DORMLEY PTY LTD AS TRUSTEE FOR THE POLL FAMILY TRUST

Arbitration - House not constructed properly - Whether builder should be allowed to rectify faults - Whether diminution in value of building correct measure of award to owner - Whether owner could employ persons other than builder to rectify faults

Commercial Arbitration Act 1985, s 38

Commonwealth v Rian Financial Services & Developments Pty Ltd [1992] FCA 239; (1992) 36 FCR 101

Cowell v Rosehill Racecourse Pty Ltd [1937] HCA 17; (1937) 56 CLR 605

Darlington Borough Council v Wiltshire Northern Ltd [1995] 1 WLR 69

Duquemin v Slater (1993) 65 BLR 124

Gianfriddo v Garra Constructions Pty Ltd [1971] VicRp 34; [1971] VR 289

Graham H Roberts Pty Ltd v Maurbeth Investments Pty Ltd (19740 1 NSWLR 93

Hughes Bros Pty Ltd v Telede Pty Ltd (1989) 7 BCL 204

Mayfield Holdings v Moana Reef Ltd [1973] 1 NZLR 309

Pearl Marin Shipping A/B v Pietro Cingolani SAS (The General Valdes) [1982] 1 Lloyd's Rep 17

Porter v Hannah Builders Pty Ltd [1969] VicRp 86; [1969] VR 673

Promenade Investments Pty Ltd v State of NSW (1992) 26 NSWLR 203

UDR Equipment Pty Ltd v Afkos Industries Pty Ltd [2000] WASC 57

Zamperoni Decorators Pty Ltd v Lo Presti (1983) 1 VR 1338

1 WALLWORK J: These are reasons for judgment on an originating motion applying for leave to appeal pursuant to s 38(4) of the Commercial Arbitration Act 1995 from an Arbitrator's interim award. The award was made on 15 September 1999.

2 A statement of agreed facts was submitted to the Court pursuant to which it is agreed that the applicants (the builder) carry on business in partnership under the business name of B J and L H Hughes. By an agreement in writing made between the builder and the respondent (the owner) on 4 November 1995, the builder agreed to complete building works at Lot 4, Blackrock Road, Margaret River for the sum of $338,640 upon the terms and conditions contained in the contract.

3 The builder commenced the works on about 6 November 1995. By way of two letters to the architect dated 20 November 1996, the builder made a claim for progress payments pursuant to the contract. The architect issued a progress certificate dated 29 November 1996 for an amount differing from that claimed by the builder. By letter of the same day the architect indicated that he disputed the amount claimed by the builder for the "sixth draw".

4 On 5 February 1997 the owner issued a notice of default, purportedly pursuant to clause 12.2 of the contract, which was personally served on the builder at the builder's home address. The builder then issued a notice of dispute dated 6 February 1997 pursuant to clause 13.1 of the contract. That was sent by registered post to the owner on the same day. The owner then issued a notice of termination dated 20 February 1997 pursuant to clause 12.3 of the contract. That was served on the builder on the same day. Also on the same day Messrs Marinko Lucas on behalf of the owner informed Messrs Jackson McDonald that: "Your clients are prohibited from re-entering the works without the proprietor's written consent. Our client will regard any unauthorised entry by your client onto the site as trespass."

5 No rectification work was undertaken by either party after that time, until the date of the interim award, which was 15 September 1999.

6 The originating motion referred to above, was lodged in the Supreme Court on 11 October 1999 claiming that:

(1) The Arbitrator erred in law in failing to find that, on the proper construction of the contract, and in the events which occurred, the respondent was required to follow the procedures set out in clause 6.8 (and thus clause 5.5) before employing and paying others to rectify any defects or other faults in the building works.

(2) Alternatively the Arbitrator erred in law in failing to find that on the proper construction of the contract and the events which occurred, the respondent's duty to mitigate its loss required it to follow the procedure set out in clause 6.8 (and thus clause 5.5) thereof before employing and paying others to rectify any defects or other faults in the building works.

(3) By reason of the matters set out in grounds 1 and 2 hereof the Arbitrator erred in law in finding that the respondent's damages were equal to the costs of employing and paying other contractors of the respondent's choosing to rectify any defects or other faults in the building works.

(4) In the alternative to (3) the Arbitrator erred in law in finding that in the events which occurred the respondent's entitlement to damages was equal to the costs which would be incurred by the respondent employing and paying others to rectify defects or other faults in the building works rather than by the diminution in the value of the building works caused by defects or other faults in the building works.

7 In this case the builder took possession of the dwelling on 4 November 1995 and the date for practical completion was specified under the contract as 10 June 1996. That date was extended at the builder's request to 22 July 1996 and again at the builder's request to 1 October 1996. By a letter from the architect to the builder dated 8 November 1996, the architect sought an explanation pursuant to the contract as to why the builder had failed to bring the works to a practical completion by the extended date. The architect requested a revised completion programme. The builder failed to respond to that letter and the architect, through its solicitor, gave to the builder on 22 January 1997 a second notice in accord with the provisions of clauses 5.5 and 6.6.2 of the contract. That notice required the builder to comply with the architect's instructions and also required the builder to provide the architect with evidence to show that the materials and goods used complied with the provisions of clause 6.6 of the contract.

8 Pursuant to clause 5 of the contract, the architect was authorised to give a notice requiring the builder to comply with the architect's instructions. If the builder did not comply with a second notice, the proprietor was authorised to employ and pay others to execute any work necessary to give effect to the architect's instructions.

9 On 5 February 1997 the owner gave notice pursuant to clause 12.2 of the contract on the ground that the builder had failed to proceed diligently with the works. Pursuant to clause 12.3 it is provided:

"If the builder either shall continue in default for ten days after receipt of the notice under clause 12.2 or shall at any time repeat such default (whether previously repeated or not) then the proprietor without prejudice to other rights or remedies may within ten days of such continuance or repetition by written notice sent by certified mail to the builder immediately determine the employment of the builder under this agreement provided that notice pursuant to this clause shall not be given unreasonably or vexatiously. If the proprietor at the time of such notice is in breach of this agreement, then the said notice of determination of the employment of the builder shall be deemed to be void and of no effect."

10 It was contended for the owner that by 5 February 1997, which was the date of the notice, the works had not reached practical completion and that the builder was in default under the contract by failing to proceed diligently with the works. A long list of particulars was given in the notice as to why that was so. By the notice the builder was required to bring the building up to the standard of the contract within ten business days from the date of the receipt of the notice, otherwise the owner said it would determine the contract.

11 A subsequent notice of termination dated 20 February 1997 specified that that had not been done, although as stated above, in the meantime and on 6 February 1997, the builder had issued a notice of dispute pursuant to clause 13.1 of the contract.

12 The notice of termination dated 20 February 1997 purported to immediately determine the employment of the builder under the contract and also prohibited the builder from re-entering the site without the proprietor's prior written approval.

13 I was informed at the hearing of this matter by counsel for the owner that the reason the clause 12.2.2 notice was given was because it was considered that the defects in the building were so grave that the owner wished to terminate the contract if the builder failed to make them good. It was said that it had been obvious that there were innumerable defects in the building of a very grave nature which had amounted to wholesale errors of a major and significant kind, and that the builder had not complied with his obligations under the contract in a major manner. It was said that although the builder could have said that he rejected the notices and was still ready, willing and able to proceed, the builder had decided that it had had enough of the contract and had accepted the notices as repudiation. It was submitted that as at that point the contract was at an end as far as both parties were concerned and that neither party had any further obligation under the contract. It was submitted that the Arbitrator had then been left with the question of how to value the work which the builder had already carried out.

14 It was submitted for the owner that the Arbitrator had made no manifest error of law in his award and that the determination of the questions raised by the originating motion would not be likely to add substantially to the certainty of commercial law.

15 Acting on the notice of dispute given by the builder on 6 February 1997, the Arbitrator determined that the notice of default given by the proprietor on 5 February 1997 was invalid; also that the notice of termination dated 20 February 1997 from the owner was invalid.

16 The Arbitrator found that the claims arising from L(e) of the notice of default were not specified in sufficient detail to fully inform the builder as intended by the terms of the contract. He held that the builder had not been notified specifically as to the work required, and that the details of matters to be attended to, were not specified in all cases, as was called for in the contract. This was why the Arbitrator determined that the notice of default did not contain sufficient particulars.

17 With respect to the notice of termination dated 20 February 1997 clause 9.3 of the contract provided clear directions for the counting of days and that it provided that Saturdays, Sundays, statutory public holidays and rostered days off were not to be counted. The Arbitrator held that the notice of termination could not therefore have been given before 22 February 1997. It was given on 20 February 1997.

18 The Arbitrator also found that the architect's role in connection with the sixth progress payment had breached the express terms of the contract as had been claimed by the builder, because the architect had not given sufficient written particulars in the notice.

19 The Arbitrator gave his interim award on 15 September 1999. He found that the second extension of time granted by the architect to 1 October 1996 had determined the date for practical completion, and that a claim for any further extension was rejected. He also found that the owner "had manifest legitimate cause to determine the contract as set out in 12.2.2 of the contract." However, due to a discrepancy in procedures the owner had inadvertently and without any way sacrificing its right to determine the contract, repudiated the contract. He determined, however, that such repudiation had not "changed in any way, the builder's position which was at that time that it was in very serious breach of the contract, as set out in reasons attached ..."

20 In his reasons for his award the Arbitrator, amongst other things, said that the majority of the claims by the architect in connection with defective work, "referred accurately to a poor standard of workmanship causing damage to materials and displayed a lack of effective supervision." The Arbitrator said that a very long list of defective works set out in annexure A1 in the main was found to be a good indication of the poor quality of workmanship, damaged and neglected materials, incorrect materials employed and an overall lack of effective supervision of workers, who had failed to produce the required high level of finish which had been specifically made known to the builder prior to submission of tenders for the works.

21 The architect had advised in a letter which was received by the builder prior to the tender being made that:

"...the drawings and specifications are fairly detailed and we expect a very high quality level of finish throughout the project...We hope you will be mindful of the high level of workmanship we expect when you select your particular subcontractors for this project."

22 It was found by the Arbitrator that that condition had been accepted by both parties "as part of the contract documentation as claimed by the respondent."

"It was clear from the view that the claimant failed to meet its clearly defined obligation to provide a 'very high level of finish throughout the project' and that the claimant apparently failed to be 'mindful of the high level of workmanship' expected."

24 The Arbitrator also found that there could have been no misunderstanding on the builder's part as to what was required by the owner, and as to the standard of finish throughout which would be required to satisfy the architect.

25 The Arbitrator found that the builder's performance had fallen well short of that which would have reasonably satisfied the architect or anybody else expecting average or a higher class of workmanship.

26 The Arbitrator referred to other clauses in the contract which referred to materials being of first class quality and that "all labour and workmanship shall be first class."

"In the two days of the viewing of the works...it became abundantly obvious that the claimant had failed to comply with the express terms of the contract documentation in respect to its requirement for a high standard of workmanship and materials to be employed in the construction of the works. The view in fact revealed workmanship and materials of a standard clearly below average."

28 The Arbitrator found that the evidence had "illustrated without doubt the minimal extent of builder supervision on site and an almost total reliance on workmen to perform their duties without effective guidance from the builder."

"The claimant was either not capable of constructing the works in accordance with the contract or alternatively did not comprehend the extent of its commitment. In these circumstances...the respondent's decision to terminate their engagement of the claimant as their builder was correct, albeit belatedly and not strictly as set out in the terms of the contract."

"Based on past performance, any further work conducted under the control and guidance of the claimant could well have increased the rectification costs already awarded in favour of the respondent."

31 This last finding in my view is a most important finding.

32 The Arbitrator determined "that the terms of the contract, specifications and drawings were explicit in the extreme and that the claimants failed without acceptable reason to comply with those terms."

33 It was submitted for the owner at the hearing before me that in clause 12.3 it was provided that the action of the owner in giving the notice must be reasonable and that the Arbitrator had found that the owner had been quite justified in giving the relevant notice. It was submitted that practically the builder had been only too pleased to see his way out of the contract. That was confirmed by par 11(8) of the builder's points of claim dated 20 March 1997 where it was pleaded that the builder had no alternative than to accept the owner's repudiation of the contract. Further, it is submitted for the owner that there had been no attempt made by the builder to continue with the contract by going to arbitration and claiming that the contract should remain on foot.

34 It was further submitted that the question for the Arbitrator was to decide whether in the circumstances he should put any weight upon the right the builder would have had to return if the contract had been on foot. It was submitted that in this case, far from "being ready, willing and able", the builder had not had the capability to fix the faults; that it would have been of no benefit to the builder to have been allowed to attempt the rectification work, as the standard of the work as found by the Arbitrator had been so poor that there had been no reasonable basis to conclude that the builder would have been able to carry out any successful rectification work at all.

35 The Arbitrator had concluded that the project was simply beyond the capabilities of the builder. He had found:

"In the building of this fairly unique residence there was a need for a very experienced builder with a high level of fine carpentry experience and an intention to involve himself on a day to day basis with work on site. The only alternative to a builder with those qualifications and intentions would have been a full time site foreman (in the true sense of the title) of the same ilk. It was blatantly obvious that such was not the case in the building of this residence."

36 It was submitted for the owner that in all the circumstances it would have been most unreasonable for the Arbitrator to have valued the work which had been carried out by the builder as if it had been in conformity with the contract, or to discount the value of that work by a purely hypothetical estimation of what it might have cost the builder to make good on the assumption, which was plainly contrary to the facts, that the builder was capable of doing so. It was submitted that the only rational approach to the valuation of the work carried out on site by the builder was to assume, as the Arbitrator had done, that the builder would not have been capable of improving the position if left to its own devices, and that it was necessary if the work was to be made good, to bring in a competent builder capable of devoting considerable time to the work; that in assessing the value of the work in conformity with the contract, the Arbitrator's decision had been essentially one of fact rather than law, and that his decision had turned upon the particular circumstances of the case. Different considerations would apply where a competent builder had been terminated at a stage where he had satisfactorily completed the building, but had left a few omissions which could easily be remedied.

37 It was submitted for the owner that there had been very serious deficiencies in the building which had required an enormous amount of work to put right and that it had been obvious to the Arbitrator that the builder had not been competent to undertake such a task. No general rule could be laid down as to what would be a reasonable course to adopt in these circumstances. Each case would turn upon the merits of the particular circumstances; there was no possibility of the certainty of the commercial law being contributed to in any respect by the decision in this case.

38 It was submitted for the builder that the mechanism of the building contract contemplated that the builder must first be given the opportunity to remedy defects before the owner was entitled to engage others to remedy defects. Further, that the owner had deprived the builder in this case of the opportunity to remedy the defective work by virtue of the owner's repudiation of the contract.

39 The answer to those propositions for the builder is that the Arbitrator found, and there is no reason to reject his finding, that in this case the builder was not capable of remedying the defects. Because the builder was unable to complete the works or to remedy defective workmanship or materials, the reasons of Cole J in Turner Corporation Limited (Receiver and Manager appointed) v Austotel Pty Ltd (1994) 13 BCL 378 at 388 on which the builder relies are not in my view applicable to this case.

40 I am also of the view the remarks of Evans LJ in Pearce and High Limited v Baxter and Baxter (1999) CILL 1488 at 1489 are not applicable to this case. Evans LJ's remarks were based on the assumption that the contractor could remedy the defects, whereas in this case the Arbitrator in effect held that it could not do so. It cannot be said in this case that the contractor has been unfairly disadvantaged by not being able or permitted to carry out the rectification of the faults.

41 The same reasoning applies to the builder's submissions in this case that the contractual right of a builder to receive a direction to rectify defective work so that such rectification work can be performed by him is of great practical significance to the builder.

42 The builder contends that it was wrongly deprived of the opportunity to rectify the defects by virtue of the owner's repudiation of the contract, and that the Arbitrator's finding that the appropriate measure of damages was the cost to the owner of remedying the defects was inconsistent with his finding that the owner had incorrectly repudiated the contract.

43 In my opinion those submissions should not be upheld as again it is assumed that the builder was capable of remedying the defects. It is also assumed that the defects in the notices issued by the owner were fatal to its claim to claim the costs of the rectification from the builder.

44 The builder contends in its submissions that there was a manifest error of law in the face of the record in that having found that the owner incorrectly repudiated the contract, the Arbitrator should have found that the appropriate measure of damages with respect to the owner's counterclaim for defective work was the cost to the builder of making good the defects. On the Arbitrator's finding the builder was unable to make good the defects.

45 Alternatively it is submitted that the Arbitrator should have assessed damages on the basis of the diminution in the value of the works because, to do otherwise, leads to the unjust result that the owner is awarded damages almost equal to the cost of building the whole residence, despite the fact that the building works were almost complete at the date of the termination of the contract.

46 The answer to that last proposition is that it could not be said that the building works were almost complete at the date of the termination of the contract because largely they were not built in accord with the contract.

47 It was also contended for the builder that the Arbitrator accepted that the works were 96 per cent complete. That is not in accord with his findings of fact.

48 It was submitted for the builder that in Bellgrove v Eldrig [1954] HCA 36; (1954) 90 CLR 613 the High Court had said that where rectifying defective work could be unreasonable, the measure of damages should be the diminution in value, if any, produced by the departure by the builder from the plans and species under the contract, or by the defective workmanship or materials. It was submitted if the cost of remedying the defects is disproportionate to the end to be attained, the damages should be measured by the value of the building as required by the contract less its value as it stands.

49 It was submitted that in this case, having regard to the cost of the entire works under the contract, and the stage to which the works had progressed, the Arbitrator should have held that the cost to the owner of remedying the defects was in excess of a fair and reasonable sum. Accordingly there was a manifest error of law in the face of the award in that the appropriate measure of damages was the diminution in value of the works caused by the defective workmanship. It was contended that the Arbitrator had made an error of law in this regard and that the determination of the question may be likely to add substantially to the certainty of commercial law.

50 In my opinion the decision in Bellgrove v Eldrig (Supra) supports the Arbitrator's decision in this case. In Bellgrove the Justices of the High Court, Dixon CJ, Webb and Taylor JJ unanimously came to the view that the trial Judge had been correct in awarding the owner the cost of demolishing and re-erecting a building in accordance with the plans and specifications, together with certain consequential losses, less the demolition value of the house and the monies unpaid under the contract.

"In the present case the respondent was entitled to have a building erected upon her land in accordance with the contract and the plans and the specifications which formed part of it, and her damage is the loss which she has sustained by the failure of the appellant to perform his obligation to her. This loss cannot be measured by comparing the value of the building which has been erected with the value it would have borne if erected in accordance with the contract; her loss can, prima facie, be measured only by ascertaining the amount required to rectify the defects complained of and so give to her the equivalent of a building on her land which is substantially in accordance with the contract."

52 Their Honours also said that an owner is entitled to the reasonable cost of rectifying the departure or defect so far as that is possible. At 618 their Honours said:

"We prefer, however, to think that the building owner's right to undertake remedial works at the expense of a builder is not subject to any limit other than is to be found in the expressions 'necessary' and 'reasonable', for the expression 'economic waste' appears to us to go too far and would deny to a building owner the right to demolish a structure which, though satisfactory as a structure of a particular type, is quite different in character from that called for by the contract."

"As to what remedial work is both 'necessary' and 'reasonable' in any particular case is a question of fact."

54 In Ruxley Electronics v Forsyth (1996) AC 344 at 358 Lord Jauncey in the House of Lords said:

"What constitutes the aggrieved party's loss is in every case a question of fact and degree. Where the contract breaker has entirely failed to achieve the contractual objective it may not be difficult to conclude that the loss is the necessary cost of achieving that objective."

55 It is my view that the Arbitrator's decision in this case is in accord with the decisions in Bellgrove and Ruxley and that it was reasonable for the owners to have their building rectified to accord with the contract.

56 In my opinion the grounds of appeal in the notice of originating motion have not been established and leave should be refused.