Citation : DI GIOVANNI -v- DARK HORSE DEVELOPMENTS PTY LTD [No 2] [2013] WADC 23

Jurisdiction : DISTRICT COURT OF WESTERN AUSTRALIA

Citation : PIERO DI GIOVANNI (t/as TIMBER DIMENSIONS) -v- DARK HORSE DEVELOPMENTS PTY LTD [No 3] [2013] WADC 120

Building contract - Parties to contract - Collateral contract - Novation - Money owing - Borrowings loss - Turns on own facts

Corporations Act 2001 (Cth), s 500(2)

Abbott v Hessen [1913] WALawRp 22; (1913) 15 WALR 80

Hoyt's Pty Ltd v Spencer [1919] HCA 64; (1919) 27 CLR 133

Hungerfords v Walker [1989] HCA 8; (1989) 171 CLR 125

Olsson v Dyson [1969] HCA 3; (1969) 120 CLR 365

Re Bond Corporation Holdings Ltd (1990) 1 WAR 465

1 McLURE P: This is an appeal from decisions of Wager DCJ relating to a building dispute between the appellant, Brendon Aitken and Dark Horse Developments Pty Ltd (in liquidation) (Dark Horse). Dark Horse was the trustee of the Aitken Family Trust.

2 Dark Horse is in liquidation and Mr Aitken is bankrupt. The appellant sought and obtained from Pullin JA leave pursuant to s 500(2) of the Corporations Act 2001 (Cth) to commence and continue this appeal against Dark Horse. The appellant has represented himself in this appeal. There was no appearance by Dark Horse, or its liquidator, who was made aware of the appeal.

3 The appellant is a builder. At the material times, his trading name was 'Timber Dimensions'. On 1 May 2008 the appellant entered into two standard form, cost plus building contracts for the refit and renovation of two premises so each could operate as a small bar. The first building contract related to premises in Mount Hawthorn called The Cabin (The Cabin contract) and the second related to premises in Shenton Park called The Suite (The Suite contract).

4 The appellant brought proceedings in the District Court for moneys claimed to be owing to him under the building contracts. The identity of the counterparties to each building contract was in issue in the District Court proceedings. After a trial of this preliminary issue, the trial judge found that the contracting party in each case was Mr Brendon Aitken, not Dark Horse.

5 The remaining claims and counterclaims between the parties were litigated and determined at a subsequent hearing (the claims trial). In relation to The Cabin contract, the appellant claimed, among other things:

- the sum of $279,963.50, the subject of invoices rendered between May 2009 and October 2009 for outstanding unpaid work;

- interest on the outstanding balance at 19.94% from the date of the invoices;

- damage suffered as a result of borrowing money to pay debtors, primarily subcontractors involved in the building works (the borrowings loss);

6 In relation to The Cabin contract claims, the trial judge:

- found that Mr Aitken owed the appellant $267,571.50;

- found that the appellant was in breach of an implied condition of The Cabin contract in failing to provide invoices or accounts supporting the costs the subject of the builder's invoices and accordingly was only entitled to interest (at 19.94%) from January 2013 until the date of judgment;

- dismissed the borrowings loss claim on the basis it was too remote and not in the contemplation of the parties;

- ordered Mr Aitken to pay the appellant's legal costs to be taxed if not agreed, consistent with an agreement of 11 May 2009.

7 The only work performed by the appellant on The Suite was the installation, before May 2009, of an electrical sub-board at a cost of $972. The trial judge ordered payment of and interest on that amount at the rate of 19.94% per annum from 9 March 2010 until the date of judgment.

8 The appellant also claimed the sum of $39,050, being the builder's margin of 20% on the total of the projected costs of the proposed building works at The Suite. The trial judge dismissed this claim on the basis that The Suite contract had, in effect, been terminated.

9 The appellant has 22 grounds of appeal, many of which are incapable of altering the outcome below. The primary claim is that trial judge erred in failing to find that Dark Horse was a party to collateral contracts that rendered Dark Horse liable to the appellant for moneys owing under The Cabin and The Suite contracts (grounds 5 and 13).

10 The appellant's pleaded case below was that he had entered into the building contracts with Mr Aitken for and on behalf of Dark Horse. That is a plea that Dark Horse was the other party to the building contracts. His alternative plea was that Mr Aitken entered into the building contracts on his own behalf.

11 The defendants (Mr Aitken and Dark Horse) admitted that Dark Horse had entered into the building contracts and denied that Mr Aitken did so on his own behalf. How and why there was a trial of an issue that was, in effect, admitted on the pleadings is a mystery. Perhaps the parties (who were unrepresented by the time of the preliminary hearing) did not understand that it was open to them to agree that fact and remove it from the matters to be litigated. Be that as it may, the issue was litigated and determined by the trial judge on the evidence. It is now too late to rely on the pleadings.

12 In her reasons on the preliminary issue, the trial judge dealt with, and rejected, an unpleaded claim that Dark Horse had become a party to the building contracts as a result of contract variations by letters dated 17 November 2008 and/or 11 May 2009.

13 The appellant does not challenge the trial judge's finding that Mr Aitken entered into the building contracts on his own behalf. The appellant claims in the appeal that the letter dated 11 May 2009 is a 'collateral contract' whereby Dark Horse also became bound by the terms of the building contracts between the appellant and Mr Aitken.

14 On 17 April 2008 Dark Horse was incorporated by Mr Aitken. At all material times Dark Horse had two directors, Brendon Aitken and his father, Peter Aitken.

15 The building contracts, both signed on 1 May 2008, referred to the parties as the 'Builder' and 'Owner' respectively. The name of the Owner in each building contract is identified as Brendon Aitken and is signed by him. There is no reference anywhere in either building contract to Dark Horse.

16 The appellant had prepared the building contracts. The trial judge found that Mr Aitken had not advised the appellant that Dark Horse had been set up to develop the small bars until around 15 June 2008. No evidence was led at trial as to the identity of the person or entity who had leased The Cabin premises or The Suite premises.

17 The parties agreed to work on The Cabin project first so Mr Aitken could continue to operate The Suite as a café in order to keep generating income. Soon after commencing work on The Cabin, the relationship between the appellant and Mr Aitken broke down. The appellant stopped work from 20 October 2008 until 17 November 2008.

18 The appellant sent a letter dated 17 November 2008 to Mr Aitken and Dark Horse setting out further terms to form part of The Cabin and The Suite contracts, which letter was endorsed and signed by Mr Aitken (the November 2008 variation). The letter refers to the variation agreement as being between 'Brendon Aitken (Darkhorse)' and refers throughout to 'Darkhorse'. There is no appeal from the trial judge's determination that this variation did not result in any change to the parties to The Cabin or The Suite contracts. Under the November variation, when Brendon Aitken was not available, Peter Aitken was to assume responsibility.

19 The appellant recommenced work at The Cabin after Mr Aitken had agreed to the November 2008 variation. Once again, there were significant problems between the appellant and Mr Aitken. On 11 May 2009 the appellant wrote to Dark Horse in relation to early handover of The Cabin in the following terms:

Dear Brendon and Peter,

Before I can give early handover of 'The Cabin' to Darkhorse Developments Pty Ltd, that is before all invoices are paid for in full. I require this renewal of our contract agreement signed.

• That all invoices relating to the construction of 'The Cabin' be paid in full as per our Cost Plus agreement.
• Timber Dimensions retains full ownership of all material and services relating to the above property until paid for in full.
• Timber Dimensions has full access to the above property until all invoices and debts are paid for.
• In the event of any legal action taken to recover unpaid invoices, that all costs of said legal shall be charged to and paid for by Darkhorse Developments Pty Ltd.

This early handover is designed to be helpful to Darkhorse Development Pty Ltd to raise revenue for payment of present, past and future works. As well as being for income to Darkhorse Developments.

No future works shall commence while there are unpaid invoices retaining to 'The Cabin' to Timber Dimensions.

This is confirming our previous agreement on The Cost Plus contracts signed on 1st May 2008.

[signature] [signature]

________________________ _____________________

Brendon Aitken Peter Aitken

Director Director

[signature]

Piero Di Giovanni

Timber Dimensions

20 The trial judge considered and dismissed the possibility that there had been a novation. She said that although it could be inferred the parties believed that Dark Horse had responsibility for The Cabin and The Suite, there was no clear evidence of Dark Horse's acceptance of the two building contracts and variations thereto [54].

21 The appellant claims that the May 2009 letter evidences a collateral contract pursuant to which Dark Horse was to pay the full amount of the invoices rendered to Brendon Aitken and that Dark Horse was bound by the terms of the agreement entered into between the appellant and Mr Aitken. The appellant relies on the definition of collateral contract taken from Black's Law Dictionary (2nd ed, 1910), a dictionary of American law that is available free online.

22 In Australian law, a collateral contract is a contract made in consideration of entering into a separate, main contract. Thus, a collateral contract is entered into before or no later than, entry into the main contract. Further, a collateral contract cannot be inconsistent with the terms of the main contract: Hoyt's Pty Ltd v Spencer [1919] HCA 64; (1919) 27 CLR 133, 146.

23 A collateral contract can be tripartite in nature, such as where A makes a promise to B who, in reliance on the promise, enters into a contract with a third party, C, which is of some indirect benefit to A. In those circumstances, there can be a contract between A and B. Examples of a tripartite collateral contract are given in Cheshire & Fifoot Law of Contract (10th Aust ed, 2012) [3.7]. In Australian law, a sub-contract of the type common in the building industry does not result in a contractual relationship between the proprietor and sub-contractor.

24 The form and content of the May 2009 letter is inconsistent with there being a collateral contract between the appellant and Dark Horse. First, it is not 'collateral' to The Cabin contract. Second, it is inconsistent with The Cabin contract, both in terms of the parties thereto and in terms of content. The appellant's obligations under The Cabin contract are to Brendon Aitken, whereas the May 2009 letter contemplates that the obligations under The Cabin contract, together with a continuing right of access after handover, are owed to and by Dark Horse. Third, the May 2009 letter is inconsistent with a claim of two separate contracts for each of The Cabin and The Suite.

25 The only reasonable, objectively determined intention from the May 2009 letter is first, that it is confined to The Cabin contract and has no application to The Suite contract and second, that there is a single contract governing the rights and obligations relating to The Cabin. That objectively determined intention can only give rise to an enforceable contract if there has been an effective novation of The Cabin contract.

26 A novation comprises the formation of a new contract in place of the old contract, with the consequence that there must be contractual intention and consideration for the new contract. Ordinarily, the consideration for the new contract is the continuing party (in this case the appellant) releasing the original party (Brendon Aitken) from the old contract and the new contracting party (Dark Horse) standing in the shoes of the released party. A novation does not effect a transfer of liability but is the replacement of one liability with another and requires the involvement of all parties to the old and new contracts: Olsson v Dyson [1969] HCA 3; (1969) 120 CLR 365, 388. Novation may be express or implied from the conduct of the parties: Abbott v Hessen [1913] WALawRp 22; (1913) 15 WALR 80.

27 Relevant conduct prior to the May 2009 letter includes the fact that Dark Horse had, to the appellant's knowledge, applied for and obtained finance for the building works; progress claims under The Cabin building contract were sent to and (when paid) paid by Dark Horse and the November 2008 variation refers to Dark Horse performing contractual obligations.

28 The letter of May 2009 is only consistent with Dark Horse having replaced Mr Brendon Aitken as the party to The Cabin building contract: it provides for the handover of the works to Dark Horse not Brendon Aitken; Dark Horse agrees to the appellant having post-handover access to The Cabin; and Dark Horse agrees to pay the outstanding progress claims under The Cabin building contract. The statement in the letter that it 'confirms The Cabin contract' is consistent with the intention that Dark Horse be substituted for Brendon Aitken and assume his rights and liabilities thereunder. It can be taken that Brendon Aitken signed the May 2009 letter in his capacity as a director of Dark Horse and in his personal capacity.

29 The trial judge should have concluded that The Cabin contract had been novated by the release of Brendon Aitken and the substitution of Dark Horse. I would uphold grounds 5 and 13 to this limited extent, notwithstanding that the collateral contract claims must fail.

30 The appellant claims in grounds 1, 2, 3, 8 and 9 that the trial judge erred in describing what the appellant says was an estimate of costs as a 'quotation' or 'quote' in pars 7, 15, 23, 69 and 72 in the judgment in the claims trial (the claims judgment). Assuming the appellant is correct, the characterisation is in the context of the defendants' unsuccessful counterclaim for misleading and deceptive conduct as to the cost of the works. Any misdescription is incapable of having any effect, direct or indirect, on any order challenged in the appeal. An appeal to this court is from the orders made below, not from the trial judge's reasons or reasoning.

31 In ground 4 the appellant challenges the correctness of the trial judge's statement in par 30 that Mr Aitken offered to obtain quotes on the appellant's behalf but that the appellant rejected this proposal. The appellant claims Mr Aitken was allowed to obtain quotes for work to be performed but was not allowed to pay contractors or suppliers directly. Even if the appellant is correct, nothing of significance flows from the error.

32 In ground 6 the appellant challenges the trial judge's statement in par 60 that on a few occasions the appellant proceeded to carry out works from a single quotation without consulting Mr Aitken and obtaining his approval. The November 2008 variation provided that '[l]arger items still outstanding will be quoted with all smaller works being completed without quoting to speed up works'. However, this is of no consequence. The trial judge found that Mr Aitken was estopped from claiming that he had not approved quotations for subcontracts and that it would be unfair for the appellant not to be remunerated for all work performed by subcontractors [63].

33 In ground 7 the appellant challenges the statement in par 64 that Evoke was engaged by the appellant to prepare, design and draw plans and to liaise with the appellant in the building process when what the trial judge should have found was that Evoke was engaged by Mr Aitken to do those things. Nothing turns on the difference because the trial judge found that Mr Aitken approved the variations drawn by Evoke on his behalf [65].

34 Grounds 1, 2, 3, 4, 6, 7, 8 and 9 should be dismissed.

Undisputed invoices (grounds 10, 11 and 19)

35 The appellant had invoiced Dark Horse for the outstanding balance of $279,963.50 and was awarded $267,571.50, a difference of $12,392. The trial judge deducted the claimed cost of $5,000 for an oven, on the basis that its value had not been established, and deducted $7,392 which reflected a transposition error of costs claimed by a third party (Westec Electrical) [83] - [84]. The trial judge knew a great deal about the oven because it was at the centre of a claim of theft that brought The Cabin contract to a halt in October 2008.

36 The appellant contends the trial judge erred in discounting the invoices because they had not been disputed within the period specified in cl 10 of The Cabin contract. Clause 10 relates to progress claims and provides:

(b) ... Progress Claims are subject to the following conditions:

(i) the Progress Claim shall identify all Costs incurred by the Builder up to and including the date of that progress claim together with the Builder's fee as specified in Item 5 of the Schedule (20%);

(ii) payments shall be payable of the Owner within ... (5) days of receipt of any Progress Claim;

(iii) if the Owner shall not within ... (5) days of receipt of any Progress Claim notify the Builder of their disagreement with any of the items therein specifying in full details of the Owner's disagreement the Owner shall be deemed to have accepted and approved of that Progress Claim as true and correct.

37 Clause 10(a) provides that the builder is entitled to make progress claims at intervals of either seven days or when the value of the progress claim exceeded $100.

38 The trial judge found that the progress claims made by the appellant were very large and rendered months after the work had been performed. The progress claims included the appellant's detailed itemisation of the costs but not third party invoices of accounts to the appellant. It is clear from the appellant's invoices (progress claims) that the vast majority of costs were the claims of third party suppliers and subcontractors in connection with the works. Mr Aitken made repeated requests for the invoices to enable him to check the progress claims, however the requests were ignored. The only progress claim with a third party invoice attached was for a claim of $972 relating to The Suite.

39 The trial judge found that it was an implied term of The Cabin contract that the appellant was obliged to give Mr Aitken access to documentation substantiating the actual costs of the works payable by the Owner under cl 6 of The Cabin contract. The trial judge found the appellant was in breach of that implied condition. She concluded that once the invoices were provided and Mr Aitken was given an opportunity to determine the accuracy of the costs claimed by the appellant, he was required to pay [97].

40 The implied term has the necessary consequence that cl 10(a)(i) and (ii) are themselves conditional upon the appellant complying with his obligation to provide access to documents substantiating the costs the subject of the progress claims. I would dismiss grounds 10, 11 and 19.

41 Ground 12 is directed at pars 102 and 103 of the claims judgment which relevantly state:

The cut and thrust of business dealings mean the parties to commercial contracts may have to carry debt as a result of that contract. I am not satisfied that the impact of being in debt has been proven by [the appellant] as anything other than a usual business cost.

The loss to [the appellant] is too remote and was never contemplated by the parties at the time that they made the contract as being a probable result of a breach of that contract.

42 The appellant claims the trial judge's 'personal opinion' as to commercial contracts and business dealings is irrelevant in the establishment of damages for breach of contract. The trial judge was not expressing a personal opinion. She was making an evaluative assessment in applying the law to the facts.

43 Until the decision of the High Court in Hungerfords v Walker [1989] HCA 8; (1989) 171 CLR 125, it was a principle at common law that interest may not be recovered as damages for breach of contract except in limited circumstances. After Hungerfords, an innocent contractual party may be entitled to damages for the loss of the opportunity to use money due and owing under the contract. Compound interest is normally awarded: (149). The High Court in Hungerfords said that a party sustains a loss 'in the form of the investment cost of being deprived of money which could have been invested at interest or used to reduce an existing indebtedness, ... or in the form of borrowing cost, ie interest payable on borrowed money or interest foregone because an existing investment is realised or reduced' (143). In Hungerfords, the loss was measured by the rate that Hungerfords had paid on the highest interest loans.

44 The only evidence to which this court was referred is a letter dated 13 January 2010 to the appellant from a debt collection agency relating to a Synergy account for $434.30 (exhibit 71.3); a letter dated 3 August 2009 to the appellant from a debt collection agency relating to an Alinta account for $2,087.55 (exhibit 71.4) and a letter dated 15 September 2009 from the ANZ approving an interest only loan of $420,000 for the construction of a residential property (exhibit 71.1); an ANZ statement for the home loan (exhibit 71.2) and another bank statement (exhibit 71.5). The evidence is inadequate for the purpose of proving the borrowings loss.

45 In any event, I would uphold the trial judge's decision to refuse the claim on another ground. Both building contracts provided for what was, by any measure, a very high interest rate (19.94% per annum) for late payment under the building contracts. The obvious inference is that the agreed interest rate was to recompense the appellant for not having the use of the moneys due and payable under the building contract. Even if, which has not been established, that rate did not protect the appellant against all relevant loss, it would not be in the reasonable contemplation of the parties that he would be entitled to top it up with a Hungerfords claim. I would dismiss ground 12.

46 The appellant claims the trial judge erred in failing to award legal costs on an indemnity basis. That claim is based on the terms of the May 2009 agreement.

47 The trial judge held that the appellant was entitled to his legal costs in accordance with the May 2009 agreement, to be taxed if not agreed. She did not fix the sum because she said the costs were not sufficiently particularised to make a final order [107] - [108].

48 I do not understand the trial judge to conclude that the appellant was not entitled to the costs of the legal action on an indemnity basis. However, a standard order for indemnity costs excludes costs unreasonably incurred or unreasonable in amount: Re Bond Corporation Holdings Ltd (1990) 1 WAR 465, 479. The May 2009 agreement should be construed as incorporating those requirements of reasonableness. The trial judge was correct to make the order she did. I would dismiss grounds 14 and 20.

49 These grounds challenge pars 110 - 114 of the claims judgment. The trial judge found that after signing The Suite contract on 1 May 2008 both parties decided that The Suite works would not proceed until The Cabin had been completed or was near completion. That is in accordance with the evidence.

50 The trial judge also relied on a statement that 'if all parties are happy with The Cabin then Timber Dimensions will build Shenton Park', which she said came from the May 2009 letter. That is incorrect. The quoted statement is in the November 2008 variation which followed (and resolved for a short time) the breakdown in the relationship between the appellant and Mr Aitken. The November 2008 variation expressly states:

Shenton Park - The Suite to be determined at or near completion of 'The Cabin'. If all parties are happy with 'The Cabin', then Timber Dimensions will build Shenton Park.

51 The trial judge relied on the hostility that arose between the appellant and Mr Aitken after 11 May 2009, which descended into threats, abuse and protracted legal proceedings, to conclude that the parties were not happy with The Cabin [111].

52 The trial judge also found that the appellant had no intention of proceeding with The Suite, relying on the fact that the appellant had not received payment for moneys owing under The Cabin contract, was unable to communicate civilly with Mr Aitken and did not perform any works under The Suite contract after May 2009. The trial judge concluded that 'the relationship had broken down to such an extent that the contract could not proceed' [112]. She continued:

I reject [the appellant's] claim. The condition of 'happiness' was not met. The Suite contract is void [113].

53 The November 2008 variation to The Suite contract rendered its performance conditional on all parties being satisfied with the post-May 2009 performances relating to The Cabin contract. The evidence overwhelmingly established that neither side was happy with their experiences with The Cabin contract and that all parties, by their conduct,

regarded The Suite contract as having terminated. I would dismiss grounds 15, 16, 17 and 18.

54 In ground 21 the appellant complains that the trial judge did not mention his allegation that false information was filed by the defendants' lawyers concerning their clients' claim of misleading and deceptive conduct. The trial judge was not required to make findings as to the conduct of the defendants' solicitors to resolve the claim in the appellant's favour. This ground is without merit.

55 Ground 22 complains that the trial judge made no mention of the appellant's allegations that Mr Aitken stole an oven from The Cabin site and the problems the theft created. The trial judge was not required to address those matters as their determination was unnecessary for the purpose of disposing of the issues in the action. That course was entirely appropriate. This ground is also without merit.

56 The trial judge erred in concluding that The Cabin contract had not been novated. The Cabin contract was novated, with the consequence that Brendon Aitken was released and Dark Horse substituted in a new contract on the same terms and conditions as The Cabin contract as varied. That would be accommodated by changing the identity of the judgment debtor in the orders made by the trial judge from Brendon Aitken to Dark Horse. If the appellant moves for an order in those terms, I would make it. In all other respects, the grounds of appeal must be dismissed.