Bak v Glenleigh Homes Pty Limited

CATCHWORDS: CONTRACT - breach of contract - whether breach causative of substantial damages - DAMAGES - loss of a chance - estimation of probabilities in assessment of damages - MITIGATION - where innocent party not aware of facts giving rise to breach - when duty to mitigate damage arises - APPEAL - further evidence - s 75A (9), Supreme Court Act 1970 - new trial ordered (D)

LEGISLATION CITED: Suitors' Fund Act 1951 Supreme Court Act 1970

Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602 British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 Doherty v Liverpool Hospital (1991) 22 NSWLR 284 Greater Wollongong City Council v Cowan (1955) 93 CLR 435 Hotson v East Berkshire Area Health Authority [1987] AC 750 CASES CITED: Lambert v Lewis [1982] AC 225 Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 McDonald v McDonald (1965) 113 CLR 529 Orr v Holmes (1948) 76 CLR 632 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 The Indian Grace [1993] AC 410

PARTIES: Ted Bak v Glenleigh Homes Pty Limited

COUNSEL: J J E Fernon SC/T J Boyd (Appellant) D D Feller SC/C C Dwyer (Respondent)

SOLICITORS: Herbert Weller Solicitor (Appellant) Adam Partners Lawyers (Respondent)

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40056/05 DC 4364/02

HANDLEY JA HODGSON JA McCOLL JA

Wednesday, 15 February 2006 BAK v GLENLEIGH HOMES PTY LIMITED

Judgment 1 HANDLEY JA: In this appeal I have had the benefit of considering the judgment of Hodgson JA in draft. I agree with and gratefully adopt his Honour's reasons in paras [26] to [61], [63] to [67], [70] to [71], and [77] to [85]. I will not repeat or summarise there paragraphs and it follows that this judgment can only properly be understood after the judgment of Hodgson JA has been read. 2 I have reached different conclusions on the extent of the appellant's duty to mitigate his damage, breach of cl 3.4 of the Standard, and causation.

Mitigation 3 The innocent party's so-called duty to mitigate his damage in a contract case arises on breach, subject to the question of knowledge, and not [para 62] when damage is first suffered or noticed. The relevant principles are summarised in McGregor on Damages 17th ed 2003 at pp 224-5: "A claimant need take no steps in mitigation until a wrong has been committed against him. Thus the attempt, which is often made, to use the 'duty' to mitigate damage to force upon a party to a contract an acceptance of a repudiation of the contract by the defendant is misconceived. Where a party to a contract repudiates it, the other party has an option to accept or not to accept the repudiation. If he does not accept it there is still no breach of contract, and the contract subsists for the benefit of both parties and no need to mitigate arises. On the other hand, if the repudiation is accepted this results in an anticipatory breach of contract in respect of which suit can be brought at once for damages, and although the measure of damages is still prima facie assessed as from the date when the defendant ought to have performed the contract, this amount is subject to being cut down if the claimant fails to mitigate after his acceptance of the repudiation. These principles have from an early day found illustration in sale of goods cases … Employment contracts also provide illustrations." 4 In the cases referred to the innocent party was immediately aware of the breach, and the Courts did not have to consider the position where a breach has occurred without the knowledge of the innocent party. The basic principles in contract cases were stated by Viscount Haldane LC in British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673, 689: "The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps … this second principle does not impose on the plaintiff an obligation to take any steps which a reasonable and prudent man would not ordinarily take in the course of his business." 5 I am not aware of any authority on the nature of the "duty" to mitigate in contract where the innocent party was not aware of the facts giving rise to the breach, and the question must be considered in principle. The duty is only to do what is reasonable, and the prima facie measure of damage is only reduced if the innocent party has neglected to take reasonable steps. If the innocent party is not aware of the facts giving rise to the breach he cannot, by doing nothing, be said to act unreasonably. The question therefore must be whether he ought, acting reasonably, to have been aware of the breach. 6 Some light is thrown on this question by Lambert v Lewis [1982] AC 225. A farmer purchased a towing hitch for coupling his Land Rover to a trailer but it was not reasonably suitable for that purpose and was not of merchantable quality. After becoming aware that the coupling was broken he continued to use it for some months. It failed when the Land Rover was towing a trailer on a public road resulting in an accident in which two passengers in a car were killed. The farmer was found liable in negligence but sought an indemnity from the supplier of the coupling on the basis that the damages he had to pay were caused by the breaches of warranty. 7 The trial Judge held (ibid 273) that because of the design defect which made the coupling dangerous in use there were breaches of both warranties for which the farmer was entitled to nominal damages but the damages for which he was liable were caused by his own negligence in continuing to use a coupling he knew was broken without taking steps to have it repaired or to ascertain whether it was safe. This decision was affirmed by the House of Lords. 8 If the appellant ought to have known of the respondent's breach of contract in siting the tank too close to the building and the downpipe he was bound, from then on, to take reasonable steps to mitigate his damage. I am unable to agree that he owed no such duty until he knew or ought to have known that some damage had flowed from the breaches. 9 The trial Judge held that when mud leads were first noticed the appellant knew or ought to have known that a trained pest inspector should have been brought in and that an inspector would have located the mud lead behind the tank [para 37]. When inspectors were called in during February 2000 they located that mud lead [para 53]. The relevance of this finding will be a matter for consideration in the new trial.

Breach of contract 10 There is no doubt that the respondent was in breach of cl 2.6 of the Standard [para 49] but, contrary to the views of Hodgson JA [paras 68, 69] I am not persuaded that it was in breach of cl 3.4. This provides: "Where slab edge exposure is used as part of a termite barrier system, the vertical face of the perimeter of all raft and footing slabs shall be smooth off-v-form and shall not exhibit areas of rough surface, honeycombing or ripples. It shall be exposed for a minimum of 75mm to permit ready detection of termite entry and shall not be rendered, tiled, clad or concealed by flashings, adjoining structures, paving or soil. See Figure 3.1." 11 The respondent used slab edge exposure, including the first course of bricks [para 64], as part of its termite barrier system. In my judgment the slab edge in the vicinity of the tank was exposed for the required distance. The respondent's negative obligation that the edge "shall not be rendered, tiled, clad or concealed by flashings … paving or soil" was not breached. If one looked behind the tank from the open side one could see the exposed edge without having to remove anything. The tank was an adjoining structure, but it did not conceal the slab edge like render, tiles, cladding, flashings, paving or soil which would have to be removed before the edge was exposed. 12 The context confirms the relevance of the Macquarie Dictionary definition of conceal as "to hide, withdraw or remove from observation, cover or keep from sight". This is further confirmed by Figure 3.1 in the Standard (blue 1/154) which contemplates exposure to close observation, not casual observation from a distance. The finding of Hodgson JA [para 72] that the area behind the tank had been "concealed from one side" confirms to my mind that it had not been concealed.

Causation - the facts 13 The presence of the required 40mm gap, and the absence of the down pipe would not have permitted the appellant or anyone else to detect the presence of mud tracks in the gap without a close inspection. Such an inspection would have revealed the actual mud track behind the tank as installed. In my opinion this Court should not draw the inference that if the gap had been 40mm and the downpipe had been elsewhere "the appellant would have noticed a termite mud track in this area also, without specifically setting out to look 'behind the water tank'" [para 72]. 14 The appellant would have had to deliberately look behind the tank even if it had been 40mm from the slab. The breaches of contract did not stop the appellant doing this, and if he had looked he would have seen the mud track. If he first attempted to look behind the tank on the down pipe side he would naturally have been led to get a better look from the other side. 15 The trial Judge referred to the appellant's evidence that on the various occasions he inspected the perimeter of his dwelling for mud leads he did not look behind the hot water system (red 16-17). He also referred, with apparent acceptance, to Mr Bain's evidence that "it was not difficult to inspect behind the [hot water] system even if [it was] close to the house" (red 18).

Causation - the law 16 Hodgson JA has held that if the appellant established a breach of contract he is entitled to recover damages for loss of a chance, or otherwise in accordance with the principles discussed in Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 without having to prove on the balance of probabilities that but for the breach or breaches he would have noticed the mud track behind the tank [paras 73-74]. In my opinion Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 is authority to the contrary. That was a tort case where somewhat different principles apply but the joint judgment considered the position in contract. Having referred to The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 and Malec the joint judgment continued (351): "Unlike contract, loss or damage is the gist of the action for contravention of s 52. Is this a convincing point of distinction? That, it seems to us, is the critical question. The adoption of the Malec principle in the assessment of damages for personal injury for negligence would seem to deny the validity of such a distinction. But, in cases of that kind, the fact that the plaintiff has suffered some damage and therefore has a complete cause of action is normally established by evidence which satisfies the civil standard of proof. More to the point are authorities in Australia and England which suggest that, in some hypothetical fact situations, causation and the incurring of some loss or damage must be established according to the civil standard of proof." 17 Having considered the authorities referred to the joint judgment continued (353): "It may be that Sykes , Gates and Norwest are to be treated as cases which turn primarily on the issue of causation which is ordinarily governed by the general civil standard of proof. The distinction between proof of causation and damages was emphasised in Hotson v East Berkshire Area Health Authority [1987] AC 750. There Lord Ackner stated that the first issue that fell to be determined was that of causation. This was to be determined on the balance of probabilities. Once liability was established, the assessment of the plaintiff's loss could proceed, taking into account any reductions arising from the uncertainty of future events. When the issue of causation turns on what the plaintiff would have done, there is no particular reason for departing from proof on the balance of probabilities notwithstanding that the question is hypothetical." 18 The joint judgment concluded (355): "Notwithstanding the observations of this Court in Norwest , we consider that acceptance of the principle enunciated in Malec requires that damages for deprivation of a commercial opportunity, whether the deprivation occurred by reason of breach of contract, tort or contravention of s 52(1), should be ascertained by reference to the court's assessment of the prospects of success of that opportunity had it been pursued … On the other hand, the general standard of proof in civil actions will ordinarily govern the issue of causation and the issue whether the applicant has sustained loss or damage. Hence the applicant must prove on the balance of probabilities that he or she has sustained some loss or damage." 19 The law in England is the same: Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602 CA, 1610. 20 The appellant must therefore prove the causal link between his loss and the breach of cl 2.6, and any breach of cl 3.4, on the balance of probabilities. He must establish that, but for those breaches, he would have discovered the mud track behind the tank and avoided the damage caused by termite entry at that point.

Conclusion 21 It follows in my judgment that the appeal as originally argued would have failed. 22 However the appellant has a compelling case for allowing the fresh evidence and ordering a new trial because all breaches of contract in constructing its termite barrier system occurred at or about the same time and gave rise to a single cause of action. Dismissal of the appeal would have created a cause of action estoppel which barred proceedings in respect of the recently discovered damage: The Indian Grace [1993] AC 410, 420-1. 23 The reception of the fresh evidence entitles the appellant to a general new trial. I therefore agree with orders 1, 2 and 3 proposed by Hodgson JA. The appellant is entitled to the costs of the further hearing in this Court, but at this stage no order should be made as to the general costs of the appeal, or the first hearing, but these should abide the order of the trial Judge following the new trial. 24 The new trial may lead to findings that damage was suffered as a result of termite entry behind the water tank for which the respondent is not responsible, and from termite entry elsewhere for which it is responsible and of course other findings may also be made depending on the further evidence. The fresh evidence about termite entry at other points and its causes is yet to be fully tested. It is also not known what proportion of the total damage falls into each of these categories and this will also be settled by the new trial. The parties should not be put to the expense of coming back to this Court on the question of costs and in these circumstances, as I have indicated, the costs of the original appeal should abide the order of the judge presiding at the new trial. Any application for a further certificate under the Suitors' Fund Act following the new trial could be dealt with in chambers. 25 In lieu of order 4 as proposed by Hodgson JA I would make the following orders:

(4) The costs of the first trial, and the costs of this appeal other than the costs of the application to adduce further evidence and the second hearing will abide the order of the Judge presiding at the new trial.

(5) The respondent is to pay the appellant's costs of the application to adduce further evidence and the second hearing and in respect of those costs it is to have a certificate under the Suitors' Fund Act if otherwise eligible.

26 HODGSON JA: On 22 September 2004, Sorby DCJ gave a verdict and judgment for the respondent in proceedings in which the appellant had sought damages for breach of contract in respect of a house built by the respondent for the appellant on his property at East Kurrajong. The appellant appeals from that decision.

27 On 21 October 1997, the appellant and the respondent entered into an agreement for construction of a house on the appellant's property, in the terms of the Housing Industry Association (NSW Division) Building Agreement Edition 9. On the same day, the appellant also signed a document in the following form: I/We the homeowners noted below, have read the contents of Master Builders Australia's Homeowners Guide for Protection from Termites (July 1995 Edition) and fully understand the system of termite control which will be used in our new home (or addition) and undertake to implement the recommendations suggested in this guide.

The system of termite control proposed to be used is: concrete slab cured with "Evencure XD5 Granitgard" to slab penetrations and to perimeter of home. 28 Building work commenced in November 1997, and reached practical completion in May 1998. The appellant moved into the house on 1 July 1998. 29 In early December 1998, the appellant first observed termite mud tracks on the brick walls of his house from ground level to weepholes in the walls. He said there were 19 in all, scattered around the perimeter of the house. On advice from a friend, he applied a solution of creosote and kerosene around the brick perimeter of the house, first having removed the mud tracks manually. 30 According to a finding of the primary judge, not challenged on appeal, a few more mud tracks were detected by the appellant in the following months, and treated by him in the same way, without recourse to expert advice or reference to the respondent. 31 From about February 1999, the appellant did paving work around his house, continuing it throughout 1999, doing sections at a time. He reached a point where a hot water tank was situated near the house wall, at which point he tapered the paving in towards the wall. However, his evidence was that he never looked behind that hot water tank to see if there were any termite mud tracks there. 32 In January 2000, the appellant saw termite mud tracks inside the house, and the next day he notified the respondent. A representative of the respondent inspected the property on 31 January 2000. 33 On 15 February 2000, the property was inspected by Paul Robinson of Building Services Pty. Limited and by Charles Floyd of Combat Termite & Bug Specialists. On 16 February 2000, the property was inspected by Rowan Goodwin and Peter Harrison of Environpest. These inspections disclosed that there was extensive termite damage inside the house. 34 In March 2000, Mr. Harrison treated the property for termites, such treatment being extensive and including arsenic and liquid chemical treatment both internally and externally. 35 These proceedings were commenced in May 2002. The principal case sought to be made out by the appellant, as recorded by the primary judge, was as follows: It is the Plaintiff's case that: i) His physical removal of the mud tracks around the perimeter of his dwelling prevented external entry of the termites into his house; or ii) If the termites had penetrated the internal walls via the weep holes by the time the mud tracks were removed by the Plaintiff, then the removal of the tracks would kill any termite in the wall cavities which could not survive without the mud tracks tunnels to the central nest of the colony which could be many metres from the residence; and iii) The extensive termite damage to the interior of the Plaintiff's dwelling was caused by the termites that had entered the building by breaching the internal granitgard perimeter in some way. 36 That case was rejected by the primary judge who, on the basis of expert evidence, found on the balance of probabilities that access to the house that caused the internal damage was via a mud trail behind the hot water tank referred to above. 37 The primary judge noted a contention for the appellant that, on that finding, the mud lead behind the hot water tank was a concealed point of entry to any other than a trained person. The primary judge rejected that contention, as follows: In my view, as I have found the Plaintiff knew or should have known that when mud leads were first noticed, a trained pest inspector must be brought in to deal with the problem and such a person, in my view, and the opinion of Mr Floyd would have looked behind the hot water service as part of the procedure of dealing with the inspection as revealed by the mud leads. Mr Bak decided to deal with the problem on his own without recourse to professional advice, including advice from the Defendant. In my view his claim must fail. 38 The appeal as originally argued accepted the primary judge's decision rejecting the appellant's principal case, but challenged the rejection of the contention that the respondent was liable because the mud lead behind the hot water tank was a concealed point of entry. However, after the decision in the appeal had been reserved, the appellant applied to lead further evidence and to extend the appeal so as to challenge the primary judge's rejection of the appellant's principal case. 39 A further hearing was arranged, in which the appellant's further evidence was received on this application, together with further evidence from an expert for the respondent. There was no cross-examination on this evidence, and submissions were made on the basis that, if the evidence was received on the appeal, the Court could decide the appeal either by dismissing it or by sending the matter back to the District Court for a further hearing. 40 The appellant's further evidence was to the effect that, in late October 2005, after the hearing of the appeal, the appellant discovered fresh termite activity inside the house, despite inspections confirming no visible termite activity outside the house, including behind the hot water service. This discovery was confirmed by a pest controller Charles Floyd, who on 1 November carried out a detailed inspection and found no external activity. The appellant's expert Peter Meadows carried out an inspection on 30 November 2005, and found substantial termite activity near the south-western corner of the house. Bricks were removed from the external wall at this point, and Mr. Meadows identified defects in the Granitgard system at this point. 41 The respondent's expert Stephan Iskowicz inspected the property on 6 December 2005, and his evidence was that he did not observe any defect in the barrier installation where the bricks had been removed. 42 I find it convenient to consider first the appeal as originally argued, and then to consider the application to rely on the further evidence and to expand the grounds of appeal. 43 The appeal was originally argued on the basis that, on the findings of the primary judge, the respondent was in breach of its agreement of 21 October 1997, and that the primary judge should have addressed the question of what damages flowed from that breach. There was a submission from the respondent that this was not open on the way the case was conducted below, and also that, on the evidence before the primary judge, the damage to the appellant's house was not caused by the breach. In order to address these questions, it is necessary to set out some relevant material in some detail.

44 The Home Owners' Guide, referred to in the document signed by the appellant on 21 October 1997, had been sent to the appellant by the respondent on 5 August 1997, and it included the following: (a) Damages from termite attack can be reduced to a minimum, if not eliminated, by the use of some proven methods and regular maintenance, by you, the home owner.

(b) Regardless of the system used, it is extremely important that regular inspections be carried out as part of your ongoing maintenance of the home.

(c) Inspections by competent trained persons will ensure that the barriers have not been breached by termites. For some of the methods, annual inspections will be a mandatory requirement of the warranty conditions. However, inspections should be carried out at least every 12 months and even more frequently in high risk areas.

(d) The homeowner will be responsible for ensuring annual inspections of the home are carried out by trained persons. 45 Clause 3 of the building agreement between the appellant and the respondent identified the contract documents as being the Approved Plans and/or Drawings together with the Conditions of Approval from Hawkesbury Council. Those documents were attached to the contract. Clauses 7 and 8 of the Conditions of Approval provided: 7. The sub-slab or sub-floor ground area, all walls and structures, poles etc., shall be treated for termites in accordance with Building Code of Australia and Australian Standard 3660.1 by a recognised pest controller and proof of treatment shall be securely fixed to the formwork or steel reinforcement at the slab steel inspection stage. A formal certificate of treatment shall be lodged with Council prior to requesting a final inspection of the building (hand sprayed systems shall incorporate a physical barrier to penetrations, control joints and footings/slab joints.

8. A Termite Protection Notice, in accordance with AS 3660, printed on durable material shall be affixed at the entrance to a crawl space or in the case of slab on ground construction, in the meter box prior to a 'Final Inspection' being carried out. The Notice shall include information on the form of termite protection employed and the expected service life of the barrier before maintenance is required. 46 The notes on the engineering drawings prepared for the building works included the requirement that "termite protection... be in accordance with AS 3660.1 -1995 and Council's requirements". 47 Australian Standard 3.660.1-1995 (the "Standard") deals with the protection of buildings from subterranean termites. Part 1 details "termite barriers and construction techniques to be used in new buildings". The Foreword states: The purpose of termite barriers is to impede and discourage termite entry into a building. Termites can build around barriers but their workings or evidence thereof are then in the open where they can be detected more readily during regular inspections. 48 Clause 1.1 describes the Standard as setting "minimum requirements for detailing fabrication and installation methods of protection against termite infestation for implementation during new building work and for minimising the risk to new buildings from damage by subterranean termites". It also describes the Standard as providing "a series of details to achieve the performance requirement for evidence of termites to be forced into visible locations when gaining entry to a building". 49 Clauses 2.6 and 3.4 of the Standard provide: 2.6 ATTACHMENTS TO BUILDINGS Steps, verandahs, porches, access ramps, claddings, carports, trellises, decks or similar structures should be protected by one of the methods described in this Standard or separated by a clear gap of at least 40 mm from the main structure.

3.4 SLAB EDGE EXPOSURE Where slab edge exposure is used as part of a termite barrier system, the vertical face of the perimeter of all raft and footing slabs shall be smooth off-v-form and shall not exhibit areas of rough surface, honeycombing or ripples. It shall be exposed for a minimum of 75mm to permit ready detection of termite entry and shall not be rendered, tiled, clad or concealed by flashings, adjoining structures, paving or soil see Figure 3.1.

50 There was no evidence of measurement of the hot water tank, but from photographs of it, it appears to be a cylinder well in excess of 60cm in height, and about 60cm in diameter. It was placed on what appears to be a pad about 60cm square. At its closest point to the wall of the house, it was closer than 40mm, the evidence being that there was merely the width of a finger from the wall to the tank (perhaps about 20mm). The pad was not placed 75mm below the bottom of the brick veneer skin. There was a downpipe immediately adjacent to the tank, blocking the line of sight along the wall from that side of the tank to the point where the tank came closest to the wall. 51 It was common ground that there was at least a technical breach of the Standard in that the water tank was closer than 40mm to the wall. However, it was contended for the respondent that the 75mm exposure required by the Standard could be provided by the bottom row of bricks; and there was also a question whether or not the area between the nearest point to the wall and the downpipe was in terms of cl.3.4 of the Standard "exposed", and whether or not that area was "concealed by … adjoining structures".

52 There was evidence from Mr. Meadows, an expert called by the appellant who had inspected the property in November 2002, that the extent of the damage to the interior of the appellant's house was such as to indicate that termites were active within the house for at least six months prior to February 2000; and that when termites within a building were cut off from their main nest, they would become dysfunctional and die out, within a few days or at most within a few weeks. Mr. Meadows also gave evidence to the effect that it was most unlikely that the main nest was inside the building. I do not understand any of this evidence to be in dispute. 53 There was evidence from a number of experts concerning the effect of the position of the water tank on detection of termite mud tracks. Mr. Meadows said there was enough space behind the tank to inspect it reasonably well. Mr. Floyd said it would be hard to miss the mud leads behind the tank because a professional pest inspector would be looking for scenarios like that. Mr. Bain, a representative of Granitgard, did not agree it was an area difficult to inspect, and said it was not, to a trained pest controller, an area which cannot be inspected. All experts who went to the property in February 2000, including a building consultant, detected the termite mud track behind the hot water tank.

ISSUES AT TRIAL AND ON APPEAL (AS ORIGINALLY ARGUED)

54 In the Statement of Claim, the appellant included the following items in the particulars of breach: iii) Failing to provide a minimum 40mm gap between the pad of the hot water service and the dwelling.

v) Failing to place the pad of the hot water service 75mm below the bottom of the brick veneer skin, thus providing 75mm exposed concrete slab edge. 55 In its Amended Defence, the defendant denied the breach and also alleged the following: 3. In further answer to the Statement of Claim the defendant says: a) that if it is found that the defendant has caused the plaintiff damage as alleged, which is denied, the plaintiff has through his own actions failed to mitigate his damage.

PARTICULARS i) upon becoming aware of the attack of termites on his home in December 1998 the plaintiff failed to contact a qualified and licensed pest inspector or the defendant or both to inspect and eradicate the termites attacking his home.

ii) by using a method that was inappropriate for the eradication of and prevention of further termite attack in December 1998 and April and May 1999.

iii) by failing to contact a qualified and licensed pest inspector or the defendant or both when he became aware of further termite attacks between December 1998 and February 2000.

iv) by failing to have regular pest inspections at least once every twelve months from his date of occupation of his home in 1998 to date. 56 During the hearing of the case, there was the following exchange between Mr. Boyd (Counsel for the appellant) and the primary judge concerning issues in the case: BOYD: I object to that evidence too, if it's now being alleged that the water heater doesn't have to comply with the standard .

HIS HONOUR: I don't know what it goes to. The issue is that behind the water tank here, which is hard to see, there was a mud pack. You're not saying as part of your claim that this mud pack was part of the concealed entry. Your claim is the concealed entry was via the Granitgard, which was improperly - the Alcore guard which was either improperly used or improperly fitted, is your claim. Nothing (sic) do with the water heater.

HIS HONOUR: They couldn't see this mud pack, but that's not what the plaintiff says they got in by. Even though Mr Meadows says he didn't know about that and it may well have been the source to the termite mound so many metres away. To be fair to Mr Meadows, he only discovered that in the course of the hearing. I must say of Mr Meadows, I thought he was trying to assist the court in his evidence. He was not trying to hide anything. I'm just letting you know how I view his report, but how close the water heater was to the wall and whether or not that was a fault of the builder is not part of the plaintiff's claim, because they didn't get in that way, according to the plaintiff. You'll say that that's where they probably did.

HIS HONOUR: But that's not the plaintiff's claim. Whether or not it conforms to the standard is neither here nor there, it seems to me. That's right, Mr Boyd?

HIS HONOUR: You didn't plead it, so it can't be any issue.

BOYD: No, all right, your Honour. I was thinking about mitigation, but I'll withdraw it. 57 The appellant's written submissions to the primary judge included the following: 19. Even if the court is satisfied that the relevant point of entry was behind the hot water service, it is submitted the plaintiff still should succeed. On the evidence that point is a concealed entry point for anyone other than a trained person. The whole basis of the barrier is that any entry point be visible to the home owner. It was never suggested to the plaintiff that the system relied solely upon inspections by a trained person. It was suggested the plaintiff should have brought in a trained person after observing mud leads but his failure to do so can have nothing to do with the defendant's obligation to provide a barrier which would provide reasonable protection to a home owner and allow a reasonable opportunity to the home owner to inspect and observe termite leads and to take action to eradicate any potential threats. 58 The respondent responded to this submission as follows: In summary, it is clear from the evidence that there is nothing to support the Plaintiff's claim that Mr. Bak's home was not built in a good and workmanlike manner and failed to comply with Australian Standard 3660.1.

The claim that the inspection zones allowed were insufficient and therefore in breach of the Australian Standard was not supported by the Plaintiff's main witness, Mr. Meadows. He said that all the areas were of a sufficient (sic) to make a visual inspection. In short he didn't see a problem with them. 59 Those matters were dealt with in the passage of the judgment set out earlier. 60 In this Court, Mr. Feller SC for the respondent submitted that the appellant had withdrawn before the primary judge any case apart from that based on penetration through the Granitgard barrier; but in my opinion, having regard to the pleadings, the temporary misapprehension about the pleadings under which the primary judge and the appellant's Counsel apparently laboured at the time of the quoted exchange, the content of the written submissions to which I have referred, and the terms of the judgment, the issue is open to the appellant on appeal. 61 Accordingly, the issues on appeal (as originally argued) were whether there was a breach of contract because of breaches of cl.2.6 and/or 3.4 of the Standard, and if so, in what respect or respects; and second, was this breach causative of substantial damages to the appellant. If the Court were to conclude that it was not proved that any breach was causative of substantial damages, the result would be a verdict for the appellant for nominal damages, with all costs going against the appellant. It was common ground that, if the Court found that the breach was causative of substantial damages, the matter should go back to the District Court for the assessment of those damages. 62 It was conceded by Mr. Feller that it was not open to the respondent to rely on a breach by the appellant of such contract as may have been constituted by the appellant's signing of the document of 21 October 1997 referring to the Home Owners' Guide, because no defence or cross-claim based on any breach of any such contract had been pleaded; and also that the respondent could not rely on any failure by the appellant to mitigate damages, because the question of mitigation could not arise before a time when the appellant either knew or ought to have known of a breach of contract (and perhaps also damages flowing from it). It was also clear that, because the appellant's claim was for breach of contract, the respondent could not rely on contributory negligence of the appellant to reduce damages payable by the respondent; although conduct of the appellant causing or contributing to his loss could be relevant to the question of whether damage was caused by any breach of contract by the respondent.

63 Mr. Fernon SC for the appellant submitted that the evidence clearly established a breach of cl.2.6 of the Standard in that the hot water tank was not separated by a gap of at least 40mm from the house, the separation being only of the order of 20mm. He submitted that there were breaches of cl.3.4 of the Standard, in that the slab edge exposure was not exposed in the vicinity of the hot water tank for a minimum of 75mm, and was concealed by an adjoining structure, namely the downpipe. 64 Mr Feller submitted that there was only a technical breach in relation to the requirement of 40mm in cl.2.6 of the Standard. The requirement of a slab edge exposure of a minimum of 75mm was satisfied in this case, because the termite strip shielding was placed over the first course of bricks, and the diagram at 1 Blue 179 showed that this was sufficient. The slab edge in the vicinity of the water tank was "exposed" and was not "concealed", as shown by the evidence of the experts and illustrated by the circumstance that the termite mud track in this vicinity was readily detected by all persons who inspected the house in February 2000. He also submitted that the question of whether the slab edge was exposed or concealed at this point was not the subject of pleading and was not adequately explored during the hearing.

65 It is clear that there was a breach of cl.2.6 of the Standard in that the gap between the water tank and the wall of the house was about 20mm rather than 40mm. 66 I accept Mr. Feller's submission that the 75mm slab edge exposure can be provided by the first course of bricks where the termite strip shielding goes over that row. The real question concerning breach of cl.3.4 in this case is whether the slab edge in the vicinity of the hot water tank was "exposed" and not "concealed by … adjoining structures". 67 As regards the appellant's contention that the slab edge was not exposed, and was concealed by the downpipe, this was not specifically pleaded in the Statement of Claim. The pleadings did not expressly refer to cls.2.6 and 3.4 of the Standard, although by their terms they were plainly invoking them. However, the submissions below referred to a concealed point of entry. The question of whether the slab edge was exposed in this area, or concealed by an adjoining structure, does not in my opinion depend on expert evidence directed to that question, but rather on a common sense judgment based on a configuration clearly established in evidence and depicted in the photographs. In all the circumstances, in my opinion it is open to the appellant to rely on this allegation of breach, and in my opinion the question was sufficiently explored in evidence below. 68 I do not think the evidence that termite mud tracks behind the water tank could readily be detected by qualified pest inspectors shows that the slab edge at this point was exposed and not concealed. The evidence of Mr. Meadows suggests that substantial damage can occur within a space of six months, and it would seem unlikely that owners would be expected to arrange for expert inspections more frequently than once a year (the Home Owners' Guide recommends annual inspections). In those circumstances, I think the question of whether a point of access for termites is concealed or exposed should be considered from the point of view of an ordinary home owner, not a pest control expert. 69 Considered from that point of view, in my opinion the area behind the hot water tank between its closest point to the wall and the adjoining downpipe was not exposed, and was concealed by an adjoining structure, so that there was a breach of the Standard, and thus of contract, in that respect also.

70 Mr. Fernon submitted that, in circumstances where the appellant detected 19 other termite mud tracks, it could be inferred that, if the area in question had been exposed and not concealed, and if the hot water tank had been set 40mm back from the wall, the termite mud track behind the hot water tank would have been seen by the appellant and dealt with by him in the same way as the other termite mud tracks. Had that occurred, on the evidence of Mr. Meadows, there would not have been sustained termite activity inside the house that could have caused significant damage. 71 Mr. Feller submitted that the evidence did not establish that the termite mud track which sustained the termite activity inside the house was in the particular area identified as not exposed or concealed, that is the area between the part of the water tank closest to the wall and the adjoining downpipe. The plaintiff did not establish that, had the relevant breaches not occurred, he would have seen and dealt with the termite mud track in question, because the plain evidence was he did not look there, so that compliance with the Standard would not have made any difference. At best, it was a matter of pure speculation whether it would have made any difference, and that could not support proof of causation of damages. Mr. Feller submitted that the appellant could not rely on the loss of a chance that the termite mud track would have been detected, because the case was never put that way, and it was not dealt with by the evidence.

72 In my opinion, having regard to the circumstance that the appellant found 19 termite mud tracks in December 1998, and some more in following months, and, on the findings of the primary judge, there was no other termite mud track that he did not detect, it could be inferred that the one termite mud track that he did not find was in the area between the downpipe and the point of the hot water tank that approached closest to the wall of the house. This is confirmed by some of the descriptions given by the experts as to where they located the mud track in question. I think it also could be inferred that, if this area behind the hot water tank had not been partially concealed from one side by the downpipe, and particularly if the hot water tank had also been 40mm from the wall rather than 20mm, the appellant would have noticed a termite mud track in this area also, without specifically setting out to look "behind" the water tank. 73 However, despite Mr. Feller's submissions to the effect that damages should not be awarded on the basis the loss of a chance, and despite the fact that Mr. Fernon did not rely on the loss of a chance, in my opinion the correct approach in these circumstances is not to decide what would have happened on the balance of probabilities, and then (if the decision is that the appellant would have detected the mud track) award damages on the basis that this is a certainty, but rather to treat this as a hypothetical fact and award damages in according with the principles discussed in Malec v. J.C. Hutton Pty. Limited (1990) 169 CLR 638. 74 It is true that in Sellars v. Adelaide Petroleum NL (1994) 179 CLR 332 at 353, the following appears: When the issue of causation depends on what the plaintiff would have done, there is no particular reason for departing from proof on the balance of probabilities notwithstanding that the question is hypothetical.

However, as is made clear at 350-351 of Sellars , that was a case where loss or damage was the gist of the action, and a distinction was drawn between that kind of case and a case of a claim for breach of contract, where a cause of action is complete without proof of damages. Furthermore, in my opinion there is a distinction between a case where the occurrence of any damages at all depends on a finding that the plaintiff would have chosen to take a particular course of action, on the one hand, and a case like the present where the question is whether the plaintiff, in the ordinary course of his activity, would or would not have noticed something. 75 There are further questions of probability that need to be factored into the assessment of damages in this case. It can be inferred with near certainty that if the appellant had noticed the termite mud track in the vicinity of the hot water tank, he would have physically removed it and treated the area in the same way as with the other termite mud tracks that he removed. That leaves uncertain the extent of damage inside the house that had been caused by termite entry through the 19 mud tracks that he did destroy and how much internal damage would have occurred from termite entry through the termite mud track in the vicinity of the water heater which, on this hypothesis, he would have seen and destroyed at some time after it was established. It cannot in my opinion be inferred that there would have been no internal damage whatsoever in those circumstances, and again, in my opinion a Malec approach has to be applied. 76 A question arises whether this Court should make a determination of these questions or leave them entirely to the District Court, to which the matter would be returned on the findings I have made. I think the estimates of these probabilities could be made by this Court, since they do not depend upon assessment of credibility but rather are matters of inference from primary facts as to which there can be little dispute. However, they were not the subject of argument, so in my opinion they should be left to the District Court. I would however indicate that the kind of assessment that might be made could be along the following lines. If the probability that the appellant would have detected the termite mud track in the vicinity of the hot water heater but for the breaches was of the order of two-thirds, that is 66⅔%, and if the extent of the damage that would have occurred if the appellant had so detected that termite mud track, but not at that time called on any expert assistance, was of the order of one-quarter of the damage that actually occurred, then the combination of these two probabilities would leave the respondent liable for one-half of the cost of rectifying the damage that did occur.

77 Section 75A of the Supreme Court Act provides as follows: 75A Appeal (1) Subject to subsections (2) and (3), this section applies to an appeal to the Court and to an appeal in proceedings in the Court. (2) This section does not apply to so much of an appeal as relates to a claim in the appeal: (a) for a new trial on a cause of action for debt, damages or other money or for possession of land, or for detention of goods, or (b) for the setting aside of a verdict, finding, assessment or judgment on a cause of action of any of those kinds, being an appeal arising out of: (c) a trial with a jury in the Court, or (d) a trial: (i) with or without a jury in an action commenced before the commencement of section 4 of the District Court (Amendment) Act 1975 , or (ii) with a jury in an action commenced after the commencement of that section, in the District Court. (3) This section does not apply to: (a) an appeal to the Court under the Crimes (Local Courts Appeal and Review) Act 2001, or (b) to a case stated under the Criminal Appeal Act 1912. (4) This section has effect subject to any Act. (5) Where the decision or other matter under appeal has been given after a hearing, the appeal shall be by way of rehearing. (6) The Court shall have the powers and duties of the court, body or other person from whom the appeal is brought, including powers and duties concerning: (a) amendment, (b) the drawing of inferences and the making of findings of fact, and (c) the assessment of damages and other money sums. (7) The Court may receive further evidence. (8) Notwithstanding subsection (7), where the appeal is from a judgment after a trial or hearing on the merits, the Court shall not receive further evidence except on special grounds. (9) Subsection (8) does not apply to evidence concerning matters occurring after the trial or hearing. (10) The Court may make any finding or assessment, give any judgment, make any order or give any direction which ought to have been given or made or which the nature of the case requires.

Submissions 78 Mr. Fernon referred to Doherty v. Liverpool Hospital (1991) 22 NSWLR 284 at 294-6, and submitted that the evidence demonstrated the primary judge was wrong to conclude that the Granitgard barrier did not fail. 79 Mr. Feller submitted that to justify the admission of the further evidence, it must be reasonably clear that it must produce an opposite result: Orr v. Holmes (1948) 76 CLR 632 at 640, Greater Wollongong City Council v. Cowan (1955) 93 CLR 435 at 444, McDonald v. McDonald (1965) 113 CLR 529 at 532. The discovery of a new area of damage was merely the occasion for further investigation by Mr. Meadows, this being investigation that could have been carried out for the original trial. The most that could be said was that the further evidence might have produced a different result.

80 In my opinion, to a substantial extent the further evidence sought to be adduced on the appeal does concern matters occurring after the trial, namely a fresh infestation occurring notwithstanding inspections confirming no visible termite activity at the exterior of the house. Even without the evidence of Mr. Meadows, this would support an inference of a defect in the Granitgard barrier, because unless there was such a defect the termites could not gain access to the interior of the house without visible activity (termite mud track or tracks) at the exterior of the house. Accordingly, to that extent, the further evidence is within s.75A(9) and special grounds are not required. 81 As regards the evidence of Mr. Meadows, following removal of the bricks at the south-western corner of the house, that investigation could have taken place before the trial; but in my opinion, in the absence of indications suggesting that a defect might be found in that very position, it is not an investigation that should, as a matter of reasonable diligence, have been undertaken before the trial. 82 Mr. Iskowicz disagrees with Mr. Meadows's evidence of defects apparent at the south-western corner; but he makes no suggestion as to how the fresh infestation could have occurred in the absence of some defect in the Granitgard system. 83 If the finding against the appellant's principal case is not set aside, there will be an issue estoppel, and perhaps a cause of action estoppel, preventing the appellant from claiming damages from the respondent in respect of the new infestation. This consideration is additional to the question of probability of a different result as regards the damage that occurred before the trial. 84 On that matter, I cannot find that a different result is certain or almost certain. However, the primary judge's conclusion that the extensive termite activity in the house was sustained by a single mud lead behind the water tank did depend on his giving weight to evidence suggesting there was no defect in the Granitgard system. The further evidence, suggesting strongly that there is and always was a defect in the Granitgard system, counts against the primary judge's conclusion. I note incidentally that there was evidence at the trial that there were two species of termites found in February 2000, although there was little expert comment on the implications of this; and this could count against the termite activity being supported by a single entry point. 85 In my opinion, there is a high likelihood of a different result as regards damages for the new infestation, and a substantial likelihood of a different result as regards damages for the original infestation. In my opinion, common sense and justice require admission of the further evidence, and a new trial on the question of liability.

86 Although I have held that the appeal as originally argued would have succeeded, my decision on the further evidence point requires a new trial on the question of liability; and because the evidence on this trial could be different, I do not think the appellant can have the benefit of the finding of breach and consequential damages that would have resulted if the appeal had been confined to and upheld on the original grounds. However, because of my view as to the merits of the appeal as initially argued, in my opinion the appellant should have the costs of the appeal and also of the further evidence application. 87 In my opinion, subject to arrangements that may be made by the District Court, it would be appropriate that the new trial be by the primary judge, on the basis of the evidence previously led, supplemented by further evidence. 88 Accordingly, I propose the following orders: 1. Appeal allowed. 2. Orders below set aside. 3. Matter remitted to the District Court for determination in accordance with this judgment and for determination of all questions of costs at first instance. 4. Respondent to pay appellant's costs of the appeal and the further evidence application, and to have a certificate under the Suitors' Fund Act if otherwise eligible. 89 McCOLL JA: I agree with Hodgson JA.

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