Calibre Construction Corp Pty Limited v Bayside Council

Supreme Court of NSW|2021-05-05|Before: Parker J

Judgment

These proceedings arise out of a dispute under a construction contract dating from 2012. The plaintiff, Calibre Construction Corp Pty Limited ("Calibre"), was the contractor. Bayside Council (formerly Rockdale City Council), the defendant and cross-claimant, was the principal.
The contract arose out of a property development undertaken by Calibre at Arncliffe in Sydney. The Council was the consent authority for the development. As commonly occurs with major developments, certain financial contributions for the benefit of the public were imposed by the Council as conditions of consent to the development under s 94 of the Environmental Planning and Assessment Act 1979 (NSW) ("the Act"), and Calibre and the Council entered into a contract providing for Calibre to undertake specified public works as payment in kind towards those contributions. I will refer to the contract as the Works-in-Kind ("WIK") Agreement.
The development undertaken by Calibre was approved by the Council in 2009. It involved the construction of two tower buildings containing a total of 182 residential units. The WIK Agreement was entered into in January 2012. The dispute is about roadworks undertaken pursuant to the Agreement. Those works were completed and handed over in October 2012.
According to the Council, Calibre still owes a debt under the WIK Agreement attributable to the value of the roadworks of about $650,000. That debt has never been paid. Furthermore the Council claims that there are testing and documentation tasks to be done to complete the job. The Council is still holding $400,000 in bank guarantees provided by Calibre by way of security for its obligations under the Agreement.

Summary of evidence

The evidence in the case was essentially documentary. Although affidavits were read from each side, there was no cross-examination. There were no disputed issues of fact.
The WIK Agreement was dated 25 January 2012. The Agreement acknowledged Calibre's liability to make the s 94 contributions required by the Council ("Development Contributions"). Calibre undertook to design, construct and hand over three items of building work ("the Works"). Each item of work was to have a value attributed to it ("Contribution Value"). The Council undertook to accept the Works by way of "full and final satisfaction" of the developer's obligation to make the Development Contributions, to the extent of the Contribution Values of the Works (clause 3.1). If the total Contribution Value exceeded the value of the Development Contribution, provision was made for reimbursement by the Council to Calibre of the surplus. If there was a deficit ("Deficient Value"), Calibre was to pay the difference (clause 3.2).
Item 1 of the Works was the construction of a trunk drainage culvert and surcharge pit. Its agreed Contribution Value was $1,050,301. Item 3 was the construction of a pedestrian safety fence. Its agreed Contribution Value was $25,030.
The roadworks which have given rise to the dispute in these proceedings were Item 2. They involved the construction of a new access road which was required by condition 116A(i) of the Development Consent.
Clause 4 provided for the determination of the Contribution Value for Item 2, on which the parties had been unable to agree. Once the Council had approved the design for the works it was to engage a QS to conduct the determination. Upon receipt of the QS's calculations, the Council was to provide them to Calibre. Calibre then had an opportunity, within thirty days, to make a submission to the Council on the QS's calculations. If it did so, the Council was obliged to provide that submission to the QS, together with any submission the Council might make in response. The QS then had fourteen days to finalise the assessment of the Contribution Value.
Clause 11 of the Agreement dealt with the rectification of defects. It provided for the Council to give Calibre a rectification notice requiring works to be done. Such a notice had to be given during a specified period known as the "first defects liability period".
Once Calibre had undertaken the rectification works, it was able to give the Council a rectification certificate. This then gave the Council a further period, known as the "second defects liability period" to issue any further rectification certificate. In the case of the Item 2 works, the first defects liability period was a period of twelve months beginning on the handover date. The second defects liability period was a further period of twelve months.
Security was governed by clause 14. The clause provided for security to be retained by the Council both for any Deficient Value which might arise from the Contributions Valuation determination process and for the cost of any rectification works. I refer to the relevant clauses in more detail below (see [70]-[73]).
Calibre's design for the roadworks was approved by the Council on 22 February 2012. The first occupation certificate (which was an interim certificate relating to one of the towers) was issued about six months later, on 10 August. The roadworks were handed over on 12 October.
The first defects liability period for the roadworks was thus due to expire on 12 October 2013. Two days beforehand, the Council sent a rectification notice to Calibre. The notice required certain specified works to be done within 30 days.
Meanwhile, on 4 September, the Council had retained a QS, Aquenta, for the purposes of determining the Contribution Value of the roadworks. Aquenta reported to the Council on 18 December with an estimated value of $336,535.
As already mentioned, Calibre disputed the validity of Aquenta's determination. Calibre also disputed the rectification notice which had been given. On 12 March 2014, Calibre wrote to the Council requesting return of the bonds.
It took a long time for the Council to respond to this letter. The response came on 23 September. The Council rejected Calibre's objections and demanded that the works be done within thirty days in accordance with the original notice.
Calibre did not accept the Council's response and did not comply with its demand. Further correspondence ensued which petered out in 2015. It is not necessary for the purposes of this judgment to go into the details.
The hearing of the common law proceedings took place on 17 November 2015. On 23 December Fagan J delivered his judgment. He recorded that the Council was claiming payment of a deficient value of $729,680. At [7] his Honour explained that Calibre disputed its liability for that amount on the basis that it had not been validly ascertained and was too low. Calibre said that Aquenta's determination of the estimated cost was not carried out in accordance with the WIK Agreement and was therefore not binding. Aquenta had excluded from its determination the cost of certain elements of work, which Calibre alleged should have been treated as part of the roadworks. His Honour concluded at [88]: It follows from the above that Aquenta's report of 18 December 2013 does not fulfil the requirements of a quantity surveyor's determination under the Works-in-Kind Agreement in the respect, and only in the respect, that it fails to allow for the cost of pavement removal, excavation and disposal of spoil as referred to at [69] - [73]. The determination is therefore not binding upon the defendant and the plaintiff has not established its entitlement to the amount claimed under the calculation referred to at [6]. It remains open to the plaintiff to engage the same or a different quantity surveyor to make a redetermination under Clause 4.3. That clause permits the determination to be made at any time after the design of the new access road has been approved.
Following the judgment, the Council recommissioned Aquenta to undertake the assessment of the Contribution Value for the roadworks. Aquenta produced a further estimate of $492,190 on 19 April 2016. On the following day, the Council forwarded this to Calibre.
Calibre's response came on 17 May in the form of a submission. Aquenta did not make its determination within the fourteen day period specified in the contract but eventually produced a report dated 22 August 2016. In that report Aquenta gave a revised estimate figure of $634,287.
However the Council did not send this report to Calibre or indeed tell Calibre anything about it. There is no evidence to explain why that was so. The issue seems simply to have been forgotten for a period of more than two years. Nor did the Council take any further action concerning the alleged defects over this period.
On 2 August 2019 Calibre wrote to the Council seeking return of the bank guarantees. On 10 September the request was followed up. There appears to have been no response from the Council.
Calibre's proceedings began on 3 October 2019. On 21 November the Council belatedly made demand for payment.

Contribution Value shortfall

It is convenient to deal first with the Council's claim to recover the Contribution Value shortfall as assessed in Aquenta's August 2016 report.
Calibre's first defence to this claim is that it is statute barred and as a result has been extinguished (Limitation Act 1969 (NSW), s 63). Alternatively, Calibre contends that the contract was abandoned. But the Council contends that the first of these defences (at least) is barred by issue estoppel. It is convenient to deal with that question first.

Issue estoppel

The proceedings in the Common Law Division were commenced by way of statement of claim. The Council claimed payment of a cash shortfall under clause 3.2 in accordance with Aquenta's December 2013 determination (the shortfall under that determination being $790,000). The claim was pleaded in the conventional way as a claim for an amount due under the WIK Agreement.
Calibre's defence admitted the existence of its obligations under clause 3.2 but denied that Aquenta's determination answered the description of a determination for the purposes of the WIK Agreement. The defence went on to allege that had a proper determination been made of the costs of the roadworks, the Contribution Value would have exceeded the value of the contribution and the Council would have been liable to reimburse Calibre for the excess. But no cross-claim was filed and no attempt seems to have been made by either party in the proceedings to ask the Court to determine what the amount of the Contribution Value for the roadway was. It seems to have been assumed by all concerned that if Calibre's defence succeeded then (as in fact happened) a further determination would be obtained.
Counsel for the Council started the issue estoppel argument by observing that there had been no argument before Fagan J that Calibre had no obligation to pay. Counsel pointed to the following paragraphs from his Honour's judgment: 7. The defendant disputes its liability for this balance amount upon the basis that the allowance for Works-in-Kind Item 2 has not been validly ascertained and is too low. The defendant says Aquenta's purported determination of the "estimated cost of construction of the road" was not carried out in accordance with the Works-in-Kind Agreement and is therefore not binding. Aquenta excluded from its determination the cost of certain elements of work which the defendant alleges should properly have been treated as part of the "construction of the road". 8. The road was required to be built over a large concrete stormwater holding tank which was constructed underground as part of the development. The defendant has argued that Aquenta erroneously excluded from its costing all of the work which was in any way associated with the construction of the holding tank, whereas the cost of that work should have been treated, either wholly or in part, as part of the cost of construction of the road. The defendant contends that this has resulted in an understatement of the credit to which it is entitled and a corresponding overstatement of the balance of the contribution due.
Counsel submitted that to uphold Calibre's claim would give rise to a judgment which conflicted with what his Honour said in these paragraphs. But I think there are two difficulties with that argument.
The first difficulty concerns the requirement of finality. The Court dismissed the proceedings. Had the judgment relevantly been final, there would have been a res judicata, but it would have operated against the Council. But although the Council had sought judgment on its contractual cause of action under clause 3.2 of the Agreement, the parties clearly treated the proceedings as being confined to the determination of a specific issue, namely the contractual validity of Aquenta's December 2013 determination. Because his Honour found against the Council on that issue, the judgment simply did not deal in a final way with the Council's contractual claim.
Secondly, there is no inconsistency between the position taken by Calibre in the proceedings and the defences it now wishes to run. Calibre accepts in these proceedings that at the time the Common Law Division proceedings were decided it had a contractual obligation. Its defences involve saying that as a result of subsequent events (the expiry of the limitation period or the alleged abandonment by the parties) that liability has ceased to be maintainable.
It follows that the judgment of Fagan J was not relevantly final and in any event no question of conflicting judgments can arise. The Council's issue estoppel point fails.

Limitation Act

Schedule 4, which identified the various items of work, specified for Item 2 under the heading Contribution Value: The current estimated cost of construction of the road to the design approved by the Council as determined by a quantity surveyor engaged by the Council, in accordance with clauses 4.3 to 4.7.
Clauses 4.1 and 4.2 relevantly provided: 4.1 For the purposes of this Agreement, the Parties acknowledge that: 4.1.1 … 4.1.2 the Contribution Value specified in Column 6 of Schedule 4 in respect of Item of Work 2 specified in Column 1 of that Schedule is the estimated value of the completed Item of Work determined by a suitably qualified quantity surveyor in accordance with clauses 4.3 to 4.7, and 4.1.3 the Contribution Values include all costs associated with the provision of the completed Works, including the costs of design, project management, consultants and any fees and charges incurred by the Developer. 4.2 If the actual cost of carrying out an Item of Work, including any costs incurred pursuant to this Agreement, as at the date on which that item is Handed-Over to the Council, differ from the Contribution Value of that item specified in Column 6 of Schedule 4, then, subject to clause 7, no Party to this Agreement shall be entitled to claim credit or reimbursement, as the case may be, for the difference.
I have already summarised the other provisions of clause 4 concerning the determination process.
The critical clause is clause 3.2 which provides: 3.2 Where the sum of all the Contribution Values is less than the value of all the Development Contributions, the Developer is to make a monetary contribution to Council for the Deficient Value: 3.2.1 within 90 days of the receipt of a written notice from the Council, provided that such notice is not issued until the Council has obtained the quantity surveyor's final determination of the Contribution Value of the New Access Road under clause 4.7, or 3.2.2 prior to the issue of the first Occupation Certificate for the Development, whichever is the sooner.
At first reading, the effect of clause 3.2 is clear. The date on which the notice was served under clause 3.2.1 was 21 November 2019. Ninety days after that was 19 February 2020. It is agreed that the date of the first occupation certificate for the purposes of clause 3.2.2 was 12 October 2012. The clause provides that the payment was to be paid on the sooner of those dates, namely 12 October 2012.
The Council's cross-claim against Calibre is deemed, for the purposes of the Limitation Act, to have been made on the date on which the proceedings were commenced: see s 74. That date was 3 October 2019. But this was almost seven years after the date specified in clause 3.2 as the date for payment.
Counsel for the Council sought to avoid this result by pointing to the fact that on this construction Calibre's obligation to pay the sum of money arose before the quantum payable had been determined (or even before it was known that there would be an amount to pay, given that if the valuation had been high enough there would have been no deficit at all). Counsel relied on the principle of contractual interpretation that the Court leans against a construction which would give rise to a result which is capricious or otherwise contrary to business common sense. This principle is often stated as one applicable to commercial contracts, but there was no dispute that it applied in the present case.
The principle upon which counsel relied is well established but it is only available in cases where there is a sufficient degree of ambiguity or uncertainty in the contractual language to allow it to operate. The Court is not justified in re-writing a contract under the guise of interpretation so as to make the contract comply with the Court's conception of what is commercially sensible: see McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liq) (2011) 81 NSWLR 690 at 697 [17] per Bathurst CJ, Macfarlan JA and Sackville AJA agreeing).
I asked counsel how, textually, the clause would be read so as to give effect to the principle of construction upon which he relied. Counsel's suggestion was that the contract would be read as if clause 3.2.2 read "prior to the issue of the first occupation certificate for the development provided that the final determination has then been made".
This formulation focuses on the making of the determination, picking up the language of clause 3.2.1. Notably it would only limit the operation of clause 3.2.2 if the determination had not been made; it would have no impact if the determination had been made but the notice had not been issued. It is hard to see what logical basis there is for that distinction. Furthermore, I think the outcome is very clumsy and the implication of the existing words is by no means obvious or natural.
As to business common sense, no doubt it would be somewhat unsatisfactory from Calibre's point of view to be subject to an obligation (and therefore to the accrual of interest, if sued), but unable for practical purposes to discharge it. But such a situation is by no means unknown. It may arise, for example, where interest is awarded on costs which have not yet been assessed. Counsel for the Council accepted that the implication was not necessary in order to make the contract workable. To put this another way, counsel accepted that it would be possible for a sufficiently clearly worded contract to provide that an obligation to pay arose before the quantum of the payment had been determined.
Furthermore, considerations of business common sense are not all one way. The Council's construction would mean that the accrual of the cause of action could be deferred indefinitely by the Council failing to issue the notice. There would be an element of capriciousness in such a result.
It is also worth mentioning that the timetable in clause 4 for determination of the amount payable was a tight one. The QS was determining an estimated value, which did not depend upon what the actual cost of construction was. That is made clear by clause 4.2. Consistently with this, the obligation to retain the QS arose as soon as the design had been approved. The period for submissions to be made on the preliminary determination was only thirty days and the QS was required to make a final determination after a further fourteen days.
In these circumstances the parties would presumably have contemplated that in the ordinary course the valuation would be completed well before the actual work was undertaken and an occupation certificate obtained. Indeed, if I were to adopt the Council's submission, a question might have arisen as to whether the Council's claim involved relying on its own wrong, namely its failure to retain the QS as soon as the design was approved.
On balance I am against the Council's argument. The practical difficulty upon which the argument relies only arises in a particular contingency and there is no reason to think that the parties would have thought that the occurrence of that contingency was particularly likely. If it does arise it is marginal. I do not think that it is a compelling enough reason to depart from what I consider to be the clear language of the contract.

Abandonment

Whether the parties abandoned performance of the contract at some point before 2019 is a question of intention, objectively determined. I have set out the relevant facts above, which were not in dispute, and the decision as to whether there was an abandonment is therefore a question of law. As, on my interpretation of the contract, the question does not arise, I do not propose to express any opinion on it.

Quantum of payment

The Council's terms of consent, which were picked up by the WIK Agreement, provided for the indexation of amounts payable by way of s 94 contributions. At the end of the hearing a dispute arose between the parties about how those provisions would operate in the present case. Again, this dispute involves a question of interpretation of the relevant provisions; there is no dispute about the underlying questions of fact and it is simply a matter of calculation. Again, this issue does not arise on the conclusions which I have reached and I therefore do not propose to deal with it in this judgment.

Rectification of defects

Clause 11 relevantly provides: Rectification of Defects 11.1 During the First Defects Liability Period and the Second Defects Liability Period, the Council may give to the Developer a Rectification Notice In relation to any aspect of any Item of Work. 11.2 The Developer must comply with a Rectification Notice at its own cost according to the terms of the Notice. 11.3 When the Developer considers that rectification is complete, the Developer may give to the Council a Rectification Certificate relating to the Item of Work the subject of the relevant Rectification Notice. 11.4 A Rectification Certificate discharges the Developer from any further obligation to comply with the relevant Rectification Notice. 11.5 If the Developer does not comply with a Rectification Notice, the Council may do such things as are necessary to rectify the defect and may: 11.5.1 call upon such part of the Security provided by the Developer to the Council under this Agreement as is required to meet its costs in rectifying the defect, and 11.5.2 recover, as a debt due in a court of competent jurisdiction, any difference between the amount of the Security and the costs incurred by the Council in rectifying the defect.
For the purposes of determining when the cause of action against Calibre for failure to rectify the defects in the rectification notice began, counsel for Calibre relied on clause 11.2. The rectification notice given on 10 October 2013 required the work to be done within 30 days, that is, by 10 November 2013. Had a claim been made in these proceedings by the Council under its cross-action, it would probably have been in time because of the effect of s 74 of the Limitation Act: see [50] above. But no such claim has been made in the proceedings. It follows on this view that the claim is now statute barred and has been extinguished by s 63 of the Limitation Act.
Counsel for the Council relied instead on clause 11.5. Counsel submitted that it remained open to the Council itself to rectify the defect, and that the Council's right to rely on the security was expressly preserved by clause 11.5.1.
One problem with this view seems to me to be that it would allow a claim for rectification in effect to be deferred indefinitely. That would be a very unlikely construction from a business point of view. In any event I think it is unsound as a matter of legal analysis.
I think it is clear that upon the failure of the developer to comply with a rectification notice according to its terms, a cause of action arises. That is a simple cause of action for breach of contract. It was open at that point for Council to sue Calibre for the damage, if any, suffered by the Council as a result of the breach.
What clause 11.5 allows the Council to do is to undertake the work itself and thereby convert the claim into a liquidated liability. Council can then call upon the security to satisfy the liability and if necessary recover the balance in a debt claim in a court of competent jurisdiction. But the Council is not required to do this.
So analysed, clause 11.5 does not create any separate cause of action in the Council. It simply creates a mechanism for the Council, if it wishes, to quantify that claim.
I therefore uphold the argument of counsel for Calibre. In my view, the rectification claim has now been extinguished under the Limitation Act.

Return of bank guarantees

Clause 14 dealt with security for the Deficient Value as follows: 14.7 Where the sum of the Contribution Values of all the Items of Work is less than the value of The Development Contributions, the Council will set aside a further proportion of the Security equivalent to the Deficient Value (Cash Contribution Security). 14.8 The Council is to return to the Developer the Cash Contribution Security when the Developer has made any monetary contribution required by clause 3.2.
In Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297, the tenant under a lease was required to give a bank guarantee which was to cover moneys paid under the lease of loss and damage sustained by the landlord. The landlord had a claim for rent which was statute barred. The Court of Appeal held that the guarantee did not cover a statute barred liability and, there being no other claim, the landlord was obliged to return it: see at [43]-[45], [48].
Counsel for Calibre submitted that if I reached the conclusion that the claim under clause 3.2 was statute barred (as I have), it followed on the authority of the Miwa decision that Calibre was entitled to retrieve its security. I am not sure that there was any dispute from the Council that in such circumstances that conclusion followed. In any event, it seems to me to be correct.
Clause 14 dealt with the security for defects as follows: 14.3 The Council will set aside a proportion of the Security equivalent to 10% of the sum of the Contribution Values of all of the Items of Work (Defects Rectification Security). 14.4 The Council is to return to the Developer the proportion of the Defects Rectification Security amount relating to each Item of Work Handed-Over to the Council under this Agreement at the expiration of the First Defects Liability Period applying to that Item. 14.5 Despite clause 14.4, where the Council has given the Developer a Rectification Notice in respect of an Item during the First Defects Liability Period It Is to retain such an amount of the Security relating to that Item as it considers sufficient to meet its own costs of rectifying, under clause 11.5, the defect described in the Notice. 14.6 Subject to clause 11.5, the Security amount held by the Council under clause 14.5 Is to be returned to the Developer: 14.6.1 where Council has not given the Developer a Rectification Notice in relation to that Item during the Second Defects Liability Period - upon the expiration of that Period, or 14.6.2 where the Council has given the Developers Rectification Notice in relation to that Item during the Second Defects Liability Period - when the Developer gives the Council a Rectification Certificate the subject of that Notice or the expiration of that Period, whichever Is the later.
Counsel for Calibre submitted that the same result followed with respect to the claim to recover its security for the rectification claim as for the Council's claim for Deficient Value. In my view that submission is correct. Again, on my findings, the cause of action has been extinguished. No other claim has been made in these proceedings. Subject to the separate proceedings in the Land and Environment Court, to which I refer below, I think that Calibre has established its right to have the security delivered up.
Calibre presented an alternative argument about the operation of clause 14.5 which would have come in to play had I decided that clause 11.5 gave rise to a separate cause of action which could still be maintained by the Council. Counsel for Calibre submitted that the Council had failed to act in accordance with clause 14.5. Counsel argued that there had been no proper analysis of the amount actually outstanding and accordingly, so the argument appeared to run, the purported reservation of security was invalid. I am not sure that this argument is correct, but on my findings it does not arise and I do not propose to deal with it further.

Conclusions and orders

I have concluded that: 1. the claim against Calibre by the Council for Deficient Value is statute barred and has been extinguished; 2. so too has the claim against Calibre for failure to comply with the Council's rectification notice of October 2013 concerning the roadworks; 3. Calibre is on the face of it entitled to delivery up and cancellation of the guarantees still being held by the Council.
Conclusion (3) is provisional. After these proceedings were instituted, the Council brought proceedings in the Land and Environment Court concerning compliance with the development condition requiring the s 94 contributions which are the subject of the WIK Agreement. As I understand it, the Council contends in those proceedings that it is entitled to enforce that condition against Calibre even if (as I have found) it has no entitlement to do so under the Agreement. Counsel for the Council asked me in that event not to make any final orders in case the Council wished to contend that it was entitled to retain the security pending the outcome in the Land and Environment Court proceedings.
I will accordingly leave it to the parties to formulate a minute of order giving effect to my conclusions, and dealing with costs. If there is any disagreement, including any disagreement about the stay question, I will hear further argument.
The orders of the Court are: 1. Adjourn the proceedings to 9.30 am on 19 July 2021, or such other time and date as may be arranged with my Associate. 2. Direct that the parties confer and, within one day before the date of the hearing referred to in Order (1), each of the parties submit a minute of order, giving effect to my judgment and dealing with costs.

Amendments 08 July 2021 - update legal representatives DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 July 2021

(Limitation Act 1969(NSW)

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Judgment (12 paragraphs)

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