: [119] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA).

Esso Australia Ltd v Australian Petroleum Agents’ & Distributors’ Association (1999) 3 VR 642 applied.

Cause of loss

(vi)   Where there has been an assignment of contractual warranties, including the right to sue for past breaches, the assignee is entitled to recover damages of the same kind as the assignor could have recovered and steps into the shoes of the assignor for the purpose of pursuing the right vested in the assignor. It is irrelevant whether the assignee knows of the breaches or otherwise: [152] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA).

Renold Australia v Fletcher Insulation [2007] VSCA 294 applied.

Lambert v Lewis [1982] AC 225 distinguished.

(vii)   The principle in Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd [2009] NSWCA 224, that a successor in title who acquires a building in full knowledge of its defects suffers no loss from the existence of those defects, requires that the successor has full knowledge of the existence of the defects and their significance. It could not be said that Tzaneros had such knowledge. The principle in Allianz does not extend to an assignee who has constructive knowledge by reason of failing to properly investigate the extent of a patent defect: [155]-[158] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA).

Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd [2009] NSWCA 224 distinguished.

Damages

(viii)   It was not unreasonable for Tzaneros to recover the total cost of replacement of the pavement. The whole of the pavement suffered from defective design. The fact that certain panels may not in fact crack does not alter the position. Tzaneros could decline to bear that risk and rather seek compensation sufficient to ensure the pavement is repaired in conformity with the contract: [189], [191] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA).

Bellgrove v Eldridge (1954) 90 CLR 613; [1954] HCA 36; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8; Scott Carver Pty Ltd v SAS Trustee Corporation [2005] NSWCA 462; De Cesare v Deluxe Motors Pty Ltd (1996) 67 SASR 28; Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253; UI International Pty Ltd v Interworks Architects Pty Ltd [2008] 2 Qd R 158; [2007] QCA 402; Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 applied.

Betterment

(ix)   No allowance should be made for betterment. The contract provided for a pavement with a minimum life of 20 years and it would not be expected the pavement would be unusable immediately on expiration of that period. The proposed replacement has been designed to ensure the terminal can continue in operation thus avoiding consequential loss that would otherwise have flowed from the breach: [204]-[205] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA).

Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333; British Westinghouse Electric and Manufacturing Company Ltd v Underground Railways Company of London Ltd [1912] AC 673; Hyder Consulting (Australia) Pty Ltd v Wilhelmsen Agency Pty Ltd [2001] NSWCA 313 applied.

Costs

(x)   The failure to provide the particulars requested did not require the primary judge to make an order other than one of indemnity costs. The response to the request identified the defects said to constitute a breach of the contractual warranties and it was not necessary to supply particulars of why such a breach occurred: [229] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA).

(xi)   In relation to the costs of the appeal, there was no renewal of the offer of compromise and therefore no reason to make an order other than the usual order for costs: [237]-[239] (Bathurst CJ); [241] (Beazley P); [242] (Gleeson JA).

Coombes v Roads & Traffic Authority (NSW) (No 2) [2007] NSWCA 70; Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 applied.

Ettinghausen v Australian Consolidated Press Ltd (1995) 38 NSWLR 404 distinguished.

Judgment

1. BATHURST CJ: This is an appeal from a decision of a judge of the Equity Division of the Court in which the appellant, Walker Group Constructions Pty Ltd (WGC) was found liable to the first respondent, Tzaneros Investments Pty Ltd (Tzaneros) in the sum of $11,612,013.53 under building warranties granted in relation to the construction of a container terminal at Molineux Point, Port Botany (the terminal). The land on which the terminal was built is owned by Sydney Ports Corporation (the land). At the time of construction of the terminal, the land was leased to P&O Trans Australia Holdings Limited (P&O). WGC was responsible for, among other things, laying various types of pavement, in particular types P2 and P2/B2 pavement (the pavement). It was common ground that the pavement did not meet the relevant contractual specifications and was thus defective. The leasehold interest in the terminal was assigned on a number of occasions. This appeal concerns firstly whether the assignee of the relevant building warranties had a right to sue under those warranties and secondly, the extent of its loss.

Background

Contract between P&O and WGC

2. Construction of the terminal was governed by a design and construct contract between P&O and WGC (the D&C contract). Under that contract, work was to be performed in two stages: the first stage to be completed by 28 January 2004 and the second stage to be completed by 6 April 2004. These timeframes were complied with, with construction of the first stage being completed on 27 January 2004 and construction of the second stage being completed on 6 April 2004.

3. The D&C contract was comprised of a number of documents including the formal instrument of agreement, special and general conditions of contract and the performance specification. The operation and maintenance manual (the O&M manual) was Annexure E to the special conditions of contract.

4. Clause 3.1 of the general conditions of contract provided that “[T]he Contractor”, being WGC, would “execute and complete the work under the Contract in accordance with the requirements of the Contract.”

5. Clause 4.1 contained the warranties provided by WGC. It was in the following terms:

“4.1    Contractor’s Warranties

Without limiting the generality of Clause 3.1, the Contractor warrants to the Principal that the Contractor —

(a)   at all times shall be suitably qualified and experienced, and shall exercise due skill, care and diligence in the execution and completion of the work under the Contract;

(b)   subject to Clause 9, shall engage and retain the Consultants identified in the Contractor’s tender and who are suitably qualified and experienced;

(c)   has examined and carefully checked any Preliminary Design included in the Principal’s Project Requirements and that such Preliminary Design is suitable, appropriate and adequate for the purpose stated in the Principal’s Project Requirements;

(d)    shall execute and complete the Contractor’s Design Obligations and produce the Design Documents to accord with the Principal’s Project Requirements and, if Clause 10 applies, accept the novation and retain the Consultants for any work the subject of a prior contract with the Principal; and

(e)    shall execute and complete the work under the Contract in accordance with the Design Documents so that the Works, when completed, shall –

(i)   be fit for their stated purpose; and

(ii)   comply with all the requirements of the Contract and all Legislative Requirements”

6. “Works” was defined as:

“the whole of the work to be executed in accordance with the Contract, including variations provided for by the Contract, which by the Contract is to be handed over to the Principal”,

while “work under the Contract” was defined as:

“the work which the Contractor is or may be required to execute under the Contract and includes the Contractor’s Design Obligations, variations, remedial work, Constructional Plant and Temporary Works”.

7. Clause 5 dealt with the provision of security for ensuring due and proper performance of the contract. WGC provided security to P&O in the form of an insurance bond in accordance with this clause (the contract security).

8. Clause 9.1 dealt with assignment of the contract. It was in the following terms:

“9.1    Assignment

Neither party shall, without the prior written approval of the other and except on such reasonable terms and conditions as are determined in writing by the other, assign the Contract or any payment or any other right, benefit or interest thereunder.”

9. Clause 37 stipulated that the “Defects Liability Period” was to commence at 4.00pm on the date of practical completion. As soon as possible after that date, the Contractor was to “rectify any defects or omissions in the work under the Contract existing at the Date of Practical Completion”. The defects liability period lasted one year, expiring on 27 January 2005 for stage 1 works and on 6 April 2005 for stage 2 works.

10. Clause 3.41 of the special conditions of contract provided:

“3.41   Pavement design life

(a)   In this clause 3.41:

(i)   O&M Manual means the document entitled ‘Operation & Maintenance Manual – Concrete Pavements’ which comprises Annexure E to this Contract;

(ii)   Pavements means the concrete pavements constructed as part of the work under the Contract and referred to in the O&M Manual.

(b)   The Principal acknowledges and agrees that:

(i)   the Contractor’s responsibility in respect of pavement loadings is set out in paragraph 3.2 of the Contract document entitled ‘Performance Specification Contract No. P200-T1.1-002’ (Pavement Design Loading Obligation);

(ii)   the Contractor has no control over the manner in which the Pavements are utilised, or the loads to which they are subjected;

(iii)   the O&M Manual sets out the minimum operational and maintenance standards which must be complied with by the Principal;

(iv)   subject to paragraph (v), the Contractor’s Pavement Design Loading Obligation is conditional on compliance by the Principal with the O&M Manual; and

(v)   paragraph (iv) will not apply to any claim by the Principal for breach of the Pavement Design Loading Obligation to the extent that the Principal has demonstrated that the loss or damages the subject of the claim were not caused nor contributed to by any non-compliance by the Principal with the O&M Manual.”

11. In the O&M manual, s 3.0 set out the pavement design parameters that were incorporated into the design calculations. It then provided: “P&O must not permit any vehicle to be used or operated on the pavements that places a load on the pavements which is greater than the loads for which the pavements have been designed.”

12. Section 5.0 prescribed obligations for pavement maintenance. It was, relevantly, in the following terms:

“5.0   Pavement Maintenance

P&O must implement a comprehensive inspection and maintenance regime with regard to the concrete pavements constructed on the project. The regime implemented must include, without limitation, compliance with the requirements set out below.

P&O must ensure that all drivers and operators of heavy equipment be inducted into the limitations of all pavements and the safe handling of containers and other equipment.

P&O must not implement any changes to the pavement use without first consulting with Walker Group Constructions Pty Limited. This includes the use of alternative container handling equipment, racking design, or any other loading parameter which could potentially overload the pavements.

P&O shall ensure that any loads, vehicles, or numbers of repetitions that may:

1.   exceed the specification or intent of this manual; or

2.   have a greater impact on the pavements than the vehicles specified in this manual,

are not applied to or used on the pavements, without the written consent of WGC.

P&O must perform six-monthly inspections to identify any areas that require remedial works. Attached to this manual is an inspection checklist setting out minimum criteria which P&O must investigate during inspections. The checklist is a modified version of a checklist produced by the American Concrete Institute (ACI). Any deficiencies identified in the inspections must be:

1.   rectified by WGC if attributable to a failure of WGC to construct the pavements in accordance with the terms of the contract dated [to be inserted] between P&O and WGC for the construction of the pavements; or

2.   rectified by P&O if attributable to normal wear and tear.

Rectification must be done promptly to prevent any additional or consequential damage.

…”

13. Appendix D to the O&M manual was the pavement inspection checklist. It stipulated that the pavements were to be inspected every six months with defects recorded in a table according to distress type and measured value, which was then accorded a severity level of either non-contributing, light, medium or heavy.

14. Clause 2.4 of the performance specification relevantly provided:

“2.4    Design Criteria

All aspects of the proposed trade and transport shall be designed with due regard to the site location and element durability to provide a minimum design life of 20 years with minimum maintenance. All items required to undergo major maintenance in the 20 year design period are to be identified in the submitted tender.

Design working life is defined as the period for which structural elements, pavements, building, services, etc, are to be used for their intended purposes with acceptable maintenance, but without major repair and/or replacement being necessary.”

Acceptable maintenance for pavements was defined as “None” and unacceptable repair/replacement was stated to be “Any removal/replacement”.

Assignment to Tzaneros

15. On 1 April 2004, P&O assigned its leasehold interest to a subsidiary, Smith Bros Trade and Transport Terminal Pty Ltd (Smith Bros). On 2 December 2005, Smith Bros assigned the leasehold interest to Tzaneros, the sole director of whom was Terry Tzaneros. A deed of assignment was entered on the same day between P&O, Smith Bros and Tzaneros under which P&O purported to assign the benefit of the building warranties given by WGC (the assignment deed).

16. The recitals to the assignment deed were in the following terms:

“A   The Assignor is a party to the Building Contract for the construction of the Improvements.

B   The Assignor is the beneficial owner of the Building Warranties.

C   The Assignor wishes to assign to the Assignee all of its rights, title and interest in the Building Warranties.”

17. The definitions of “Building Contract” and “Improvements” circularly referred to one another, but it was accepted that the “Building Contract” was a reference to the D&C contract. “Building Warranties” was defined as:

“the building warranties provided by, or imposed by law upon, Walker Group Constructions Pty Ltd, its sub contractors and consultants in respect of the Improvements, and the benefit of all builders’ or manufacturers’ warranties in respect of any work or goods or equipment forming part of the improvements.”

18. Clause 2.1 was an acknowledgement of interest. It was in the following terms:

“2.1   Genuine commercial interest

The Assignor and P&O acknowledge that the Assignee, by virtue of its acquisition of the Improvements, has a genuine and substantial commercial interest in the Building Warranties and the enforcement thereof.”

19. Clause 3.1 effected the assignment. It was in the following terms:

“3.1   Assignment

The Assignor as beneficial owner and for valuable consideration (the receipt of which is acknowledged) assigns to the Assignee absolutely all of the benefit of the Building Warranties with effect from the Effective Date.”

20. The “Effective Date” was the date on which the agreement for sale of assets between Smith Bros and Tzaneros was completed, that is, 2 December 2005.

21. Clause 4 contained the warranties given by P&O in relation to the assignment. Clause 4.1 was in the following terms:

“4   ASSIGNOR WARRANTIES

4.1   The Assignor warrants and represents to the Assignee, as an inducement to the Assignee to enter into this Deed that:

(a)   there are no moneys owing or payable to Walker Constructions, its subcontractors or consultants pursuant to the Building Contract except for the bank guarantee provided under the Building Contract;

(b)   save for those Building Warranties that have expired due to the effluxion of time, as far as it is aware the Building Warranties are valid and subsisting;

(c)   It has no notice of any disclaimer, or of a refusal to comply with the terms of a Building Warranty by Walker Constructions, a manufacturer, sub contractor, consultant or other party or of any fact, matter or circumstance that would give rise to such a disclaimer.”   

22. Clause 6 operated to impose a trust on P&O in the event that the assignment of the benefit of the building warranties was not effective. It was in the following terms:

“6   TRUST

6.1    Declaration of Trust

If,

(a)   the assignment of a Building Warranty contemplated by this deed fails or is ineffective; or

(b)    a Building Warranty is not capable of assignment, or

(c)   for whatever reason the Assignee does not receive the benefit of a Building Warranty,

the Assignor hereby declares that it holds such Building Warranty including all rights and all benefits derived attaching thereto, upon trust for the Assignee absolutely.

6.2   Obligations of the Assignor

The Assignor must:

(a)   deal with the Building Warranty and all such rights privileges benefits income and proceeds in such manner as the Assignee may from time to time direct and not otherwise;

(b)   furnish to the Assignee every notice or other written communication received by the Assignor in respect of the Building Warranty immediately [sic] it is received by the Assignor;

(c)   exercise all rights attaching to the Building Warranty in such manner as the Assignee may from time to time direct and not otherwise;

on request by the Assignee execute and deliver any transfer or other instrument relating to the Building Warranty as the beneficiary requires.

6.3   Obligations of the Assignee

The Assignee indemnifies the Assignor against all Losses which the Assignor incurs as a result of, or arising from, the Assignor’s compliance with clauses 6.1 and 6.2 of this Deed or the Assignee’s exercise of its rights under clause 5. If the Assignor is likely to incur costs as a result of the commencement or conduct of legal proceedings in respect of the Building Warranties, then, the Assignor may require the Assignee to provide such security as the partiers may agree, as a precondition to the performance of those obligations under clauses 6.1 or 6.2 or the exercise of those rights under clause 5 (as applicable).”

23. Clause 7.4 was an entire agreement clause. It provided as follows:

“7.4   Entire agreement

This document contains the entire agreement of the parties with respect to the subject matter and supersedes all prior understandings and representations between the parties with respect to the Building Warranties.”

24. In accordance with cl 9.1 of the D&C contract, WGC provided a letter of consent to the assignment. The terms of that consent were as follows:

“In relation to the proposed sale of P&O’s Molineux Point facility to Tzaneros Investments Pty Ltd, Walker Group Constructions hereby acknowledges that:

It constructed the terminal facility pursuant to a Design and Construct Contract executed with P&O Trans Australia Holdings Limited (“the Contract”).

The benefits of the building warranties contained in the Contract will pass to Tzaneros Investments Pty Ltd from the sale date;

Save for those building warranties that have expired due to the effluxion of time all building warranties are valid and subsisting;

It is not aware as of the above date of any notice of any disclaimer, or refusal to comply with the terms of any building warranty by a manufacturer, sub contractor, consultant or other party; and

Tzaneros Investments Pty Ltd will be subject to the same obligations as P&O in relation to those warranties from the date of sale.

In accordance with clause 9.1 of the Contract, Walker Group Constructions hereby consents to, and accepts the assignment of the building warranties to Tzaneros Investments Pty Ltd from the sale date.”

25. In the agreement for the sale of assets between Smith Bros and Tzaneros, it was a condition precedent to the sale of the assets that there be:

“execution of a deed or other document (in a form agreed by the parties) effecting the assignment of the Building Warranties, from the person currently having the benefit of the Building Warranties, to the Purchaser, with effect from Completion.”

26. “Building Warranties” was defined in that agreement as “the benefit of any building warranties under the Building Contract in respect of the Leasehold improvements, including, without limitation, the Insurances and the Contract Security under the Building Contract, to the extent capable of assignment”.

Drafting History

27. In evidence was a series of emails between representatives of P&O, Tzaneros and WGC in which draft versions of the assignment deed and letter of consent were exchanged. The use which could be made of such evidence was the subject of considerable debate at the appeal. That evidence revealed three significant changes in the evolution of these documents: first, the removal of WGC as a party to the assignment deed; second, the release of the contract security and resolution of outstanding claims between WGC and P&O; and third, the removal of explicit reference to “any cause of action” in the description of building warranties.

28. In a draft assignment deed, circulated by Peter Panagiotopoulos (the solicitor acting for Terry Tzaneros) to Richard de Carvalho of WGC on 25 October 2005 (the draft assignment deed), WGC was listed as a party to the deed. Clause 6.1 contained an expression of WGC’s consent in the following terms:

“The Promisor,

(a)   unconditionally consents to, and accepts the assignment of the Building Warranties to the Assignee contemplated by this document; and

(b)    as a separate and independent covenant with the Assignee, agrees to comply with the terms of each Building Warranty and to do all things necessary to give the benefit of each Building Warranty to the Assignee.”

29. Clause 3.1 of the draft assignment deed was in the following terms:

“3.1   Assignment

In consideration of the payment of $[#] by the Assignee to the Assignor (receipt of which is acknowledged) the Assignor as beneficial owner assigns to the Assignee absolutely all of the benefit of the Contract Security, the Insurances and all warranties provided by, or imposed by law upon, the Promisor, its sub contractors and consultants in respect of the improvements, and the benefit of all builders’ or manufacturers’ warranties in respect of any work or goods or equipment on the Business Premises.”

30. Clause 4 dealt with the transfer of the contract security from P&O to Tzaneros. It was in the following terms:

“4   RETAINED SECURITY

4.1   Retained security

The Assignor holds the Retained Security as security for the performance by the Promisor of its obligations to amend and make good any defects or faults due to faulty materials or workmanship which have appeared in the Improvements in accordance with the terms of the Building Contract.

4.2   Delivery

On the Effective Date, the Assignor shall deliver to the Assignee

(a)   the Retained Security; and

(b)    a Transfer of the Retained Security.”

31. In the draft assignment deed, “Building Warranties” was defined as having

“the same meaning ascribed to in the Sale Contract and for the avoidance of doubt includes any cause of action arising out of or in any way connected to a breach of the Building Contract, Trade Practices Act or other law or obligation in which the Assignee has an interest”.

32. In a draft letter from a Mr Walker of P&O to Tzaneros sent on 28 October 2005 (the P&O draft letter), it was stated that Smith Bros and P&O confirmed that: “Save for x invoices totalling $y which remain outstanding from Walker Constructions, P&O has no call on the Contract Security and will work with Walker Constructions to assign the benefit of that security to Tzaneros Investments”.

33. In an email of 31 October from Mr Walker to Mr Tzaneros, Mr Walker stated: “Subject to agreement of the issues re the insurance bond the letter appears fine from a vendor perspective.” The email went on to state: “This is the only form of assignment document that Walkers [WGC] will agree to. I am liaising with our Peter Lim re the amended building warranty deed sent to us today and will revert shortly with comments – this document will need to take out all references or issues as affects Walkers”.

34. The response referred to by Mr Walker was an email from David Thomas (Development Manager of WGC) which attached the draft letter of consent. Mr Thomas stated: “We are prepared to sign the letter provided we can resolve the outstanding claims from both parties and have returned our outstanding insurance bond.” That letter, subject to an immaterial amendment, was in the same form as the signed consent letter.

35. The “outstanding claims” were documented in a series of meetings and defects lists culminating in the minutes of a meeting on 1 September 2005 which referred to air conditioning issues, concrete crack repairs, roof repairs, wall cladding repairs and flood light lens failure.

36. In an email from Mr Walker to Mr Thomas on 2 November 2005, Mr Walker wrote: “Further to our telco can I ask you to confirm that if we courier the bank guarantee to you in the morning and agree that there remain no outstanding monies from either side, that Walkers will have the building warranty letter signed and couriered to me asap Thursday”. Mr Thomas confirmed that this was OK and sent the signed consent letter the following day. There was no further evidence exposing the reasons for WGC’s withdrawal as a party from the assignment deed.

Pavement defects

37. Cracks began to develop in the pavement shortly after pouring, as early as September 2003. Cracking and spalling continued to worsen in terms of number and severity. On 15 December 2004, Peter Watt of P&O undertook a “cursory survey” of the external pavements, identifying areas on a map (the crack map) of medium, heavy and severe spalling and cracking. He was accompanied on this inspection by Terry Tzaneros. In cross-examination, Mr Tzaneros was asked to recall this inspection and the following exchange occurred:

“Q.    So does that remind you that in fact you and Peter Watt did an inspection of the pavement in late 2004?

A.   Yes.

Q.    And that was the occasion when he prepared that crack map, wasn’t it?

A.    I don’t know what map he prepared, but we did a, a tour round the site in 2004.

…

[Mr Tzaneros was shown a copy of the crack map]

Q.    …So is that the map that was prepared by Mr Watt when you did your inspection with him in late 2004?

A.   If that’s the map, that’s the map, yes.

Q.   You were therefore aware at the time, weren’t you, that there were, as is noted on the plan, medium to heavy cracking --

A.   Yeah.

Q.   -- for example? Yes?

A.    Yes.

Q.    Heavy cracking and spalling?

A.    Yes.”

38. Later in the exchange, Mr Tzaneros clarified: “I never actually saw these markings on this map, when I’m saying, you know, heavy and so forth … this would have been done after he’d left”. In his affidavit of 14 June 2013, Mr Tzaneros stated:

“In the period after practical completion of Stage 1 in January 2004, and getting worse towards December 2004, Mr Peter Watt and I observed that there was a range of cracking and spalling on the external pavements that indicated that repairs were required … On 15 December 2004 Mr Watt made his own inspection, marked the location of the worst of these cracks on a pavement drawing, and in a letter to [WGC] dated 17 December 2004 requested that [WGC] undertake inspection and maintenance which was the responsibility of [WGC] in the defects liability period.”

39. Mr Tzaneros’ evidence was that the first time he was aware that the cracks in the pavement were of a structural nature was upon receiving a letter dated 25 July 2006. The letter enclosed a report into issues associated with cracking and stated that “the issues raised can partly be attributed to either a design or construction related issue”. Mr Tzaneros gave evidence that he had been reassured on a number of occasions by representatives of WGC that the cracks were only shrinkage and surface cracks. In cross-examination, Mr Tzaneros stated “I’ve always had in my mind that they were only shrinkage crack[s], shrinkage cracks and surface cracks, and being repaired by Walkers”. On this latter point, Mr Tzaneros also gave evidence that he was continuously assured, up until 2009, that WGC would rectify the pavement.

40. Mr Tzaneros indicated in cross-examination that he was not concerned to conduct any form of due diligence prior to the acquisition, despite being aware of the cracking. He did conduct a personal visual inspection of the pavement for around half an hour to an hour, without the assistance of an engineer.

41. Fielder Engineers Pty Limited was appointed superintendent under the D&C contract. Mr Peter Fielder (the Superintendent) carried out this function on its behalf. In his affidavit of 14 June 2013, Mr Fielder stated:

“Shortly after the pavement concrete was poured in late 2003, in 2004 and up to April 2005, I recall that a number of cracks opened up in different parts of the Pavement … I recall that during this period WGC were undertaking some repairs with epoxy and towards the end of 2004 many of these cracks were getting worse.”

42. When cross-examined on this statement, Mr Fielder agreed that the cracking during that period “was indicative of some form of either construction or design defect in the pavement which took it beyond the category of mere shrinkage cracking”. He proceeded to confirm that “[b]y April 2005 we were becoming concerned with the structural integrity of the pavement” and in February 2005 he had noticed cracking which he would describe as “structural cracking”. Reference was also made to the minutes of a site meeting held on 20 April 2005 between Mr Fielder and Mr Walker that recorded a “[s]tructural [c]rack west of warehouse 4”.

42. Mr Fielder prepared a report in late 2009 on the instructions of Tzaneros (the Fielder report). The report stated, by reference to the O&M manual, that, if defects exceeded the maximum repairable severity, there was no recommended repair methodology and replacement of the defect slab would be required. In cross-examination, Mr Fielder was asked to apply the O&M manual distress criteria to the descriptions provided on the crack map and agreed that many of the cracks there described exceeded the maximum repairable severity, requiring replacement.

43. From late 2004, WGC attempted to repair some of the cracks by epoxy injections. However, it soon became apparent that the crack repairs were not performing satisfactorily. Some repairs were performed by WGC at no expense to Tzaneros. However, after proceedings were commenced, Tzaneros began engaging third parties to perform the repairs totalling costs of approximately $534,185.74.

44. Design experts were retained by WGC and Tzaneros to assess the extent of the damage and necessary repair. In their joint report, they identified four defects in the design of the pavement: inadequate thickness of the concrete; joint details which relied too heavily on aggregate interlock and were inadequate to transfer the specified loads; inappropriate joint spacing; and use of sand as a sub-base.

45. The position of Tzaneros’ expert, Anthony Davis, was that the state of the pavement was such that it would require substantial replacement within the next three to five years and that if the pavement was to be used on the same basis as it was currently being used, the rate of failure of the pavement in the trafficked areas would increase and the already damaged pavement would deteriorate further and quicker. In cross-examination, Mr Davis clarified that his position was that the entire pavement should be replaced because of its under-design, but if that was inappropriate, then he had designated in his report the areas not requiring replacement. Following this exchange, Mr Davis produced diagrams indicating the precise panels requiring replacement. Panels were divided into those that required immediate replacement, those where an allowance should be made for possible future replacement and panels previously replaced by third parties.

46. WGC’s expert, Andrew Baigent, performed an inspection of a more “general nature”. His opinion was that “not every concrete panel displayed evidence of damage”. He concluded that approximately one half of the panels had suffered cracking and it was only those panels that had suffered significant cracking damage that required rectification. In a further supplementary report, Dr Baigent categorised the damage into five categories. His opinion was that only those in “Damage Category 5”, being 66 of approximately 1000 panels, required immediate replacement and a further allowance should be made for the replacement of approximately 20% of the 182 panels within ‘Damage Category 4”.

47. Mr Davis’ recommended method of replacement was a heavily reinforced pavement solution. In cross-examination, Mr Davis gave evidence that this form of pavement was defined under the Australian Standard AS 3600 as having a design life of around 50 years. According to the evidence of Michael Sturgess, an expert quantity surveyor retained by Tzaneros, the cost of replacing the entire pavement with the heavily reinforced design would be $14,819,256.72 and the cost of replacing those panels identified by Mr Davis as requiring immediate replacement, with allowance for those panels possibly requiring future replacement, would be $9,071,116.31.

Sale to TCAL

49. On 5 February 2015, Tzaneros sold its leasehold interest to the Trust Company (Australia) Limited (TCAL) who in turn, through a number of transactions, subleased the terminal to ACFS Port Logistics (ACFS), the Managing Director of whom was Arthur Tzaneros, the son of Terry Tzaneros.

50. Tzaneros’ leasehold interest was sold for $44 million. This was consistent with a valuation report prepared by Knight Frank Valuations. The basis of the valuation was “Market Value ‘As is’ of the leasehold interest”. Under the heading “Building Age and Condition”, it was stated: “Our valuation is conditional on the structure and service installations of the improvements being free from any defects requiring material capital expenditure, other than that stated herein.”

51. Under the contract for sale entered between Tzaneros and TCAL (the sale agreement), Tzaneros undertook that it held the benefit of the building warranties (defined as per the assignment deed) and that the building warranties were valid and subsisting. Under cl 65.3 it also promised to hold and maintain the benefit, rights and entitlements of and associated with the building warranties and not to assign them without TCAL’s consent.

52. Clause 65.4 dealt with Tzaneros’ liability to carry out repairs to any defects in stage 1 or 2 of the premises. It was in the following terms:

“65.4   Upon:

(a)    request by the Tenant to the Purchaser and notice thereof from the Purchaser to the Vendor; or

(b)   on notice from the Purchaser, if the following circumstances are satisfied:

(i)   a Tenant has not given a notice, but it would be reasonable for a tenant to request works to keep the External Pavements operational having regard to their use, and

(ii)    the Tenant does not object to the Vendor carrying out the required works on the Property; and

(iii)   there has been material deterioration or dilapidation in the External Pavements that will adversely affect the operational use of the External Pavements having regard to the purpose for which the pavement is being used at the time,

the Vendor shall carry out (or procure the carrying out of) any and all reasonable repairs or replacements to any defects in the External Pavement in stage 1 and stage 2 of the Premises in accordance with clause 65.7(a) or 65.7(b) (as applicable) limited to:

(A)   such repair as is reasonably necessary to ensure that they are fit for the purposes described in the First Building Contract for the balance of the term of the relevant Building Warranties adjusted to reflect the purpose for which the pavement is being used at the time;

(B)   such repair as is reasonably necessary to ensure the design life and design parameters of the External Pavement as provided for in the First Building Contract adjusted to reflect the then age of the External Pavement extends throughout the balance of design movements remaining in the term of the relevant Building Warranties,

where such defects are attributable to a failure to design and/or construct the External Pavement in accordance with the terms of the First Building Contract and such repair is necessary to keep the External Pavements operational having regard to the purpose for which the pavement is being used at the time.”

53. Clause 65.5 dealt with Tzaneros’ liability to carry out repairs to any defects in stage 3 of the premises, it is not relevant for the purpose of the present proceedings. Clause 65.6 dealt with the categorisation of works as minor or substantial works. It was in the following terms:

“65.6   If the Vendor is requested to carry out repairs pursuant to clauses 65.4 or 65.5:

(a)   the Vendor shall nominate whether the Works shall comprise “Minor Works” or “Substantial Works” and the Vendor shall nominate the methodology for the Works;

(b)   the Purchaser shall indicate to the Vendor if the Purchaser agrees with the Works being “Minor Works” or “Substantial Works” and whether the Purchaser agrees with the methodology for the Works as nominated by the Vendor and if not, the reasons for disagreement; and

(c)   if within 5 days of the Vendor receiving a notice pursuant to clause 65.4 or 65.5 the Vendor and the Purchaser are unable to agree on whether the Works shall comprise Minor Works or Substantial Works and as to the methodology for the Works (dispute), the dispute will be referred to an expert in accordance with clause 65.8.”

54. Clause 65.7 contained warranties in respect of repairs under cl 65.4 or 65.5. “Minor Works” were defined as “Works that do not involve any substantial removal of the existing pavement including the Works or otherwise require material or structural works”. It provided:

“65.7   If the Vendor carried out repairs pursuant to clauses 65.4 or 65.5, the Vendor warrants to the Purchaser that:

(a)   in respect of Works that do not involve any substantial removal of the existing pavement including the Works or otherwise require material or structural works (Minor Works):

(i)   it will engage or cause to be engaged a suitably competent repairer to carry out the Minor Works;

(ii)   the repairer engaged to carry out the Minor Works:

(A)   will at all times be suitably experienced, and the Vendor will use all reasonable endeavours to procure the repairer to exercise due skill, care and diligence in the execution and completion of the Minor Works in compliance with all Legislative Requirements including the WHS Law;

(B)   will examine and carefully check the agreed scope of works and satisfy itself that the agreed scope of work is suitable, appropriate and adequate for the purpose; and

(C)   shall execute and complete the Minor Works in accordance with the agreed scope of work when completed, shall be; [sic] fit for the purpose to the extent required to keep the External Pavements operational having regard to their use, and comply with all Legislative Requirements;

(iii)   it will use its best endeavours to cause the repairer to provide a warranty in a form and to an extent that constitutes the industry standard warranty for the type of work undertaken.

(b)   in respect of all other Works (Substantial Works):

(i)   it will engage a licenced contractor to carry out the Substantial Works under a building contract in a form acceptable to the Purchaser which approval will not be unreasonably withheld;

(ii)   the contractor engaged to carry out the Substantial Works:

(A)   will at all times be suitably qualified and experienced, and the Vendor will use all reasonable endeavours to procure the contractor to exercise due skill, care and diligence in the execution and completion of the Substantial Works in compliance with all Legislative Requirements including the WHS Law;

(B)   will examine and carefully check the agreed scope of work and satisfy itself that the agreed scope of work is suitable, appropriate and adequate for the purpose;

(C)   shall execute and complete the Substantial Works in accordance with the agreed scope of work so that the Substantial Works, when completed, shall be fit for purpose and sufficient to ensure the design life and design parameters described in either the First Building Contract or the Second Building Contract (as applicable) adjusted to reflect the then age of the External Pavement and adjusted to reflect the balance of design movements remaining in the term of the relevant Building Warranties, to the extent required to keep the External Pavements operational having regard to their use, and comply with all Legislative Requirements;

(iii)   it will use its best endeavours to provide a warranty to the Purchaser:

(A)   in a form and to an extent that constitutes the industry standard warranty for the type of work undertaken; and

(B)   with a maximum period which would ordinarily be obtainable for the nature of the work.”

55. On 5 February 2014, Tzaneros and TCAL also entered into a works side deed, under which Tzaneros was required to carry out certain work supplementary to its obligations under the contract for sale. Under cl 2.1, Tzaneros agreed “to commence the Works by 31 December 2016”. “Works” was defined as “the works detailed in the Works Schedule including Minor Works and Substantial Works (as applicable).”

56. The area of the works was identified in cl 4 of the Works Schedule as “the areas of the P2 external pavement located within the green and red zones on the aerial photograph in annexure A hereto and more specifically identified in the areas marked in orange on the drawing in annexure B hereto”. The annexed photograph and drawing revealed that some areas of P2 pavement were not subject to the works side deed, namely the P2 pavement between Warehouses 2, 3 and 4 on one side, and warehouses 5 and 6 on the other, and thus, were only subject to repair obligations under the contract for sale.

57. Clause 5 of the Works Schedule was in the following terms:

“The Works shall constitute that repair or replacement of the external pavement as necessary to ensure that the pavement is fit for the purposes described in the First Building Contract adjusted to reflect the then age of the External Pavement and adjusted to reflect the balance of design movements remaining in the term of the relevant Building Warranties to the extent required to keep the pavement operational having regard to the pavement use at the time.”

58. In the affidavit of Arthur Tzaneros of 6 November 2015, he stated: “It is my intention as Managing Director to take steps to cause ACFS Port Logistic to seek to have the whole of the P2 pavement progressively replaced over the next few years.” In an earlier affidavit, sworn on 27 September 2013, Arthur Tzaneros gave evidence concerning the operation and use of the terminal under ACFS. He stated:

“The Terminal is now operating at what I consider to be high capacity or medium capacity for all of the year … I anticipate that the periods of time when the Terminal will operate at high capacity will further increase over time, even if there is some downturn in economic conditions because (i) the Port volumes are generally growing annually, the ACFS Logistics Terminal is the largest logistics facility of this kind on the Port, and (ii) the operations of ACFS around Australia are growing, and the businesses of the company’s main customers are growing.”

The primary judgment

59. The primary judge noted that it was not in dispute that the pavement was defective in the sense it did not meet the relevant contractual specifications.

60. The primary judge identified the first issue in dispute as whether the assignment to Tzaneros was only effective to assign the contractual right to performance under the D&C contract and not effective to assign any cause of action that had already accrued at the time of assignment. He noted that a cause of action for breach of warranty arises at the time of breach regardless of when damage is suffered.

61. The primary judge found that the ordinary and natural meaning of the words “all of the benefits of the Building Warranties” included the right to sue in respect of breaches that had already occurred, and that the right to sue was one of the benefits of the warranties. This construction was supported by the context of the assignment, “where P&O and Tzaneros knew that there had been cracking in the pavement and they must have contemplated the possibility that that would give rise to a claim for breach of warranty against WGC: Tzaneros Investments Pty Limited v Walker Group Constructions Pty Limited [2016] NSWSC 50 (Trial Judgment) at [95].

62. His Honour found that evidence of prior negotiations did not assist WGC’s construction as “the parties’ decision to change the definition [of building warranties] is equally consistent with a shared belief that the rejected words were unnecessary”: Trial Judgment at [94]. In regards to WGC’s contention that it did not consent to an assignment of accrued rights, the primary judge found first, that the consent given by WGC could not affect the scope of the assignment and second, that the reference to the date of sale was simply to identify when the assignment took effect and WGC should start dealing with Tzaneros rather than P&O.

63. The second issue was whether Tzaneros had suffered any loss in light of the principle in Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd [2009] NSWCA 224 (Allianz) that a successor in title who acquires a building in full knowledge of its defects suffers no loss from the existence of those defects. The primary judge dismissed this argument for two reasons. First, the principle was not applicable in the case of an assignee of warranties. In the absence of any other evidence, it was to be inferred that the price paid by Tzaneros for the terminal reflected the fact that warranties were being assigned. Second, Tzaneros did not have full knowledge of the defects at the time it acquired the terminal. The primary judge stated that the relevant knowledge was that of Mr Tzaneros, whose evidence was that the first time he knew of structural problems with the pavement was in July 2006. The primary judge accepted Mr Tzaneros’ evidence that he did not know the pavement suffered from a design defect at the time of acquisition, stating that this was consistent with what Mr Tzaneros was told at the time and the concession made by WGC’s counsel: Trial Judgment at [100].

64. In calculating Tzaneros’ loss, the primary judge referred to the principle in Bellgrove v Eldridge (1954) 90 CLR 613; [1954] HCA 36 (Bellgrove) that “the innocent party is entitled to recover as damages the cost of rectifying the defects, and not simply the difference in value of the relevant property with and without the defects”: Trial Judgment at [101]. He stated that an exception to this principle existed where it would be unreasonable to rectify the defects in question, but only where the cost of remedying the defect would be out of proportion to the achievement of the contractual objective. The primary judge pointed to undisputed evidence that the pavement was defective in the sense that it could not sustain the contracted-for level of traffic over the 20-year period specified and reiterated that what Tzaneros was seeking to recover was the cost of replacing the pavement so that it conformed to the contractual standard.

65. The primary judge stated that it was difficult to see how the assignment to Tzaneros could affect the application of the principle in Bellgrove. He stated that the effect of the assignment was that Tzaneros was placed in the shoes of P&O and seeking to recover damages from WGC as if it were P&O: Trial Judgment at [116]. He found there was no evidence to suggest Tzaneros acquired the terminal at a substantial discount.

66. In response to WGC’s contention that it would be unreasonable to replace the whole of the pavement because the defects had not affected the operation of the terminal, the primary judge queried how this fact affected the application of the Bellgrove principle in circumstances where WGC accepted that at least some of the panels required replacement. His Honour stated that, in any event, it did appear that the defects had a significant effect on the operation of the terminal on the basis of evidence given by Arthur Tzaneros to the effect that he had to engage in substantial repairs and that forklifts were required to operate at slower speeds. He said this was consistent with what could be observed on a view of the terminal.

67. The primary judge rejected the evidence of Dr Baigent, the engineering expert retained by WGC, in favour of Mr Davis, the expert retained by Tzaneros, on questions of both the extent of necessary replacement and appropriate design. His Honour noted that Mr Davis’ “concession” that not all panels needed to be replaced was made on an incomplete assumption, namely, on the physical state of the pavement at present.

68. Applying the principle in Bellgrove, his Honour concluded that it would be reasonable to replace any part of the pavement that has been or might be the subject of the loads specified in the D&C contract and it would be unreasonable to replace those parts of the pavement that have not been subjected and are not likely to be subjected to those loads over the next nine years. The only parts falling under this latter category were the parts of the pavement falling under the awnings of the warehouses. Regarding the balance of the area, he reasoned that there was a realistic possibility that systems of work would change over time with the result that different parts of the pavement would be subject to different levels of stress. Further, his Honour found that Tzaneros was not entitled to recover the costs of replacing panels that had been replaced by third parties, but was entitled to recover the original costs of replacement. He also accepted that the design of the replacement paving proposed by Mr Davies was the appropriate methodology.

210. On 16 October 2013 the further offer of compromise was made (the second offer) in an amount of $9 million exclusive of costs, expressed to be open until 14 November 2013.

211. The motion to amend was heard by Sackar J on 8 November 2013 on which date he allowed the amendment observing, however, the effect would be to introduce a new claim as up to that time a breach was only alleged in relation to the construction of the pavement and not its design.

212. The primary judge rejected the contention that the amendments in 2013 essentially raised a new case, stating he was not bound by the contrary conclusion reached by Sackar J. He concluded that since the proceedings were commenced, Tzaneros’ primary claim was that WGC was in breach of the warranties contained in the contract for the design and construction of the terminal. He considered that Tzaneros’ solicitors were correct in pointing out that the case did not depend on proving deficiencies in design or construction but rather it depended on proving that the pavement was incapable of supporting the contracted for loads for the minimum period of 20 years. The primary judge concluded in the circumstances, Tzaneros was entitled to costs on an indemnity basis from the day after the 2010 offer was made.

213. The primary judge stated that if he was incorrect in reaching this conclusion, he would have ordered costs on an indemnity basis from the day after the 2013 offer was made. He rejected the submission that it was not appropriate to make such a costs order because the proceedings were in a state of flux, noting that although the motion had not been determined, the amendment did not substantially change the plaintiffs’ case. He also rejected the submission that the crucial question was whether WGC acted unreasonably in rejecting the offer, stating that question is only relevant to an offer made in accordance with the principles in Calderbank v Calderbank [1975] 3 WLR 586. He stated that the question under UCPR r 42.14 is whether the Court should order otherwise than (in this case) making an order for indemnity costs. He stated that the onus is on the offeree to establish such an order should not be made, an onus which is not discharged merely by proving the offeree acted reasonably in rejecting the offer.

The submissions

WGC’s submissions

217. WGC submitted the primary judge erred in ordering indemnity costs in relation to the first offer as no particulars were supplied such as would enable the claim to be assessed, particulars not being supplied until 2013. It also submitted the claims upon which Tzaneros was successful were not pleaded until the 2013 amendments and thereafter Tzaneros did not pursue the claims it had made at the time of the 2010 offer.

218. WGC also submitted the provision of expert evidence was critical because the warranties could not be the subject of a claim unless it could be demonstrated that there had been compliance with the O&M Manual or the damage would have been occasioned in any event (Special Condition 3.41 of the D&C contract).

219. In relation to the second offer, WGC submitted that having regard to the procedural history of the case it was appropriate to decline to award indemnity costs. It repeated its submission below that it was not unreasonable to reject the offer when the pleadings were in a state of flux.

220. WGC noted a difference of views in the authorities as to whether it was appropriate to depart from the usual order, but submitted in the present case there were proper reasons for doing so.

221. Counsel for WGC summarised the allegations in the first summons and list statement as at 30 September 2009 as including an allegation that the contract involved the design and construction of the terminal (statement C5, C6 and C12) an allegation the defective work constituted a breach of contract (statement C37) and the failure to rectify constituted a breach of the pavement warranty (statement C38). He submitted that the amended summons dated 29 September 2010, the one in force at the time of the first offer, did not make allegations in these broad terms. It referred to C17 of the amended list statement which it stated contained no allegation that the design was inadequate and that WGC had breached the contractual warranties by the design work.

Tzaneros’ submissions

222. Tzaneros stated that its claim under the amended summons was for breach of contractual warranties under the D&C contract and the primary judge was correct in concluding that it did not depend on establishing the cause of the defect was a defect in design or construction.

223. Tzaneros submitted WGC overstated the significance of cl 3.41 of the special conditions. It submitted that the clause simply required the respondent to prove that any breach of the Pavement Design Loading Obligation was not caused by a failure to comply with the maintenance requirements under the O&M Manual.

224. In relation to the second offer, Tzaneros submitted that WGC advanced no substantial reason why the primary judge erred in the exercise of his discretion in failing to “otherwise order”.

225. Senior counsel for Tzaneros noted the particulars to C7 of the amended list statement (the one in force at the time of the first offer) embraced the obligations of both design and construct. He pointed out that C8 included reference to the design criteria.

226. Senior counsel for Tzaneros also referred to the allegation of breach in C17 of the amended list statement. He submitted the breach was want of fitness. He submitted that the precise cause of lack of fitness was not a material fact. He submitted the failure to provide particulars in the circumstances was not a ground to disentitle Tzaneros from an order for indemnity costs in its favour.

Consideration

227. Each of the offers of compromise were made in accordance with the rules. The question is whether in those circumstances the primary judge erred in declining to make an order other than that provided for in UCPR r 42.14.

228. WGC argued that an order for indemnity costs should not be made from the date of the first offer because the case made by Tzaneros substantially changed by amendment made in 2013 and also by the failure to provide the particulars requested in June 2010.

229. I do not think that the failure to provide the particulars requested required the judge to make an order other than an indemnity costs order. The response to the request from the solicitors for Tzaneros, to which I have referred at [209] above, identified the defects said to constitute a breach of the contractual warranties. It does not seem to me to be necessary to supply particulars of why such a breach occurred.

230. As counsel for WGC pointed out, the original Summons and List Statement allege breaches of the warranties in broad terms. It is true that the List Statement of 29 September 2010, the one in force at the time of the first offer, was more detailed, but it does not seem to me that it limited the claim for breach of warranty to a breach caused by faulty construction as distinct from design.

231. Part B.1 of that List Statement stated that one of the issues likely to arise was the nature of the defects in respect of the pavement. Paragraph C.7 pleaded the warranties said to have been breached.

232. Paragraph C.17 is of importance. It was in the following terms:

In breach of the Contractual Warranties:

1. WGC failed to construct the Pavement Works fit for:

1. their use as part of a trade and transport terminal initially comprising five warehouse and office facilities together with container storage facilities and associated services; and

2. the movement of shipping containers by forklift and storage of laden containers up to four high and empty containers up to six high;

in each case for a period of 20 years.

(b)   WGC failed to construct the Pavement Works with a minimum design working life of 20 years with:

(i)   nil routine maintenance requirements; and

(ii)   no removal or replacement being necessary;

(iii)   in the case of each of (i) and (ii), having regard to the pavement loadings.

233. Paragraph C.17(b) refers to a failure to construct the pavement with a minimum design working life of 20 years. The addition of the words “design working life” seems to me to effectively extend C.17(a) to a failure to construct a pavement designed to have a working life of 20 years. It does not seem to me that in those circumstances C.17 abandoned any claim for faulty design.

234. As the primary judge pointed out (Costs Judgment at [51]) Tzaneros’s claim was for breach of warranty and was dependent upon it proving the pavement was incapable of supporting the contracted-for loads for a minimum period of 20 years. To that extent the cause of the failure was irrelevant. In these circumstances the primary judge did not err in the exercise of his discretion by declining to make an order other than an order for indemnity costs.

235. Even if that order was incorrect I agree with the conclusion of the primary judge that there was no reason to make an order other than for indemnity costs from the date of the second offer of compromise. By that time Tzaneros had served a pleading which clearly identified the issue of faulty design. The fact that WGC was resisting the amendment does not, in my view, provide a reason to make an order other than an order for indemnity costs.

236. This ground of appeal has not been established.

Costs of the Appeal

237. Tzaneros somewhat faintly argued that if successful on the appeal it should have its costs of the appeal on an indemnity basis notwithstanding the failure to renew the offer of compromise following the conclusion of the trial.

238. Although there is authority that an offer of compromise retains significance for the purpose of cost orders on appeal (Ettinghausen v Australian Consolidated Press Ltd (1995) 38 NSWLR 404 at [409]-[410]), subsequent decisions of this court have expressed a contrary view: Coombes v Roads & Traffic Authority (NSW) (No 2) [2007] NSWCA 70 at [79]-[82]; Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 at [37]-[43].

239. In the present case the appeal was arguable and raised some difficult questions. The offer of compromise not having been renewed, there is no reason to make an order other than the usual order for costs.

Conclusion

240. In the result I would make the following orders:

1. Appeal dismissed.

2. Order that the appellant pay the first respondent’s costs of the appeal.

241. BEAZLEY P:  I have had the advantage of reading in draft the reasons of Bathurst CJ.  I agree with his Honour’s reasons and proposed orders.

242. GLEESON JA:  I agree with Bathurst CJ.

Judgment

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Amendments

01 March 2017 - Paragraph numbering corrected

02 March 2017 - Paragraph numbering corrected

Decision last updated: 02 March 2017