D'Agostino v Goulburn Murray Rural Water Authority [2003] VSC 497

"... as a result of this agreement no reduction in the right to drain to Goulburn-Murray Water drainage will result."

The trial proceeded on the basis that only liability would be determined at this stage. The issue for determination was whether, in the circumstances set out below, the defendant had breached clause 6 of the agreement.

2 Rocky and Richard D'Agostino are brothers. They are the joint registered proprietors of the two lots constituting a property on the north-eastern corner of the intersection of the Midland Highway and Doyles Road, East Shepparton. The D'Agostino family have occupied that property since about 1959, when the parents established a pear and apricot orchard on it. In 1975 the plaintiffs purchased the property from their father and since 1976 they have conducted their business "D'Agostino Engineering" on the property. A workshop and warehouse for the business have been built on what is now Lot 2. From about 1990 to 1994 Mr Rocky D'Agostino was a Shire of Shepparton councillor. He was also a former member of a water services committee advising GMW.

3 In 1992, for reasons associated with the connection of sewerage to the property, the plaintiffs applied to the Shire Council for a four lot subdivision of the property. That subdivision did not proceed. It was replaced in 1993 by an application for a two lot subdivision. This application was referred by the Shire Council to a predecessor of GMW, the Rural Water Corporation, which advised that a formal application under s.231 of the Water Act 1989 needed to be made to obtain its approval. By a letter dated 3 October 1994, GMW wrote to the Shire of Shepparton advising that it had no objection to Council certifying the plan of subdivision subject to the statement of compliance being deleted from the plan and Council not issuing that statement until advised by GMW that the subdivision had been approved. The apportionment of the existing water right of 13 megalitres between the two lots and the cost of providing an access pipe to Lot 1 from the irrigation channel on Lot 2 were yet to be agreed.

4 Lot 1 was the smaller of the two lots and measured approximately 1.22 hectares. It was situated at the south-western corner of the property, that is, right on the intersection itself. Irrigation channel 1/2/12/12 ran along the north and western boundaries of Lot 2 before crossing under Doyles Road just north of the northern boundary of Lot 1. Both lots had access to drain 1/3/2 from their southern boundaries which fronted the Midland Highway.

5 In 1993, the plaintiffs also applied for a planning permit to develop Lot 1 as a roadhouse, service station, public toilet and bus terminal in three stages. On 8 February 1994 the Greater Shepparton City Council issued a planning permit allowing the development of a service station on Lot 1 under the Shepparton Shire Planning Scheme. The planning permit application was not required to be, and was not, referred to GMW.

6 In early 1996 discussions took place between Mr Phillip Hoare, GMW's Project Team Leader for the Shepparton and Murray Valley irrigation areas, and Mr Rocky D'Agostino regarding proposed extensions to and widenings of irrigation channel 1/2/12/12 and drain 1/3/2.

7 On 23 February 1998 the Greater Shepparton City Council reissued a planning permit for the service station development. Again, it would appear that the Council did not refer the matter to GMW.

8 Mr Rocky D'Agostino gave evidence that sometime after June 1998 during a discussion with Mr Jeff Parry of GMW about the installation of an irrigation pipe to Lot 1 from the irrigation channel on Lot 2, he was asked whether he and his brother would be prepared to give up their water right to Lot 1. Mr D'Agostino said that either in the same conversation with Mr Parry, or a subsequent one with Mr Parry and Mr Glenn Dunstone, a GMW engineer, at the D'Agostino property, he told Mr Parry that if he and his brother were to lose their drainage right from the property then they would not be prepared to give up their water right. Mr D'Agostino had heard of a case where supposedly someone had relinquished their water right and consequently lost their drainage right. He was also concerned that, because GMW was a body that only served irrigation areas and its drains were designed to take away the excess run off of water as a result of irrigation, once he and his brother gave up their water right they might also lose their drainage right. He said that Mr Parry told him that they would not lose the drainage right if they gave up their water right. The possibility of a small amount of compensation from GMW to cover some of the costs already paid by the plaintiffs to GMW was also discussed.

9 In 1999 Mr Parry was employed by GMW as its Customer Services Co-ordinator for the Shepparton area. He gave evidence that in early March 1999 he spoke with Mr Rocky D'Agostino regarding the installation of a pipe outlet to Lot 1. According to Mr Parry's internal memorandum dated 2 March 1999 concerning that conversation, the installation of the pipe was "not in line with the preferred option of rationalizing channel 2/2/12/12 [sic]." However, his memorandum continued that he had spoken with Mr D'Agostino and he was:

"prepared to forego supply to the subdivided block provided G-MW compensate him for the extra cost (and inconvenience) he incurred in having the water right subdivided (cost was $558)."

Mr Parry advised that he believed some compensation could be justified as it allowed GMW "to abandon approximately 100 metres" of East Goulburn channel 1/2/12/12.

10 Mr Parry said that in May 1999 he and Mr Dunstone had telephone discussions with Mr R. D'Agostino. By a letter dated 31 May 1999 GMW wrote to the plaintiffs purporting to confirm "the phone discussions held between yourself, Glenn Dunstone and Jeff Parry ... regarding the proposed rationalisation of the East Goulburn 1/2/12/12 Channel". The letter recorded that it was proposed "with regards to your planning permit and subdivision of land" that "no water right or domestic or stock water is to be allocated to Lot 1". As the result would be that "the proposed pipe outlet for Lot 1 would not be required", GMW indicated its willingness to refund $1,682 previously paid to it in respect of "the subdivision and associated works", to "complete and return statement of compliance for planning permit" and to "complete the subdivision process".

11 Mr Rocky D'Agostino said that after he received the letter he telephoned Mr Dunstone and told him that the letter did not record the fact that the drainage from the property was not to be affected by the relinquishment of the water right. Subsequently, on 10 June 1999, Mr Dunstone and Mr Parry visited the plaintiffs at their business premises and Mr Parry assured Mr D'Agostino that if they gave up the water right this would not affect their right to drain into GMW's drain. Mr Parry gave evidence that Mr D'Agostino sought assurance that even though Lot 1 would not have access to irrigation water it would still have drainage access to the GMW drain. In cross-examination, Mr Parry said the negotiations with Mr D'Agostino were about retaining the right of access to GMW drainage:

"His sole concern was that if he got rid of the water right that we'd also take away his access to drainage so that the words I recall using was about access to Goulburn Murray Water drainage."

Mr Parry said that he and Mr Dunstone advised Mr D'Agostino that both lots would continue to have drainage access at the current rural rate to the GMW drain 1/3/2. Mr Dunstone gave similar evidence. He said that Mr D'Agostino did not ask, and Mr Dunstone did not tell him, what the current rural rate was.

12 Mr D'Agostino said that, following this discussion about continued drainage access, as Mr Parry was leaving he said words to the effect that GMW could now get on with removing the irrigation channel and "you boys can get on with developing the site into a service station development". Mr Parry said that he did not recall saying that, but did not deny it.

13 On the following day, 11 June 1999, Mr Dunstone sent by facsimile a redrafted letter and a draft Agreement for Removal of Water Right and Stock and Domestic Supply for Proposed Subdivision on East Goulburn 1/2/12/12 Channel ("the Agreement"). The amount which GMW was prepared to pay had been increased by $1,000 for "compensation for the works undertaken to date and for the loss of right to have irrigation and domestic and stock supply to Lot 1". The following paragraph had also been added to the letter:

"Both Lot 1 and Lot 2 will continue to have drainage access at the current rural rate to the Authority's Shepparton Drain 1/3/2 as previously discussed."

14 Mr D'Agostino said in his witness statement that the meaning of the words "current rural rate" had not been explained to him. He said that he telephoned Mr Dunstone and told him words to the effect that he was concerned to ensure that the understanding between them, namely that if they gave up the water right to Lot 1 "then nothing else would be affected and GMW would continue to drain from Lot 1 and Lot 2 as it had always done" and that Lot 2 would continue to have the same water right, was accurately reflected in whatever documents they were asked to sign. He said that he told Mr Dunstone that the words "current rural rate" suggested something different to that understanding and therefore he and his brother would not be prepared to give up the water right to Lot 1. In cross-examination, Mr D'Agostino said that he was not interested in run off rates because he knew from his prior experience that they differed according to the condition of the land. Water ran off bare land quicker than it did through long grass. He said that he therefore asked that "what was there was what we got". He explained in evidence that he and his brother did not have to give up their water right. The allocation between the two lots had already been approved and paid for. He continued:

"That was done, and were were just ensuring that we would not be done by in the sense that we would lose our drainage rights without an irrigation right."

15 Subsequently, Mr Dunstone and Mr Hoare went to the property to discuss the water right. Mr Richard D'Agostino was present at the meeting, intermittently. By this time, Mr Rocky D'Agostino said, he was anxious to have the agreement completed because the time for GMW to approve the subdivision was running out. He said that he told Mr Hoare this. Mr D'Agostino said that Mr Hoare told him that the basis for the discussions was that the D'Agostinos would continue to have the same access to GMW drainage as the property had always had, even after the water right was given up. Mr D'Agostino told Mr Hoare that the words "current rural rate" suggested to him that their right to drain from Lot 1 and Lot 2 would be changed. He said that Mr Hoare replied that GMW had no intention of altering the drainage from Lot 1 and Lot 2 "in consequence of the water right being given up". If the D'Agostinos gave up the water right their drainage would not be affected. Mr Hoare then wrote on the faxed copy of the draft Agreement another commitment by GMW under the Agreement. The added words read as follows:

"6. Undertake that as a result of this agreement no reduction in the right to drain to GMW drainage will result."

Mr D'Agostino said that he told Mr Hoare that if this meant that they would continue to have the same ability to drain as they always had, then they would agree to give up the water right He said that he explained to Mr Hoare that it was his understanding that the right to drain to GMW drainage was a right which effectively permitted the drainage of all water from the property into the drain via a drainage inlet cut, as had been the case for over 40 years. The following is a passage from his cross-examination:

"Your concern was that you wanted an assurance that you would have this right to continue to drain?---We wanted what was there and prevailing for over 40 years, that's what we wanted. We wanted to maintain what we had. We didn't want any effect on the drainage there or the other side of the property, being Lot 2. You wanted to be able to continue to drain your rural property to the Goulbourn Murray Water drain?--Yes."

Mr D'Agostino was later asked whether he agreed with Mr Hoare's wording of clause 6. He answered:

"Well, I agreed because he explained to me that that would mean that the water right that was existing, that was there would always remain there, the drainage rights should I say."

According to Mr D'Agostino, neither Mr Hoare nor Mr Dunstone told him that the right to drain was limited to 1.2 litres per second per hectare. Mr D'Agostino said that they also had a discussion about the impact on the agreement of an urban drainage scheme. Mr Hoare assured him that the agreement would be binding on either side for many generations.

16 On or about 15 June 1999 Mr D'Agostino received from Mr Dunstone a revised draft of the Agreement with clause 6 included. In his facsimile Mr Dunstone said that as could be seen from the revised draft:

"a drainage service will be provided to Lot 1 if there is no water right or stock and domestic water allocated to the property after the subdivision."

17 Mr D'Agostino said that after further discussions with Mr Dunstone a clause 7 was also inserted in the Agreement, which therefore read:

"The Authority will: ... 7. Not unreasonably withhold approval of the proposed subdivision, if the rationalisation of the north south section of the East Goulburn 1/2/12/12 channel adjacent to Doyles Road, is not approved by 30 July 1999."

This clause was apparently thought necessary because at that stage GMW could not be sure that the channel would definitely be removed as it was still negotiating with another landowner.

18 Mr D'Agostino said that in one of his conversations with Mr Parry he told him that he was concerned not to affect the drainage because that would "impact upon developing Lot 1 into a service station development". Mr D'Agostino insisted that at some stage he discussed with the GMW representatives, including both Mr Parry and Mr Hoare, the proposed development of the service station on Lot 1. However, he agreed that he did not raise with them what the drainage requirements would be for the service station. He said that was not a concern at that time:

"We were discussing the relinquishing of the water right. That's what we were discussing."

19 In his witness statement Mr Dunstone said that at no time during his discussion with Mr D'Agostino was he aware that Mr D'Agostino had a planning permit to develop Lot 1 for a service station. Mr Dunstone said that it was never mentioned by Mr D'Agostino. Mr Dunstone said in evidence in chief that Mr D'Agostino was "mainly concerned that he'd still be able to drain both lots of the subdivision to that drain". In cross-examination he said that he could not recall any comment about the development of a service station on the site. He did not think the topic was discussed.

20 Mr Parry gave evidence that he could not recall any discussion on the use of the land, although in cross-examination, he agreed that at the time he knew that the D'Agostinos were subdividing the land. He continued:

"I was aware that there was a service station development there. Now I don't know if my recollection of that is prior to us negotiating or post us negotiating because I do recall some article being in the newspaper about a service station development on the site."

He agreed that the article he had read was in the Shepparton News and that it could have been about Mr D'Agostino applying for a planning permit at the time when he was a councillor. At the very end of the hearing, the plaintiffs tendered an extract from the Shepparton News dated 27 May 1993, which referred to a plan by Shepparton Shire councillor, Rocky D'Agostino, and his brother Richard to build a 24-hour service station roadhouse incorporating a store, restaurant, bus terminal and public toilets on the north-eastern corner of the intersection of the Midland Highway and Doyles Road. The newspaper story also said that the D'Agostino brothers' conceptual plan had been approved but that they also had to apply for a building permit before work could begin. In re-examination Mr Parry said that at the time of his discussions with Mr D'Agostino he was not aware whether any planning permit had been issued.

21 In his witness statement, Mr Hoare denied that, at the time he negotiated with Mr D'Agostino, he was aware that the plaintiffs had a planning permit to develop Lot 1 as a service station. He said that the plaintiffs made no mention of this in their discussions and gave no indication as to how they proposed to use the subdivided land. He maintained this denial throughout his vigorous cross-examination.

22 Mr Dunstone said that he gave a copy of the final Agreement to Mr Rocky D'Agostino on 22 June 1999. On the other hand, Mr Parry said that he took a copy of the final Agreement to the plaintiffs' property on 30 July 1999, where they both signed it in his presence and he witnessed the signatures. Mr D'Agostino did not resolve this conflict. He simply said that after he and his brother received a copy they signed it and returned it to GMW, leaving it undated. After a follow up call from Mr Rocky D'Agostino, by a letter dated 6 October 1999, the D'Agostinos received the Agreement signed on behalf of GMW by Mr Ross Plunkett and dated 30 July 1999 and a cheque from GMW for $2,682.

23 Mr Hoare gave evidence that in the discussion preceding the addition of clause 6 it was:

"explained that we couldn't give any concrete guarantee into the future with changes of policy and things like that. But we could confirm that as a result of this agreement to give up the water right, that there'd be no change in their right to drain."

He said that this was what he explained to his superior, Mr Plunkett, who signed the Agreement on behalf of GMW. He continued:

"that's the words we'd agreed to with Rocky that their - as a result of rationalising the channel and giving up that water right, there'd be no change as a result of that. In their right."

Mr Hoare was criticised in cross-examination on the ground that this version of the discussions was not contained in his witness statement. He denied that he had just made it up.

24 Mr Richard D'Agostino filed a witness statement in which he said that he corroborated the witness statement of his brother insofar as it referred to actions taken or words spoken by him. In cross-examination, he was asked about the discussions which led to the deletion of the reference to "the current rural rate" and the addition of clause 6. He said that they occurred:

"in the context that we wanted to ensure that we still had the access to the rural drain - to the - access to the Authority's drain."

In re-examination he was asked a similar question. He answered:

"The discussions as they went in regards to the rural rate, were - was of concern to us because there was no quantity - I guess reference, made to them. No-one explained what they meant, and we - right or wrong through the discussions, emphasised that what we had on the property as drainage from that particular outlet, was what we wanted in the future. There was - that was our biggest concern. Why they came about was that we were made aware, and I'm not to sure how - where it actually came from, but were made aware that there was a potential that if there wasn't any water right to the property, that drainage right could - or would be relinquished as well, and that was our prime objective as to maintain the drainage for that property, and what was said at the discussions was that we wanted what was currently - what had been there for the - since the ownership of the property by ourselves. That's what was discussed at those particular meetings. It was strongly emphasised by ourselves."

25 In about August or September 1999 GMW advised the Greater Shepparton City Council that it could issue a statement of compliance for the plaintiffs' two lot subdivision. This was done by the Council on 15 October 1999.

26 However, finalisation of the drainage requirements for the service station remained outstanding. One of the conditions of the planning permit issued by the Greater Shepparton City Council was that drainage be provided to the development and site in accordance with plans and specifications approved by the Responsible Authority. Approval has apparently been withheld by the Council pending agreement being reached between GMW and the D'Agostinos over the discharge rate from Lot 1. The plaintiffs' complaint is that, notwithstanding clause 6 of the agreement, GMW has since late 2001 withheld its approval. It has stated that it was only prepared to allow the development to discharge into drain 1/3/2 via the existing infrastructure without retardation for an interim period of time up to 30 June 2004 and that if an urban drainage scheme was not implemented by the Council by that date, the plaintiffs would be required to provide on-site retardation and limit discharge from Lot 1 to a rate of 1.2 litres per second per hectare.

27 GMW says that for a number of years prior to July 1999 it adopted a policy of requiring all of its drains to meet a particular standard which was that they could over a period of five days drain a 1 in 10 year rainfall event where the rainfall lasts for 24 hours, that is 75 millimetres of rainfall in 24 hours. This equated to an allowable discharge rate into the drain of 1.2 litres per second per hectare, using GMW's standard assumptions that one-third of the land has just been irrigated, one-third of the land is about to be irrigated and one-third of the land is halfway through the irrigation cycle.

28 The plaintiffs maintain that the 1 in 10 year discharge rate for Lot 1 was 23 litres per second and that this was the estimated water run off rate as at 30 July 1999. Accordingly, the plaintiffs' proposed plans would include a retardation basin which would limit the discharge of water from Lot 1 to 23 litres per second or about 19 litres per second per hectare for the 1.22 hectare lot.

29 Mr Rocky D'Agostino asserted in his witness statement that if he had been told that the right to drain from Lot 1 was 1.2 litres per second per hectare, he and his brother would have disputed this and would not have given up the water right to Lot 1 until either a higher drainage discharge rate was agreed or at all.

30 Mr Hoare agreed in cross-examination that in the middle of 1999, GMW did not require an owner of a rural property in Shepparton East which had a water right and which drained into a GMW drain to install any sort of retardation basin, so long as the property was being used for rural purposes. It was different if there was a proposed development involving a use other than rural. The relevant consideration, he explained, was whether the development changed the run off from the property.

31 Mr D'Agostino stated that during the 40 years that the property had been owned by his family, he had observed that water had always drained rapidly and efficiently from the land He said that the property had not flooded. As long as he could remember the cross-over pipe from the property, and after it was subdivided from Lot 1, was via a 375 millimetre pipe, which he understood from Mr Seamons had a drainage capacity of approximately 131 litres per second. Mr D'Agostino's evidence about the property never flooding over the last 40 years was challenged by the defendant. An internal report from one of GMW's predecessors dated 27 June 1963 noted as follows:

"1. Mr C D'Agostino's allotment is situated in a natural basin and all the run off from surrounding properties drains into this area. 2. It is well known as one of the wettest and most easily flooded blocks in the Shepparton area."

Another internal report concerning flooding following heavy rainfall in November 1971 recorded that:

"This area has a long history of flooding well known to Commission officers, the owner, and local residents. ... It is certain that when rains of 3" or more are received this area and surrounds will flood."

It was also suggested that the property had flooded in 1974 and 1993. An internal report of the Rural Water Corporation dated 3 March 1994 recorded that "property owners" including Mr Rocky D'Agostino had approached the Shire and the Corporation "regarding regular flooding of their properties near the [Midland Highway and Doyles Road] intersection ... it was claimed the flooding events are caused by inadequate drainage in the area."

32 Mr D'Agostino disagreed with these statements. He rejected the suggestion that the property was like a saucer. He said that there was a definite fall from the back to the front. He also rejected the suggestion that the property flooded a lot, referring to the fact that his parents successfully grew vegetables and fruit trees on the property. In addition, Mr D'Agostino explained that the earlier flooding was caused by water coming back up the drains. In the light of the consistent picture presented in the contemporaneous reports I cannot accept Mr D'Agostino's claim that the property had never flooded.

33 A civil engineer, Mr Rodney Seamons, was called by the plaintiffs as an expert witness. He was the Operations Manager of Planright Australasia Pty Ltd with over 30 years' experience in civil infrastructure projects and services for local government in both urban and rural environments.

34 In his witness statement Mr Seamons said that at the request of Mr Rocky D'Agostino he had carried out site calculations to estimate the water run off from Lot 1 "on a pre-developed basis into the GMW drain 1/3/2". He said that a pre-developed site did not include hard surfaces such as concrete and tin. Water falling on a site containing such surfaces would run off at a greater rate than water falling on a site which was simply land with pasture. Mr Seamons said that his calculations showed that for a 1 in 10 year rainfall event the water discharge rate from Lot 1 was 23.4 litres per second and for a 1 in 100 year rainfall event the rate was 77 litres per second. He also calculated that the capacity of the existing entry drain to receive water from Lot 1 was at the rate of 131 litres per second. He said that he had been informed by Mr D'Agostino that the site was not prone to flooding and in his opinion this was consistent with the fact that water was draining and able to drain from the whole of the property, and after the subdivision from Lot 1, "at flow rates of well in excess of 23 litres per second and up to 131 litres per second".

35 Mr Ronald Palmer gave evidence on behalf of the defendant. He was a qualified civil engineer currently holding the position of Associate Engineer with URS Australia Pty Ltd, a firm of consulting engineers. Prior to commencing with that company in April 2002, he had worked for the defendant and its predecessors for approximately 31 years.

36 In his witness statement Mr Palmer criticised the methodology used in Mr Seamons' calculations. He stated that this methodology was appropriate for the calculation of a peak flow for urban design in a small catchment and was usually used to calculate the size of a pipe to service the site. In his view it was not appropriate to use in drainage calculations for a large rural irrigated catchment where a volumetric approach was required. He disagreed with Mr Seamons' discharge rate of 23.4 litres per second because his approach:

(a) had assumed a slope of the land which was substantially greater than the actual slope;

(b) had assumed that the total run off could be accommodated in the drainage network;

(c) did not consider the appropriate duration of the rainfall event for rural catchments;

(d) made no allowance for retention and removal over a period of five days; and

(e) would require the discharged water from the 1 in 10 year event to be removed in a substantially shorter period than five days.

37 In cross-examination, Mr Seamons rejected these criticisms when they were put to him. Nevertheless, he agreed that his calculations were for "a small area site" not a rural situation. He said that his co-efficient of run off took into account that the site was "grassland or earth and grass" not paved. The assumed slope of the land of 3.3 millimetres per metre was a figure "recommended by VicRoads when the slope is extremely low". However, he agreed, after being taken to the contour map of the property, that there could be "some localised retention in the depressions" and that his calculations made no allowance for that. He stated that if the slope was taken to be zero then "the whole process" would not work. He also agreed that there would not be his suggested flow if the water already in the drain was restricting the outlet. His estimate was of "what that pipe could carry given ideal conditions". He therefore agreed that there could well be retention on the property which was not taken into account in his calculations. He said that he had not been requested specifically to do that. Finally, Mr Seamons agreed that he had considered a storm with a duration of 44 minutes rather than a 24 hour rainfall. The longer rainfall event has a lower intensity than the shorter storm which gives a substantially larger peak flow. It therefore seems to be that there is much to be said for Mr Palmer's criticisms of methodology used by Mr Seamons in making his calculations.

38 Mr Palmer was asked very few questions in cross-examination. He agreed that he had not measured the slope of Lot 1, but no doubt based on the contour map he stated that it was very flat. He was asked to identify his signature on a document dated 17 January 2002 in which he had commented on Mr Seamons' calculations. This document contained the statements that "pre-development allowable runoff has been determined from the capacity of the existing drainage inlet pipe serving the property", and that "capacity as calculated of 23 L/S is correct." However, he was not challenged on his disagreement with Mr Seamons' discharge rate of 23.4 litres per second or on any of his other criticisms of Mr Seamons' methodology.

39 The primary contention of the plaintiffs was that the Agreement dated 30 July 1999, on its proper construction, required the defendant to allow the plaintiffs to discharge run off water from Lot 1 into the defendant's drain at a run off rate equivalent to that which Lot 1 enjoyed as at 30 July 1999. Based on Mr Seamons' evidence, the rate was estimated to be at least 23.4 litres per second. Mr Wyles of counsel, who appeared on behalf of the plaintiffs, submitted that such a construction reflected the true intent of the Agreement and that GMW had breached the Agreement by insisting that the discharge rate be limited to 1.2 litres per second per hectare.

40 Mr Miller of counsel, who appeared on behalf of the defendant, disputed that GMW had breached the Agreement of 30 July 1999. He submitted that under clause 6 GMW undertook that there would be no reduction in the right to drain to GMW drainage as a result of the plaintiffs giving up their water right to Lot 1, not that GMW would not reduce the run off rate from that prevailing at the time of the Agreement, as pleaded in paragraph 5(b) of the Amended Statement of Claim. Mr Miller stated that GMW accepted that while the plaintiffs' property continued to be undeveloped and rural they could continue, and had continued, to discharge water from the property into the GMW drain. But this situation changed once the property was to be developed for urban use because the discharge from the property would increase and reach the GMW drain more quickly.

41 The first point to consider in construing clause 6 of the Agreement is whether there is any ambiguity, in which case evidence of the surrounding circumstances is admissible to assist in the interpretation of the contract, or whether the meaning is plain, in which case there can be no resort to the surrounding circumstances.[1] In my opinion, the meaning of clause 6 is quite clear. GMW agreed that as a result of the plaintiffs entering into the Agreement, whereby they gave up their water right to Lot 1, there would be no reduction in their right to drain to the GMW drain 1/3/2. There has been no reduction or proposed reduction in the plaintiffs' right to drain as a result of them agreeing to give up their water right. The plaintiffs' problem has been brought about because they wish to develop Lot 1 as a service station. The limitation now sought to be imposed on the plaintiffs is only relevant in the context of their attempt to use the site for a non-rural use, namely, development as a service station. It has nothing to do with giving up the water right to Lot 1.

42 Mr Wyles submitted that this construction put forward by the defendant was only based on "the recently invented evidence of Mr Hoare". He described the defendant's submission as an "unworthy contention" which led to a "completely capricious" result because the right to drain could be reduced by the defendant whenever it chose, so long as the reason for the defendant making that determination was not related to removal of the water right. Mr Wyles maintained that this submission meant that the defendant sought to persuade the Court that the agreement was not that recorded in the document dated 30 July 1999 but a different agreement to the effect that there would be no reduction by GMW in the plaintiffs' right to drain to GMW drainage:

"provided that if the use of Lot 1 is changed from rural/non residential to any other use requiring the issue by the City of Greater Shepparton of a planning permit, then GMW will be free to reduce the right to drain."

43 I do not accept Mr Wyles' submission. It seems to me that the Agreement means what it says. GMW agreed that there would be no reduction in the plaintiffs' right to drain to GMW's drain 1/3/2, as a result of the Agreement, that is as a result of the plaintiffs giving up their right to have Lot 1 irrigated. As this has not occurred, as GMW has not reduced the plaintiffs' right to drain to GMW's drain 1/3/2 based on the fact that the plaintiffs gave up their right to have Lot 1 irrigated, there has been no breach of the Agreement.

44 In my opinion, it is Mr Wyles' submission which requires words to be added to clause 6 to give effect to his construction. I consider that his submission meant that the Agreement should be read as though clause 6 contained words to the effect that there would never be any reduction in the run off rate from that which Lot 1 enjoyed as at 30 July 1999, regardless of what changes the plaintiffs might make to the land and to their use of that land. This is a very far-reaching conclusion to be drawn from the plain words of clause 6 which, in my opinion, say no such thing. Further, it is worth noting, in this context, that in pleading the critical terms of the Agreement, paragraph 5(b) of the Amended Statement of Claim does not reproduce clause 6 verbatim but seeks to substitute no reduction in "the run off rate" for no reduction in "the right to drain". This indicates, in my view, that the plaintiffs are seeking to advance a construction of clause 6 which is not justified.

45 Mr Wyles' argument on ambiguity centered on the phrases "as a result of this agreement" and "no reduction in the right to drain". As I understood the argument, Mr Wyles submitted that the former phrase did not mean "as a consequence of the D'Agostinos entering into this agreement to give up their water right" but "in consideration of the D'Agostinos giving up their water right", or that at least this was an arguable construction which meant that clause 6 was ambiguous. None of the men who played a part in the drafting of this Agreement were lawyers and no legal advice was obtained about its wording. In my opinion, the construction advanced by the plaintiffs is overly legalistic and not one which would have been intended by these lay members of the business community. The phrase "as a result of this agreement" takes on the normal meaning of the outcome or consequence of the action of giving up their water right.

46 The arguments with respect to the phrase "no reduction in the right to drain" was that the use of the word "reduction" implied a lowering of the run off rate. Again I do not agree that this phrase is ambiguous. The emphasis should not be on "reduction" but on "the right to drain". Clearly, the parties agreed that the plaintiffs' right to drain to GMW's drains was not to be reduced, either partially or completely, because they had given up their right to have irrigation water or domestic and stock water supplied to Lot 1. Mr Wyles submitted that the words "the right to drain" were themselves ambiguous. I do not agree. Either the plaintiffs could discharge water to GMW's drains or they could not. It was this right which was to be protected by GMW's undertaking.

47 Nevertheless, in case I am subsequently held to be wrong in my view that there is no ambiguity in the meaning of clause 6, I propose to consider the submissions concerning the light that the surrounding circumstances arguably shed on the construction of clause 6.

48 As Lord Wilberforce said in Reardon v Smith[2], it is legitimate "to have regard to ... 'the surrounding circumstances' "[3]. He went on to say:

"In a commercial context it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating."[4]

These extrinsic facts must be within the knowledge of both parties to the contract.[5] This is because the court looks:

"not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting."[6]

49 Mr Miller submitted that there were a number of extrinsic facts which were within the knowledge of both parties. The first of the more important and relevant matters was the purpose of the Agreement itself. For the defendant, the purpose of the contract was for the plaintiffs to forgo their right to obtain irrigation and stock and domestic water to Lot 1 so that the defendant could end irrigation channel 1/2/12/12 when it reached Doyles Road with a consequential saving to GMW. The plaintiffs emphasised the financial benefits to GMW from a rationalisation of that channel. Mr Wyles referred to the evidence from Mr Hoare to the effect that GMW had calculated it would save approximately $62,500 in present day dollar terms if the rationalisation took place. As Mr Hoare's report to Mr Plunkett dated 4 November 1998 showed, the estimated cost in present day dollars of keeping the channel in place for 150 years was $112,556 whereas the estimated cost of rationalisation was expenditure of $50,000 - thus the saving of approximately $62,500. However, this was not an immediate saving but one spread over 150 years! And $50,000 had to be spent straight away to achieve that benefit. Whilst acknowledging that this was the purpose of the Agreement as far as the defendant was concerned, Mr Miller submitted that the financial benefits could be overstated.

50 Mr Miller submitted that for the plaintiffs, the purpose of the contract was to avoid the cost of putting in the pipe outlet to Lot 1; to obtain compensation from GMW; to ensure that the removal of their water right did not result in them losing their existing right to drain Lot 1 to drain 1/3/2; to obtain the defendant's agreement to the statement of compliance for the proposed subdivision; and to ensure that approval of the subdivision was not unreasonably withheld due to GMW's desire to achieve rationalisation of channel 1/2/12/12. Significantly, it was not suggested by the plaintiffs that one of the purposes of the contract from their point of view was to reach agreement with GMW about the drainage situation from Lot 1 once it had been developed as a service station.

51 Another fact in the common knowledge of both parties was that the plaintiffs were concerned that giving up their water right to Lot 1 might result in them losing the right to drain to GMW's drain because Lot 1 was no longer being irrigated and they were determined to avoid that result. The above analysis of the factual background reveals that all five participants in the negotiations (the D'Agostinos, and Messrs Dunstone, Parry and Hoare) agree that the D'Agostinos repeatedly stated that this issue was their primary focus and concern.

52 It was also common knowledge between the parties that there was no agreement between them about the rate of run off from the property. There had been no mention of GMW's standard of 1.2 litres per second per hectare and no discussion of what the run off from the property might be from time to time. Indeed, Mr Rocky D'Agostino rejected the form of the Agreement proposed by GMW when it included the words "at the current rural rate" because, as he said, he was not interested in run off rates as he knew from prior experience that they differed according to the condition of the land. Presumably, GMW's employees, Messrs Dunstone, Parry and Hoare, also knew of this difficulty of measurement. Moreover, the point is amply illustrated by the disagreement between the two experts over the calculation of the run off rate as at 30 July 1999. GMW's standard rate was not mentioned in the negotiations preceding the Agreement because it was only relevant once an urban development was being discussed for the property.

53 Mr Wyles submitted that prior to 30 July 1999 the plaintiffs' intention to develop the site as a service station was known to the defendant and its officers. In the first place, the plaintiffs relied on Mr Parry's evidence. Whilst Mr Parry very honestly conceded that at some stage he knew of the plaintiffs' intention, he was unsure whether it was before or after the 1999 negotiations. It seemed that his knowledge stemmed from an article in the Shepparton News, possibly at the time when Mr Rocky D'Agostino was a councillor. This would suggest that the tendered extract from the Shepparton News dated 27 May 1993 was what was read and recalled by Mr Parry. Unfortunately, however, because this extract was not tendered until the end of the hearing, Mr Parry was not asked whether that was the source of his knowledge about the plan for a service station development. Nevertheless, I am prepared to draw the inference that it was, which means that he did know of the plaintiffs' intentions before the 1999 negotiations. In any event, Mr Miller very fairly virtually conceded that this was the case.

54 Mr Wyles submitted that Mr Parry's knowledge was sufficient to lead to the conclusion that the defendant itself had this knowledge. In Brambles Holdings Ltd v Carey[7], Bright J held that:

"Always, when beliefs or opinions or states of mind are attributed to a company it is necessary to specify some person or persons so closely and relevantly connected with the company that the state of mind of that person or those persons can be treated as being identified with the company so that their state of mind can be treated as being the state of mind of the company. This process is often necessary in cases in which companies are charged with offences such as conspiracy to defraud."

This passage was subsequently quoted with approval by the High Court of Australia in Krakowski v Eurolynx Properties Ltd[8]. Mr Parry's position with GMW was sufficiently senior and his involvement with these negotiations was sufficiently close for me to conclude that his state of mind can be treated as being the state of mind of GMW for relevant purposes.

55 Given my finding that the defendant, through Mr Parry, knew prior to the 1999 negotiations that the plaintiffs intended to develop Lot 1 as a service station it is unnecessary to consider whether Mr Hoare and Mr Plunkett also knew this and whether the defendant's failure to call Mr Plunkett, who signed the Agreement on behalf of GMW, brought into operation the rule in Jones v Dunkel[9]. As I did have the opportunity of seeing Mr Hoare, give evidence, I should say that I accept his denial that, at the time of those discussions in mid 1999, he knew that the plaintiffs intended to develop Lot 1 as a service station. Even if he had read the Shepparton News of 27 May 1993, it is not at all surprising to me that he did not recall the details of the article on the proposal some six years later. Mr Dunstone, whose evidence I also accept, could not recall any comment about the development of a service station on the site.

56 This means that I cannot accept Mr Rocky D'Agostino's evidence that at some stage he discussed with the GMW representatives the proposed development. If this subject had been mentioned, I find it unlikely that the parties would not have gone on to discuss what impact this would have in terms of the future drainage from the property and for this to have been specifically mentioned in the Agreement. Yet this is what Mr D'Agostino would have me believe. I find that the subject of drainage from the intended service station development was not raised, either because Mr D'Agostino's primary concern was to ensure that he and his brother did not lose their drainage right by giving up their water right to Lot 1 or that for some other unexplained reason Mr D'Agostino decided not to mention the topic during those discussions.

57 Mr Wyles made the valid point that all of GMW's officers involved in these negotiations must have had some idea that the plaintiffs were proposing to develop Lot 1, even if they did not know that the intended use was to be a service station. Why else, he asked rhetorically, would the plaintiffs be seeking to sub-divide their property and be willing to give up their water right to Lot 1? However, Mr Miller responded that there was no reason why GMW's officers should be focusing on the future use of Lot 1. After all, the plaintiffs had done virtually nothing in the six years since the issue first surfaced in 1993. Why should the next six years be any different?

58 More importantly, however, I do not accept that it is relevant to the construction of clause 6 of the Agreement that I have concluded that GMW knew at the time of the 1999 negotiations that the plaintiffs intended to develop Lot 1 as a service station. As I understood it, Mr Wyles' argument was that both parties knew that it was intended to develop Lot 1 as a service station, knew that this would increase the rate of run off and agreed that whatever the current rate was that would be "the baseline" discharge rate which GMW would always have to accept from the plaintiffs. In my opinion, this approach is not maintainable in the light of the absence of any discussion, let alone agreement, about what the existing run off rate was and Mr D'Agostino's reasons for his specific rejection of the inclusion of the phrase "at the current rural rate". Such a construction would simply be too uncertain to be enforceable, as the expert evidence showed.

59 Therefore, I have concluded that there is nothing in the surrounding circumstances referred to above or the other minor matters referred to by the parties which results in my adopting a different construction to clause 6. On the contrary, the surrounding circumstances discussed above, on balance, strengthen my view that clause 6 meant that the plaintiffs' right to drain would not be reduced because they had given up their water right in respect of Lot 1.

60 Mr Wyles submitted that such a promise could always be circumvented by GMW. Certainly the result of my construction of clause 6 is that changes in the defendant's obligation to accept drainage from Lot 1 could be made, particularly if the property became subject to an urban use, but what GMW could not do was to reduce the plaintiffs' right to drain on the ground that the defendant no longer had any obligation to accept drainage from Lot 1 because it was no longer within the irrigation system as the plaintiffs had given up their right to have water supplied to it.

61 Mr Wyles also submitted that if there was ambiguity in the meaning of clause 6, it should be construed contra proferentem against GMW, being the party who put forward the wording of the Agreement. As I do not consider there is any ambiguity in the meaning of clause 6, the opportunity for this approach to be adopted does not arise.

62 In my opinion, GMW has not breached clause 6 of the Agreement because it has not reduced the plaintiffs' right to drain to GMW's drains as a result of the plaintiffs giving up their water right in respect of Lot 1. The defendant's indication that if Lot 1 is to be developed as a service station it will require on-site retardation to be provided so that the discharge from Lot 1 will be limited to 1.2 litres per second per hectare is also not a breach of clause 6 of the Agreement. This means that it is unnecessary to attempt to resolve the disagreement between the experts about what the run off rate from Lot 1 was as at 30 July 1999.

[1] Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 352 per Mason J.

[2] [1976] 1 WLR 989

[3] [1976] 1 WLR 989 at 995

[4] [1976] 1 WLR 989 at 995-996

[5] Reardon v Smith [1976] 1 WLR 989 at 996 per Lord Wilberforce; DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 at 429 per Stephen, Mason and Jacobs JJ; Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 352 per Mason J.

[6] Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 352 per Mason J.

[7] (1976) 15 SASR 270 at 279

[8] (1995) 183 CLR 563 at 582-583 per Brennan, Deane, Gaudron and McHugh JJ

[9] [1959] HCA 8; (1959) 101 CLR 298