Illawarra Hotel Company Pty Ltd v Walton Construction Pty Ltd [2013] NSWCA 6 | Case summary

Court of Appeal (NSW)|2012-11-02|Before: Meagher JA, Barrett JA, Ward JA, Einstein J, McDougall J

ppellant Walton Construction Pty Ltd - Respondent Representation: S R Donaldson SC/ Ms H M Durham /D A Moujalli - Appellant W Sofronoff QC/M R Gracie/D A Neggo - Respondent Norbert Lipton & Co - Appellant Crisp Legal - Respondent File Number(s): 2008/290556 Decision under appeal Citation: (1) Walton Construction Pty Ltd v Illawarra Hotel Company Pty Ltd [2011] NSWSC 534; (2) Walton Construction Pty Ltd v Illawarra Hotel Company Pty Ltd [2011] NSWSC 1188 Before: (1) Einstein J; (2) McDougall J File Number(s): 2008/290556

Principal contentions on appeal 10Illawarra contends that Einstein J erred in that he did not: (a) properly construe and give effect to a key provision of the contract (clause 35.5) in considering the referee's findings concerning certain extension of time claims and in finding that it was open to the referee to hold that Walton was entitled to extensions of time; and (b) properly construe and give effect to another provision of the contract (clause 40.5) in determining that Walton was entitled to a margin on variations. 11These supposed errors are said to have affected the decision of Einstein J with respect to the adoption of the referee's report. 12Illawarra contends that McDougall J erred in: (a) assessing the quantum of the losses sustained by Illawarra as a consequence of the late completion of the works; and (b) determining that Walton was entitled to interest from 14 March 2008.

A preliminary matter 13The decision of Einstein J was upon a motion for the adoption of a referee's report. That circumstance makes it necessary, at the outset, to consider the nature and scope of an appeal from such a decision (the same considerations are not relevant to the decision of McDougall J). 14Division 3 of Part 20 of the Uniform Civil Procedure Rules 2005 makes provision for the court to order that the whole of the proceedings or any question arising in them be referred to a referee appointed by the court for inquiry and report by the referee. Under rule 20.24, the court has power to adopt, vary or reject a referee's report in whole or in part. 15The principles that must guide a judge asked to adopt, vary or reject a referee's report were stated by McDougall J in Chocolate Factory Apartments Ltd v Westpoint Finance Pty Ltd [2005] NSWSC 784 by way of distillation of what had been said by Gleeson CJ in Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549 at 562-564 (with Mahoney JA and Clarke JA agreeing and Mahoney JA adding comments of his own) and by Cole J in Chloride Batteries Australia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60, White Constructions (NT) Pty Ltd v Commonwealth of Australia (1990) 7 BCL 193 and Foxman Holdings Pty Ltd v NMBE Pty Ltd (1994) 38 NSWLR 615. McDougall J listed the principles as follows (at [7]): "(1) An application under Pt 72 r 13 is not an appeal either by way of hearing de novo or by way of rehearing. (2) The discretion to adopt, vary or reject the report is to be exercised in a manner consistent with both the object and purpose of the rules and the wider setting in which they take their place. Subject to this, and to what is said in the next two sub paragraphs, it is undesirable to attempt closely to confine the manner in which the discretion is to be exercised. (3) The purpose of Pt 72 is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation, that purpose would be frustrated if the reference were to be treated as some kind of warm up for the real contest. (4) In so far as the subject matter of dissatisfaction with a report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh. (5) Where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition towards acceptance of the report, for to do otherwise would be to negate both the purpose and the facility of referring complex technical issues to independent experts for enquiry and report. (6) If the referee's report reveals some error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than 'unsafe and unsatisfactory'. (7) Generally, the referee's findings of fact should not be re-agitated in the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. Thus, the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence. (8) The purpose of Pt 72 would be frustrated if the Court were required to reconsider disputed questions of fact in circumstances where it is conceded that there was material on which the conclusions could be based. (9) The Court is entitled to consider the futility and cost of re-litigating an issue determined by the referee where the parties have had ample opportunity to place before the referee such evidence and submissions as they desire. (10) Even if it were shown that the Court might have reached a different conclusion in some respect from that of the referee, it would not be (in the absence of any of the matters referred to in sub para (6) above) a proper exercise of the discretion conferred by Pt 72 r 13 to allow matters agitated before the referee to be re-explored so as to lead to qualification or rejection of the report. (11) Referees should give reasons for their opinion so as to enable the parties, the Court and the disinterested observer to know that the conclusion is not arbitrary, or influenced by improper considerations; but that it is the result of a process of logic and the application of a considered mind to the factual circumstances proved. The reasoning process must be sufficiently disclosed so that the Court can be satisfied that the conclusions are based upon such an intellectual exercise. (12) The right to be heard does not involve the right to be heard twice. (13) A question as to whether there was evidence on which the referee, without manifest unreasonableness, could have come to the decision to which he or she did come is not raised 'by a mere suggestion of factual error such that, if it were made by a trial judge, an appeal judge would correct it'. The real question is far more limited: 'to the situation where it is seriously and reasonably contended that the referee has reached a decision which no reasonable tribunal of fact could have reached; that is, a decision that any reasonable referee would have known was against the evidence and weight of evidence'. (14) Where, although the referee's reasons on their face appear adequate, the party challenging the report contends that they are not adequate because there was very significant evidence against the referee's findings with which the referee did not at all deal, examination of the evidence may be undertaken to show that the reasons were in fact inadequate because they omitted any reference to significant evidence. (15) Where the court decides that the reasons are flawed, either on their face or because they have been shown not to deal with important matters, the court has a choice. It may decline to adopt the report. Or it may itself look at the detail of the evidence to decide whether or not the expense of further proceedings before the referee (which would be the consequence of non adoption) is justified." 16McDougall J was dealing with a case of reference out under Part 72 of the former Supreme Court Rules 1970. His Honour's summation may be accepted as equally applicable to a reference under Division 3 of Part 20 of the Uniform Civil Procedure Rules, the regime relevant to the present case. The point it emphasises is that a judge considering whether or not to adopt a refereee's report is called upon to exercise a discretion - whether to give the court's imprimatur to a decision made outside the normal curial process by a person charged with the duty of assessing a particular question in the light of the evidence and coming to an informed conclusion, often as to matters lying within a field in which that person has special expertise. 17The discretionary nature of this task shapes the nature of an appeal from a decision to adopt, vary or reject a referee's report. As this Court emphasised in Bellevarde Constructions Pty Ltd v CPC Energy Pty Ltd [2008] NSWCA 228 at [51], where the appeal is from the orders of the judge adopting, varying or rejecting the recommendations of the referees, it is the approach taken by the judge and any asserted error therein that is the subject of the appeal, not the referee's report itself. In Nine Network Pty Ltd v Kennedy Miller Television Pty Ltd (unreported, New South Wales Court of Appeal, 8 June 1994), Gleeson CJ (with the concurrence of Meagher and Handley JJA) explained the matter thus: "It is not for this Court to review the referee's report ... In the exercise of the power of review given by the rules, the judge at first instance may fall into appealable error. If that can be demonstrated to the Court of Appeal, then ordinarily the judgment at first instance will be set aside and consequential relief granted. However, what the Court of Appeal is concerned with is error on the part of the judge. If the judge's decision to adopt (or vary or reject) the referee's report in whole or in part cannot be shown to be based upon a material error on the part of the judge, then there will be no ground for attacking the judgment based on that decision. If on the other hand, that decision can be shown to be based upon a material error on the part of the judge then a different result will follow. If the point at issue is one of law, it may not be difficult to demonstrate such error. If the judge can be shown to have made an error in the approach taken to the exercise of the discretion conferred by the rules (as was contended unsuccessfully in Super Pty Ltd v SJP Formwork (1992) 29 NSWLR 549) then that also may constitute a ground for setting aside the judgment. It may even, in a given case, be possible to demonstrate that the judge's decision to adopt, or vary or reject, the report was based upon an appealable error of fact made by the judge. An example might be a case where the judge embarked upon a consideration of new evidence, or a fresh consideration of evidence that was before the referee, and could be shown to have reached a wrong conclusion. The important point is that it is the judge at first instance who reviews what the referee did; the Court of Appeal, within the limits of the ordinary rules governing appeals, reviews what the judge did. ...However, if the judge, in the proper exercise of the discretion given by the rules, declines to consider afresh questions of fact that have been decided by the referee, then it is not open to the party aggrieved to invite this Court to re-visit those questions on the basis that, by virtue of the adoption of the referee's report, the judge's decision is vitiated by any errors in it." 18 In the same way, the Court of Appeal of Victoria noted in Wenco Industrial Pty Ltd v WW Industries Pty Ltd [2009] VSCA 191; (2009) 25 VR 119 at [18] that, because the decision of a judge invited to adopt a referee's report is one that calls for an exercise of discretion, an appeal court entertaining an application in relation to the decision "is limited to the correction of error exhibited by the approach of the primary judge constrained by principles of the kind expressed in House v R"; and the ultimate question for the appeal court "is not whether the referee was in error, but whether the judge erred in the exercise of his discretion to adopt the report". 19Review by this Court of Einstein J's exercise of discretion must therefore be in accordance with the approach described by Dixon, Evatt and McTiernan JJ in House v The King [1936] HCA 40; (1936) 55 CLR 499 at 504 - 505: "It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred."

Particular implications for this case 20Many of the challenges to Einstein J's decision to adopt the referee's report are advanced on the footing that, having regard to the whole of the evidence before her, the referee should have made a decision on a particular issue different from that in fact made. 21In the proceedings before Einstein J, item (7) in the summation at [15] above required that his Honour accept the referee's findings of fact where there was factual material sufficient to entitle the referee to reach the particular conclusion in fact reached (particularly on technical matters within the referee's field of expertise) and that there be no interference with factual findings where the referee had based those findings on a choice between conflicting evidence. In that item (7), these propositions are qualified by the words "generally" and "ordinarily" respectively, no doubt to cater for exceptional cases. But any such qualification is to be understood in the light of the immediately following item (8) which enunciates the important proposition that the purpose of the reference to a referee, as part of curial dispute resolution, would be frustrated if the judge were required to reconsider disputed questions of fact when it was conceded (or, one might add, obvious) that there was material on which the conclusions could be based. 22As item (13) at [15] above recognises, such a judge should approach submissions that a finding of the referee is not supported by the evidence by considering whether the referee's decision was one which no reasonable tribunal of fact could have reached, having regard to the evidence as a whole. 23It is within this framework as to the discretionary task of the first instance judge that an appeal court must, by reference to House v The King (above) principles, approach that judge's decision on the question whether to adopt, vary or reject the referee's report.

24The first aspect of the appeal concerning the decision of Einstein J focuses on five conclusions of the referee about extensions of time. The referee decided that Walton was entitled to the following relevant extensions: (a) 16 days because of delay in the provision of a construction certificate; (b) 65 days for delay in the provision of permanent electric power to the site; (c) 39 days for delay in the installation of acoustic panels; (d) 10 days for delay in the commissionaing of the electrical installation and the certification of the building; and (e) 22 days for delay in the certification of the building. 25All periods of days refer to working days. There is no dispute that that is the correct approach. 26Einstein J rejected submissions by Illawarra that the referee should not have allowed the five extensions. 27The provisions of the contract of central relevance to the delay claims were clauses 35.2 and 35.5. Clause 35.2, so far as relevant, was in these terms: "The Contractor shall execute the work under the Contract to Practical Completion by the Date for Practical Completion." 28The expression "Date for Practical Completion" was defined by clause 2: "'Date for Practical Completion' means - (a) where the Annexure provides a date for Practical Completion, the date; (b) where the Annexure provides a period of time for Practical Completion, the last day of the period, but if any extension of time for Practical Completion is granted by the Superintendent or allowed in any arbitration or litigation, it means the date resulting therefrom;" 29The schedule specified 5 August 2006 as the Date for Practical Completion. 30Clause 35.5 provided: "Extension of Time for Practical Completion When it becomes evident to the Contractor that anything, incluiding an act or omission of the Principal, the Superintendent or the Principal's employees, consultants, other contractors or agents, may delay the work under the Contract the Contractor shall promptly notify the Superintendent in writing with details of the possible delay and the cause. When it becomes evident to the Principal that anything which the Principal is obliged to do or provide under the Contract may be delayed, the Principal shall give notice to the Superintendent who shall notify the Contractor in writing of the extent of the likely delay. If the Contractor is or will be delayed in reaching Practical Completion by a cause described in the next paragraph and within 28 days after the delay occurs the Contractor gives the Superintendent a written claim for an extension of time for Practical Completion setting out the facts on which the claim is based, the Contractor shall be entitled to an extension of time for Practical Completion. The causes are - (a) events occurring on or before the Date for Practical Completion which are beyond the reasonable control of the Contractor including but not limited to - industrial conditions; inclement weather; (b) any of the following events whether occurring before, on or after the Date for Practical Completion - (i) delays caused by -

the Principal; -
the Superintendent;
the Principal's employees, consultants, other contractors or agents; (ii) actual quantities of work being greater than the quantities in the Bill of Quantities or the quantities determined by reference to the upper limit of accuracy stated in the Annexure (otherwise than by reason of a variation directed under Clause 40); (iii) latent conditions; (iv) variations directed under Clause 40; (v) repudiation or abandonment by a Nominated Subcontractor; (vi) changes in the law; (vii) directions by municipal, public or statutory authorities but not where the direction arose from the failure of the Contractor to comply with a requirement referred to in Clause 14.1; (viii) delays by municipal, public or statutory authorise not caused by the Contractor; (ix) claims referred to in Clause 17.1(v); (x) any breach of the Contract by the Principal: (xi) any other cause which is expressly stated in the Contract to be a cause for extension of time for Practical Completion. Where more than one event causes concurrent delays and the cause of at least one of those events, but not all of them, is not a cause referred to in the preceding paragraph, then to the extent that the delays are concurrent, the Contractor shall not be entitled to an extension of time for Practical Completion. In determining whether the Contractor is or will be delayed in reaching Practical Completion regard shall not be had to - - whether the Contractor can reach Practical Completion by the Date for Practical Completion without an extension of time; - whether the Contractor can, by committing extra resources or incurring extra expenditure, make up the time lost. With any claim for an extension of time for Practical Completion, or as soon as practicable thereafter, the Contractor shall give the Superintendent written notice of the number of days extension claimed. If the Contractor is entitled to an extension of time for Practical Completion the Superintendent shall, within 28 days of receipt of the notice of the number of days extension claimed, grant a reasonable extension of time. If within the 28 days the Superintendent does not grant the full extension of time claimed, the Superintendent shall before the expiration of the 28 days give the Contractor notice in writing of the reason. In determining a reasonable extension of time for an event causing delay, the Suiperintendent shall have regard to whether the Contractor has taken all reasonable steps to preclude the occurrence of the cause and minimise the consequences of the delay. 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. A delay by the principal or the failure of the Superintendent to grant a reasonable extension of time or to grant an extension of time within 28 days shall not cause the Date for Practical Completion to be set at large but noting in this paragraph shall prejudice any right of the Contractor to damages." 31It is common ground that construction work commenced on 20 February 2006, despite a scheduled commencement date of 9 January 2006; and that the superintendent (Ms Indyk) issued a certificate of practical completion on 9 July 2007, having granted extensions the effect of which was that the extended date for practical completion was 28 November 2006. 32Walton contended in the proceedings below that the correct extended date for practical completion was 29 June 2007 and that extensions should have been granted accordingly. Illawarra's position was that no extension was warranted beyond that granted by the superintendent. 33The referee concluded that extensions should have been allowed so as to cause the adjusted date for practical completion to be 26 June 2007. Einstein J's adoption of the referee's report represented endorsement of that conclusioin.

The 16 days issue - construction certificate 34The referee found that Walton was entitled to an extension of 16 days (30 January 2006 to 20 February 2006) because a construction certificate was not provided until 20 February 2006. Demolition was programmed to start on 30 January 2006 but did not begin until 20 February 2006. 35The referee found (and the finding was not challenged) that, by law, demolition could not start until Illawarra, through the superintendent, provided a construction certificate; that the certificate was provided on 20 February 2006 and that demolition commenced on that day. The referee also found that, although the contract required Walton to provide dilapidation and demolition management reports before commencing demolition, these were never provided and demolition was undertaken despite their absence. The referee therefore proceeded on the basis that the failure of Walton to provide these reports did not, in reality, prevent commencement of demolition on 30 January 2006: if demolition was in fact undertaken at a later time without regard for the non-provision of the reports, it could likewise have been undertaken at the earlier time. 36On the question of any relationship between the requirements with respect to a construction certificate and the dilapidation and demolition reports, Einstein J said (at [43]): "The irrelevancy of the delay of the reports and the primacy of the construction certificate in causing the delay was a factual finding open to the referee on the basis of the evidence before her and no cause to disturb this finding was shown." 37Illawarra submitted in this Court that Einstein J was in error. The term of the contract with respect to the dilapidation and demolition reports is said by Illawarra to have created a condition precedent to the commencement of work, so that a construction certificate could not have been issued until the condition was satisfied or waived. Illawarra says that the condition precedent was never satisfied and, to the extent that the judge found that there had been a waiver, he was in error there also. 38Walton's contention is that there was no condition precedent and that, in any event, the question whether the provision concerning the certificates was of that character is beside the point, given that, under clause 35.5, it is only some critical or operative cause of delay that counts and the real cause of inability to start work before 20 February 2006 was the absence of a construction certificate, something that, on the evidence, did not have its source in the absence of the dilapidation and demolition reports. 39The dispute in this Court goes primarily to the question whether, in terms of the contract, the provision of the dilapidation and demolition reports was a necessary precursor to the commencement of work. That is a question of the correct construction of the contract; and it may be accepted that any error of construction on the part of a judge making an order adopting a referee's report is susceptible to correction within the narrow scope of appellate intervention allowed upon an appeal against such an order. 40As a matter of construction, the position Walton takes is correct. The provision with respect to the reports was that they be provided prior to the commencement of any work on the site. If, as happened, work started without their having been provided, there was a breach of or non-compliance with the contract. But Walton's failure to provide the reports did not require or justify postponement of commencement of work by it immediately the construction certificate became available. If it were otherwise, Walton would have had in its own hands a means of indefinite postponement without penalty. It is also noteworthy that clause 27.1 allowed Illawarra to refuse to give Walton possession of the site if Walton was in breach of the contract in certain respects and that the clause did not mention breach in respect of dilapidation and demolition reports. 41Walton acted in accordance with the contract when it commenced work immediately after receipt of the construction certificate and notwithstanding that it had not provided the dilapidation and demolition reports. 42On the matter of "waiver" - an expression that Einstein J said the refereee had used "loosely" - the point of particular significance is that the commencement of work immediately after the issue of the construction certificate was at the express instruction of Illawarra's superintendent. 43Having regard to the limited scope for appellate intervention to which I have referred, I am of the opinion that Illawarra's challenge concerning the period of 16 days fails.

The 65 days issue - "power-on" 44The referee found that Walton was entitled to an extension of 65 days for delay in the connection of a permanent electric power supply to the site. That delay extended the date for practical completion from 23 February 2007 to 28 May 2007 (the former is the date by which, according to a program dated 6 December 2006, Walton was scheduled to complete the works). The end date of 28 May 2007 was set by reference to the provision of upgraded mains power by Integral Energy and reconnection of electricity on 24 May 2007, a further three days then being allowed for completion of a coolroom which was to house the new switchboard after the reconnection of the upgraded electricity supply. 45Einstein J accepted that Walton could not undertake and complete its commissioning works unless and until Illawarra procured the provision by Integral Energy of upgraded electric power, including upgraded service mains from the Integral Energy system to the switchboard within the premises. His Honour also accepted that the need for an enhanced power supply did not arise from the project for which Walton was engaged and that the power upgrade was solely the concern and responsibility of Illawarra, outside Walton's scope of works. 46On those matters, the judge accepted the findings of the referee. His Honour also accepted the referee's findings that the delay had been actual as distinct from expected and that the necessary work (principally upgrading and relocating the switchboard into the coolroom) could not realistically have been done before the upgraded power had been reconnected on 24 May 2007. 47The referee found (and the judge accepted) that the testing and commissioning of the electrical works was programmed to occur during January and February 2007 and was to proceed progressively; that it was not until 19 February 2007 that Illawarra even submitted its design to Integral Energy for the increase in power supply; and that the power was not connected to the new switchboard until 24 May 2007. The referee also found, by reference to clause 35.5, that Illawarra's delay in making the application to Integral Energy caused a delay to Walton in reaching practical completion by which Walton was entitled to an extension of time. The judge accepted this. 48Illawarra submitted in this Court that the judge erred in deciding that there was a "clear evidentiary basis" for the referee's finding of "actual delay in the relevant sense", that is, a delay in Walton's achieving practical completion. 49For reasons I have stated, it may, in my opinion, be accepted that a judge's decision to adopt a referee's report on the basis of findings of the referee that the judge holds to be supported by the evidence before the referee will be susceptible to correction on appeal if it was wrong for the judge to conclude that the evidence supported the findings (and a fortiori if the findings were not made). This is an application of the broader principle that the decision of the judge may properly be challenged on appeal if the judge concluded that an ultimate finding of the refereee was open when it simply was not open. 50Illawarra's submissions in this respect are based in large measure on the proposition that there was no evidence and no finding by the referee that the upgrading of the power supply (which included moving the switchboard to the coolroom and installing the coolroom) actually delayed Walton in reaching practical completion. 51The referee found that the updated construction program dated 6 December 2006 forwarded by Walton to Illawarra on 12 December 2006 was the relevant basis for prospectively determining any extension of time. This was not challenged by Illawarra. That program identified mid-December 2006 as the time for "move switchboard" and "install coolroom". 52The referee had before her evidence from two expert witnesses (Mr Ash and Mr Khreich) on two crucial matters: first, the date from which any delay should be measured; and, second, whether the delay in providing permanent power caused any delay to the project. The experts disagreed on both questions. The referee also had evidence from an expert electrical consultant called by Illawarra that the existing power supply could have been transferred to the new switchboard without any need to wait for the enhanced supply, the "implication" being "that Illawarra could have completed the bulk of its work without the permanent power connection" (these are the referee's words). The matter was approached before both the referee and Einstein J on the basis that these witnesses were qualified to give expert evidence on the matters in question. Neither party sought to impugn the opinion of an expert called by the opposing party, save by arguments as to why the opinion of one ought to be preferred over the opinion of another. In particular, there was no suggestion that any opinion lacked foundation or explanation. 53In the end, the referee accepted the opinion of Mr Ash in preference to that of Mr Khreich and set out the following matters which she considered had been established: (a) that Illawarra caused delay to Walton's work related to the power connection; (b) that this delay commenced in December 2006; (c) that this delay ultimately entitled Walton to an extension of time to 28 May 2007; and (d) that, when a reasonable time was inserted into Walton's December 2006 program, the first activity that was critical to the program was the power connection. 54Two findings were then stated: first, that there were no concurrent critical delays; and, second, that Walton was entitled to an extension of 65 working days. 55The evidence before the referee was capable of supporting these findings. It is significant that that evidence consisted, in large measure, of conflicting opinions of experts and that one of those opinions (that of Mr Ash) was consistent with the conclusion that the referee reached and the judge endorsed. 56Einstein J referred specifically to a submission by Illawarra that Mr Ash had taken an "unorthodox" approach to programming. The complaint was that Mr Ash included in his programme an event which was not properly the role of the contractor. His Honour dealt with that in this way (at [83]): "While this approach may not be the usual course, it was merely a tool used to calculate the delay caused by absence of power. As the Referee noted at paragraph 336 of the Report, clause 35.5 allows extensions of time for delays caused by the principal. A proper application of clause 35.5 concerns the effect of a delaying event on a contractor's scope of work that is to be assessed, not whether it is within the contractor's scope. In this circumstance, the method used by Mr Ash was entirely appropriate and produced an accurate estimation of the delay caused by the principle's failure." 57This represented a specific aspect of the judge's conclusion that it was open to the referee to accept and base her findings on the expert evidence of Mr Ash. 58It is not possible to accept Illawarra's submission on appeal that the judge erred in deciding that there was a clear evidentiary basis for the granting of the 65 day extension. The real question for the judge was whether the referee had reached a decision which no reasonable tribunal of fact could have reached, that is, a decision that any reasonable referee would have known was not supported by the evidence or against the weight of evidence. His Honour answered that question in the negative, as regards the grant of the extension in question. That conclusion is not shown to be unreasonable or plainly unjust.

The 39 days issue - acoustic panels 59The extension of 39 days in respect of installation of acoustic panels was an alternative to the extension of 65 days just discussed, in that the period of 39 days fell within the 65 days and was recognised as not meriting any additional extension if the extension of 65 days was properly granted. For that reason, the conclusion I have expressed with respect to the challenge to the judge's decision on the 65 days claim means that there is, strictly speaking, no need to deal with the challenge concerning the 39 days claim. It is nevertheless desirable that the matter be addressed. 60Einstein J dealt with this matter shortly at [86] - [88] of his judgment: "In the event that Walton is not entitled to an extension of time in respect of the Power-on claim, the Referee found that Walton was entitled to an extension of time of 39 days for delay in the installation of acoustic panels. Given my finding above it is not strictly necessary I deal with this element, but for completeness it is dealt with shortly below. Illawarra questioned whether the acoustic panels were a critical delay. Illawarra criticised the Referee for any implied finding that the delay was critical as being perverse and patently misapprehending the evidence. Ultimately it was open to the Referee to find that sanding could not take place without the installation of the acoustic panels. In reaching this finding, the Referee did not impermissibly reverse the onus of proof, but rather noted that no evidence was put to the contrary by Illawarra to challenge Mr Ash's evidence about the need to sand last to avoid damage to the floor. There is no apparent misapprehension in this conclusion." 61In advancing this particular delay claim, Walton contended that the specified acoustic panels did not meet a necessary flame spread index (which is, in essence, a standard of resistance to fire), with the result that the fabricator, under instruction from the superintendent, had to treat the panels to enhance their fire-resistance. This delayed delivery of the panels. 62Recognising that her conclusion on the 65 days claim meant that the 39 days claim did not need to be determined, the referee nevertheless expressed her opinion on it. Her decision turned substantially on a finding that Walton was entitled to require - and in fact required - that installation of the acoustic panels should occur before floor finishing. Against that background, the installation of the panels was seen as having the relevant quality of criticality. 63In making her assessment of this issue, the referee had regard to the evidence of the two experts, Mr Ash and Mr Khreich, and to evidence given by Mr Jerez, Walton's project manager. Mr Ash said that, in his experience, floor finishes were typically applied last to prevent damage from installation items, such as joinery doors, which could scratch the floor. 64Illawarra argued in this Court that Einstein J was wrong when he found (at [88]) that floor "sanding could not take place without the installation of the acoustic panels". That argument has some narrow semantic merit but must fail as a matter of substance. Taken as a whole, [88] of the judgment amounts to an endorsement of the referee's conclusion, based on the evidence of Mr Ash (itself reflecting common sense), that it was appropriate to delay finishing of the floor until after the acoustic panels had been installed, given the risk of damage to finished floors that other work of substance presents. 65Again, the question for the judge was whether the referee had reached a decision that no reasonable tribunal of fact could have reached (that is, a decision that any reasonable referee would have known was not supported by the evidence or against the weight of evidence); and his Honour correctly answered that question in the negative.

The 10 days issue - testing and commissioning 66Walton sought from the superintendent an extension of 10 days for the testing and commissioning of the electrical installation. The period provided for by the program was one day. The superintendent rejected the claim but the referee allowed it. 67Illawarra argued before Einstein J that there was no basis for the referee's finding that the delay in question was critical; nor were there adequate reasons explaining why a 10 day allowance was reasonable. 68His Honour saw several difficulties with that submission. He said that the criticality of this work was necessarily implied by the determination of Mr Ash in his reports and a joint report with Mr Khreich. Further, as commissioning was the last activity on Walton's program before practical completion because Mr Khreich had agreed that practical completion could not occur without commissioning, his Honour concluided (at [91]) that criticality was "a given". 69Second, his Honour said (at [92]) that the evidence "was heavily weighted towards the proposition that this work was critical". He referred to the testimony of two expert electrical engineers and Mr Hill on behalf of Walton and the concurrence of Mr Greenfield, Illawarra's expert who explained that Walton could not fully commission until there was reconnection of the power supply from Integral. The judge noted that "only Mr Jerez expressed some doubt" (also at [92]). 70Third, the judge noted that Ms Indyk, the superintendent, agreed that it was impossible to have final commissioning of all the hotel plant under full operational load before 24 May 2007, being the date that Integral Energy effected the upgrade and the switchover to the new distribution board. The superintendent also agreed that final commissioning was always necessary for practical completion. 71Einstein J continued (at [94] - [96]): "As to reasonableness of the delay, the Referee deals with the 10 days granted for commissioning at paragraph 314 of the report. The initial 1-day allowance referred to by Illawarra in an earlier Walton program was based on an assumption that commissioning would proceed progressively as equipment or services became available for commissioning. This was prior to Illawarra deciding to upgrade its power service mains. The evidence which was not disputed by the Superintendent was that Mr Jerez advised on several occasions, that after the connection of the upgraded power Walton would need 10 days for testing and commissioning. This is not a retrospective approach. This was during the period of the power delay. Finally, it is important to appreciate that this claim relates to commissioning work and not the connection of power to enable commissioning to commence. Final commissioning could not be undertaken prior to 28 May 2007 (allowing 3 days for the coolroom from the date of the power upgrade works being completed) and whatever Walton could have done in relation to other works, could not have enabled commissioning to be completed at any time prior to 28 May 2007. The Referee found that the reasonable time was the 10 days foreshadowed by Mr Jerez to the Superintendent. The 10 days also equated to what Mr Ash determined as the actual extent of the delay by reference to the as-built data. On the basis of the above evidence there is no cause shown to disturb the Referee's finding." 72Illawarra's contention on appeal is that there was no evidence to support the conclusion that any delay in testing and commissioning of the electrical installation had any effect on practical completion; and that Einstein J erred in adopting the referee's conclusion that Walton was entitled to an extension of time. Illawarra further says that, even if some extension was warranted, it was an error to regard 10 days as the appropriate period. 73On the question of criticality, Walton points to the fact, noted by the judge, that the relevant commissioning was the last activity on the program. Illawarra's submission that the significance of that was destroyed by the fact that further work continued for about a month afterwards is amply countered by Walton's observation that that further work was itself covered by extensions of 22 days. Furthermore, criticality was supported by the evidence of Mr Ash and Mr Jerez. 74This Court should not accept the contention that there was no evidence to support the conclusion that any delay in testing and commissioning of the electrical installation had any effect on practical completion. 75As to Illawarra's submission that there was no basis for allowing 10 days rather than some other period, Walton validly observes that Illawarra does not make (in the alternative to its contention of disallowance in whole) any case in favour of some other period. Illawarra's case is, in substance, put on an "all or nothing basis"; and the conclusion that criticality was sufficiently supported by the evidence means that the challenge to the judge's endorsement of 10 days should not be upheld.

The 22 days issue - certification 76The referee found that Walton was entitled to an extension of 22 days for delays associated with certification of the building. Illawarra's case before Einstein J was that no allowance should have been made because there were concurrent delays caused by Walton that simultaneously delayed practical completion. Illawarra submitted to Einstein J that the referee had ignored critical evidence of Mr Anzani. 77As Einstein J noted, the referee did not accept that there was critical concurrent delay. In relation to the descriptions of several items put forward by Illawarra, the referee said that they " ... were not detailed and in most instances Illawarra led no evidence to support a conclusion that they delayed or prevented practical completion. There was also no analysis from which I can conclude that the rectification work fell on the critical path. It will be seen below that the Superintendent acknowledged on 6 July 2007 that the only matter preventing her from issuing the certificate of practical completion was the non-provision of the occupation certificate. All other defects and outstanding work preventing Walton from achieving practical completion must, therefore, have been completed by this date." 78His Honour held (at [99]) that it was open to the referee to accept the evidence of Mr Ash which she described as "able to show that Walton was critically delayed between 6 June 2007 and 6 July 2007 by a combination of the three certification causes". 79The basis of the appeal in respect of this part of the decision of Einstein J is again that his Honour was in error in concluding that there was a sufiicient evidentiary basis for the referee's findings. 80Illawarra's submissions on appeal canvass various aspects of the evidence before the referee. Those submissions were substantially to the effect that the referee should have made findings different from those she in fact made. But that, for reasons I have stated, is not a valid basis for interference by this Court with the decision that the judge made. 81The significant point, for present purposes, is again that the task of the judge was to decide whether the referee had reached a decision that no reasonable tribunal of fact could have reached (that is, a decision that any reasonable referee would have known was not supported by the evidence or against the weight of evidence). His Honour correctly answered that question in the negative and, in so doing, identified a sound evidentiary basis in the evidence of Mr Ash.

The proper adjusted date for practical completion 82 It follows from what I have said in relation to the five separate extension of time matters that, in my opinion, no basis has been shown for this Court to interfere with the decision of Einstein J that, as found by the referee, the proper adjusted date for practical completion was 26 June 2007.

Margin on variations 83This aspect of the appeal is not related to extensions of time. It concerns the decision of Einstein J to adopt, over objection by Illawarra, the referee's decision that, having regard to variations to the works, Walton was entitled to a payment or allowance (termed a "margin") under clause 40.5 of the contract. That provision, so far as relevant, was in these terms: "Where the Contract provides that a valuation shall be made under Clause 40.5, the Principal shall pay or allow the Contractor or the Contractor shall pay or allow the Principal as the case may require, an amount ascertained by the Superintendent as follows: ... in the event that the sum of the net trade costs of all variations excluding those to which sub-clause (f) applies (the variation sum) exceeds the difference between the Warranted Maximum Price and the sum of the actual costs of the trade works as referred to in clause 3.1(a)(ii) (the saving), 10% shall be added to the difference between the variation sum and the saving for the Contractor's overheads and profit." 84It is not disputed that the effect of clause 40.5 was to entitle Walton to a 10% margin on the cost of variation works if there was no "saving", as defined, that is, a sum by which the actual trade costs were less than the Warranted Maximum Price (defined as $2,459,713). 85The referee decided that there was no "saving" because the actual trade costs were $2,486,758.31, a sum that exceeded the Warranted Maximum Price of $2,459,713. 86Illawarra challenged before Einstein J the referee's determination of $2,486,758.31 as the actual trade costs. The basis of the challenge paid attention to the methodology adopted by the referee which involved, as its starting point, a sum of $3,848,607 for total expenditure on the project, and deduction therefrom of "the expenditure that was unrelated to this work" - with "this work" referring to trade works. Actual trade costs were therefore, in concept, a residual item. 87Illawarra submitted in this Court that there was no evidence of the amount of certain classes of expenditure thus deducted "including, for example, expenditure on Preliminaries and management expenditure"; and that the referee had taken into account, as the amount to be deducted, the contract price of preliminaries, the lump sum management fee allowed for in the contract and an amount for delays based on contract rates for supervision. This, it is said, was an erroneous approach because the provision of the contract directs attention to costs - and the cost of particular work does not necessarily coincide with the contract price ascribed to it. Illawarra says that, in the absence of any evidence or available inference that the sums taken into account were equal to the actual expenditure, the referee's approach was wrong in principle. 88The same argument was put to Einstein J. It was dealt with as follows in the judgment (at [185] - [186]): "First it must be stated that the Referee's reasoning is detailed and scientific. Illawarra does not dispute this, other than to say that, as the amounts deducted for 'manager's preliminaries' and 'management fee' were prices and not costs they could not properly be deducted from the total costs of the project to determine the actual cost of trade works. This argument does not bear weight, as the deduction of prices and not costs is actually favourable to Illawarra. What the Referee sought to do by deducting 'non-trade works costs' from the total expenditure was arrive at a figure for 'actual cost for the trade works'. The 'deduction' of the preliminaries and management fee was simply to disregard those costs for the purposes of calculating the 'actual cost for the trade works'. Disputing this process on the basis of the deduction being a price and not a cost is overly technical in circumstances where the deductions produce a considerably more favourable result for Illawarra than would have been achieved if the Referee were to estimate the costs in some other way. Illawarra suffered no prejudice and the Referee's calculation should be accepted." 89Einstein J thus approved the referee's approach to the matter as "detailed and scientific" (at [185]). It is true that his Honour did not deal in a direct way with the proposition that it was wrong to use prices rather than costs. He saw no need to do so because of his opinion that the use of prices produced an outcome more favourable to Illawarra than would have been produced by estimation of costs. 90Walton emphasised in this Court (as it had below) that the referee had relied on a report by a quantity surveyor in concluding that there was no saving. The report is that of Mr Makin who, after referring to the relevant contract provision and the question it posed as to the existence of "saving", said: "I have established that this is not the case so this special condition does not apply." 91Mr Makin, although undertaking minute examination of invoices, offered no explanation of this briefly stated conclusion and did not disclose the process of analysis, reasoning and calculation that produced it. 92Walton says that, because of Mr Makin's report, the finding of fact by the referee that there was no relevant saving was open to the referee on the evidence and that Einstein J's endorsement of that proposition through his adoption of the referee's report was accordingly correct. 93Illawarra's response is that the opinion of Mr Makin did not rise above mere assertion and was therefore not a sound basis for the particular factual finding. Illawarra points to submissions made by its counsel to the referee: first, that there was no evidence of what the actual cost of the relevant items was; and second, that Mr Makin's opinion "lacks the usual foundations". That, it was said, meant that his opinion should not be accepted or should, at most, be given minimal weight. 94Like submissions were made before Einstein J. The following general objection was made (I quote from the transcript of counsel's oral submissions): "Mr Makin's evidence that's referred to at 967 doesn't purport to be and wasn't a calculation of the trade cost of the project as identified in the revised trade breakdown which is attchment 3 to the contract. What Mr Makin did, as is evident from paragraph 967, was calculate the total expenditure, total amount shown in Walton's books and records, as expense in connection with this project. They didn't endeavour to and - or if they did endeavour to, certainly the referee didn't accept and identify any calculation put forward from Walton's records as to the actual cost of the specific items in the revised trade breakdown." 95Counsel for Illawarra then referred to the referee's approach and calculations and to the two particular matters of preliminaries and management fees: "Now, the reason why her conclusion in that regard is plainly flawed is that there are two items in her deductions, namely construiction managers preliminaries and construction managers management fee, $55,210 and $230,200, which are not drawn from any record of costs but are simply the amounts specified in the contract as payable to the contractor in respect of those items. So that if the managers, constructions managers preliminaries, which were supposed to be covered by that $55,000 were in fact more than $55,000, then she has come up with a materially inaccurate calculation." 96Counsel for Illawarra submitted before Einstein J that the approach of the referee under which Mr Makin's figure for total expenditure was taken as a starting point and elements of that total were then treated as reflections of the actual cost of particular items was flawed as a matter of logic, with the result that Walton had "failed to put forward the evidence to prove the actual cost of the expenditure in the trade works and . . . no basis exists for the finding that together with the variations it exceeded the warranted maximum price and therefore no basis exists for a finding of entitlement to a 10 percent mark up". 97Walton seeks to uphold the conclusion of Einstein J on the basis expressed by his Honour and by reference to propositions advanced by notice of contention, particularly that there was unchallenged evidence (in the form of Mr Makin's report) to which the referee had regard in finding that there was no saving. 98The particular argument thus raised by the notice of contention cannot be accepted. The aspects of submissions made to Einstein J to which I have referred (as well as submissions to the referee) show that the adequacy of Mr Makin's opinion as a foundation for the relevant finding made by the referee was squarely challenged by Illawarra. Mr Makin's report provided no basis for any finding as to costs as distinct from contract prices and his opinion as to absence of saving was not supported by analysis or explanation making it possible to understand the way in which it had been formed. That opinion, taken alone and in the absence of explanation, was insufficient to sustain Einstein J's endorsement of the referee's decision on this aspect and his Honour's further conclusion that the referee's approach based on the opinion produced a result considerably more favourable to Illawarra than would have emerged had the referee estimated the relevant costs in some other way. 99In submissions before this Court, Walton drew attention to evidence of Mr Jerez, Walton's project manager, that he had maintained a cumulative tally of costs of variations work and referenced that amount to the total of the potential savings on trade item costs that might be achieved pursuant to the relevant provision of the contract - from which, Mr Jerez said, he had concluded in about October 2006 that "the total of variation work had exceeded the total of the potential 'savings' on the 'trade items' costs that might possibly be achieved pursuant to the savings provision". Mr Jerez informed the superintendent of this opinion by email dated 23 October 2006 and referred in his evidence to a conversation with the superintendent in which he made a statement to like effect. The superintendent, in evidence before the referee, said that she had been unable to ascertain that there had been a saving. 100It does not avail Walton to refer to that evidence of Mr Jerez. It is not shown that either the referee or Einstein J took it into account. That of itself does not mean that it should not now be recognised as something that could have supported the finding. The real point is that Mr Jerez's evidence suffers from the same substantial shortcoming as the evidence of Mr Makin, that is, it does not disclose the way in which the opinion was reached or the matters that were taken into account in forming it. 101This Court was not directed to any finding or submission going to the question whether the opinions of Mr Makin and Mr Jerez were substantially based on specialised knowledge of the kind referred to in s 79(1) of the Evidence Act 1995. But even if that was the case, there is still be the fatal point that there was, in each case, an absence of explanation or exposition of the basis for the opinion. In Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 243 CLR 588, Heydon J said (at [129]): "It is necessary to avoid the insidious risk that the trier of fact will simply accept the opinion without careful evaluation of the steps by which it was reached, and hence the evidence must state the criteria necessary to enable the trier of fact to evaluate that the expert's conclusions are valid. The evidence must reveal the expert's reasoning - how the expert used expertise to reach the opinion stated. It is not enough for evidence tendered under s 79 merely to state the expert's qualifications in a field of expertise and the conclusion. Admissibility does not depend on the reasoning being accepted as correct; that is a matter for consideration at the end of the trial. But admissibility does depend on the reasoning being stated." (citations omitted) 102In this case, there was, in the same way, no basis for accepting either opinion as reliable. 103In my respectful opinion, adoption by Einstein J of the aspect of the referee's report now in issue entailed error of the kind made relevant on appeal by the principles in House v The King (above). Once the opinion of Mr Makin is put to one side (as it should have been, for the reasons just stated) and it is recognised that, although the opinion of Mr Jerez was not taken into account by either the referee or Einstein J, that opinion was objectionable on the same basis, there is seen to have been no evidence before the referee supporting the findings as to the existence and quantum of "saving" for the purposes of clause 40.5. His Honour was therefore bound to accept Illawarra's submission to that effect.

Damages for late completion 104This part of Illawarra's appeal concerns the subsequent decision of McDougall J which dealt with a number of matters on the express footing that the order of Einstein J adopting the referee's report estopped the parties from contending to the contrary of findings of the referee. The correctness of that approach is not questioned. 105One such finding was that the correctly adjusted date for practical completion was 26 June 2007. For reasons I have stated, Einstein J's conclusion to that effect should stand. The point from which McDougall J commenced should therefore be accepted as valid. 106McDougall J was called upon to decide the damages to which Illawarra was entitled in consequence of practical completion being achieved on 9 July 2007 rather than 26 June 2007. The matters considered by the referee in the report adopted by Einstein J did not impinge upon the question before McDougall J beyond defining the adjusted date for practical completion. 107The parties accepted that damages for delayed completion were appropriately quantified, having regard to the provisions of the contract, as a per day sum for the relevant period of nine working days (equivalent to 13 trading days for the hotel, which was open for business every day). McDougall J decided that the appropriate per day sum was "a little less than $300"; and he awarded damages of $4,000 for the 13 days period, acknowledging that this was somewhat higher than the arithmetical working-out of figures he set out, "but the assessment of damages is not a precise science" (at [123]). 108Illawarra argued before the judge and on appeal that the appropriate per day sum was significanly in excess of $300. 109Illawarra's claim for damages was advanced on the basis that it was, by Walton's breach, "deprived of and lost the economic value of the use and enjoyment of its premises" for the period from the adjusted date for practical completion to practical completion itself. It particularised its loss as loss of the opportunity to obtain one of (a) rent from the tenants to which the premises were let; (b) the profit that Illawarra would itself have derived had it carried on the hotel business; and (c) rent assessed by reference to the market rental value of the premises. 110In its submissions before McDougall J, however, Illawarra concentrated on the first of these alternatives and quantified its loss by reference to loss of rent under the lease in fact in force during the period in question. That lease provided for both "base rent" (a fixed sum payable regardless of business turnover) and "turnover rent" (a variable sum geared to the turnover of the hotel business). While the works were in progress, only part of the premises could be used for hotel trading at any given time with the result, it may be inferred, that the quantum of business transacted with patrons and therefore the turnover of the business were less than they would have been had the whole of the premises been available and operative. 111McDougall J said at [102] of his judgment: "Under the lease, the lessees paid a fixed or base rent and a turnover rent. Illawarra's claim for damages was based only on loss of the turnover rent. It relied on Mr Krochmalik's evidence to quantify this." 112The emphasis was no doubt on the "turnover rent" because the "base rent" was payable in any event, so that the continuation of the works and the consequent unavailability of part of the premises did not lead to any loss in respect of "base rent". 113The lessees under the lease in question were the two associated entities of Illawarra to which reference has already been made, Vosava Pty Ltd and Gamone Pty Ltd; and, as has been noted, the lease was granted well after the building contract between Illawarra and Walton was signed. 114McDougall J held (and Illawarra does not dispute) that Walton could not be fixed with the risk of losses incurred as a result of arrangements that were uncommercial and involved substantially greater return for Illawarra than was achievable under an arm's length arrangement. His Honour then posed the following as the relevant question (at [125]): "since the claim that is put [by Illawarra] is one for loss of turnover rent, the question is really: what is the reasonable, or market, or arm's length, turnover rent to be taken into account as the basis for calculation of loss?" 115His Honour's conclusion as to the uncommerciality of the turnover rent actually reserved by the lease to the associated entities was supported by what he described as the "essentially unchallenged" evidence of Mr James, an expert witness. His Honour noted that the turnover rent was based on gross turnover, not net turnover, and was a fixed percentage of gross turnover. Also (at [110]: "The impact of the 'payout ratio' and tax on gambling revenues was such that, as Mr James said, the lessees 'lost money on every dollar put into a gambling machine; the more successful the gaming operations, the more money [the lessees] lose'. Even leaving taxes out of consideration, the payout ratio (89%) and turnover rent (15% of gross revenue) meant that the lessees were required to pay out $1.04 for every dollar gambled." 116His Honour noted that Mr Robertson, another expert witness, made the same point, although in different terms. Mr Robertson said that the relevant provisions, including the definition of "gaming revenue", were not such as would be found in a lease negotiated at arm's length. On figures given by Mr Robertson, the turnover rent actually payable under the lease would be about nine times greater than that which would be payable under a lease (of the same hotel) negotiated at arm's length. Mr Robertson said that no prospective arm's length lessee would have agreed to the particular terms, despite the prospect of renovations being undertaken to the premises and the potential for significantly increased trading. 117From that point, McDougall J proceeded to state principles emerging from Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 and Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528. There is no challenge to the statement of principles. His Honour then said (at [117]): "Applying those considerations to the present case, I think it could be said that losses arising from the inability to earn income from the trading operations of the hotel must have been in the contemplation of the parties as a consequence of unjustified delay in achieving practical completion. But losses arising from a specially lucrative arrangement made to maximize the profits of Illawarra as landlord at the expense of Vosava and Gamone as lessees should not be taken to have been in the contemplation of the parties. To put it in a positive way: the parties should be taken to have contemplated that delay would cause loss of income based on the ordinary commercial operations of the hotel, but no more." 118McDougall J said that the appropriate way to assess loss flowing from delay in completion was to proceed on the basis that the parties had in contemplation that Illawarra might either lease the hotel out, or operate the hotel itself; and that it was "inherent in Illawarra's submissions" that the court should proceed on the former basis. In his Honour's opinion, however, the court would also appropriately take into account that, in the former circumstance, the parties would have had in contemplation that the rental payable would be a rental calculated at a reasonable, or market, or arm's length rate. He then said (at [118]): "Accepting (as again as inherent in Illawarra's submissions) that the parties may well have contemplated that the rent would be composed partly of a base rent and partly of a turnover rent, the question then becomes: what would be a reasonable, or market, or arm's length quantification of the turnover rent component?" 119McDougall J proceeded to consider the evidence of expert witnesses on this question. He concluded, by reference to the evidence of Mr Robertson, that a reasonable or market or arm's length turnover rent was $1,903 per week; and it was from this that he derived the per day sum of $300 as the appropriate basis for assessing damages. 120Illawarra maintains that it was incorrect to say that Illawarra claimed only for loss of turnover rent and to confine the inquiry to turnover rent. Illawarra says that if, as it accepts, the rental arrangement in fact existing (and consisting of fixed and turnover components) was, because of its non-arm's length character, not a reliable measure, the task was to identify (by reference to the evidence) and to have regard to a measure that was reliable and then to make allowance for the fact that the rent actually reserved by the non-arm's length arrangement was payable despite the delay in completion of the works. 121Implicit in this argument advanced by Illawarra is the proposition that, if the rental arrangement in fact in force was, as his Honour observed, calculated to maximise the profits of Illawarra as landlord at the expense of the associated entity lessees and the rent was therefore artificially high, there was no sound basis for confining the inquiry to what an arm's length or commercial turnover rent would be and ignoring the question whether the base rent was at a commercial or arm's length level. 122Illawarra's submissions in this respect should be accepted. If the lease had been on commercial terms, the circumstance that the turnover rent was set at an abnormally high level would have indicated a strong probability that the base rent entailed elements of concession, so that the aggregate rental obligation was within limits acceptable to a lessor and lessee bargaining at arm's length. But the findings that the lease was not on commercial terms, that the turnover rent was abnormally high and that the purpose of the rental structure was to maximise the profits of Illawarra at the expense of its lessee associates did not justify unquestioning acceptance of the base rent actually reserved (which the expert witness, Mr Robertson, considered unusually low) any more than it justified unquestioning acceptance of the turnover rent actually reserved. 123The task was to determine what was appropriate to give quantified content to "the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it": Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145 (per Alderson B at ER 151) - that contemplation being, in McDougall J's words, "that delay would cause loss of income based on the ordinary commercial operations of the hotel, but no more" and that Illawarra would lease the hotel for a rent representing "a reasonable, or market, or arm's length rate" (at [117] - [118]. Illawarrra correctly submitted that, if the terms of the related-party lease in fact existing were to be put to one side as a fair measure of the foreseeable loss, they should have been put aside in their entirety, with both the turnover rent and base rent components discarded. 124On this basis, the conclusion of McDougall J that $300 per day for the period of the delay in completion was the appropriate measure of damages requires re-examination. 125Illawarra referred to various aspects of the reports of the two experts, Mr Robertson and Mr Krochmalik, as providing assistance. Walton referred to Mr Robertson's report. That report may be accepted as providing a reasonable basis for assessing what would have been the market rent for the refurbished hotel. After discussing calculations based on maintainable average weekly turnover of $82,636 and maintainable annual net operating profit (or EBITDA) of $1,377,493 and applying multipliers of 15 per cent and 20 per cent for turnover and 55 per cent and 60 per cent for EBITDA, Mr Robertson identified three alternative annual rent sums: $644,561, $757,621 and $826,496. At paragraph 57 of his report, Mr Robertson indicated that, where the ingoing premium was low or non-existent, the rent would commonly be up to 60 per cent of EBITDA or approximately 20 per cent of turnover. He then said at paragraph 60 of his report: "In my opinion, the market rent post renovations was $825,000 per annum, which equates to 60% of EBITDA." 126Walton contends that if, as has been found, it is necessary to determine an arm's length market rental figure, it should be the lowest suggested by Mr Robertson, that is, $644,561 based on 15 per cent of maintainable average weekly turnover of $82,636. To adopt that course, however, would be to ignore Mr Robertson's ultimate conclusion which favoured approximately 20 per cent of turnover or the equivalent of 60 per cent of EBITDA. 127The appropriate course is to have regard to rent on arm's length terms at the rate of $825,000 per year that reflects that ultimate conclusion, being $2,260.27 per day and therefore $29,383.51 for 13 days. It is accepted that the rent components payable for the relevant period of 13 days under the lease in fact in force were $1,417 ($109 per day) for base rent and $9,562 ($735.54 per day) for turnover rent. These (aggregating $10, 979) were payable by the tenants and recoverable by Illawarra despite the breach of contract, so that the loss was only the remainder of the market rent of $29,383.51 referable to the 13 days period, that is, $18,404.51. 128Damages awarded to Illawarra under this head should therefore be increased from the $4,000 assessed by McDougall J to the rounded sum of $18,400.

Pre-judgment interest 129Walton's amended summons claimed nine items of relief. The eighth was: "Interest." 130The final provision in Walton's pleading (paragraph 59) was: "Walton claims interest on all the moneys due to it which remain unpaid above, pursuant to clause 42.9." 131Clause 42.9 of the contract began: "If any moneys due to either party remain unpaid after the date upon which or the expiration of the period within which they should have been paid then interest shall be payable thereon . . ." 132Illawarra, by its response, denied the entitlement to interest claimed by Walton and relied on clause 43(b) of the contract: "Not earlier than 14 days after the Contractor has made each claim for payment under clause 42.1, and before the Principal makes that payment to the Contractor, the Contractor shall give to the Superintendent a statutory declaration by the Contractor or, where the Contractor is a corporation, by a representative of the Contractor who is in a position to know the facts declared, that all subcontractors have been paid all moneys due and payable to them in respect of work under the Contract." 133Illawarra also referred to clause 43(c) which provided that, if the contractor failed to comply with clause 43(b), the principal was entitled to withhold payment until the statutory declaration had been provided. 134Illawarra stated that Walton had provided no relevant statutory declaration, with the result that the entitlement to withhold payment applied in respect of any sums that might be due. 135Illawarra also pleaded provisions of the Industrial Relations Act 1996, the absence of statements under s 127(2) and 127(3) of that Act and the consequent statutory entitlement to withhold payments. 136Walton admitted that it did not give any relevant statutory declaration or statement until 5 August 2011. 137Illawarra submitted before McDougall J that, because these pre-conditions were not satisfied until 5 August 2011, Walton did not suffer any loss until that date, with the result that pre-judgment interest should be awarded from that date, rather than from the date of the relevant breach. 138McDougall J held (at [90] - [91] of the judgment): "Illawarra relied on cl 43(b) of the contract and on s 127 of the Industrial Relations Act 1996 (NSW). Clause 43(b) provided, in substance, that if Walton did not give the Superintendent a statutory declaration as to payment of subcontractors then Illawarra could withhold payment of any money otherwise due to Walton. Section 127 of the Industrial Relations Act is to similar effect (in relation employees). The short answer to this submission is that the Superintendent should have determined that amounts were payable for variations and in respect of provisional sum adjustments as found by the referee. Had the superintendent so determined, then those amounts would have been paid or allowed to Walton. It does not appear that Illawarra relied on either cl 43(b) or s 127 as a reason for withholding payment of whatever it was that the Superintendent certified. In those circumstances, it seems to me, Illawarra has had the use of the money that otherwise it would have paid to Walton, and Walton has been deprived of the use of that money, from whatever times it was that amounts in respect of variations and provisional sum adjustments were awarded and either paid or allowed. On that basis, in my view, interest should run from those times." 139These observations appeared under a heading "interest on damages" which, in turn, followed a lengthy analysis culminating in a finding of breach by Illawarra of clause 23 of the contract (at [76] of the judgment) and a separate discussion of the question of Walton's claim for damages for extra time incurred (which claim his Honour did not uphold: at [89] of the judgment. 140It follows that McDougall J was concerned, at [90] - [91] of the judgment, only with the consequences of breach of contract by Illawarra and Walton's claim for unliquidated damages for such breach, as opposed to any claim to recover some amount by pointing to a provision of the contract as the source of an obligation that Illawarra pay it. The distinction is between a sum that becomes payable in consequence of lack of due performance of the contract and a sum that becomes payable in due performance of the contract. 141Walton submits (and maintains by notice of contention) that, because the relevant claim was a claim for damages, there is no basis on which Illawarra can rely on absence of a statutory declaration or statement as a valid basis for limiting interest so that it runs only from 5 August 2011 when those documents were provided. That submission must be accepted. The pre-condition regarding a statutory declaration arising from clause 43(b) of the contract applies only where a claim for payment is made under clause 42.1, a provision creating mechanisms that result in quantification of sums payable pursuant to and in fulfilment of the contract. The relevant provisions of the Industrial Relations Act are likewise concerned with sums payable in due discharge of obligations. Neither regime purports to regulate entitlements to damages awarded by a court because of, and as compensation for, a breach of contract. 142The interest awarded by McDougall J was interest on damages for breach of contract. Clause 43(b) of the contract and the Industrial Relations Act provisions were not concerned with interest on such damages. His Honour correctly recognised (at [165]) that the damages awarded "stand in the place of the proper amounts that should have been paid" in due performance of the contract; and that interest on the damages should accordingly run from the date of breach - being, as he said, when those "proper amounts" would have been payable had the claims been assessed in accordance with the superintendent's duty as set out in the contract (or within a reasonable time). 143His Honour awarded interest up to judgment pursuant to s 100 of the Civil Procedure Act 2005. Because the sums in question were damages, he was correct to resort to that statutory provision rather than any provision of the contract or the Industrial Relations Act. His decision as to the time from which interest should run was also correct.

Conclusion 144I am of the opinion that Illawarra's contentions on appeal should be accepted in two respects only. 145First, the order of Einstein J adopting the referee's report should, in my view, be varied so as to except from the adoption the finding that Walton was entitled to a payment or allowance under clause 40.5 of the contract. Because there was no evidence supporting the findings as to the existence and quantum of "saving" for the purposes of that provision, Walton's claim for the payment or allowance should be dismissed and the orders made at first instance should be varied so as to eliminate the resultant monetary entitlement of Walton. 146Second, I am of the opinion that the sum awarded by McDougall J to Illawarra and against Walton as damages for late completion should be increased from $4,000 to $18,400. 147In all other respects, the appeal should be dismissed. 148I propose that this Court make directions as follows:

Direct that, if the parties agree on the form of the orders appropriate to give effect to the decision of this Court, they shall within 14 days file short minutes of those orders.
Direct that, if the parties do not agree on the form of the orders appropriate to give effect to the decision of this Court, each shall within 21 days file short minutes of the orders for which it contends together with brief written submissions in support of the making of those orders.
Direct that the parties exchange brief written submissions on costs and that those submissions be filed within 21 days. 149WARD JA: I agree with Barrett JA.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 11 February 2013

Illawarra Hotel Company Pty Ltd v Walton Construction Pty Ltd

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