DELIVERED : Oral reasons delivered extemporaneously and published on

Builders' Registration Act 1939 (WA) - Application for leave to review Disputes Tribunal - Building contract - Effect of liquidated damages clause - Whether day means calendar day - Whether term implied permitting additional damages

Builders' Registration Act 1939 (WA)

BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266

Cellulose Acetate Silk Company v Widner's Foundry (1925) Ltd 1933 AC 20

Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1981) 149 CLR 337

Electric and Musical Industries Ltd v Lissen (1938) 4 All ER 221

Elsley v Collins (1978) 83 DLR (3d) 1

Frazer v Evans [1946] VicLawRp 58; (1946) VLR 382

Public Works Commissioner v Hills (1906) AC 368

1 The State Administrative Tribunal heard an application for leave to review a decision of the Building Disputes Tribunal, and the review together.

2 The Tribunal found that the Disputes Tribunal had erred in not applying a definition clause where stipulated that 'day' meant working days, in its assessment of liquidated damages. It was also found that the Disputes Tribunal had erred in implying a term in the contract permitting damages to be claimed in addition to the liquidated damages. There was nothing to suggest that the parties had contemplated that the additional damages would be suffered in the event of breach, and the damages did not flow naturally from this breach. The contract was expressed to be the entire contract and the Tribunal considered that none of the criteria for the implication of a term could be satisfied.

3 Leave to review the decision was accordingly granted, and the review was upheld. Orders were made substituting the correct amount to be paid to the respondent for that ordered to be paid by the Disputes Tribunal.

4 In this matter the applicant applies for leave to review and for the review of a decision of the Building Disputes Tribunal reflected in an Order to Pay number 179 of 2005-06 for an amount of $6216. The application for leave and the review itself were heard together.

5 The Disputes Tribunal has provided reasons for its decision dated 18th May 2006. The issues raised by the proposed review are, firstly, whether the Disputes Tribunal erred in law in calculating the quantum of liquidated damages payable by the applicant to the respondent in that it took account of each calendar day instead of each working day as defined in cl 27 of the building contract and, secondly, whether the Disputes Tribunal erred in law in finding that the respondent was entitled to the sum of $1100 in addition to the liquidated damages properly calculated under the terms of the building contract.

6 In order for the Disputes Tribunal to assess the liquidated damages and for it to make findings about whether additional damages should have been awarded there were some steps which it was necessary for it to undertake. It should obviously have applied itself to the proper construction of the contract and in particular the liquidated damages clause. There has been some limited attention given to that clause in the decision but not to the contract as a whole.

7 Further, when assessing damages or considering whether additional damages should be awarded it was necessary for the Tribunal to consider whether or not the damages claimed fell under either limb of the rule expressed in the well-known case of Hadley v Baxendale (1854) 156 ER 145. There appears to have been little attention to that particular issue.

8 In relation to the construction of the liquidated damages clause the Tribunal did say at par 41 of its reasons for decision that there was no merit in a proposition put forward on behalf of the applicant that the calculation had to be based on working days. The reason given for that was that the clause referred to the payment of liquidated damages at the rate of $20 per day for each day beyond the due date for practical completion until practical completion has taken place.

9 The liquidated damages clause, which is cl 11(a) of the contract, provides:

"If the builder breaches subclause 11(a) it shall be liable to pay the proprietor liquidated damages at the rate of $20 per day for each day beyond the due date for practical completion until practical completion is deemed to have taken place."

10 It is common cause that the builder did breach the provisions of subclause 11(a) which stated the period when read with the Schedule of the contract, within which the works were to be completed. In order to reach a proper understanding of the clause it must of course be interpreted in the context of the contract as a whole.

11 The applicant's counsel has referred the Tribunal to cl 12(a) of the contract which relates to the defects liability period where express reference is made to calendar days. In itself this may be an indication that the parties intended a different meaning to the ordinary meaning elsewhere in the contract to references to the term "day" or "days" and this is supported by the definition section of the contract, cl 27. That clause provides relevantly that words importing the singular shall include the plural and vice versa and in particular that "days" means "Monday to Friday but excluding any day that is a public holiday in the area of the site or throughout the state of Western Australia".

12 The interpretation clause therefore conveys that the term "day" is to have a corresponding meaning, being a day, namely Monday to Friday but excluding a day that is a public holiday in the area of the site or throughout the state of Western Australia. In Hudson's, "Building and Engineering Contracts" Vol 2, 1995 edition, par 10.025, the learned authors discuss liquidated damages and say that "day" in liquidated damages clauses includes holidays and Sundays unless, "working days" are specifically referred to. Authority is given for that proposition being Brown v Johnson (1842) 10 MNW 331.

13 It is of course the case here that the contract does and expressly refers to working days. In the work, the "Interpretation of Contracts" by Lewison, (London 2004) at par 5.10 the learned author discusses the effect of the use of definitions. Reference is made to the case Re Sassoon (1933) 1 Chancery 858 and a quotation is set out.

"Except in actions for rectification a court has no power whatsoever of adding to or subtracting from the words of a written instrument. A testator or settler may, however, in the instrument itself indicate sufficiently plainly that he is using certain words or phrases in other than their literal and ordinary meaning. In such cases he has said to have provided his own dictionary and the court will construe such words and phrases in the light of that dictionary."

14 The author proceeds to then refer to a decision in Electric and Musical Industries Ltd v Lissen (1938) 4 All ER 221 where Lord Russell said:

"I would point out that there is no question here of words in the first claim bearing any special or unusual meaning by reason either of a dictionary found elsewhere in the specification or of technical knowledge possessed by persons skilled in the art. The prima facie meaning of words used in a claim may not be their true meaning when read in the light of such a dictionary or of such technical knowledge and in those circumstances a claim when so construed must bear a meaning different from that which it would have borne had no such assisting light been available."

15 In applying those principles it is obvious therefore that the parties own dictionary definition had to be applied to the calculation of liquidated damages. The Disputes Tribunal erred in not doing so. The correct calculation applying the definition reduces the number of days for which liquidated damages should be awarded to 174 days which computes to an amount of $3480 which is payable as liquidated damages.

16 The next issue for consideration therefore is the question of the additional damages of $1100 which were awarded by the Tribunal. At par 37 the reasons state:

"The owner has also claimed the cost of boarding her daughter in the area so her year-12 studies were not interrupted. The tribunal is of the view that it was never within the contemplation of the parties that the building contract would overrun by more than 8 months from the originally agreed four and a half months. The builder's failure to comply with its contractual obligations was and is egregious."

17 It is to be noted that there is no reference to any evidence which might indicate what was actually within the contemplation of the parties. The above quotation refers only to what was not in the contemplation of the parties. The principles to which we have already referred and which are known as the rule in Hadley v Baxendale are set out in the work, "Building and Construction Contracts" by Dorter and Sharkey, (2nd Ed, Law Book Company 1990) par 1820.

18 After referring to that decision and other cases the authors sets out the principles as follows:

"The damages which the innocent party ought to receive from breach of contract should be such as may fairly and reasonably be considered either to have arisen naturally from the breach itself or to have been in the contemplation of both parties at the time they made the contract as the probable result of its breach. What is often described as the first branch of the rule will allow the innocent party such damages as arise naturally, that is, according to the usual course of things from the breach of contract. Under the second branch of the rule, any damage which is due to special circumstances will be too remote unless those circumstances were known to both parties at the time of the making of the contract."

19 In view of the fact that there is nothing to suggest that there is any evidence of discussions between the parties prior to entry into the contract which would have shown that the circumstances giving rise to the claim described in par 37 was in the contemplation of the parties; it cannot be said that the damages fall within the second limb of that rule.

20 Certainly in our view the damages cannot be said to fall within the first limb of the rule. Damages which would be, or could be, regarded as flowing directly from a breach such as delay, being the failure to complete within time would be a claim for rental or for additional interest paid on a mortgage and that is not the type of claim which was considered here. Although a claim relating to additional rental was advanced the Tribunal, in our view, correctly dismissed that claim because it fell within and was substituted by the liquidated damages provision.

21 It may be that the Disputes Tribunal did not intend to address the rule in Hadley v Baxendale and in all probability the reference in par 37 is an attempt to do no more than set out the background for and basis upon which it subsequently found that there was an implied term in the contract.

22 The Disputes Tribunal said as follows in paragraphs 38 and 39 of the reasons for decision - in 38:

"Had the parties sat down at the time the contract was entered into and considered who should bear the additional costs associated with boarding the owner's daughter if the contract was not completed within 12 months the answer to that question would undoubtedly have been the builder."

Such a cost would not have been in the contemplation of the parties as being incorporated into the $20 per day liquidated damages allowance."

"The Tribunal is prepared to award damages to the owner for breach of an implied term of the contract that the building would be available for occupation within 12 months of the contract being entered into by the parties."

24 There are no reasons beyond those which we have quoted to establish why that term should be implied.

25 In proceeding, as it has done, we consider that the Disputes Tribunal has ignored the purpose of, and the nature of, liquidated damages clauses. Liquidated damages clauses are of course clauses agreed to between the parties to avoid the difficulty of having to prove actual damages and also to fix with certainty what the liability will be in the event of delay.

26 If it should turn out that the liquidated damages are not a genuine pre-estimate of the loss likely to be suffered the clause could be attacked as being a penalty and therefore contrary to public policy and void. The principles are generally set out in the text by Dorter and Sharkey, to which we have referred above, at par 9.720 and following. It is also the case that generally liquidated damages would limit the right to recover additional damages.

27 At par 9.730 (page 4750) the authors deal with a situation where the liquidated damage clause is struck down as a penalty and submit that the position in Australia is that the liquidated damages clause would nevertheless fix an upper limit beyond which damages could not be recovered. The authors say "..the better view it is submitted is that the principal is limited to a maximum of what would have been the amount of his liquidated damages. In Cellulose Acetate Silk Company v Widner's Foundry (1925) Ltd 1933 AC 20 the House of Lords preferred to leave such a question open but the Law Lords constituting the Privy Council in Public Works Commissioner v Hills (1906) AC 368 held that such unliquidated damages should not exceed the "penalties" at 375. In Australia this philosophy was preferred by Gavan Duffy J in Frazer v Evans [1946] VicLawRp 58; (1946) VLR 382 at 385:

"Though the sum ... is not an assessment of the damages, it sets a limit beyond which damage cannot be recovered."

28 The authors then continue: "Similarly, the Supreme Court of Canada has preferred the view that the clause could still operate as a limitation in Elsley v Collins (1978) 83 DLR (3d) 1 at 14-16 viz:

'The party imposing the penalty should not be able to obtain the benefit of whatever intimidating force the penalty clause may have in producing performance and then ignore the clause when it turns out to his advantage to do so. A penalty clause should function as a limitation on the damages recoverable.'"

29 None of those principles were given any consideration by the Disputes Tribunal and they were obviously relevant and necessary matters to be considered. While the liquidated damages clause would hardly be struck down as a penalty, the above principles remain applicable, if anything with more force because the clause remains fully operable.

30 In addition to that it is a well-established principle as set out in the decision of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1981) 149 CLR 337 at 346 that:

"The more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question at issue and then there is the difficulty of identifying with any degree of certainty the term which the parties would have settled upon had they considered the question. Accordingly the courts have been at pains to emphasise that it is not enough that it is reasonable to imply a term. It must be necessary to do so to give business efficacy to the contract."

31 The ordinary criteria for the implication of a term as endorsed in the Codelfa decision were set out in the of Privy Council decision BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266.

32 They are that the proposed term:

(2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it

(3) it must be so obvious that it goes without saying;

(5) it must not contradict any express terms of the contract.

33 The effect of Codelfa is to make plain that a court should be all the more slow to imply a term where what the parties have agreed represents the totality of their willingness to agree. In this particular matter the contract on its face appears to be a comprehensive reflection of the matters agreed between the parties. The contract itself comprises some 12 pages of relatively small print and it includes by virtue of cl 1 of the contract the drawings, plans and specifications including all addenda and schedules to be drawn in accordance with the contract particulars sheet annexed or as varied by agreement, all of which are thereafter referred to as the contract documents.

34 Any doubt that the contract was intended to represent a comprehensive recording of all the terms agreed by the parties is put to rest by the provisions of cl 7(e) of the contract.

35 That clause provides:

"The proprietor warrants that he has not relied on any representations, whether express or implied, which are not contained in the contract documents. The builder is not bound by anything the proprietor may have seen in any of the builder's display homes or in any marketing or advertising material and the contract documents signed by the parties shall constitute the entire contract between the parties."

36 In those circumstances any attempt to imply a term could succeed only with great difficulty. When one has regard to the particular criteria which are set out in the BP Refinery case we do not consider that any one of those criteria can be met. In particular, the last criterion that it must not contradict any express term of the contract is not met because to imply the term found by the Disputes Tribunal would be directly contradictory to the liquidated damages clause itself (cl 11(j)). It makes plain that it applies:

"For each day beyond the due date for practical completion until practical completion is deemed to have taken place."

37 The reference to "deemed to have taken place" must be read in the context of cl 11(e) which "deems" practical completion to have taken place when the works are completed except for omissions or defects not preventing the works being reasonably capable of being used for its intended purpose, or where the Owner takes possession without the consent of the Builder or the Builder, has handed the keys of the Works to the Owner, whichever first occurs. The effect is therefore, that the liquidated damages clause operates until practical completion is achieved in any of these ways. We consider that the implied term found by the Disputes Tribunal contradicts the express terms of cl 11(j) of the contract.

38 The implied term cannot be said to be reasonable in circumstances where the parties have agreed a liquidated damages clause, given the nature and purpose of that clause unless some qualification is expressly made as to the operation of the clause, which is not expressed in this contract. It is certainly not necessary to give business efficacy to the contract because the contract is capable of performance without any difficulty absent the proposed term and it is, in our view, certainly not so obvious that it goes without saying. Indeed, we consider that the opposite is quite true. It is not at all obvious.

39 So for all those reasons we consider that leave should be given to review the decision of the Disputes Tribunal and that the review should succeed on both grounds. The effect of that is that in respect of the second ground of review the amount awarded of $1100 will be disallowed, and the total amount to be awarded will therefore, be the amount payable under the liquidated damages clause as properly calculated in accordance with these reasons in an amount of $3480.

40 There are some additional comments that the Tribunal wishes to make. The Tribunal was assured that if the applicant succeeded with the review that it would not actually endeavour to enforce the Tribunal's orders. That was a matter of concern to the Tribunal because of its obligation to arrive at the correct and preferable decision having regard to the substantial merits of the matter.

41 The Tribunal raised whether the liquidated damages clause might have been capable of being attacked as being unconscionable and that may have been a matter which would have required this matter to be referred back to the Disputes Tribunal. Our concern in that regard fell away because of the undertaking which was provided to the Tribunal.

42 The orders we make therefore are as follows:

1. The applicant has leave to bring the application for review.

2. The application for review dated 30 May 2006 be upheld.

3. The Order to Pay number 179/2005-06 be set aside and be substituted as follows:

That BGC Residential Pty Ltd pay to Cheryl Lorraine Parker the sum of $3480.

I certify that this and the preceding [42] paragraphs comprise the reasons for decision of the State Administrative Tribunal.

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MR C RAYMOND, SENIOR MEMBER