Wehbe v Rolando

[1999] NSWSC 384

CITATION:	WEHBE V ROLANDO [1999] NSWSC 384
CURRENT JURISDICTION:	Construction
FILE NUMBER(S):	55041/1995
HEARING DATE(S):	12th, 13th, 14th, 15th April 1999
JUDGMENT DATE:	29 April 1999
PARTIES :	Raymond Wehbe as representative of the Estate of the late Joseph Assad Wehbe - First Plaintiff Mars Constructions Limited - Second Plaintiff Rolando Pty Limited - First Defendant Corbel Pty Limited - Second Defendant George Papallo - Third Defendant Pioneer Plasterboard Pty Limited - Fourth Defendant
JUDGMENT OF:	Rolfe J

COUNSEL :	Dr C.J. Birch - Plaintiffs Mr G.T.W. Miller QC/Ms V.A. Hartstein - Defendants
SOLICITORS:	Wehbe & Co - Plaintiffs Snelgrove & Partners - Defendants
CATCHWORDS:	Case involving consideration of a dispute in respect of a one-off contract situation; Aggravated and exemplary damages. Whether payable in respect of damages for breach of contract.; McGregor on Damages (16th Edition) (1997) para 442; Halsbury's Laws of Australia (Volume 6) para 110-11060; Butler v Fairclough & Anor (1917) 23 CLR 78; Addis v Gramophone Company Limited [1909] AC 488; Flamingo Park Pty Limited v Dolly Dolly Cration Pty Limited & Ors (1986) 65 ALR 500; Gray v Motor Accident Commission (1998) 73 ALJR 45 applied.
DECISION:	Held no entitlement to aggravated or exemplary damages.

111

JUDGMENT

HIS HONOUR:

Introduction

1 On 1 December 1993, the plaintiffs, Mars Constructions Pty Limited, (“Mars Constructions”), and its founder and principal director, Mr Joseph Wehbe, for which and whom Dr C.J. Birch of Counsel appeared, entered into two written building contracts pursuant to each of which they undertook to build a block of home units. I shall also refer to the plaintiffs as “the builder”. One contract was entered into with Rolando Pty Limited, (“Rolando”), as trustee for a unit trust, and provided for the redevelopment of a property at 6-10 May Street, Hornsby by the demolition of existing improvements and the construction of twenty seven new two-bedroom and one new three-bedroom Strata Title home units for a fixed price of $2,785,225 “subject only to rock excavation being undertaken in accordance with the contract”. The project manager was nominated as PBI Holdings Pty Limited, (“PBI”), a company effectively controlled by Mr George Papallo. The nominated architect was H & B Pty Limited, although it was accepted that Mr Papallo had the control of supervision on the site. The other contract was entered into with Corbel Pty Limited, (“Corbel”), as trustee for another unit trust, and provided for the redevelopment of a property at 8-12 Water Street, Hornsby, which was nearby 6-10 May Street, by the demolition of existing improvements and the construction of twenty seven new two-bedroom Strata Title home units for a fixed price of $2,773,200 “subject only to rock excavation being undertaken in accordance with the contract”. The project manager was nominated as Alanto Investments Pty Limited, (“Alanto”), which was also effectively controlled by Mr Papallo and, notwithstanding that H & B Pty Limited was the nominated architect, Mr Papallo had the control of supervision. Mr Richard Hudson and Mr Herman were directors of Rolando and Corbel. The two contracts were to be performed almost simultaneously. Mr G.T.W. Miller of Queen’s Counsel and Ms V.A. Hartstein of Counsel appeared for Rolando, Corbel and Mr Papallo, which and who respectively were the first, second and third defendants. I shall also refer to Rolando and Corbel as “the proprietor”.
2 It was not in issue that Mr Wehbe was a very experienced and competent builder and, before these contracts were entered into, he and Mr Papallo had been engaged in other building projects in the same capacities including one next door to the May Street site, being 2-4 May Street, and that they enjoyed a good relationship and friendship. Mr Wehbe’s wife and his son, Mr Raymond Wehbe, were also directors of Mars Constructions. Towards the end of May or in early June 1995 Mr Joseph Wehbe returned to the Lebanon, where he remained until his death on 26 July 1995. Mr Raymond Wehbe appears to have assumed basic control of the builder, and he was appointed to represent his father in these proceedings.
3 The contracts were the subject of detailed negotiations between the parties and their solicitors. Mars Constructions and Mr Wehbe retained Mr Wehbe’s nephew, Mr Louis Wehbe, as their solicitor, and the defendants retained Mr J.A. Snelgrove as their solicitor. It did not seem to be in issue that on the late afternoon or early evening of 1 December 1993 Mr Joseph Wehbe, Mr Raymond Wehbe and Mr Louis Wehbe attended at Mr Snelgrove’s offices for the purpose of considering and, if satisfied, signing the contracts. Mr Snelgrove was present from time to time, but there was no other representative of the defendants present. However, during the meeting there was a telephone conversation with Mr Papallo, which was conducted on a conference line. There was an issue as to whether, during that telephone conversation, Mr Joseph Wehbe told Mr Papallo that he was not satisfied with the time provided for building the May Street units. It was alleged by Mr Raymond Wehbe and Mr Louis Wehbe that a conversation to that effect took place and that Mr Papallo, in essence, said that if any additional time was needed there would be no problem about it. Any conversation to this effect was denied by Mr Snelgrove and Mr Papallo but, in the end, it did not seem to matter particularly which version is accepted. Therefore, I find it unnecessary to resolve the conflict.
4 Each contract comprised the standard form JCCB 1985 Building Works Contract together with detailed special conditions and a specification. There is no issue but that the work was essentially carried out, although disputes arose towards its conclusion in relation to alleged defects and, subsequently, concerning the failure to provide insulation and an acceptable fire rated ceiling on the top floors. These matters were not ascertained until about August 1995.
5 Clause 10.20 required the builder to give security, which was agreed at five per cent of the contract sum, by way of bank guarantee “in an amount being the equivalent of five per cent (5%) of the Contract Sum in two (2) Bankers’ Undertakings or Guarantees each the equivalent of two and one half per cent (2%) of the Contract Sum”. This was done by way of four Bank Guarantees furnished by the National Australia Bank Limited, (“NAB”).
6 Clause 10.22.02 provided that the Bank Guarantee should be maintained effective until the issue by the architect of the Notice of Practical Completion pursuant to Clause 9.09.02, or until the date the works are deemed to have reached Practical Completion pursuant to Clauses 9.09.04 or 9.10.04 and, upon the first of those events to happen, the proprietor was to authorise the reduction to half the original amount or, upon the builder providing a further Bank Guarantee on like terms and conditions but equal to one half of the amount the proprietor was to release the original Bank Guarantee.
7 Clause 9.09.04 provided for what should happen in the event of the architect not issuing a Certificate of Practical Completion; and Clause 9.10.04 provided:-
“If the Proprietor occupies and/or uses the Works or part thereof prior to Practical Completion in the absence of any such agreement and Notice or of other written agreement between the Proprietor and the Builder then the whole of the works shall be deemed to have reached Practical Completion on the date of commencement of such occupancy and/or use.”
8 Clause 9.11 provided that the Defects Liability Period shall commence on the date on which the works reached or were deemed to have reached Practical Completion, and Clause 9.12 provided that subject to several clauses the builder should complete the making good of all defects within a reasonable time “of the end of the Defects Liability Period”. The Defects Liability Period was twenty six weeks.
9 Clause 10.14 provided that if the builder failed to bring the works to Practical Completion by the date for Practical Completion then the architect may give notice in writing to the builder and to the proprietor, not later than twenty days after the date on which the works actually reached or are deemed to have reached Practical Completion, that in his opinion the works ought reasonably to have been brought to Practical Completion at some earlier time to be stated in the Notice, not being earlier than the date for Practical Completion. Clause 10.14.02 provided that if such notice was given the builder shall pay or allow to the proprietor a sum calculated and certified by the architect at the rate stated in Item M of the Appendix as liquidated and ascertained damages for the period commencing from the date so stated during which the works shall remain or have remained not brought to Practical Completion, and Clause 10.14.03 provided:-
“In the event of no further moneys being payable to the Builder or in the event of the sum calculated in accordance with paragraph 10.14.02 exceeding the amount remaining payable by the Proprietor to the Builder the Proprietor shall be entitled to recover the same, or any excess, as a debt due to the Proprietor by the Builder.”
In the schedule the amount provided was $6,000 “per week or part thereof”.
10 The terms of the building contracts were largely overtaken by various events. Firstly, the architect was not required to issue notices Mr Wehbe and Mr Papallo apparently sorting out matters in a more informal way as the building work progressed. Thus the giving of formal notices conformably with the contract was not required. Secondly, a further agreement was entered into on 18 May 1995, which, in my opinion, overtook the building contracts, save to the extent that their terms were incorporated in it.

The Agreement Of 18 May 1995
11 On 18 May 1995 Mr Joseph Wehbe and Mr Papallo met with a view to seeking to resolve various differences which had arisen and letters bearing that date were exchanged. They discussed the problems for several hours, after which they approached Mr Noel Smith, who worked on some contract basis for Mr Papallo. Mr Papallo dictated both letters in the presence of Mr Wehbe. Mr Smith typed what Mr Papallo dictated and, thereafter, Mr Wehbe took the letters away to consider them with Mr Raymond Wehbe and Mr Louise Wehbe before he signed his letter. The letters were then returned to Mr Papallo. The letter signed by Mr Joseph Wehbe was addressed to Mr Papallo and, after referring to the two properties in the heading, continued:-
“In regard to the above matters and further to my meetings with you, we acknowledge the following:

1) As agreed, your principals owe us a total of $153,000 in regard to the Building Contracts re the above properties, inclusive of all extras etc.

2) We concede that penalties apply in regard to both of the above projects in the sum of $133,000.

We therefore advise that upon payment of the sum of $20,000 your principals have fully satisfied their obligations to us under the relevant contracts and no further monies whatsoever are due.

We again reiterate our assurances to you that we acknowledge our continuing obligations under the contracts in regard to defects etc and we will always promptly attend to rectification of the same and any of our other obligations under the contracts for as long as we remain liable under the said contracts.”

12 The letter signed by Mr Papallo, which was on Alanto’s letterhead and was signed by him on behalf of Alanto and PBI, stated:-
“On behalf of ourselves in regard to 8-12 Water Street and on behalf of PBI Holdings Pty Ltd in regard to 6-10 May Street, we acknowledge receipt of your letter dated today and advise that we find the contents thereof as being satisfactory and acceptable.
We further acknowledge that the second Bank Guarantee in regard to May Street is due to be released to you on 8th June 1995 and the second Bank Guarantee in regard to Water Street is due for release to you on 3rd September 1995.”
13 There is a handwritten post script stating:-
“We accept that the tar staining on the driveway cannot be rectified and we will not require any further rectification in regard to such tar staining.”
14 On the same day Mr Papallo caused the $20,000 to be paid and the first Bank Guarantees in relation to May and Water Streets to be delivered to Mr Wehbe. Those actions support the conclusion that the only matters outstanding were the repair of defects and the release of the second guarantees.
15 It was not in issue that the two letters constituted an agreement but, on behalf of the defendants, it was submitted that they did not set forth the totality of it. It was submitted that the defendants’ position was that the reference to the dates in the second letter was in response to a request from Mr Wehbe that he be advised of the dates when those Bank Guarantees were due for release, and that it was always a term of the agreement that their release was contingent on the defects being rectified.
16 It was also submitted on behalf of the defendants that there were certain oral terms, namely that upon payment of $20,000 the parties would compromise their claims, but that the plaintiffs remained liable and responsible to address the defects and the remaining bank guarantees were to be retained to support the performance of that obligation.
17 It was not in issue that the agreement reached on 18 May 1995, subject to ascertaining its precise terms, was a genuine attempt by Mr Joseph Wehbe and Mr Papallo to conclude their differences in relation to the building works. Mr Joseph Wehbe, according to Mr Raymond Wehbe, was concerned that there may be a claim for substantial damages and he wished to resolve the matter before leaving for the Lebanon, which he did shortly thereafter. Matters then seem to have been left in the hands of Mr Raymond Wehbe and, on 20 June 1995, he wrote to Mr Papallo stating:-
“I refer to the undertaking given by you on behalf of Alanto Investments and PBI Holdings P/L on the 18th of May 1995 regarding the bank guarantees. Pursuant to the undertaking you were to return the guarantee given in regard to May Street development on 8 June 1995. The bank guarantee has not yet been returned. Your failure in this regard is causing Mars Constructions P/L to incur further costs for which we hold you responsible. I insist that you return the bank guarantee referred to within 48 hours, i.e. 1.00 pm Thursday 22 June 1995.
Failure by you to return the bank guarantee would be a serious breach of the arrangements entered into between yourselves and Mars Constructions for the settlement of all outstanding claims between the parties that was made on the 18th of May 1995.
Following my conversation with Mr Noel Smith last week he indicated that you were retaining the bank guarantee until you had received a notice from us addressed to Metway Finance Limited. We are not obliged to provide you with any notices for Metway Finance and we will not be providing you with any notices that we are not obliged to provide under the terms of the contracts. You are not entitled to refuse to return the bank guarantees on conditions relating to us providing notices to your financiers.”
18 On 26 June 1995 Mr Louis Wehbe wrote to Mr Papallo stating:-
“We refer to previous correspondence in respect to the above matter and advise that we act on behalf of Joseph Wehbe and Mars Constructions Pty Limited regarding same.
We are instructed that pursuant to the Agreement reached with you on 18th May 1995, the second Bank Guarantee in respect of the development at 6-10 May Street Hornsby was to be released to our clients on 8th June 1995. We note that our client by letter dated 20th June 1995 demanded the return of the Bank Guarantee within a further 48 hours but that you have refused or neglected to provide same to our client.
We accordingly formally advise that the Agreement of 18th May 1995 referred to above is hereby rescinded.
We will, on behalf of our clients, pursue recovery of the monies outstanding to them and commence proceedings against Corbel Pty Limited and Rolando Pty Limited in the District Court of New South Wales forthwith.
All future correspondence regarding this matter from yourself or the proprietors of the subject property should be directed to this office.”
19 On 28 June 1995 Mr Papallo wrote to Mr Joseph Wehbe and Mars Constructions:-
“Having just returned from holidays, I have now read with bemusement your correspondence as addressed to ourselves and PBI Management Pty Ltd dated 20 June 1995.
Your letter seems to be based on your ignorance of your contractual obligations and I would suggest you and your solicitors read all your contractual documentation before coming to the conclusions as expressed in your letter. Your expression (in the final paragraph of your letter) of Noel Smith’s statement is not correct. Our undertaking to you in regard to the bank guarantees as contained in our letter to you dated the 18 May 1995 was based upon the matters contained in your letter to us of even date, and in particular your final paragraph. Your non-compliance in the matter of defects is despite our continual verbal and written demands since approximately November 1994 and continues since the 18 May 1995, whereby you have failed and continue to fail, to rectify the defects. This is primarily the reason that the bank guarantees have not been released.
Having regard to your attitude and your continuing non-compliance with our demands regarding defects you are now put on notice that you leave us with no option but to cash all bank guarantees and use these funds to pay for the rectification of the defects.
Finally, we would request that you inform your solicitors to correspond with our solicitors and not ourselves.”
There is no suggestion in this letter of the existence of any additional oral terms.
20 On 28 June 1995 Mr Louis Wehbe wrote to Mr Papallo denying that there were any defects, which had not been rectified, seeking particulars of any notification of such defects, and stating that all defects had been attended to promptly on notification.
21 On 29 June 1995 Mr Snelgrove responded stating, inter alia:-
“We note at a meeting in May 1995, at which Joe Wehbe for himself and on behalf of Mars Constructions Pty Limited was present with George Papallo on behalf of Alanto Investments Pty Limited and PBI Management Pty Limited, certain matters were agreed and which we are instructed are correctly set out in your client’s letter to our clients of 18 May 1995.
Our client acknowledged the correctness of the abovementioned letter by its letter of 18th May 1995 and the cheque of $20,000 was paid by way of a bank cheque drawn on Metway Bank Limited on 18th May 1995.
In relation to the bank guarantees referred to in the second paragraph of our client’s letter of 18th May 1995 to your clients, these are the dates that are referred to in the relevant Building Contracts but naturally any release of such bank guarantees is dependent upon your clients discharging their contractual obligations in accordance with the Building Contracts. In that regard we advise that contrary to your letter of 28th June 1995 to our clients, there are still defects that are not rectified or defects that have been purportedly rectified but not to our clients’ and its consultants’ requirements.
In relation to your letter of 24th May 1995 addressed to Mr Noel Smith of Alanto Investments Pty Limited, your letter appears to ask to proceed on an erroneous basis, namely, that the matters set forth in our respective clients’ communications of 18th May 1995 are not yet complete. This is certainly incorrect as the compromise as worked out between our respective clients was agreed and then completed upon payment of the sum of $20,000 as indicated above. These matters cannot be revisited and your client, and indeed our client, are bound by the agreement that has been reached and now concluded. However, this has nothing whatsoever to do with rectification of defects, and the consequent release of the second bank guarantees on each project, that have been and are yet to be resolved.
On 20th June 1995 your clients wrote to our clients a letter which again appears to us to proceed on an erroneous basis. The agreements reached between our respective clients of 18th May 1995 have nothing to do with defects and their rectification by your clients in order the release of the second bank guarantees for each project. Indeed, the defects issue is specifically accepted by your clients in their letter of 18th May 1995 and it goes without saying that the reference to the release of the bank guarantees in our client’s letter of 18th May 1995 is and has always been and will be dependent upon your clients’ performance of their contractual obligations.
In relation to your letter of 26th June 1995 to our client, we do not intend to say anything further as the matters mentioned above adequately respond and deal with the matters that you have raised save that your clients had no basis to pursue the matters that were the subject of the compromise agreed 18th May 1995 which has now been completed and fully performed. If the reference in the penultimate paragraph of this letter is to some other moneys, then please provide to us how those moneys allegedly became owing or are due and owing to your clients in the face of the compromise of 18th May 1995.”
This letter made no reference to any additional oral terms.
On 5 July 1995, Mr Louis Wehbe wrote to Mr Snelgrove referring to that letter and advising that the defects period relating to the May Street development “is now finalised”. The letter continued that there were no outstanding defects, and that with respect to the Water Street property his clients were attending to other defects of which they had been advised. The letter continued:-
“With regard to the letters of 18th May 1995 we wish to confirm that the contents of those letters have been rescinded. The original Contract accordingly applies. Your client has breached that Contract by not paying progress payments claimed, and demands for payment, regarding the May Street development on 13th September 1994, 19th October 1994, 1st December 1994, 19th December 1994, 6th January 1995, 3rd April 1995 and 7th April 1995.”
In my view, and for reasons to which I shall refer, the statement that the original building contracts were applicable was erroneous.
22 The letter went on to refer to a dispute about payments in respect of Water Street and because of the existence of those disputes the prospect of the matter being referred to arbitration.
23 There was an assumption in this letter that the effect of terminating the agreement of 18 May 1995, assuming that it was lawfully terminated for breach, was to reinstate the original building contracts, rather than to bring about a situation whereby the rights of the parties were to be determined pursuant to the agreement of 18 May 1995.
24 On 11 July 1995, Rolando and Corbel gave notice to NAB calling up the Bank Guarantees in the sums of $69,631 and $69,330 respectively. NAB, pursuant to those notices, paid out the amounts to those companies. The evidence, however, makes it clear that neither company had made an assessment of the amount payable to remedy the defects, at that time, and the evidence of Mr Papallo was that he gave instructions to Mr Snelgrove to recover the amounts notwithstanding that fact, and notwithstanding that each guarantee allowed for a payment by NAB in whole or in part. It will be necessary to refer to Mr Papallo’s evidence about this in some detail. On 12 July 1995 Mr Raymond Wehbe was informed that the guarantees had been drawn down and, on 13 July 1995, the plaintiffs commenced proceedings in relation thereto and obtained relief on an ex parte basis from Brownie J.
25 The purported justification for calling on the guarantees was the alleged failure by the plaintiffs to remedy the defects. However, on 23 May 1995, Mr Smith, who was contracted in some way to Alanto and PBI, sent a facsimile transmission to Mr Raymond Wehbe in relation to outstanding defects at both properties. On 24 May 1995 Mr Wehbe responded advising that all items had been rectified with certain exceptions and, in relation to May Street, the exception was that in two units a tiler was to replace damaged tiles. The other defects to which attention had not been given were in the Water Street property.
26 There was a dispute between Mr Raymond Wehbe and Mr Papallo about the terms of a telephone conversation between them on 24 May 1995. Notwithstanding that Mr Papallo had prepared a contemporaneous note, I prefer the evidence of Mr Raymond Wehbe, whom I accepted as a generally truthful witness. Whichever version is accepted, it is quite clear that Mr Papallo was seeking to have a letter to the financier signed and was threatening to move against the guarantees if this was not done. It is inherently improbable that only six days after the 18 May 1995 agreement was entered into Mr Papallo would have been saying that the defect position was “getting out of hand”.
27 On 29 May 1995 Mr Smith sent another facsimile transmission to Mr Wehbe referring to defects at both properties and, on 7 June 1995, Mr Wehbe wrote to Mr Papallo reporting that all items referred to in that facsimile transmission had been rectified “with the exception of the planter box waterproofing in Water Street which has been promised to be done this week by the sub-contractor”. Accordingly, the assertion was being made that all the defects at May Street had been rectified. This was never contradicted orally or in writing by Mr Papallo or Mr Smith. It is to be noted that an expert retained by Mr Papallo, Mr Edminston, appears to have carried out an inspection on 30 May 1995 but no report from him detailing defects was furnished before proceedings were commenced.
28 Notwithstanding that Mr Papallo had been a solicitor for some ten years until 1981 and was an experienced property developer by 1995, and notwithstanding that he said that defects remained, he made no response to the assertions in the letter of 7 June 1995. This is a matter of some significance because on 20 June 1995 Mr Smith sent a facsimile transmission to Mr Wehbe complaining about possums entering Water Street. The significance of this, in my opinion, is that when complaints were thought to be justified they were made and, on 22 June 1995, pursuant to a further list of defects in respect of Water Street, Mr Wehbe wrote to Mr Papallo dealing with them. However there were no complaints in respect of May Street.
29 At Tp.103 Mr Papallo said, in a not particularly satisfactory manner, that so far as May Street was concerned “there are a whole list of things that were not completed” on about or shortly after 7 or 8 June 1995.
30 At Tpp.113-115 I referred Mr Papallo to the letter of 28 June 1995, which he said he drafted and which correctly recorded his views about the matters to which he referred. I asked him to what documents he was referring in the second paragraph and he said the building contracts and he supposed all the defects lists, but nothing else. Although his attention had been turned to the letters of 18 May 1995, Tp.114, he did not include those among the contractual documents to which he was suggesting regard should be had.
31 He agreed, Tp.115, that he could not find any written correspondence in relation to May Street after the letter in which he was told that all defects had been made good, and that in retrospect the obvious thing for him to have done, if there had been a dispute about May Street, would have been to send a letter or facsimile transmission stating that, contrary to what Mr Wehbe was asserting, there were still matters outstanding. He said he was an experienced developer, used to dealing with builders and a solicitor of some ten years’ standing, who appreciated the importance of contemporaneous written documents and:-
“Q. Yet in answer to one of the major assertions in this case, at that point, namely that May Street had been concluded so far as defects were concerned, you made no response; is that the position?
A. Yes your Honour.”
I am satisfied there were no such communications because Mr Papallo and Mr Smith were satisfied there were no defects in May Street at that time, nor up to the time when Mr Papallo refused to return the Bank Guarantee for May Street.
32 At Tp.122 I again referred Mr Papallo to the letter of 28 June 1995 and he agreed there was no reference in it to any oral communications concerning the contract. He attempted to say that whilst there was no direct reference there was one by implication in the words “Having regard to your attitude and your non-compliance with our demands”. At Tp.123 he agreed the demands were not contractual terms and:-

“Q. And in this letter, you were pointing the reader to the contractual obligations in contractual documentation were you not?

A. In contractual documentation, and in agreements that Joe and I had come to from day to day.

Q. Would you tell me where you refer to that in agreements where you and Mr Joe Wehbe had come to day by day?
A. I don’t - can’t show you in this letter. No it’s not in this letter.

Q. What I put to you I think is correct: you were referring the reader to the contractual documentation?
A. That’s the way it reads your Honour, yes.

Q. You were not referring the reader to some oral terms after contract into which you and Mr Wehbe had entered, were you?
A. Your Honour, in my mind the contractual obligations between us involved a little bit in so far as from January onwards of that year the costs of discussion about what would and would not be done, which weren’t necessarily one hundred per cent covered by the written documentation.

Q. The point I’m making is that you make no reference to those conversations in this letter?
A. That’s correct. I agree.

Q. You only refer the reader to the contractual documentation?
A. That’s what this letter does, yes.

Q. Which you have identified for me earlier this afternoon?
A. Yes your Honour.”
33 Mr Papallo, acting on behalf of Rolando and Corbel, instructed Mr Snelgrove to obtain the funds covered by the second two guarantees on 11 July 1995. He said that was done with the intention of using the funds to rectify defects in the buildings and that the amount obtained was $138,000. He agreed, Tp.115, that he had not then made any calculations whatsoever as to what moneys were needed to rectify whatever defects there were in the buildings, and added that the intent was to go straight out to tender and get it done. He also agreed the costs might only have been $15,000. He said, although he agreed he was uncertain about it, that he did not think he understood that the Bank Guarantee could be drawn down in part, but that the moneys that were drawn down “went into a trust account”, and that there was no intention to touch any of them “apart from whatever likely was required to rectify”. It was not in issue that the Bank Guarantees provided that the whole or part of the money could be drawn down, nor that the moneys were to discharge the indebtedness of the plaintiffs. The evidence continued, Tp.116:-

“Q. Before you drew them down, before you gave the instruction to draw them down, did you turn your mind to that question and think to yourself how much am I entitled to draw down?

A. No, we just drew down the whole lot and put it into a trust account.

Q. Well when you say you put it into a trust account, did you receive notice shortly after the visit to the Bank that an application had been made to the Supreme Court?
A. Several days later, yes.

Q. The moneys were actually moved from the account they were initially paid into, were they not, shortly after proceedings were commenced?
A. My instructions were that the moneys were to go into trust, and to be held there until we knew how much was to be used, because the balance was to be refunded to Mars Construction.

…

Returning though to the contract itself, did you consult the contract to ascertain whether you were entitled to take all the moneys and put them into a trust account under your control, and then deal with them as you saw fit?
A. No I didn’t consult the contract. I knew we were entitled to draw down on them, I just instructed the solicitor to do that.

Q. You didn’t bother to find out firstly whether you could only draw down for so much as was due to you at that time?
A. I was of the impression that we had to draw down the whole lot.”
34 Mr Papallo agreed he did not check the contracts and that he was not sure, because he did not check, whether the guarantees provided for drawing down of part of the money. He said that he simply instructed Mr Snelgrove to draw down the Bank Guarantees: Tp.118, and that he never turned his mind to what was the amount of money to which there was an entitlement under them, having no “specific idea” of the amount to which Rolando and Cordel would ultimately be entitled. He agreed, however, that he knew that under the contracts he was only entitled to have recourse to the guarantees to the extent that money was due by the builder to the proprietor under the contracts, but he was uncertain of the amount due. He repeated that and said, at Tp.119:-

“Q. And you didn’t care whether or not the moneys that you were demanding from the Bank were really due to you or not, or whether they were in excess of what was due to you?

A. The issue of caring didn’t cross my mind.

Q. You simply took $138,000 without caring whether or not that was money that you were entitled to take on 12 July?
A. I didn’t consider we took it. We cashed some guarantees and put some money into trust.

Q. You were intending to put it into an account that was controlled by you, is that correct?
A. Absolutely not. An account that was controlled by the legal firm handling the matter.”
35 He was unable to give any explanation as to why he did not leave the money with NAB, although he said that “in retrospect” he should have. He denied that he called upon the guarantees because he wanted to put pressure on Mr Wehbe to sign a letter to the financier of Rolando and Corbel.
The Pleadings
36 On 12 April 1999 the plaintiffs filed a Further Amended Summons in Court whereby they sought, as against Rolando, Corbel and Mr Papallo declarations that the proceeds of the two Bank Guarantees given by NAB on 6 December 1993 in the sums of $69,631 and $69,330 were held on trust for them, and an order that they be restrained from dealing with the proceeds. Various other orders were sought in relation to those moneys, and declarations were sought that Rolando is indebted to the plaintiffs pursuant to the building contract in respect of May Street in the sum of $62,122, and that Corbel is indebted to the plaintiffs pursuant to the building contract in respect of Water Street in the sum of $105,694.
37 An order was sought that the defendants pay damages to the plaintiffs and, further or alternatively, exemplary and/or aggravated damages.
38 At the commencement of the proceedings it was far from clear what matters were in issue or the extent to which the pleadings dealt with matters in issue. This arose notwithstanding that the proceedings have now been on foot for some four years, that the hearing was specially fixed to commence on 12 April 1999 as long ago as early November 1998, and that the parties were directed to bring in a statement of the issues. On the second day of the hearing Mr Miller was still promulgating the Defence to the Further Amended Summons. This is not said in a necessarily critical manner as the Amended Summons was only filed in Court on 12 April 1999, but it is totally unsatisfactory, when matters are the subject of extensive case management, for the parties and those representing them not to be able to formulate the issues, both through pleadings and a Statement of Issues prior to the commencement of the hearing. It is a quite inefficient way to conduct litigation and it leads to a waste of the Court’s time.
39 In the Notice of Contentions to the Further Amended Summons, most of which were not amended in any material respects, it was pleaded, and so much was not in issue, that Mr Raymond Wehbe was appointed to represent the estate of the late Mr Joseph Wehbe, who died on 26 July 1995, that the various corporate parties were duly incorporated, and the entry into the building agreements. Initially paragraphs 7 and 8 were admitted, they asserting that as at 18 May 1995 Rolando and Corbel were indebted to the builder in the sums of $62,122 and $105,694 respectively pursuant to the building contracts. Mr Miller withdrew those admissions and, in place thereof, substituted a pleading that in relation to Rolando the amount owing is $59,569, and that in relation to Corbel the amount owing is $82,707, but that from the sum of those two amounts must be deducted $20,000 paid pursuant to the agreement entered into on 18 May 1995. However, Rolando and Corbel also pleaded that the building contracts were novated by the agreement of 18 May 1995 whereby the parties resolved this part of the claim by setting off the amounts of $153,000 and $133,000, and by the payment by Rolando and Corbel to the plaintiffs of $20,000.
40 The plaintiffs pleaded that as 18 May 1995 there was a dispute between the parties as to any penalties alleged to be owing by the builder to Rolando or Corbel in regard to the contracts, which was admitted, although it was asserted that the builder admitted penalties were owing and that the dispute was as to the quantum thereof.
41 In paragraph 10 to 13 it was pleaded:-

“10. On 18th May 1995 the builder of the one part and Corbel and Rolando of the other part entered into an agreement to settle the dispute between themselves in regard to the outstanding penalties under the said contract, such agreement being in writing and contained in two (2) letters each dated 18th May 1995 (hereafter ‘the Agreement’).
11. It was a term and condition of the said agreement that the builder acknowledged to Rolando and Corbel that penalties applied under the said Contract in the sum of $133,000 and that $156,000 was outstanding under the said Contract and that Rolando and Corbel were consequently indebted to the builder in the sum of $23,000.

12. It was a further term of the said agreement that Rolando and Corbel acknowledged that the second Bank Guarantee in regard to the May Street development was due to be released on 8th June 1995 and the second Bank Guarantee in regard to the Water Street development was due to be released on 3rd September 1995.

13. It was either an express term or alternatively an implied term of the said agreement that the said Bank Guarantees would be released upon the said dates but for any sum which Rolando or Corbel might become entitled to retain pursuant to the said Contract in regard to defects in the said building works notified in accordance with the terms of the said Contracts.”

42 The defendants admitted paragraph 10, it not being contended at that stage that there were any oral terms of the agreement. However, when the case commenced Mr Miller said there was no issue that the two letters of 18 May 1995 constituted an agreement, but that they did not constitute its totality, the defendants’ position being that the reference in the letters to the date of the two guarantees was in response to a request from Mr Joseph Wehbe for confirmation of the dates when the guarantees were to be released, which release was always contingent on defects being rectified. He added there were some oral terms, namely that upon payment of $20,000 the plaintiffs would compromise their claims, but that the builder remained liable and responsible to address the defects and the remaining two Bank Guarantees were to be held to bring about performance of the rectification work, Mr Joseph Wehbe saying that all outstanding defects would be rectified. Paragraph 13 of the Notice of Contentions provides support for this view.
43 The Defence, in answer to paragraph 11, admitted that it was a term and condition of the agreement that the builder acknowledged to Rolando and Corbel that penalties applied in the sum of $133,000, and the defendants denied that $156,000 was outstanding and that they were indebted to the plaintiffs in the sum of $23,000. The defendants admitted that it was agreed that $153,000 was outstanding and that Rolando and Corbel were consequently indebted to the builder in the sum of $20,000. So much did not seem to be in issue. The Defence admitted paragraph 12, but, on 13 April 1999, Mr Miller said that paragraph 12 was now denied in so far as there was a reference in the letters to the dates on which the Bank Guarantees were due to be released, and that it was now asserted that as to paragraphs 12 and 13 the agreement, which arose in consequence of the exchange of the letters together with the payment of $20,000, constituted a novation of the contracts on the terms that the defendants acknowledged liability to pay for extras in the sum of $153,000, the plaintiffs acknowledged liability to pay penalties of $133,000, and the plaintiffs acknowledged a continuing obligation to address defects arising under the contract and such other obligations as might remain under the contracts to enable the work to be completed in a proper and workmanlike manner. It was further asserted that in consideration of the entry by the defendants into the novated agreement, Mr Joseph Wehbe, on behalf of the plaintiffs, represented and promised that all defects would be addressed in seven to ten days as from 18 May 1995 and that both projects would be brought to a stage where they were completely free from defects. So much was pleaded in the Amended Defence filed on 14 April 1999, although paragraph 12 was still admitted.
44 This led to an oral withdrawal of the admissions in paragraphs 5, 6 and 7 of the Defence and to the addition of a further amendment, whereby it was asserted that the plaintiffs are estopped and precluded from raising or relying on any alleged failure to give notice of the defects under the contracts because both the proprietor and the builder had so conducted themselves as not to rely on the notification provisions of the contracts, save for giving a notice to a third party lender; and that the plaintiffs waived their rights to insist on notice provisions of the contract. None-the-less the Amended Defence still admitted paragraphs 5 and 6.
45 In paragraphs 14 and 15, both of which were admitted, the plaintiffs asserted that they demanded the return of the May Street Guarantee “due for release on 8th June 1995” by letter dated 20 June 1995 and by a conversation on 21 June 1995 with Mr Noel Smith, and that on 11 July 1995 Rolando and Corbel procured NAB to pay the whole of the proceeds of those guarantees “which were appropriated to the use of Rolando and Corbel”.
46 In paragraph 16 it was pleaded that when that occurred there were no defects requiring rectification. The defendants denied that allegation and said that when the proceeds were taken by the defendants:-
“.. there were defects outstanding the cost of rectifying which far exceeded the sum of the proceeds of the said guarantees, particulars of which have been supplied.”
This assertion now has to be viewed in the light of the evidence of Mr Papallo that he had no idea of the amount necessary to remedy any defects, and of the calculation of the amount necessary to remedy defects.
47 In paragraph 17 it was pleaded that in the alternative to paragraph 16 if there were any defects they had not been notified to the builder by the architect in accordance with Clause 6.11 of the said contracts, that the builder was ready, willing and able to correct any such defects as may have been notified to the builder in accordance with the terms of the contract; and that the cost of correcting any such defects as may have been contained in the building works would not have exceeded $10,000. I have noted the pleadings and the changed pleadings in relation to this. I should also note that in the original Defence, in answer to paragraph 17, the defendants repeated what appeared in paragraph 8, which raised essentially the same issue as Mr Miller propounded on 13 April 1999.
48 In paragraph 18 it was pleaded that Rolando and Corbel, through Mr Papallo, knew that when the Bank Guarantees were appropriated the builder was not indebted to Rolando or Corbel in the sum of $138,961 “or any sum at all” pursuant to the contracts, and that neither Rolando nor Corbel had any entitlement to any of the moneys appropriated from the Bank Guarantees. This was denied, it being asserted that the builder had failed and refused to rectify defects which had been notified according to the agreement and practice “the cost of which exceeded the proceeds of the said guarantees”. Rolando and Corbel did not establish this.
49 In paragraphs 19, 20 and 21 it was pleaded that the conduct of Rolando and Corbel constituted a repudiation of the agreement entered into on 18 May 1995, in consequence of which repudiation the builder accepted it and terminated the agreement, and, in consequence of that termination, the builder is now entitled to recover the whole of the moneys due under the building contracts. Certain consequences were said to flow from that including a claim for exemplary and/or aggravated damages against Rolando, Corbel and Mr Papallo.
50 That claim was pleaded thus:-

“23. Further and/or alternatively at all material times Rolando and Corbel authorised the third defendant (hereafter ‘Papallo’) to take all action on their behalf in relation to the said contracts including all action in relation to the said Bank Guarantees such that the conduct and intentions of Papallo at all material times was the conduct and intentions of Rolando and Corbel.

24. Papallo caused the said Bank Guarantees to be appropriated on behalf of Rolando and Corbel knowing that Rolando and Corbel had no entitlement to the proceeds of the said guarantees and the said appropriation of the said guarantee was fraudulent.

25. By virtue of the matters described in paragraphs 23 and 24 above each of the defendants displayed a contumelious disregard for the entitlements of the builder under the said agreement, the building contracts, and to its entitlement not to have the proceeds of the Bank Guarantees appropriated other than in accordance with the lawful entitlements of Rolando and Corbel.

26. By virtue of the matters pleaded in paragraphs 24 and 25 above each of the defendants is liable to the plaintiffs for exemplary and/or aggravated damages.”

51 On 14 June 1996 the defendants filed a Further Amended Cross-Claim. In the nature of the dispute reference was made to the contracts and the alleged failure by the builder to carry out and complete the building work as specified in the contracts or in a good and workmanlike manner. It was further asserted that the builders and Mr Raymond Wehbe had made false and untrue claims for payment under the contracts and untrue representations in circumstances amounting to fraud or to conduct which was misleading or deceptive pursuant to ss.52 and 42 of the Trade Practices Act and the Fair Trading Act, and that the defendants relied on the representations and have suffered loss and damage. The essential allegations of fraud or breach of the statutory obligations were that there were representations made in respect of both buildings that the ceilings installed in the top level of the units were one hour fire rated ceilings in compliance with the requirements of the agreements and the Building Code of Australia. The claim for damages arising from this alleged conduct included claims for making good the work, the alleged reduction in the selling prices of the units “by reason of delayed construction”, increase in advertising costs “by reason of delayed construction”, additional rates, levies and other outgoings “by reason of delayed construction”, additional fees payable to the project managers and consultants, and liquidated damages under Clause 10.14 and Appendix M and Special Condition 69 of the contracts at the rate of $6,000 per week in respect of each of the said agreements.
52 By the Defence to this Cross-Claim the plaintiffs denied, inter alia, that the ceilings installed did not comply and asserted that they were “certified to be one (1) hour fire rated in accordance with Pioneer Plasta Masta Specification PS560 by AAA Interiors Pty Limited dated 24 November 1994”.
53 In paragraph 22 it was pleaded that on 7 December 1994 and 1 March 1995 Hornsby Shire Council approved the works at May Street and Water Street as in accordance with the Code, and that possession of May Street and Water Street was taken on 12 December 1994 and 29 January 1995 respectively.
54 In paragraph 23 it was pleaded that there was a failure by the defendants to mitigate their loss because, by letter dated 11 September 1995, Pioneer offered to rectify the failure to provide fire rated ceilings but the defendants refused to permit it to do so; and, on 31 July 1995, Mr Martin Wahbe, a licensed builder, offered to Mr Papallo that he would rectify all defects claimed by him to be then existing, which offer Mr Papallo refused. According to Mr Wahbe the refusal was in the context that Mr Papallo also required payment of some $10,000 to $12,000 by way of legal costs.
The Referee’s Report
55 On 7 November 1997 Giles CJCommD ordered, by consent, that Mr Geoffrey Lumsdaine and Professor Stephen Grubits be appointed as joint referees, pursuant to Part 72, to inquire into and report to the Court upon the questions arising as specified in Schedules 1 and 2. Those matters were:-

“1.1 Which of the items (other than items admitted by the plaintiffs as physical defects and the items dealing with the defects referred to in Schedule 2 concerning fire upgrading to ceilings and fire acoustic upgrading to risers and ceilings) referred to in the Scott Schedule of defects filed in these proceedings by the first and second defendants:-

1.1.1 are physical defects in the building works the subject of the May Street and Water Street building contracts undertaken by the plaintiffs and for which the plaintiffs are responsible; and

1.1.2 the reasonable cost of rectifying such physical defects.

1.2 Which of the items (other than items admitted by the first and second defendants) referred to in the Scott Schedule of extras and variations filed in these proceedings by the plaintiffs:-

1.2.1 are extras and variations in the building works the subject of the May Street and Water Street building contracts undertaken by the plaintiffs; and

1.2.2 the reasonable cost of such extras and variations; but

1.2.3 noting that the first and second defendants do not admit that the plaintiffs are entitled to any extras and variations by reason of the agreement pleaded by the first and second defendants of 18 May 1995, which agreement and its status as between the plaintiffs and the first and second defendants is not part of this Reference.

SCHEDULE 2

2.1 That the means of rectifying the Fire Defects as referred to in the quotations of LAF Group dated 1 July 1997, No 5397FRI, as to the fire upgrading to ceiling and No 5397AC1, as to fire and acoustic upgrading to risers and ceilings and filed in these proceedings by the first and second defendants:-

2.1.1 is the appropriate means of rectification; and

2.1.2 as to 5397FRI, is in conformity with the recommendations contained in the report of the CSIRO referred to in Order 1 and CSIRO’s supplementary report of 7 August 1997.

2.2 That the costs of rectification as referred to in the said quotations are the reasonable costs for rectification.

2.3 That if the means of rectifying such defects are not appropriate, or as to 5397FRI, in conformity with the said CSIRO report and supplementary report then:-

2.3.1 what means of rectifying such defects is appropriate? and

2.3.2 as to 5397FRI is in conformity with the CSIRO report and supplementary report.”

56 The Referees reported on 10 August 1998. The report was adopted by the Court, by consent, on 28 August 1998, on which date the proceedings against the fourth defendant were, by consent, dismissed.
57 The report noted that the major items were related to work required to attain the standards of fire resistance construction required for the types of building under the Building Code of Australia. The Referees continued:-
“By the terms of reference, as interpreted by the parties, we were required to report only on methodology and quantification. Accordingly it was considered appropriate to work with the parties’ experts, and a number of conclaves were held by the Referees with various groups of experts, culminating in the submission of joint reports. Consensus was reached on the majority of items, and we adopt and set out below such agreed findings.
The findings are based on methodologies and related quantum on which the experts agreed and which we found appropriate to adopt. The agreements expressly excluded questions of liability.”
58 The Referees dealt firstly with defects other than fire rating items and concluded that the amount payable in respect of such items, including the builder’s fee, was $9,411 in respect of May Street and $26,649 in respect of Water Street giving a total of $36,060.
59 The Referees dealt nextly with extras and variations, which were found in respect of May Street to be $59,569 and in respect of Water Street to be $46,707 giving a total of $106,276.
60 In Section 3 of the Report the Referees considered preliminaries, administration and builder’s fee. They came to certain conclusions and, in Section 4, dealt with the acoustic requirements and roof space installation. They found that certain elements of the construction did not, as agreed by the experts, achieve the necessary acoustic rating as required under the Building Code of Australia and that roof space insulation had not been put in place, although there was a dispute as to whether that was a contractual requirement. They concluded that the amount required to rectify the acoustic rating problem was $29,903.80, and the amount to provide roof insulation was $11,584.10, if it was required.
61 In Section 5 the Referees turned to fire rating related items and held that the construction of both buildings fell short of the requirements of the Building Code of Australia in this respect and that a reasonable strategy for achieving compliance was developed through a series of conclaves, which resulted in a joint report of 18 May 1998, which was annexed to the Referees’ Report. In paragraph 5.3 the Referees stated:-
“As it affects the fourth defendant, we note that the ceiling problems relate to the installation of the plaster board ceiling system as distinct from the plaster board ceiling system itself. We find that the ceiling system complied with the BCA current at the time the ceilings were installed in the May Street and Water Street buildings.”
They concluded that the reasonable costs of carrying out the work in relation to May Street was $36,995.06 and in relation to Water Street was $36,196.66 giving a total of $73,191.72.
62 In Section 6 they summarised the findings which showed that, subject to a determination of issues of liability, there was a total amount payable by the plaintiffs to the defendants of $238,230 and a total amount payable by the defendants to the plaintiffs of $106,276, leaving a difference of approximately $133,000 in favour of the defendants.
Certain Essential Issues
63 Notwithstanding that the submissions ranged over a number of topic there were, in my opinion, several fundamental issues the determination of which will essentially resolve this case. Firstly, it is necessary to determine what the agreement of 18 May 1995 means, what its significance is, whether it was lawfully terminated and, if it was, the effect of that. Secondly, it is necessary to consider whether Rolando and Corbel are entitled to recover a large amount of damages for delay in selling the units allegedly caused by delay of the builder and defects in the buildings. Thirdly, it is necessary to decide whether the parties are entitled to the amounts found by the Referees. Finally, the question of aggravated and/or exemplary damages must be addressed. Before considering these matters I propose to consider certain evidence.
The Evidence Of Mr Robert Luke Murray
64 Mr Robert Luke Murray, who is a registered valuer by profession, swore affidavits on 2 August 1996 and 1 April 1999. He supplemented his evidence by a statement of 14 April 1999, which became Exhibit C.
65 Mr Murray has had substantial experience in valuing properties, particularly in and around Hornsby, and in his report of 24 July 1996 he described the two properties and the course of the contractual relations between the parties. Under the heading “Defects” he said that he inspected both blocks of units externally and a number of the units internally on 10 July 1996 and found the defects ranged from minor items “to the usual maintenance items which appear in new buildings”. He observed that both owners were claiming financial loss from the builder due to the extra costs caused by the alleged defects, the extended building/marketing periods and the purported diminution in value to the units. He considered the course of construction and said, without objection, to have such projects completed with exhaustive lists of defects indicated a lack of project supervision and:-
“Had the project been inspected on a day to day basis, quality control would have prevailed and the finished product would have been ready for sale without delay. All new buildings of this calibre are subject to some maintenance items after they are completed due to the drying out of the structure and the expansion and contraction which subsequently takes place.”
The last sentence did not seem to be in issue and when I consider the Scott Schedule, in due course, it will appear that a number of matters fell into this category.
66 Mr Murray nextly dealt with the economy and stated that the Sydney residential real estate market has been basically in recession since December 1988, and that the period during the construction and marketing/selling of the subject units was not strong due mainly to the lack of buyer confidence and competition from other new blocks of units. He considered the economy, the sale prices achieved and the competition from other two-bedroom home unit developments in the vicinity of the subject properties, and said:-
“Sales of new two-bedroom home units in this section of Hornsby range from between approximately $190,000 to $225,000 depending upon location, aspect, size, accommodation and parking arrangements.
The sales achieved in both blocks, apart from the ‘internal’ sales, are in line with the market conditions prevailing at the time.”
No objection was taken to this statement and Mr Murray’s evidence satisfied me that it is correct. Indeed it was barely challenged. The reference to “internal sales” was to sales to unit holders in the trusts.
67 He expressed the conclusion that based on market evidence of new two-bedroom home units in the Hornsby area alleged defects “have not detrimentally affected the value of the subject units as their sale prices are in line with other new units”. He was of the view that the main defect items, which could have possibly affected marketing/sales, were the cracking of the concrete floor in the garaging areas and poorly patched mortar in the common areas. However, he observed that the acceptance of the units by virtue of their sale prices, which were in line with other new two-bedroom home units in the immediate locality, showed that the market was not concerned by that matter, and he concluded:-
“The cause of the problem between the Owners and the Builder stems from the lack of progress supervision. Had the Owners representative supervised the construction of these blocks this situation would not have occurred. Funds for the Builder during construction could have been held up until any defects or problems were rectified. To present an exhaustive defect list after completion indicates either poor building supervision practice or pettiness by the Owners.
In my opinion there is no diminution in value to these units caused by the alleged defects.”
I also accept this evidence. Mr Murray was a very well qualified expert.
68 In the report annexed to his affidavit of 1 April 1999 Mr Murray dealt, at some length, with the report of Mr Edmonds. I shall refer to his comments in relation to that when I consider Mr Edmonds’ evidence. In Exhibit C Mr Murray considered the report of Ms Colleen Coyne dated 13 April 1999 and I shall consider that when I come to her affidavit.
69 Although Mr Murray was cross-examined at some length I am satisfied that he was not only an honest and reliable witness, who was well qualified to express his opinions, but that his evidence was supported by the probabilities. I therefore accept it.
70 The defendants’ cross-claim is based, in large part, upon assertions that the consequence of the delay in completing the units and of the defects was, firstly, that the units were being sold at a less favourable time, it not being seriously in issue that the market was beginning to become more difficult for sales towards the end of 1994 by virtue, inter alia, of the increase in interest rates and greater competition from more home units; and, secondly, that the defects were such as to cause potential buyers not to proceed with the purchase of units. There are, in my opinion, a number of matters which establish that these allegations have not been made out.
71 Firstly, in May 1995, Mr Papallo, who, in my opinion, was an astute businessman and property developer, was prepared to accept from the plaintiffs, albeit by way of a compromise settlement, $133,000 for penalties. I have no doubt that if Mr Papallo had any valid reason for believing that the claim was substantially in excess of that amount, as opposed to asserting it, he would not have settled on that basis.
72 Secondly, I accept the evidence of Mr Murray that such defects as appeared were not such as to cause prospective purchasers not to buy and his further evidence that the sales were at prices in line with the sale price for comparable units. There was an exception to this, namely the “internal sales”, but it was not suggested that these should be taken into account. Mr Murray’s evidence received the strongest corroboration from the evidence of Mr Barry Hudson, who is a very experienced real estate agent and has been, at all material times, the manager of Ray White Real Estate at Hornsby. Mr Hudson swore three affidavits, one on 18 August 1995 and two on 9 April 1999. In his first affidavit he referred to various letters he had written to the trustees, which he said accurately and frankly set out the position as he saw it. Mr Hudson’s agency had a sole agency agreement for the sale of these units and, so far as I can see, there is absolutely no reason why any letter written by him would not disclose to the owners all relevant matters in relation to their sale. Indeed, it would be contrary to his interests to conceal any matter which made it difficult to sell the units and, in quite voluminous correspondence with the trustees and Mr Papallo, he pointed out how the sales’ programmes were proceeding. This correspondence has to be viewed in the light of assertions by Mr Hudson that had the properties been available for sale earlier and had they not suffered from defects, they would have sold more quickly and at better prices. In my opinion the effect of the contemporaneous correspondence is to show that this evidence is not to be accepted and, in fairness to Mr Hudson, he agreed on three occasions in cross-examination, Tpp.205, 209 and 210 that the appearance of the home units made no difference to the ability to sell them.
73 On 29 June 1994 Mr Hudson wrote to Mr Papallo concerning May Street. He confirmed the proposed completion date and the marketing strategy for the project. He noted that the completion date was expected to be around the end of September 1994, subject to weather conditions, and said that based on this estimated date and provided the main entrance and the individual entrances to all the units were finished, landscaped, and totally free of building material etc, thus providing a good clean access from the street, it was his recommendation that a “display unit” be made ready and the full marketing programme commence four weeks prior to the date of completion. He said that meant the gala “open for inspection” weekend should be scheduled to commence on 3 and 4 September 1994. He did not suggest that that date would cause any difficulty in effecting sales.
74 He referred to the fact that there were several other home unit projects currently under construction in the immediate area, but said:-
“However, your project at 6-10 May Street, has a substantial advantage over all the other competitive projects in so far as ‘May Lea’ has a superior location, proven design, larger individual unit size and above all, quality of finishing and fittings.”
75 He regarded another major factor favouring the project as being that it would be completed some two to three months ahead of any other unit project that would impose any direct competition. He discounted competition from 5-7 Water Street and furnished certain further information about other projects in the area. He expressed the view that those should not pose any direct competition to May Street for various reasons and concluded:-
“Although no written guarantee can be given, we strongly believe, if priced and marketed correctly, your units 6-10 May Street should sell without hesitation, as not only have you produced what we consider to be ‘the best Units ever built in Hornsby’ but certainly the best Units that will be on the market at that time.
We already have a number of enquiries from potential buyers showing interest in the project subject to price and an inspection of the finished product.”
76 On 10 November 1994 Mr Hudson wrote confirming a telephone conversation and documenting details in respect of activity at the May Street units. He recorded that the official opening was held on the weekend of 29 and 30 October 1994 and that some thirty five groups of people inspected, although he noted a number were neighbours rather than actual buyers. Despite that he was pleased to report that the comments from the majority of these people “were extremely complimentary of the Unit Project in general terms and specifically in respect to size, design, location and in particular the outstanding quality”. These are hardly the remarks to be attributed to units being put forward which evidenced substantial and disabling defects, such as to make them difficult to sell.
77 The letter continued that there was more enquiry the following week and:-
“As you are aware, total completion of the project is approximately some two weeks away, thus making the presentation of the complex and the individual Units more desirable as completion grows nearer.”
He noted that in respect of ten units contracts had either been issued, exchanged or there were negotiations in train, and that he was “extremely pleased” with the results of the campaign “and confidently expect the same positive results to continue over the next few weeks”.
78 It seems to me it would be utterly impossible for Mr Hudson to have written a letter in those terms if the difficulties in selling the units about which Rolando and Corbel complained existed. A real reason for the problem emerged in his letter to the trustees of 31 January 1995. He reported that thirteen units had either been sold or retained by the trust, and continued:-
“Unfortunately since the latter part of November and, up to and including the present date there has been a substantial reduction in buyer inquiry with much fewer people attending the ‘open for inspection’ period, thus resulting in only a couple of additional sales since the last report.
However, on review of previous years the trend has been exactly the same with December and January being extremely quiet with buyer inquiry and subsequent sales showing a positive increase and the market returning back to normal from about mid February.
We feel there is no reason why this year should be any different to previous years and expect a reasonable recovery in inquiry and sales to take place within the next few weeks.”
He said that everything was being done which was “humanly possible to ensure that this project is being positively promoted in every respect”.
79 On 16 March 1995 he wrote to Mr Papallo advising that thirteen of the twenty eight units had been sold and that there had been a number of inspections by potential buyers of several others. He continued:-
“As mentioned to you during our conversation there are a number of other new unit developments currently on the market for sale with prices ranging from high $190’s to early $200’s thus giving a far greater choice to any potential buyer to view and select from. However, the proven formula of size, aspect and quality of finish in your project is not only proving superior to the competition but is enabling us to achieve substantially higher sale prices.” (My emphasis.)
80 In so far as Mr Hudson asserted that he made oral complaints about quality to Mr Papallo, but did not commit them to writing because the letters would go to other people, this letter is extraordinary. It may be understood that the letters to the trustees may go to others, but in this case Mr Hudson was writing to Mr Papallo, and advising him, in glowing terms, of the quality of finish. His enthusiasm was such that he continued:-
“As you no doubt will remember the ‘May Glen’ development was extremely successful, not only in the market place, but because of aforesaid formula we were able to achieve an additional $17,785.75 per unit up and above the nearest competition.
It is our opinion that the same will apply to the current projects at 6-10 May Street and 8-12 Water Street.”
81 On 5 April 1995 Mr Hudson wrote to the trustees advising “with regret” that there was no change to the previous sale report, and noting that weekly inspection numbers had become totally unpredictable and were changing substantially from one week to the next. This provided another reason for the drop in sales. He continued:-
“Even though the majority of the people inspecting the units praise this project and, in many cases have inspected several times previously, they are still very hesitant and not prepared to commit themselves, with the lack of confidence and the overwhelming concern that interest rates may continue to rise like they did in 1989-90 being given as the main reason.
This factor is not only effecting (sic) the ‘May Lea’ project but has effected (sic) every other unit development in the Hornsby area, with very few new unit sales being made during and over the past four to six weeks. The lack of sales is not only confined to the ‘May Lea’ style of project but includes the projects with units that are priced substantially cheaper than ours.
We therefore believe that until such time as general confidence is restored and a clear indication that interest rates will remain stable, the above situation may continue at least until the May budget is announced.
Perhaps in the immediate future you may consider the possibility of renting out a few selected units which can still be sold to investors at any stage and, in the interim, would assist you in recovering some of the holding charges.” (My emphasis.)
82 On 18 May 1995 a further letter was sent by Mr Hudson to the trustees noting that since the last report two units had been sold and negotiations were continuing in relation to another. The letter concluded that it was Mr Hudson’s belief that if “this newly found confidence continues to grow, in particular amongst the investor buyers, we should see a substantial increase in inquiry for these units thus resulting in subsequent sales”.
83 On 6 June 1995 Mr Hudson wrote to the trustees noting the lack of interest in the units and that advertising was not attracting buyers “generally” irrespective of the type of real estate being promoted. He confirmed “that there is still a lack of confidence amongst the buying public”. He said that:-
“.. We feel certain that the recent announcement by the banks of a further drop in home loan interest rates will assist greatly and instil some confidence back into the market, which, in turn, should result in a steady increase in inquiries for these units.”
84 On 15 August 1995 Mr Hudson wrote to the trustees stating that it was not possible to report any further “definite sales”, although there were some negotiations in progress. The letter stated that weekly inspections were still continuing and:-
“During the past six weeks or so there has been some five or six new units sold in the area. These sales have been made only after substantial reduction in price of all these units with the contract prices ending up at $186,000, $195,000, $199,000, $201,000, $203,000 and $205,000.
It is very obvious that the current buying public has acknowledge (sic) the downturn in the market (in other words the current market is a buyer’s market) and expects to be able to negotiate a substantial amount off the asking price and buy under their terms.
Please rest assured that we are doing everything humanly possible to encourage potential buyers to purchase a unit in this project. We do however, point out that the market has dramatically changed (for the worse) since we started marketing this project.” (My emphasis.)
85 On 11 September 1995 Mr Hudson wrote to the trustees confirming that following telephone discussions and a meeting on 23 August 1995 the asking price tag had been removed from each of the unsold units and, during the last two week period, Mr Hudson had been promoting the units without a specific asking price and inviting offers over $205,000. The letter stated that as a result of “this positive move” contracts had been issued on three units at $213,980, $213,000 and $210,870. The letter repeated that the buying public recognised that the market “is still very much a buyer’s market” and that purchasers would only buy “after they are totally satisfied that they have obtained good value”.
86 On 30 October 1995 he wrote to the trustees in relation to May Street. He said that two new blocks of units had come on to the market and continued:-
“As you are aware, when these two complexes first came on the market some weeks ago their two bedroom units were being offered ‘for Sale’ around the $200,000 to $210,000 bracket, however, due to the lack of activity during this time they have in turn both slashed their prices dramatically with 2 two bedroom units now being advertised for $155,000 and $169,000 respectively.
Even though there are only a few units available at these ridiculous prices the balance of their units including the ‘better ones’ can be purchased between $180,000 and $195,000 making it extremely difficult for us to compete in the market when there is a price difference of approximately $25,000 in the asking price.
Although the majority of people inspecting the May Street units agree that these units are of a better quality and location they find it hard to accept the price difference. Subsequently, the only offers we are receiving are those in the vicinity of $190,000 or thereabouts.
Therefore, if these units are to be sold in this current market it appears that you will have to be prepared to accept an end sale price of between $190,000 to $195,000. However, as an alternative to sacrificing them now at silly prices you may consider the possibility of renting out the balance and wait until the market recovers at which time they can be put back on the market to achieve sale prices similar to those accepted in the early stages.
Although we are keen to see these units sold now it seems a shame for you to be forced into a situation of disposing the remainder at prices well below what we consider to be their true value, given the right market, and, in doing so we further believe that you may undermine all the good you have done in the Hornsby area to date.” (My emphasis.)
87 This letter is totally inconsistent with any suggestion that the May Street units were not selling other than for the reason that the market had taken a severe downturn, and with any suggestion that the presentation of the units or the delay in marketing them was hampering their sale. It was this letter which stimulated the letter from Mr Papallo to the trustees of 31 October 1995, which stated:-
“This confirms our verbal advice to you over recent months that Corbel has two clear choices, being:
1. Meeting the market; or
2. Refinancing, holding and remarketing in twelve to eighteen months time.
The second option is our recommendation as rental returns will more or less cover interest costs thus allowing the situation to be put on ‘hold’ until the market rationalises itself. Having seen ‘forward-market’ reports that are in your possession, holding and remarketing in the future can only but be a huge advantage when compared to meeting the market now.”
88 On 29 June 1994 Mr Hudson wrote to Mr Papallo in relation to Water Street noting that it was expected that subject to weather conditions completion would be effected around the end of November or early December 1994. On this basis he suggested a gala “open for inspection” weekend scheduled to commence on 12 and 13 November 1994, and he stated that the project had a unique advantage over all other projects because it had been designed around and took advantage of a newly created landscaped park, which in turn provided uninterrupted views to the majority of the units. He continued:-
“The other major factor in your favour is that this project boasts a proven internal design, larger individual unit size but above all, the project is being built by an established and well respected builder who has a proven track record in providing nothing but the highest standard of quality and finish.
At the time ‘Park Court Garden’ is programme (sic) for completion, there should be very few other new units completed and available for sale that will create any competition to the sale of these units.
One thing is for sure there will be no other units on the market at the time that have their own park-like environment or offer the views these units will enjoy.”
89 On 9 March 1995 Mr Hudson wrote to the trustees in relation to Water Street. The letter reflected that there had been a downturn in the market and that there was competition from other new unit developers “thus giving a far greater choice to any potential buyer to view and select from”. Mr Hudson pointed out the problems and continued:-
“However, in our opinion, the 8-12 Water Street development is substantially superior to any of it’s (sic) competition, not only in design and quality but has the distinct advantage of adjoining and overlooking the newly created park which is now starting to look superb.
Notwithstanding all the above, you may recall a similar situation occurring in the early months of 1993 whilst marketing the complex at 2-4 May Street. Once again there was a substantial decline in inspections and immediate sales in the May Street complex when three other blocks of units were released on to the market simultaneously, at considerably lower and discounted prices.
However, you may also recall that after a settling period of time, combined with the continuing perseverance of our marketing campaign, the inquiry and subsequent sales of the better quality units strengthened bringing to a successful conclusion the marketing of 2-4 May Street Hornsby. Not only did the better quality unit ultimately win out but the average sale price achieved throughout “May Glen” was some $17,000 higher per unit that (sic) nearest competitor.” (My emphasis.)

90 On 5 April 1995 Mr Hudson wrote to the trustees in respect of Water Street stating that the problems confronting the sales were lack of confidence and the overwhelming concern that interest rates may continue to rise as they did in 1989-1990. The letter continued:-
“This factor is not only affecting the ‘Park View Court’ project but has effected (sic) every other unit development in the Hornsby area, with very few unit sales being made during and over the past four to six weeks. The lack of sales is not only confined to the ‘Park View Court’ style of project but includes the projects with units that are priced substantially cheaper than ours.”
91 On 18 May 1995 Mr Hudson again wrote to the trustees in respect of Water Street stating that there had been some return of confidence and, on 6 June 1995, he reported to them that advertising was not attracting buyers, although the likelihood of the drop in home loan interest rates would probably greatly assist the market and instil some confidence in it.
92 On11 September 1995 Mr Hudson wrote to the trustees in the same terms as the letter to the trustees of Rolando of the same date.
93 Mr Hudson was cross-examined about the letters he had written and he said, Tp.204, that the letters were providing advice on matters which he thought the proprietors should take into account in selling the units and:-

“Q. And you would have also considered it important, if you thought that some aspect of the presentation of the units called for attention to mention that to them?

A. That is also correct, yes.

Q. In particular, if you considered that the appearance or condition of the building was having a detrimental effect on the selling programme, that is something that you would have pointed out in your reports to the proprietors?
A. Not necessarily in the report, more so in letters when the defects were brought up more so than the actual errors.”

94 Mr Hudson said he notified defects, which he expected would have been attended to, although he said he did not report on defects necessarily in his reports. However, Tp.205, he continued:-

“Q. If it had been the case that over a period of months the marketing of the block would have been hindered or impaired by its appearance, then that would have been a crucial matter for you to record in your report to the proprietors?
A. That’s correct, yes.”

95 This answer is totally inconsistent with the suggestion that there were continuing and unresolved defects in the buildings, which precluded their being sold, and with his failure to note any such conditions.
96 He was taken through the correspondence in relation to May Street and referred to the words “outstanding quality”, and he said that as at the date of his letter of 29 June 1994 he was satisfied that May Street was of outstanding quality for marketing and he did not consider that anything so far as the physical state or condition of the buildings needed to be drawn to the proprietors’ attention in accordance with the report. He agreed, Tp.206, that in November 1994 there were no difficulties inhibiting or preventing the effective sale of May Street. All his advertising was consistent with this. He was referred to the correspondence in early 1995 where he attributed the failure to sell to the time of the year, and to the letter in March 1995 where he observed that the proven formula of size, aspect and quality of finish was not only proving superior to the competition, but was enabling him to achieve substantially higher sale prices. He agreed, Tp.207, that he was not experiencing any difficulty with the presentation of May Street through defects or incomplete building “or anything of that sort”, and that in relation to the insides of the units the quality of finish was superior to the competition and to that point the outside of the buildings was not having an effect on the marketing programme.
97 He agreed that by mid-1995 the market had deteriorated and, Tp.208, that the letters he wrote to his clients frankly and accurately set out the position as he saw it in relation to the units, and that he did not conceal anything from them.
98 He was asked whether it would have been important to draw to the proprietors’ attention a shabby or poor appearance or presentation to which he replied that he was dealing with Rolando as the trustees and with Mr Papallo as the project manager “and I did verbally on many occasions talk to him about some of the things that I would like to have seen done; not in the reports”. He referred to several units which he was unable to open “as time went on”, but he said that matter was fixed.
99 At Tp.209 he said:-

“Q. The position is that in the first half of 1995, you never had cause to tell the proprietors that their marketing programme was impaired by the appearance or presentation of the block?

A. No, not the trustees.

Q. The reason you didn’t tell the trustees was because there was not a problem with marketing presentation?
A. I guess I have to accept that, yes.”

100 He was then taken to the Water Street property and, once again, he agreed that he did not, in his letters, report to the trustees in relation to Water Street that the marketing programme was being impaired or harmed by the appearance of the units or the existence of defects: Tp.210. His advertising was consistent with this.
101 At Tp.210 he said, in relation to May Street:-

“Q. And you give advice at the bottom of that regarding whether or not they should continue to leave the units on the market or withdraw them?

A. That is also correct, yes.

Q. And this is the case, isn’t it, that the reason that you advised them to withdraw those units from the market was because you considered the market at that stage was over supplied?
A. Well, that is exactly right, and also the deterioration of the market had taken place.

Q. Did you receive that instruction to withdraw the units?
A. Yes.”

102 He also became concerned about the legal proceedings in September 1995, and he was cross-examined about paragraph 21 of his affidavit in which he said that because of problems caused to the sales and marketing programme associated with ceiling defects and non-compliance, he advised Mr Papallo and the trustees to consider letting the units. It was suggested to him that answer was false and:-

“Q. You didn’t suggest that they take them off the market because of problems with the ceilings, you advised them to take them off the market because of the over supply?

A. It was a combination of both.

Q. Well, I think you have agreed it would have been sufficient in itself just to have over supply as a reason to take them off?
A. Well, it was not the intention of that. It was the intention of both, because there certainly was an over supply and a deterioration of the market, but when this was made aware to me, it made sense at that time that it would be very difficult to proceed with sales, when the market was hard, number one, and, two, there was a problem that at that time could not be explained.”

His letter of 30 October 1995 made it clear that his reasons for suggesting the units be taken off the market was concerned only with the state of the real estate market. Further, he agreed that before the ceiling issue was resolved the units were returned to the market.
103 At Tp.210 it was put to Mr Hudson that in relation to Water Street the marketing programme was not being affected or impaired by the existence of defects with which he said he would have to agree. In re-examination he said he complained to Mr Papallo about some cosmetic defects.
104 At Tp.213 he said there was no mention in any of the letters to a poor presentation because they were going to other people, and it was not necessarily in their interest, he believed, to know the ins and outs “of that part”. This answer was totally inconsistent with the evidence he had given earlier about the need for frankness and accuracy, and with what he had written and much of his oral evidence. It was evidence which did him no credit at all, and, as I have observed, did not correspond with his advertising, which emphasised the high quality of the units.
The Evidence Of Ms Colleen Coyne
105 Ms Colleen Coyne is a director of LandMark White (NSW) Pty Limited, which is a property research valuation and consultancy practice. She is its National Research Manager and a Master of Urban and Regional Planning, a Corporate Member of the Royal Australian Planning Institute, a Member of the Urban Land Institute, a Member of the Australian Population Association and a Member of the Australian Institute of Urban Studies. She does not hold any qualifications in relation to valuation matters. In her affidavit of 13 April 1999 she said she had been instructed to comment upon Mr Murray’s report of 26 March 1999:-
“.. in relation to the issues of the Hornsby real estate home unit market and the economic and property cycle for the same periods as referred to by Mr Murray.”
106 In her report, which is Annexure “A” to her affidavit, she described her knowledge of the Hornsby residential unit market during 1994 and 1995, which arose from her having prepared two separate reports in respect of the new residential unit market in Hornsby, the first in about December 1994 and the second in about May 1995. She researched these reports by examining all new projects of ten units or more, visiting units and talking with local agents. She said that from her knowledge and experience of the Sydney Metropolitan and Hornsby residential unit markets, she came to a different understanding of the economic and property cycle from that described by Mr Murray. She continued:-
“I believe that by late 1993, when the building contracts were let, the economy was in recovery from the recession of the early 1990’s and the residential unit market was entering a period of buoyant demand.”
She then referred to unemployment and attached to her report certain graphs.
107 Under the heading “Hornsby Unit Market” she referred to graph 4, which she said showed trends in the number of total residential unit sales and median prices for the Hornsby Local Government area. She continued:-
“The graph reflects sales at the date of settlement, that is, when pre-sales are made during construction, they appear in the graph at the time the building has completed. It shows a new peak of 187 sales in the June quarter 1994 at a median price of $192,000. This probably coincided with the completion of the first round of new supply in the Hornsby suburb. The second half of 1994 saw a gradual decline in activity and a dip in median prices, with the first and second quarters of 1995 being the lowest since the June quarter 1993. The resurgence in the September quarter 1995 may reflect settlement of new stock in the Hornsby suburb as buildings had completed. From this time onwards prices were flat until the over supplies in the market were absorbed.”
108 She then dealt in more detail with her analysis of the research carried out in December 1994, in which research she included May Street and Water Street. She said May Street had recently completed and the agent was reporting twelve units sold with the average asking price of the remaining units being $225,900. She observed that the building at Water Street had just commenced marketing at prices from $224,000 to $232,000 and was under construction.
109 However, by the time of her May 1995 research she found that market conditions “had noticeably deteriorated, with evidence of projects discounting to effect sales”.
110 She continued:-
“The market was effected by the higher interest rates and by the increased availability of units for sale. I identified 195 units in ten low rise projects being marketed in the Hornsby suburb. Of these, approximately 57% were reported sold.
The number of units under construction, but not marketed as at May 1995 was 75 units in four buildings, with a further 239 units in thirteen developments proposed, with DA approved or lodged.
In summary, the Hornsby low rise unit market had experienced buoyant conditions during 1994, with 502 recorded sales, and evidence of rising median prices. During 1995, sales activity declined noticeably and median prices fell. There was evidence of discounting occurring as at May 1995, and it was considered that further discounting would be required to sell out remaining stock in low rise buildings. There was evidence of developers not putting buildings into the market, but renting them instead. The rental market appeared to be quite strong. I consider that over supply conditions were likely to characterise the Hornsby unit market for some time, particularly if all of the proposed developments were to proceed.
I am of the opinion that had the subject buildings been completed to the schedule originally envisaged (by late 1994), they would have caught the market while it was still relatively buoyant, before the downturn in 1995.”
111 Ms Coyne’s evidence is not relevantly in conflict with that of Mr Murray and Mr Hudson. She observed the downturn, which is well illustrated in graph 4, but where, in my opinion, she fell into error, was that she assumed, contrary to the fact, that May Street and Water Street were not completed by late 1994. The evidence of Mr Hudson makes it clear that they were being actively marketed with success at that stage, but that they suffered from the quiet period over the Christmas/New Year time and the subsequent downturn in the market.
112 In her oral evidence in chief Ms Coyne said that the third and fourth graphs had some bearing on the Hornsby market, her view being that the most telling material was that in relation to the low rise unit market in the Central Hornsby area during 1994 and 1995. She confirmed, Tp.163, that there was a decline in the second half of 1994, and that the Christmas/New Year period is one of a traditional downturn in the market.
113 At Tpp.164-165 she was asked to assume that May Street would have been completed in or about 17 September 1994 and Water Street in or about mid-November 1994 and, on those assumptions, what the likely or available market would have been. She replied:-
“When I visited in December 1994, the agents were reporting back to me; still strong buying conditions. In fact, during the latter part of 1994, some developments were still increasing prices and there was still quite a lot of units coming through, with some under construction not yet marketing, and a further 200 units were either with developers’ approval or applications before Council.
So I would conclude that as at the end of 1994, even then there was some impact from the interest rates in the general market. The Hornsby local market was still strong and I think Mr Murray referred earlier to a shortage of units in the Hornsby market. That was probably still driving demand from both investors and owner/occupiers after modestly priced products close to the railway station and shopping centre.”
All of this, as I would understand it, is completely consistent with what Mr Hudson was finding.
114 Ms Coyne was then asked when the market went into decline and she said that was in the early part of 1995 and certainly by May 1995 market conditions had deteriorated markedly. She added that given the weaker buying conditions and increase in supply, it had become a very competitive market by 1995. By that she meant it was a buyers’ market.
115 At Tp.167 Ms Coyne said that from 1993 through to 1995 prices remained fairly flat in the sense that there was not much price growth, but it was a buoyant period in terms of market activity and demand. She said that by May 1995 discounting to the extent of some 5% was occurring.
116 Whilst it may be correct to say that there was some difference, at least of emphasis, between Mr Murray and Ms Coyne I do not consider this to be significant. Ms Coyne’s evidence made it clear that had the units come on the market towards the end of 1994, which they did, they would have experienced the advantage of a reasonably buoyant market. This was totally consistent with the evidence of Mr Hudson and, in my opinion, not inconsistent with the evidence of Mr Murray. Thereafter the market faced the problem, firstly, of the Christmas/New Year downturn which appears to happen each year, and, more importantly, the loss of buyer and investor confidence brought about by fiscal problems, such as interest rates. The simple fact, in my opinion, is that the sale of the units in these projects, which started at about the time anticipated, was caught up in these two problems. The evidence, in my opinion, is all one way on this and I am not satisfied that the inability to sell the units resulted from either defects in them or any delay. It resulted from circumstances totally beyond the control of either the plaintiffs or the defendants, but for which, in my opinion, the defendants are now seeking to make the plaintiffs responsible. In my view they have failed on the evidence to establish any such responsibility. As I have said this matter is further highlighted by the agreement reached on 18 May 1995 when penalties were decided at $133,000.
The Evidence Of Mr Philip Edmonds
117 Mr Philip Edmonds swore affidavits on 6 May 1996 and 2 March 1999. He is a registered valuer and accountant in private practice and has had extensive experience in real estate development, real estate marketing, and valuation. He prepared a report, which was annexed to his affidavit of 6 May 1996. He dealt, in that report, with the defects he saw in both blocks of units as a result of his inspections on 2 November 1995, 10 January 1996 and 10 April 1996. He was of the view that the attempted rectification of some of the defects had left a continuing defect in the construction of the building, and that the defects and the poor attempts at rectification of some of them reflected on both the value and saleability of the units.
118 At p.8 of his report he noted that on 17 August 1994 the Reserve Bank raised official cash interest rates by .75 per cent, which was followed by further increases of 1 per cent on 24 October 1994 and 1 per cent on 14 December 1994. He stated these increases were in response to concerns that the rate of growth of the Australian economy evident in 1994 was not sustainable and also that dwelling construction and business investment were at unsustainable levels.
119 He considered the list price for the units, the averages for May Street being $226,750 and for Water Street being $216,592.
120 He noted that according to the agent the units in both the buildings “as planned” were substantially superior to any other new units available in the locality at the time, and he considered that there were features which warranted a price premium for them. He said that the list prices reflected the higher quality of the units and were considered by him to be appropriate at the time, assuming the buildings were completed in a proper and workmanlike manner and to a standard not less than that of the other units available on the market at the time.
121 He dealt with the selling period stating that May Street commenced to sell around July 1994 and Water Street about October 1994. He considered, contrary to the views of Mr Hudson, who had the advantage of being “on the ground” selling, that there were several competitive projects at the same time, although he observed that most of those units sold more quickly, but at lower prices than May Street and Water Street. He also noted evidence that the market in the locality had been shrinking from December 1994 to May 1996. He expressed the opinion that had May Street been completed by 22 September 1994 “it was reasonable to expect that the sale of units would have been settled at the rate set out in Annexure 7.15 over the months January 1995 to July 1995”. He was also of the opinion that had Water Street been completed by 19 December 1994 it was reasonable to expect that the sale of units would have been settled at the rate set out in an annexure to his report over the months May 1995 to December 1995. He said that from his enquiries of Mr Hudson when these units came on to the market “other units were already being offered on the market which were of similar quality and price”. If Mr Hudson said that it differed from what he had told the trustees. He continued that this had a detrimental impact on the sales rate achieved for the Water Street property, such that the first unit was not sold until April 1995. I have already referred to the evidence of Mr Hudson, which makes it clear that he did not share the opinion that these units were in competition with other units as they were superior in many ways including quality.
122 In Section 5.2 of his report Mr Edmonds dealt with the reduction in selling prices. In relation to Water Street he noted that six units were sold before the completion of construction and, therefore, those units were not, in his view, the subject of an allowance for loss of selling price. He was also of the view that the seven units retained by Corbel as trustee were properly subject of an allowance for loss of value, and the remaining fourteen units together with three other units retained by Corbel had prices “at 7 October 1994 totalling $3,965,000 and averaging $220,278 per unit”. He expressed the opinion that there had been some loss in value as a consequence of the defects and:-
“The calculation of that loss in value is necessarily based on informed opinion following inspection of the subject units, inspection of other units being offered for sale in competition to the subject units and inquiry of those involved in the selling of the subject units and those offered in competition to them.”
What, however, it was not based on was a proper valuation of the units, which could be compared to the actual sale prices. I shall return to what I regard as this deficiency in Mr Edmonds’ evidence.
123 Once again I would observe that in so far as Mr Hudson may have given advice contrary to the contemporaneous letters he wrote and to his sworn evidence, I prefer the latter evidence, to the extent to which I have accepted it. However Mr Edmonds calculated that in his opinion $50,000 was “a reasonable estimate” of the loss in value of selling price suffered by Corbel in respect of twenty one units in Water Street. He agreed, in cross-examination, that he had not sought to value the units in a conventional manner, i.e. by a consideration of comparable sales. This, if I may so with respect to Mr Edmonds, was a somewhat extraordinary omission. In my opinion, the way in which one could determine how any particular matter impacted on the value of units was by working out the valuation of them by reference to comparable sales and then comparing that figure with the actual sale prices to see if there was a difference and, if there was, to seek to attribute the difference to some defect in the building. For this not to have been done leaves a quite gaping hole in the defendants’ case.
124 Mr Edmonds followed the same approach in relation to May Street and concluded that $35,000 was a reasonable estimate of the loss in value and selling price suffered by Rolando in respect of twenty one units in that development. He said, at p.15:-
“In the last quarter of 1994 the market was subjected to three consecutive increases in interest rates the effect of which was to depress the rate of sale of real estate right through 1995 and to suppress what would have otherwise been an increase in prices.”
Once again this was not a matter particularly in dispute.
125 In his report of 2 March 1999 Mr Edmonds sought to carry out an exercise which, if I may so with respect, was the correct exercise of comparing what actually happened with what, in his opinion, would have happened but for the breaches of contract. However, in doing this he made a number of assumptions, which the facts did not establish, and he laboured under the disadvantage of having no valuation of the subject units. He included an interest component at 12.5 per cent based on opportunity loss, i.e. being a figure at which in his opinion Rolando and Corbel would have been able to re-invest the money in further developments. However there were certain obvious defects and errors in his calculations, which he sought to correct by preparing a further report.
126 In his further report of 15 April 1999, Exhibit 6, Mr Edmonds re-worked the figures and, in Schedules B1 and B2, he set out the interest loss he calculated “as a consequence of the delayed sale of the units” and their reduced selling prices. He said the latter were worked from summary settlement sheets he received and he dealt only with the units which were sold.
127 So far as interest was concerned the amended recalculations provided for interest at the rate “actually paid” until the loans were paid out and, thereafter, “at the approximate average rate available for the investment of funds on mortgage”. So far as Annexure “B1” was concerned the interest rate actually paid ceased in October 1995 and, thereafter, the interest rates applied were on a loss of opportunity basis. So far as Annexure “B2” was concerned the interest rates actually paid ceased as at July 1998 and, thereafter, the interest rates applied related to opportunity loss.
128 Mr Edmonds also recalculated Annexure “C” because he allowed for the fact that the builder did not receive the plans until 15 February 1994. He factored into his calculations the agreement figures of 18 May 1995.
129 In Annexure “C1” he provided for the extended completion date in respect of May Street as being 22 September 1994, and in respect of Water Street as being 22 November 1994 and for the commencement of the liquidated damages period as being 20 October and 19 December 1994 respectively. He noted the date of occupation of the first unit sold in May Street was 24 March 1995, and in Water Street as 26 June 1995, although there was no evidence showing the terms on which the contracts were entered into.
130 The substantial elements in each of his calculations were the loss of interest due to delayed settlements as set forth in paragraph 5.4. In relation to May Street and Water Street the interest components were $674,874 and $491,911 respectively whether the agreement of 18 May 1995 stood or not. However, these calculations did not take into account the settlement as at that date of the amount for penalties. In my opinion, that precluded any such amount being allowed prior to that date.
131 Paragraph 5.4 of Mr Edmonds’ first report asserted that the settlement of the sale of the units had been delayed initially by the delay in the registration of the Strata Plan to the extent that this was due to the delayed completion of the building, and to the reduced rate of sale resulting from the construction defects. It was conceded by Mr Miller that these were assumptions Mr Edmonds was asked to make for the purposes of his calculations and that I had to be satisfied that the assumptions had been made good.
132 Mr Edmonds also worked out figures for other loss amounts, but the same assumptions and principles apply to them.
133 In his oral evidence Mr Edmonds said he compared the sale prices with the listing prices, Tp.179, and that in relation to selling periods he considered when the units would have been at a sufficiently advanced stage of construction to enable some pre-sale activity, which he assessed would have been from mid-1994. He said that Annexures “B1” and “B2” were his calculation of what actually happened as opposed to what would have happened if certain assumptions had come to pass as to when the units would have been completed. He said the figures in those annexures were net figures.
134 At Tp.182 Mr Miller said that the completion date for Water Street should have been calculated from 15 February 1994.
135 Mr Edmonds said that he did not understand that one of his tasks was to determine the market value of the typical units in May and Water Streets, and that he did not make an attempt to do so. Rather he made, in a general way, a comparison to other units being offered at the time and how the prices compared with what was being sold on the market at the time. He agreed that one way of testing his assertion that the units would have sold for more, if they did not have defects, was by reaching a market value. Indeed, unless Mr Edmonds performed that task I find it difficult to understand how he can offer any valid opinion as to whether the units sold for more or less than their value. I have commented on the effect of his not doing this exercise. He attempted to excuse this by saying that only a few units had been sold when he undertook his report, although he added that he did not consider it necessary “at that time in order to draw the conclusions which I have drawn”. He did not think such an exercise was warranted, but rather he attempted to estimate what he believed was a diminution in value per unit as a result of the defects. I reject this method as providing any reasonable or proper basis for forming a proper opinion, particularly in the light of all the other evidence in relation to the saleability of these units.
136 Mr Edmonds said, Tp.187, that the loss in value of the units was caused by people seeing that there was a defect “and either not buying the units or deferring their purchase, or paying a lesser price because they knew they were going to have a hassle with the builder or developer or the owner about getting these things fixed”. This was contrary to the contemporaneous letters of Mr Hudson and not established by any evidence.
137 In my opinion these were all assumptions Mr Edmonds made which were not validated by what happened. I have referred to the evidence of Mr Barry Hudson and I shall refer to the evidence of Mr R.H. Hudson in due course.
138 Mr Edmonds also agreed that it was usual valuation practice not to treat asking prices as evidence of market value “absolutely, yes”, but none-the-less he did that by comparing the actual prices with the asking prices from which he said he could assess “what sort of discount was being evidenced, if any, between the list price and the price being achieved”. This, in my view, was an unsatisfactory answer in the sense that the method which supported it was unsatisfactory because no real reliance could be placed on the list prices and, therefore, the “discount” may not in truth have been any such thing, which, I think, Mr Edmonds readily enough accepted: Tp.187. Once again his method lacked any reasonable or rational basis given the task he was undertaking.
139 He then said he had enough evidence of sales of units to form a conclusion as to what the market value “generally” was, but he agreed he did not undertake a specific valuation exercise, although he thought he had done sufficient work to form a view as to what the value of the units were “in a general way”. In this case, and perhaps in most posing these issues, that left the evidence for the defendants in a totally unsatisfactory state.
140 In some evidence he gave at Tp.188 he seemed to agree that it was necessary to inspect comparable sales to determine that they were, in truth, comparable, although his evidence made it clear that he was relying on generalised estimates, which, in my opinion, provided an unsatisfactory basis for the calculation of damages, even if the assumptions he had made had been established.
141 At Tp.192 Mr Edmonds agreed that if the estate agent selling the units properly held the view that they were well presented and were being well received by those inspecting them, that would tend to indicate that whatever defects were present were not affecting the market value, and he agreed that having regard to the nature of his task he was certainly more aware of the defects than he might otherwise have been. The first part of his agreement substantially negated his evidence, in so far as it retained any real semblance of accuracy.
142 Mr Edmonds said, Tp.167, that interest was claimed on the basis that the sale was settled at a later date than otherwise would have been achieved:-
“.. and I have calculated the interest on the difference between the date that the money would have been received if they had been sold in the normal course, and the date that the proceeds were actually received as a consequence of them being settled later than they would have normally been.”
This was obviously a reference to “normally have been” but for delays in completion and defects.
143 In the state in which the evidence was left as to the calculations Mr Edmonds had carried out he was invited to prepare fresh schedules, which became Exhibit E, and, at Tp.228, he produced those calculations and said that he had adopted the two differing interest rates. In relation to lost opportunity interest he said he made no assumption that the trusts would have made distributions to the unit holders, although he agreed they probably would, but he could not be sure. He said that if that had occurred then no interest would have been payable as the unit holders would have received the interest. At Tp.229 he said:-

“Q. If you pick up the interest rate which was actually being paid, doesn’t that have to be taken into account in the cash flow, rather than as a separate component?

A. It could be expressed in a cash flow, but doing it in this way still produces a meaningful result.”

144 Mr Edmonds concluded by saying that he calculated liquidated damages up to 18 May 1995 and, thereafter, used an assessment of general damages. Whilst I am prepared to assume Mr Edmonds did his best to tackle the task, his methodology was, for the reasons I have given, quite unsatisfactory and provided no basis for a claim for damages.
The Evidence Of Mr Richard Hamish Hudson
145 Mr Richard Hudson was, at all material times, a director of Rolando and Corbel. He said it was his practice to provide written reports to the unit holders regularly and he was shown a bundle of reports, which became Exhibit D. He said the purpose of doing this was to provide unit holders with accurate information about the state of the investments and the progress being made in their building and marketing. He understood his duties included keeping unit holders properly informed about the state of their investment and, if the value of the investment was jeopardised by some matter that may have been capable of correction, then it would have been important to inform the unit holders about it unless it was fixed immediately.
146 Mr Hudson agreed, Tp.218, that he did not have sufficient concern about the marketing programme to refer it to unit holders. His recollection was that in October 1995 a decision was made to cease selling the units and that marketing did not resume until some time in 1997, part of the reason for that decision being that it was his belief that the market was adverse and the units would not be able to fetch what he thought was their real value. He said there were other factors. He disagreed that if the market had been buoyant in October 1995, he would have allowed the remaining units to remain on the market, although he agreed he received a letter from Mr Papallo, dated 31 October 1995, which stated, inter alia, that he had sighted a copy of Mr Barry Hudson’s recent report, which was identified as that of 30 October 1995, regarding Water Street and stating that Mr Papallo “can only but agree with the contents therein”.
147 This letter bears out entirely, in my view, the problem which was confronting the sale of these units. It had absolutely nothing to do with delay in completion or defects. It was solely concerned with the downturn in the market, which had to be overcome by retaining the units and selling later and on a more favourable market. I do not accept, even allowing for the finding of the failure to properly fire rate the top storey ceilings, that the units would not have remained on the market but for the downturned market. Even on Mr Hudson’s evidence one of the reasons for taking the units off the market was the downturn in the market: Tp.221.
148 Mr Hudson agreed that he never reported to the unit holders about any defects in the buildings, or the need to rectify them, nor did he report to them about any delay in completion: Tpp.221-222.
149 Mr Hudson also agreed that the units were put back on the market before the fire rating problem was finally resolved, which corroborates the view that the reason they were taken off the market was not related to that.
The Evidence Of Mr George Papallo
150 At Tp.93 Mr Papallo agreed that in the correspondence of 18 May 1995 he was acknowledging that the two remaining guarantees were to be released on the dates stated and:-

“Q. It was more than that, Mr Papallo. There was a dispute between you and Mr Joe Wehbe about whether there had been delay in the construction of the units, wasn’t that the case?

A. That was a dispute, yes.

Q. And you maintain that you were entitled to substantial penalties?
A. Penalties and damages, yes.

Q. And, indeed, part of the reasons that Mr Joe Wehbe, you believed, wanted to enter into the agreement was to settle the disputes?
A. Yes, we both were.

Q. And the dates on which the release guarantees were to be released, depended on the date on which the buildings were treated as being completed?
A. That and completion of defects and problems, yes.

Q. But the position is this; the date upon which the guarantees were due to be released, was one of the things you and Mr Wehbe were arguing about?
A. Absolutely not. The Bank guarantees were not part of the discussions downstairs at all. The Bank guarantees were raised by Joe as we were dictating, if you like, the words to Mr Smith and that is why it was dictated at that time.”

I do not accept this evidence. It is inherently improbable that a matter as important as the return of the guarantees would not have been discussed before the dictation commenced, or that Mr Papallo did not choose his words in this regard carefully.

151 Notwithstanding, Mr Papallo said that in his mind at that time he and Mr Joseph Wehbe had resolved any issues between them “so, there was nothing further to talk about”. However, he said there was not a resolution as to when the guarantees were to be released “because it was not discussed during the negotiations”.
152 Mr Papallo agreed that the release of the guarantees was dependent upon an agreement as to the date of completion, and that the dates 8 June 1995 and 3 September 1995 “therefore” were related to an agreed date of completion, which dates were part of the settlement negotiations. He continued that he and Mr Wehbe agreed to adopt practical completion at 18 May 1995. It was quite clear, Tp.24, that the dates 8 June and 3 September 1995 were negotiated around completion dates and “came out of the discussions and negotiations, yes”. This is totally inconsistent with the matter being a last minute thought.
153 In the light of that evidence I am not prepared to accept Mr Miller’s submission, or, for that matter, Mr Papallo’s evidence, that those dates were merely indicative of the dates when, subject to the defects being rectified, the guarantees were “due” to be released. I consider that those words mean that those were the dates agreed upon for the release of the guarantees, irrespective of other considerations.
154 Mr Papallo agreed, although not immediately, that the agreement to remedy the defects was to take place in accordance with the contractual provisions in effect as incorporated in the letters of 18 May 1995, it then being delegated to Mr Smith to follow up the rectification. He also agreed the words appearing in the two letters of 18 May 1995 were of his dictation in Mr Wehbe’s presence.
155 Mr Papallo was then cross-examined about the drawing down of the two guarantees on 11 July 1995. He was referred to various correspondence emanating from Mr Smith and he said that he would not necessarily have considered it because, as Mr Smith had the carriage of the matter to some extent, he would accept what he said was the situation.
156 At Tp.100 Mr Papallo said, somewhat surprisingly, that he did not consider that “free of defects” meant “defects measured by their obligations under the contract” and, at Tp.101, he agreed that what was being discussed were defects representing bad workmanship and the failure to build in accordance with the contract and its specifications. From this it arose that he agreed that the obligation on the plaintiffs was to correct that which they were contractually obliged to correct under the contracts.
157 At Tp.102, after having referred to the various ways in which defects can appear in a building, Mr Papallo agreed that he received the letter dated 7 June 1995 stating that all items had been rectified with the exception of the planter box waterproofing in Water Street, and that that showed that the plaintiffs understood they had finished May Street as at that date. But he said he did not think he inspected the premises after receipt of the letter, but engaged Ray White to do so. He added that he would have wanted to satisfy himself as to May Street, but he was not satisfied because “there are a whole list of things that were not completed”. Notwithstanding, he put nothing in writing to the plaintiffs, and he agreed the next letter from Mr Smith referred only to Water Street, as did the following correspondence. Put shortly there was no complaint about May Street after 7 June 1995.
158 It then became apparent that Mr Papallo needed a document signed by Mr Wehbe for the purpose of obtaining further funds from the financier. He agreed it was no part of the agreement of 18 May 1995 that the plaintiffs were obliged to sign any such document, but it was a matter of commercial importance to him that it occurred.
159 In relation to Corbel Mr Papallo agreed, Tp.107, that on 4 May 1995 a document signed by Mr Smith was prepared at his direction, which demanded a payment of the final instalment from Corbel. This is quite inconsistent with any assertion that work had not been completed. By way of emphasis Mr Papallo said, Tp.108:-

“Q. But what Corbel is being charged for is the amount under the building contract which had been approved by you, isn’t that what the letter plainly says?

A. Yes.

Q. And that is the whole of the amount demanded by Mars Construction?
A. Yes.

Q. Absolutely without any deduction for penalties or damages or anything of that sort?
A. Not on this statement.

Q. Because on 4 May you didn’t believe that there were any penalties or damages that should be deducted?
A. That is not correct.”

Mr Papallo said that there was a calculation of $133,000 in relation to penalties, which figure he denied he had dreamt up. However, he was quite unable to give any comprehensible explanation for the obvious discrepancies in his evidence.
160 Mr Papallo was then taken to the evidence in relation to the drawing down of the two guarantees, including the failure to advise of further defects either in writing or, so far as he was concerned, orally. This reinforced the view that there was no foundation in fact for these complaints. In my opinion Mr Papallo was seeking to attribute blame to the plaintiffs for the financial plight in which Rolando and Corbel found themselves in consequence of the market turning against them.
A Consideration Of Certain Issues
161 I shall now consider certain of the issues raised.
162 (a) The Contract of 18 May 1995
It was not in issue that Mr Joseph Wehbe, on behalf of himself and Mars Constructions, entered into an agreement with Mr Papallo, on behalf of Rolando and Corbel, on 18 May 1995. There were, however, issues as to the terms of the agreement, the proper meaning of the written agreement, whether the agreement was lawfully terminated on behalf of Mars Constructions and Mr Wehbe, and, if it was, the consequences of that termination. If it was not lawfully terminated a further question arose as to the consequences of its remaining on foot.
163 The background factual matrix against which, in my opinion, the agreement can be considered is that Mr Joseph Wehbe and Mr Papallo engaged in building projects together previously; each was a highly experienced and competent businessman; the May and Water Street projects were essentially completed by May 1995 and were being actively marketed for some months before then; disputes had arisen between Mr Wehbe and Mr Papallo as to the payments for extras and penalties; and each was desirous of resolving those disputes and working out a way in which any further disputes in relation to defects could be resolved and the Bank guarantees returned.
164 I am satisfied that the agreement reached on 18 May 1995 was intended to effect a final resolution of all the problems the parties had encountered, and that it was confined to the two letters of that date. I reject the submission that there were additional oral terms as was contended for by Mr Miller. My reason for this latter view is that after the agreement had been worked out over a long period of discussion, Mr Papallo and Mr Wehbe went to see Mr Smith and Mr Papallo dictated the two letters to him and, as he did so, Mr Smith typed them. If, as Mr Papallo suggested, there were oral terms such as the defaults being rectified within seven to ten days and the two Bank guarantees only being released in the event of the defects being rectified, there was absolutely no reason why Mr Papallo, who, in addition to being an experienced and, I am satisfied, astute businessman, had also practised as a solicitor for a number of years and appreciated the significance of contemporaneous written records, would not have committed any further terms to writing. The care the parties employed in reaching their agreement and ensuring it was committed to writing is clear and emphasised by Mr Papallo’s handwritten postscript to the second letter. Further, the letters were not signed immediately by Mr Wehbe, who took them away to consider them with his solicitor, Mr Louis Wehbe, and his son, Mr Raymond Wehbe. This, in my opinion, showed a degree of care in what he was doing to negate any suggestion that he would have agreed to terms, which were not included in the letters. Mr Raymond Wehbe made it clear that his father was anxious to have all matters finalised so that he could be sure that no further claims, save to the extent he agreed about rectifying defects, could be made. For all these reasons I am satisfied that the agreement of 18 May 1995 was wholly in writing and incorporated the relevant terms of the building contracts, but that those obligations were spelt out very precisely as only applying “for as long as we remain liable under the said contracts”.
165 The next question is what the agreement means. Firstly, it resolved the questions of extras and penalties and these matters were concluded by the payment to Mr Wehbe of the balance of $20,000 on that day. I have referred to the significance of the acceptance by Mr Papallo of the amount for penalties. The effect of this part of the agreement was that Rolando and Corbel satisfied all their obligations to pay money to Mars Constructions and Mr Wehbe. The rights, in regard to those matters, became accrued rights. Therefore, even I had accepted Mr Edmonds’ methodology it was in error because penalties were agreed to 18 May 1995. It was only if additional damage for delay or defects could be proved that there was any conceivable basis for such a claim.
166 Further, Mr Wehbe acknowledged the obligation to make good the defects, subject to there being a continuing liability under the building contracts. The contractual liability in respect of defects ended, prima facie, at the expiration of the defects liability period, which was twenty six weeks after the date for Practical Completion. Mr Miller submitted that the dates for Practical Completion were 17 September 1994 in respect of May Street and 21 November 1994 in respect of Water Street. However, it is clear from Mr Papallo’s evidence that the parties varied those dates when determining the dates upon which the two remaining Bank guarantees were to be released. If the defects were not rectified by each of those dates, the rights of Rolando and Corbel were to be governed by the right to sue for breach of the 18 May 1995 agreement.
167 This gave rise to the next difficulty, namely the meaning of the paragraph:-
“We further acknowledge that the second Bank Guarantee in regard to May Street is due to be released to you on 8th June 1995 and the second Bank Guarantee in regard to Water Street is due for release to you on 3rd September 1995.”
Dr Birch submitted that it was an essential term of the agreement that on each of those dates the second guarantee would be released, noting that on 18 May 1995 the first guarantees had been released. Mr Miller submitted that the words did not constitute an agreement to release the guarantees on those dates, but comprised a statement that provided the rectification work was carried out those would be the days on which they would be released. He submitted that the evidence established that these words were inserted to advise Mr Wehbe of the dates upon which the guarantees were “due” to be released, provided that the rectification work had been carried out. I reject Mr Miller’s submission.
168 The return of the guarantees was a matter of high significance to Mars Constructions and Mr Wehbe. Whilst they remained on foot they incurred fees to NAB and, of course, the guarantees could be drawn down without prior notice. The total amount guaranteed was $138,961 which, in the context of the amounts being discussed on 18 May 1995, was significant. Any final settlement between the parties demanded that the dates upon which the guarantees were to be released was resolved. When the relevant words are read they bring about, in my opinion, the necessary resolution. Firstly, Mr Papallo signed an “acknowledgment” in relation to them. This is hardly the word to be used if one was merely conveying information. Secondly, it was an acknowledgment of the date when each guarantee was “due to be released to you” and “due for release to you”. The words mean, in my opinion, that on those dates the guarantees would be released. There was no reservation of any right not to release them, nor was there any insertion of any provision for early release if the defects were rectified.
169 If, as Mr Miller submitted, the release was dependent on the defects being rectified I would have expected the letter to provide two things, namely that in the event of that not occurring there would be no release or, put another way, that the release was contingent on that happening; and, in the event of the defects being rectified before those dates there would be a release of the guarantees upon that occurring. No reason can be advanced as to why the guarantees should have been retained once the rectification of defects was concluded. On the other hand, I appreciate that the defects may have been rectified before the dates for the release of the guarantees occurred, but that only reinforces, having regard to the care with which this agreement was worked out, the view that the dates were the dates on which, irrespective of what had happened, the guarantees would be released. The parties determined on dates certain remitting themselves thereafter, so far as Rolando and Corbel were concerned to sue, and so far as Mars Constructions and Mr Wehbe were concerned, to be sued, for the cost of the rectification of defects not carried out in accordance with the contractual terms and, so far as the former were concerned, without the benefit of the guarantees.
170 One may ask why Mr Papallo was prepared to risk having defects carried out without the assurance of the guarantees. I am satisfied that that was a concession he was prepared to make for the entry into the overall agreement and, in any event, the defects were, in so far as any existed on 18 May 1995, of a quite minor nature. As I have said there can be no doubt that no agreement could have been concluded unless certainty was brought to the release of the guarantees.
171 The guarantee was not returned on 8 June 1995, or at all, and Mars Constructions and Mr Wehbe purported to terminate the contract for breach of an essential term by the letter from their solicitor dated 26 June 1995. That could only be done if the term was an essential one, the test being:-
“.. whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor ..”: Tramways Advertising Pty Limited v Luna Park (NSW) Limited (1938) 30 SR (NSW) 632 per Jordan CJ at pp.641-642.
172 In my opinion, the promise to return each guarantee had these qualities. It was contained in a separate letter signed by Mr Papallo by way of an acknowledgment, and it related to the return on dates certain of guaranteed funds of $69,631 and $69,330 respectively. Until the guarantees were returned Mars Constructions and Mr Wehbe remained liable on those guarantees and, therefore, to having $138,961 debited to their accounts. Viewing the matter objectively I cannot conclude that Mr Wehbe would have entered into this agreement unless he had been assured of the return of the guarantees in exchange for his promise to rectify the defects. That was the basis on which the parties reached their overall agreement and, as I have said, there was no reservation of rights in relation to the guarantees if the defects were or were not rectified.
173 Accordingly, I am of the view that the failure to release the May Street guarantee on 8 June 1995, or at least after demand for its release had been made, led to a breach of an essential term of the agreement, which entitled Mars Constructions and Mr Wehbe to terminate it, as they did by the letter of 26 June 1995. Although the letter referred to the agreement being rescinded, it is more accurate to say that it was terminated for breach. Dr Birch submitted that the consequence of that termination was to avoid the contract ab initio, thus remitting the parties to their rights under the building contracts and entitling his clients to claim for all extras and variations, which had been compromised. Mr Miller submitted that the agreement was only terminated in respect of future rights, and that the termination did not impact on accrued rights.
174 In my opinion, Mr Miller’s submission is correct. Thus, the settlement of the claim for extras and penalties was not affected. Mars Constructions and Mr Wehbe were, however, released from their obligations to comply further with the contract and, by virtue of the breach, entitled to recover damages for the failure of Rolando and Corbel to release the guarantees. They also claimed damages from Mr Papallo for his having given instructions for the draw down of both guarantees on 11 July 1995.
175 The agreement of 18 May 1995 was entered into by Mr Papallo on behalf of Rolando and Corbel. So much was not in issue. However, that did not make Mr Papallo a party to that agreement. Further, the draw down of the guarantees on 11 July 1995 was effected by Rolando and Corbel. The notices to NAB were furnished under the common seals of each of those companies and, in so far as those were wrongful acts, they were performed by the companies, albeit pursuant to instructions given by Mr Papallo. It will be necessary to consider these matters when dealing with the question as to whether Mr Papallo is liable to pay damages to the plaintiffs.
176 A termination ab initio is only brought about where there is a rescission for misrepresentation or mistake or some other disqualifying factor affecting the entry into the contract, rather than for breach of an essential term. The consequence of a termination for breach is to discharge the party not in breach from further performance of the contract and to entitle that party to sue for damages.
177 The consequences of the breach by Rolando of failing to deliver up the second guarantee meant, in my opinion, that Mars Constructions and Mr Wehbe were absolved from any further obligation to rectify the defects. It also meant that they were entitled to sue for damages for the wrongful drawing down of the guarantee.
178 In my opinion, the drawing down of the guarantee was wrongful because the parties had not, by the agreement of 18 May 1995, provided that that should be done. On the other hand, if the view is taken that the incorporation of the terms of the building contracts entitled Rolando to exercise its rights against that guarantee, Rolando was faced with the further difficulty that as at 11 July 1995 there was no evidence of any subsisting defects entitling the drawing down of the guarantee. I have referred in some detail to the evidence, which showed that by 7 June 1995 the plaintiffs were contending that there were no further defects in May Street, and that thereafter it was conceded by Mr Papallo that he gave no written or oral notice to the plaintiffs of any such defects. I have dealt with the total improbability of this not having been done if defects existed. I do not accept that Mr Papallo would not have given written notice if there had been defects in May Street. Further, as I have observed, Mr Papallo, when he gave the instructions that the guarantee in favour of Rolando be drawn down did so without knowledge of the amount involved, of the terms of the guarantee, of whether it could be drawn down in part, and, not caring what the situation was.
179 A submission was raised that the agreement of 18 May 1995 had to be viewed as, in effect, two agreements, one being between the plaintiffs and Rolando, and the other being between the plaintiffs and Corbel. I do not consider this is a proper characterisation of the agreement which, in my opinion, was intended to be one between all parties for the resolution of all disputes between them. The determination of the disputes in respect of extras and penalties, involving as it does lump sums not divided between Rolando and Corbel, is incomprehensible unless this view is taken. Therefore, in my opinion, if the plaintiffs were entitled, as I consider they were, to terminate the agreement because of Rolando’s conduct, that led to a termination of the whole agreement. There is no injustice in this situation bearing in mind the commonality of directors of both companies and of Mr Papallo, through Alanto and PBI, being the supervisor for both projects which, in essence, were running in tandem. However, if I be wrong in this view, there was a further and separate breach by Corbel on 11 July 1995 in drawing down the guarantee. There was no evidence that at that time Corbel was entitled to do that pursuant to its rights under the building contract. There was no evidence as to the amount owing at that date, and Mr Papallo displayed the same attitude to drawing down that guarantee as he had in relation to the May Street guarantee. I can only assume, in those circumstances, that the directors of Rolando and Corbel shared that view. No attempt was made by Mr Richard Hudson to say anything to the contrary. There was no evidence to establish that any breach by the plaintiffs in relation to defects at Water Street was of such a nature as to entitle Corbel to terminate the agreement lawfully.
180 In those circumstances the conduct of Corbel amounted to an anticipatory breach, Mars Constructions and Mr Wehbe having until 3 September 1995 to remedy any defects. That breach, in my opinion, was accepted by the immediate institution of legal proceedings for declaratory relief denying the entitlement of Corbel to act in the way in which it had. Therefore, if one views the contracts as two separate contracts there were, in my opinion, two separate breaches. Each breach was of an essential term and entitled the plaintiffs to terminate the contracts, which they did.
181 The consequences of the breaches were, in my opinion, that the plaintiffs were discharged from the obligation to carry out any further rectification work and entitled, by way of damages, to a repayment of the amounts drawn down pursuant to the guarantees.
182 There was no entitlement to re-visit the questions of extras and penalties. Nor was there any room for the application of the liquidated damages amount, even if the evidence had otherwise made out an entitlement to such damages, which it did not.
183 (b) The Effect Of The Referees’ Report
I have set out the terms of reference, which, in relation to defects required the findings as to the physical defects in the buildings “for which the plaintiffs are responsible” and the reasonable cost of rectifying them.
184 The Referees approached their task by referring to the terms of reference “as interpreted by the parties”. They stated that they were “required to report only on methodology and quantification”. They concluded their opening remarks thus:-
“The findings are based on methodologies and related quantum on which the experts agreed and which we found appropriate to adopt. The agreements expressly excluded questions of liability.”
185 In their submissions before me the parties accepted, as I understood it, that this was the way in which the reference had been conducted. I think it unfortunate, and it adds to the difficulties for referees, when, notwithstanding the order of the Court for reference out, the parties adopt a different attitude at the hearing. In saying this I do not intend that it is impermissible. However, this is what happened and, accordingly, the defects other than fire rating items, which disclosed a figure of $36,030 payable comprising $9,411 for May Street and $26,649 for Water Street, have to be considered on the basis that the liability for these amounts is to be determined by me.
186 The way the Referees approached their task in relation to defects is disclosed from the letter of 27 May 1998 from Mr Condliffe and Mr Sassine to Mr Lumsdaine setting out, by way of a Scott Schedule, defect items. It appears this schedule was prepared in 1998, although there is no evidence in the schedule to indicate when it is alleged the defects occurred. This is a not insignificant matter because in so far as they occurred after 26 June 1995 they are not, in the view to which I have come, defects for which the plaintiffs remained responsible.
187 The onus is on Rolando and Corbel to establish that these were defects for which the plaintiffs are liable. In my opinion they have not, save for limited exceptions, discharged that onus. The Scott Schedule comprises some hundreds of items. Mr Papallo’s affidavit of 10 February 1999 deals only with a few and not in a way which is relevantly helpful. I was not favoured with any submissions on them. The first tranche is concerned with Water Street, and the initial one is for $4,365 because the entrance driveway was splattered with black tar-like substance “in all probability damp proofing compound”. The postscript to the letter of 18 May 1995 accepted “that the tar staining on the driveway cannot be rectified and we will not require any further rectification in regard to such tar staining”. It is not immediately clear that this is a reference to Water Street, but there is a coincidence of defect. The defendants have, therefore, not established that that amount should be allowed.
188 One may infer that certain of the items, such as 2, 3 and 4, which I only state by way of example, were defects which existed at the time the building work was completed. On the other hand one may infer that other items such as 7, 8 and 9, once again to take examples, were probably not defects resulting from the building work. My immediate reaction to the way in which the case was presented was to decline to travel through items, on which the parties had not addressed me, to work out for myself those in respect of which the plaintiffs may be liable. However, I think the Court’s duty is to try and terminate this case, at least at first instance, and, with that in mind, I have been through the defects in relation to Water and May Streets and, simply from a description of them which is essentially all the information I have, I have decided that the following items are referable to the plaintiffs’ failure to fix the defects. In doing so I have satisfied myself, on the balance of probabilities and from the meagre descriptions offered, that this is the position. I have deliberately omitted cracking and other matters which can arise from general wear and tear having regard to the fact that a number of the units, if not all, have been occupied and, in any event, it was conceded that there could be no ongoing obligation on the plaintiffs to remedy matters such as hairline cracks and other minor matters, which will appear from time to time in a new building. I have also taken the view that damage to parts of the buildings cannot, on the evidence before me, properly be attributed to the plaintiffs. As I have said the onus was on the defendants to prove the defects and in so far as they have sought to do so by leaving me to work through the Scott Schedule I am not prepared to make any assumptions in their favour because they carry the onus. I think I should also note that the parties contented themselves before the Referees with dealing with the matter on the basis of the defects in the Scott Schedule. In these circumstances I do not see that the Court should go beyond that document.
189 Applying the principles to which I have referred I am satisfied that the defendants are entitled to have the plaintiffs compensate them in respect of defects 2, 3, 4, 11, 13, 16, 19-21, 77, 81 and 167 in relation to Water Street. These items total $2,623.33.
190 In Relation To May Street
In respect of May Street I allow Items 231, 232 and 233, which total $258. I do so on the basis that the experts attributed the cracking to the absence of structural expansion joints as shown on the engineer’s drawings, thus making it clear that the fault was attributable to the plaintiffs. I make it clear that I do not conclude that the cracking was evident at any time in 1995.
191 Similarly in relation to Items 2, 3 and 4 in relation to Water Street, the problem was the absence of construction joints shown on the relevant drawings.
192 In the result for minor defects to May Street I allow $258 and for Water Street $2,623.33, subject to the observations I am about to make.
193 The defendants were clearly under an obligation to mitigate their damages. Mr Wahbe, whose evidence I accept without reservation, told Mr Papallo in July 1995 that he was prepared to rectify such defects as existed, free of charge. Mr Papallo rejected this offer unless he was paid some $10,000 to $12,000 by way of costs for the legal proceedings, which had just been instituted because of the wrongful drawing down of the Bank Guarantees. This was a preposterous suggestion, which Mr Wahbe quite rightly rejected. The consequence was that the defects were not remedied and the reason was solely attributable to Mr Papallo’s totally unreasonable response.
194 In considering Mr Wahbe’s evidence it is necessary to note that he confirmed that the offer he made to carry out the rectification work was a genuine one and that when he made it he was aware there were a number of defects, which required fixing. He had a list of them. His offer was made in July 1995. However, there was no evidence sought to be adduced as to which defects, if any, related to May Street and which related to Water Street.
195 If Mr Papallo had accepted Mr Wahbe’s offer the rectification would have been carried out without any cost to him. No valid reason was put forward why Mr Papallo was justified in not accepting that offer and, in all the circumstances, I consider that the plaintiffs have established that the defendants failed to take appropriate steps to mitigate their damages. Accordingly, I do not consider that the defendants are entitled to any damages for rectification costs and my conclusion would have been the same even if I had come to the view that they had established a greater entitlement than that of which they have satisfied me.
196 The next item dealt with in the Referees’ Report was extras and variations which, for the reasons I have given, are covered by the agreement of 18 May 1995. That is a matter which, in the view I take, cannot be re-visited.
197 The fourth matter dealt with in the Referees’ Report was the question of acoustic requirements and roof space insulation. The Referees found that certain elements of the construction did not, as agreed by the experts including Mr Ian Ezzy, achieve a rating required under the Building Code of Australia, and that reasonable methods to achieve such ratings were agreed by the experts and costed by experts. As to roof space insulation there was a dispute as to whether it was a contractual requirement, which question was not referred to the experts. In relation to acoustics the Referees found the amount payable to be $29,903.80 and, in relation to roof insulation $11,584.10. There was not, as I understood it, any dispute about the former amount.
198 In relation to insulation Mr Ezzy conceded there was a clause in the contracts requiring it, but he said it was “incorrectly contained, was not even a reference to domestic construction. It was a reference to industrial construction …”: Tp.68. In my opinion, on the evidence, there was a requirement for insulation, even if it had been incorrectly stated in the specifications, and unless the matter was the subject of some subsequent agreement, which I am not satisfied it was, the defendants are entitled to be paid $5,792.05 for May Street and $5,792.05 for Water Street, they being the agreed figures. Dr Birch submitted this was a lump sum contract, so that if the work was not done, the same amount was payable. I disagree for reasons which must be obvious. The lump sum must have been based on the cost of carrying out the specified work.
199 As I understood it there was no argument in relation to the expenses for the acoustics and, accordingly, the defendants are entitled to be paid the figures found by the Referees of $14,516.41 for May Street and $15,387.39 for Water Street.
200 This left the fire rating related items. The Referees found the construction of both buildings fell short of the requirements of the Building Code of Australia to provide fire rating. I am not satisfied by the evidence that this was in consequence of any fraudulent conduct by the plaintiffs or of conduct which contravened ss.52 or 42 of the Trade Practices Act and the Fair Trading Act, rather the evidence indicates that the plaintiffs were misled, albeit probably innocently, by the manufacturers of the ceiling material. None-the-less the fact is that the plaintiffs did not achieve the fire rating requirements and it was not suggested that this was a matter which Mr Wahbe had in mind when he made his offer. Nor was it suggested that he had in mind rectifying the acoustic and roof insulation problems. However, the evidence of Mr Simmons, in his affidavit of 12 December 1997, and of Mr Carasso, in his affidavit of 7 November 1996, make it clear that the sub-contractor, AAA Pty Limited, and the supplier, Pioneer Plasterboard Pty Limited, showed an interest in undertaking rectification work. Mr Papallo gave reasons for rejecting the offers, which, so far as AAA Pty Limited was concerned, was valid. On the whole of the evidence I am not satisfied that it has been shown that adequate was done to justify the conclusion that Mr Papallo, on behalf of Rolando and Corbel, should have accepted this method of rectification, or that there was a sufficient offer made to require that to be done. Accordingly, in relation to these items I would allow the amounts the Referees found being in respect of May Street:-
(a) Mechanical vent boxes $ 6,387 . 22
(b) Wardrobe and linen CPD boxes $ 2,322 . 63
(c) Ceiling penetrations etc $ 36,995 . 06

Total $ 45,704 . 91

201 In respect of Water Street I would allow the figures found by the Referees of:-
(a) Mechanical vent boxes $ 7,185 . 62

(b) Wardrobe shaft panels $ 71,594 . 92

(c) Ceiling penetrations etc $ 36,196 . 66

Total $ 114,977 . 20

The Defendants’ Claim for Loss Resulting From Alleged Delay and Defects
202 A substantial claim mounted by the defendants was for loss allegedly caused because of delay by the plaintiffs in completing the works and the defects meant that the units were difficult to sell, such that the loss allegedly suffered by the defendants on their sale is attributable to the plaintiffs. In my opinion the defendants have failed to establish this claim. They have failed at a number of levels. I have set them out earlier in these reasons and it is only necessary to summarise my conclusions.
203 Firstly, the prima facie method of calculating any such loss would be by having a valuation made of the units at the time it was alleged they should have been brought on to the market and in the condition in which it was alleged they should have been, and to have compared that valuation with the prices actually achieved. The defendants did not cause any valuation to be carried out, Mr Edmonds conceding, as I have noted, that he did not perform a valuation exercise of comparing like with like. Nor did he perform any exercise placing the units into the temporal context, which the defendants would have asserted should have been the time they would have been available for sale. In the absence of any valuation evidence from the defendants comparing the units as valued by the implementation of proper valuation principles, with the prices achieved, from which at least an inference could be drawn that any delay or defects caused the fall in the price, the defendants have, in my opinion, no case at all. However, their task is made harder by a number of other matters, not the least of which is that Mr Murray’s evidence is that the units were sold at prices which matched the market prices for comparable units. Therefore, not only did the defendants not prove their case in the way to which I have referred, but there was evidence to the contrary, which I accept, that there was no diminution in value. Secondly, the evidence from Mr Barry Hudson makes it obvious that there was no problem so far as delay or defects were concerned in marketing these units. I have referred in some detail to the letters he wrote and I find it inconceivable that if there had been a problem in relation to either delay or defects he would not have referred to it. In so far as he suggested that he did not refer to those matters because he was writing to the trustees, who would pass the information on, I reject his evidence and, as I have observed, in writing to Mr Papallo he made no such comments. Mr Hudson’s evidence makes clear what is corroborated by the evidence of Mr Murray, Ms Coyne and, to some extent, Mr Edmonds, namely that when the units came on the market they were acceptable and indeed of a better quality than other units, such that Mr Hudson did not consider they would be affected by the competition from them. Initially the units sold reasonably well. There was then the slow period, which happens according to the evidence every year in the real estate market over the Christmas/New Year holidays, after which the sale of the units struck the difficulty of a downturn in the market brought about, inter alia, by increasing interest rates. The whole thrust of Mr Hudson’s correspondence during the first half of 1995 was to the effect that there was a lowering in confidence because of this problem and other financial uncertainties and that the saleability of all units in the area was reduced in consequence thereof.
204 The advertising by Mr Hudson showed a concerted campaign to sell what he described as quality units. There was no suggestion that he was engaging in false advertising, nor that the letters he wrote were inaccurate and deceptive.
205 The totality of this evidence, in my opinion, when combined with the failure by the trustees in reporting to the unit holders to make any complaint about the matters now complained of, makes a nonsense of the suggestion that any conduct or lack of conduct on the part of the plaintiffs was responsible for the inability to sell the units.
206 Thirdly, the evidence of the decline in the market was corroborated, as I have stated, by the evidence of Mr Murray, Ms Coyne and, to an extent, Mr Edmonds. Mr Papallo also agreed with it in his correspondence with the trustees.
207 Fourthly, Mr Papallo’s preparedness to accept a figure of $133,000 in respect of penalties on 18 May 1995, by which time the market was in serious decline, shows his acceptance of this situation.
208 Fifthly, the various assumptions on which Mr Edmonds’ report has been based have not been made out. There is no evidentiary basis for his assertions of delay or defects rendering the units more difficult to sell; nor for his assertions that prospective purchasers would be put off by the appearance of the units, as to which Mr Hudson’s correspondence is to the contrary; nor to support his assumption that the quality of the units was diminished by any conduct on the part of the plaintiffs. Once again Mr Hudson’s evidence disposes of this contention. Nextly, there was no evidentiary basis for the awarding of damages on the basis of lost opportunity, because there was no evidence from Mr Richard Hudson that the moneys would have been used in a different project and would not have been returned to the unit holders.
209 For all these reasons I reject the defendants’ claim for damages on this basis, and I repeat that there is no basis for applying the liquidated damages provisions of the contracts.

The Claim Against Mr Papallo
210 I have referred to the fact that Mr Papallo was acting as the agent for Rolando and Corbel, which is confirmed in paragraph 23 of the plaintiffs’ allegations. That paragraph, in its concluding words, makes it clear that the claim in relation to Mr Papallo relates to his position as the agent of Rolando and Corbel. In the way in which the matter was pleaded it seems to me that if there is any claim for aggravated and/or exemplary damages it is a claim to be made against Rolando and Corbel acting through their agent Mr Papallo. There was no suggestion that this was not the situation and, in the Amended Defence filed on 14 April 1999, paragraph 23 was admitted and the later paragraphs were denied. The Amended Defence thus accepted the fact that Mr Papallo was acting conformably with authority conferred upon him by Rolando and Corbel.
211 For the reasons I have given I consider that the actions of Mr Papallo, for which Rolando and Corbel are responsible, were high-handed in the extreme and were not justified by the circumstances which then existed.
212 The plaintiffs are seeking aggravated damages, which are compensatory in nature, and exemplary damages, which are punitive in nature. In Lamb v Cotogno (1987) 164 CLR 1, the High Court was concerned with a case in tort in which an award had been made by way of exemplary damages for trespass arising out of a motor vehicle incident. In that case the High Court, in a joint judgment, upheld that exemplary damages could be awarded where the conduct of a party was sufficiently reprehensible to require the Court to mark its disapproval of it by the award of damages. Their Honours adopted what Brennan J had said in XL Petroleum (NSW) Pty Limited v Caltex Oil (Australia) Pty Limited (1985) 155 CLR 448 at p.471:-
“As an award of exemplary damages is intended to punish the defendant for conduct showing a conscious and contumelious disregard for the plaintiff’s rights and deter him from committing like conduct again, the considerations that enter into the assessment of exemplary damages are quite different from the considerations that govern the assessment of compensatory damages.”

213 At p.8 in Lamb their Honours distinguished between exemplary damages and aggravated damages, which they described as “compensatory in nature, being awarded for injury to the plaintiff’s feelings caused by insult, humiliation and the like”. They continued:-
“Exemplary damages, on the other hand, go beyond compensation and are awarded ‘as a punishment to the guilty, to deter from any such proceeding to the future, and as proof of the detestation of the jury to the action itself’.”
214 Assuming for present purposes that such damages may be awarded in a contract case, I am not satisfied that this is a case in which it is appropriate to award aggravated damages. Certainly Mars Construction would not be entitled to such damages and I am not satisfied that Mr Joseph Wehbe is through his estate. I make the assumption because the parties did not address me on any authorities showing that aggravated and/or exemplary damages may be awarded for breach of contract, although reference, without further relevant elaboration, was made to Gray v Motor Accident Commission (1998) 73 ALJR 45, which was a tort case.
215 The question then is whether an award of exemplary damages is permissible for breach of contract and, if it is, whether it is justified on the facts of this case.
216 Although no submissions were made to me as to whether exemplary and aggravated damages could, as a matter of law, be awarded in circumstances such as the present, where the breach alleged is of contract, it seems to me that is the first matter for consideration. I should add that Dr Birch suggested that there may be a tortious basis for the award of damages based on fraud, but, for the reasons I have given, I consider that, on a proper analysis, the damages flow from breach of contract.
217 In McGregor on Damages (16th Edition) (1997) in paragraph 442 the authors stated:-
“In addition to these two exclusions from the exemplary damages net, it is clear that awards of exemplary damages will not be available in negligence, however gross, or public nuisance - AB v South West Water Service so decides - or in conversion, and certainly not for breach of contract where the writ of exemplary damages has never been allowed to run.”
218 In Halsbury’s Laws of Australia (Volume 6) at paragraph 110-11060 it is stated:-
“The fundamental principle governing the award of damages at common law is that they are compensatory. Because the purpose of the award is to compensate the plaintiff rather than to penalise the defendant, exemplary or punitive damages are not awarded in contract, although they are available for some torts. Thus the general principle when damages are awarded in contract is for the plaintiff, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.”
219 In Butler v Fairclough & Anor (1917) 23 CLR 78 Griffith CJ said, at p.89:-
“The measure of damages in an action for breach of contract is well settled. It is such loss as may fairly and reasonably be considered as arising according to the usual course of things or may reasonably be supposed to have been in the contemplation of the parties at the time of making the contract as the probable result of a breach. The motive or state of mind of a person who is guilty of a breach of contract is not relevant to the question of damages for the breach, although if the contract itself were fraudulent the question of fraud might be material (see per Lord Chelmsford in Bain v Fothergill). A breach of contract may be innocent, even accidental or unconscious, or it may arise from a wrong view of the obligations created by the contract. Or it may be wilful, and even malicious and committed with the express intention of injury the other party. But the measure of damages is not affected by any such considerations. A statement of claim which alleged that the defendant wilfully or maliciously or fraudulently committed a breach of contract would not gain any additional effect from the vituperative epithets, which would indeed be as irrelevant to the case as the ancient averment that a person accused of an offence acted at the instigation of the devil.” (My emphasis.)
220 In Addis v Gramophone Company Limited [1909] AC 488 a servant sued for wrongful dismissal. It was held that the damages could not include compensation for the manner of the dismissal, for injured feelings, or for loss sustained from the fact that the dismissal of itself made it more difficult for the servant to obtain fresh employment. Lord Loreburn LC, who gave the first speech, commenced:-
“My Lords, this is a most unfortunate litigation, in which the costs must far exceed any sum there may be at stake. A little commonsense would have settled all these differences in a few minutes.”
221 If I may say so with respect these remarks remain as relevant, or perhaps more so, to-day to much litigation which comes before the Court, as they were ninety years ago.
222 After considering the facts his Lordship said, p.490:-
“My Lords, it is difficult to imagine a better illustration of the way in which litigation between exasperated litigants can breed barren controversies and increase costs in a matter of itself simple enough.”
223 On the point presently in issue he said, p.490:-
“To my mind it signifies nothing in the present case whether the claim is to be treated as for wrongful dismissal or not. In any case there was a breach of contract in not allowing the plaintiff to discharge his duties as manager, and the damages are exactly the same in either view. They are, in my opinion, the salary to which the plaintiff was entitled for the six months between October 1905 and April 1906, together with commission which the jury think he would have earned had he been allowed to manage the business himself. I cannot agree that the manner of dismissal affects these damages. Such considerations have never been allowed to influence damages in this kind of case.”
224 At p.493 Lord James of Hereford said:-
“I have been unable to find any case decided in this country in which any countenance is given to the notion that a dismissed employee can recover in the shape of exemplary damages for illegal dismissal, in effect damages for defamation, for it amounts to that, except in the case of Maw v Jones.”
225 At p.496 Lord Atkinson said that exemplary damages were not recoverable in a case such as that before him.
226 In Flamingo Park Pty Limited v Dolly Dolly Creation Pty Limited & Ors (1986) 65 ALR 500, at p.526, Wilcox J said that according to the 14th Edition of McGregor on Damages there had never been an award of exemplary damages for breach of contract, although he thought that there was a suggestion that in the wake of Rookes v Barnard [1964] AC 1129 this may now be possible in England. His Honour continued:-
“It is not impossible to conceive of circumstances in which a defendant’s conduct, in relation to a breach of contract, will be conduct of the type attracting exemplary damages in tort. However, that would probably be a rare event; and if it arose it would be a matter of policy for the Courts to determine whether it was appropriate to extend what some see as an anomaly - punishment in a civil action - from tort into contract law. The question does not arise in the present case. Although the circumstances of Mercedes’ breach of contract reflect no credit on that company, its behaviour does not merit the epithets necessary, upon the traditional view, to attract exemplary damages.”
227 The matter was most recently considered by the High Court in Gray v Motor Accident Commission. That was a case involving tort liability in circumstances where the tortious act was also a criminal act and the defendant had been punished by the criminal law. It was held that the infliction of that punishment for virtually the same conduct was a bar to the award of exemplary damages.
228 In their joint judgment Gleeson CJ, McHugh, Gummow and Hayne JJ noted the distinction between aggravated and exemplary damages, and that the case before them was concerned with exemplary damages. Their Honours did not doubt the power to award exemplary damages in dealing with tortious liability. At paragraph 13 they quoted from the passage in Butler v Fairclough to which I have referred and continued:-
“The position is put somewhat differently in Restatement (Second) of Contracts:
‘Punitive damages are not recoverable for a breach of contract unless the contract constituting the breach is also a tort for which punitive damages are recoverable.’

The reasons underlying the apparent rule excluding an award of exemplary damages, even in cases of intentional or malicious breach of contract, were discussed by Friendly J in Thyssen Inc v SS Fortune Star . That case also is authority that an Admiralty Court does not award exemplary damages for a deviation or other breach of contract.”

229 In my opinion the mainstream of authority, which has been consistently applied, precludes the award of exemplary damages for breach of contract.
230 I have already expressed my views as to the conduct of Mr Papallo, and therefore Rolando and Corbel, in calling upon the guarantees. I regard it as high-handed and lacking due commercial justification. If I had concluded that exemplary damages were available, I would, on the basis of that conduct, have awarded $10,000 against each of Rolando and Corbel. As I have said I do not consider Mr Papallo is liable for such damages. None-the-less, for the reasons to which I have referred the law does not recognise that exemplary damages may be awarded in those circumstances. The same conclusion, I think, follows in relation to aggravated damages, although, as I have said, on the facts I do not consider that aggravated damages would be awarded.
Conclusions
231 In my opinion, the plaintiffs are entitled to recover damages from Rolando in the sum of $69,631 with interest at Supreme Court rates, no other rate being suggested, from 12 July 1995 to the date of judgment, and from Corbel in the sum of $69,330 with interest at the same rate for the same period.
232 I consider that Rolando is entitled to recover damages from the plaintiffs in the sum of $60,221.32 with interest at Supreme Court rates from the date when it outlaid those moneys to the date of judgment; and that Corbel is entitled to recover damages from the plaintiffs in the sum of $130,364.59 with interest at Supreme Court rates from the date when it outlaid those moneys to the date of judgment.
233 I consider that there should be a judgment in favour of Mr Papallo.
234 The parties should bring in short minutes of order reflecting the judgments, which, conformably with these reasons, should be entered, at which time I shall hear submissions on costs.

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