Growthbuilt Pty Ltd v Modern Touch Marble & Granite Pty Ltd

Supreme Court of NSW|2020-11-04|Before: Henry J

2016] NSWCA 270 Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; [2005] HCA 71 Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116 Spiers Earthworks Pty Ltd v Landtec Projects Corporation Pty Ltd (No 2) (2012) 287 ALR 360; [2012] WASCA 53 Stuart Pty Ltd v Feteni Pty Ltd [2004] NSWSC 237 Timwin Construction Pty Ltd v Façade Innovations Pty Ltd [2005] NSWSC 548 Turner Corporation Ltd (Receiver & Manager Appointed) v Austotel Pty Ltd (1997) 13 BCL 378 Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 Woolworths v Ryder (2014) 87 NSWLR 593 Texts Cited: Hudsons Building and Engineering Contracts (14th ed, 2020, Thomson Reuters) Category: Principal judgment Parties: Growthbuilt Pty Ltd (Plaintiff/Cross-Defendant) Modern Touch Marble & Granite Pty Ltd (First Defendant/Cross-Claimant) Johnne Khouri (Second Defendant) Elizabeth Khouri (Third Defendant) Representation: Counsel: T Breakspear with M Keene (Plaintiff/Cross-Defendant) R Notley with N Simone (Defendants/Cross-Claimant)

Solicitors: BCP Lawyers & Consultants (Plaintiff/Cross-Defendant) Paramonte Legal (Defendants/Cross-Claimant) File Number(s): 2017/115956 Publication restriction: Nil

Judgment

The disputes in these proceedings arise out of four subcontracts entered into in 2015 and 2016 by the plaintiff builder, Growthbuilt Pty Limited (Growthbuilt), as head contractor and the first defendant, Modern Touch Marble & Granite Pty Limited (Modern), as subcontractor in relation to four residential building projects in Surry Hills, Mosman, Balgowlah and Putney.
Under the four subcontracts, Modern agreed to design, supply and install stone, primarily for kitchens and bathrooms, for the Surry Hills, Mosman, Putney and Balgowlah building projects.
Modern commenced works under each of the subcontracts however, there were delays in progress. On 30 August 2016, Growthbuilt terminated each of the subcontracts for the reason that Modern had failed to complete the subcontract works on time.
On 18 April 2017, Growthbuilt commenced these proceedings by summons. By an amended summons filed by consent and with leave on 3 November 2020, Growthbuilt seeks to recover from Modern: 1. liquidated damages under each of the four subcontracts from the dates of completion specified in the subcontracts to the 30 August 2016 termination date in the sum of $1,300,000; 2. post-termination completion costs relating to the Surry Hills, Mosman and Balgowlah projects in the sum of $349,666; and 3. the cost of stone purchased for the Putney project which Growthbuilt alleges has been wrongfully kept by Modern in the amount of $19,715.85.
Growthbuilt also claims that the second defendant, Mr Johnne Khouri, Modern's sole director, is jointly and severally liable under the guarantee provisions of the Surry Hills, Mosman and Putney subcontracts to pay what is claimed in relation to those subcontracts. A similar claim under the Mosman subcontract was made against the third defendant, Ms Elizabeth Khouri, an employee of Modern, but was withdrawn on the second day of the hearing.
On 22 December 2017, Modern filed a cross-claim against Growthbuilt seeking to recover $619,510.25 in respect of the balance of unpaid invoices issued to Growthbuilt for works carried out under the subcontracts.
The hearing commenced on 2 November 2020 and completed early, on 4 November 2020, as a result of the co-operative approach of the parties to resolving issues and a ruling I made concerning the application of the prevention principle to Growthbuilt's claims for liquidated damages and evidence that Modern wished to adduce regarding various causes of delay. The parties were content for me to rule on those matters and give my reasons later, which I have done in this judgment.
According to the agreed position, as a consequence of the ruling made in relation to the prevention issue, the only substantive issue that remains to be determined is whether the liquidated damages clause of the Putney subcontract (cl 12.1) is unenforceable as a penalty. There is no longer any contest about Growthbuilt's post-termination costs claim, Growthbuilt's stone claim in relation to the Putney subcontract, Modern's cross-claim or that Mr Khouri is personally liable pursuant to the guarantee provisions of the Surry Hills, Mosman and Putney subcontracts.
Growthbuilt read parts of two affidavits of Mr Peter Sukkar, a director of Growthbuilt, sworn 29 March and 10 October 2019; parts of three affidavits of Mr Michael Kounellis, a Senior Project Manager of Growthbuilt, sworn 3 May 2018, 29 March 2019 and 30 October 2020; and parts of three affidavits of Mr Marcio Teixeira, a Senior Site Manager of Growthbuilt, sworn 14 May 2018, 29 March 2019 and 30 October 2020. Mr Sukkar and Mr Kounellis were cross-examined. Growthbuilt also tendered an extract of documents from the court book, to which there was no objection.
Modern and Mr Khouri did not read any evidence or tender any other documents in support of its case.
I was greatly assisted by the parties' submissions, the claim summary document prepared by Growthbuilt (MFI-1) which calculates each of the claims made by Growthbuilt and Modern by reference to the four subcontracts and the evidence, and the document setting out the parties' agreed position as to the determination of the remaining issues in dispute (MFI-4).

The building projects and subcontracts

Growthbuilt and Modern entered into a subcontract in relation to each of the four residential building projects in Surry Hills, Mosman, Putney and Balgowlah. The four subcontracts are in a common format and contain largely the same terms. The key differences between them are the project specific terms, such as the site address, contract sum, dates of commencement and completion, liquidated damages rates and scope of works.
Page one of each subcontract identifies the site address, the subcontract price or lump sum, a date for the commencement of the subcontract works (Date for Commencement), a date for completion of the subcontract works (Date for Completion) and the amount payable as Liquidated Damages per calendar day.

Overview of the projects and subcontracts

The Surry Hills building project involved the construction of apartments on Commonwealth Street, Surry Hills by Growthbuilt pursuant to a contract it entered into in or about mid-2015 with Crescent Developments (NSW) Pty Limited for a total contract sum of $9,467,499.
Growthbuilt and Modern entered into the Surry Hills subcontract on or about 9 August 2015. The Surry Hills subcontract is a lump sum contract for $118,000 (excluding GST) and is signed by Mr Khouri on behalf of Modern. It specifies the Date for Commencement as "mid-December 2015", the Date for Completion as "mid-April 2016" and liquidated damages at a rate of $3,500 per calendar day. The scope of Modern's works under the Surry Hills subcontract is set out in Annexure A and, in general terms, required Modern to manufacture, supply and install kitchen benchtops, splashbacks, stone shelving and the bathroom stone and vanity benchtops in the apartments.
The Mosman building project involved the construction of multiple apartments on Belmont Road, Mosman by Growthbuilt pursuant to a contract it entered into on or about 4 August 2015 with Belmont Road Developments Pty Limited for a total contract sum of $21,782,732.
Growthbuilt and Modern entered into the Mosman subcontract on or about 14 March 2016. The Mosman subcontract is for a contract sum of $1,030,000 (excluding GST) and is signed by Mr Khouri as a director of Modern. The Date for Commencement is 25 April 2016, the Date for Completion is "16 weeks from the Date for Commencement" (namely 15 August 2016) and liquidated damages are at the rate of $5,000 per calendar day. The scope of Modern's works under the Mosman subcontract is set out in Annexure A and, in general terms, required Modern to design, supply and install stone benchtops, splashbacks and vanities for the kitchens and bathrooms in the apartments.
The Balgowlah building project involved the construction of 19 apartments, two retail units and two basement levels at a site on Sydney Road, Balgowlah by Growthbuilt pursuant to a contract it entered into on or about 3 February 2016 with Wellton Property Group Pty Limited for a fixed price of $5,970,000.
Although the Balgowlah subcontract is not signed by Modern, it is common ground that Growthbuilt and Modern entered into a subcontract in relation to the Balgowlah building project on 27 June 2016 on the terms of the subcontract document in evidence. The Balgowlah subcontract is for a lump sum of $21,000 (exclusive of GST) and refers to the Date for Commencement as "April 2016 [1] ", the Date for Completion as "May 2016" and the liquidated damages rate as $3,500 per calendar day. The scope of Modern's works under the Balgowlah subcontract is set out in Annexure A and included the supply and installation of stone for kitchen benchtops and bathrooms in the residential units.
The Putney building project involved the construction of a residence on Phillip Road, Putney by Growthbuilt for Charles Sukkar and Tony Sukkar, employees of Growthbuilt and brothers of Peter Sukkar, the director of Growthbuilt who gave evidence in these proceedings. The building contract entered into by Growthbuilt and Charles and Tony Sukkar for the construction of the Putney house is not in evidence.
Growthbuilt and Modern entered into the Putney subcontract on or about 3 February 2016. The Putney subcontract is for a lump sum of $60,500 (excluding GST) and is signed by Mr Khouri as the director of Modern. The subcontract refers to the project as the "Sukkar Residence", the Date for Commencement as "February 2016", the Date for Completion as "April 2016" and the liquidated damages rate as $3,500 per calendar day. The Putney subcontract scope of works included the supply and installation of kitchen and laundry benchtops and splashbacks, cladding to walls and works to the pool.

The common subcontract terms

Under each subcontract, Modern agreed to execute and complete the whole of the works described in Annexure A (Works) diligently, expeditiously and to the satisfaction of Growthbuilt in accordance with the Subcontract Documents. Clause 1.1 of each subcontract provides that Modern must complete the Works by the Date for Completion.
Clause 2.7 provides that Growthbuilt may deduct from or set off against any amount payable to Modern any amount which is due or owing to Growthbuilt, including amounts claimed by Growthbuilt in relation to liquidated damages and other amounts owing.
Clause 3 deals with variations of the works. Clause 3.1 provides that Growthbuilt may at any time vary the Works, including by giving notice in writing to Modern, and that Modern must not vary the works without a written direction from Growthbuilt.
Clause 7 includes an indemnity. Clause 7.1 provides: [2] 7.1 The Subcontractor is liable for and indemnifies Growthbuilt against all claims, liabilities, costs, losses, expenses, penalties and damages (including without limitation in respect of: (a) personal injury to or death of any person; (b) loss of or damage to any property, including any property of Growthbuilt. [3] arising out of or in connection with: (A) the Works; ….. (E) the termination of this Subcontract by Growthbuilt under clause 19.1. Under cl 7.3, the indemnity is a continuing obligation which remains in force and effect after the end of the Date for Completion and/or the termination of the subcontract.
Clause 11 deals with extensions of time. It relevantly provides: 11. Extensions of Time Subject to the Subcontractor having submitted a claim for an extension to the Date for Completion in writing to Growthbuilt within 5 days of the commencement of an Act of Prevention, including details on the nature, cause, effect and duration of the delay, the Subcontractor will be entitled to a reasonable EOT to the Date for Completion in respect of a delay caused by an Act of Prevention. The Subcontractor will not be entitled to any EOT to the Date for Completion for any other reason, event or circumstance. The Subcontractor will have no Claim for any additional or increased costs whatsoever including any delay and/or disruption costs. Failure by the Subcontractor to give notice to Growthbuilt strictly in accordance with the preceding paragraph within the stated period of 5 days for any delay to the Date for Completion caused by an Act of Prevention will disentitle the Subcontractor from making a claim (including for additional payment or time) against Growthbuilt and the Subcontractor will have no Claim arising out of or in any way connected with any delay to the Works caused by an Act of Prevention. It is an essential and fundamental term of this Subcontract that, notwithstanding anything to the contrary in this Subcontract, an EOT granted under this Subcontract only entitles the Subcontractor to an EOT to the Date for Completion and not to any delay, disruption costs and/or any other costs. For the avoidance of doubt, the Subcontractor agrees that it has no Claim relating to or in connection with any EOT claim and/or alleged delay including without limitation delay or disruption caused by Growthbuilt or its employees, subcontractors, consultants or other agents. Growthbuilt may in its absolute discretion at any time and for any reason, without prejudice to its rights or the Subcontractor's obligations under this Subcontract, extend the Date for Completion, but Growthbuilt is under no obligation to extend, or to consider whether it should extend, the Date for Completion. In this clause 11, "Act of Prevention" means an event or circumstance which results in actual delay to the Works and which is one of the following causes: (a) an act or omission of Growthbuilt or its employees, other contractors or agents, except for an act or omission authorised or permitted by this Subcontract, or which arises as part of proper exercise of any rights of Growthbuilt, or its consultants, agents or other contractors (not being employed by the Subcontractor under this Subcontract); (b) a breach of this Subcontract by Growthbuilt; or (c) a variation direction issued under clause 3.1.
Clause 12 provides for the payment of liquidated damages and provides: 12 Liquidated damages 12.1 If the Subcontractor fails to complete the Works or any stage of the Works by the Date for Completion, as adjusted by any EOT granted by Growthbuilt under clause 11, then the Subcontractor must pay or allow to Growthbuilt liquidated damages calculated at the Liquidated Damages Rate for each calendar day during the period from the day following the Date for Completion up to and including the Date for Completion. 12.2 The Subcontractor agrees that the amount of liquidated damages payable under this clause 12 is an agreed and genuine pre-estimate of Growthbuilt's damages if the Subcontractor fails to complete the Works or any stage by the Date for Completion. …
Clause 19 deals with termination. Relevantly, cl 19.1 provides that Growthbuilt may immediately terminate the subcontract by notice in writing to Modern if it is in breach of any of its obligations under the subcontract. Upon termination, Growthbuilt may also deduct from any amounts then due to the Subcontractor all costs, losses, expenses or damages incurred, or which may be incurred, by Growthbuilt as determined by Growthbuilt to be arising from or in connection with any such termination.
Clause 26 deals with the warranties given by Modern. Relevantly, by cl 26.1(f), Modern warrants that it will "perform its obligations with due diligence and within the time stipulated in the [s]ubcontract, utilising the most expeditious and economical methods."
Clause 32 is the guarantee provision. "Guarantor" is defined by cl 32(a) to mean the individual or person who signs the subcontract on behalf of the subcontractor and, in the case of a corporation, the directors and/or company secretary that have signed the subcontract on its behalf.
Clause 32(b) provides that the Guarantor guarantees to Growthbuilt the payment of all moneys payable and performance of all other obligations by the subcontractor under the subcontract and indemnifies Growthbuilt from and against any liability, loss, damage, expense or claim arising directly or indirectly from any breach of the subcontract or any other act or omission by the subcontractor. Under cl 32(d), the guarantee and indemnity are principal (non-collateral) obligations of the Guarantor. Clause 32(f)(i) provides that the guarantee and indemnity continue even if Growthbuilt exercises its right to terminate the subcontract.
Clause 34 sets out the defined terms and relevantly provides: "Claim" includes any claim by the Subcontractor for an increase in the Subcontract Sum for payment of money (including damages) or for an EOT - (a) under, arising out of, or in any way in connection with the Subcontract, including a breach of the Subcontract by Growthbuilt or any direction of Growthbuilt; (b) arising out of, or in any way in connection with the Works or any party's conduct before the Subcontract; or (c) otherwise at law or in equity, including - (i) by statute; (ii) in tort for negligence or otherwise including negligent misrepresentation; (iii) for restitution; (iv) quasi contract or quantum meruit; "Completion" is that stage in the carrying out and completion of the Works when, in the opinion of Growthbuilt: (a) the Works are complete such that they are useable by Growthbuilt for their intended purpose and free from any defects and there are no omissions; (b) those tests which are required by the Subcontract to be carried out and passed before the Works or the Stage are handed over to Growthbuilt have been carried out and passed; … (h) any other thing required by the Subcontract to be done by the Subcontractor before completion has been done by the Subcontractor. "Date for Completion" means the date on which the Works or a relevant stage is brought to Completion. "EOT" means an extension of time to the Date for Completion.

Termination of the subcontracts

On 30 August 2016, Growthbuilt sent an email to Modern in which Growthbuilt stated that it "hereby terminates" each of the four subcontracts in accordance with cl 19.1.
The basis on which Growthbuilt terminated the subcontracts is stated in its 30 August email to be Modern's failure to complete the subcontract works in accordance with the Dates for Completion despite "numerous allowances" and "notices of acceleration" being provided by Growthbuilt. Growthbuilt's email also stated that it would seek from Modern the charges Growthbuilt incurs from using replacement subcontractors and liquidated damages in respect of each of the failures and noted that Modern was currently in possession, at its site, of stone belonging to Growthbuilt, presumably a reference to the stone relating to the Putney building project.
At the hearing, there was some debate about whether Modern and Mr Khouri had accepted Growthbuilt's termination of the subcontracts on 30 August 2016. Growthbuilt contended that they had, referring to the admissions that the subcontracts terminated on 31 August 2016 [4] : List Response at [C5], [C15], [C22] and [C35]. Counsel for Modern and Mr Khouri flagged a possible amendment application to withdraw the admissions and allege that Growthbuilt purported to terminate for breaches which was denied (at T54.28-T55.2). As a consequence of my ruling in relation to the prevention issue, Modern did not press any application to amend regarding termination of the subcontracts and accepted the subcontracts were terminated on 30 August 2016.

Liquidated damages

Before setting out the reasons for the ruling on the prevention issue, it is appropriate to say something about the Growthbuilt's liquidated damages claim and the matters raised by Modern and Mr Khouri (who I refer to jointly as Modern) in response.
By its amended summons and list statement, Growthbuilt pleads that, as a result of Modern's failure to achieve completion of the Works by the Dates for Completion, Growthbuilt is entitled to liquidated damages from the Dates for Completion to termination of the subcontracts on 30 August 2016, calculated at the daily rates specified in each subcontract.
In their list response, Modern and Mr Khouri deny they are liable to pay liquidated damages under any of the subcontracts. They admit that the Works under each of the subcontracts were not competed by the Dates for Completion but deny that this was due to any failure on their part (List Response at [C4], [C13], [C27] and [C33]) and assert that the subcontract terms regarding liquidated damages for delay (cl 12.1) are unenforceable as penalties (List Response at [C5A], [C15A], [C26] and [C35A]).
In addition to the penalty defence, Modern's written and oral submissions referred to cl 11 of the subcontracts, which was asserted to raise two matters that responded by way of defence to Growthbuilt's liquidated damages claim.
The first was an assertion by Modern that Growthbuilt had, in fact, extended the Dates for Completion in relation to the Surry Hills, Mosman and Balgowlah subcontracts which had the effect of reducing or extinguishing Growthbuilt's liquidated damages claims. As was put by Modern at the hearing, this defence relied on the programs for the projects that were in evidence, not on evidence or issues relating to allegations of delay.
The second matter raised was the application of the prevention principle and evidence that Modern sought to adduce to demonstrate that Modern's delays in completing the Works by the Dates for Completion were the result of Growthbuilt's acts or defaults (which Growthbuilt denied). It was on the issue of prevention and Modern's delay evidence that the Court was asked to make a ruling.
Growthbuilt argued that, on the proper construction of cl 11 of the subcontracts, the issue of prevention did not arise in this case and, as a consequence, Modern's evidence in relation to various causes of delay on each project was not legally relevant. Growthbuilt submitted that a ruling by the Court (if made in its favour) would avoid the need for a lengthy contest on factual topics about causes of delay that had no legal consequence and would limit the evidence to those matters that were legally determinative of the real issues in dispute.
Modern's counsel accepted that if the Court was against Modern on its interpretation of cl 11 of the subcontracts and the application of the prevention principle, the issue of whether Modern was delayed or not in respect of each of the four subcontracts and the associated evidence would fall away. He also indicated that, other than the issue of the penalty defence in relation to the Putney subcontract, all that would be left would be the issue of whether the Dates for Completion for the Surry Hills, Mosman and Balgowlah subcontracts had, in fact, been extended by Growthbuilt.
Growthbuilt had earlier challenged Modern's right to pursue a defence based on the allegation that Growthbuilt had in fact extended the Dates for Completion under the Surry Hills, Balgowlah and Mosman subcontracts. It argued that the allegation was inconsistent with the admissions in Modern's list response that extensions of time (EOT) had not been given under the Surry Hills subcontract and the Dates for Completion were as set out in the subcontracts, and the allegation regarding the Mosman subcontract was raised for the first time at the hearing. In response, Modern's counsel indicated that Modern would make an amendment application, submitting that it was "not a particularly complicated argument" as it relied only on the program documents in evidence and that no issue would arise as to the date of termination of the subcontracts. Modern's counsel also acknowledged that Growthbuilt may apply to adduce further evidence in response to Modern's amendment application but was not asking the Court to rule at that stage.
After hearing the parties' submissions and having had regard to s 56 of the Civil Procedure Act 2005 (NSW) and case management principles, I was persuaded that it was appropriate to rule on the prevention issue. For reasons that are set out below, I ruled in favour of Growthbuilt as I had formed the view that cl 11 of the subcontracts did not allow for the implication of the obligations submitted by Modern. This ruling had the consequence that Modern's delay evidence was not admitted and the issue of prevention did not arise in response to Growthbuilt's liquidated damages claim.
As events transpired, Modern did not make the foreshadowed amendment application to assert the Dates for Completion of the Surry Hills, Mosman or Balgowlah subcontracts had been extended by Growthbuilt by reason of the program documents. As the issue as to whether Growthbuilt had, in fact, extended the Dates for Completion of the Surry Hills, Mosman or Balgowlah subcontracts under cl 11 of the subcontracts is not raised by the pleadings and no application to amend was advanced by Modern, I have not considered that issue in these reasons. I should record that, as the program documents for the Surry Hills, Mosman and Balgowlah projects are not in evidence, I am unable to determine, as a matter of fact, whether the Dates for Completion of those subcontracts were extended by Growthbuilt, as Modern contended.
Accordingly, other than setting out my reasons for ruling on the prevention issue, the only substantive issue that remains for determination in relation to Growthbuilt's claim for liquidated damages is whether or not cl 12.1 of the Putney subcontract is an unenforceable penalty.

Ruling on prevention issue and delay evidence

The essence of the prevention principle is that a party cannot require the other party to perform a contractual obligation if it itself has caused the other party's non-performance: Spiers Earthworks Pty Ltd v Landtec Projects Corporation Pty Ltd (No 2) (2012) 287 ALR 360; [2012] WASCA 53 (Spiers Earthworks) at [47].
In the context of a construction contract, the prevention principle may preclude recovery of liquidated damages for delay caused by the principal contractor. An act of prevention in breach of contract by a principal which causes actual delay to the contractor will, in the absence of a contractual mechanism to grant an extension of time, have the effect of setting the time for performance of the contract "at large" with no date from which liquidated damages can run: Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd (2017) 95 NSWLR 82; [2017] NSWCA 151 (Probuild) at [116]; Hudsons Building and Engineering Contracts (14th ed, 2020, Thomson Reuters) at [6-028].
The operation of the prevention principle can be modified or excluded by contract. The manner in which this is usually done is by a contractual extension of time regime: Probuild at [117]. A failure by a contractor to exercise the contractual right to seek an extension of time may negate the effect of preventing contract on the part of the principal, such that the prevention principle does not operate to set time at large. Whether it does will depend on the proper construction of the contract: Probuild at [118].
There is no dispute that an act or omission of Growthbuilt or its contractors that results in actual delay to the Works is an Act of Prevention under the subcontracts and that Modern had a contractual right to claim EOTs and have the Dates for Completion adjusted in respect of delays caused by such Acts: cl 11. It is also common ground that Modern had not claimed any EOTs under the subcontracts in accordance with the cl 11 extension of time regime.
Growthbuilt submitted that, as Modern had not claimed any EOTs and had not pleaded any EOT entitlement in the proceedings, any evidence by Modern contending that there were Acts of Prevention which caused delay was of no legal consequence and irrelevant. It argued that Modern could not now rely on any preventing conduct as it had failed to exercise the contractual right to claim EOTs that would have negated the effect of that conduct, relying on Cole J's statement in Turner Corporation Ltd (Receiver & Manager Appointed) v Austotel Pty Ltd (1997) 13 BCL 378 (Turner) at 384-385: If the Builder, having a right to claim an extension of time fails to do so, it cannot claim that the act of prevention which would have entitled it to an extension of the time for Practical Completion resulted in its inability to complete by that time. A party to a contract cannot rely upon preventing conduct of the other party where it failed to exercise a contractual right which would have negated the affect [sic] of that preventing conduct.
Growthbuilt submitted that Cole J's statement had been approved on multiple occasions; for example in Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211 (Peninsula Balmain) at [78] (Hodgson JA) and Champion Homes Sales Pty Ltd v DCT Projects Pty Ltd [2015] NSWSC 616 at [157]-[158] (Ball J).
Modern contended that Growthbuilt's unilateral power in cl 11 of the subcontracts to extend the Dates for Completion meant that the prevention principle remained an issue, relying on the Court of Appeal's decision in Probuild.
In Probuild, the New South Wales Court of Appeal considered a challenge to an adjudicator's decision under the Building and Construction Industry Security of Payment Act 1999 (NSW). The adjudicator rejected the set-off claim for liquidated damages by the head contractor, noting that the head contractor had directed variations the subject of the contractor's payment claim well after the date for practical completion and the head contractor's power to extend time under the contract for any reason. The Court of Appeal dismissed the head contractor's appeal seeking to quash the adjudicator's decision. In doing so, the Court considered the prevention principle.
McColl JA (with whom Beazley ACJ (as Her Excellency then was) and Macfarlan JA agreed) referred to the debate as to whether a contractor (in this case Modern) may rely on the prevention principle where the contract contains a provision for extensions of time and the contractor does not avail itself of the provision. After noting some conflict of authority on that issue, her Honour considered a number of cases that involved contracts which included a discretionary power on the part of a superintendent to grant an extension of time, including Peninsula Balmain: at [120] to [127].
In Peninsula Balmain, Hodgson JA (Mason P and Stein JA agreeing) endorsed the principle from Turner but concluded that there was no error in a referee treating the contractor as being entitled to an extension of time even though the contractor had not claimed them in accordance with the contractual regime. His Honour found that the Superintendent was obliged to act honestly and fairly in deciding whether to exercise the discretionary power in the contract to grant an extension of time. The clause containing the discretionary power considered by Hodgson JA was in the following terms: Notwithstanding that the Contractor is not entitled to an extension of time the Superintendent may at any time and from time to time before the issue of the Final Certificate by notice in writing to the Contractor extend the time for Practical Completion for any reason.
McColl JA affirmed the reasoning of Hodgson JA from Peninsula Balmain and applied it in Probuild in the context of a clause which provided the head contractor (Probuild) with the discretionary power (described as the reserve power) to extend time notwithstanding the subcontractor had not claimed an EOT under the contract. In Probuild, the clause containing the reserve power was in the following terms: Notwithstanding that the Subcontractor is not entitled to or has not claimed an extension of time, the Head Contractor may at any time and from time to time before the issue of the Final Certificate under this Subcontract by notice in writing to the Subcontractor extend the time for Practical Completion for any reason.
Her Honour concluded that Probuild was obliged to exercise the unilateral power to grant extensions honestly and fairly having regard to the underlying rationale of the prevention principle or, if necessary, because there was an implied duty of good faith in exercising the discretion the clause in question conferred: at [128].
In addition to Probuild, Modern referred to a number of cases in which the Court has considered obligations of reasonableness and good faith.
In Minister for Immigration and Border Protection v SZVFW (2018) 264 CLR 541; [2018] HCA 30, a case involving the review of a decision made by the Refugee Review Tribunal, Edelman J at [132] recognised that the implication of reasonableness was not unique to statutes. He observed that a contractual clause that empowers one party to act to the detriment of another has sometimes been construed as requiring the power holder to reach a decision reasonably and with fair dealing having regard to the interests of the parties and the provisions and purposes of the contract, objectively ascertained. His Honour also observed that the precise content of any implied duty of reasonableness will depend on the circumstances and the construction of the instrument (or contract) as a whole and be influenced by expressions such as "their sole and absolute discretion": at [133].
His Honour referenced his earlier decision in Mineralogy Pty Ltd v Sino Iron Pty Ltd (No 6) [2015] FCA 825; 329 ALR 1 (Mineralogy) and the Full Federal Court's decision in Paciocco v Australia New Zealand Banking Group (2015) 236 FCR 199; [2015] FCAFC 50, cases in which the Court considered the principles relating to the implication of a term of good faith in contracts providing for the exercise of a contractual discretion. Both cases refer to the norm of good faith as requiring reasonableness and fair dealing in the exercise of the contractual power having regard to the interests of the parties, noting that the interests may conflict.
Modern's counsel also referred me to Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896 (Dundee), a case that considered a decision by trustees about a legacy under a will, and the decision of Lady Hale in Braganza v BP Shipping Ltd [2015] UKSC 17; [2015] 4 All ER 639 (Braganza), a case involving a challenge to a decision taken by a company to deny a death benefit under a contract.
In Dundee, the Court considered that the use of the words "sole and absolute discretion" meant that the trustees were to be the sole arbiters of all relevant matters and their decision would be immune from challenge except on limited grounds, including if they did not act honestly or in good faith: at 905 (Lord Reid).
In Braganza, Lady Hale described the implication of reasonableness in general terms and observed that an implication concerning the manner in which a contractual discretion may be exercised was one that was drawing closer to the principles applicable to judicial review. Her Honour referred at [22] to the decision of Rix LJ in Socimer International Bank Ltd (in liquidation) v Standard Bank London Ltd [2008] EWCA Civ 116, in which His Honour referred to a decision-maker's discretion being limited, as a matter of necessary implication, by concepts of good faith and honesty and the need for the absence of arbitrariness, capriciousness, perversity and irrationality, akin to Wednesbury unreasonableness, and emphasised at [31] that any implication of a term of reasonableness would depend on the terms of the contract.
In Mineralogy, Edelman J noted the English approach by reference to Braganza and accepted there may be good reasons to adopt an approach to reasonableness implications concerning contractual discretions that mirror the reasonableness requirement for judicial review. His Honour went on to state that he doubted there would be a general limitation upon an implied qualification of reasonableness such that the obligation applied only to circumstances of irrationality or where the outcome is so unreasonable that no reasonable power holder could ever have acted in that way, and that the existence and content of the implication in any case will depend on the context: at [1011]-[1015].
Modern submitted that in view of Probuild and the other authorities to which I was referred, even though Modern had failed to seek EOTs under the subcontracts, Growthbuilt was obliged to act reasonably and in good faith in exercising its discretion under cl 11 having regard to the prevention principle if delays were solely due to Growthbuilt. It submitted that the implied terms obliged Growthbuilt to act reasonably and in good faith in terms of the way cl 11 operated as a whole, both in the exercise of its absolute discretion to extend the Dates for Completion under the subcontract and also in its consideration of whether it should extend those Dates. In other words, Modern contended that Growthbuilt was also obliged to act reasonably and in good faith in deciding whether to rely on that part of cl 11 that stated that Growthbuilt was under no obligation to extend the Dates for Completion or to consider whether it should extend them.
I was not persuaded by Modern's submissions.
Unlike the reserve power in Probuild and Peninsula Balmain, the unilateral extension of time clause in the subcontracts describes Growthbuilt's power to extend the Dates for Completion as an "absolute discretion".
The words "absolute discretion" have been accepted as excluding an obligation to act reasonably although there is authority that the words may leave room for the implication of a good faith obligation in the exercise of a unilateral power: Macquarie International Health Clinic Pty Ltd v Sydney Local Health District (2020) 19 BPR 40,463; [2020] NSWCA 161 at [268]-[269]; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 (Vodafone) at [195]-[196]; Australian Mutual Provident Society v 400 St Kilda Road Pty Ltd [1991] 2 VR 417 at 424-425.
However, in this case, the discretionary power to extend the Dates for Completion that is described as "absolute" is contained in a clause that also expressly excludes any obligation on Growthbuilt to exercise the power to extend or to consider whether to do so. In other words, the express terms of the subcontracts make clear that, despite having the discretionary power to do so, Growthbuilt has no obligation to extend or make any decision whether or not to extend time under the subcontracts at all. Unlike the reserve power clauses in Probuild and Peninsula Balmain, cl 11 also states that Growthbuilt's discretion may be exercised without prejudice to Modern's obligations under the subcontracts and the power to do so does not arise solely because Modern is not entitled to or has not claimed an EOT.
An obligation of reasonableness and good faith in the exercise of a unilateral contractual power may be implied as a matter of law as an incident of a particular type of commercial contract. However, the implication of such terms cannot extend to imposing obligations on parties that are, in effect, inconsistent with the terms of the relevant agreement itself: Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [146], citing Vodafone at [194] and [208].
I was of the view that there was no room to impose an obligation on Growthbuilt to exercise the power to extend the Dates for Completion, whether reasonably or fairly in the interests of Modern having regard to the prevention principle or not, in circumstances where the express terms of cl 11 provided for no such obligation. On this point, I note that none of the cases to which I was referred by Modern's counsel contained a contractual provision which stated that the relevant decision maker had no obligation to exercise the discretionary power conferred onto them.
I was also of the view that there was no room for a reasonableness or good faith obligation to be imposed on Growthbuilt in deciding whether to rely on the last part of the clause that provides for no obligation on Growthbuilt to extend time or consider whether to extend time. As Growthbuilt submitted, and I accepted, it made little sense and seemed circular to contend for an implied term that obliged Growthbuilt not to rely on an express exclusion of the obligation to exercise that discretion (or consider doing so).
To have construed cl 11 in the way contended for by Modern would, in my view, not have been consistent with the well-known principles of construction of commercial contracts in cases such as Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [47]. The language of "absolute discretion" and "no obligation" reflected a clear intention to confer a discretionary power to extend without any obligation being imposed on Growthbuilt to exercise or to consider whether to exercise that power.
The concept of the prevention principle is addressed by the EOT regime in cl 11 through the definition of an Act of Prevention and the right of Modern to obtain an EOT. The subcontracts, through compliance with the procedures under cl 11, thus enable Modern to have new Dates for Completion substituted in the event of Growthbuilt's acts or omissions actually causing delay. The subcontracts make clear that if the procedures under cl 11 were not adhered to, Modern had no entitlement to an EOT or to claim one, including an EOT arising under any principle of law or equity, and had no right to claim damages for delay. They also make clear that Growthbuilt had an absolute discretion to extend the Dates for Completion for any reason but was under no obligation to exercise that discretion or even consider doing so, and provided for Growthbuilt to be paid liquidated damages if Modern failed to complete the Works or any stage of the Works by the Date for Completion, subject to any adjustment to that Date by any EOT granted by Growthbuilt.
In my view, the objectively determined purpose of cl 11 was to provide contractual machinery to enable new Dates for Completion to be arrived at in the event of Growthbuilt's prevention to avoid time under the subcontracts from being set at large by the operation of the prevention principle and to place on Modern the risk of delay caused by others if Modern failed to obtain EOTs under the regime provided for in that clause.
I was also of the view that the operation of the terms sought to be implied by Modern, which would oblige Growthbuilt to extend the Dates for Completion based on the prevention principle, was inconsistent with the express terms of the subcontracts that provided that Growthbuilt had no obligation to exercise or to consider exercising its contractual discretion, and that Modern's right to extensions to the Dates for Completion due to prevention arose through compliance with the EOT procedures set out in cl 11. I was satisfied that the words in cl 11 weighed strongly against the implication of an obligation on Growthbuilt to exercise the power provided for.
In view of the above matters, I was persuaded that Probuild and Peninsula Balmain were distinguishable. The parties' bargain in this case adopted substantially different terms to those considered by the Court of Appeal in those cases. As Growthbuilt submitted, and I accepted, cl 11 of the subcontracts may have been drafted with Peninsula Balmain in mind: see also Hervey Bay (JV) Pty Ltd v Civil Mining and Constructions Pty Ltd [2008] QSC 58 at [39]-[40].
For these reasons, I concluded that the subcontracts modified the application of the prevention principle such that Modern was precluded from arguing that delays caused by Growthbuilt obliged Growthbuilt to extend the Dates for Completion or that time for performance under the subcontracts had been set at large in answer to the liquidated damages claim. Accordingly, I upheld Growthbuilt's objection to Modern's delay evidence and ruled in its favour that the issue of the prevention principle did not arise in this case.
For completeness, I make another observation about Modern's defence to the liquidated damages claim based on the application of the prevention principle and the implication of terms. In support of its claim that the prevention principle applied in this case, Modern's oral submissions made clear that it relied on implied duties that obliged Growthbuilt, acting reasonably or in good faith, to extend the Dates for Completion for its acts of prevention. Implicit in this submission is the contention that, by failing to exercise its discretion under the subcontracts, Growthbuilt breached implied terms. As was put by Modern's counsel at the hearing, Growthbuilt had an obligation to act in good faith in the way cl 11 operates and could not act capriciously, in an arbitrary manner or dishonestly.
Modern's list response does not plead that Growthbuilt was subject to any implied duties of the type referred to in its submissions or that Growthbuilt had breached those duties by failing to exercise its powers under cl 11 due to its alleged acts of prevention. Nor did it plead or make any claim that the Dates for Completion should have been extended for particular delays and to particular dates, it was simply asserted in submissions that the time for completion was set at large.
As Growthbuilt's counsel submitted at the hearing, to the extent that Modern's claim that Growthbuilt's failures in extending the Dates for Completion involved some element of bad faith, dishonesty or capriciousness, those matters would have to be pleaded. It also seemed to me that, as Modern's defence relied on allegations that Growthbuilt's acts or defaults caused the delays that enlivened the prevention principle, that Growthbuilt had an obligation to extend the Dates for Completion by reason of implied duties of good faith and reasonableness, and that it had failed to do so, those matters and the conduct giving rise to the alleged breaches of the alleged duties should also have been raised in Modern's list response.

Is the liquidated damages provision of the Putney subcontract a penalty?

As noted above, Modern contends that cl 12 of the Putney subcontract that provides liquidated damages at the rate of $3,500 per calendar day is unenforceable as a penalty.
It is common ground that cl 12 operates in respect of a breach of Modern's obligation to complete the Works by the Date for Completion as adjusted for any EOTs granted by Growthbuilt and that the Date for Completion, which is stated in the subcontract to be April 2016, was not extended.
The relevant legal principles on contractual penalties were not in dispute. The parties accepted that they were summarised by McDougall J (with whom Gleeson JA agreed and Sackville AJA agreed with added reasons) in Arab Bank Australia Ltd v Sayde Developments Pty Ltd (2016) 93 NSWLR 231; [2016] NSWCA 328 (Arab Bank) at [69]-[76]. In that case, McDougall J observed that the High Court in Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; [2005] HCA 71 (Ringrow) accepted aspects of Lord Dunedin's speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 (Dunlop) as expressing the law applicable in Australia, which the High Court in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 also followed. The relevant parts of Dunlop (at 86-87) are as follows: 2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage … 3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach … 4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are: (a) It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach … (b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid … (c) There is a presumption (but no more) that it is penalty when "a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage.
His Honour also summarised the propositions emerging from the judgments of those forming the majority in Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28 (Paciocco) as follows: (1) Lord Dunedin's propositions were not "rules of law", but "distillations of principle" (Gageler J at [143]; compare Kiefel J at [32] and Keane J at [260]). (2) The essence of a penalty is that it is a collateral stipulation, the (or a predominant) purpose of which is to punish the borrower for breach, and thus to compel performance (Kiefel J at [29]; Gageler J at [127], [159], [166]; Keane J at [254], [259], [273]). (3) One way of testing whether the impugned stipulation is penal - intended to punish - is to inquire whether the sum that it stipulates to be payable on breach (as I have indicated, the equitable origins and continuing equitable operation of the principle have no present relevance) is to ask whether the stipulated sum is extravagant or out of all proportion to, or unconscionable in comparison with, the maximum amount of damage that might be anticipated to follow from the breach (Kiefel J at [29], [54]; Gageler J at [158] to [162]; Keane J at [221]). (4) "Damage" in this sense is not limited to damages recoverable upon breach of contract, but may extend to damage, or losses, caused by the impairment of other legitimate commercial interests that were intended to be protected by the stipulation (Kiefel J at [33], [42] to [47]; Gageler J at [145], [160] to [162]; Keane J at [216], [283]). (5) The analysis is to be made at the time, and taking into account the circumstances applicable, when the contract was made; not at the time of breach; the analysis is prospective, not retrospective (or as is said in some judgments, is ex ante, not ex post) (Kiefel J at [62]; Gageler J at [169]). (6) Mere disproportion between the stipulated sum and the possible damage is not enough to indicate "penalty"; the disproportion must be such that it is unconscionable for the lender to rely on the stipulation (Kiefel J at [54], Gageler J at [164]; Keane J at [221], [240], [279].
One other principle is relevant in this case, which is that the evidentiary and persuasive onus of proving that cl 12 of the Putney subcontract is a penalty rests with Modern: Paciocco at [167] (Gageler J).
Modern submits that Growthbuilt could not have suffered any damage as a result of Modern's delay in completing the Putney subcontract works by the Date for Completion because of Peter Sukkar's evidence in cross-examination that the owners of the Putney property would not sue Growthbuilt if there was any delay caused by Growthbuilt in completing the residential building works. Modern submits that Growthbuilt would have known this at the time the Putney subcontract was entered into.
Modern also submits that, as Growthbuilt tendered the head contracts for each of the Surry Hills, Mosman and Balgowlah projects but not the written Masters Builders Association contract between Growthbuilt and Charles and Tony Sukkar (Putney Head Contract), the Court would infer that the Putney Head Contract would not have assisted Growthbuilt, based on the principles in Jones v Dunkel (1959) 101 CLR 298 at 320; [1959] HCA 8 (Jones v Dunkel).
Modern then submits that there is otherwise no evidence to suggest that, at the time the Putney subcontract was entered into, Growthbuilt would have anticipated that it would suffer any damage as a consequence of Modern's delay in completion, with the consequence that the sum of $3,500 per day was plainly extravagant, out of all proportion, or unconscionable in comparison with the greatest loss that could have been anticipated to follow from Modern's breach and delay to the completion of the Putney subcontract Works.
While accepting that Peter Sukkar's evidence demonstrates that Growthbuilt was not exposed to losses arising from the risk of litigation brought by the owners of the Putney property, Growthbuilt takes issue with Modern's submission that "Growthbuilt could never suffer any damage as a result of delay". Growthbuilt argues that there is a pool of obvious and well recognised costs incurred on any construction project affected by delay, such as holding costs, preliminaries, site establishment costs and costs associated with the loss of opportunity to deploy resources, and that the risk of litigation is but one loss that might be said to follow from delay.
In support of this submission, Growthbuilt referred to Grocon Constructions (Qld) Pty Ltd v Juniper Developer (No 2) Pty Ltd [2015] QCA 291 (Grocon), a case in which the Queensland Court of Appeal recognised that, in addition to the risk of litigation, inevitable holding costs and a potential for damage to reputation were factors that would each justify a legitimate prospective concern at the time of contract about the impact of delay: at [100]. Pausing here, Grocon involved a large commercial development and there was evidence that the developer had entered into finance agreements to carry out the project, expected to generate revenue to repay creditors through the sale of parts of the project, and would suffer financial loss if the contemplated revenue stream was postponed by any delay in completion of the contract. Further, the builder in Grocon did not dispute that a failure to achieve the relevant stage of completion may be expected to occasion the developer serious damage: at [11] and [96].
Here, the position is different. The liquidated damages clause is contained in a subcontract relating to the construction of a residential home owned by employees of Growthbuilt who have a familial relationship with one of its directors. As I observed at the hearing, in that context it is difficult to see what reputational damage Growthbuilt could expect to suffer as a consequence of Modern's delay when it entered into the Putney subcontract. Nor is there any suggestion that Growthbuilt is subject to finance or sale holding costs of the type considered in Grocon and in some other building cases: see for example, Stuart Pty Ltd v Feteni Pty Ltd [2004] NSWSC 237 at [282], citing Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWLR 504 at 519-521.
In Spiers Earthworks, a case involving a building contract, Murphy JA said (at [93]): In considering the question of whether a provision operates as a penalty, regard may be had to whether the provision stipulates for the payment of a rate over time, so that the total payment increases as the inconvenience caused to the innocent party by the defaulting party increases. In the absence of circumstances indicating to the contrary, a provision of that nature will ordinarily not, prima facie, be a penalty: Williamson v Murdoch (1912) 14 WALR 54 at 58; Bysouth v Shire of Blackburn and Mitcham (No 2) [1928] VLR 562 at 575-576. For example, in Lax v Glenmore the developer of a subdivision required a road to be built in the subdivision within a stipulated time, and the contract for road works provided for payment of an amount by way of liquidated damages for each week that the contract remained uncompleted after the contractual date for completion. The court held that there was nothing on the face of the terms of the contract to indicate that it was a penalty and that there were no "proved circumstances" which indicated that the clause operated as a penalty: Lax v Glenmore (706).
While Murphy JA was in dissent in this case, his Honour's comments were referred to with approval by the Court of Appeal in Grocon: at [100].
The liquidated damages clause in this case is one that provides for a daily rate which increases the total payment over time based on the length of Modern's delay. In my view, the key question to be determined is whether Modern has adduced sufficient evidence of "proved circumstances" to satisfy me, on the balance of probabilities, that the sum stipulated by cl 12 should be characterised as "extravagant, out of all proportion or unconscionable" and operated as a penalty.
As noted above, Modern invited me to draw a Jones v Dunkel inference against Growthbuilt from its failure to adduce the Putney Head Contract. Modern submitted that, in the absence of that contract, it was not possible to say what Growthbuilt was required to do or obliged to pay for on the Putney project and the Court could not start from the position that there were inevitable holding or other costs likely to have been incurred. As was put by Modern's counsel "it may be in this instance that all Growthbuilt was doing was engaging subcontractors and then passing on the invoices to Charles and Tony, but we don't know because the contract is not in evidence" (T142.13-16).
Modern's counsel also submitted that, as it was within Growthbuilt's power to adduce the Putney Head Contract and evidence of other matters, the evidentiary onus had been shifted to Growthbuilt, relying on Lord Mansfield's statement in Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 970 that all evidence "is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted".
This principle is also relevant to the appropriateness of deciding whether a fact has been proved when only limited evidence is available. In Ho v Powell (2001) 51 NSWLR 572; [2001] NSWCA 168 at [14]-[15], Hodgson JA (with whom Beazley JA agreed) said: … [I]n deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision … In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so …
In Gerard Cassegrain & Co Pty Limited v Cassegrain (2013) 87 NSWLR 284; [2013] NSWCA 453 at [26], Beazley P said of Blatch v Archer: That case is authority for the proposition that where material evidence is peculiarly within a party's knowledge, it may be sufficient for the opposing party to adduce slight evidence of a matter in issue.
As for drawing an inference based on the principles in Jones v Dunkel, the significance to be given to a failure by a party to adduce evidence, including documentary evidence, is that it enables the Court to more readily draw an inference against that party which is available from the existing evidence. It cannot be employed to fill gaps in the evidence: Manly Council v Byrne [2004] NSWCA 123 at [54]; RHG Mortgage Corporation Ltd v Iaani [2016] NSWCA 270 at [161].
What is known from the evidence is the following: the Putney project involved a residential build for employees of Growthbuilt who were also brothers of Peter Sukkar; Mr Khouri was aware that the Putney project was for a relative of Peter Sukkar (T135.22-32); the owners of the Putney property would not sue Growthbuilt for delay costs; Growthbuilt stayed the works on the Putney project for an unknown period while one of the owners was sick (T122.3-5); as a residential building project, the Putney works were completed sequentially, one trade after another (affidavit of Peter Sukkar dated 29 March 2019 at [10b]); there was a written building contract between Growthbuilt and the owners of the Putney project; the Putney subcontract was for a contract sum of $60,000 and the works were to be completed within three months; the Putney subcontract included an EOT regime that enabled the Date for Completion to be extended and for Modern not to be exposed to the daily rate payment under the liquidated damages clause if it completed works by the new extended date; and Growthbuilt's subcontracts with Modern on the Surry Hills, Mosman and Balgowlah building projects ranged from a contract sum of $21,000 to just over $1 million and contained liquidated damages clauses at rates of $3,500 or $5,000 per calendar day.
It might be inferred from that evidence that a liquidated damages rate of $3,500 per calendar day is on the "high side" given the Putney residential building project involved a subcontract price for one trade at a cost of $60,500. That said, the test of whether a particular provision is punitive or penal in character is not whether the sum stipulated would be considered to be merely disproportionate compared to the likely damage, but whether it has been demonstrated to be extravagant or unconscionably disproportionate: Arab Bank at [105]. While finely balanced, I have concluded that it is not open to infer from the direct evidence as a whole that $3,500 per calendar day is out of all proportion, extravagant or unconscionably disproportionate to the greatest loss that Growthbuilt could conceivably have suffered in the event of delay or that it was purely punitive in character, noting that loss to Growthbuilt includes all varieties of commercial interests.
As the trade works on the Putney project were to be completed sequentially, it may be expected that, at the time the Putney subcontract was entered into, Growthbuilt anticipated that a delay by Modern would have caused delay to other trades and to the completion of the Putney project building works overall. Logic suggests that a commercial builder, such as Growthbuilt, also had a commercial interest in the Putney project being completed as soon as possible and on time. The longer Growthbuilt was involved in the project, the more cost there would be to it, even if it was only in the value of the loss of opportunity to undertake other work using the resources it had deployed on the Putney project. In that context, it was objectively reasonable for Growthbuilt to have considered the possibility of delay and provide for a contractual remedy in its subcontract with Modern based on a daily rate whereby the total payment increased with the inconvenience and cost to its business from ongoing delay.
It is also possible that Growthbuilt's contract with the owners of the Putney property did not cover all of Growthbuilt's overheads and that it was required to pay ongoing site related costs arising from the delay. While the Putney Head Contract terms are a matter within Growthbuilt's knowledge, in my view, it was open to Modern to obtain evidence about them through further cross-examination of Mr Sukkar or some form of document production process. In any event, even if I were to draw a Jones v Dunkel inference from Growthbuilt's failure to adduce the Putney Head Contract, it would not permit an inference to be drawn that the untendered contract was damaging to Growthbuilt or there was evidence from which the Court could infer that Growthbuilt would not suffer any loss in the event of delay to Modern's subcontract works: Woolworths v Ryder (2014) 87 NSWLR 593; [2014] NSWCA 223 at [35].
Modern had the opportunity to cross-examine Peter Sukkar about a range of matters but chose not to do so. As Growthbuilt submitted, Modern could have asked Mr Sukkar about the rates in the subcontracts and the opportunity costs by reference to the number of people and the equipment on site. Although Modern obtained evidence in cross-examination that Growthbuilt would not be sued for delay by the owners of the Putney project, it did not address the other legitimate interests which Growthbuilt might seek to protect, or whether the costs that Growthbuilt expected to incur from any delay were disproportionate to the daily liquidated damages rate. Modern was entitled to rest its case on the evidence obtained through its limited cross-examination of Mr Sukkar and the documents tendered by Growthbuilt. But, having done so, it ran the risk of failing to adduce sufficient evidence from which the Court could make a positive finding in its favour.
Modern also agreed in the Putney subcontract that the amount of liquidated damages payable under cl 12 was a genuine pre-estimate of Growthbuilt's damages: cl 12.2. While such an agreement is not conclusive, it is not irrelevant in the context where Modern had already signed up to the Surry Hills and Mosman subcontracts that contained similar terms.
McDougall J observed in Arab Bank at [104] that the doctrine of freedom of contract remains important, referring to Keane J's judgment in Paciocco at [220]. Here, there is no evidence that Modern was not capable of understanding and protecting its interests, had been pressured into agreeing to the clause or suffered any "disability".
As Growthbuilt noted, in Ringrow, the High Court (Gleeson CJ, Gummow, Kirby, Hayne, Callinan and Heydon JJ) said at [32]: Exceptions from that freedom of contract require good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed. That is why the law on penalties is, and is expressed to be, an exception from the general rule. It is why it is expressed in exceptional language. It explains why the propounded penalty must be judged 'extravagant and unconscionable in amount'. It is not enough that it should be lacking in proportion. It must be 'out of all proportion'.
In the end, the burden of establishing that the sum stipulated by cl 12 should be characterised as "extravagant, out of all proportion or unconscionable" compared to the greatest loss which may be suffered by Growthbuilt rested with Modern. For the above reasons and based on the limited evidence before the Court, I am not persuaded that Modern has satisfied that onus.

Conclusion on liquidated damages claims

I am satisfied that Modern is liable to pay liquidated damages under cl 12 of the four subcontracts for the period following the Dates for Completion up to and including 30 August 2016, being the date of termination, at the rates specified in each subcontract.
The parties are agreed that the Dates for Completion and liquidated damages calculations, as set out in MFI-1. Accordingly, Modern is liable to pay Growthbuilt liquidated damages as follows: 1. in relation to the Surry Hills subcontract, liquidated damages for 137 days (from 15 April 2016 to 30 August 2016) at a rate of $3,500 per day, for a total sum of $479,500; 2. in relation to the Mosman subcontract, liquidated damages for 15 days (from 15 August 2016 to 30 August 2016) at a rate of $5,000 per day, for a total sum of $75,000; 3. in relation to the Balgowlah subcontract, liquidated damages for 91 days (from 31 May 2016 to 30 August 2016) at a rate of $3,500 per day, for a total sum of $318,500; and 4. in relation to the Putney subcontract, liquidated damages for 122 days (from 30 April 2016 to 30 August 2016) at a rate of $3,500 per day, for a total sum of $427,000.

Other claims involving Modern: post-termination completion costs, stone claim and Modern's cross-claim

Completion costs

Growthbuilt claims post-termination completion costs in the amount of $349,666 for the amounts paid to third party builders to complete Modern's subcontract works as costs incurred in connection with the termination of the subcontracts pursuant to the indemnities provided in cl 7.1(E) of the Surry Hills, Mosman and Balgowlah subcontracts.
In principle, Growthbuilt is entitled to recover any costs to complete the Surry Hills, Mosman and Balgowlah subcontract building works additional to those it would have had to pay Modern as damages flowing from Modern's breaches of the subcontracts. As the parties did not make submissions on the issue and they are agreed on this claim, I have not addressed the interpretation issue raised by cl 7.1 of the subcontracts as to whether the indemnity extends to all termination costs or only those in respect of personal injury to or death of any person or loss of or damage to any property, including any property of Growthbuilt.
I am also satisfied that Growthbuilt has, by the evidence (which is also not challenged), proved that the work undertaken by third parties was necessary to complete the subcontract works required to be undertaken by Modern for the Surry Hills, Mosman and Balgowlah projects and that those costs have been paid for by Growthbuilt.
In relation to the Surry Hills subcontract, there is evidence that Baron Forge completed Modern's subcontract works, as set out in the scope of works document dated 1 September 2016 (MFI-2), at an adjusted subcontract sum of $72,025. Invoices in evidence identify that the amount claimed by Growthbuilt of $68,423.75 (excluding GST) has been paid to Baron Forge.
Growthbuilt claims the amount of $30,664 for the Surry Hills subcontract completion costs. That amount, which is accepted by the parties, is arrived at by deducting the Surry Hills subcontract sum ($118,000) and approved variations costs ($12,900) from the total of the Baron Forge completion costs ($68,423.75) and the amounts paid by Growthbuilt to Modern for works done under the Surry Hills subcontract ($93,140). [5]
There is evidence from Mr Teixeira and in tendered documents that show that, in relation to the Mosman project: 1. Baron Forge completed Modern's subcontract works for an adjusted subcontract sum of $740,000 and Growthbuilt has made payments to Baron Forge for those works totalling $740,000.01, which included a retention payment; and 2. Protecta Group supplied a fluted protective sheeting product (Protecta-Flute) that was used to cover and protect stone supplied by Modern at a cost to Growthbuilt of $818.90. The protection of stone was work that had to be performed by Modern under the Mosman subcontract.
Growthbuilt claims the amount of $312,002.32, for the Mosman subcontract completion costs. That amount, which is accepted by the parties, is arrived at by deducting the Mosman subcontract sum ($1,030,000) from the total of the Baron Forge completion costs ($740,000.01), the Protecta Group costs ($818.90) and the amounts paid by Growthbuilt to Modern for works done under the Mosman subcontract ($601,183.41). [6]
In relation to the Balgowlah subcontract, Mr Kounellis gives evidence that: 1. PDM Stone Pty Ltd completed work required by the Modern subcontract to the kitchen benchtops and island bars in the two penthouses at a cost to Growthbuilt of $5,400; 2. That Stone Guy performed work on the Balgowlah project to repair a defect to the kitchen benchtop stone that had been supplied by Modern, which Growthbuilt received an invoice for and paid $250; and 3. Baron Forge rectified defects to Modern's subcontract works relating to failures in the epoxy used to adhere the sink to the underside of the stone kitchen benchtops works, which Growthbuilt received an invoice for and paid an amount of $1,300 (excluding GST).
Growthbuilt claims the amount of $7,020 for the Balgowlah subcontract completion costs. That amount, which is accepted by the parties, is arrived at by deducting the Balgowlah subcontract sum ($21,000) from the total of the PDM Stone costs ($5,400), That Stone Guy costs ($250), the Baron Forge costs ($1,300) and the amounts paid by Growthbuilt to Modern for works done under the Balgowlah subcontract ($21,070). [7]

Stone claim

The stone claim relates to ten Calacatta marble slabs purchased by Growthbuilt on or about 5 November 2015 that were to be used on the Putney project by Modern.
Modern and Mr Khouri admit that Growthbuilt owns and retains title in the stone, that Growthbuilt asked Modern to return the stone (which it has not done), and that Growthbuilt has suffered loss and damage: List Response at [C25]. Modern and Mr Khouri do not dispute the stone cost was $19,715.85 and has been paid in full.
Based on the invoice in evidence and the concessions by Modern and Mr Khouri, I am satisfied that Growthbuilt is entitled to recover the cost of the Calacatta stone from Modern in the amount of $19,715.85.

Modern's cross-claim

Modern seeks to recover amounts outstanding pursuant to tax invoices issued to Growthbuilt for works undertaken pursuant to the subcontracts totalling $543,282.14 (excluding GST). [8] It also pleaded an alternative unjust enrichment claim which was not pressed at the hearing.
Based on the documents in evidence, which are not challenged by Growthbuilt, I am satisfied that Modern is entitled to recover the amounts it claims for work done under each of the subcontracts.
In relation to the Surry Hills project, the amount claimed of $56,756 (excluding GST) is evidenced by three invoices, which are not disputed, dated 17 June 2016, 1 August 2016 and 17 August 2016.
The amount claimed in relation to the Mosman subcontract is $419,365.23 (excluding GST). The claim is based on the unchallenged evidence of two unpaid invoices; one dated 20 July 2016 for $9,103.23, the other dated 15 August 2016 for $410,262.
The amount claimed in relation to the Balgowlah subcontract is $21,070 (excluding GST) which relates to an unpaid invoice dated 28 July 2016.
The amount claimed for work done under the Putney subcontract is $46,090.91 (excluding GST). This amount is based on Modern's invoice dated 17 April 2017 totalling $66,000, less payments of $9,090.91, $1,818.18 and $9,000 made on 25 March, in June and on 25 August 2016 respectively.

Conclusion on Growthbuilt's claim and Modern's cross-claim

Having regard to the above, I am satisfied that Growthbuilt is entitled to judgment in the amount of $1,126,119.79 (excluding GST). This amount is calculated as follows: 1. in relation to the Surry Hills subcontract, an amount of $453,407.75 payable to Growthbuilt comprising liquidated damages ($479,500) plus completion costs ($30,664) less the amount of Modern's cross-claim ($56,756); 2. in relation to the Mosman subcontract, an amount of $32,362.91 payable to Modern comprising Modern's cross-claim amount ($419,365.23) less Growthbuilt's liquidated damages ($75,000) and completion costs ($312,002); 3. in relation to the Balgowlah subcontract, an amount of $304,450 payable to Growthbuilt comprising Growthbuilt's liquidated damages claim ($318,500) plus completion costs ($7,020) less the amount of Modern's cross-claim ($21,070); and 4. in relation to the Putney subcontract, an amount of $400,624.94 payable to Growthbuilt comprising Growthbuilt's liquidated damages ($427,000) plus the stone costs ($19,715.85) less Modern's cross-claim ($46,090.91).

Guarantee claim

There is no dispute that the guarantee provisions of the Surry Hills, Mosman and Putney subcontracts apply to Mr Khouri, as the director of Modern, and that he is liable, as Guarantor, under cl 32(b) to pay Growthbuilt the liquidated damages, completion costs and stone costs amounts relating to the Surry Hills, Mosman and Putney subcontracts, as set out at [132(a)], [132(b)] and [132(d)] above.
Thus, Growthbuilt is entitled to judgment against Mr Khouri in the amount of $886,395.60 (excluding GST).

Costs and orders

The parties agree that calculations as to interest and questions of costs, including in relation to Ms Khouri, should be addressed after the delivery of judgment. I have deferred making any orders at this stage, including in relation to judgment in favour of the plaintiff, and invite the parties to confer and, within 14 days, send to my associate agreed short minutes that reflect these reasons and deal with the issue of costs.
The parties are at liberty to approach my associate if agreement on the form of the orders cannot be reached, including on the issue of costs. If agreement cannot be reached, the parties should confer and, by Monday 12 April 2021, advise my associate whether they are content for me to deal with the remaining issues on the papers and, if so, provide a timetable for the exchange of competing orders and short written submissions.

Endnotes

2015 (rather than 2016) is quoted at CB1091, however this appears to be a typographical error.
As quoted from the Surry Hills subcontract (CB530) and Putney subcontract (CB720).
The Mosman subcontract (CB789) and Balgowlah subcontract (CB1097) have a comma rather than a full stop after the word "Growthbuilt".
The parties accept that the termination date was 30 August 2016, not 31 August 2016 as pleaded in the List Statement.
The amounts paid by Growthbuilt include Modern's cross-claim for unpaid invoice amounts, which are detailed below.
The amounts paid by Growthbuilt include Modern's cross-claim for unpaid invoice amounts, which are detailed below.
The amounts paid by Growthbuilt include Modern's cross-claim for unpaid invoice amounts, which are detailed below.
As agreed by the parties and set out in MFI-1.

Amendments 25 May 2021 - [5] "Balgowlah subcontract" changed to "Mosman subcontract" in second sentence. 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: 25 May 2021

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