Second Basis of Claim
84I will proceed to consider the owners' case against the builder on the Second basis, the first aspect of which is a claim for $145, 281.00 in respect of costs which were allegedly not reasonable and proper.
85The basis for this claim is the implied terms which are pleaded at paragraph 5 of the Second Further Amended Points of Cross Claim.
86The builder did not plead in response to the Second Further Amended Points of Cross Claim. However, it did plead to the Amended Points of Cross claim dated 7 April 2011 which contains an earlier version of paragraph 5. The builder's Points of Defence are at Annexure TS 59 of Mr Sheppard's statement dated which is exhibit 1.
87The builder denies the implied terms pleaded in paragraph 5(a) and (b) and otherwise admits the warranties implied into the contract pursuant to section 18B of the Home Building Act 1989.
88The builder has not responded to the most contentious of the implied terms pleaded, for the first time, in paragraphs 5 (d), (e) and (f) of the Second Further Amended Points of Cross Claim, namely that:
(a)costs incurred by the builder would be reasonable and proper;
(b)the owners would not be liable for any costs that were not reasonable and proper; and
(c)costs charged by the builder which were not reasonable and proper would be reimbursed to the owners.
89Clause 17 of the contract states that the 'Owner must pay to the Builder the cost of the works a set out in Schedule 1 Part A together with the fee set out in Schedule 1 Part B.'
90Schedule 1 Part A of the contract states what the cost of the works includes. This description is set out in 9 sub-paragraphs.
91Schedule 1 Part B of the contract which is titled 'NOMINATED LUMP SUM' provides that 'The Owner will pay to the builder a fee of $45,000.00plus GST'.
92Clause 3(d) of the contract states:
'Apart from any terms implied by Statute, the whole of the terms, conditions and warranties of this Contract are set out in the Contract, drawings and specification (as set out in Schedule 3) and will not and are not in any way varied or affected by reference to any prior negotiations, stipulations or agreement, whether written or verbal.'
93Following a discussion during submissions about the above clause, counsel for the owners was kind enough to forward to the Tribunal copies of the decision of the High Court in Hart v Macdonald (1910) 10 CLR 417 and a copy of the decision of her Honour Justice Bergin in Insight Oceania Pty Ltd v Philips Electronics Australia Pty Ltd [2008] NSWSC 710.
94In Hart v Macdonald the contract contained a term similar to clause 3(d). Issacs J. stated:
'This action is brought for breach of an implied contract to commence and carry on the manufacture of butter so as to pay for a dairying plant, which was agreed to be supplied under a written agreement consisting of a tender and an acceptance, and to recover the price of the plant. The agreement contains this provision: "It is to be understood that there is no agreement or understanding between us not embodied in this tender and your acceptance thereof." It was urged that this provision excluded implications. But that is not so. It excludes what is extraneous to the written contract: but it does not in terms exclude implications arising on a fair construction of the agreement itself, and in the absence of definite exclusion, an implication is as much a part of a contract as any term couched in express words.'
95In Insight Oceania Pty Ltd v Philips Electronics Australia Pty Ltd the contract between the parties also contained a term similar to clause 3(d) of the contract. Bergin J. stated at paragraph 158 of her judgement:
'The defendant submitted that the plaintiff's claim that there are implied terms must fail because clause 5.1 of the Agreement provides that it is the "entire agreement and understanding between the parties on everything connected with the subject matter of the Agreement". In my view clause 5.1 does not mean that there are no implied terms, rather it means that it is the entire Agreement with whatever express and/or implied terms there may be within it: Hart v MacDonald [1910] HCA 13; (1910) 10 CLR 417, per Griffith CJ at 421 and Isaacs J at 430.'
96The terms considered in Hart v Macdonald and in Insight Oceania Pty Ltd v Philips Electronics Australia Pty Ltd were similar, but not identical to clause 3(d) of the contract. In particular clause 3(d) of the contract states 'Apart from any terms implied by Statute, the whole of the terms, conditions and warranties of this Contract are set out in the Contract'.
97In Hart v Macdonald Issacs J. said of the term that was relied upon to exclude implied terms;
'It excludes what is extraneous to the written contract: but it does not in terms exclude implications arising on a fair construction of the agreement itself, and in the absence of definite exclusion, an implication is as much a part of a contract as any term couched in express words.'
98The issue is whether clause 3(d) has in terms excluded implications. The clause recognises that terms are implied by Statute and then goes on to state that apart from those terms 'the whole of the terms, conditions and warranties of this Contract are set out in the Contract'. In my view, the recognition of terms implied by Statute does not carry with it the meaning that only those implied terms are recognised and that all other implied terms are excluded.
99In my view the phrase 'the whole of the terms, conditions and warranties of this Contract are set out in the Contract' includes implied terms, as Issacs J. stated 'an implication is as much a part of a contract as any term couched in express words.'
100In BAE Systems Australia Ltd v Cubic Defence New Zealand Ltd [2011] FCA 1434 Besanko J stated at paragraph 65:
'I recognise that the terms of clause 1.4 of the Subcontract are different from the terms of the clause considered by the High Court in Hart v MacDonald. Nevertheless, assuming for the purposes of argument that the prevention principle and the duty of cooperation may be excluded by express words of a contract, those words would need to be very clear before a court held that that result had been achieved. The words of clause 1.4 are not so clear as to achieve that result. It seems to me that clause 1.4 precludes reliance on representations, statements, advices or information extraneous to the contract, but not implied terms of the nature alleged by the applicant.'
101The words of clause 3(d) of the contract are not in my view specific enough to exclude the implication of the terms sought by the owners.
102The owners have referred to the case of Onesteel Manufacturing Pty Ltd v United KG Pty Ltd [2006] SASC 119 in support of the terms that they state ought to be implied.
103In Onesteel Manufacturing Pty Ltd v United KG Pty Ltd Debelle J. was concerned with a Target Estimate Contract which he stated was a 'variant of a cost plus contract'. Debelle .J considered in great detail, including a comprehensive review of the relevant authorities, whether a term ought to be implied into that contract that only 'direct actual costs that have been reasonably and properly incurred' could be recovered by the contractor.
104At paragraph 36 of his judgement Debelle J. stated:
'As a matter of general principle and ordinary commercial common sense, it is quite obvious that, in the absence of a clear expression to the contrary, a provision in a building contract which entitles the contractor to be reimbursed for costs incurred will be subject to an implied term that the cost will be reasonably and properly incurred. In the absence of such a provision, the building owner has an entirely open-ended obligation or, looking at the other side of the coin, the contractor has been handed a blank cheque. Such a contract would put a premium on inefficiency and extravagance. There would be no proper accountability for incompetent or unnecessary work. There are, I think, compelling reasons why it is proper to imply a term that Reimbursable Costs should be reasonably and properly incurred.'
105I agree with the reasoning of Debelle J. as referred to above and find that a term is to be implied into the contract as contended for in paragraph 5(d) of the Second Further Amended Points of Cross Claim. However, I find that there is no basis for the implication of the terms set out in paragraphs 5(e) and (f) of the Second Further Amended Points of Cross Claim. These terms go, in my view, to the consequences of a breach of the term referred to in paragraph 5(d). In that sense they are not necessary in order to give business efficacy to the contract.
106I have decided that the contract does contain an implied term that costs payable by the owners should be reasonably and properly incurred. As stated above, the owners claim $145,281.00 in respect of costs which were not reasonable and proper under the Second basis in paragraph 20 of their Second Further Amended Points of Cross Claim. I will now consider the detail of that claim.
107In paragraph 8H of their Second Further Amended Points of Cross Claim, the owners allege that the builder overcharged them in respect of the following items which total $145,281.00:
a)Preliminaries - $19,338;
b)Concrete Slab, stairs and paved area - $47,011;
c)Retaining wall - $21,652;
d)Carpentry roof and wall - $22,449;
e)Pergola carpentry and columns including breezeway roof - $12,831; and
f)Tiling $22,000.00.
108I will proceed on the basis that the costs to which the owners refer in paragraph 20 of their Second Further Amended Points of Cross Claim are those particularised at paragraph 8H, as referred to above.
109The owners bear the onus of proving on the balance of probabilities that the builder has claimed for costs which were neither reasonable nor proper.
110To establish that a builder under a cost plus contract has claimed costs that were not reasonable and proper will in my view require an owner to identify the item of work for which the builder has claimed the cost of, and further to identify the respects in which the costs claimed by the builder were not reasonable and proper. This process will most probably result in the Tribunal reaching a conclusion about what is or was the reasonable and proper cost of the item of work in question. To establish these matters before the Tribunal will ordinarily require expert evidence.
111In their written outline of final submissions, the owners submit that Mr Sturgess gives evidence of the reasonable and proper costs of the job and that his evidence should be accepted in full. Mr Michael George Sturgess from the company Australian Cost Planners Pty Ltd prepared a report on behalf of the owners which is dated 4 June 2012, exhibit H in the owners' case
112The owners have not referred to the precise places in Mr Sturgess's report where he has given evidence in support of the matters pleaded in paragraph 8H of the Second Further Amended Points of Cross Claim. In paragraph 10.3 of his report Mr Sturgess identifies trades that he says 'exhibit significant costs over runs'. The trades that he identifies, with the exception of 'Structural Steel' and 'Landscaping and Retaining Walls', correspond to the trades or work items set out in paragraph 8H of the Second Further Amended Points of Cross Claim.
113Mr Sturgess' report is not un-contradicted. The Further Statement of Mr Tobias Sheppard on behalf of the builder which was undated, but is exhibit 3 in these proceedings addresses Mr Sturgess' report in paragraph 22. The builder's expert Mr Austin does not address the owners' allegations in connection with the items of work referred to above, namely that the builder's charges for this work were in part, neither reasonable nor proper. Mr Austin's undated report which is exhibit 7 in these proceedings does not address these issues despite the fact that paragraphs 10 and 11 of his report address other aspects of Mr Sturgess' report.
114In paragraph 10.4 of his report, in relation to preliminaries, Mr Sturgess states that 'the actual cost incurred for preliminaries are excessive'. The owners' claim $19,338.00 in relation to preliminaries. Mr Sheppard states that the preliminaries costs 'are not excessive'.
115In paragraph 10.5 of his report, in relation to Concrete Slab, stairs and paved area, Mr Sturgess states that the final cost of concrete works 'is excessive'. The owners claim $47,011.00 in relation to the Concrete Slab, stairs and paved area. Mr Sturgess elaborates on this conclusion in paragraph 10.6 of his report. In relation to this item Mr Sturgess states that in his opinion there has been a cost overrun because the builder made a decision to undertake this work on an hourly basis rather than sub-contract the work to Lotus Concretors Pty Ltd who had provided a lump sum quote for the work in the sum of $36,190.00. The total claimed by the builder for carrying out this work on an hourly basis was according to Mr Sturgess, $84,217.00. The reasoning of Mr Sturgess in connection with this item is that in carrying out this work on hourly rates, the builder charged approximately $48,000.00 more than would have been incurred had this work been contracted out.
116In response in his Further Statement, Mr Sheppard states that the costs are not excessive. He states that the actual costs represent the detailed nature of the engineering requirements and that the costs of the slab achieved the best use of site labour.
117In paragraphs 10.7 and 10.8 of his report, in relation to the retaining wall, Mr Sturgess states that the final cost of the retaining wall is excessive against both the builder's original estimate and his own estimate. The owners claim $21,652.00 in relation to the retaining wall.
118In response Mr Sheppard states that Mr Sturgess's estimate of the work to the retaining wall is a gross under-estimate.
119In paragraph 10.9 of his report, in relation to Carpentry roof and wall, Mr Sturgess states that the final cost of carpentry works is excessive against both the builder's original estimate and his own estimate. Mr Sturgess elaborates on this conclusion in paragraphs 10.11and 10.12. The owners claim $22,459.00 in relation to Carpentry roof and wall.
120In relation to this item, Mr Sturgess has stated that the final cost incurred by the builder in carrying out this work was $61,407.00. He states that the builder's estimate of this work was $21,559 and that he estimated the cost of carrying out this work at $38,958.00. Mr Sturgess states that in his opinion the cost overrun was caused by the builder's decision to carry out this work on hourly rates rather than sub-contracting it. He states that the reason for this statement is his own experience and is also based on the labour:materials ratios published in Rawlinsons Australian Construction Handbook 2008 at page 702. Rawlinsons states that for the carpentry trade there is a typical ratio of 55% onsite labour to 45% material supply prices. In annexure B to his report Mr Sturgess calculates that the actual cost of materials for this item of work totalled $17,552. Based on this cost Mr Sturgess calculates that a total cost of $39,004 for this work would be comprised of actual material costs of $17,552, being 45% of the total and a calculated labour cost of $21,452 being 55% of the total.
121In response Mr Sheppard states that Mr Sturgess' estimate of $38,958 is grossly low. He also states in response to Mr Sturgess' point about sub-contracting that the best outcome was to keep the builder's foreman and labourer fully occupied. He states that if all trades were sub-contracted the foreman and labourer would not have been fully occupied. Mr Sheppard also states that Mr Sturgess has not taken into account the heavier structure of the roof, walls and the associated steel cantilevered beams and the construction of the steel portal frame.
122In paragraphs 10.13 and 10.14 of his report, in relation to Pergola carpentry and columns including breezeway roof, Mr Sturgess states that the final cost of this work is excessive against both the builder's original estimate and his own estimate. The owners claim $12,831.00 in relation to Pergola carpentry and columns including breezeway roof.
123In response, Mr Sheppard states that Mr Sturgess has not taken into account the handling and erection of the steel structure required to support the pergola and the handling and erection of the concrete columns.
124In paragraph 10.16 Mr Sturgess states that tiling totalling $22,000.00 was deleted from the contract works, but there was not a credit included in the builder's scott schedule claim.
125In response, Mr Sheppard states that while there was no tiling, there was an extra requirement for a polished slab with associated formwork, finishing and grading to allow for drainage falls.
126With respect, the reasoning provided by Mr Sturgess is not persuasive. If work is deleted from the contract works, the consequence will be a reduction in the contract price. The owner will not be charged for the deleted works. Mr Sturgess does not state that there was no reduction in the contract price. Further, there is no evidence that despite the deletion of tiling totalling $22,000.00, the builder claimed for and was paid for this item, thereby entitling the owners to a refund of money paid for work that was not performed. There is no reason why there should be, as Mr Sturgess suggests, a credit given to the owner for tiling in the builder's scott schedule claim, which in this case is for variations claimed by the builder. I have had regard to the builder's scott schedule. It does not claim for tiling or work carried out in lieu of tiling. If it did, then in that case, one would expect to see a credit for the original contract work omitted and replaced by the variation.
127Mr Sturgess has provided details of why he is of the opinion that the builder has charged for costs that were neither reasonable nor proper in relation to Concrete Slab, stairs and paved area and Carpentry roof and wall.
128For the remainder of the items which the owners state that the builder has claimed costs that were neither reasonable nor proper, Mr Sturgess has stated either that the actual cost, or the final cost is excessive. This conclusion is stated to be based on his opinion and experience.
129For the remainder of the items referred to, Mr Sturgess has provided no reasoning process or details to identify the respects in which the costs claimed by the builder were, in relation to the items of work or the trades that he has identified, not reasonable or proper. What he has done is to prepare an estimate himself of the cost of the items of work or trades referred to. By a comparison of that estimate with the final cost, he reaches a conclusion that because the actual or final cost exceeds his estimate, it is for that reason not reasonable and proper.
130Although Mr Sturgess's evidence has been admitted into evidence, there still remains the question of the weight that is to be given to it.
131In considering that question I have had regard to the decision of the Court of Appeal in the case of Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705. In particular, I have had regard to paragraph 85 of Heydon JA's (as he was then) judgement where his Honour states:
'85 In short, if evidence tendered as expert opinion evidence is to be admissible, it must be agreed or demonstrated that there is a field of "specialised knowledge"; there must be an identified aspect of that field in which the witness demonstrates that by reason of specified training, study or experience, the witness has become an expert; the opinion proffered must be "wholly or substantially based on the witness's expert knowledge"; so far as the opinion is based on facts "observed" by the expert, they must be identified and admissibly proved by the expert, and so far as the opinion is based on "assumed" or "accepted" facts, they must be identified and proved in some other way; it must be established that the facts on which the opinion is based form a proper foundation for it; and the opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached: that is, the expert's evidence must explain how the field of "specialised knowledge" in which the witness is expert by reason of "training, study or experience", and on which the opinion is "wholly or substantially based", applies to the facts assumed or observed so as to produce the opinion propounded. If all these matters are not made explicit, it is not possible to be sure whether the opinion is based wholly or substantially on the expert's specialised knowledge. If the court cannot be sure of that, the evidence is strictly speaking not admissible, and, so far as it is admissible, of diminished weight. And an attempt to make the basis of the opinion explicit may reveal that it is not based on specialised expert knowledge, but, to use Gleeson CJ's characterisation of the evidence in HG v R (1999) 197 CLR 414, on "a combination of speculation, inference, personal and second-hand views as to the credibility of the complainant, and a process of reasoning which went well beyond the field of expertise" (at [41]).'
132In the course of his judgement, commencing at paragraph 80, Heydon JA refers to a number of decisions of Anderson J in the Supreme Court of Western Australia. In Pownall v Conlon Management Pty Ltd (1995) 12 WAR 370 at 389-90 his Honour Anderson J. stated;
'Expert opinion is to be judged like any other evidence. It must be comprehensible and reach conclusions that are rationally based. The process of inference that leads to the conclusions must be stated or revealed in a way that enables the conclusions to be tested and a judgment made about the reliability of them. This requirement is not satisfied by evidence from an expert which says, in effect: 'I have examined the costings and estimates made by others and on the strength of my own expertise and experience in the field I believe them to be reasonable.'
Such a forensic device overlooks the most important rule that it is for the court to judge the reliability of evidence given in support of the case. If an opinion relies on facts that must be proved or assumptions that must be verified, it is to the court that they must be proved and verified, not to the expert witness.'
133At paragraph 81 of his decision, Heydon JA refers to another decision of Anderson J:
'In Bollock v Wellington (1996) 15 WAR 1 at 3 Anderson J said:
"Before an expert medical opinion can be of any value the facts upon which it is founded must be proved by admissible evidence and the opinion must actually be founded upon those facts ..."
He then said at 3-4, citing Steffen v Ruban:
"As with any other evidence, expert opinion must be comprehensible and the conclusions reached must be rationally based. A court ought not to act on an opinion, the basis for which is not explained by the witness expressing it ...
None of these requirements is satisfied, when all that the medical expert says is 'I have examined this patient and from what I know about plant operation I think he can drive a D10 bulldozer on production work'."
He also said at 4, citing Pownall v Conlan Management Pty Ltd (1995) 12 WAR 370 at 390:
"Unless the process of inference by which an opinion is reached is expressed in a manner which permits the conclusions to be scrutinised and a judgment made as to its reliability, the opinion can carry no weight."
134I have taken these statements by Heydon JA and Anderson J into account when considering the weight to be given to the expert evidence in this case
135I have also had regard to the statement of Branson J. in Sydneywide Distributors Pty Ltd v Red Bull Australia Pty Ltd [2002] FCAFC 157 where her Honour states at paragraph 7 that the passage of Heydon JA quoted above might be regarded as 'counsel of perfection'. While that may be one view of Heydon JA's judgement, I am of the view that what is said in the passages quoted from Heydon JA and Anderson J is compelling in so far as they state an expert's conclusions must be 'rationally based', and that 'The process of inference that leads to the conclusions must be stated or revealed in a way that enables the conclusions to be tested and a judgment made about the reliability of them' and further 'the expert's evidence must explain how the field of "specialised knowledge" in which the witness is expert by reason of "training, study or experience", and on which the opinion is "wholly or substantially based", applies to the facts assumed or observed so as to produce the opinion propounded'.
136In the instances of Concrete Slab, stairs and paved area and Carpentry roof and wall Mr Sturgess has, albeit briefly, set out a reasoning process which leads to and supports his conclusions that the costs incurred by the builder were excessive, which I understand to mean, neither proper nor reasonable. This reasoning process has been described above in the discussion of the evidence relating to these items.
137Where Mr Sturgess has provided a reasoning process to support his conclusion one is able to understand the basis for his opinion and also to critically assess the reasoning relied upon. The obvious benefit of being able to do so contrasts with the instances where Mr Sturgess has not provided that reasoning process. In those instances Mr Sturgess states a conclusion that costs are excessive because actual costs exceed estimated costs.
138I have stated above that the owners bear the onus of proving on the balance of probabilities that the builder has claimed for costs which were neither reasonable nor proper.
139The owners are obliged to call sufficient evidence to raise an issue about whether or not the builder has claimed for costs which were neither reasonable nor proper so as to entitle me to find in their favour on this head of claim.
140In connection with the amount of $19,338.00 claimed in connection with Preliminaries, I find that the evidence of Mr Sturgess which is un-supported by an adequate reasoning process and is denied by the builder is not of sufficient weight to satisfy me that the owners are entitled to recover the sum claimed because the builder's claims for preliminaries were neither reasonable nor proper. I dismiss this item of the owners' claim.
141In connection with the amount of $21,652.00 claimed in connection with the Retaining wall, I find that the evidence of Mr Sturgess which is un-supported by an adequate reasoning process is also not of sufficient weight to satisfy me that the owners are entitled to recover the sum claimed because the builder's claims in relation to the Retaining wall were neither reasonable nor proper. I dismiss this item of the owners' claim.
142In connection with the amount of $12,831.00 claimed in connection with the Pergola carpentry and columns including breezeway roof, I find that the evidence of Mr Sturgess which is un-supported by an adequate reasoning process, which is denied by the builder and stated not to have taken into account relevant work, is not of sufficient weight to satisfy me that the owners are entitled to recover the sum claimed because the builder's claims in relation to the Retaining wall were neither reasonable nor proper. I dismiss this item of the owners' claim.
143In connection with the amount of $22,000.00 claimed in connection with Tiling, I find that the evidence of Mr Sturgess is not adequate to satisfy me that the owners are entitled to recover the sum claimed. As stated the owners have not produced evidence that despite the deletion of tiling totalling $22,000.00, the builder claimed for and was paid for this item, thereby entitling them to a refund of money paid for work that was not performed. Mr Sturgess' reasoning that the owners are entitled to a credit in the builder's scott schedule is not persuasive for the reason set out above, namely that a scott schedule for variations, which does not deal with the subject in issue, is not the place for recording deductions or omissions from the contract with the associated credit against the contract price. Further, the builder's evidence suggests that the tiling was replaced by a polished slab with associated formwork, finishing and grading to allow for drainage falls. The builder's scott schedule does not claim for that work. If it did, then in that case one would expect to see a credit for the original contract work omitted and replaced by the variation.
144In connection with the amount of $47,011.00 claimed in connection with Concrete Slab, stairs and paved area, I find that the evidence of Mr Sturgess which is supported by the reasoning process that I have referred to above is sufficient to satisfy me that the builder's claims in excess of the quote received from Lotus Concretors Pty Ltd wall were neither reasonable nor proper. The builder's evidence stating that the costs of the slab achieved the best use of site labour does not in my view provide an adequate basis for proceeding in that fashion, if it is a more costly outcome than sub-contracting the works to achieve a more cost efficient outcome. For these reasons I will find in the owners' favour on this item of their claim.
145In connection with the amount of $22,459.00 claimed in connection with the carpentry roof and wall, the evidence is more finely balanced. Mr Sturgess relies upon Rawlinsons which gives a ratio of onsite labour to material costs. Mr Sheppard states that Mr Sturgess has failed to take into account the heavier structure of the roof, walls and the associated steel cantilevered beams and the construction of the steel portal frame. Mr Sheppard does not elaborate on this. He does not explain how the factors that he has identified resulted in the costs, specifically labour costs, charged for this work being reasonable and proper.
146Mr Sheppard of the builder also states in response to the suggestion that this work ought to have been sub-contracted, that the builder carrying out the work itself was the best outcome so far as keeping its own labour occupied was concerned. I am not persuaded that this approach sits comfortably with the implied term as found. As stated, this approach does not in my view provide an adequate basis for proceeding in that fashion if it results in a more costly outcome than sub-contracting the works to achieve a more cost efficient outcome.
147I prefer the evidence of Mr Sturgess in connection with this item. The builder's position is not sufficient to persuade me that I ought to accept it and dismiss this head of claim. In particular, the builder's position that carrying out the work itself was the best outcome so far as keeping its own labour occupied is at odds with the term that has been implied. The builder keeping its own labour occupied cannot be justified if the result is excessive and avoidable cost to the owners. I will find in favour of the owners in connection with this item.