Kheng Kok Chua v Archiworks Architects Pty Limited

Supreme Court of NSW|2010-02-02|Before: McDougall J, Mr J, Rolfe J, Honourable J, Dougall J

CITATION : Kheng Kok Chua v Archiworks Architects Pty Limited [2010] NSWSC 76

HEARING DATE(S) : 2 February 2010 JURISDICTION : Equity Division Technology and Construction List

The Court adopts the reference report of Mr J M N Rolfe QC dated 30 July 2009. 2. Verdict and judgment in favour of the Cross Claimant against the Cross DECISION : Defendants in the amount of $120,583.30 (inclusive of interest payable in accordance with the terms of the Construction Management Agreement dated 1 November 2004). 3. The Cross Defendants to pay the Cross Claimant's costs of the Cross-Claim.

CATCHWORDS : PRACTICE AND PROCEDURE - referee's report - whether referee's report should be adopted - relevant principles - whether referee erred in construction of orders for reference - no error in construction - UCPR r 20.24. - CONTRACTS - construction - whether referee misconstrued relevant provisions of construction management agreement - meaning of "costs of the works" in contract. - COSTS - indemnity costs - whether time limit for acceptance of offer of compromise was reasonable - not reasonable - costs not ordered UCPR rr 20.26, 42.12.

Chocolate Factory Apartments Limited v Westpoint Finance Pty Ltd [2005] NSWSC 784 Chloride Batteries Australia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60 Franks & Anor v Berem Constructions Pty Ltd (NSWCA, 2 December 1998, unreported; BC 9806367) CASES CITED : Foxman Holdings Pty Ltd v NMBE Pty Ltd (1994) 38 NSWLR 615 Hughes Bros Pty Ltd v Minister for Public Works (Rolfe J, 17 August 1994, unreported; BC 9402885) Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549 White Constructions (NT) Pty Ltd v Commonwealth of Australia (1990) 7 BCL 193 Xuereb v Viola (1989) 18 NSWLR 453

Kheng Kok Chua (First Plaintiff/First Cross-Defendant) Dorothy Chua (Second Plaintiff/Second Cross-Defendant) PARTIES : Archiworks Architects Pty Limited (First Defendant/Cross-Claimant) Minh Van Hoang (Second Defendant) Jennifer Hoang (Third Defendant)

COUNSEL : I H Bailey SC / M W Sneddon (Plaintiff/Cross-Defendants) M A Ashhurst SC (Defendants/Cross-Claimant)

SOLICITORS : McLaughlin & Riordan Solicitors (Plaintiffs/Cross-Defendants) McCabe Terrill Lawyers (Defendants/Cross-Claimant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TECHNOLOGY & CONSTRUCTION LIST

2 February 2010 (ex tempore - revised 11 February 2010)

266659/07 ARCHIWORKS ARCHITECTS PTY LIMITED v CHUA JUDGMENT

1 HIS HONOUR: The plaintiff (Mr and Mrs Chua) retained the first defendant (Archiworks) to provide architectural and construction management services. There were two separate contracts. One was made on about 28 January 2004, in respect of architectural services. The other was made on or about 1 November 2004, in respect of construction management services. 2 Mr and Mrs Chua asserted that Archiworks breached both contracts, and performed services negligently under them. Archiworks denied those allegations. That dispute has been resolved by acceptance of an offer of compromise pursuant to which judgment has been entered. 3 Archiworks cross-claimed for what it said were outstanding amounts (including for fees) owing to it. That cross-claim was not resolved, for the reasons indicated in my judgment of 21 May 2009 ([2009] NSWSC 411). Pursuant to those reasons, I made an order for reference out on 28 May 2009. The referee was the Honourable J M N Rolfe QC. He has furnished a report dated 30 July 2009. Archiworks has moved for the adoption of that report. Mr and Mrs Chua oppose adoption. The issues 4 The essential issues on the application for adoption are:

(1) whether the referee misconstrued the relevant provisions of the construction management agreement (which I will refer to simply as "the contract") between the parties; and (2) whether the referee erred in his construction of the orders for reference, and accordingly erred in undertaking a task and that which had been referred to him.

The relevant principles 5 Proceedings on a report are governed by UCPR r 20.24. That rule is substantially equivalent to the former SCR pt 72 r 13. I set out r 20.24: 20.24 Proceedings on the report (cf SCR Part 72, rule 13) (1) If a report is made under rule 20.23, the court may on a matter of fact or law, or both, do any of the following:

(a) it may adopt, vary or reject the report in whole or in part, (b) it may require an explanation by way of report from the referee, (c) it may, on any ground, remit for further consideration by the referee the whole or any part of the matter referred for a further report, (d) it may decide any matter on the evidence taken before the referee, with or without additional evidence, and must, in any event, give such judgment or make such order as the court thinks fit. (2) Evidence additional to the evidence taken before the referee may not be adduced before the court except by leave of the court. 6 In Chocolate Factory Apartments Limited v Westpoint Finance Pty Ltd [2005] NSWSC 784, I set out my understanding of the principles to the discretion given by Pt 72 r 13 at [6]-[8]. I see no reason to take any different approach, and accordingly I adopt, on the basis that references to Pt 72 r 13 should be read as references to r 20.24, what I there said:

[6] The principles to be applied, in exercising the discretion conferred upon the Court by Pt 72 r 13 to adopt, vary or reject in whole or in part a report of a referee, are well established. There are a number of cases to which, customarily, reference is made. They include Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549; the unreported proceedings in that case before Giles J (19 May 1992: the relevant considerations referred to by his Honour are sufficiently extracted in the decision of the Court of Appeal); 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. As to the nature and content of the referee's obligation to give reasons, the relevant authorities include Xuereb v Viola (1989) 18 NSWLR 453 and Hughes Bros Pty Ltd v Minister for Public Works (Rolfe J, 17 August 1994, unreported; BC 9402885).

[7] The relevant principles, distilled from those decisions, can be stated as follows: (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.

[8] The twelfth point restates the aphorism of Mahoney JA in Super at 567. The thirteenth, fourteenth and fifteenth points are drawn (and include direct quotations) from the judgment of Hodgson CJ in Eq (with whom Priestley JA agreed and with whom, as to the relevant principles, Fitzgerald AJ also agreed) in Franks & Anor v Berem Constructions Pty Ltd (NSWCA, 2 December 1998, unreported; BC 9806367). If I may say so with respect, I regard what his Honour said as giving content, on the facts of the particular case, to the operation of relevant principles rather than as stating any new principle.

The order for reference 7 I ordered that there be referred to the referee the following questions arising in the proceedings:

(1) the relevant terms of the construction management agreement; (2) the estimated value, as at the date of termination of the contract of all work under the construction contract; (3) the value, at the same date, of all construction work actually carried out; (4) the total amount of the fees paid to [Archiworks] up to that date; (5) the amounts paid by [Archiworks] for goods ordered on behalf of Mr and Mrs Chua and utilised in the construction process; and (6) the quantification of the amounts owed to Archiworks by Mr and Mrs Chua pursuant to the terms of the construction management agreement. 8 The word that I have interpolated into sub-paras (4) and (5) above is agreed by the parties as the appropriate word to replace the word "it", which actually is to be found in those sub-paragraphs. The referee's reasons 9 The referee, having set out the orders for reference, dealt with what he called the background facts and with the hearing of some preliminary issues before me on 4 and 5 May 2009. He then turned his attention to the relevant terms of the contract, and identified them in a manner to which I will return. Having done that, he looked at the issues on the cross-claim. If I may say so, it was entirely appropriate for him to do so given that the sixth of the orders for reference required him to consider what it was that Archiworks claimed from Mr and Mrs Chua pursuant to that cross-claim. In considering the pleadings (an inexact but useful term) the referee referred at paras 34 and 35 of his report to an admission by Mr and Mrs Chua (to whom he referred as "the principals"). I will come back to that. Likewise, I will come back to the referee's summary of the claim made in the cross-claim at para 44 of the report. 10 It became apparent, as the referee noted, that the real issue of difference between the parties was whether Archiworks was required to prove (as it said it was) the "cost of the works" as that expression was contractually defined and no more, or whether it was required to prove (as Mr and Mrs Chua said it was) the actual value of those works. The referee dealt with this at some length and came to the conclusion that what was required to be proved was the "cost of the works" in accordance with the contractual formula, not, at large, the value of those works. He then dealt with the task which he understood, for the reasons that he gave, was entrusted to him on the proper construction of the orders that I had made. If that were the task entrusted to the referee, then, subject to the issue of construction of the relevant terms of the contract, the report must be adopted. If that were not the task entrusted to the referee, or if his conclusions were in any event vitiated by a misconstruction of the relevant terms of the contract, then the report should not be adopted. Relevant terms of the contract 11 Clause 14 of the contract, read in conjunction with Schedule 5, entitled Archiworks to a lump sum fee for construction management services payable by monthly instalments (Schedule 5). The instalments were to be calculated "in the same proportion to the progressive monthly payment of the cost of the works which that cost of the works bears to the estimated total cost of the works", with an adjustment at the time of final payment. 12 The expressions "cost of the works" and "works" were defined. The former was defined to mean "the costs and expenses incurred by [Archiworks] and by [Mr and Mrs Chua] in the construction stage of the works whether paid for or not". The latter was defined to mean "the work required to construct the project set out and detailed in the drawings and specification...". 13 Clause 16 provided for progress payments. The regime required Archiworks to submit to Mr and Mrs Chua a monthly statement of the cost of the works and of the fees due, and for Mr and Mrs Chua to pay those works. Any amounts overdue were to carry interest at the rate of two per cent per month. 14 Clause 17 provided for "determination". It gave either party "the right and power" to terminate the contract at any time by giving to the other party ten days' written notice of intention to terminate. It is clear that termination under cl 17 could be effected for any reason or no reason. 15 Clause 18 provided for payments to be made on termination. Mr and Mrs Chua were required to pay for any unclaimed or unpaid cost of the works incurred by Archiworks up to the date of termination and a "termination fee" calculated in accordance with cl 19. 16 Clause 19 provided for two alternatives. It is the former of those - the alternative given by cl 19(a)(i) - which is relevant. However, the proper construction of that alternative should be understood with the context of the clause as a whole, and accordingly I set out the whole of cl 19: 19. Termination fee (a) The Principal must pay the Construction Manager pursuant to clause 18(a)(iii) , one only of the following:- (i) Where the Construction Manager is being paid by a lump sum fee pursuant to clause 14(b)(i) , the balance of the payable to the Construction Manager on a value pro-rata basis to the date of termination. "Value pro-rata basis" means that proportion of the Construction Manager's fee (less any amount already paid on account) which the Costs of the Works executed to the date of termination bears to the end Cost of the Works as estimated by the Construction Manager at the time of determination. (ii) Where the Construction Manager is being paid by a percentage of the Cost of the Works pursuant to clause 14(b)(ii) , the balance of the fee payable based on the percentage set out in Schedule 5 and the value of the Cost of the Works executed to the date of termination. The value of Cost of the Works will be as estimated by the Construction Manager at the time of determination. (iii) Where the Construction Manager is being paid a fee based on an hourly rate pursuant to clause 14(b)(iii) , the balance of that fee up to the time of determination including any fee already claimed but not yet paid.

17 Clause 20 provided for arbitration. It is not necessary to set out the terms of that clause. The first issue: the proper construction of cl 19 18 Mr Ashhurst SC, for Archiworks, submitted that when cl 19(a)(i) required payment of the termination fee to be made "on a value pro rata basis", the elements of the calculation were those set out in the subclause: namely, the cost of the works as defined to date and estimated to the end of the contract (had it run to its end). Thus, he submitted, what needed to be looked at was the actual costs incurred to the date of termination on the one hand, and the estimate of actual costs to be incurred up to the end of the contract on the other. 19 Mr Bailey SC, who appeared with Mr Sneddon of counsel for Mr and Mrs Chua, submitted that cl 19(a)(i) required consideration of the actual value of the works carried out to the date of termination. Any other construction, he submitted, would mean that Mr and Mrs Chua could be liable to pay a fee for works based on defective work, in respect of which a vast amount of rectification would need to be carried out. He submitted that any such agreement would not make commercial sense. 20 The referee preferred the construction advanced by Archiworks. So do I. It seems to me that the meaning of the relevant clause is clear. What is required, as the first element of the pro-rating exercise, is an assessment of the "cost of the works" as defined. That means the costs and expenses incurred by Archiworks and by Mr and Mrs Chua, whether paid or not, up until the date of termination. A similar meaning should be given to the expression "end cost of the works". 21 The point is made good, as the referee recognised, by contrasting cl 19(a)(i) with cl 19(a)(ii). In the latter paragraph, the parties made reference to "the value of the cost of the works". They did not do so in the former paragraph. That seems to me to reflect a deliberate decision, and to recognise that the two paragraphs contemplate a fee payable on different bases. The first paragraph is concerned simply to pro-rate the lump sum fee in a way that, if not fair to both parties, is at least not entirely arbitrary. The second relates to a fee which is a percentage of the cost of the works. One could well understand why it would be unjust (to put it mildly) for the owners to be required to pay a fee based on the cost of the work which was of no value to them, because it was defective. 22 Of course, a similar point could be made in relation to the first paragraph. That is where sub-cl(b) has work to do. If application of the mechanical formula provides an unjust or inequitable outcome, it can be reviewed by an arbitrator. The arbitrator can fix the fee at such amount as is considered to be just and equitable in all the circumstances. Thus, any unfairness arising from the mechanical formula can be corrected. 23 The referee reasoned to essentially similar effect. As I have said, I think he was correct to do so.

The second issue: construction of the orders 24 Mr Bailey submitted that when I referred to the referee the question of value, the referee was bound to determine the question of value and not some other question based on the terms of the contract. Mr Bailey referred to paras [34] and [51] of my reasons given on 21 May 2009. I set out those paragraphs:

[34] The contract gave either party the right to terminate it by giving the other ten written days notice of intention to do so (cl 17). Upon such termination, any outstanding construction management fees were payable, as were any outstanding fees for preconstruction duties; and a "termination fee" in accordance with cl 19 also became payable. By cl 19(a)(i), the termination fee was stated to be, in effect, the lump sum fee of $108,000.00 pro-rated by reference to the value of construction work, compared to the estimated total cost of the works at the time termination, less all amounts paid.

[51] It was common ground that, in general, the burden of proof of a particular fact lay with the party asserting it. In Archiworks' case, the matters it would be required to be proved would include the following (what I say should not be taken as being exhaustive):

(1) The relevant terms of the contract. (2) The estimated value, as at the date of termination, of all work under the construction contract. (3) The value, at the same date, of all construction work actually carried out.

(4) The total amount of the fees paid to it up to that date. (5) The amounts paid by it for goods ordered on behalf of Mr and Mrs Chua and utilised in the construction process. 25 It is important to bear in mind that I was not dealing with Archiworks' cross-claim. I was dealing with the preliminary issues identified at [7] of those reasons, and with a supplementary issue identified by Mr Bailey set out at [6]. 26 The referee noted that, in my reasons, I used the words "value of construction work" as being effectively interchangeable with the contractual phrase "cost of the works". Further, he said, it was plain that what I required him to consider was the quantification of Archiworks' contractual entitlement, as advanced in its cross-claim (see at para 44 of the report). 27 In that context, the admission on the pleadings to which the referee referred is significant. 28 As the referee recorded at para 34, Archiworks pleaded that in the event of termination of the contract, the contract entitled it to "fees...to be calculated on a "value pro rata basis" by using a formula of actual costs incurred up until the date of termination against the estimated total cost of the works". Particulars were given: cl 19(a)(i) of the contract. The defence to cross-claim admitted paragraph 5 but, as the referee noted, referred to "paragraphs 25A - E of the proposed further amended statement of claim". The referee pointed out that there were no such paragraphs in any document before him, and accordingly assumed that the reference to those paragraphs was not of any significance. It was not suggested that he erred in this approach. It followed, the referee said, "that there is an admission by [Mr and Mrs Chua] that cl 19(a)(i) provided, within the definition "value pro rata basis", for a formula relating to "actual costs incurred until the date of termination against the estimated total cost of the works". 29 It followed, the referee said at para 36, that there was no qualification placed upon the definition to the effect that, in calculating the amount payable by way of termination fee, "one takes into account value of the work performed pursuant to the incurring of costs and expenses". 30 In my view, the approach taken by the referee is correct both on the proper construction of the relevant provisions of the contract and on the analysis undertaken by him of the issues on the pleadings. 31 It follows that, unless the orders require the referee to do otherwise, he was correct to undertake the task required to be performed by cl 19(a)(i) and not some assessment of the value of the works. 32 The referee gave detailed reasons for considering that the orders that I had made required him to undertake the contractual assessment. In doing so, he undertook a legitimate task: namely, the proper construction of the orders for reference. He did not, as Mr Bailey submitted before me he did, vary without authority the order for reference that had been made. 33 As the referee said, the issue with which I was concerned was the entitlement under clauses 18 and 19 of the contract. I was not concerned with some other issue, namely value of the works. What I wanted was, as I said at [46] of my reasons of 21 May 2009, recommendations made for the figures to be inserted in the definition of cl 19(a)(i), so that there could be a decision on Archiworks' cross-claim. 34 In my view, the referee did not err in his construction of the orders. 35 Nor do I think paras [34] and [51] of my earlier reasons, which were expressed in general language, required him to come to any contrary view. 36 It follows, in my opinion, that the referee correctly understood the task that he was to perform.

37 It is accepted that, if I were to come to the conclusions that I have expressed, then the report of the referee should be adopted, and I shall do so. It follows that there should be verdict and judgment in favour of Archiworks. Archiworks has propounded a figure inclusive of interest. Before I make orders, I will hear whether those calculations are agreed. (Counsel addressed on costs) 38 It is common ground, having regard to the reasons that I have just given, that Mr and Mr Chua should pay Archiworks' costs of the cross-claim. Archiworks seeks those costs on the indemnity basis from 1 May 2009. That application is based on an offer of compromise made on that day limited for acceptance until 9 am on the following Monday, 4 May 2009. 39 The relevant sequence of events, so far as it concerns the question of costs, is that on 29 April 2009 the matter was listed for hearing to commence on 4 May 2009 with an estimate of ten days. At that stage, I think, all issues (including on Mr and Mrs Chua's claim) were up for grabs. On 1 May 2009, the list judge confirmed the hearing date but noted an estimate of two days. That no doubt reflected the fact that there had been a settlement of Mr and Mrs Chua's claim. 40 Thus, the offer of compromise was given after ordinary working hours on the Friday on which the hearing scheduled to commence the following Monday was confirmed, and limited to expire half an hour before that hearing was scheduled to commence. 41 The general position under UCPR r 20.26 is that an offer may be expressed to be limited as to the time it is open for acceptance (see sub-r (6)). However, if the offer is so limited, the closing date for acceptance of an offer made less than two months before the date set down for commencement of a trial must be "such time as is reasonable in the circumstances" (see sub-r (7)(b)). 42 It follows that the offer of compromise, and the non-acceptance thereof, can only attract the consequences set out in UCPR r 42.14 if the time limited for its acceptance was reasonable in the circumstances. 43 In my view, the time was not reasonable. As I have said, the offer was made well after business hours on 1 May. Mr and Mrs Chua, or their legal advisers, may or may not have been working on the matter over the weekend, but if they were, it is reasonable to think that they were working on the preparation of the case. The same applies for such work as they may have undertaken on the morning of the hearing. In my view, having regard to the difficult questions that were raised, it was not relevantly "reasonable" to expect Mr and Mrs Chua and their legal advisers to turn their minds away from the myriad tasks of last minute preparation to assessment of the offer of compromise. 44 Mr Ashhurst submitted, I thought somewhat hopefully, that if the offer did not achieve its purpose under the rules it could be considered as an offer under the general law. To my mind, the same analysis applies. Considered as an offer under the general law, non-acceptance could only be relevant to the question of costs if, in all the circumstances, rejection or non-acceptance were unreasonable. For the reasons that I have given, I do not think that it was. 45 I direct entry of judgment and make orders in accordance with paragraphs 1-3 as amended of the form of order initialled by me and dated today's date.

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