Cordon v Lesdor [2010] NSWSC 1073 | Case summary

Cordon v Lesdor [2010] NSWSC 1073 | Case summary | Zoe

[210]

168 The difficulty, in this case, is that Cordon's performance of its obligation to bring the works to completion is not in terms a condition of its entitlement to receive the contractual consideration. It is, on the construction of cl 15 of the deed that I have given, a condition precedent to the obligation of Lesdor to sign the strata plan. For better or for worse, the parties bargained for a contract under which Lesdor could not be compelled to sign the strata plan unless Cordon brought the works to completion, and, on the construction that I have given, they bargained for completion to mean completion in accordance with the plans and specifications and free of apparent defects. As I have tried to show, in dealing with the question of construction, there were good commercial reasons for Lesdor to take that position. How is the Court to decide that some form of lesser, but still "substantial", performance should be sufficient to trigger Lesdor's obligation? How is the Court to assess the sufficiency of performance? What shortfalls in performance will leave Lesdor compelled to perform its obligation; and what shortfalls will excuse it? In effect, Cordon's submission invites the Court to rewrite the parties' bargain, on the basis of a concept that is almost as slippery as the concept of waiver. 169 Further, were it necessary to do so, I would accept Mr Hale's submission that Cordon did not substantially perform its obligations as to completion. The referee's finding, that the extent of defective, incomplete and non-conforming work was such that the works were not, or would not be, reasonably fit for occupation or use by an owner, makes this clear. Whatever is the test for "substantial completion", it must at least encompass that the works said to have been completed substantially are reasonably fit for their contemplated occupation and use. 170 I note that Cordon, by its notice of motion filed in court on 20 July 2010, sought the adoption of the report except for specified paragraphs. Paragraphs 421 and 424 were not listed among the excepted paragraphs. It follows that they will in due course be adopted. Waiver

[213]

(2) Lesdor was not entitled to the benefit of possession until the works had been brought to completion. 172 Mr Corsaro then submitted that, because Lesdor had taken possession of the works at a time when (on its case) they were not complete, it had obtained that which, on its contract, it could only have obtained by virtue of "completion". Accordingly, he submitted, Lesdor had waived any entitlement to "completion" on some other basis. 173 Mr Corsaro referred to the principles stated by Hunter J in Walter Construction Group Ltd v Walker Corp Ltd [2001] NSWSC 283 at [173]. 174 Mr Hale's submissions did not really touch on waiver, as distinct from substantial performance. Decision 175 One of the difficulties in dealing with this aspect of the submissions is that it was not framed in terms of the most recent analysis of the concept of waiver, as found in the decision in Agricultural and Rural Finance. Mr Corsaro did not refer to that decision. Mr Hale referred to it, but in a different context (namely, the extent to which subsequent events could be used in the construction of the deed: see para 42(a) of the written outline of Lesdor's closing submissions). 176 The joint reasons of Gummow, Hayne and Kiefel JJ in Agricultural and Rural Finance indicate, at 588 [55], three different principles that may be invoked by the word "waiver": "election, forbearance and abandonment or renunciation". It is entirely unclear whether Mr Corsaro was using the word waiver to indicate one of those concepts, or something else. That is a matter of some significance, because, as Gummow, Hayne and Kiefel JJ had pointed out at 587 [51], there are cases in which the word waiver: … is used as no more than a conclusionary word stating the consequences of the operation of [some] more specific principle, rather than as indicating the application of any distinct and independent principle. 177 Forbearance and abandonment (or renunciation) can be put to one side. At no time did Lesdor explicitly give up its claim that it was entitled to completion on its interpretation of the deed: complete, in accordance with the plans and specifications and free of apparent defects. If it is to be said that forbearance or abandonment should be implied simply from the fact that Lesdor took possession of parts of the works after issue of the occupation certification and completion report, it is necessary to bear in mind that it was Cordon's case that it then gave Lesdor possession of the new commercial offices, the residential lots to which Lesdor was entitled and their associated car parking spaces (see the chronology set out in para 3 of Cordon's brief outline of opening submissions against the date 1 December 2005). There was no evidence that this happened because Lesdor demanded possession (or, if there were some such evidence buried away in the thousands of pages of paper comprising the affidavits, court book and transcript, the Court was not referred to it). On the face of the opening outline of submissions, it appears to have been a voluntary act on Cordon's part. Further, any inference of forbearance or abandonment is refuted by the repeated insistence to be found in correspondence thereafter emanating from Lesdor's solicitors. 178 I turn to election. Mr Corsaro's submissions did not identify the inconsistent rights, or the alternative rights or remedies between which the putative election occurred. There is nothing in the deed which suggests that it was an "either / or" situation for Lesdor. It is, of course, correct to observe that Lesdor was required to give Cordon vacant possession, for the duration of the works, and that Cordon was entitled to have uninterrupted possession until it completed its obligations (see cll 9(a) and 17). It does not follow that, if (as appears to be the case) Cordon voluntarily put part of the works back in Lesdor's possession, Lesdor thereby elected not to have the works brought to some further or higher state of completion. 179 Cordon did not submit that it had been prevented from achieving completion, in the sense for which Lesdor contended, because it had given possession of part of the works back to Lesdor. I think it is a reasonable inference from the evidence that, if Cordon had indicated a firm desire to complete the works to the standard required by Lesdor, Lesdor would have given Cordon such access as it required. 180 In any event, the doctrine of waiver (in whatever form it was relied upon) can have no application in respect of the existing commercial building or the residual lots. As to the former: Lesdor remained in occupation of the existing commercial building throughout its refurbishment. It did not retake possession at the stage of what Cordon asserted was completion, or practical completion, or substantial completion. As to the latter: Lesdor did not take possession until after it had terminated the deed, by its notice of 8 August 2006. On any view, that termination brought the deed to an end (either because it was effective in terms or because, if it were ineffective, it was a repudiation on Lesdor's part which Cordon accepted as bringing the deed to an end). After 8 August 2006, there were no rights (other than those accrued to the date of termination) that could be the subject of forbearance or abandonment. "Deemed" completion or practical completion

[217]

183 The completion report referred to various documents, including the construction certificate and other certificates that had been furnished to council, and to inspections carried out from time to time. It stated: … that the above described building work is completed in accordance with the development consent. The parties' submissions 184 Mr Corsaro relied on cl 11 of the deed, by which Cordon was required diligently to proceed with and complete the works "in accordance with the Approvals in a good and workmanlike manner". He submitted that the work had been completed "in accordance with the Approvals" because the Council had issued an occupation certificate and completion report. That, he submitted, confirmed that what was required was completion to a stage sufficient to enable the building to be used and occupied, or in effect "practical completion"; not completion free of all defects. 185 Mr Hale submitted that cl 11, if anything, assisted Lesdor, because it insisted on completion "in a good and workmanlike manner". In any event, he submitted, the fact that Council had issued an occupation certificate was irrelevant. He relied on cl 155(1)(e) of the Environmental Planning and Assessment Regulation 2000 which showed, he submitted, only that, in the Council's opinion, those conditions of the approvals concerned with health and safety issues and the like had been complied with. Decision 186 The obligation under cl 11 is not merely to proceed with and complete the works in accordance with the Approvals. It also includes an obligation to perform the works in a good and workmanlike manner. Even if the occupation certificate and completion report are to be taken as evidencing that the works have been completed in accordance with the Approvals (and although I express no view, the proposition does not seem to be unreasonable), they say nothing as to the standard of workmanship. 187 There is nothing in the occupation certificate or completion report to suggest that, in the view of Mr Harlor or the Council, the relevant requirements of the deed, as to the standard of workmanship required, had been achieved. Nor is there any reason why that matter should have been attested. It is no part of the Council's function to interpose itself between owner and builder, in effect as some sort of superintendent, to monitor and to report upon performance in accordance with the terms of the contract between the owner and the builder. 188 Clause 155 of the Environmental Planning and Assessment Regulation gives some indication of what it is that an occupation certification should deal with: 155 Form of occupation certificate (cf clause 79P of EP&A Regulation 1994) (1) An occupation certificate must contain the following: (a) the identity of the certifying authority that issued it, including, in a case where the certifying authority is an accredited body corporate, the identity of the individual who issued the certificate on behalf of the body corporate, (b) if the certifying authority is an accredited certifier, the accreditation number of the certifying authority, including, in a case where the certifying authority is an accredited body corporate, the accreditation number of the individual who issued the certificate on behalf of the body corporate, (b1) if the certifying authority is an accredited certifier who is an individual, the signature of the accredited certifier, (b2) if an individual issued the certificate on behalf of the certifying authority, the signature of the individual who issued the certificate, (c) the date of the certificate, (d) indicate the type of certificate being issued (that is, interim or final), (e) a statement to the effect that: (i) the health and safety of the occupants of the building have been taken into consideration where an interim occupation certificate is being issued, and (ii) a current development consent or complying development certificate is in force for the building, and (iii) if any building work has been carried out, a current construction certificate (or complying development certificate) has been issued with respect to the plans and specifications for the building, and (iv) the building is suitable for occupation or use in accordance with its classification under the Building Code of Australia , and (v) a fire safety certificate has been issued for the building, and (vi) a report from the Fire Commissioner has been considered (if required). (2) Except as provided by subclause (3) or (4), the certificate must be accompanied by a fire safety certificate and fire safety schedule for the building. (3) If the need for the occupation certificate arises solely from fire link conversion, the certificate need only be accompanied by a fire safety certificate of the kind referred to in section 153 (1A) and the relevant fire link conversion schedule or fire safety schedule issued under clause 168A. (4) If the building is a temporary structure, subclauses (1) (e) (v) and (2) do not apply.

[318]

(2) Cordon denied the existence of any defects or omissions which it was reasonable for Lesdor to rectify or repair, and stated its intention to assert, as part of its defence to a cross-claim brought by Lesdor, that any costs incurred by Lesdor in rectification or repair were unreasonable and should not be regarded as project costs. 287 Against that background, the IMA provided as follows (omitting formal parts): 1. Lesdor shall cause to have registered the Council approved Stratum Plan and Strata Plans with all due diligence. 2. Lesdor's solicitors on behalf of Lesdor and Cordon will request the President of the Institute of Valuers (or equivalent) to nominate a valuer to prepare a valuation of the Residual Lots (except units 13, 14 and 15) for selling purposes, and a marketing and selling strategy for the sale of the Residual Lots, within 7 days. Lesdor and Cordon agree to bear the cost of the valuer's fees equally. 3. Lesdor shall arrange and conduct the sales of the residual Lots in the Strata Plan, with the exception of Lots 20, 21, and 25, and will do so in accordance with the marketing and selling strategy referred to in paragraph 2 above. 4. Lesdor agrees not to sell any Residual Lot below the value ascribed to same by the valuer referred to in paragraph 2 above, without Cordon's consent. If Cordon does not consent, the matter will be referred to the said valuer for his determination as an expert, and such determination shall be final and binding on the parties. 5. Lesdor shall direct the proceeds of the all sales and income received in connection with the Residual Lots (with the exception of Lots 20, 21, and 25) in the Strata plan towards the payment of the refinancing of the loan facility referred to in paragraph 21(d) of the Affidavit of Leslie Herbert Semken sworn 11 October 2006, after deducting all reasonable costs and expenses, taxes and statutory charges associated with such sales. 5A. AND THEREAFTER UPON THE FACILITY BEING REPAID IN FULL, ANY FURTHER PROCEEDS OF SUCH SALE AND INCOME (LESS OUTGOINGS) TO BE HELD IN A CONTROLLED MONIES ACCOUNT IN THE JOINT NAMES OF THE PARTIES BY LESDOR'S SOLICITORS PENDING FURTHER ORDER OF THE COURT OR AGREEMENT BETWEEN THE PARTIES. 6. Lesdor agrees to provide all information concerning GST to be paid by Lesdor in respect of the sale of the Residual Lots. Relevant events following the making of the IMA 288 On 13 November 2006, Mr Solari asked the President of the Australian Property Institute (API) to nominate a valuer to undertake the tasks described in cl 2 of the IMA. After some to-ing and fro-ing (apparently resulting in the President's suggestion that one person should be appointed to undertake a valuation, and another should be appointed to advise on a marketing and selling strategy), the API was notified that the parties agreed that two, appropriately qualified, persons could be appointed. 289 On 3 January 2007, the API advised that its fees of $550.00 were payable, and that the appointments would be made on payment. Mr Solari asked McBride Harle & Martin to pay their client's one-half ($275.00) of that amount (letter of 5 January 2007). On 24 January 2007, Mr Solari wrote to McBride Harle & Martin advising that he held Lesdor's cheque, but had not received Cordon's. 290 At about this time, Cordon changed solicitors, from McBride Harle & Martin to Anthony C Simpson & Associates. On 24 April 2007, Mr Simpson wrote to Mr Solari noting that Cordon had paid its one-half share of the API's fees on 25 January 2007, and expressing disquiet that Lesdor had not done likewise. It appears that Mr Simpson may not have been apprised of Mr Solari's letters of 5 and 24 January 2007. 291 On 3 May 2007, Mr Solari sent Lesdor's cheque for $275.00 to the API. 292 On 9 May 2007, the API appointed Mr Robert Randall to determine the value of the property. Mr Solari sent a copy of that letter to Mr Simpson on 16 May 2007, and sought confirmation that Mr Randall could be instructed to value the residual lots. There was apparently a dispute as to whether the date of valuation should be as at November 2006 (when the IMA was made) or "the current market value", because it was required "for the purpose of marketing the properties for sale". 293 On 13 August 2007, Mr Randall wrote to Mr Simpson noting that nothing appeared to have happened for some time, and asking "whether this matter is to proceed". Mr Simpson replied on 28 August 2007, stating that Mr Randall was to proceed. 294 Again, nothing appears to have happened for some time. On 28 November 2007, Mr Randall wrote stating that if the matter were to proceed, he would require each party to provide a cheque for $3,000.00 on account of his fees. Mr Simpson paid that amount (for Cordon) on 29 November 2007. Lesdor made no payment. On 14 February 2008, Mr Randall wrote to Mr Solari to remind him of the outstanding request. Mr Solari does not appear to have replied to that letter. 295 On 15 February 2008, a solicitor employed by Mr Simpson sent an email to Mr Solari inquiring, in effect, what was happening with the valuation. That email provoked a response (not, on any view, one given with any sense of urgency) dated 10 March 2008. So far as it is relevant, that response reads: We refer to your email of 15 February 2008 and your request for confirmation of the number of units sold and are instructed to reply as follows: 1. Our client has made a decision that it does not wish to proceed with the sale of any more of the units within the complex. Therefore, no further units have been sold. We understand that this is inconsistent with the interim management agreement that had been entered into between the parties previously and our client now seeks to vary that. 2. Our client acknowledges that in those circumstances, the value of the properties will need to be assessed in order for those values to be taken into account in considering the amount owing by one party to the other in the context of the claims in these proceedings. 3. However, our client had previously obtained a valuation of the properties and our client does not believe that a further joint valuation should be obtained. 296 It is difficult to avoid drawing a comparison between the zeal with which Lesdor hounded Cordon, to procure what it saw as its rights under the deed, with its leisurely approach to performance of what on any view were its own obligations under the IMA. 297 It is fair to say that Les and Paul accepted, in substance, what is in any event apparent from Mr Solari's letter of 10 March 2008: that by March 2008 at the latest, Lesdor had decided unilaterally that it would not perform, or continue to perform, its obligations under the IMA. The parties' submissions 298 Although breach of the IMA is raised as an issue in Cordon's brief written outline (of opening submissions), it is not addressed in that outline. Nor is it addressed in Cordon's closing written outline, or closing oral submissions. It is therefore difficult to know how Cordon puts the case of breach that it raised in its opening outline. 299 For Lesdor, Mr Hale submitted that the IMA was not implemented, first because of the initial misunderstanding as to payment of fees, "and then by mutual abandonment". 300 In any event, Mr Hale submitted, the claim was effectively secondary or defensive, because to the extent that sales under the IMA produced a surplus (over and above the amount required to recoup Lesdor for the amount that it had paid to discharge the NAB facility), that surplus was to be held in a controlled account to abide either the agreement of the parties or the order of the court. Decision 301 Unaided by submissions from the parties alleging the breach, it is very difficult to do more than record the apparent effect of the evidence. It is clear that the IMA was not effectively implemented up until April or May 2007, because of the apparent misunderstanding as to payment of the fee required by the API. Thereafter, so far as the documents disclose (and they appear to be incomplete: for example, because Mr Randall's letter of 31 May 2007, referred to in his letter of 13 August 2007, is not in evidence), the matter appears to have fallen into a hole because neither party was particularly attentive in giving instructions to Mr Randall. Matters drifted along until late November 2007, when Mr Randall raised the question of his duties and asked for payment on account of his fees. Cordon made that payment promptly. Lesdor did not. It is, I think, open to infer that by about that date, Lesdor had decided that it did not want to perform the IMA, and would not do so. 302 On the face of things, that is a breach of contract. There is no evidence to support the proposition that there was "mutual abandonment of the IMA". Lesdor may have decided not to perform its obligations pursuant to the IMA. To the extent that Les or Paul sought to suggest that Lesdor's lack of interest paralleled, or was responsive to, an equivalent lack of interest on Cordon's part, I do not agree. Cordon, so far as the evidence goes, wanted the IMA to be performed. 303 Lesdor appears to accept - at least by inference - that, absent abandonment, it did breach its obligations under the IMA. But assuming that it did, the breach goes nowhere. By the time the IMA was made, the deed on any view had been brought to an end. The residual lots were on any view Lesdor's property (and, even had the deed not been terminated, they would have been its property, but subject to the agreement for sale set out in the deed). If the IMA had been performed after May or August 2007, a list of selling prices would have been developed, together with a marketing and sales strategy. If the parties were able to implement that strategy, at the prices recommended by Mr Randall (and the history of the matter suggests that one or other of them is likely to have been dissatisfied with the outcome of Mr Randall's deliberations), some of the residual lots would have been sold. The proceeds would have been applied in reduction of the amount owed to Lesdor for payment out of the NAB facility. If there were a surplus, it would have been held in a controlled account. 304 Nothing in the IMA gives Cordon any entitlement to the proceeds of sale once Lesdor has been recouped for the amount that it paid out to NAB. Thus, I think, there is much to be said for Mr Hale's submission that the question of breach of the IMA is really relevant only as a matter of defence to Lesdor's cross-claim, including as to the issue of mitigation. 305 In short, even if the IMA had been performed and had yielded a surplus, that surplus would not have been payable to Cordon pursuant to, or by reason of the terms of, the IMA. 306 In the absence of any attempt by Cordon to articulate this aspect of its claim, and the issue that it framed based on that claim, I do not think that I can take the matter further. 307 The consequence is that the sixth issue should be answered by saying that Lesdor did breach the IMA, but that the consequences are to be dealt with in considering, in particular, the question of damages. Seventh issue: restitution, quantum meruit 308 Mr Corsaro's submissions on this point rested on the proposition that "Lesdor has obtained a substantial and unfair benefit by virtue of its breach of the [deed], and further or alternatively, its breach of the [IMA]" (outline closing submissions, para 143). 309 Since I have found that Lesdor did not breach the deed, and that Lesdor's breach of the IMA has no consequences in terms of loss to Cordon (because the IMA did not provide for any surplus proceeds of sale to be paid to Cordon), it follows that this basis of claim has no prospects of success. In those circumstances, I see no point in outlining and reaching a moot decision on the parties' submissions. Those submissions are either in writing (and will remain with the file) or recorded in the transcript. 310 I will however say that, if it were held that some restitutionary claim should succeed, or that Lesdor should make payment on a quantum meruit basis, the quantification of any amount to be paid must take account of the fact that Cordon has been paid, by drawdowns from the NAB loan facility, substantially the whole of the actual cost to it of doing the work. (I say "substantially" because, as noted at [279] above, Habib's evidence showed that the actual cost of the works exceeded the amount of the facility: by an amount of about $87,026.00.) 311 Whilst I accept Habib's evidence that the amounts claimed and drawn do not include any profit margin, nor any amount not attributable to the project, it remains the case that Cordon has claimed (and substantially been paid) for every cent of construction cost to which it was entitled under the deed, leaving aside any balance from the net proceeds of sale of the residual lots. By way of example only, claims were made and paid for time spent by various members of the Ghosn family in and about the project. I point to that to make good the proposition that Cordon has claimed (as it was entitled to do) the actual cost to it of doing the works, not to suggest that the claims for the time spent on the project by members of the Ghosn family was in any way unjustified. 312 In those circumstances, any consideration of payment on a "quantum meruit" basis would be limited to a "profit and risk" allowance. Although, as I have said, I do not propose to decide a point which is moot, I do have difficulty in seeing why the Court should award a profit and risk allowance, on a quantum meruit basis, when the parties' contract expressly provided for the way in which (if at all) Cordon was to be remunerated over and above the actual costs of the works. 313 The seventh issue should be answered by saying that Cordon has no entitlement to be paid on a restitutionary or quantum meruit basis. Eighth issue: Lesdor's damages Nature of the dispute 314 The damages claimed by Lesdor comprised:

[321]

(3) expenses, including bank charges and interest, incurred, on the Macquarie facility, since the NAB facility was paid out. 315 The claim for defective, incomplete and non-conforming work was quantified, with two exceptions, at $364,956.90, in accordance with the referee's report (see the summary at para 400 of the report). The exceptions were the amount required to bring the roof of the new building into accord with the plans and specifications, which the referee quantified at $21,726.00 (see paras 152 to 166 of the report) and an amount of $44,460.00 claimed to bring the walkway and entrance at the western end of the old commercial building into accord with the plans and specifications (which the referee discussed at paras 312 to 318 of the report, concluding at para 318 that there was insufficient material before her to enable her to quantify the claim). The amount claimed (but as I have said not found by the referee) for this item was $44,640.00. 316 In respect of the amount paid out to discharge the NAB facility, the basic amount of the claim was the amount actually paid out: $8,275,765.12. Lesdor accepted that it should give credit for the net proceeds of sale of residual lots, and for the net value (after GST calculated on the basis of the margins scheme and selling expenses) of the residual lots still unsold. It accepted also that it should give credit for rents received from time to time. It claimed interest and other expenses charged to the balance, from time to time, owing under the Macquarie facility. 317 Cordon disputed some of the referee's findings as to quantum. In addition, as to some of the more major items for which a claim was made, Cordon submitted that it was not reasonable for them to be rectified, and that Lesdor was thus not entitled to the cost of rectification. In addition, Cordon asserted that Lesdor had failed to mitigate its loss by selling the residual lots, either pursuant to the IMA or within a reasonable time after it was made. Accordingly, Cordon submitted, Lesdor was not entitled to the full amount of interest and charges claimed by it. 318 Cordon submitted, in addition, that Lesdor was not entitled to damages for: (1) defects in the common property that manifested themselves only after registration of the strata plans (i.e., only after that common property became vested in the relevant owners corporation); and

[322]

(2) non-conforming work in common property that became vested in the relevant owners corporation after registered of the strata plans. 319 It relied on the decision of Giles CJ Comm D in Central Coast Leagues Club Ltd v Gosford City Council (9 June 1998, unreported; BC 9802257). As is clear from the relevant passage of his Honour's reasons, that question is closely related to the "Bellgrove v Eldridge" issue, and I shall discuss the submission in that context. 320 Underlying this outline of the issues in relation to Lesdor's claim for damages are two disputes, one of principle and one of valuation. 321 The dispute as to principle relates to the decisions of the High Court in Bellgrove v Eldridge (1954) 90 CLR 613 and Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272. 322 The issue as to valuation is, as one might expect, what was the value of the units at whatever time is thought to be relevant. Each party relied on the evidence of a valuer. Cordon called Mr Ken Adams. Lesdor called Mr John Lloyd. 323 In addition, the parties relied on a joint report of two accountants, Messrs Vincent Aboud and Constantine Andreoloas. Those gentlemen earned the Court's substantial gratitude by producing an agreed report which set out the net cash flows that would have been derived from sales of the residual lots at various specified prices after taking into account commission, selling costs and GST calculated on the basis that the margins scheme applied. First question: the cost of rectifying defective, incomplete and non-conforming work 324 For reasons that I give below in discussing the tenth issue, the referee's report is to be adopted. It follows, in principle, that I accept Lesdor's submission that the costs of rectification are as found by her (excepting the two matters that she did not decide) in the sum of $364,956.90. 325 As to the cost of bringing the roof into accordance with the plans and specifications, the underlying issue was whether Paul's direction to Joe to change the works by inserting a skylight had the effect of absolving Cordon from the obligation to cover the bitumenous membrane with gravel. I do not see how that could be so. It was common ground that the works to be done were subject to council approval. The Council refused consent. Accordingly, the skylight was constructed over the space where the proposed staircase was to exit. To the extent that the skylight was constructed, there was of course no need either for a bitumenous membrane or for gravel over it. But to the extent that the skylight was not constructed, the original scope of works remained in place. 326 The referee found that if the work were required to be done (i.e., if Cordon had not been absolved from doing it because of the variation that I have summarised), the cost of doing it, as agreed by the experts, was $21,726.00. In principle, that is the amount that should be allowed for this aspect of the claim. 327 Lesdor does not submit that the claim for the walkway and entrance at the western end of the old commercial building can be resolved, and submits that if it is found entitled in principle, and the parties cannot agree, that question should be returned to the referee. 328 In principle, then, the amount of the claim for defective and incomplete works is $386,682.90, together with whatever might be found to be the cost of making good (or bringing into accord with the plans and specifications) the western end of the old commercial building.

[323]

Second question: mitigation 329 Lesdor has not really sought to justify its decision to hold, rather than sell, the residual lots, except by vague assertions, on the part of Les in particular, that it did not wish to crystallise a loss. However, on the view that I take of the valuation evidence, the value of the residual lots was at all times sufficient to cover the balance owing to Macquarie in respect of the discharge of the NAB facility. If Lesdor had acted reasonably promptly during 2007 to sell the residual lots, it would have received, net of selling costs and GST, more than enough to pay out the balance that had been borrowed from Macquarie to pay out the NAB facility. 330 It follows that Lesdor is not entitled to interest to date, and continuing, in respect of the Macquarie facility. 331 I accept that it would have taken some time to sell the residual lots. In the absence of any indication from the parties, either by way of evidence or by way of submissions, as to how long should be allowed for this process to occur, I think that the appropriate, although arbitrary, course is to allow a year for that process. On that basis, the net proceeds of sale of the residual lots that were actually sold before or in the year following 8 August 2006 should be brought to account as they were received, and the notional net proceeds of sale of the remaining residual lots should be brought to account as at 8 August 2007. In a sense, this is artificial, and in favour of Lesdor, because it ignores the likely reality that if Lesdor had applied itself with reasonable diligence to the task of selling the residual lots (and it must be remembered that Paul was a licensed real estate agent), the net proceeds would have been received over time. That may however be regarded as affording some protection to Lesdor against the possibility that sales might have taken longer than 12 months (from the date of termination) to be effected and settled. 332 It appears that the actual net principal balance of the Macquarie account, leaving aside interest, is $5,233,868.09. That balance allows for costs and commissions, GST on the sales effected and capital gains tax on those sales. It is unclear why capital gains tax should be allowed in circumstances where, one would think, the units should have been regarded as trading stock in the hands of Lesdor. On the ruling assumption - that Lesdor was acting to mitigate its loss by selling the residual lots - they would be regarded as stock held by Lesdor for the purpose of sale. On the face of things, Lesdor should be regarded as carrying on a business activity which involves dealing in land. If all that is correct then, as Mr Corsaro submitted, the matter would appear to fall within the relevant ruling issued by the Australian Taxation Office: TD92/124A. 333 However, I express no concluded view on this. The applicability of capital gains tax was one of the matters on which Messrs Aboud and Andreolas did not agree. For the reasons that follow, I am prepared to assume that it is correct to allow for it, notwithstanding what I have just said. 334 As I have noted, there was a dispute between Mr Adams (called by Cordon) and Mr Lloyd (called by Lesdor) as to the value of the residual lots. Were it necessary to do so, I would prefer, and accept, Mr Adams's evidence. However, the question of mitigation can be dealt with by accepting, as Mr Hale submitted I should, Mr Lloyd's valuation. 335 Mr Lloyd's valuation of the residual lots, as at 27 March 2007, totalled $6,785,000.00. As Mr Hale submitted, if one were looking at the position that the units would be sold at those figures, it would be necessary to deduct GST and sales commission; and as well, he submitted, capital gains tax. Those amounts (including, for the sake of argument, capital gains tax) total $602,453.00 (see para 150 of the closing written submissions for Lesdor, based on the joint report of Messrs Aboud and Andreoloas). That leaves a net value, or as Mr Hale put it "potential sale income", of $6,182,457.00. 336 On that basis, it is apparent that the net realisable value of the residual lots, based on a valuation as at 27 March 2007 - i.e., during the notional selling year with which I am concerned - was more than enough to pay out the principal sum owed to Macquarie in respect of the amount borrowed to discharge the NAB facility. 337 The bank statements for the Macquarie account are in evidence. They show that, for the period from 31 August 2006 (the month of drawdown) until 31 August 2007, some $613,449.77 of interest was charged. If that is added to the net balance of loan as indicated above ($5,232,868.09), the total is $5,847,317.86. (I accept of course, that if the units had been sold over the year that I have somewhat arbitrarily allowed, and the net proceeds credited over that year, the actual amount of interest would have been less. However, this can be put to one side.) 338 Those figures, which I repeat are based on the evidence called for Lesdor, demonstrate that if Lesdor had sold the residual lots promptly after it terminated the deed, the proceeds of sale would have been more than sufficient to recoup it for the amount borrowed in order to discharge the NAB facility, and for interest on the amount borrowed until the principal was repaid in full. 339 Indeed, those figures show that, in all likelihood, there would have been a substantial surplus, of the order of at least $330,000.00 (subject to the question regarding capital gains tax, and to the point as to interest made parenthetically at [337] above), after Lesdor had been recouped. That surplus would have been available to apply to whatever damages Lesdor suffered by reason of Cordon's defective, incomplete and inconsistent work. A non-issue 340 The funds to discharge the NAB facility should be regarded as having been provided by Lesdor, Marlborough and Semken Bros, because those funds came from the Macquarie facility advanced to those three companies. In those circumstances, it might be thought that any claim for repayment should have been brought by those three companies. Mr Hale submitted that, since they were jointly and severally liable under the terms of the Macquarie facility, any one of them - in this case, Lesdor - had standing to sue for and recover the whole amount paid in discharge of the NAB loan facility. Mr Corsaro's submissions did not touch on this point. Since it was not raised as an issue (Mr Hale's submissions were advanced in answer to a question that I had asked, not in respect of any identified or discrete issue), I do not propose to deal with it. The "Bellgrove v Eldridge" issue 341 The decision in Bellgrove is authority for the following propositions:

[324]

(1) the measure of damages recoverable by a building owner for breach of a building contract is the difference between the contract price of the work contracted for and the cost of making the work conform to the contract, together with consequential loss, and subject to the qualification next stated; (2) that principle is subject to the qualification that the work undertaken to produce conformity must be necessary to do that, and, in the circumstances, a reasonable course to adopt; and (3) it is a question of fact as to what, if any, remedial work is both necessary and reasonable in any particular case. 342 The decision in Bellgrove was considered by the High Court in Tabcorp. Of present relevance, the Court explained the concept of necessity ("necessary to produce conformity") at 289-290[19]. Their Honours said that the word "necessary" meant "apt to bring about conformity": between whatever had been done and the plans and specifications that had not been conformed with. In other words, the test of necessity is directed at bringing the work into compliance with the plans and specifications. The test of reasonableness, on the other hand, is directed to the decision to undertake works to achieve compliance; and as the Court had pointed out at 288[17], "the test of "unreasonableness" is only to be satisfied by fairly exceptional circumstances". 343 Damages may be recovered on the Bellgrove basis even where the building has been sold without the rectification having been performed: De Cesare v Deluxe Motors Pty Ltd (1996) 67 SASR 28. The rationale of that decision is, I think, that the sale price of the building was depressed because of the unrectified defective work. However, Lesdor did not claim damages on the basis of diminution in value. 344 In Central Coast Leagues Club, Giles CJ Comm D had occasion to consider the application of Bellgrove in circumstances where it was clear that rectification work would not be carried out. His Honour said (at BC 216) that if rectification work will never be undertaken, there is no loss. Building on that, his Honour said (at BC 216-217) that if work will never be undertaken, it is open "to conclude that it is not a reasonable course to adopt" to do that work. His Honour referred to Alucraft Pty Ltd (In Liquidation) v Grocon Ltd (No.2) (1996) 2 VR 385, where it was held that the contractor did not intend to rectify the works and would not be called upon to do so; in those circumstances, the contractor was held not entitled to the cost of rectification of defective work done by the subcontractor. 345 The question arose again in Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253. In that case, Giles JA (with whom McColl and Campbell JJA agreed) considered the relevant principles from [41]. His Honour stated at [61] that if supervening events meant that rectification work could not be carried out, it could not be found that rectification was reasonable in order to achieve the contractual objective, because achievement of that objective was no longer relevant. At [62], his Honour qualified what he had said in Central Coast Leagues Club by saying: … it is necessary to ask why the rectification work would never be carried out. In these cases the rectification work could not be carried out because of supervening events, and established that the plaintiff had not been deprived of the benefit of performance of the contract and thus had not suffered a compensable loss. In other cases, depending on their facts, whether rectification work would be carried out could come under consideration, but not because an intention not to carry out the work itself precluded the award of damages. 346 In other words, as I understand it, if the work cannot be carried out then the Bellgrove principle is inapplicable. If there is no intention to carry out that work, what is relevant is not just the intention, but the reason why it has been formed: for example, because the building has been sold, and the vendor thereafter has no intention to carry out the works because it cannot carry out the works. 347 In this case, some of the defective work, and much of the incomplete or non-conforming work, is in common property. That common property is no longer owned by Lesdor. It is owned by the relevant owners corporation. No owners corporation is a party to these proceedings. In those circumstances, it is open to conclude, and I do conclude, that the work of rectification will never be undertaken: at least, by Lesdor. Certainly, Lesdor called no evidence of any resolution by the members, or executive committee, of any owners corporation to show that rectification work was in contemplation (let alone that Lesdor proposed to fund that work). Nor did Lesdor prove any demand made on it to perform, or fund the performance of, rectification work. 348 Further, it was always the case that Lesdor was going to be divested of the common property on registration of the strata plans. Thus, if the matter is looked at in terms of Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145, the cost of rectification of defects in common property which were unrectified at the time the strata plans were registered would not be either the natural result of the breach (arising "according to the usual order of things" from the breach) or something that "may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it". That is because the parties must have understood, had they turned their minds to the point, that on registration of the strata plans Lesdor would be divested of the common property, and of both the right and the ability to repair and defects. Nor, where that occurred not as the result of sale but as the result of a statutory divestment that the parties always contemplated would occur, is there any basis for claiming damages on a "diminution in value" basis. 349 Mr Hale submitted that it was irrelevant that Lesdor had been divested of common property on registration of the strata plans. First, he said, Lesdor was entitled to insist on performance of the deed, and the divestment did not of itself prevent it from doing so. Second, he submitted, the existence of the owners corporations was relevant only to the extent that they themselves commence proceedings against Cordon. Third, he submitted, Lesdor had "an exposure" to the owners corporations and to lot owners, by reason of ss 3A and 18D of the Home Building Act 1989 (NSW). 350 The first and second points are answered by the reasons of Giles JA in Westpoint. The question is not whether Lesdor can pursue a claim for damages, but what is the proper measure of damages for whatever breaches it proves? Where the damages claimed are the cost of rectification of defects, then the question of reasonableness requires consideration. As Giles JA pointed out in Westpoint, if supervening events mean that the innocent party to the contract cannot carry out rectification work, then it cannot be found that the rectification work is reasonable to achieve the contractual objective. That objective ceases to be relevant once supervening events have the effect of preventing rectification. 351 As to the third point, it may be accepted that Lesdor has "an exposure" to the owners corporations and to lot owners in respect of the residential strata development. There is no evidence of any complaint, or of any threat. In any event, Lesdor has not sought damages on the basis that it is entitled to be indemnified against any such claim. If that is the approach on which damages are to be assessed, then it would be necessary to investigate the likelihood that a claim would be made, and of the amount that would be awarded. There is no basis in the evidence for assessing those matters. If damages are sought on the basis of an indemnity against claims, it is necessary to show in some way the amount for which indemnity is sought. 352 Accordingly, I conclude, both by application of the "Bellgrove v Eldridge" principle and on more general grounds, that Lesdor is not entitled to recover damages for so many of the defects as are within common property. As I understand the evidence, that includes a number of minor defects of about $31,000.00 in value, as found by the referee; the five major defects that I discussed at some length earlier in these reasons; and another major defect (so characterised by the referee, because of its amount) relating to some planter boxes. Conclusion 353 Lesdor is entitled to damages for defective, incomplete or inconsistent workmanship, in the applicable amounts found by the referee, but excluding any amount that is referable to common property (or, more accurately, unrectified defects in common property). 354 To put it another way, Lesdor is only entitled to recover damages for defective, incomplete or inconsistent work to the extent that such work is relevant to lots that it owns. 355 It may be possible, with great labour, to struggle through the report and identify the extent of Lesdor's entitlement in accordance with these reasons. However, the safer course is to leave it to the parties to resolve this matter, and to give liberty to apply in the event that they cannot do so. If they cannot do so, I would envisage returning the matter to the referee. Ninth issue: Cordon's damages 356 On my findings, Lesdor did not breach its contract with Cordon and, accordingly, Cordon has no entitlement to damages. Tenth issue: adoption of the report The relevant principles 357 I set out the principles relevant to adoption of referee's reports, as I understood them, in Chocolate Factory Apartments v Westpoint Finance [2005] NSWSC 784 at [7]. That decision was taken on appeal. It appears from the judgment of Giles JA (with whom McColl and Campbell JJA agreed) ([2007] NSWCA 253 at [9]) that I did not misdirect myself in so stating the principles. Accordingly, I repeat what I said: 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. The parties' submissions 358 Mr Corsaro submitted that the referee misdirected herself in some respects, and that in those respects her report should not be adopted. Otherwise, he submitted, the report should be adopted. 359 Mr Hale submitted that the report should be adopted without qualification.

[326]

Whether the Building Works were completed except for minor omissions and/or defects which did not prevent the works from being reasonably fit for occupation and/or use by an owner, and the site cleared of all rubbish and building materials, as at 23 February 2006 and 31 July 2006. 364 Mr Corsaro submitted that the referee had not considered whether the question of whether the defects were minor in nature was informed by the extent to which they rendered the works unfit for occupation or use. He submitted that she erred in considering those two aspects of the question disjunctively rather than conjunctively. 365 I have great difficulty in understanding this complaint. If, as the referee concluded, the defects did prevent the works from being reasonably fit for occupation or use, then it did not matter whether, otherwise, they were "minor". She concluded, after a detailed analysis of the evidence (at paras 407 to 420 of the report) that, as at 23 February 2006, the defects, whether considered individually or in combination, that she had found existed were not minor and would prevent the works from being reasonably fit for occupation or use. On either basis, Cordon did not achieve what it contended was the appropriate standard for "practical completion". Since it was sufficient, for this to follow, that a finding be made that the effect of the defects was to prevent the works from being reasonably fit for occupation or use, it is unnecessary to go further into this aspect of the referee's reasoning. 366 I do not think that the referee's reasoning on this question betrays any error of principle. But even if it did, there is a sufficient basis for the conclusion that she did reach - being that which I have just emphasised - to make any further investigation pointless. 367 Mr Corsaro submitted that the referee had misdirected herself in the construction of the specifications in so far as they dealt with the requirement for structural steel to be hot dip galvanised. For the reasons that I have given at [141] to [143] in dealing with this defect, I do not think that the referee erred. 368 Mr Corsaro submitted that the referee had erred in her approach to defects in the common property. I am not sure that this is of any significance. The referee did not conclude that any particular amount was owing by Cordon to Lesdor for defective, incomplete or inconsistent work. She merely reported on the extent of defective, incomplete or inconsistent work at relevant times and on the cost of rectification or making good. It is up to the Court to make what it will of, and take what it wishes from, those findings. Adoption of the report will not of itself dictate that everything in it is added to the damages bill. 369 Mr Corsaro may be correct in submitting that the findings are irrelevant, but that does not matter because, as I have indicated, adoption of the report does not compel the Court to award irrelevant matters as damages. 370 As I have indicated, the report ought be adopted. What follows from that is a matter yet to be determined. Conclusions 371 In summary, I have concluded that: (1) Cordon breached the deed, and repudiated its obligations thereunder, both in relation to completion and in relation to the refinancing of the NAB facility; (2) Lesdor was entitled to, and did, accept that repudiation as terminating the deed and discharging it from further performance; (3) Lesdor did not, thereby, itself repudiate the deed; nor did it breach the deed in the way that it dealt with NAB; (4) Lesdor's exercise of its right to terminate was not vitiated by failure to comply with any applicable duty of good faith or reasonableness; (5) Lesdor breached the IMA, but this results in no loss to Cordon; (6) Cordon has no entitlement to be paid on a restitutionary or quantum meruit basis; (7) Lesdor is entitled to damages, but it should have mitigated its loss by selling the residual lots within 12 months after the date of termination of the deed; (8) had Lesdor acted properly to mitigate its loss, there would have been sufficient net proceeds of sale to discharge entirely the amount borrowed from Macquarie to pay out the NAB facility, and a probable surplus of at least $330,000.00; (9) Cordon has no entitlement as to damages; and (10) the referee's report should be adopted without qualification. 372 I have indicated, along the way, items of damage that are and are not recoverable. At present, I do not know whether those that are recoverable (on the basis of my conclusions) will exceed $330,000.00 (more accurately, whatever the notional surplus should be, taking into account and resolving the issue as to capital gains tax flagged but not resolved at [332] and [333] above). Accordingly, it will be necessary for the parties to seek to quantify, in monetary terms, the effect of my reasons and conclusions. I think that the best way to do that is for the parties to submit a draft of the orders that should be made, and written submissions in support. 373 That leaves the question of costs. If the outcome of the process that I have just described is that Lesdor's damages are less than the notional credit arising from the notional sale of the residual lots, then it would seem that the appropriate order is that the claim and cross-claim should be dismissed with costs to follow the event in each case, and that costs should be set off. However, that is merely a provisional view; there may be other factors that impinge on the costs decision, and it may not be until the monetary effect of these reasons is quantified that proper consideration can be given to the question of costs. 374 In those circumstances, I make the following orders:

Cordon v Lesdor

At a glance

Court

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Before

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Judgment (329 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (15)

Cited By (6)