Gray t/as Clarence Valley Plumbing Services v Ware Building Pty Ltd

Court of Appeal (NSW)|2013-07-04|Before: Meagher JA, Ward JA, Leeming JA

Re Secretary, Department of Social Security and Truscott [1995] AATA 278; (1995) 39 ALD 597 Reid v Moreland Timber Co Pty Ltd [1946] HCA 48; (1946) 73 CLR 1 Richardson v Fingleton (1980) 24 SASR 511 Seltsam v McGuiness [2000] NSWCA 29; (2000) 49 NSWLR 262 State of Victoria v Sutton [1998] HCA 56; (1998) 195 CLR 291 Walker v Walker [1937] HCA 44; (1937) 57 CLR 630 Category: Principal judgment Parties: Robert Gray t/as Clarence Valley Plumbing Services (Appellant) Ware Building Pty Ltd (Respondent) Representation: Counsel: K J Pierce (Appellant) Ms L Thomas (Respondent) Solicitors: Barraclough Jones & Associates (Respondent) File Number(s): CA 2012/318523 Decision under appeal Jurisdiction: 9101 Citation: Ware Building Pty Ltd v Robert Gray Trading as Clarence Valley Plumbing Services Date of Decision: 2012-06-14 00:00:00 Before: Toner DCJ File Number(s): DC 2010/210587

Judgment 1MEAGHER JA: I agree with Ward JA. 2WARD JA: The appellant, Mr Robert Gray, is a plumber. In early July 2008, trading as Clarence Valley Plumbing Services, Mr Gray commenced plumbing work as a sub-contractor to the respondent (Ware Building Pty Ltd) on a construction project for an aged care facility at Mareeba. Ware Building was the contractor on that project. There was a contract between Ware Building and Mr Gray for the provision by the latter of the plumbing work. The contract was in a standard Master Builders' Association form of sub-contract. Among other things, the sub-contract conferred on Ware Building a right of termination of Mr Gray's engagement as sub-contractor on the occurrence of an insolvency event, as defined, on the part of Mr Gray. 3In October 2008, Ware Building terminated Mr Gray's engagement, expressly relying on what it contended was the occurrence of an insolvency event. It brought proceedings in the District Court alleging breaches of contract and its repudiation by Mr Gray and seeking damages quantified by reference to the net cost to it of rectification and completion of the plumbing works and the cost of materials that Mr Gray had been obliged under the sub-contract to provide at his own cost. 4Mr Gray denied the allegations of breach of contract and the like that were made against him. He cross-claimed for unquantified loss of bargain damages, ongoing financial losses and an amount due under an adjudication that had been made under the Building and Construction Industry Security of Payment Act 1999 (NSW) in February 2009 for work done prior to termination of the sub-contract. Mr Gray contended Ware Building was estopped by reason of the adjudication from making the claims it made against him. He also contended that any inability on his part to meet his financial obligations under the contract was brought about or contributed to by Ware Building and that this also precluded Ware Building from seeking the relief it had sought against him. 5The matter was heard by Toner DCJ in June 2012, in the absence of Mr Gray, in circumstances that I will outline in due course. His Honour held that the contract had been validly terminated, dismissed Mr Gray's cross-claim and ordered Mr Gray to pay damages. 6Mr Gray appeals from the whole of the decision below. He contends, first, that he was denied procedural fairness in the hearing of the matter; second, that his Honour erred in making certain findings; and, third, that his Honour erred in failing to construe, or properly construe, the relevant provisions of the sub-contract. Various other grounds of appeal (those contained in paragraphs 2, 5, 6, 7, 8 and 9 of the Amended Notice of Appeal filed on 20 November 2012) were not pressed.

Background 7The broad background to the dispute has been set out above. However, it is necessary to set out in more detail the circumstances in which Ware Building came to terminate the sub-contract, as gleaned from the evidence adduced by Ware Building in the proceedings before the primary judge. 8Ware Building relied on three affidavits at the hearing: an affidavit sworn 12 June 2012 by Mr Matthew Ware, the principal of Ware Building; an affidavit sworn by Mr Robert Fitzalan, the principal of Mid North Coast Plumbing Pty Ltd, the company which completed the plumbing works on the project; and an affidavit sworn by Mr Colin Wheat, who was associated with a consulting firm that had prepared a defects list in relation to the hydraulic works for the project. Handed up by Ware Building to the primary judge, but not ultimately read in the proceedings, was a statement by Mr Trent Higgs, a person who had been engaged in early October 2008 as project manager for the project. 9No evidence was adduced at the hearing by or on behalf of Mr Gray, other than evidence in support of an application made on his behalf at the commencement of the hearing to vacate the hearing date and an affidavit received in the Court registry the following day in support of an application to seek a change of venue for the hearing. 10Following the commencement of work by Mr Gray in July 2008, Mr Gray lodged a number of progress claims. The first two were paid by Ware Building without dispute. There was a dispute as to aspects of the third progress claim dated 20 September 2008, part only of which was paid, and a dispute as to the fourth progress claim dated 4 October 2008. Ultimately the progress claim disputes were resolved by way of adjudication in February 2009 under the Building and Construction Industry Security of Payment Act, resulting in the payment of an amount in respect of those claims to Mr Gray. 11According to Mr Ware ([13] of his affidavit), in late September 2008 he caused a site instruction to be issued to Mr Gray requesting rectification of defects itemised in a defects list that had been provided to Mr Ware by Mr Wheat. That site instruction was issued on 8 October 2008. 12In early October 2008, prior to the termination of the sub-contract, Ware Building engaged Mr Trent Higgs as project manager. Mr Ware deposed (at [14]) that he discussed with Mr Higgs the need to rectify defective works and that the hydraulic works were falling behind the programme timetable. Mr Ware deposed that he also had discussions about those matters with the Contract Administrator for the project, Ms Megan Heinemann. The content of those discussions was not set out. 13Mr Ware then deposed (at [15]) that he had received "reports" from Mr Higgs and Ms Heinemann on various matters concerning Clarence Valley Plumbing, including: ... the failure of CVP [Clarence Valley Plumbing] to attend to rectification of the defective works, the fact that CVP was behind programme with the hydraulic works, CVP's inability to pay its staff and CVP's inability to have materials delivered to the site as a result of the freezing of its accounts by its suppliers. 14No further detail was provided in Mr Ware's affidavit as to the nature or content of those reports. No evidence was adduced from Mr Higgs or Ms Heinemann as to those or any other matters. 15In mid-October 2008, but prior to the termination of the sub-contract, Ware Building engaged another company, Mid North Coast Plumbing Pty Ltd, to provide additional labour for up to six weeks in order to assist Clarence Valley Plumbing to bring the hydraulic works into line with the works programme and to rectify defects with existing works (Ware at [22], [24]; Fitzalan at [5]-[7]). 16On 24 October 2008, Mr Ware had a meeting with Mr Gray. Mr Ware says that he said to Mr Gray words to the effect: Bob due to your problems paying staff wages and your suppliers freezing your accounts WB have formed the view that you cannot perform your obligations under the subcontract. The job is suffering because of your inability to resource your part of the project. I have prepared a document for you to sign acknowledging that you can't complete the contract. 17The document provided to Mr Gray to sign on that occasion was a letter stating that: I confirm my advice that the financial circumstances of Clarence Valley Plumbing has been affected by events outside of the contract works at Mareeba as well as the cost to correct defective or non-conforming work and to obtain materials to complete the contract works being greater than the contract sum which remains unpaid. In these circumstances Clarence Valley Plumbing Services will not be carrying out any additional work on this project effective 24 October 2008. As such Clarence Valley Plumbing Services is not able to complete the contract works and Ware Building should engage an alternate plumber to carry out the contract work effective immediately. 18Mr Gray refused to sign the letter. Mr Ware's evidence was that Mr Gray appeared to read it. Mr Ware did not record any further discussion with Mr Gray about the contents of the letter. Mr Ware deposed that he then handed Mr Gray a letter on Ware Building letterhead that was post-dated 25 October 2008. That letter stated: Yesterday you advised Ware Building that you were unable to pay wages for your staff which are now due and requested Ware Building to make payment in advance to assist with payment to staff. In addition in the immediate past you have advised Ware Building that you were having difficulties getting payments due or said to be due from past jobs and have engaged the services of a third party to take action to recover money said to be outstanding. We spoke with this third party yesterday. Further, as a result of discussions over the last week or so leading to a need to determine the cost of materials needed to complete your contract works, Ware Building has determined that the cost to obtain materials in order to complete the work under your contract will be in the order of $400,000.00. This exceeds the balance of your contact sum, noting that you have been paid $100,000 for claims 1 and 2 and that a 3rd claim is presently under review for an additional $50,000. Finally there are numerous aspects of the work already carried out which are defective and or non conforming. These have been advised to you in writing. This corrective work has to be done at your own cost. The above circumstances clearly indicate that your business is unable to pay its debts as and when they fall due and additionally that you do not have the financial resources to complete the contract works. In such circumstances we issue this letter as a notice under clause Q2 of the contract and terminate your contract. 19Mr Ware deposed (at [21] of his affidavit) that Mr Gray's response to being handed that letter was to say "so that's it then" and that Mr Gray was "very quiet" and "seemed to accept what had been said to him". 20After the termination of Mr Gray's sub-contract, Ware Building engaged Mid North Coast Plumbing to rectify the works and to complete the remaining plumbing works to be done. Mr Fitzalan provided an initial quotation and then an amended quotation for the work (affidavit [13]-[15]).

Ground 1 - Denial of procedural fairness 21The first ground of appeal was that Mr Gray was denied procedural fairness in the hearing of the matter. The Amended Notice of Appeal set out 7 matters by way of particulars of that contention. Only the first three of those were addressed on the appeal, those being: first, that his Honour heard the matter in the absence of Mr Gray; second, that Mr Gray was at the time seeking new legal representation; was "in the middle" of seeking funding for such new representation; and was unable to secure legal representation in time for the hearing of the matter; and, third, that medical documents were provided to the Court to substantiate the reasons that Mr Gray could not attend in person a hearing in Taree. The last of those three particulars also referred to the fact that Mr Gray had applied on the same grounds to have the matter transferred to Grafton where he would be able to attend in person regardless of whether or not he was able to secure legal representation, though a challenge based on his Honour's refusal of that application was not pressed on the appeal. 22The circumstances in which the matter came to be heard in Mr Gray's absence appear from the Court transcript, which was included in the Combined Appeal Book (CB). The matter had been listed for hearing in the District Court in Taree on Tuesday, 12 June 2012. According to the primary judge's review of the Court file, that hearing date had been fixed since 28 August 2011. 23Mr Gray was not present in Court on 12 June 2012. Instead, a solicitor (Mr Schneider) attended the Court and advised his Honour that Mr Gray had instructed him late on the preceding Friday that he, Mr Gray, was no longer legally represented. Mr Schneider, who had previously appeared as agent for Mr Gray's solicitors in Tweed Heads, informed his Honour that Mr Gray wanted an adjournment because he was seeking new legal representation. Mr Schneider also explained to his Honour that Mr Gray had not attended Court due to his wife's health. Mr Schneider informed the Court (at CB 2.15) that Mrs Gray had had a number of heart attacks, a lung removed and surgery. He foreshadowed an application by Mr Gray for a change of venue. 24The matter was stood down in the list to permit Mr Schneider, on behalf of Mr Gray, an opportunity to present any materials on which Mr Gray relied for the adjournment based on his wife's state of health. When the matter resumed later that day, his Honour admitted into evidence two medical reports tendered by Mr Schneider in support of Mr Gray's application to vacate the hearing date. Both reports were dated 12 June 2012. One was from an ophthalmic surgeon, Dr Cottee, and stated that Mr Gray suffered from double vision and that driving at night, particularly if tired, would be dangerous for him. The other was from a general practitioner, Dr Gregor, and stated that Mrs Gray had a serious illness and that her carer, Mr Gray, needed to be with her at all times. 25As his Honour noted (at CB 4.16), there was no evidence as to what endeavours had been undertaken by Mr Gray to obtain new legal representation. Nor, for that matter, was there anything as to the reason that Mr Gray no longer had legal representation other than Mr Schneider's statement from the bar table that his previous lawyers had been "sacked". His Honour raised with Mr Schneider the difficulty he saw in the medical reasons put forward for the adjournment application in that they suggested that Mr Gray would never be able to attend the proceedings (CB 6.41). There was no evidence or response to address that concern. 26His Honour expressed the view that both reasons put forward for the adjournment (i.e., Mr Gray's then lack of legal representation and the medical reasons) were inadequate. In relation to the medical reasons, his Honour commented that "albeit that they might have some merit to them, one wonders how he was going to prosecute his defence in this case if he hadn't sacked his lawyers" and noted that no application for a change of venue had been made (CB 7.36). The matter was then stood in the list to 13 June 2012. I can only assume that, consistent with his obligations as a solicitor, Mr Schneider informed Mr Gray of the position that his Honour had taken and that the matter had been stood in the list and might then be heard the matter the following day (i.e., 13 June 2012). 27When the matter was called at 10am on 13 June 2012, there was no appearance by or on behalf of Mr Gray. It is apparent from the transcript of the hearing of the matter on that day (CB 9-18) that a Notice of Motion for Mr Gray, seeking a change of venue from Taree to Grafton, and a supporting affidavit, had by then been received in the Court registry. This is consistent with Mr Schneider having informed Mr Gray of what had transpired when the matter had been before Toner DCJ the previous day. Neither the Notice of Motion nor the affidavit was in evidence on the appeal. 28The matter was called again at around 3.40pm. His Honour then dismissed the application for a change of venue on two bases: first, that there was no one there to prosecute the motion, although his Honour said that this was not conclusive, and, second, that the affidavit in support did not demonstrate merit in the application. His Honour observed that the affidavit sworn by Mr Gray "simply lists matters of his convenience as to why the matter ought to be transferred" that were on their face unpersuasive. 29Ground 2 of the Amended Notice of Appeal and "particular" 3 of Ground 1 of the Amended Notice of Appeal took issue with the dismissal of the motion to transfer the proceedings to Grafton. As indicated above, neither of these was pressed on appeal. 30As to the adjournment application, his Honour noted (from CB 12.5) that the first medical report dealing with Mrs Gray simply indicated that she had a "serious illness" and that Mr Gray was her carer and needed to be with her at all times; that the second report was simply that Mr Gray could not drive at night; that the matter had been fixed for hearing since August the previous year; that there had been a number of interlocutory hearings but at no stage had there been any application made to change the venue of the hearing until the day it was listed to commence; and that Mr Schneider had told the Court "that the defendant had discontinued the services of those who had been his solicitors and wanted the opportunity apparently of retaining new lawyers". His Honour commented that he had "more than an idle suspicion that the defendant seems to be avoiding battle" (CB 12.23). 31His Honour then commenced to hear the matter in Mr Gray's absence. The hearing was adjourned part-heard to 14 June 2012, on which date there was further argument (again, in Mr Gray's absence). Reasons for judgment were given orally on that date. Judgment was entered against Mr Gray in the order of around $600,000 and Mr Gray's cross-claim was dismissed. 32The sole submission put by Counsel appearing for Mr Gray on the appeal (Mr Pierce) on the first ground of appeal was that there was a rational cause or explanation for Mr Gray's absence from the Court, namely that he needed to care for his seriously ill wife, and that his absence was not a mere matter of personal convenience. A distinction was sought to be drawn between the present case and those in which no rational cause or explanation for non-attendance at Court was found to have been given (as was the case in Magjarraj v Asteron Life Ltd [2009] NSWSC 1433) or where an inadequate medical certificate had been relied upon (as in Jeray v Blue Mountains City Council [2012] NSWCA 339, where the medical certificate relied upon had been redacted to mask the medical condition there being certified). 33In Forster v Harvey [2006] NSWSC 1112, where the defendant had relied upon a standard form medical certificate stating simply that he was unfit for work and suffering from major depression, Young CJ in Eq, as his Honour then was, commenting on the inadequacy of the medical certificate, also suggested that likelihood of recovery from an illness was a relevant factor to take into account on such an application. In the present case, as is apparent from the comments of his Honour to which I have referred above, Toner DCJ adverted to the absence of any information as to when Mr Gray might be available to attend an adjourned hearing, if the hearing date were to be vacated. 34While his Honour did not refer to the principles applicable on an application to adjourn a hearing such as was made on behalf of Mr Gray, he clearly had regard to the sufficiency of the medical reasons provided for Mr Gray's absence, the lack of evidence as to what steps had been taken to secure new legal representation by Mr Gray, and the lack of any indication as to when Mr Gray might later be in a position to attend an adjourned hearing. 35The primary judge was faced with a situation where there was a last minute application to adjourn a hearing that had been set down for some time; he had been informed by Counsel then appearing for the plaintiff (Mr Colquhoun) that the plaintiff was ready to proceed and had arranged for a witness from Queensland to be in attendance for the commencement of the hearing; and there was a paucity of evidence as to the reasons for the late application and as to when Mr Gray might be in a position to proceed with the hearing. The decision to dismiss the application for adjournment and to proceed in Mr Gray's absence involved an exercise of the Court's discretion, to be undertaken having regard, among other things, to the statutory mandate in s 56 of the Civil Procedure Act 2005 (NSW). 36No error has been shown of the kind referred to in House v The King (1936) 55 CLR 499 in the exercise of his Honour's discretion so as to give rise to appellate intervention in this case. Whether or not this Court might have come to a different decision in the exercise of the discretion to adjourn the hearing is not to the point. 37Mr Gray must have been aware that if the adjournment application, and the subsequent application for change of venue, failed then the hearing was likely to proceed in his absence. He had obviously had the benefit of the attendance by Mr Schneider on 12 June 2012 and of the opportunity afforded to him by the primary judge to put on evidence to support the application for adjournment of the proceedings. No denial of procedural fairness has been shown. The first ground of appeal therefore fails.

Ground 3 - Primary judge's findings 38Ground 3 relates to the alleged errors in the findings made by his Honour. This will more conveniently be addressed after consideration of Ground 4.

Ground 4 - Construction of the Contract 39Ground 4 of the grounds of appeal alleges failure on the part of the primary judge to construe, or properly to construe, the provisions of the sub-contract. The relevant provisions to which this ground of appeal relates seem to be limited to those relating to the right of termination on the happening of an "insolvency event". 40Clause Q2 of the sub-contract, under the hearing "Contractor may immediately terminate", provides as follows: 1. If an insolvency event occurs in relation to the Subcontractor, the Contractor may immediately terminate the engagement of the Subcontractor under this subcontract by giving the Subcontractor written notice of termination. 41Sub-clause 2 requires that the notice of termination state that it is given under that clause. 42"Insolvency event" is defined in Clause S of the sub-contract as meaning: in relation to a person, ... anything that indicates that the person is or will become unable to pay their debts as and when they become due or payable including: ▪ the person is declared, made or becomes insolvent ▪ an execution or distress process is levied against the person's assets which includes the person's income ▪ the person enters into a deed of company arrangement with the person's creditors ▪ the person fails to comply with a bankruptcy notice or a statutory demand served under the corporations law ▪ a provisional liquidator, liquidator, receiver, receiver and manager, administrator, scheme administrator, controller or other such administrator is appointed (whether by a court, creditor or otherwise) to the person or over the person's assets ▪ a trustee in bankruptcy, interim receiver, controlling trustee or other such administrator is appointed (whether by a court, creditor or otherwise) to the person or over the person's assets 43His Honour did not, in his ex tempore reasons, specifically address the proper construction of clause Q2. However, no challenge as to adequacy of reasons was pressed and it must be remembered that they were delivered in the course of a running list in respect of which his Honour was dealing with a number of matters. His Honour focussed in the course of the hearing on the definition of "insolvency event" (from CB 29.36). It is clear from the transcript his Honour's understanding of the plaintiff's case was that it was based on an entitlement to terminate by reason of the fact that Mr Gray's "supplier accounts" had been frozen and he had not paid his workers. In other words, his Honour appeared to accept that those matters, if proved, amounted to something that "indicated", for the purposes of clause Q2, that Mr Gray either then was or would in future become unable to pay his debts as and when they became due or payable. 44As to the proper construction of clause Q2, there are a number of points to note. 45First, clause Q2 in its terms provides that on the occurrence of an "insolvency event", the contractor "may immediately terminate" the sub-contractor's engagement. It is permissive, giving to the contractor a right of election between termination of the engagement of the subcontractor and the continuation of the engagement of the subcontractor (State of Victoria v Sutton [1998] HCA 56; (1998) 195 CLR 291 at 306). Other than the requirement that the right of termination be exercised by a notice in writing stating that the notice was given under clause Q2, there is nothing in clause Q2 as to the manner of exercise of the right of termination once an insolvency event has occurred. 46The words "may immediately terminate" are to be read as meaning "may terminate with immediate effect", the adverb "immediately" qualifying the verb "terminate" rather than the time within which the exercise of the power to terminate must take place. That this is the proper construction of those words is reinforced by the following textual and contextual considerations. First, clause Q2.1 may be contrasted with the power to terminate following a show cause notice, which requires that ten working days' notice be given (clauses Q1 and Q12-13). Second, there is no good reason for the right to be lost if not exercised immediately. Third, if the adverb "immediately" qualified the timing of the exercise rather than its effect, difficult questions would arise having regard to the variety of potential insolvency events - for example, as to whether the right was lost if not exercised immediately after non-compliance with a statutory demand or immediately after the contractor learns of the non-compliance; as to the degree of immediacy required in the exercise of the right; and as to the operation of the clause if there were a series of events each one or a combination of which was capable of amounting to a separate "insolvency event" - rendering the clause in practical terms likely to be unworkable. 47The effect of serving a written notice under clause Q2.1 is the immediate termination of the contract. Service of such a notice must take place within a reasonable time. As Dixon J said in Reid v Moreland Timber Co Pty Ltd [1946] HCA 48; (1946) 73 CLR 1 at 13, "an implication of a reasonable time when none is expressly limited, is, in general, to be made unless there are indications to the contrary" (and see Ballas v Theophilos [No 2] [1957] HCA 90; (1957) 98 CLR 193 at 197). That is consistent with what was held in Galaxy Communications P/L v Paramount Films of Australia Inc (unreported, NSWCA, Priestley, Meagher, Stein JJA, 27 March 1998). 48In any event, nothing turns on this issue in the present case as there was no complaint that the notice of termination was invalid because any right of termination that had arisen had not been exercised immediately on the occurrence of the insolvency event on which it was based. 49The second point to note is that, since Q2 speaks of an occurrence of an event ("if an insolvency event occurs ..."), the contractor must be able to point to a particular 'event', whether viewed in isolation or perhaps as the culmination of a series of events, satisfying the definition of an insolvency event (Galaxy at [21]). 50Third, there is nothing in clause Q2, or the definition in clause S, that suggests that the occurrence of any insolvency event is to be determined subjectively. Hence the subcontractor's opinion that a right of termination had arisen would be irrelevant unless, perhaps, if an issue were to be raised as to whether the exercise of the right was in good faith. An obligation that the power to terminate be exercised reasonably or in good faith is one that may well be implied, given the nature of the power there being exercised (Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 at 369; Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558 at [144]-[163]). Although this area of the law continues to be unsettled (see the authorities referred to in Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [144]), ordinary principles of construction will to some extent limit the way in which the power may validly be exercised. 51Fourth, the definition of "insolvency event", although adopting the language used in the common law and statutory tests of insolvency (i.e., ability to pay debts as and when they fall due), does not require that actual insolvency be established. The definition is to be read as a whole and the meaning of its opening words is therefore informed by the six classes of events expressly included in the definition. 52The second to sixth examples given are all particular things, the occurrence of which may objectively be established. 53The first example, though speaking of insolvency, should be construed to extend to cases where the person is a natural person, having regard to the fact that the example in the fourth bullet point contemplates that the person may be either a natural person (who can fail to comply with a bankruptcy notice) or a corporate entity (which can fail to comply with a statutory demand). The first example has three limbs: "declared", "made" or "becomes" insolvent. The first two refer to a particular objectively ascertainable thing - the declaration or 'making' of insolvency. The better view is that the third limb also is to be construed as referring to a particular objectively ascertainable thing, on the happening of which the person "becomes" insolvent. If not, it might, on its ordinary meaning, either refer to the happening of a particular event or, more generally, a conclusion to be drawn (perhaps contestably) from a range of factual matters. 54Each of the six classes of events expressly included in the definition must, as a matter of ordinary syntax and reading the definition as a whole, be something which "occurs" and also answers the description of "anything that indicates" the state of affairs next mentioned in the definition, i.e., that the subcontractor "is ... unable to pay their debts as and when they become due or payable" or "will be" unable to do so. 55"Anything that indicates" is language that takes its meaning from the context in which it appears. Generally speaking, words are "inherently contextual in their meaning" (cf OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd [2013] NSWCA 27 at [61]). 56Use of the word "anything" means that a broad range of events may be covered by the definition. Use of the word "indicates" is capable of bearing a range of meanings, depending on context, as the following cases illustrate. 57In McDonald v McDonnell & East Pty Ltd Ex parte McDonald [1957] Qd R 540, where the issue was as to whether a particular advertisement could be taken as "stating, indicating or implying" the price from which an advertised reduction was made, Stanley J considered that the word "indicating" meant expressly signifying the relevant matter without expressly stating it in words, or words and figures, such as by pictures or diagrams or graphs allied with figures. 58In Maurice Binks (Turf Accountants) Ltd v Huss [1971] 1 WLR 52; [1971] 1 All ER 104, the meaning of the word "indicating" in s 10(5) of the Betting, Gaming and Lotteries Act 1963 (UK), when used in the phrase "advertisement indicating that particular premises are a licensed betting office", was considered. The relevant question was whether a sign displaying a company name that included the words "Turf Accountants" indicated that the premises in question was a licensed betting facility, "turf accountants" being a term accepted as synonymous with the term bookmaker. "Indicating" was not said to include something that suggested that the premises were of that quality. Ashworth J (with whom Lord Parker CJ and Cantley J agreed) referred (at pp 57- 58) to two dictionary meanings of the word "indicate": the first, being to point out, to make known or to show; and the second, being to suggest, to call for, to state briefly, to be a sign of, or to betoken. The Court held that the use of the word "indicating" in the relevant statutory provision fell within the first of those meanings. It was not sufficient that the sign might suggest that the premises were of the particular kind, what was required was that the sign in question "make known" or "show" that the premises were of that kind. 59In Richardson v Fingleton (1980) 24 SASR 511 the Supreme Court of South Australia considered the meaning of the words "as indicated" when appearing in a statutory provision referring to "evidence of the concentration of alcohol in the blood of the defendant as indicated by analysis of a sample of his blood" (my emphasis). In that case, the result of a blood alcohol analysis was displayed on a calibrated dial of the particular instrument. The Full Court agreed with the trial judge (Cox J) that the word "indicated", in those circumstances, referred to the reading shown on the instrument. Cox J had had regard to the Standard Oxford Dictionary definition in coming to that view (Fingleton v Richardson (1980) 23 SASR 297). On appeal, Mitchell J said: Clearly it means indicated on the dial or in what other way it is indicated in the particular breath analysing instrument. In other words it means "shown on the instrument". 60Those decisions were considered by a Full Tribunal of the Administrative Appeals Tribunal in Re Secretary, Department of Social Security and Truscott [1995] AATA 278; (1995) 39 ALD 597 at 599-603, in the context of the question whether the word "indicated", where appearing in s 1237 of the Social Security Act 1947 (Cth), encompassed the meaning "implied" or required that something be "shown". The Tribunal considered that in those cases a narrow construction of the word had been adopted but that this was to be expected since what was there being considered in each case was punitive legislation. In circumstances where the Tribunal did not so characterise the operation of the legislation before it, the Tribunal considered that the word "indicated" should be given its broader meaning so as to mean either "shown", "stated" or "expressed" as well as "implied". 61In the present case, of course, the Court is not concerned with statutory interpretation. It is a question of construction of the clause in the context of the contract as a whole. The object of the verb "indicates", when used in the definition, is expressed in positive terms ("is or will become unable ..."). The right conferred by clause Q2 is one that gives rise to serious consequences: i.e., the immediate termination of the sub-contract without the other party being given a notice to show cause or an opportunity to explain or to remedy the situation giving rise to the insolvency event. Given the existence of other bases for termination of the contract for cause, and the consequences for the other party, there is no reason broadly to construe the language of clause Q2 (and its counterpart permitting the sub-contractor to terminate on the occurrence of an insolvency event of the principal). 62That said, it is not necessary that the person in fact be (or will be) unable to pay his, her or its debts as and when they become due and payable. A failure to comply with a bankruptcy notice or a statutory demand does not, for example, entail that the person is in fact bankrupt or insolvent as the case may be. Moreover, the party with the power to terminate the contract will often not have full access to all the information necessary to make such a determination at the time the occasion for the exercise of the power arises. However, especially given the seriousness of the consequences for the party in respect of whom the power is to be exercised, the language is to be construed as requiring something which provides a sound basis objectively to conclude that the person is or will become insolvent, in circumstances where immediate action to terminate the contract may be warranted and there may be little point in obtaining a response from the other party. 63Therefore, while I consider that the use of the verb "indicates" means that not only something that "shows" or "demonstrates" inability to pay debts but also something that "strongly suggests" that state of affairs will satisfy the definition, what is required must be more than something that simply indicates that the person "might be" or "might become" unable to pay his or her debts. The definition speaks in positive terms, i.e., that the person "is" or "will become" unable to pay one's debts. It speaks to present or future inability not potential inability, though requiring only that there be something ("anything") to indicate this. 64The consequence of this in my opinion is that the clause is not satisfied by pointing to an event that would be equally consistent with either an ability or an inability to pay one's debts as they become due or payable. What is required is "anything" that shows, makes known, points to or strongly suggests a present or future inability; in other words, something that objectively makes it more probable than not that there is or will be such an inability. I would not, however, go so far as to construe the clause as requiring that the evidence be consistent only with a present or future inability to pay one's debts, since that would in effect impose a higher test than would be required to establish actual insolvency. 65What the clause speaks to is an objective indication of insolvency, which makes sense since a contractor would not be expected to have access to all the material that might establish insolvency but must assess the position based on the facts known or reasonably available to it. In my opinion, if reliance is placed on a state of affairs which is not one of the particular ascertainable things capable of conclusive proof, what is required is something so demonstrative of insolvency as not to warrant an explanation from the counterparty. 66Finally, the definition speaks in terms of inability to pay one's debts. Non-payment of debts, of itself, is something that does not necessarily bespeak inability. The observations of Kitto J in Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 at p 310 are pertinent in this context (and see also the discussion in Robert Cussen as liquidator of Akai Pty Ltd (in liq) v Commissioner of Taxation [2004] NSWCA 383 and Iso Lilodw' Aliphumeleli Pty Ltd (in liq) and Anor v Commissioner of Taxation [2002] NSWSC 644 as to the concept of inability to pay debts as they fall due). 67In Queensland Bacon, Kitto J contemplated that a reasonable businessman might draw other possible conclusions from the fact that debts were not paid, including what his Honour referred to as "an understandable disinclination" to sell assets improvidently or to "forego the attractions of expansion of business for the sake of overcoming what might well be a temporary shortage of cash", contrasting an inability to pay debts amounting to insolvency for the purposes of the legal use of that term with a temporary liquidity problem. Similarly, in Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559 (referred to by Barrett J, as his Honour then was, in Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87), Jacobs J said (at 566): A temporary lack of liquidity must be distinguished from an endemic shortage of working capital whereby liquidity can only be restored by a successful outcome of business ventures in which the existing working capital has been deployed. 68Mr Pierce refers to the observation by Young CJ in Eq, as his Honour then was, in Manpac Industries v Ceccattini [2002] NSWSC 330; (2002) 20 ACLC 1304 at [40] to the effect that "despite what is written on the invoices etc as to time for payment, industry practice or dealings between the parties demonstrate that everyone accepts that debtors will often not pay creditors within normal trading terms". 69The existence of outstanding debts, while an indication of possible insolvency, would not therefore of itself be sufficient to satisfy the definition of "insolvency event". One would need something to point to the reason for the non-payment of the debts and that they were due and payable at the time. 70It follows from the above that in my opinion what was required to be established by Ware Building was an event which, considered alone or taken in the context of earlier events, objectively showed, or strongly suggested, at a particular time that Mr Gray was insolvent or would become insolvent in the future; and not simply something that might be equally consistent as between a state of present or future solvency and that of present or future insolvency or which cast doubt on his present or future insolvency. Counsel for Ware Building, Ms Thomas, submitted that facts consistent with a temporary liquidity problem might nonetheless give rise to an "insolvency event" under the definition in this contract if they objectively indicated insolvency, in the sense that they were consistent with that state of affairs and for that reason some evidence of it. I disagree. What was required was that the evidence show more than facts that were equally consistent with insolvency as with insolvency.

Ground 3 - Impugned findings 71I turn then to the errors alleged in the findings of his Honour. Those "findings" were identified in Ground 3 of the Amended Notice of Appeal and are summarised below as that: (i) Ware Building was entitled to the sum claimed; (ii) Ware Building was entitled to interest; (iii) Ware Building was entitled to costs; (iv) Ware Building validly terminated, or purported to terminate, the contract; (v) Mr Gray was in breach of clause Q2 of the contract; (vi) there was an "insolvency event" within the meaning of the contract; (vii) upon the occurrence of an "insolvency event" Ware Building was nonetheless entitled to be paid; (viii) Ware Building validly complied with clause Q8 and 89 [sic]; (ix) Ware Building's claim "springs simply from contract law"; (x) the quote obtained by Ware Building from Mid North Coast Plumbing was limited to finishing of the work and performing rectification work which Mr Gray had been bound to perform; and (xi) that, in effect, his Honour enabled Ware Building to benefit from its own wrong. 72The impugned findings may be broadly grouped by reference to the particular issue to which they relate: the finding as to the occurrence of the insolvency event (grounds 3(iv), (v) and (vi)); findings as to the amounts payable (grounds 3(i), (vii), (viii), (ix), (x)); and miscellaneous challenges to other findings (grounds 3(ii), (iii) and (x)). Other than the challenges to findings relation to the question of the availability of a right to terminate, no written submissions were advanced by Mr Gray in support thereof (and unsurprisingly Ware Building did not address those sub-grounds of appeal). No oral submissions were directed to them, despite an invitation to do so being extended (T 26). In those circumstances the appropriate course is to treat those sub-grounds of appeal as not being pressed.

Finding as to occurrence of Insolvency event - Grounds 3(iv), (v), (vi) 73Much of the complaint as to his Honour's findings, and the focus of the appeal in this regard, turned on whether his Honour erred in finding that there was an insolvency event. His Honour dealt with this from about page 3 of his reasons (Red 15). 74His Honour found that, by October 2008, Mr Gray was having difficulty complying with his obligations under the contract. That finding was open on the evidence given by Mr Ware as to the existence of unremedied defects and as to the hydraulic works being behind programme (although there was no evidence as to what precisely was the extent of the slippage in the work programme). 75His Honour referred to the engagement of Mr Higgs of project manager as being "in effect to supervise the work that was being done by [Mr Gray] and to ensure compliance with his obligations under the contract". While Mr Ware's affidavit does not state that Mr Higgs was engaged solely for that purpose, he does refer to Mr Higgs' appointment as being to assist in the performance of the hydraulic works and hence an inference that Mr Higgs was engaged to address problems in completion of the work by Mr Gray is not unfounded. 76His Honour then went on to refer to a meeting on 14 October 2008 between Mr Gray and Mr Higgs. His Honour said that in that meeting: [Mr Gray] told Mr Higgs who was representing [Ware Building] that he was unable to do the rectification work that had been required by the earlier site instruction, or in fact that he was unable to do any further work pursuant to his contractual obligations as his suppliers has [sic] frozen his account and until those accounts were unfrozen he was unable to obtain the material necessary to do the work required by the contract. 77The difficulty with this is that what was said at the meeting on 14 October 2008 between Mr Higgs and Mr Gray was not in evidence before his Honour, since Mr Higgs' statement (marked MFI at the hearing) was not ultimately tendered. This is conceded by Ms Thomas. Therefore, to the extent that reliance was placed on Mr Higgs' statement for the finding that there was an insolvency event, that finding would not be able to be maintained. It is nevertheless submitted by Ms Thomas that his Honour's finding is able to be supported by evidence other than Mr Higgs' statement, to which I will shortly refer. 78His Honour then referred to the fact that there had "already been a significant amount of materials delivered to the site" for which Mr Gray had been unable to pay. His Honour noted that "[t]o enable the work to proceed [Ware Building] paid for the materials which had been delivered on the order of [Mr Gray] to the site", amounting to $59,089.74 and that Mr Gray's defence did not appear to dispute that that payment was made. 79After referring to what was contained in the termination letter dated 25 October 2008 and the contract provisions, his Honour found that on the balance of probabilities the notice of termination was valid and the contract thus validly terminated. 80Ms Thomas pointed to three matters which were said to amount to the occurrence of an insolvency event and which she submitted, on a fair reading of the primary judge's reasons, had informed his conclusion that the notice of termination was valid: first, that Mr Gray had not paid for materials ordered; second that Mr Gray's suppliers' accounts had been "frozen"; and, third, that Mr Gray had not been able to pay his workers. The evidence in support of those matters fell into two categories: documentary evidence of invoices and terms of supply; and (unchallenged) testimonial evidence.

(i) evidence of unpaid invoices 81That there were unpaid invoices as at 24 October 2008 is not disputed. Exhibited to Mr Ware's affidavit was a bundle of tax invoices (CB 131-147), showing the amounts unpaid. There was no evidence as to the terms of trade between Mr Gray and his suppliers so as to know when particular invoices were due and payable, other than that one of the invoices, from Ajay Fibreglass Industries Pty Ltd, was marked "COD" (CB 141) from which one can infer that the terms of trade with that supplier required payment on delivery. Other statements or invoices (CB 145; CB 146) though not the TradeLink invoices, apportioned the total invoiced amount as between current, 30 days, 60 days and the like, from which it might well be open to infer that the terms of trade required payment of accounts within 30 days. One account (CB 146) bore a handwritten annotation requesting payment for "overdue" amounts. Therefore, there was some evidence from which it may have been open to the primary judge to conclude that as at 24 October 2008 there were some trade accounts that were due and payable and had not been paid (and others that might or might not have been then due and payable but had also not been paid). That does not, of itself, provide a sound basis for concluding that the subcontractor was insolvent. Though it would be supportive of such a conclusion, it is insufficient in itself to support a reasonable exercise of the power immediately to terminate the contract.

(ii) "freezing" of supplier accounts 82As to the evidence of a freezing of one or more of the suppliers' accounts, other than the hearsay evidence by Mr Ware referring to reports received that included reference to an inability to have materials delivered to the site as the result of the freezing of its accounts by Mr Gray's suppliers, and whatever inference might have been drawn from the fact that on 20 October 2008 there was a TradeLink invoice addressed to Ware Building rather than to Mr Gray (CB 143), there is no evidence of this. At the hearing, Counsel then appearing for Ware Building, Mr Colquhoun, seems ultimately not to have pressed this on the basis that the documents to indicate the freezing of the TradeLink account had not been produced (CB 37.2). 83Ms Thomas submits that there was sufficient evidence of the freezing of the TradeLink account by reference to the payment by Ware Building, after termination of the sub-contract, of a little over $59,000 for materials that Mr Gray had ordered. However, payment by Ware Building of outstanding TradeLink invoices provides no evidence that, at the time of termination of the sub-contract, the trade account had in fact been frozen, if by that it is meant that the supplier has refused further deliveries pending payment of the accounts or has refused further credit. 84The invoices rendered by TradeLink show that at least up until 24 September 2008 it was continuing to invoice Mr Gray for deliveries to it (CB 141). As at 20 October 2008, TradeLink invoiced Ware Building for delivery of certain materials in relation to the project. One might perhaps infer from that that there had been a freezing of accounts, although it is not necessarily the case that such an inference was the only one open on the evidence before his Honour. 85Reliance was placed by Ms Thomas on the statement by Mr Ware (at [15] of his affidavit) that he had received reports from his staff as to Clarence Valley Plumbing's suppliers' accounts being frozen. However, it is not clear what was said if anything by Mr Gray to support that conclusion. Reliance was also placed on the fact that Mr Ware did not, in his affidavit, report any response from Mr Gray to the assertion by Mr Ware as to the difficulties. It was submitted that this amounted to acquiescence by Mr Gray in the statement that he had problems paying staff wages and suppliers freezing accounts. On the basis of the above, it was submitted by Ms Thomas that it could be inferred that the need to pay unpaid invoices for materials was due to the freezing of accounts.

(iii) Non-payment of staff 86The evidence of non-payment of staff wages was limited to the hearsay evidence of Mr Ware (at [15]) to the effect that he had received reports from Mr Higgs and Ms Heinemann that included "CVP's inability to pay staff" had been told that Mr Gray's trade account had been frozen; the lack of any reported demeanour by Mr Gray to the proposition put to him by Mr Gray (at [18]); the evidence of Mr Fitzalan of Mid North Coast Plumbing (at [11]) that, in order to retain the staff previously employed by Clarence Valley Plumbing he was asked to pay wages due to them in the sum of $7,000 and did so; Mr Fitzalan's invoice to Ware Building for reimbursement of that amount; and the fourth progress claim that included an amount for staff wages for the period from the week ending 4 October 2008 (CB 148-149). 87It was submitted by Ms Thomas that, as a matter of commercial reality, it could be inferred that non-payment of workers was due to an inability to pay them, having regard to the proposition that if workers were not paid they would not continue working. Hence the argument was that a failure to pay such important debts was indicative of an inability to pay them. That, however, does not take into account what arrangements there may have been between Mr Gray and his staff in relation to payment of wages, during temporary liquidity crises or generally, of which there was no evidence. That said, the inclusion of the staff wages in the fourth progress claim, in the absence of an arrangement with Ware Building that it would meet those payments would support an inference of an inability by Mr Gray to pay those debts.

Conclusion as to grounds 3(iv), (v) and (vi) 88His Honour's finding that Mr Gray had told Mr Higgs that Ware Building that his suppliers had frozen his trade account and that he was unable to perform any work pursuant to his contractual obligations until it was unfrozen cannot stand. There was no evidence before his Honour to the effect that Mr Gray had told Mr Higgs this. There was only evidence in Mr Ware's affidavit of the fact that he had received reports as to the inability of Clarence Valley Plumbing to pay its staff and to have material delivered to the site because of the freezing of accounts. The source of the information in those reports and the precise content of those reports were matters not addressed in the evidence. It may have derived from something Mr Gray had said to one or both of Mr Higgs or Ms Heinemann or it may have been a conclusion derived by them from something else. What Mr Gray did or did not say to them is not known. The only evidence is the summary statement in the affidavit of Mr Ware. 89On the evidence before his Honour an inference may have been open that Mr Gray was unable or would be unable to pay to pay staff wages, having regard to the inclusion of that amount in the fourth progress claim, or was/would be unable to pay the one cash on delivery invoice in full or other supplier invoices within 30 days, but there is only the change in the delivery address on the 20 October 2008 TradeLink invoice to support an inference that any of his supplier accounts had been frozen. 90As to the "freezing" of accounts, as noted above there was direct evidence from Mr Ware of a conversation with Mr Gray in which Mr Ware referred to suppliers freezing the accounts and that Mr Gray did not demur from that proposition (in that Mr Ware said that "Mr Gray was very quiet and seemed to accept what had been said to him"). 91As to the non-payment of staff, Mr Fitzalan's evidence was that he had been asked to pay wages to them and had done so. 92In those circumstances, the difficulty with his Honour's implicit finding as to the occurrence of an insolvency event is that it is not clear whether and to what extent that was dependent on the statement of Mr Higgs, which was not in evidence at the hearing. 93The submission that there was sufficient other evidence to support that finding without reference to the Higgs conversation is one that depends on inferences drawn as to why it was that invoices or staff wages were unpaid and as to whether the change in delivery arrangements was the product of freezing of one or more suppliers' accounts. Insofar as reliance is placed on any acquiescence by Mr Gray in the propositions put to him by Mr Ware, it is difficult to form a concluded opinion in circumstances where one does not know whether Mr Ware was purporting to give a complete account of the conversation on 24 October 2008. Insofar as reliance is placed on the reports received by Mr Ware from his staff, the reference by Mr Ware to those reports is stated in summary terms and the weight to be attributed to that evidence is in my view low in circumstances where it was not tested. 94I note that in Seltsam v McGuiness [2000] NSWCA 29; (2000) 49 NSWLR 262, Spigelman CJ commented that in the ordinary course "not admissible" in s 70 of the Evidence Act meant "not admissible over objection" but considered that in some cases a question might arise as to whether that proposition required qualification. In Federal Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74, the Court noted that even if certain evidence was hearsay it would not follow that the trial judge was disabled from acting upon it once it was admitted into evidence without objection (at [25]). There, the Court noted the arguments as to the proposition that hearsay even when admitted would have no value but rejected that proposition by reference to Walker v Walker [1937] HCA 44; (1937) 57 CLR 630 which appeared to show that a hearsay letter once placed in evidence was a legitimate source of probative material. 95Here, the reference to the reports at [15] was hearsay but was admitted into evidence. There was no objection thereto, not surprisingly since there was no defendant at the hearing to make such an objection. While the material could be relied upon by his Honour the question is what probative weight it would bear. In my view, the probative weight of this evidence is low because it does not point to the reason for non-payment of the relevant amounts. The most persuasive evidence in support of an inability to pay debts seems to me to be the inclusion of an amount for staff wages in the fourth progress claim but even that is not conclusive in the context of a then ongoing dispute as to the non-payment by Ware Building of disputed amounts from the third progress claim. 96The position in relation to non-payment of staff is finely balanced. The contract made special provision in relation to a sub-contractor's staff in the context of termination of the contract under clause Q2. The contractor in those circumstances had the right to direct the sub-contractor to assign all of its rights relating, inter alia, to the supply of labour (clause Q4), presumably to ensure continuity of staff on site. It is easy to see why ensuring the continuity of staff on site would be of sufficient importance to warrant special treatment in the event of insolvency on the part of the sub-contractor. (The ability of the contractor to take over the staff and other contracts of the sub-contractor in the event of insolvency is itself another factor emphasising the seriousness of the consequences of the clause, when construing what is meant by the verb "indicates"). 97The sum paid by Mr Fitzalan's company for unpaid staff wages represented one week's wages. There was no clear evidence of any explanation for the unpaid wages; simply the unchallenged evidence of Mr Gray's lack of a response to Mr Ware's reference to him having problems paying staff. There might have been an explanation for the unpaid wages that is not consistent with insolvency, as considered earlier. 98In circumstances where it cannot be determined how much weight his Honour placed on matters not in evidence before him, and the material does not in my view compel, as a matter of logic, the drawing of the inferences that Ware Building submits should be drawn, I consider that the finding as to the occurrence of an insolvency event was in error. Therefore, ground 3(vi) is satisfied and it follows that ground (iv) is satisfied insofar as the occurrence of an insolvency event was the only ground on which the contract was terminated by Ware Building. 99Ground 3(v) is meaningless because no finding was made of breach of clause Q2; nor could there have been since Clause Q2 imposed no obligation on Mr Gray - it simply conferred a right of termination on Ware Building if there was an occurrence of an insolvency event. 100In light of the conclusion as to grounds 3(vi) and (iv), the appropriate order is that the matter should be remitted for a new trial on all issues since the critical issue of the occurrence or otherwise of an insolvency event was not determined on a proper consideration of the evidence before his Honour. There would be a substantial miscarriage of justice if the matter were not remitted for hearing for that issue to be properly tested.

Conclusion 101For the reasons set out above, I am of the view that the appeal should be allowed. Insofar as Mr Gray seeks an order that the rehearing be held in Grafton, that is an application that should be made by him in the District Court. I would make the following orders:

Appeal allowed.
Judgment and orders made on 14 June 2012 by Toner DCJ be set aside.
The matter be remitted to the District Court for rehearing.
The respondent is to pay the costs of the appeal and of the hearing below.
The respondent is to have a certificate under the Suitors' Fund Act, 1951 (NSW), if qualified. 102LEEMING JA: I agree with Ward JA.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 23 August 2013

Social Security Act 1947(Cth)

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