Cleve Smith Excavations Pty Ltd v Hodgson

District Court of NSW|2009-11-03|Before: Mr J, Mr P

For the reasons I have outlined above, I do not accept Mr Sunter's opinions concerning the cost of restoring plant and equipment as being referable to the defendant's obligations under the lease.

Mr Sunter was given an operational history of the machinery on the site. He was told it was operated for the best part of a 6 year period before it was laid idle. Of the history beforehand he gave the following evidence: " Q. And what were you told about what happened before that six year period? A. Actually I don't really recollect at this stage exactly. The most fundamental thing to me is that it has plainly been operating and been able to operate for a period of time and I know what that requires. I've seen a lot of equipment, you know both what it's like new, how soon it deteriorates and what repairs are required generally and when major overhauls are required. So I'm able to assess that without really having to have precise details of what's actually happened there.

Q. I understand. I'm just asking you whether in that process you made any assumptions as to the age of the equipment? A. I don't, I didn't, at least not directly. I may have intuitively, I'd have to think about that. I don't see it as highly relevant to the thing that I was basically asked to do ."

In my view, the foregoing evidence is an unsatisfactory foundation on which to base a finding of liability for repairs above and beyond reasonable wear and tear and the quantification of such repairs. Mr Sunter agreed that he was not asked to consider the condition of the equipment in either 2000, 2001 or 2003. He said he was not asked to consider what deterioration might have occurred between 2000 and 2003 although he said he did consider this. Whatever factors emerged from such consideration did not feature in his evidence. He was asked whether such a consideration was relevant to the expression of his opinion as an expert. He avoided giving a direct answer, as is evident from the following evidence: " Q. Do you consider that to be a matter relevant to the expression of your expert opinion? A. I think that quite simply equipment that's standing idle deteriorates very slowly. I've had some quite detailed experiences of exactly that, of relocating equipment that's been off for seven years in Tasmania and bringing it back to the Hunter Valley, setting it up again and if necessary repairs, reconfigurations, that sort of thing, the equipment itself doesn't deteriorate very quickly at all.

Q. Yes, but my question was did you consider the matters asked of you by Mr Menadue to be relevant to the expression of your opinion. A. Oh. Slightly, but it's actually probably not going to do him any favours because the reality is that the lack of continuity of operating of this plant is more of a hazard for, you know, what's involved in starting it up again and that different legislation and the interpretation of the WorkCover authorities and that, or the approving authorities lets say, can actually create a considerably increased scope of work. The increased scope of work from the passage of time is minimal to the point of being nil, the, the same work, the same repairs, the same holes need fixing, the same weaknesses need fixing, there is a point when the - and there's a differentiation between functional capacity and aesthetics and people often make that discrimination, I guess, for all sort of qualitative reasons. But in terms of operating the plant, the aesthetics is a very low issue and it's just not affected costs wise on the quotations that are provided here across that period ."

I consider Mr Sunter's evidence that the equipment in question deteriorates very slowly to be unpersuasive, especially since that view must be relative and it was not explained with reasons that demonstrate its specific relevance to the plant and equipment in question. It also appears to be contrary to the evidence that the equipment, which exposed to the elements, was badly rusted.

In reality, Mr Sunter was not asked to consider any differences in the state of the equipment between 2000 and 2003. He only saw what was evident to him at the time of his inspection. Without more, I do not consider that this circumstance provided him with any reasonable or meaningful opportunity to assess the condition of the equipment as at 31 December 2003 and I consider this undermines the probity of his evidence on that issue.

Mr Sunter's views on what was considered to be fair wear and tear on the equipment was based on his assessment as at the dates of the quotes, not the relevant date, namely 31 December 2003, which was the date on which the assessment of good condition, working order and fair wear and tear were required to be made concerning this component of the claim. In this regard, Mr Sunter gave the following evidence: " Q. Thank you. I just want to ask you to reflect on your answer about the relevance of the machinery being inactive for a while, whether that would have had an effect on its workability or wear and tear, summarising rather than quoting. Do you recall that evidence? A. In nature yes.

Q. Yes. A lot of this machinery had moving parts didn't it? A. Yes.

Q. If moving parts are left to stand still then they have a tendency to seize up in the ordinary atmosphere unless kept lubricated don't they? A. Yes. That was actually the point I was in the process of making to the defendant counsel when he cut me off, is that what actually significant about is the amount of things that aren't on here and they're things of that nature. It's a simply, silent, there's been no attempt to get recovery for that, probably an acceptance that at the time of entry into they were in some condition and now at the completion of you know the relevance leases in some other condition and there's simply no attempt to get you know recovery for anything other than stuff that is simply missing."

This was taken up by Mr Lazarus in re-examination as follows: "Q. Just in relation to the answer you just gave, are you able to give or provide an explanation by way of examples as to the kind of equipment that you were expecting would have been the subject of these quotes but actually were not?

Q. Yes? A. The comment that effectively in here is that it is on the low, you know bottom end, there relating - that's answering that basic question of the types of equipment to be the cyclones and any of the rotating equipment, the conveyor drives, the pulleys that dealt with the rotating equipment, idlers arm, the crushing equipment. It's not dealt with in any way other than whether it is there or not there. This is all about wear plates, pipes that relocated, stuff that's worn our, is physically visibly deteriorated as opposed to a, cause to properly answer the question that leads from what other equipment, it's actually a fairly expensive investigation, you just wouldn't undertake it. You'd actually, it's cheaper to pull the things out and to do the repair and to deal with the bills that come from it and share them according, you know between the parties. That would be a normal way of dealing with that or just making an arbitrary allowance based on operational history, which is also quite a good indication of what the costs are likely to be.

Q. Thank you. And in answer to a question, possibly the last question before the morning tea adjournment, you were asked by my friend, and I just want to clarify your answer here, that it was put to you words to the effect that the purpose or the focus of your report was to assess these particular quotes and assess whether they were fair and reasonable. I think the words used by my friend were 'at the time they were given' and you answered yes in relation to that. Are you able to say by reference to your more recent report whether that is a complete answer to the question? A. I think they're relevant at the time they were given, they're relevant you know as at today and the further deterioration for the nature of the repairs that were needed will be low to the point of being, being irrelevant in these proceedings ."

It is clear from the above testimony that Mr Sunter took extraneous considerations into account in stating his views concerning this head of claim.

In summary, the plaintiff's claim for the damages in respect of plant and equipment was made in terms that went well beyond the terms of the lease as to the number of individual items that could legitimately form the basis of a claim in this regard. Further, in my view the evidence does not satisfactorily establish first, the condition of the equipment at the commencement of the relevant lease, secondly, the nature of what might be reasonably considered to be legitimate wear and tear from ordinary use, and thirdly, what proportion of Mr Sunter's expert opinion, if any, could be fairly and reasonably attributed to reasonable wear and tear so as to enable reasonable quantification of the claim for maintenance and repair of the equipment in question to proceed in a rational way.

In my view, the evidence concerning damages for the cost of maintaining the relevant plant and equipment has been left in a speculative state that does not reasonably permit a rational assessment of the plaintiff's entitlement to damages for this component of the plaintiff's claim. For the foregoing reasons I consider that the plaintiff has not discharged the onus of making out its claim concerning damages for the cost of maintenance and repair of the equipment on the site as an incident of the defendant's obligations under the lease in question.

I therefore find that the plaintiff has failed to establish an entitlement to quantifiable damages for this component of the claim. Further, I consider that the state of the evidence does not enable a proportion of the claimed amount to be awarded because to follow such a course would involve unwarranted speculation.

The plaintiff makes a claim for damages in respect of the alleged failure by the defendant to reinstate or rehabilitate the land of the quarry once he had ceased mining operations. The claim asserts a breach of clauses 5.12 and 5.16 of the lease, the latter provision requiring compliance with all relevant consents, which in this case includes the 1979 consent. The quantum claimed is $79,233 and relates only to two tailing dams or ponds and not to the entirety of the site.

The defendant has contended he is not liable for this claim because the tailings dams were full or almost full at the time he took possession of the site

The plaintiff asserts that the defendant's response to this component of the claim is irrelevant because the defendant assumed an unqualified obligation imposed by the lease to reinstate the surface of the premises at the conclusion of the mining operations in each area : Lease clause 5.12. Further, the plaintiff asserts that the submitted obligation of the defendant extended to compliance with the terms of all consents and approvals governing the mining operations on the premises : Lease clause 5.16.

By this route of argument the plaintiff claims that the relevant planning consent that had been engaged comprised the 1979 Development Consent exhibited to the 24 June 2008 affidavit of Mr Smith as Exhibit "CLS-3", which included, amongst other things: "" (e) No area larger than 0.5ha is to be worked at any one time, consequentially the procedure should be 0.5ha being prepared for extraction, 0.5ha being worked and 0.5ha being rehabilitated."

"(i) All topsoil is to be stockpiled and respread over disturbed areas including graded banks, no topsoil to be stockpiled longer than 6 months nor is it to be stockpiled in watercourses or graded banks."

"(j) All disturbed areas are to be re-shaped such that no water ponding occurs on the extraction site."

"(k) After topsoil respreading, all disturbed areas, banks and batters are to be sown and fertilised with the following mixtures:- ""

The evidence of Mr Smith to the effect that the defendant failed to reinstate the land was unchallenged and the defendant did not deny that he had not reinstated the land. The question is therefore whether the defendant was obliged to carry out the reinstatement rehabilitation as claimed by the plaintiff.

The defendant claimed that when he first entered the property the first tailing pond was almost full and the second tailings pond was about 70 per cent full, and at the end of the lease, that pond was about 85 per cent full. The defendant also conceded that he had placed slurry into the tailings ponds on the property, including to stop leaking of the contents onto the property, which was in fulfilment of another obligation he had under the lease. Notably, by the time the defendant took on the lease in question, the "topsoil" referred to in condition (k) imposed by the 1979 Consent was no longer available on site for "respreading" as required.

According to the lease, the lessee's obligation to rehabilitate or reinstate the land was obviously dependent on the conclusion of mining operations. It is necessary to determine what constituted mining operations in order to determine if they had concluded and to determine any consequential liability of the defendant in respect of this head of claim.

The lease did not define what in fact constituted mining operations. Further, the lease did not identify which particular mining operation or aspects of mining operations, or activity incidental to mining operations should be ceased so as to engage the obligation to reinstate the land.

In my view, the plaintiff's claim for reinstatement is based on a misconception that mining operations had ceased on the property. All that had ceased was the defendant's occupation as lessee. Mining operations per se had not ceased. The land still comprised a quarry. In fact Mr Smith conceded that after the defendant had left the quarry, he had personally used the pumps and motors located on pontoons on the tailing ponds located on the property in order to siphon water out of those ponds. This suggests that some sort of operation had been undertaken on the property after the defendant had left the site.

More importantly, there was the concession by Mr Smith to the effect that the Council had granted a Deferred Commencement Development Consent on 20 June 2006 and had granted a subsequent modification of that Deferred Commencement Consent on 17 September 2007. These Consents were clearly confirmatory of proposed new workings of the quarry in stages over a period of some 19 years. In my view this is compelling evidence that mining operations on the site had not ceased but were in fact intended to continue following the departure of the defendant from the site. In my view it is not to the point that the plaintiff had not undertaken substantial commencement pursuant to those Consents.

In addition to the foregoing analysis, it must be observed that on assuming the obligations under the lease in question, the defendant removed no topsoil from the quarry as the ground had already been broken by pre-existing mining operations. In those circumstances, having regard to the likely cost of bringing topsoil onto the site and carrying out planting as claimed, I consider it fundamentally unjust to visit the cost thereof onto the defendant when neither he nor his associated company was responsible for the pre-existing denuded condition of the surface of the quarry. At best, the defendant would have been liable to "respread" stockpiled topsoil on the site, not for bringing in topsoil to replace that which had been removed from the site. "Respreading" could have no other relevant meaning in this context.

Accordingly, I find that in the circumstances under review, the obligation to reinstate or to rehabilitate the land comprising the quarry, or part of it, did not arise as a burden to be discharged by the defendant. It follows that the plaintiff's claim against the defendant arising from the alleged obligation to reinstate or rehabilitate the land must fail.

In accordance with convention, and to allow for the possibility that I may be incorrect in respect of the foregoing construction of the lease, in brief terms I propose to address a further aspect of the quantum sought by the plaintiff regarding this component of the claim.

The first matter to be observed concerning the proposed cost of reinstatement of the quarry is the concession made by Mr Burns, the expert called by the plaintiff, to the effect that the rehabilitation that he was recommending involved a different form of vegetation than that which was required under the 1979 Consent. I consider this to be an important matter.

In my view, it is fundamental that like proposals be compared and costed with like requirements and that the correct scenario be costed. It is not to the point that the grass seed and fertiliser mix involved in the 1979 consent scenario was a more expensive proposition than the recommendation made by Mr Burns. It is for the plaintiff to correctly prove the required quantum of its claim, and in this regard it is fundamental that the correct rehabilitation scenario be costed.

Similarly, I consider that it is not to the point to argue, as does the plaintiff, that the tree seeding quotation considered and recommended by Mr Burns was less expensive than other rehabilitation quotations. The fundamental point here being that the correct scenario ought to be costed, and unless it has been costed correctly, the conclusion must be that the plaintiff has failed to prove quantum in the appropriate manner. It is inappropriate for the plaintiff to rely upon a costing scenario for something approximating rather than complying with what is required under the 1979 Consent.

In view of my findings concerning the land rehabilitation issues, I consider that the plaintiff has not made out its case for damages concerning this head of claim.

Issue 4 - Liability for legal fees in respect of lease in the sum of $7928

The plaintiff claimed the sum of $7928 plus interest in respect of lease preparation costs. The claim arose pursuant to clause 9.7(d) of the lease. On the face of the lease this claim was maintainable against HB Rindean Pty Limited but the defendant has been sued as the guarantor of the obligations of that company under the lease in any event. The defendant raises no dispute concerning his liability for this amount, but the plaintiff gives the defendant credit for the sum of $5000, which has already been contributed by Mr Betts, the former second defendant, in respect of this liability. Accordingly, I find the defendant is liable to the plaintiff for the balance of this sum, namely $2928 plus interest.

C. FINDINGS ON ISSUES ARISING IN DEFENDANT'S CROSS CLAIM

Issue 5 - Alleged sub-standard electrical wiring on the plaintiff's property

The evidence indicated that Mr Smith had installed some unauthorised electrical wiring and connections at the quarry. Mr Hodgson claimed that the master switch for the electricity supply to the premises was unsafe and dangerous. Initially Mr Hodgson cross claimed for the cost of electrical repairs to the premises to make the installation safe, including the installation of an isolator safety switch for the plant and equipment. At the commencement of the case, these claimed sums were identified in the amounts of $3061 and $3900, totalling $6961. In his closing address, on behalf of the defendant, Mr Menadue indicated that these amounts were no longer pressed. Accordingly, there is no need to give consideration to this issue.

Issue 6 - Alleged unreasonable withholding of consent to mine the "banned areas"

Mr Hodgson claimed that he had lost substantial profits in the 2003 calendar year because the plaintiff had refused to allow him to dig within two areas that were within the footprint of the quarry where, from his point of view, there was still good and easily exploitable control sand from which he could readily produce his staple product which he supplied to the building industry. He described that product as yellow brickie sand, which was the major product sold from the quarry. The areas in question were described for convenience as the "banned Areas". These comprised the Stockpile Area and the Bench Area.

Mr Hodgson's initial quantum claim in respect of the claimed loss of profits was $227,000. Following the meeting of the financial experts, subject to proof of certain assumptions, to which I will return, it is agreed that the defendant's net economic loss on the cross claim was limited to the amount of $103,743.

The basis of the claim for this sum is that Mr Hodgson believed, and I accept, that by late 2001, the footprint at the quarry was basically exhausted of the type of control sand he required for his favoured product, except for three small areas in the quarry mainly the Stockpile Area, the Bench Area above the Washplant, as well as at the top north-western corner of the property known as the Top Pad where, in respect of the latter area, the Council sought to have mining stopped.

In September 2001 and June 2002 Mr Hodgson stated, and I accept, that he undertook some earthworks in the quarry to level and shape the Stockpile Area. He stated, and I accept, this work was aimed at improving drainage at the site and, at the same time, it would also give him access to yellow control sand which he needed to make his product. In February 2002 and May 2002 Mr Hodgson attempted to level and shape the Bench Area of the quarry which would also have given him the yellow control sand he needed. On all of these occasions, Mr Smith refused to allow him to carry out the work and ordered him to work elsewhere within the footprint of the quarry. The evidence of Mr Hodgson on these matters is located at paragraphs 37, 43, 44 and 45 of his first affidavit. That evidence was admitted by Mr Smith, and was as follows: " Stockpile Area

'37. In about September 2001 after I had spent some time levelling and shaping some of the Sales Stockpile Area, Mr Smith came onto the site and we had a conversation that included words to the following effect:

I said: "I'm levelling this area to get the drainage right and am getting control material for the yellow brickie."

I said: "But I need it for the yellow brickie colour."

He said: "No. You've got to get it out of the holes."

He said: "That's not my problem. You can only dig in the holes.' Bench Area

'43. On about 13 February 2002, Mr Smith came onto the site and we had a conversation that included words to the following effect:

I said: "I'm levelling the area out and getting colour for yellow brickie."

He said: "You can't dig here. You've got the two areas down the bottom."

I said: "But down there it's not the right colour and quality. It's just too hard, it's not breaking up, and the recovery rate is just not worth it"

I said: "But where am I going to get the yellow from to keep the sales going?"

He said: "Well, that's not my problem. You're just not operating properly.' Bench Area

'44. In May 2002 the situation was dire. I had no control materials. As a result, I started digging again on the Bench Area. After a short time, Mr Smith came onto the site and we had a conversation which included words to the following effect:

He said: "Look, I told you I don't want you to dig here any more. I only want you to dig in the lower areas."

I said: "Yeah. But where do I find the control colour?"

He said: "I don't know and I'm not worried. Dig in the bottom area."

I said: "OK. Then why don't you tell me where to find it in the bottom area."

I said: "OK. Then why don't you take the place back over."

I said: "Because I'm going to run out of yellow brickie sand."

'45. By June 2002, I had once again run out of control material, so I started digging on the Sales Stockpile Area again. On the first day of ripping, Mr Smith turned up and we had a conversation which included words to the following effect:

He said: "Look, I've already told you, I don't want you digging here."

I said: "I'm doing it to get the control material and get the drainage going the right way.

The undisputed evidence of Mr Hodgson on these matters was also supported by the evidence of Mr Betts, who confirmed that on more than just isolated occasions, Mr Smith declined to permit any mining activity anywhere on the site other than in the hole at the bottom of the property. In this regard, I accept the evidence of Mr Hodgson to the effect that the bottom hole was fully exploited for the purpose of producing his product.

The effect of Mr Smith's conduct in this regard was to continue to charge Mr Hodgson rent but at the same time to also prevent him from running a profitable operation. Mr Hodgson claims that Mr Smith's repeated refusals to allow him to mine in the Banned Areas constituted a clear breach of provisions 13.01 and 13.03 of the lease which respectively provided for the lessee to have quiet enjoyment of the property and to permit the property to be used for the purpose of the lease, noting that in this case it was to extract sandstone and sand from the quarry.

As a consequence, Mr Hodgson claims that Mr Smith's interference with the exercise of his rights under the lease forms a legitimate basis upon which to claim damages and pecuniary loss, including lost business profits : Butt, Land Law, 5th ed, at pp 1560 and 1565; Kenny v Preen [1963] 1 QB 513 per Pearson J; McCall v Abelesz [1976] QB 585 per Lord Denning MR at 594.

In response to the defendant's claim in this regard, Mr Smith places reliance upon Special Condition 2 (Item 20) of the lease which provides : "The Lessee shall not mine any area within the Premises without the consent of the Lessor, which shall not be unreasonably withheld".

Mr Hodgson argues that on at least the four occasions that have been identified, Mr Smith entered the premises and stopped him from levelling, shaping and excavating the Banned Areas. This was in circumstances where the implication of Mr Hodgson's activity was to seek to dig in those areas to obtain the material he needed and Mr Smith did not merely withhold his consent, but he positively forbad Mr Hodgson from digging in those areas, and instead directed him to only dig in the holes that had already been exploited. In cross-examination Mr Smith admitted that he was "insistent" that Mr Hodgson could not dig in the Banned Areas and that he "wasn't even prepared to consider" allowing Mr Hodgson to be in those areas.

Mr Hodgson argues that this evidence is proof that Mr Smith's refusal to consent to him digging in those areas was unreasonable, and therefore constituted a breach of Special Condition 2.

By way of answer, Mr Smith argues that there is a line of authorities dealing with a landlord's refusal to consent to the assignment of lease or improvements on the premises, including those dealing with s 12 of the Conveyancing Act 1919 and on the basis of those authorities, Mr Hodgson is not entitled to damages for an alleged breach of Special Condition 2.

Accordingly, the matter at issue is that of reasonableness or, the claimed unreasonableness, of the plaintiff's position in withholding the giving of consent to the defendant in the absence of a rational explanation.

In my view, what Mr Smith did in this case, was to arbitrarily reject out of hand and without sound reasons, Mr Hodgson's desire to mine in the Banned Areas. In my view this constituted unreasonableness in the absence of a rational explanation.

As a consequence of the unreasonable refusal and withholding of consent for the mining in question, I find, as was submitted on his behalf, that Mr Hodgson was therefore released from the obligation to obtain consent, analogous to the circumstances in Haberecht & Anor v Chapman (1993) CCH Conveyancing Reports at 279 per Meagher JA (with whom Sheller JA agreed). Accordingly, I consider that Mr Smith's actions in positively and insistently forbidding Mr Hodgson from working in the Banned Areas and directing him to work elsewhere, was a clear breach of Mr Hodgson's entitlement to quiet enjoyment of leased premises pursuant to clauses 13.01 and 13.03 of the lease.

In my view this is evident from the context of the relationship between the parties. The relevant lease was entered into after Mr Hodgson exercised an option dated 18 March 1998 enabling him to take a further lease on the property for a term of three years. Hence the lease in question, which was dated 24 October 2001, in fact commenced on 1 January 2001. It would have been unreasonable to assume that having entered into the formalities of a lease to exploit the quarry in those circumstances, that Mr Smith could legitimately object to Mr Hodgson, as lessee, ripping material within the Banned Areas since they were within the existing footprint of the ground that had already been broken within the quarry, and because there were no reasonable economic alternatives to the Banned Areas for Mr Hodgson to exploit in order to make his product.

The relationship between the parties had to have a mutual commercial benefit. There is no dispute that the good quality control sand that Mr Hodgson required for his product was either not available, or of poor quality and difficult to exploit if it was sought to be obtained from outside the Banned Areas. I accept Mr Hodgson's evidence that it was difficult for him to sell a lesser quality product obtained by such means. He had leased a quarry and was paying rent and royalties to the plaintiff for materials extracted from the quarry. In my view he was entitled to take reasonable steps to commercially exploit what he was paying for. There were a number of mutual benefits that flowed from him being able to do so. If he had been able to level the Bench Area this would have provided a better gradient for machine operation on the site, and for the drainage of rain water, as well as allowing a more efficient and better stockpiling of raw materials near the Washplant for processing. I accept Mr Hodgson's evidence to the effect that unless this was done, the Stockpile Area would remain unlevelled which would impede drainage, which did not constitute good quarry management.

I do not accept the reasonableness of Mr Smith's explanations for not wanting Mr Hodgson to mine in the Banned Areas. His explanation for refusing to allow Mr Hodgson to carry out levelling, namely his belief that levelling was not required, was based on the assumption that previous operators had no problem in that regard, but this ignored the fact that the site had been exploited since previous operators had left, and the site had obviously changed. Further, in my view, this statement that "… just that there was no need to mine in that area, it was a sales stockpile area and it had a specific purpose" showed that he had little regard for the need for Mr Hodgson to make a profit from his rental of the quarry. In my view this is apparent from his acknowledgement that he knew there was good-quality yellow control material in the Stockpile Area that Mr Hodgson wished to mine, and because he was aware of Mr Hodgson's complaints of not being able to get access to such material elsewhere on the site. In this context, I infer from the fact that he was not even prepared to consider allowing Mr Hodgson to mine in the Banned Areas, that his refusals were unreasonable.

I accept the submission made on behalf of Mr Hodgson that Mr Smith did not base his refusal to allow digging in the Banned Areas upon the grounds referred to in his affidavits. In this regard I am satisfied that he was not concerned about possible disturbance to the footings of the Stockpile tower, matters of development consent, possible breaches of the lease or the need for mining plans. He was simply unconcerned about the problems faced by Mr Hodgson in seeking to exploit the quarry pursuant to his lease. In my view his refusals were simply unreasoned, and therefore unreasonable.

It is noteworthy that the lease made no provision for any formal procedure for obtaining the consent of the lessor. The relationship between the parties was initially one of informality but I accept that over time, Mr Smith became resistant to Mr Hodgson's desire to exploit the quarry. Mr Hodgson correctly summed up the problem as follows: " A. "You're Honour...I'm in a quarry that's been operating for quite a number of years. I hadn't broken new ground, I hadn't pushed trees over and removed topsoil. I was doing a two-fold effect there...and Mr Smith, again, didn't like what I was doing, came down and let me know that he didn't want me there. It's very hard, your Honour, you're leasing a quarry that's been operating and I'm just trying to progress along and I get stopped doing this in this area and I've got to go back to a couple of areas that certainly aren't producing quality material ."

It was apparent that Mr Hodgson had been digging in Banned Areas without interference before Mr Smith had later intervened to ask him to cease. As Mr Hodgson had not broken new ground in the quarry and was digging within the existing footprint, the topsoil having been removed long beforehand by other operators, owners and lessees. In my view it could not reasonably be said that he was operating contrary to any development consent. In this regard, as the topsoil had already been removed, and the quarry had been mined and reduced in levels, in my view there was no need to submit a mining plan.

Mr Smith's stated concern about the stability of the footings around the Stockpile tower is in my view a matter of late invention after the event. In this regard I accept Mr Hodgson's evidence that the footings were surrounded by very stable sandstone material and it was his intention to stay well away from the footings. In my view Mr Smith did not consider any of these matters in refusing to give his consent. In my view he simply acted unreasonably in refusing and withholding his consent.

Mr Hodgson stated that had he been allowed to dig in the Stockpile Area alone he would have recovered at least 46,000 tonnes of yellow brickie control sand. He believed that the deposit was a lot larger than that estimate, based on his extensive experience in the quarrying industry. I accept his evidence in this regard as he was in a good position to ascertain and make this estimate.

The significance of the evidence was that he needed about 25 per cent, or at worst, 50 per cent, control sand, to blend with other materials to make up his yellow brickie sand product. He said if he had been allowed to mine sand containing 50 per cent control material, which he said was a worst case scenario, he would have been able to obtain at least 92,000 tonnes of finished product for sales which is well in excess of the more conservative assumptions used to base the expert accountancy calculations.

He based this evidence on his visual inspection of the depth of the cross-section of the control sand that was evident to him on his examination of the eastern face of the Stockpile Area. This evidence was not relevantly contradicted. Mr Smith was not in a position to contradict this evidence as he had not looked into the issue from that perspective. I accept Mr Hodgson's evidence concerning the availability of control sand in this area as a reasonable and reliable estimate because of his experience in the quarry industry, and in light of his reference point, namely, that he had extracted at least 4000 tonnes of good quality yellow brickie sand from the Stockpile Area before Mr Smith had stopped him from continuing. In this regard, Mr Hodgson's evidence concerning the availability of yellow brickie sand in the Stockpile Area was supported by the evidence of Mr Betts, who confirmed the existence of yellow control material in the Banned Areas. I also accept the evidence of Mr Betts in this regard.

I accept the foregoing evidence notwithstanding geo-technical evidence relied upon by the plaintiff. That evidence, which was based on the 1989 bore drilling results undertaken on the site by the firm Coffey Partners, makes no mention of yellow control sand. In this regard I accept the explanatory evidence of Mr Hodgson that the bore logs of Coffey Partners relied upon by the plaintiff were not representative of the available materials at those locations because the "washings" from the sampling process would not give a good indication of what sand and colour of sand was within the bore because the water used in the process would have washed the colour out of the residual sand that had been left for examination in the base process. I accept Mr Hodgson's evidence in this regard in light of his unchallenged experience and expertise in the quarrying industry.

Mr Hodgson impressed me as an experienced and efficient quarry operator who gave credible evidence as to the manner in which he efficiently and profitably organised his business at the quarry, insofar as he was able to do so within the operating strictures imposed by Mr Smith. I therefore felt confident that I could rely upon his evidence that he had lost a significant sum of money during the 2003 calendar year as a result of Mr Smith prohibiting him from digging in the Banned Areas to obtain his principal marketing product from the quarry, namely yellow brickie sand. In this regard, the following figures from within the evidence are insightful: "Calendar year Tonnage Sales 2000 45,906 $315,806.39 2001 44,763 $304,892 2002 62,263 $513,238 2003 16,137 $96,351"

Mr Hodgson said, and I accept, notwithstanding that sales had been affected by the intervention of the Council in late 2002, if he had been permitted access to the material, he could have continued to sell yellow brickie sand during 2003. Clearly, this would have resulted in significant sales in the volume and profitability. I accept the conservative estimate identified through the evidence of the accountants, in the sum of $103,743.

In this regard, it is significant to note that the interference from the Council was not in the form of a stop-work order. It is also of some significance to note that if Mr Hodgson had been permitted unfettered access to the Banned Areas in 2002, he would have had a significant stockpile of yellow brickie sand that would have comprised a very substantial reserve and which would have enabled him to service his existing customers, and to maintain his sales in the 2003 year, as claimed in his cross claim for economic loss.

In my view, it was not reasonably possible for Mr Hodgson to mitigate his resultant loss by shifting his customers to another product from another quarry. In this regard he said, and I accept: "As I have said previously, the products sold from Rindean were characteristic to Rindean and could not be easily interchanged with products from other sites. While the Somersby material was similar to the yellow brickie sand sold from Rindean, it had a different texture and very different colour which meant that bricklayers (who tend to be very fussy) would not buy both. Brickies are very hard to change from one product to another. Further, there were approximately four other quarries in the immediate area which sold similar products to yellow brickie sand and other products sold from Rindean. It was easy for customers to go to those quarries when Rindean could not supply those products."

In this regard, I consider it noteworthy that Mr Smith agreed that most quarry customers, particularly bricklayers, liked to obtain sand from particular quarries because of the consistency of a particular product from the quarry with which they were accustomed to dealing. I infer from this that Mr Hodgson's attempts to shift his customers to the alternative product from his nearby Somersby quarry were understandably unsuccessful.

I have come to these conclusions on the cross-claim notwithstanding the arguments to the contrary that are relied upon by the plaintiff.

The plaintiff has sought to refute any liability to Mr Hodgson by reliance upon clause 16.01 of the lease which provides : " 16.01 Lessor's non-liability for loss of damage : Notwithstanding any implications or rule of law to the contrary the Lessor shall not be liable for any damage or loss the Lessee may suffer by any act, default or neglect of the Lessor or any other persons in carrying out the powers, authorities and provisions herein contained or otherwise with respect to the premises or any building on the premises or by reason of the Lessor neglecting to do something to the premises or to any building on the premises and which as between the Lessor and the Lessee it might be legally liable to do unless the Lessee has given the Lessor written notice to do such thing and the Lessor has without reasonable cause failed within a reasonable time thereafter to take proper steps to comply therewith. "

In my view, clause 16.01 of the lease is of no assistance to the plaintiff because, as a matter of interpretation of the lease, the exclusion clause in question could not apply to the defendant's claim when the lease is construed as a whole. In taking that approach, and giving due weight to the context in which the clause appears, including the nature and object of the contract, the clause must be construed contra proferentem to the plaintiff where there is an ambiguity : Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; (1986) 161 CLR 500 at [16]; pp 510-511.

In withholding consent to mine in the Banned Areas, it cannot be reasonably said that the plaintiff was carrying out powers conferred under the lease. The argument by the plaintiff to the contrary is based on an ambiguity which, as a matter of principle, must be construed contra proferentem to the interests of the plaintiff : Darlington Futures at [16].

A limitation clause such as 16.01 ought not defeat the main object of the lease unless it is "clearly and unambiguously expressed to do so" such that it is the only logical operation which may be given to it : Kamil Export (Aust) Pty Ltd v NPL (Australia) Pty Ltd [1996] VR per Marks J at 547 ff: H & E Van Der Sterren Cibernetics (Holdings) Pty Ltd [1978] 44 ALJR 157 per Walsh J at 158.

Mr Smith's withholding of consent to mine in the Banned Areas was a deliberate breach of the lease which was not permitted by the contract between the parties and therefore the limitation clause expressed in general terms could have no application to the actions of the lessor that were not permitted or authorised under the contract : Cheshire and Fifoot; Law of Contract, 8th Australian ed, at [10.76]-[10.77]; Sydney Corporation v West [1965] HCA 68; (1965) 114 CLR 481. In West, at p503, Windeyer J stated: "…if you undertake to do a thing in a certain way …and have broken the contract by not doing the thing contracted for in the way contracted for…you cannot rely on the conditions which were only intended to protect you if you carried out the contract in the way in which you had contracted to do it…"

In short, exclusion clauses of the kind embodied in clause 16.01 of the lease should not be applied so as to exclude liability for a "fundamental breach of the contract" : Glebe Island Terminals v Continental Seagram (1993) 40 NSWLR 212 at 241 per Handley JA.

Further, clause 16.01 of the lease does not apply to a breach of the covenant of quiet enjoyment because that is a prohibition within the lease which is a negative ("shall not") stipulation on the plaintiff. It is not a "power, authority or provision" in the lease that the plaintiff was obliged to "carry out". Further, clause 16.01 is expressed in general terms and does not expressly exclude liability for a deliberate breach on the part of the lessor, which I find to be the case here.

Significantly, it is clear from the evidence of Mr Smith, that he would not have allowed Mr Hodgson to work in the Banned Areas in any event. It was therefore pointless for Mr Hodgson to give written notice of his wish to do so. Mr Smith made his verbal refusal clear at the time the work was sought to be undertaken and he categorically continued to justify his refusal when he gave evidence in these proceedings. Accordingly, I consider that the contended failure of Mr Hodgson to make a written request is no answer to the cross claim because such a written request would have been refused out of hand, which was consistent with the evidence Mr Smith gave in these proceedings.

In these circumstances, it was clear that Mr Smith did not intend to change his mind or to remedy the situation caused by his breach. He gave no requirement to Mr Hodgson for him to send a written notice under clause 16.01 of the lease and in my view, as a consequence, he has waived his right to rely upon a lack of notice from Mr Hodgson under that clause. Notice was not mandatory. Clause 16.02 of the lease provided for an optional procedure that notices "may be" served pursuant to s 170 of the Conveyancing Act 1919, and that only applied to notices the lessor may send.

It is a well-settled principle that: "A party itself unable or unwilling to perform a contract cannot complain of the other parties breach" : Cheshire and Fifoot, 9th Australian ed, at [2.26]. Accordingly, Mr Hodgson argues that since the plaintiff never intended to allow work to proceed in the Banned Areas even if a notice was received under clause 16.01, it therefore dispensed with the requirement for notice to be given under clause 16.01. That submission invoked the following statement by Coleridge J in Short v Stone (1846) 115 ER 911 at 915: "If the defendant disables himself from fulfilling such a request, then, in the first place, he dispenses with the request, because it has become impossible to make the request effectually, and, secondly, he has broken his own contract, because he is no longer able to fulfil that."

Whilst Short was a case that involved a breach of promise of marriage, I consider that the contractual principle nevertheless holds good in this case.

The plaintiff raises a defence based on clause 5.09 of the lease which provides for Mr Hodgson to indemnify the plaintiff against all "claims arising out of his use of the premises and all operations of land." In this regard, the plaintiff claims that as a consequence of the operation of the doctrine of circuity of action, the plaintiff is not liable for its own breach of the lease. The defendant's answer to that defence is that clause 5.09 has no application to the facts of this case because the plaintiff's claim does not arise out of the defendant's "use of the premises", but rather, arises out of the plaintiff's breach of the covenant of quiet enjoyment.

I accept that submission and the defendant's related submission that clause 5.09 does not apply to a situation where the lessee sues the lessor for breach of the lease. If the contrary were true, this would lead to an absurd result.

The final matter relied upon by the plaintiff in answer to the cross claim by the defendant invoked clause 5.07 of the lease which is in the following terms : "… to work the premises in sections approved by the lessor and not to break new ground until the old has been worked to the full depth of the materials in that location. Before commencing to break new ground, to provide the lessor with plans of the mining works to be carried out in the new location."

In this regard, I accept the submission of the defendant to the effect that clause 5.07 is of no application to the present case because the evidence has indisputably established that working in the Banned Areas in question did not involve the breaking of new ground. Those areas were all existing work areas which were within the existing footprint of the quarry where Mr Hodgson attempted to level and in the process, extract his control sand for his product. In my view, in those circumstances, it would be unreasonable to have expected Mr Hodgson to provide "mining plans" to dig within an area that had already been the subject of excavation within the existing quarry footprint.

Further, Mr Smith did not request that he be provided with any such plans. In my view, the evidence discloses that any such plans, if provided, would not have had the slightest impact on Mr Smith's thinking on the subject as he was adamant that there was to be no digging within the Banned Areas. In those same circumstances, I consider that the provision of plans by Mr Hodgson would have been pointless.

Finally, to the extent to which there was a conflict between a clause of the lease such as clause 5.07 and a special condition such as Special Condition 2, I consider that the special condition should prevail to the extent that consent should be withheld unreasonably.

I therefore find that Mr Hodgson is entitled to succeed on his cross claim against the plaintiff for economic loss in the amount of $103,743.

Issue 7 - Liability of the plaintiff for legal costs of $23,000 : clause 9.7 of the lease

Following intervention by the Council concerning activities on the site, Mr Hodgson spent the sum of $330,000 in legal costs in unsuccessful litigation in the Land and Environment Court seeking to overturn conditions of use of the site imposed by the Council. An appeal from that decision was contemplated. Clause 9.7 of the lease provided that the plaintiff and the "the Lessee" bear the cost of such an appeal in equal proportions. The plaintiff's liability in this regard was limited to $30,000 plus GST although Mr Hodgson paid a much higher sum in contemplation of such an appeal. The appeal did not ultimately proceed.

The plaintiff has already paid Mr Hodgson a sum of $10,000 in connection with such costs, leaving a balance of $23,000 including GST according to Mr Hodgson. That payment to Mr Hodgson was of some significance to the alleged liability of the plaintiff in this litigation because the plaintiff claimed that the lessee was HB Rindean Pty Limited, which f correct, means that the plaintiff has a liability to pay HB Rindean Pty Limited and no liability to Mr Hodgson. In contrast, Mr Hodgson claimed the lease should have referred to him as the "Current Lessee" instead of the reference to "the Lessee" as HB Rindean Pty Limited. Mr Hodgson claimed this was a mistake in the naming of a party to the contact, and that it should be construed as such.

It is therefore necessary to refer to the evidence. Mr Hodgson's evidence was that HB Rindean Pty Limited had no involvement in the Land and Environment Court litigation and did not pay any of the costs, whereas he had paid such costs in the sum of $330,000 in connection with the litigation. He stated that the sole function of HB Rindean Pty Limited was to become the new lessee of the quarry if the litigation proved successful, in which case clause 3.1 of the lease gave HB Rindean Pty Limited the right to become the new lessee.

Relevantly, when cross-examined on this topic, Mr Smith's evidence was as follows: "Q. So far as you were aware HB Rindean Pty Ltd had nothing to do with the section 96 consent application, did it? A. No, that's correct.

Q. So far as you were aware, the person who was the driving force behind the section 96 application was Mr Hodgson? A. That's right."

It is also of significance that on 29 August 2003 the subsequent and substantial payments for legal costs in connection with the proposed appeal were made by Mr Hodgson personally, through his trading name Hodgson Contracting Services.

On behalf of Mr Hodgson it was submitted that clause 9.7 of the lease should be construed in recognition of the content of error in description of the parties. In support of that argument, attention was drawn to clause 9.7 (2)(i) where the draughtsman wrote "the Lessee" when he really meant "the Current Lessee" and to clause 9.7(2)(ii) which stated that "prior to the date of this agreement the Lessor paid to the Lessee $10,000." In fact the lessor, being the plaintiff company, paid $10,000 to Mr Hodgson personally, and did not make any payments to "the Lessee" HB Rindean Pty Limited. Accordingly, it was argued that where clause 9.7(2)(ii) refers to "the Lessee", this must be a reference to Mr Hodgson, and not a reference to HB Rindean Pty Limited.

The plaintiff's response to this contended construction was that as the reference was to the lessee and not to Mr Hodgson, the claimed sum was not available to Mr Hodgson on the cross claim because he was not the lessee.

I consider that the plaintiff's argument in response is flawed. I accept the argument advanced on behalf of the defendant that clause 9.7 of the lease should be construed as if it included a mistaken reference to the naming of HB Rindean Pty Limited as the lessee, and instead that I should read that clause as if it referred to Mr Hodgson as the lessee, as was intended by the parties : The Interpretation of Contracts / Lewison K, 2nd edition. London: Sweet & Maxwell, 1997, pages 227, 229 and 230; Baramon Sales Pty Ltd v Goodman Fielder Mills Limited [2001] FCA 1672 per Finkelstein J at [3], citing Wilson v Wilson (1854) 5 HL Cas 40; 10 ER 811 and Nittan (UK) Ltd v Solent Steel Fabrication Ltd [1981] 1 Lloyds Rep 633.

As a consequence of this finding, it follows that Mr Hodgson is entitled to succeed on his claim for the balance of the outstanding legal costs he has claimed, namely $23,000 including GST, and I so find.

The monetary effect result of my findings is as follows.

The plaintiff's claim against the defendant has succeeded in part to the extent of $108,148.76 and in the following respects: (a) unpaid rent and interest in the amount of $105,210.76 including compound interest under the lease but excluding pre-judgment interest pursuant to the Uniform Civil Procedure Rules 2005;

(b) liability for contribution to legal costs in the amount of $2928 plus pre-judgment interest.

The defendant's cross claim against the plaintiff has succeeded in part to the extent of $126,743 in the following respects: (a) economic loss in the amount of $103,743 plus pre-judgment interest;

(b) contribution to legal costs of the Land and Environment Court Proceedings in the amount of $23,000 plus pre-judgment interest.

Before ordering a set-off of these amounts to identify the resultant judgment, I will hear the parties on the manner and amount in which interest should be calculated on these sums. As both parties have partly succeeded and partly failed in their respective claims against each other and because interest is yet to be calculated, it is inappropriate to make an order for costs before hearing the parties on the result.

I make the following interim orders:- (a) Verdict for the plaintiff for the plaintiff on the plaintiff's claim against the defendant in the sum of $108,148.76; (b) Verdict for the defendant/cross claimant on the defendant's cross claim against the plaintiff in the sum of $126,743; (c) The set-off of the respective claims and entry of final judgment is deferred pending the parties being heard on the outstanding questions of interest and costs. In this regard, each party is directed to provide written submissions on the issues, limited to no more than 5 pages, including setting out the contended interest calculations consequent upon my findings and the contended costs consequences of the set-off of such calculations. In the case of the plaintiff, those submissions are to be filed and served within 7 days; in the case of the defendant, those submissions are to be filed and served within 14 days.

In the interests of saving further costs, unless the parties indicate in their submissions that they wish to be heard in oral argument on these outstanding issues, I intend to enter final orders after reviewing the foreshadowed written submissions.

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.

CITATION: Cleve Smith Excavations Pty Ltd v Hodgson [2010] NSWDC 230

Baramon Sales Pty Ltd v Goodman Fielder Mills Limited [2001] FCA 1672 Angel v Hawkesbury City Council [2008] NSWCA 130 Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; (1986) 161 CLR 500 Glebe Island Terminals v Continental Seagram (1993) 40 NSWLR 212 H & E Van Der Sterren Cibernetics (Holdings) Pty Ltd [1978] 44 ALJR 157 Haberecht & Anor v Chapman (1993) CCH Conveyancing Reports at 279 CASES CITED: Kamil Export (Aust) Pty Ltd v NPL (Australia) Pty Ltd [1996] VR Kenny v Preen [1963] 1 QB 513 McCall v Abelesz [1976] QB 585 Nittan (UK) Ltd v Solent Steel Fabrication Ltd [1981] 1 Lloyds Rep 633 Short v Stone (1846) 115 ER 911 Sydney Corporation v West [1965] HCA 68; (1965) 114 CLR 481 Wilson v Wilson (1854) 5 HL Cas 40; 10 ER 811

(c) Mr Sunter based his opinions on photographs and statements that were provided to him by Mr Smith. Whilst he has stated that the information provided by Mr Smith was consistent with his own observations, he has not identified the substance of the information provided to him by Mr Smith nor has he stated the substance of his observations. Accordingly, I consider that the reasons for the opinions he has expressed cannot be properly evaluated. In this regard Mr Sunter's opinions do not adequately comply with the requirement of Schedule 7 Clause 5(c) of the Uniform Civil Procedure Rules 2005 concerning the obligation on an expert to relevantly state the reason for each opinion expressed. Further, the formation of conclusions based on the interpretation of photographs is a process that is potentially flawed and fraught with the potential for error, even when undertaken by experts, as photographs can be deceptive. There is an onus on a party seeking to rely on such photographs to adequately explain the content of such photographs, particularly where an opinion is being advanced based on the interpretation of the photographs: Angel v Hawkesbury City Council [2008] NSWCA 130. In my view, in this case, no adequate explanation of the kind required was advanced through the evidence of either Mr Smith or Mr Sunter. Whilst the photographs comprising Exhibit "G" provide some general insight into the condition of the plant and equipment they provide very little if any insight into the question of whether that equipment was in a " good and substantial repair and working order ". Accordingly, I consider the absence of such evidence to afflict the probative value of Mr Sunter's opinions;

At a glance

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Judgment (134 paragraphs)

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Cases Cited (8)