GRAY (CONSTRUCTIONS) PTY LTD v HOGAN

THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40365/98 DC 5906/94

MASON P SHELLER JA HEYDON JA

JUDGMENT 1 MASON P: The appellant did building work for the respondent at her Belrose home. A dispute ensued. The appellant sued in the District Court for the balance of moneys claimed due and the respondent cross-claimed for damages for delay and defective work. The entire matter was referred out to a referee, Mr Chapman, for inquiry and report (see District Court Rules Pt 28B r 2 (1)). 2 The appellant's principal, Mr Gray, was known personally to the respondent. He had been asked to quote a price for doing work depicted in architectural drawings. He told the respondent that the drawings lacked the necessary specificity for him to quote a fixed price. There were further discussions which resulted in a "budget estimate". Work commenced on about 5 July 1993 without a written agreement. Subsequent events suggest that the parties may have been somewhat at cross purposes as to the agreed basis of costing. During the work there were changes in the drawings and other variations to the work. 3 In his Report, the referee rejected the respondent's submission that there was a lump sum or fixed price contract. He concluded that the reference in discussions to "budget estimate" meant that the price discussed was an approximate statement of what would be charged and, in that sense, the intended contract was a "cost plus" contract. The referee rejected the respondent's claim that the sum recoverable was capped at $250,000. Since, however the contract was not in writing it was unenforceable in view of s6(1) of the Building Services Corporation Act 1969 as it then stood. (The Act is now known as the Home Building Act 1989.) 4 The referee nevertheless decided that the appellant could recover at common law on the basis of quantum meruit (see Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221). This conclusion is accepted by both parties. 5 The referee proposed that there should be an award in the appellant's favour in the sum of $43,116.25 made up as follows: Quantum meruit $337,543.00 Less payments made $280,000.00 $ 57,543.00 Less damages for defective work and materials $ 14,426.75 $ 43,116.25

6 When the matter was before the District Court the parties agreed that there were minor errors of calculation in the Report. The figure for quantum meruit less payments received became $57,763 and the figure for defective work and materials became $14,449.75. According to the Report as adjusted, the "bottom line" was that the appellant builder was entitled to recover $43,313.25 plus interest. It was also entitled to the costs and disbursements of the inquiry calculated at $34,140 (RB 53). 7 The proceedings returned to the District Court. The respondent sought rejection of the Report and the appellant sought its adoption (see Pt 28B r12). The provisions in the District Court Rules mirror Pt 72 of the Supreme Court Rules. The principles governing the exercise of the court's discretion to adopt or reject a referee's report, in whole or in part, are set out in Super Pty Ltd v S J P Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549. 8 The proceedings came before Mahoney DCJ. His Honour decided to accept the whole of the Report except for so much as related to what he described as profit margin and delay damages. He held that the Report was unimpeachable except for those two errors which were easily capable of severance. These adjustments reduced the quantum meruit sum (less the owner's damages for defective work and materials) to $278,230.52. Since this was less than the $280,000 paid by the respondent, the judge concluded that there should be a verdict and judgment in favour of the respondent in the sum of $1,769.48 plus interest calculated to date of judgment. Consequential orders for interest and costs were made as set out in Short Minutes of Orders made on 7 May 1998. Reversal of the appellant's position from that of a creditor to that of a debtor had a disastrous effect on the costs orders that followed the event. 9 The appellant appeals by leave, contending that His Honour should not have rejected the two aspects of the Report to which I have made reference. 10 Mahoney DCJ rejected the two components of the referee's Report on the basis that "fair and just restitution" (cf Pavey at 246-7 per Deane J) was to be assessed only by reference to the value to the recipient of the work performed. The parties before us agree that his Honour was in error. There will be cases where such an approach is called for, but not in relation to the valuation of a claim made "on a quantum meruit" for goods and services freely accepted under an arrangement such as the present one in which an intended underlying contract is rendered unenforceable by statute. The appellants submits and the respondent accepts that the correct approach is to determine a reasonable remuneration for the builder, including remuneration which includes a reasonable profit element (see Renard Constructions (MT) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 276; Brenner v First Artists Management Pty Ltd [1993] VR 221 at 262-3). 11 Having accepted that the learned primary judge erred in his reasons for rejecting these two items, the respondent contended that there were nevertheless many grounds upon which the judgment and verdict below could be supported. 12 The principal submission of the respondent was that the referee erred in that he failed to appreciate that various costings provided for the purpose of the inquiry by Mr Zacos, a quantity surveyor, already included a 10 percent margin which the parties had previously agreed would represent a just allowance for profit in the appellant's favour. 13 A "conclave" of experts had failed to reach consensus. The referee then arranged to appoint an expert quantity surveyor, Mr Zacos. The referee records in his Report (par 1.07) that the parties agreed to accept the costing of the independent expert on a quantum meruit basis, subject to being able to raise queries on the extent of items costed by way of statements in reply. I suggested that Mr Zacos could be a suitable person. The question of whether or not some items costed should be included or not was to be determined by me after hearing all of the evidence.

14 At that stage in the inquiry the respondent had retained her own expert architect, Mr Cusick. The inquiry transcript contains an exchange between the referee, Mr Zacos and Mr Cusick in which the referee made it plain that Mr Zacos would be retained to work out the costs using his knowledge of what was appropriate, applying rates and pricing available at the relevant time. Mr Cusick recommended that Mr Zacos should come up with a cost price, leaving for separate determination the question as to the "balance of margins and what is due to Mr Gray". He referred to "a cost figure of the job which would exclude overhead and profit margin" (inquiry transcript p132, emphasis added). 15 Mr Zacos studied the drawings, visited the site and prepared a Preliminary Assessment set out in the form of a schedule whose items totalled $258,296.47. This document shows that Mr Zacos attended to the task which he had been set. Items of work are estimated as to quantity and cost at a stated rate per unit. In addition, five items of "preliminaries" are costed. There is nothing on the face of this Assessment to indicate that Mr Zacos built any particular margin of profit into his costings. Indeed, the inferences are to the contrary, because the items relating to labour ("site leading hand" at $1400 per week and "site labourer" at $1000 per week) bear all the hallmarks of being what the builder would pay the labourers. 16 On 2 July 1997 the referee sent a copy of this document to the solicitors for the two parties. He called it a Preliminary Assessment of Costs. The opening paragraph of this letter said: I attach the Preliminary Assessment of Costs carried out by Mr Zacos on a quantum meruit basis. The assessment of costs are net to which should be added a reasonable margin for profit which, using our expertise we agree should be 10%, subject to any further evidence or submissions the parties may make.

17 This paragraph of the letter of 2 July 1997 makes it crystal clear that the referee understood that a reasonable profit margin was to be added after costings had finally been determined. That same paragraph shows the referee and Mr Zacos effectively indicating to the parties their expert opinion that a reasonable margin of profit to be added thereto was 10%, subject to any further evidence or submissions the parties might make. 18 Later in the letter the referee reminded the parties "that the basis of the claim is 'quantum meruit' and not 'cost plus'." This distinction between "quantum meruit" and "cost" is repeated in par 5.12 of the referee's Report. The respondent submitted before us that this is evidence that both Mr Zacos and the referee appreciated that the costings in the Preliminary Assessment of Costs already included some profit margin and that what was being ascertained by Mr Zacos was the value to the builder of the work done. This misunderstands the point that the referee was making. What he was emphasising was that the builder was not entitled to its actual expenditure plus some margin. In the final analysis, the builder was only to be allowed what it deserved ("quantum meruit"), whether or not the builder had already spent a particular sum. It was already common ground between the parties that the builder would be entitled to items of work at units of cost as determined in each case by Mr Zacos, provided that Mr Zacos' findings and costings were ultimately accepted by the referee. 19 The parties effectively submitted to Mr Zacos' expertise, subject to the parameters recorded by the referee in his Report. But the parties were free to do this; as was the referee so long as he did not abdicate ultimate responsibility for his Report. The referee had broad powers as to the manner in which he was entitled to conduct the inquiry (see District Court Rules, Pt 28B r7). Mahoney DCJ recorded that neither party complained about how the reference had been conducted, each having been legally represented throughout the inquiry. 20 Each party then made submissions in writing about Mr Zacos' Preliminary Assessment of Costs. The respondent's submissions were in the form of a statement from its expert architect Mr Cusick. The appellant's were in the form of a statement of its principal Mr Gray. Mr Zacos considered this further information and produced a Supplementary Report. He accepted some of the additional items claimed by Mr Gray and some of the additional reductions claimed by Mr Cusick. Where appropriate, he costed the relevant item. Where no separate costing exercise was appropriate (as with most subparagraphs in par 4 of Mr Gray's statement) he made no separate adjustment or allowance. 21 In his Supplementary Report, Mr Zacos accepted and costed items totalling $88,684 from Mr Gray's statement, including "Quantification of 12 week Delay" (cf par 5 of that statement: CB 68) in the sum of $28,800. Once again, nothing on the face of the Supplementary Report indicates that Mr Zacos misunderstood his task or included a profit margin in his costing of individual items. 22 The Supplementary Report was tendered in the inquiry, the referee noting that Mr Zacos had "costed each of the items in Mr Gray's supplementary statement and each of the items in Mr Cusick's supplementary statement" (p425, emphasis added). 23 Later in the inquiry, the parties briefly debated the profit margin and agreed to accept the rate of 10% suggested in the letter of 2 July 1997 (pp436-7). The referee's reference in the transcript to "the 10 per cent margin that Mr Zacos allowed" suggests that Mr Zacos had been the initiating party in what the referee described in his letter of 2 July 1997 (par 16, above) as derived from "using our expertise". 24 The parties, the referee and Mr Zacos clearly understood that the proper time to factor in the profit margin figure was after all of the details of costing were worked out to the referee's satisfaction. It was never put to the referee that the Zacos' schedules already included the profit margin for the simple reason that everybody participating in the inquiry knew that this had not occurred. 25 The final Report of the referee is equally clear in its intent in this regard. Nothing suggests that the experienced referee was intending to allow the builder to double dip by allowing the builder's 10% profit margin to be built into the Zacos costings and the final adjustment of the quantum meruit figure. 26 Part 5 of the Report explains how the referee valued the builder's quantum meruit claim. It explains that the "margin to be added to the net value for profit" was as determined by the referee and notified in his letter of 2 July 1997 (par 5.3). Succeeding subparagraphs detail the role taken by Mr Zacos and the parties' involvement in what became Mr Zacos' supplementary report (pars 5.4-5.11). The referee accepted Mr Zacos' costings. In deference to an argument faintly advanced by senior counsel for the respondent, I indicate that nothing betrays improper abdication of responsibility by the referee. His powers are broad. And pars 5.11 and 5.12 of the Report show his awareness of the need to form an independent judgment with respect to Mr Zacos' input. 27 The reasoning in the Report is not extensive, but it betrays no error of law on that account especially when regard is paid to (a) Mr Chapman's role as an expert referee; (b) the matters put into issue and the matters agreed upon between the parties during the course of the inquiry; (c) the agreement of the parties to accept Mr Zacos' assessments and costings subject to specific matters of complaint; and (d) the incorporation into the Report of the two sets of costings by Mr Zacos, the latter itself incorporating by reference information from the Gray and Cusick statements. 28 In his Report, the referee effectively subdivided Mr Zacos' Supplementary Report. This reflected the way the parties had segregated issues relating to the builder's claim based on "delay, sequencing problems and variations" (cf Report par 5.5). 29 The referee dealt firstly with the particular items of addition (Gray) and deduction (Cusick) advanced by the parties that were considered and costed by Mr Zacos. He accepted Mr Zacos' recommendations, for reasons set out in pars 5.6-5.12, 5.14. 30 Secondly, the referee addressed "the claim for delay costs" (par 5.13). He noted that Mr Gray had claimed a delay of twelve weeks. For this item, the referee allowed allowed $14,400. In various places the claim is described as one based upon delay. In truth, it was a claim by Mr Gray that various delays as set out in par 4 of his statement caused an additional 12 weeks construction time for which the appellant claimed the cost of its labourers (plus profit margin). See par 5 of Mr Gray's statement (CB 68). Mr Zacos quantified the 12 week delay in money terms at $28,800 and the referee allowed the appellant one half of this claim. Mr Gray had been cross-examined on his statement and, in the light of that cross-examination, it is clear that the referee thought that the builder bore responsibility for half of the claimed delays. 31 In reporting his partial acceptance of this delay claim the referee was in no way proposing an award of damages for breach of contract (as the respondent submitted). The sum allowed was the cost of the site leading hand and the site labourer at the rates specified by Mr Zacos (RB 42) for the number of weeks during which work was actually done additional to the duly costed work for specific items, being additional work (to the extent determined by the referee) caused by the type of unnecessary variations detailed in par 4 of Mr Gray's statement. 32 The referee concluded his analysis of the quantum meruit valuation exercise in the following terms:

5.16 Adjustments summary 1. Costing of Gray Statement of 29 July $59,884.00 2. Costing of Cusick Statement of 22 August $25,523.20 3. Delay costs allowed $14,400.00 Net adjustment $48,560.80 5.17 Quantum meruit net value contained in Preliminary Report = $258,296.47, add $48,560.80 from 5.16, bringing the total net value to $306,857.27. Add 10% profit, ie $30,685.73 which brings the total value to $337,543.00 on a quantum meruit basis.

This is consistent with the way the inquiry had proceeded and it contains no suggestion that there was a doubling up of the profit component. 33 I have endeavoured to show why the respondent's attempt to offer an alternative justification for Mahoney DCJ's rejection of the "delay damages" and "ten per cent profit margin" aspects of the Report is without substance. I add the following remarks in response to par 1.3 of the respondent's outline of submissions: (a) References in the transcript of the inquiry and in the Report to Mr Zacos proceeding on the quantum meruit basis cannot be read as indicating that he was building a profit margin into his costings or that the referee understood him to be doing so. The evidence to the contrary is too strong.

(b) References in the Report to adding the 10% profit margin to "values" as determined by Mr Zacos (pars 5.3, 5.4, 5.12) take the matter no further. One asks: "Value to whom?" Take the item of $1400 per week for the cost of the site leading hand. In one sense, the cost ( to the master builder) indicates the value (to the leading hand) of the latter's services. But once it is recognised that the builder is entitled to add a reasonable profit margin on all costs reasonably incurred (to Mr Zacos' satisfaction) - and this is common ground - the use of value in the Report does not provide the damning evidence of the referee's error that the respondent claims to exist and which senior counsel for the respondent described in argument as the high point of his case. 34 I have not addressed those items in the respondent's extensive Notice of Contention which were not covered in the respondent's written or oral submissions or not pressed in argument before us. Some appear to challenge the propriety of a quantum meruit award, yet that was common ground in the court below. 35 Accordingly, the principal sum in the verdict should be $43,116.25 as proposed by the referee. Pre-judgment interest to 7 May 1998 at Court rates has been calculated at $19,316.20. The total is $62,432.45. 36 I propose the following orders: 1. Appeal allowed.

2. Set aside the orders made by Mahoney DCJ on 7 May 1998.

3. In lieu thereof order: 1) The Court adopts the Report of referee Mr Martyn Chapman dated 22 September 1997. 2) Verdict and judgment for the plaintiff on the plaintiff's Statement of Liquidated Claim in the sum of $62,432.45, such judgment to take effect from 7 May 1998. 3) Verdict and judgment for the cross defendant in the Cross Claim. 4) Defendant to pay the plaintiff's costs of the proceedings in the District Court, including the plaintiff's costs of the reference (which include 50% of the inquiry costs of $34,140 set out in the Referee's Report) and the costs of the Motions heard and determined by Mahoney DCJ. 4. Respondent to pay appellant's costs of the appeal and to have a certificate under the Suitors' Fund Act 1951 if qualified. 37 SHELLER JA: I agree with Mason P. 38 HEYDON JA: I agree with Mason P.

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