Flower & Hart (a firm) v White Industries

THE COURT: 1 The appellant ("Flower & Hart"), a firm of solicitors practising in Brisbane, appeals from the judgment of a judge of this Court (Goldberg J) ordering it to pay on an indemnity basis the costs of the respondent ("White Industries") incurred in litigation commenced by Caboolture Park Shopping Centre Pty Ltd (in liquidation) ("Caboolture") against White Industries relating to a building contract entered into between White Industries as builder and Caboolture as owner for the building of a shopping centre at Caboolture in Queensland. 2 The background to the dispute is, to say the least, unedifying. Hersfield Development Corporation Pty Ltd ("HDC"), the parent company of Caboolture, was a substantial property developer and either itself or through subsidiaries, a builder in its own right. HDC was under the control of a Mr Herscu. It sought tenders for the construction of a shopping centre. On 19 August 1985 White Industries submitted its price for the construction of the shopping centre in the amount of $14,820,000. There were two other, but higher tenders. A meeting followed between the parties on 27 August 1985 at which Mr Herscu, Mr Bennett and Mr Briggs represented HDC and Caboolture. Nothing turns on the distinction between the two companies, and henceforth, unless otherwise noted, we will use Caboolture to represent either HDC or Caboolture as may be appropriate. 3 Mr Herscu told White that the price was too high. At that stage full drawings were not available. White came in later with an even higher bid, $15,075,000, as a result of a change in structural details. Caboolture sought ways the price could be reduced. White Industries had produced a summary of its charges of which $13,789,450 was for subcontract items, $986,000 for preliminaries and $300,000 for its fee. These figures appear in a letter from White Industries to HDC dated 10 September 1985. Mr Bennett went through this schedule with representatives of White Industries and suggested lower figures to them, resulting in a figure of $13,375,000. On 12 September 1985 White Industries wrote to Caboolture confirming these discussions and indicating that it was prepared to construct the shopping centre on the basis of what was described as a "target sum contract" for a target sum of $13,375,000 with a fee for White Industries of $350,000. The letter proposed that savings and overruns be shared on a 60/40 basis. The letter said, inter alia: "HDC REQUIREMENTS Under the target sum arrangements [White Industries] would require HDC to use its purchasing power on all trades to assist in achieving the target trade budgets. TENDERS [White Industries] would wish to participate in negotiations with all trades tenders to ensure these target budgets are met." 4 On 9 October 1985 Caboolture and White Industries entered into a building contract. The standard form used was amended to read "target lump sum contract". It incorporated the White Industries letters of 10 and 12 September 1985 except that the references to $15,075,000 and prime cost items were deleted from the letter of 10 September 1985. The contract provided a breakdown of the figure of $13,375,000 which comprised forty-one provisional sums totalling $11,975,000, an amount of $1,050,000 for preliminaries and an amount of $350,000 for White Industries' fee. The contract was what is generally referred to as a cost plus contract, and not a fixed price contract. The forty-one provisional sum items were subject to the prices agreed with subcontractors. 5 It soon became apparent that there would be cost overruns and that the final cost of construction would substantially exceed the target sum. The cost increases were acquiesced in and accepted by Caboolture. This was in great measure the responsibility of a Mr Poppleston, the Caboolture supervisor on site. On 17 December 1985 Mr Poppleston noted that the original budget was estimated to be exceeded by $2,451,000. There had been savings on the original budget of some $686,000 and overruns of $3,137,000. 6 By November 1986 Caboolture decided it had paid enough to White Industries. Mr Pearce, the General Manager of Caboolture, consulted Mr Meadows, a partner in Flower & Hart on 9 November 1986, seeking advice as to whether Caboolture could stop the architect issuing further certificates under the contract. Mr Pearce told Mr Meadows that the project had gone way over "budget" and that Caboolture was paying White Industries more than it had expected to pay with the prospect of paying even more. He said that Mr Herscu felt that White Industries must have been charging too much. On 11 November 1986 the architect agreed not to issue further certificates without giving Caboolture five days notice of any certification proposed to be issued. 7 Of Mr Herscu's attitude and approach to litigation, the learned primary judge, after noting that it was Mr Herscu who personally took all important decisions in relation to any litigation, said: "Mr Herscu's attitude and approach was described in various ways by HDC's general manager Mr Pearce and by HDC's solicitors. It was a robust approach and HDC was not frightened to commence litigation to get what it wanted or to defend vigorously any claim made against it. HDC's policy was to pursue vigorously any litigation undertaken. Its objective was either to win at trial or settle on favourable terms. Mr Herscu did not believe anything was impossible and was unconcerned about entering into litigation with limited prospects. HDC was unconcerned to enter into litigation to achieve its commercial purposes even if the advice was it could not win. The policy was no settlement discussions. Mr Herscu always took an optimistic view of litigation and as a result HDC viewed prospects of success in litigation more favourably than was indicated in the legal advice it received." 8 Caboolture was a major client of Flower & Hart. Mr Meadows carried out a substantial amount of its legal work. 9 On 8 December 1986 White Industries wrote to Caboolture, after receiving a certificate of practical completion, advising that the cost of the work to date, including variations and provisional sum adjustments, was $19,668,608. Of that, $17,532,509 had been approved and $16,474,251 had been paid. White Industries demanded payment of the balance of the approved amount, $1,058,258, and sought further approval for the difference between $17,532,509 and $19,668,608, a sum of $2,136,099. 10 On 9 December Mr Meadows went to Melbourne and conferred with Mr Pearce, Mr Bennett, Mr Perch (an architect) and Mr Poppleston. Mr Meadows was, as his Honour held, told that the costs had gone many millions above budget. Mr Meadows sought to ascertain how much of the increase related to variations and how much to overruns. He also asked about the circumstances in which the target contract had been entered into. His Honour's findings on this matter were as follows: "Mr Bennett said that White was the lowest of four tenders at $14,800,000 fixed and that negotiations had taken place to settle upon the contract sum. Mr Bennett told Mr Meadows that he had been delegated by Mr Herscu the task of negotiating the price with White, that tenders were called on a target sum basis due to the expedition required and that prime cost items in the tender were rejected by Mr Herscu as being too expensive. Mr Herscu told Mr Bennett and White that $13,500,000 was the most he could spend on construction. Mr Bennett said that in response to White's figures he had put it to the White representatives that the shopping centre could be constructed for $13,375,000 which was the aggregate of his estimate for each trade which would be involved and that he based his estimates on his experience and HDC's costs and the carrying out of extensions to its Capalaba Shopping centre. Mr Bennett told Mr Meadows that he went through each item on White's summary sheet with White, proposed lower figures for most items and supplied the figures that made up the $13,375,000. Mr Bennett had told White that HDC would help White negotiate prices with subcontractors as HDC had the purchasing power. Mr Bennett said that the representatives of White considered the matter overnight and the next day they met with Mr Briggs and himself and said words to the effect that they agreed with the figures that he had put forward and believed they could do the job for that price. Mr Bennett said that he then summarised the position for the meeting. He went through the figures which he had provided for the individual trades again and explained why he thought they were reasonable. He stressed that some of the trades might come in under or over the budget. Nevertheless White was to carry out the works for around $13,375,000. Mr Bennett said that Mr Dugan from White had agreed with his summary." 11 What is significant in regard to this meeting, which constituted the only instructions which Mr Meadows had dealing with the circumstances surrounding the making of the contract before proceedings were instituted by Mr Meadows on behalf of Caboolture, is that there is no suggestion that White Industries represented that the contract could be completed for around $13,375,000. That figure was suggested by Mr Bennett. There was no suggestion that the figure of $13,375,000 was unreasonable. To the contrary Mr Bennett regarded that figure as reasonable. There was no suggestion that in any way Caboolture relied upon any representation regarding the figure of $13,375,000 in entering the contract. It relied upon Mr Bennett. Caboolture's only complaint was that it had been overcharged under a cost plus contract, notwithstanding that a large part of that cost related to variations to the contract works that had been approved by Caboolture and certified as such by the architect under the contract. 12 Following this meeting Mr Meadows wrote a letter to Mr Pearce on 16 December 1986 in the following terms: "We refer to our discussions with you, Mr Ian Bennett, Mr Sol Perch and Mr Rick Poppleston in Melbourne on 9 December, and confirm Messrs Bennett & Poppleston instructed us as follows:- A. Tenders were called from some four (4) builders on a 'target sum' basis (for the purpose of expedition). Following assessment of these tenders discussions were held with White Industries (Qld) Pty Ltd ("Whites"). B. Whites had included in its tender a list of provisional sums for what are now items 1 to 41 of Clause 15.03 of the Building Contract. C. The figures proposed by Whites were rejected by your company and do not appear in the Building Contract. A new set of figures proposed by Mr Bennett and others of your company (and based to some extent on your company's experience at Capalaba Park) were included as the contract provisional sums. It is important to note that the final 'provisional sums' adopted were those proposed by your company, not Whites. As your company proposed these sums, we cannot see how it can be said Whites misrepresented the position here. It might have been possible, had Whites original figures been used, to say Whites represented the Works could be completed for a figure 'in the order' of the total nominated. But this is clearly not the case here. We do not even think it would be of much use comparing the final cost of the Works (excluding variations) with the original Whites 'target sum' for those works. It does not really seem that your company has relied on Whites' expertise here. If you wish, we can discuss the matter with Mr Callinan, Q.C. to see if he can come up with any avenue of relief to your company. We are not at all optimistic but at least your company would then have pursued all possible avenues. We confirm we think your company would now be best advised to ascertain:- (a) the cost of the Works approved by your company to date; (b) the claims for, nature of and authority for any variations to the Works, bearing in mind that if the Architect was authorised to direct variations, he need only have done so 'in writing' ie., even a plan might be sufficient; and (c) the best possible and worst possible situations for your company in relation to the outstanding claims. We confirm that the Architect is under a duty to Whites to certify progress certificates etc. in accordance with the Building Contract. Failure to do so may expose the Architect to an action for fraud and/or collusion. In these circumstances, your company can expect the Architect to seek to protect his position one way or another. Please let us have your further instructions after you have considered this letter." 13 By this time White Industries had stopped work under the contract and was threatening legal proceedings. Mr Pearce instructed Mr Meadows to confer with Mr Callinan QC, then senior counsel of ten years standing, who had previously advised Caboolture. Mr Meadows had no recollection of taking a copy of the contract with him to the conference. He had taken no witness statements at the time. He showed Mr Callinan a copy of the letter of 16 December. 14 There was some discussion about s 52 of the Trade Practices Act 1974 (Cth). Mr Meadows was concerned that because the ultimate figure appearing in the contract had been suggested by Caboolture there could be no suggestion of any representation having been made by White Industries. Mr Callinan advised that it did not matter who had initially suggested the contract figure so long as it was adopted by White Industries. There was discussion also about a concern that Mr Herscu should not build up an unrealistic expectation of success in any proceeding which could be brought for damages by Caboolture for an alleged breach of s 52 by White Industries. It is clear that, at the least, Mr Callinan believed that provided there was evidence there was an arguable, albeit weak, case for such a claim. 15 Following that conference Mr Meadows sent a letter to Mr Pearce. There was a conflict between Mr Meadows and Mr Callinan as to whether Mr Callinan dictated it, as Mr Meadows said, or merely approved it, as Mr Callinan said. The letter, dated 18 December 1986 reads as follows: "I conferred with Ian Callinan Q.C. last night. We are both very concerned about your position. I advise as follows: 1. The strict legalities are against you and your contractual position is weak. 2. Shortly stated, pursuant to Clause 4.03.03 of the Contract, the nominated amount is a provisional amount, subject to all necessary adjustments and subject to certification by the Architect as to their reasonableness. 3. As you know, the Architect either has said or will say in respect of most items that the amounts claimed are reasonable. At law, the Architect has a preliminary arbitral function and is generally regarded (in the absence of positive misconduct) as being the final umpire on disputed issues of cost for all practical purposes. 4. Your position is further weakened by the fact that in almost every case, proposed sub-contract prices were expressly referred to your Company's officers for approval. In some instances, there were express approvals and in others, approval may well be inferred from tacit acceptance or absence of protest. 5. I do not deal with other than matters of principle at this stage. To quote Ian Callinan, 'in a word, your legal position is weak'. 6. Is there anything that can be done to try to give you, at the very least, a temporary bargaining stance? (Underlining in letter as sent) I think there is one possibility, but please do not over-estimate its ultimate strength. Ian Callinan and I think that you should immediately start Section 52 proceedings (under the Trade Practices Act) in the Federal Court alleging deceptive conduct and relying upon the proposition that in each and every case i.e. in respect of the target contract price, its components and the submitted tenders, the builder represented they were reasonable when in fact they were not. Fraud on the ground of recklessness may also be available to be pleaded against the builder. 7. To put you in the best possible position, I have instructed Ian Callinan and Richard Perry (Junior Counsel) to draw proceedings for urgent filing in the Federal Court. I expect the pleadings to be completed and filed by Monday, 22 December at the latest. 8. At this time, Ian Callinan sees no reason for your Company to appoint a new Architect pursuant to the obligation in that regard imposed on your company under the Contract. I do have to make it clear however that you could not win any litigation if put to the test. I have not for example, attempted to describe the significant legal obstacles standing in your way, such as the general law of building contracts with particular reference to the role of an architect, estoppels and quantum merit. I have also not dealt with variations where generally the same obstacles exist. It is better I think that at present I apply myself and my firm's resources to the urgent institution of proceedings to attempt to secure some bargaining position for you." 16 Later on 18 December 1986 Mr Pearce instructed Mr Meadows to commence proceedings against White Industries. Mr Meadows had a discussion with Mr Herscu which added nothing to the factual material already obtained. Counsel was instructed to draw a statement of claim. Had Mr Meadows not been in a hurry he said that he would have assembled a full brief for counsel. Drafted pleadings were returned to Mr Meadows with a memorandum of advice signed by Mr Callinan and Mr Perry of junior counsel in the following terms: "We have been asked to advise in relation to this matter and to draw appropriate pleadings. Although the enclosed Statement of Claim sets out three alternative causes of action against White Industries Querist should be under no misapprehension that this is anything other than a relatively weak case. We have had discussions with Mr Poppleston and from the information that he has imparted to us it is clear that the target sum was arrived at by virtue of Querist's insistence rather than as an offer by White Industries. It is clear also from the correspondence that Querist's architects have indeed sanctioned many, if not all, of the sums now claimed by White Industries. Nonetheless it is Querist's contention that the target sum was understood by Querist to bear some relation to the final construction cost. That assumption is perhaps a reasonable one in the circumstances. Whether that assumption founds an action is perhaps debatable. Nonetheless the purpose of the pleadings is to place Querist in the advantageous position of having struck the first blow." 17 There were three counts pleaded. The first was a claim under the Trade Practices Act that an express representation had been made on behalf of White Industries that the agreed target contract sum of $13,375,000 or a sum close thereto was attainable, and implied representations that White Industries knew of facts which justified the making of the express representations, and that White Industries possessed sufficient skill and competence to have properly considered and assessed an appropriate target contract sum and total construction cost. The second was a claim in negligence based on the same representations. Thirdly there was a claim in fraud which was pleaded as follows: "12. Further and alternatively the representations referred to in Paragraphs 7 and 8 hereof were made fraudulently in that they were made with knowledge that they were false, or without knowledge that they were true or with reckless indifference as to their truth or falsity." 18 The pleadings further alleged that White Industries had been induced to enter the building contract in reliance upon the truth and faith of the representations. 19 An application was then filed in this Court in accordance with the pleading as settled. The learned primary judge found that at the time the proceeding was instituted Mr Meadows had not seen any documentary evidence in relation to the cost overruns or how they had come about. He had not seen or read any documents which came into existence prior to the date of the contract, the White Industries tender or any document relevant to the circumstances under which the contract price had increased. Mr Meadows was anxious, however, to effect the advice of Mr Callinan and strike the first blow. 20 Mr Meadows, who was not a litigation expert, arranged for his colleague Mr Lockhart, who was, to act for Caboolture in the proceedings. Among other steps that were taken Mr Lockhart briefed counsel to settle a request for particulars of the defence and cross claim that had by then been filed by White Industries. Counsel returned the request with the following letter: "We consider that, having regard to the general strategy which has been adopted in this action to date, there is some merit in taking the Respondent's solicitors to task in respect of certain aspects of their client's Defence and Counter-Claim; to that end, we have drafted a letter to those solicitors, which is self-explanatory. Subject to obtaining appropriate instructions, we recommend that a letter in substantially the same terms as our draft should be sent to the Respondent's solicitors at the earliest possible time. We have also, as instructed, drawn a Request for Further and Better Particulars, which is enclosed herewith. We were tempted to prepare a Request which was even more searching and extensive; however, on reflection, we consider that the client's tactical objectives will be best served by adopting an attitute which is not transparently obstructive. We regard the Request which we have drawn as being not unreasonable, having regard to the breadth of issues in the action, and the substantial amounts of money involved." 21 On 10 April 1987 Mr Callinan and Mr Meadows went to Melbourne to review the documentation held by Caboolture. In an opinion given after that visit Mr Callinan advised that junior counsel should commence to draft an extensive set of interrogatories. He said: "Querist is anxious to make the matter difficult generally as it can for Whites, and I reiterate that the most promising way of achieving this is by having ready as soon as possible, an extremely comprehensive set of Interrogatories." 22 Ultimately a draft set of interrogatories comprising 700 pages in all and dealing with over 500 variations was prepared. Not surprisingly, no order was ever made giving leave to administer these interrogatories. 23 At various stages steps were taken on behalf of Caboolture which could be seen as supporting a conclusion that they were taken for tactical purposes and to delay the proceedings coming to trial. These are detailed in the reasons of the learned primary judge and need not be repeated here. 24 On 1 March 1988 Mr Callinan and Mr Perry delivered an opinion in relation to the then current state of the litigation. They said: "Querist will recall that at the outset we advised that its claim pursuant to Section 52 of the Trade Practices Act was a relatively weak case. Mr Poppleston has yet to be interviewed in detail with respect to such representation as may have been made by the representatives of White Industries. In the absence of further material we remain of the view that Querist could not and should not be confident of success in that facet of the action. Nonetheless, the bringing of the application under the Trade Practices Act has more than served its purpose in that it has provided, a (so far) impregnable means whereby Querist's legal advisors have been able to maintain a considerable degree of control over the proceedings." 25 On 2 March 1988 Mr Lockhart wrote to Mr Pearce in the following terms: "In respect of this aspect of the case you will recall that Mr Callinan had previously advised your company on 22 December, 1986 that the claim pursuant to Section 52 of the Trade Practices Act was a relatively weak case. Mr Callinan has advised us that he still retains this view and that your company could not be confident of success in that facet of the action. The Trade Practices (a)ction commenced by your company has in Mr Callinan's view more than served its purpose in that it has provided an impregnable means whereby your company has been able to maintain a considerable degree of control over the proceedings thus causing considerable delays in the conduct of the counter‑claim made by White Industries. Mr Callinan is of the view that the Trade Practices action commenced by your company still has the potential to serve your company by causing further delays in the conduct of White Industries' counter‑claim. ... In summary therefore, Mr Callinan's advice is as follows: 1. Your company has little prospect of success in respect of the Trade Practices action which it has commenced against White Industries. 2. Despite the lack of prospects in respect of the Trade Practices action it should be continued as it gives to your company very real tactical advantages over White Industries. 3. Your company at this stage appears to have very good prospects of success in substantially reducing the amount of the claim which White Industries has made against your company." 26 On 7 June 1988 Caboolture opened its case. Ultimately the trial occupied 154 hearing days. An application for summary judgment, which was argued on 22 June 1988, was dismissed, not because Caboolture's case on the evidence it had filed was not hopeless, but because Caboolture might be able to rely on evidence not yet before the court. 27 As may have been expected the case did not go well for Caboolture. On 12 September 1988 Mr Callinan wrote by way of advice: "I have been asked to advise urgently with respect to this matter. You will recall that when this action was commenced in December of 1986 the expectation was, not that the action would succeed, but that the institution of proceedings would probably defer payment, by Querist, of the money demanded by White Industries for some twelve months. I should point out that it is now some twenty‑one months since that advice. That, it then seemed to be the realistic most that might be achieved. Right at the outset I drew attention to what should have been apparent to all, the insurmountable difficulty, unless fraud could be proved, presented by the repeated and unquestioned payments by Caboolture Park of sums far in excess of the target sum. It must be emphasized that payment was made from Melbourne, and that it should have been apparent there also that gross over‑runs were occurring. You will recall also that in April of 1987 I provided a lengthy advice by way of a general review of the matter. In that advice I noted that there remained one vital and unanswered question, namely how it was that the cost of construction had increased so dramatically without any protest whatsoever being made by those representatives of Querist on site at Caboolture or in Melbourne. With respect to that matter I must say that there is absolutely no evidence able to be called on Querist's behalf which might explain that failure. Moreover that regular consolidated progressive(-) accounts, revealing current total expenditure were kept by Caboolture Park, is well known (as a result of discovery) to the Court and White Industries. You will recall also that I have repeatedly advised that Querist's case is essentially a defensive action only and that, whilst there might be some prospect of success with respect to Querist's defence to the building claim made by White Industries, it should not be thought by anyone that Querist's claim was a strong one or that the whole matter would have any result other than the payment of a substantial sum of money to White Industries (plus such costs as would be incurred in the litigation of the case). It would seem that the impression has been formed, quite wrongly, and contrary to advice, that the action might, indeed perhaps, even would be ultimately successful in that it was thought, quite wrongly, that either a judgment wholly in favour of Querist would be obtained or that only a relatively small sum of money would have to be paid. Those impressions, if they have been formed, I repeat, do not accord with any of the advice that I have given and are not in any sense realistic." 28 Mr Callinan recommended settlement by payment of a substantial sum. Attempts to settle were unsuccessful. Mr Bennett's credibility was destroyed in cross examination. Mr Lockhart wrote to Mr Pearce on 23 September 1988 on the question of the allegation of fraud in the following terms: "The Judge has on a number of occasions invited your company to withdraw the allegations of fraud which it has made against White Industries. The basis for this invitation is that the evidence received to date does not in anyway go to substantiate an allegation of fraud against White Industries. The Solicitors acting on behalf of White Industries have indicated to us that if your company was to withdraw the allegation of fraud, it may go some way to assisting in the resolution of the dispute between the parties. We think that you should consider seriously withdrawing this allegation in view of the evidence given by Mr. Briggs and Mr. Bennett in cross‑examination. There is some authority which would indicate that if your company does not withdraw allegations of fraud (where the allegation can not be substantiated) then the Judge may make an Order that your company pay costs calculated on a Solicitor and own client basis rather than the usual party and party basis. This would mean that your company could potentially be exposed for approximately 100% of White's legal fees as opposed to potentially 60% of the costs if costs were awarded on a party and party basis. As mentioned to you, we think that it would be to your advantage to retain the leading firm of Cost Assessors in Brisbane as we believe Orders for costs will eventually be made against your company." 29 Despite Mr Lockhart's advice the allegation of fraud was not withdrawn. 30 On 28 July 1989 a receiver was appointed to HDC. A receiver was appointed to Caboolture on 17 August 1989. On the same day Caboolture's application was dismissed. Judgment on the cross-claim, for a lesser sum than originally claimed, was given on 6 April 1990. An order was made against Caboolture for the costs of White Industries on the proceedings initiated by Caboolture to be paid on an indemnity basis. In so ordering Ryan J said: "Having regard to the evidence of Caboolture Park's own witnesses, Messrs Herscu, Briggs and Bennett, I consider that Caboolture Park, properly advised, should have known before instituting its application, or early in the lengthy process of amendment needed to torture the statement of claim into disclosing causes of action in fraud and under s.52 and to provide appropriate particulars, that it had no chance of successfully proving those causes of action." 31 The present proceedings were commenced by motion in the original proceedings. The background to that motion is dealt with in the judgment of a Full Court of this Court in Caboolture Park Shopping Centre Pty Ltd (In liquidation) v White Industries (Qld) Pty Ltd (1993) 45 FCR 224.