Childs v Bassett trading as Bassett Built Constructions

Relevant legal principles applicable on an application for adoption of a referee's report

1. Part 20.24 is in similar terms to the previous Supreme Court Rules Part 72, Rule 13. In Chocolate Factory Apartments v Westpoint Finance [2005] NSWSC 784 McDougall J stated the following general principles at paragraphs [6]-[7]. "[6] The principles to be applied, in exercising the discretion conferred upon the Court by Pt 72 r 13 to adopt, vary or reject in whole or in part a report of a referee, are well established. There are a number of cases to which, customarily, reference is made. They include Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549; the unreported proceedings in that case before Giles J (19 May 1992: the relevant considerations referred to by his Honour are sufficiently extracted in the decision of the Court of Appeal); Chloride Batteries Australia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60; White Constructions (NT) Pty Ltd v Commonwealth of Australia (1990) 7 BCL 193; and Foxman Holdings Pty Ltd v NMBE Pty Ltd (1994) 38 NSWLR 615. As to the nature and content of the referee's obligation to give reasons, the relevant authorities include Xuereb v Viola (1989) 18 NSWLR 453 and Hughes Bros Pty Ltd v Minister for Public Works (Rolfe J, 17 August 1994, unreported; BC 9402885). [7] The relevant principles, distilled from those decisions, can be stated as follows: (1) An application under Pt 72 r 13 is not an appeal either by way of hearing de novo or by way of rehearing. (2) The discretion to adopt, vary or reject the report is to be exercised in a manner consistent with both the object and purpose of the rules and the wider setting in which they take their place. Subject to this, and to what is said in the next two sub paragraphs, it is undesirable to attempt closely to confine the manner in which the discretion is to be exercised. (3) The purpose of Pt 72 is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation, that purpose would be frustrated if the reference were to be treated as some kind of warm up for the real contest. (4) In so far as the subject matter of dissatisfaction with a report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh. (5) Where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition towards acceptance of the report, for to do otherwise would be to negate both the purpose and the facility of referring complex technical issues to independent experts for enquiry and report. (6) If the referee's report reveals some error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than "unsafe and unsatisfactory". (7) Generally, the referee's findings of fact should not be re-agitated in the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. Thus, the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence. (8) The purpose of Pt 72 would be frustrated if the Court were required to reconsider disputed questions of fact in circumstances where it is conceded that there was material on which the conclusions could be based. (9) The Court is entitled to consider the futility and cost of re-litigating an issue determined by the referee where the parties have had ample opportunity to place before the referee such evidence and submissions as they desire. (10) Even if it were shown that the Court might have reached a different conclusion in some respect from that of the referee, it would not be (in the absence of any of the matters referred to in sub para (6) above) a proper exercise of the discretion conferred by Pt 72 r 13 to allow matters agitated before the referee to be re-explored so as to lead to qualification or rejection of the report. (11) Referees should give reasons for their opinion so as to enable the parties, the Court and the disinterested observer to know that the conclusion is not arbitrary, or influenced by improper considerations; but that it is the result of a process of logic and the application of a considered mind to the factual circumstances proved. The reasoning process must be sufficiently disclosed so that the Court can be satisfied that the conclusions are based upon such an intellectual exercise. (12) The right to be heard does not involve the right to be heard twice. (13) A question as to whether there was evidence on which the referee, without manifest unreasonableness, could have come to the decision to which he or she did come is not raised "by a mere suggestion of factual error such that, if it were made by a trial judge, an appeal judge would correct it". The real question is far more limited: "to the situation where it is seriously and reasonably contended that the referee has reached a decision which no reasonable tribunal of fact could have reached; that is, a decision that any reasonable referee would have known was against the evidence and weight of evidence". (14) Where, although the referee's reasons on their face appear adequate, the party challenging the report contends that they are not adequate because there was very significant evidence against the referee's findings with which the referee did not at all deal, examination of the evidence may be undertaken to show that the reasons were in fact inadequate because they omitted any reference to significant evidence. (15) Where the court decides that the reasons are flawed, either on their face or because they have been shown not to deal with important matters, the court has a choice. It may decline to adopt the report. Or it may itself look at the detail of the evidence to decide whether or not the expense of further proceedings before the referee (which would be the consequence of non adoption) is justified."
2. These principles were cited with approval by Spigelman CJ and Allsop P (with whom Campbell JA agreed) in Bellevarde Constructions Pty Ltd v CPC Energy Pty Ltd [2008] NSWCA 228 at [46]-[47]. Bellevarde was itself approved of by Leeming JA (with whom Ward JA agreed) in Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184 at [19]-[22]. It is accordingly clear that the court has a discretion to adopt, vary or reject the referee's report. However that discretion has to be exercised taking into account that the purpose of a reference is to provide, where the interests of justice so require, a form of partial solution of disputes alternative to orthodox litigation.

The Referee's report - introduction

1. It is clear that where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition towards acceptance of the report. In the present case Ms Grey's report dated 8 August 2016 is an extremely thorough and careful analysis of the matter which on its face appears reasonable and compelling.
2. The court in deciding whether to make an adoption order will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise.
3. Ms Grey is an architect and therefore has a degree of expertise in relation to building matters. Many of the factual issues were technical building issues. Although the defendant, Mr Bassett, did initially raise some factual matters, in the end he accepted that the referee's report had determined the building matters and he did not seek to re-agitate them or point to any areas where there has been a patent misapprehension of the evidence or manifest unreasonableness in fact finding by the Referee.
4. The points which are raised in opposition to the adoption of the report by Mr Bassett are essentially legal issues which were considered by the Referee, in the main. It is clear on the principles stated in the Chocolate Factory Apartments case that where a party raises dissatisfaction with a referee's report on a question of law, a proper exercise of discretion requires the judge to reconsider and determine that matter afresh. However, if I formed a view that the legal approach taken by the Referee was incorrect in some way but that the adoption of the correct approach would have led to the same result then it would not be a proper exercise of the discretion under Part 20 to allow matters agitated before the Referee to be re-explored by refusing to adopt the report.
5. The issues raised by the defendant, Mr Bassett, against the adoption of the report involve allegations that the Referee made errors of law in the interpretation of two matters under the second written contract being: 1. The plaintiffs' right to terminate under Clauses 7 and 13 of the second contract which was a Master Builders Association Head Contract for Residential Renovations & Additions (the "Contract") entered into by the parties and dated 9 February 2013; and 2. Because of an error in relation to the proper construction of Clause 11(b)(ii) of the Contract.

Principles to be applied in the interpretation of the Contract

1. In Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 Bathurst CJ (with whom Macfarlan and Meagher JJA agreed) stated at [52] as follows: "[52] The principles underlying the construction of written contracts are well established and it is not necessary to deal with them at length. A contract is to be construed by reference to what a reasonable person would understand by the language in which the parties have expressed their agreement having regard to the context in which the words appear and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphafarm Pty Ltd [2004] HCA 52 ; (2004) 219 CLR 165 at [40]; International Air Transport Assn v Ansett Australia Holdings Ltd [2008] HCA 3 ; (2008) 234 CLR 151 at [53]. At least in the case of ambiguity, resort can be had to the surrounding circumstances known to the parties in interpreting the particular provision: Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24 ; (1982) 149 CLR 337 at 352; Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 ; (2011) 282 ALR 604."
2. In Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7, the majority of the High Court said the following at paragraph [35]: "[35] Both Verve and the Sellers recognised that this court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties … intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".
3. The context and factual background of the Contract in the present case are that the parties had already entered into a first oral agreement and had entered into the subsequent second written contract in order to deal with the contractual relations between them in the defendant undertaking the works to complete the alterations and additions to the plaintiffs' residential property.
4. It is important to note that the Contract is for residential building works and is not for works relating to a commercial building with detailed and intricate provisions including the involvement of a works or contract certifier in relation to the value and completion of works for progress claims.

The terms of the Contract

1. The Contract became an exhibit on the application. The Contract on its face was a Master Builders Association of New South Wales contract for residential renovations and additions. It is important to make some observations in relation to the Contract and to set out some of the important clauses of it which are in dispute.
2. The Contract states on the covering page that it is a: "Lump sum contract for residential alterations, renovations and additions where the work is not administered by an architect". This suggests that the Contract is aimed at a situation where the relationship is between the builder and the owners without an intervening professional to administer the Contract on behalf of the owners. The Contract was signed by the parties on 9 February 2013. The contract price under the Contract for the contract works was $280,000 (page 2). The schedules to the Contract are at the front of the Contract. The description of the work which the builder was to complete under the Contract is set out in Schedule 2 as follows: "Alterations & additions to front of dwelling".
3. Schedule 3 of the Contract indicates that the proposed commencement date was 1 September 2012 and the proposed completion date was 15 March 2013 (page 6).
4. Schedule 4 sets out details relating to payment for the work. Schedule 4 states under the heading "Progress payments" the following: "The Owner is to pay for the work progressively as the work reaches various stages. Anticipated progress payments are due when the nominated milestone is reached. See clause 7 for further details."
5. There is then a setting out of "milestones" to be reached during the payment period. There is listed in Schedule 4 various milestones with a description of each milestone and with appropriate sums linked to the achievement of the milestones totalling $280,000. These descriptions have been inserted by hand under the following statement: "List positions or stages of work which can be readily identified and which relate to the work to be done in the period agreed for claims to be made".
6. There were no special conditions to the Contract set out in Schedule 7 of the Contract.
7. Sub-clauses 1(a) to (c) of the Contract are as follows: "1. Contract work and contract sum (a) The work to be undertaken by the Builder (the "work") and documents particularising the work are detailed in Schedule 2. The contract sum is based upon those details. If those details are incomplete the contract sum payable by the Owner may change. (b) The work may be changed by agreement of the parties or by requirement of a competent Authority. Any change to the work is to be recorded in writing and treated as a variation under clause 8. Documents detailing the variation are to be treated as contract documents. (c) The contract sum payable is set out in Schedule 4. This sum is payable progressively as indicated in Schedule 4. If the contract sum is stated to be a lump sum then the lump sum may change if the work under the contract changes or is altered. Refer to clause 8."
8. Clause 3 stated that the work done under the Contract would comply with the Building Code of Australia, all other relevant codes and specifications that the work is required to comply with under any law and the conditions of any relevant development consent or complying development certificate and any construction certificate.
9. Clause 6 deals with the owner giving the builder possession of the work site to permit the builder to complete the work and provides in Clause 6(a)(iii) as follows: "(iii) The Builder is to complete the work within the period identified in Schedule 3 as adjusted under the contract. This period is known as the construction period. The construction period will commence from the date of actual commencement of work."
10. The proper construction of Clause 7 of the Contract is heavily disputed between the parties. Clause 7 of the Contract provides as follows: "7 . Progress payments Note lt is recommended that the contract parties agree to make smaller more frequent claims and payments. This is the best way to monitor the progress of work and costs relative to the contract sum. (a) Claims for payment are to relate to the work done or milestones reached. The frequency of claims or the milestones nominated in Schedule 4 are to be used as a guide not as a precedent rule. (b) The Builder should submit payment claims for the value of work carried out and costs incurred at the frequency specified in Schedule 4 point (i). If no selection is made then invoicing for work done approximately every fortnight will apply. (c) The Owner is to pay progress payments to the Builder in accordance with Schedule 4 point (ii) or if it is left blank, the Owner must make payment within five (5) days of receipt of the Builder's invoice ("the due date'). (d) Interest at the rate specified in Schedule 4 point (vii) per annum is payable on any invoiced amount not paid by the due date. If no rate is stated, 12% p.a. will be applied. (e) If a payment is not made by the due date the Builder is entitled to stop all work until such time as the payment is made. Any period of suspension will automatically adjust the date for practical completion of the works by the period of suspension. (f) (i) A milestone or aspect of the works is to be treated as reached and therefore enabling payment claim to be made, when it is complete except for minor omissions, incompleteness or defects which do not prevent the works from progressing. (ii) Where a stage or aspect of work, listed as a milestone, is not completed because of minor omissions, incompleteness or defects but does not prevent the works from progressing then the value of the omitted, incomplete, or defective work should not to be included in the progress claim. (g) If the Owner identifies in writing within two (2) days of receipt of the progress claim work which has not been done or which is incomplete or defective and for which no deduction has been made then an amount equal to no more than 2.5% of the amount claimed may be withheld unless an alternative amount has been agreed between the parties. Any amount withheld becomes payable once the work omitted, incomplete or defective has been completed."
11. Clause 8 deals with variations. Clause 10 deals with the defects liability period and notification by the owner to the builder in writing of any omissions or defects in the work. Clause 11 is headed: "Owner's maintenance obligations after practical completion". Clause 18 which deals with interpretation issues under the Contract does not contain any provision which says that the heading to a clause cannot be taken into account in the construction of and interpretation of the clause and the contract.
12. Clause 11 of the Contract is heavily in dispute. It provides as follows: "11. Owner's maintenance obligations after practical completion (a) (i) The Owner is required to and agrees to carry out ongoing maintenance to the property and specifically the works from the date of Practical Completion. Failure to do this properly or adequately will render the Owner liable for any consequential damage, loss or expense in relation to the works. (ii) Without limiting the above clause the ongoing maintenance duty of the Owner covers things such as painting, termite management and termite system maintenance and general property inspections, cleaning and maintenance. (b) (i) If the Owner discovers a matter or thing which they believe is the responsibility of the Builder they must promptly notify the Builder in writing of the matter or thing and allow the Builder free access to review the matter of concern. (ii) Unless the Owner allows access for the Builder and provided the Builder responds within the construction maintenance period or if that has expired within twenty five (25) days of receipt of the notice the Owner agrees not to make any claim about or take any action against the Builder in relation to the works. (c) The Builder is to be allowed to carry out any necessary work for which the Builder is responsible. The Builder will be responsible for determining how such work is carried out. The Builder is not obliged to carry out work where the need for the work is due to a failure by the Owner to properly maintain the works or is necessary due to fair wear and tear caused by use of the works or the exposure of the works to the environment in which they are situated or where the same relates to a matter or thing not forming part of the work."
13. Clause 13 of the Contract was the clause relied upon by the plaintiffs in the present case to issue a notice and then terminate the Contract. It provides as follows: "13. Default by Builder (a) If the Builder makes default by:- (i) wrongfully stopping work for an unreasonable period; (ii) failing to proceed with due expedition to enable completion by the due date after allowing for changes to the construction period; or (iii) failing to comply reasonably with a written notice to replace defective work or improper material so that the Builder can advise the Owner that he/she can complete the work for the contract sum or within the contract period, as varied or extended. THEN the Owner by written notice is to advise the Builder of the matter or matters constituting the default and require the Builder to rectify the same within twenty (20) days. If the Builder fails to rectify the default within the period allowed, the Owner may by further written notice determine the Builder's employment."
14. Clause 16 deals with statutory warranties and provides in Clause 16(iv) that the work will be done with due diligence and within the time stipulated in the contract, or if no time is stipulated within a reasonable time.

Referee's report - analysis

1. The proper construction of Clauses 7, 11 and 13 of the Contract was considered by the Referee in her report. I will not set out in detail the relevant paragraphs in that report because the report is very lengthy. However, the main aspects and conclusions of the report are as follows: 1. The preparation of the report followed a two day reference hearing and the preparation and submission of very lengthy submissions on behalf of the parties; 2. The Referee in summary found that in July 2013 the defendant wrongfully suspended the contract works. The Referee also found that in March 2014, under Clause 13 of the Contract, the plaintiffs terminated the Contract and that the termination was contractually valid. It was also held that as a consequence of work that was defective and incomplete at the time of the termination of the Contract, the plaintiffs suffered loss and damage which was assessed by the Referee at $140,509. The Referee noted that the damages were largely assessed at prices concurrent in February 2015: paragraphs [713]-[714]; 3. The Referee set out the principal areas of contention raised in the amended pleadings in her report: paragraph [6]; 4. Although there was an error in the estimate given for work to be completed under the Contract the Referee concluded that the figure of $280,000 inclusive of GST was the figure on which the parties agreed as the contract sum to complete the works: paragraph [38]; 5. The Referee found that although the Contract evidencing the agreement was not signed and dated until 9 February 2013, the agreement was for completion of work from 11 January 2013 (the report says 11 January 2012 but this is clearly a typographical error): paragraph [41]; 6. A consideration of the contractual documents as a whole by the Referee indicated that the common intention of the parties in the Contract was for the defendant builder to complete the work of the entire project including the rectification of any defects in the work performed under the first contract: paragraph [42]; 7. The Referee considered the 27 March 2014 termination by the plaintiffs of the builder under the Contract for his failure to remedy alleged breaches. The defendant builder pleaded that the purported notice of termination was invalid because in July 2013 the owners had orally repudiated the second building contract. The Referee found there had been no oral repudiation by the plaintiffs as alleged: paragraphs [53]-[75]; 8. The Referee concluded as set out in the factual summary above that the last payment by the plaintiffs to the defendant builder was on 25 March 2013 for the sum of $240,500. On 14 July 2013 Mr Bassett submitted an invoice for $74,687.69. The plaintiffs told Mr Bassett that they did not owe him any more money and that they would not pay him any more until he returned and completed the work. Mr Bassett suspended work in July 2013 for non-payment, although offered to return if he was paid: paragraph [76]; 9. The Referee concluded that if payment on the July 2013 invoice was due and was not paid by the due date by the plaintiffs, under Clause 7 of the Contract the defendant builder was entitled to suspend without notice. The Referee stated that on the other hand, if money was not due by the plaintiffs, the plaintiffs were entitled to resist payment and their continuing refusal to pay the builder the amounts sought could not be seen as repudiatory. The Referee concluded that there was no evidence that the defendant builder elected to accept the alleged repudiation by the plaintiffs and bring the Contract to an end. The builder continued to offer to return and complete the work if he were paid. For this reason, the Referee concluded that the Contract was still on foot at the date of termination by the plaintiffs: paragraphs [76]-[78]. 10. The plaintiffs rely on these findings to make the following submission. They say that even if the termination of the Contract by the plaintiffs was legally invalid for the reason relied on, the defendant did not elect to accept the repudiation constituted by the invalid termination by the plaintiffs and bring the Contract to an end. Therefore the Contract was still on foot and the defendant's remedies were limited to contractual ones for damages for breach of contract. The plaintiffs submitted that the Referee had found who was owed money under the Contract and moneys were owed by the builder to the plaintiffs and not vice versa. Therefore there could be no damages awarded to the defendant for breach of contract by the plaintiffs. It was said that this had important consequences even if the defendants' legal argument was successful in that the conclusions as to moneys owed by the Referee meant that the report should still be adopted. 11. It was said that the plaintiffs were entitled to rely as a basis for withholding their performance under the Contract (their payment) on a valid ground that was not known to them at the time (the defendant seeking payment of money he was not justified in seeking under the Contract) and even if the ground actually relied on had not been valid: Foran v Wight (1989) 168 CLR 385 at 406; Shepherd v Felt Textiles Australia Limited (1931) 45 CLR 359 at 377-8. 12. The Referee considered the owners' termination under Clause 13 of the Contract and found that the grounds relied upon of failing to proceed diligently and failing to proceed with due expedition were justified but that the third ground of carrying out defective and incomplete works was not justified because the requirements in the clause were not complied with: paragraphs [79]-[96]. 13. In paragraph [88] of the report the Referee stated as follows: "Under Clause 7(e) of the Contract, he was entitled to suspend without notice if payment of money due on a progress claim were not made by the due date. He was, therefore, not in default on this ground if money were due to him on the July 2013 progress claim and his subsequent termination on this ground would be invalid. On the other hand, if money were not due, termination under this clause would be valid."; 1. The Referee considered variations to the second agreement at paragraphs [102]-[383]; 2. The Referee considered the alleged defects in the work completed by the defendant builder at paragraphs [384]-[620]. The Referee also considered incomplete work. Thereafter the Referee considered contract sum adjustments and the sum due under the Contract in the light of her findings at paragraphs [666]-[673]; 3. The Referee then returned to the question of termination under Clause 13 of the Contract at paragraphs [674]-[675]. The Referee stated in those paragraphs as follows: "674. In summary, in July 2013, under clause 7 (e) of the MBA agreement, the Builder suspended work for non-payment of a progress claim. As can be seen from the contract sum adjustments set out immediately above, no payment was due at the time of the suspension. Accordingly, the suspension was unlawful. On 20 February 2014, under clause 13 (a) of the MBA agreement, the Owners issued a Notice of Breach listing three grounds of default and advising that if these were not rectified within 20 business days they would terminate. The first two of these were: 1) for failing to proceed diligently; and 2) for failing to proceed with due expedition. The Builder did not rectify these defaults within 20 days and on 27 March 2014 the Owners terminated. The termination was, therefore, contractually valid. Accordingly, the Owners are entitled to damages. 675. A further consequence of this decision was that the Owners conduct in refusing to pay the Builder in July 2013 was not repudiatory. For this reason, the Builder did not have a valid election available to him to either continue with the works or to accept the repudiation and bring the contract to an end. In any event he did not elect the latter path and was not, therefore, entitled to payment on a quantum meruit basis." 1. As stated above, having regard to her findings, the Referee concluded that the defendant had wrongly suspended the contract works and that there had been a valid termination by the plaintiff owners. She also found that as a consequence of work that was defective and incomplete at the time of the termination, the owners suffered loss and damage which she assessed at $140,509: paragraph [686].

The plaintiffs' submissions

1. The plaintiffs relied upon detailed written submissions which were expanded orally.
2. The plaintiffs identified the two legal arguments made by the defendant in opposing the adoption in his first submissions as follows: 1. The Referee made an error of law in finding that the plaintiffs were entitled to terminate the Contract as they did. The defendant submitted that the plaintiffs were not entitled to terminate the Contract because: 1. The plaintiffs purported to rely on the defendant builder having failed to make appropriate progress with the work. However, according to the defendant, he was entitled to suspend work because the plaintiffs had failed to pay his progress claim of July 2013 irrespective of whether work under the progress claim had been completed or was defective; and 2. Further or alternatively, the plaintiffs had failed to attend a meeting pursuant to the dispute-resolution procedure in the Contract. As they themselves were in breach, they could not rely on any breach by the defendant to terminate. 1. Under Clause 11(b)(ii) of the Contract, the owners may not make a claim against the builder in respect of a defect unless they have allowed the builder an opportunity to rectify it. The builder defendant submitted that the Referee made an error of law in rejecting his argument that this clause was a bar to the owners' claim. The Referee held that the defendant builder was not permitted to rely on this argument as it was raised for the first time in written submissions served after the reference hearing but in any event there was no merit in the argument as the clause relied upon had no application on the facts of the case.
3. The plaintiffs' submissions in support of the adoption order in summary were as follows: 1. As stated above, even if the Referee was wrong that there had been a valid termination of the Contract in 2014, the defendant builder had not accepted the invalid termination as a repudiation by the plaintiffs of the Contract and himself terminated the Contract. Therefore the Contract remained on foot and the only remedy of the builder was his entitlement to sue for damages for breach of contract. The Referee had determined that in relation to such a claim that in fact the plaintiffs were owed money by the builder and there would have been no award for damages to the builder. In those circumstances the Referee's report should be adopted even though, on the defendant's argument, she had made an erroneous conclusion that there had been a valid termination by the plaintiffs as the amount found was owing by the builder under the Contract; 2. The proper interpretation of clauses 7 and 13 of the Contract was that the builder could only make a progress claim for the value of work actually completed by him and could not make a claim under the Contract for an amount for work completed that was for work which was in fact either incomplete or defective. The Contract could not properly be construed as allowing a builder to make a claim for incomplete and defective work. The fact the Contract was for residential building work assisted in arriving at this conclusion; 3. The plaintiffs also submitted that the builder could not raise an issue based on clause 7(g) of the Contract as it had not been raised before the Referee and in any case clause 7(g) was inapplicable on the facts; 4. The Referee was correct in relation to the builder's argument concerning the non-attendance by the owners at the proposed dispute resolution meeting. It was submitted that a failure to meet, particularly in circumstances where the relationship between the parties had clearly broken down, could not sound in anything other than damages and none could be substantiated; 5. The builder's argument about clause 11(b) ought to be rejected because when the clause was seen in its proper context it did not deal with a factual scenario similar to the one in question here but only to a situation in the "construction maintenance period" which was after practical completion which had never occurred here. 6. It was submitted that clear words would be required if a contractual clause were to act as a bar to the plaintiff owners enforcing their common law rights to damages for breach of contract. It was submitted that the heading to clause 11 clearly indicated that it did not have the effect the builder alleged; and 7. In any case, such a construction of clause 11(b) would amount to a restriction of the right of the plaintiffs to sue for a breach of the warranties in the Home Building Act 1989 (NSW) and a purported restriction on a statutory warranty is void under Section 18G of the Home Building Act. It was submitted that the practical effect of the alleged restriction must be considered.
4. The defendant relied on substantial written submissions which I will not summarise in detail. In effect these submissions were as set out above in paragraph [32]. The defendant builder submitted: 1. That one had to construe the Contract practically and in a commonsense way so as to entitle the builder to submit a claim for payment under the Contract. The builder relied on the prompt payment of progress claims to pay for building costs including sub-contractors. Clause 7(g) was included for the purpose of protecting the builder's cashflow. One could not infer some restriction on the builder that he could not claim for works that were incomplete or defective when no notice of such incomplete or defective works had been properly given to him. The owners did not even know that the works were incomplete or defective when they refused payment. He submitted that the proper construction of clause 7 was not to limit the right to claim a progress payment linked to the value of the work completed. On 5 October 2016 the builder also submitted that clause 7(f) should be limited to what is known or should reasonably be known to the owners at the time as to incomplete or defective works. In other words, the owners cannot withhold a part of a progress claim payment under clause 7 when they have no reason to believe that the work completed by the builder is incomplete or defective; 2. The provisions of clause 7, particularly clause 7(g) exclude any right of set-off to the owners under the contract; 3. Further, clause 7(g) of the Contract should be construed as the only remedy of the plaintiffs if they asserted defects at the time a progress claim was made to them; 4. He also relied on the failure of the plaintiffs to attend the dispute resolution meeting as preventing them having the right to terminate the Contract; 5. He submitted that clause 11(b) provided a limitation to the right of the plaintiffs to terminate and to sue for alleged defective or incomplete works.
5. I have carefully considered the submissions made on behalf of both parties and have reviewed the written submissions relied on including the builder's most recent submission dated 30 September 2016.
6. In substance, I have formed the opinion that the submissions made by the plaintiffs have force for the reasons which they generally give. However, I do not agree with the submission of the plaintiffs in paragraph 23 of the submissions made by counsel on behalf of the plaintiffs that the opening words of sub-clause 7(g) are relevant so that the sub-clause only restricts the owners if the owners identify in writing incomplete or defective works within two days of receipt of the progress claim.
7. While my reasons for agreeing that the plaintiffs' submissions should be preferred are substantially in accordance with those made by counsel for the plaintiffs I provide the following reasons for my decision: 1. The approach to be adopted has to be determined by an objective reading of the Contract in its context. That context includes that the Contract is for residential building work not commercial building work and no certifying architect or other building professional has a role under the Contract in reviewing the validity of progress claims or the quality of work completed; 2. The obligations of the parties under the Contract have to be read in the context that it is quite possible that disputes will arise in relation to allegedly incomplete and defective works. The construction proposed by the defendant which is that the plaintiffs are limited by clause 7(g) of the Contract to with-holding only 2.5% of the amount claimed if they believe that the work is incomplete or defective appears to me to be an unlikely intended construction of the Contract in the circumstances; 3. It appears to me that clause 7(g) allows the owner to retain 2.5% of the amount claimed without being at risk of breaching the Contract if the requirements of the sub-clause are observed. In relation to a decision not to pay the remainder of the amount claimed, the owner remains at risk of being in breach of contract unless ultimately it is determined that the works were incomplete and defective to such a degree that the costs of finishing and correcting the defects were greater than the amount claimed by the builder in the progress claim; 4. There is no clause in the Contract that clearly says that the amounts set out in Schedule 4 are to be paid by the owner irrespective of any allegation about incomplete or defective works and that the rights of the owner are so limited; 5. If the defendant builder's construction of clause 7 is correct, works which are substantially incomplete and substantially defective would still entitle the builder to claim the entirety of payments asserted by him and the owner would only have the rights under clause 7(g). In my view that is not a commercial interpretation of the Contract in the absence of an express clause to that effect or likely to have been intended objectively by the parties; 6. The approach does not mean that the plaintiffs are exercising some right of set-off at common law or in equity. What has to be ascertained is the proper interpretation of clause 7 in its context; 7. In my view the proper interpretation of clause 7 is that the builder is only entitled to claim the value of the work completed as part of the progress claim. This, in my view, is made clear by: clause 7(a) where claims for payment are to relate to "the work done or milestones reached"; clause 7(b) which refers to the builder submitting payment claims "for the value of work carried out and costs incurred"; clause 7(f)(ii) which indicates that "the value of the omitted, incomplete, or defective work should not be included in the progress claim". These provisions clearly link the entitlement to make a progress claim to the value of the work actually completed by the builder; 8. For these reasons I accept the plaintiffs' argument in relation to the construction of clause 7; 9. The cases relied on by the builder in his 30 September 2016 submissions and his 5 October 2016 oral submissions can in my view be distinguished: 1. Cirocco Constructions Pty Ltd v Clarke (No 2) [2015] SADC 107 involved a quite different contract to the present. Although this was a case about residential building work, the contract there did not limit the builder to make a claim only for the value of the work completed. See Cirocco at [10]-[16]. 2. Redpath Dorman Long Ltd v Cummins Engine Co Ltd (1982) SLT 489. This case involved a complex commercial contract with detailed provisions for progress payments. It also provided for the independent certification of sums due to the builder by the contract architects. This is a very different case to the present; 3. Bank of East Asia Ltd v Scottish Enterprise (1997) SLT 1213 (House of Lords). That case also involved a commercial building contract and turned on the precise terms of the contract in question. See the judgment of Lord Jauncey; 4. Main Roads Construction Pty Ltd v Samary Enterprises Pty Ltd [2005] VSC 388. That case considered a commercial construction contract where a superintendent of works was involved in independently reviewing the progress claims. It was held that the detailed terms of the contract had excluded the ordinary right of set-off other than in accordance with the contract. It was held that the parties had, by way of the contract, provided a comprehensive scheme for the certification of payments and the adjustment of liabilities between them: Samary, above at [19]; [42]-[45]. That is not the case here. There is no detailed comprehensive scheme in the current contract for the certification of payments. 1. I also accept the plaintiffs' argument in relation to them not attending the dispute resolution meeting. At that time the relationship between the parties had broken down and it is unlikely to have been intended that a failure to attend a meeting would prevent the owner from exercising the right to terminate the contract for other reasons, particularly where there is a proper ground under clause 13. The obligation does not appear to me to be of such a significant nature to prevent an important right to terminate. The obligations do not appear to be dependant and concurrent such that the failure to attend the meeting prevents the right of the owner to terminate: see Chandos Developments Pty Ltd v Mulkearns [2008] NSWCA 162 at [100]-[101]. The remedy of the builder is in damages for breach of contract and no damages are obvious; 2. I accept the submission set out above by the plaintiffs in relation to the result being the same even if the plaintiffs had wrongly terminated the Contract. The only remedy of the builder would have been for damages for breach of contract as he had not accepted any alleged repudiation by the plaintiffs. The Referee has concluded that an action for breach of contract by the builder would have resulted in the plaintiffs in any cross-claim being successful. Accordingly, even if the Referee made the wrong conclusion on the law, it seems that her decision as to the amounts claimed between the parties would have led to the same result; 3. The builder relies heavily on clause 11(b)(ii) as preventing the termination by the plaintiffs in the present case. In my view that submission should be rejected; 4. The purpose of clause 11 must be seen in the context of the Contract as a whole. Clause 11 is placed after clause 10 which deals with omissions or defects after practical completion in the defects liability period. It is therefore clear that the period contemplated by clause 11 is apparently after the defects liability period or at least during and after the defects liability period; 5. It is clear that there was no practical completion in the present case. Clause 11(a)(i) deals with the obligation on the owner to carry out ongoing maintenance to the property and specifically the contract works from the date of practical completion. Clause 11(b)(i) seems to deal with the owner discovering something which they believe is the responsibility of the builder either in the defects liability period or thereafter. The word "discovers" seems to be pointing to the owner discovering a latent defect. Accordingly, clause 11(b)(ii) cannot be read divorced from the clause as a whole and its place in the Contract. Clause 11(b)(ii) refers to "the construction maintenance period". This term is not defined and it is unclear when it starts and when it finishes. However, it seems clear that it is at least after practical completion. In my view, the clause read as whole does not appear to be dealing with the factual situation with which this matter is dealing. The heading to the clause, which I am entitled to take into account as it is part of the Contract, also supports this conclusion. 6. If the construction for which the builder contends in relation to clause 11(b)(ii) is correct, that it restricts an owner's right to sue for defective works unless the requirements of the claim are satisfied, this would appear to breach section 18G of the Home Building Act. Section 18B implies statutory warranties into the building contract. Any provision of an agreement that purports to restrict the rights of a person in respect of any statutory warranty is void. See Britannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWSC 1302 at [75]-[78]. This is another reason why clause 11 of the Contract cannot operate in the manner claimed by the builder defendant.
8. If I had to decide the matter I would conclude that the builder was not entitled to raise the argument in relation to clause 7(g) because it was not raised in the reference and it was raised for the first time in the adoption hearing: University of Wollongong v Metwally (1984) 158 CLR 447 at 483, Coulton v Holcombe (1986) 162 CLR 1 at 7. However, if I am wrong in this approach I have considered clause 7(g) above and have concluded that it does not assist the defendant builder.
9. The conclusions in this matter may seem to be surprising as they place a burden on the builder in relation to progress claims. However, in my view the precise terms of clauses 7 and 11 necessitate the conclusions reached. They also place the owner in the position that if the owner wrongfully refuses to pay a progress claim for work properly completed of the claimed value, the owner will be exposed to a claim for damages. Clause 7 essentially prevents a builder making a claim unless the relevant milestone has been reached and work to the value of that claimed has been provided.
10. Accordingly, I reject the legal arguments which have been raised by the builder defendant Mr Bassett in opposition to the adoption of the report. Taking all matters into account, I can see no reason why in exercising my discretion under Part 20.24 I should not order that the report be adopted in its whole. The report appears to be detailed, thorough and carefully reasoned.
11. I therefore order that the report of Referee Ms Janet Grey dated 8 August 2016 is adopted in whole pursuant to Part 20.24 of the Uniform Civil Procedure Rules.

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