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1. appeal be allowed;

2. the order made by the primary Judge on 19 March 2004 be set aside and in lieu thereof it is ordered that the appeal from the orders of the Magistrates Court made on 9 May 2003 is allowed for the purpose of setting aside the sum of $292,275.00 and substituting in lieu thereof the sum of $146,253.30;

3. the parties have liberty to file within 7 days of the delivery of these reasons written submissions as to whether any offers of settlement made by the parties to settle the issues between them or any other matters should be taken into account in determining whether the reasons of the Court of Appeal herein have the effect that the Magistrate’s orders for costs made on 9 May 2003 should be reconsidered;

4. each party to bear its own costs of this appeal and of the appeal and the cross appeal before the primary Judge.

IN THE SUPREME COURT OF THE ) No. ACTCA 7 - 2004

) No. SCA 30 of 2003

AUSTRALIAN CAPITAL TERRITORY )

)

COURT OF APPEAL )

ON APPEAL FROM A SINGLE JUDGE OF THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

BETWEEN: LIANGIS INVESTMENTS PTY LIMITED

ACN 008 539 946

Appellant

AND: IPEX ITG PTY LIMITED

ACN 007 433 623

Respondent

Judges: Higgins CJ, Crispin P, Selway J

Date: 15 February 2005

Place: Canberra

REASONS FOR JUDGMENT

THE COURT:

1. The appellant appeals from the decision of the primary Judge in Liangis Investments Pty Limited v Ipex ITG Pty Limited [2004] ACTSC 8. The primary Judge dismissed an appeal and cross appeal from the decision of the Magistrates Court. The appellant says that the primary Judge was in error in dismissing the appeal. The appellant basically repeats the arguments it put before the primary Judge. The respondent has issued a Notice of Contention seeking to support the costs order made by the primary Judge in favour of the respondent for reasons other than those given by him.

2. The background to the dispute between the parties can be summarised shortly. The appellant is the landlord and the respondent is the tenant of premises at 100 Barrier Street, Fyshwick in the Australian Capital Territory. The respondent operates a business selling computer hardware from that site. The business consists in large part of sales to Government Departments. There had been a pre-existing lease. The relevant lease was entered into on 17 April 2000. It required that the appellant construct a new addition to the existing premises. Clause 9.2 of the lease provided:

The Lessor will at its own cost and expense within six weeks from the date of delivery to the Lessor’s solicitors of this Lease duly executed by the Lessee in order to accommodate the proposed fitout evidenced by the Interior Fitout Plan –

(a) construct in a good and workmanlike manner an extension to the Building erected on Block 11 Section 19 Division of Fyshwick in accordance with the plans annexed to Development Application No 20000410 approved on 23 February 2000 and the requirements of the Building Act of the Territory;

construct and/or install in a good and workmanlike manner and in accordance with the requirements of the Building Act of the Territory:

...

· reverse cycle air conditioning with sufficient capacity and infrastructure to heat and cool the entire Premises;

· power and lighting within this extension;

...

· such additional power, lighting, air conditioning infrastructure, toilets emergency lighting external emergency exits, exit signage and fire protection as will permit the Premises together with the Lessee’s fitout of the same in accordance with the Interior Fitout Plan to comply with the Building Act of the Territory.

3. As required by the lease, the appellant constructed an extension to the building. The extension included ‘reverse cycle air-conditioning’. The respondent alleged that the air-conditioning provided by the appellant was inadequate and in breach of the obligations under cl 9.2 of the lease. The respondent alleged that the air-conditioning did not have ‘sufficient capacity and infrastructure to heat and cool the premises’. The respondent also alleged that the power and lighting were inadequate, particularly for the purpose of providing appropriate air-conditioning. The appellant initially rejected these claims. The respondent then carried out such changes and modifications to the air-conditioning system as it considered were necessary to provide adequate air-conditioning to the premises. The cost of those changes and modifications was $245,811.50. The respondent issued proceedings in February 2001 in the Tenancy Tribunal in relation to the alleged breaches of the lease by the appellant.

Jurisdiction

4. The first issue raised on the appeal before the primary Judge and on the appeal before us concerns the jurisdiction of the Magistrates Court to make the orders that it did.

5. As already mentioned, the respondent referred the dispute to the Registrar of the Tenancy Tribunal purportedly pursuant to s 12 of the Tenancy Tribunal Act 1994 (ACT) (‘the Tenancy Act’). The appellant objected that the Tribunal (including, for this purpose, its Registrar) did not have jurisdiction, but did not choose to put any argument before the Tribunal in relation to its objection. The grounds of its objection were not clear. In any event, on 16 May 2001 the Tribunal held that it did have jurisdiction to hear the dispute.

6. The Tribunal, comprised of its President (who was a Magistrate), proceeded to hear the matter. There were over 20 days of hearings, not counting various interlocutory applications. Unfortunately the parties had so underestimated the time that would be taken in hearing the matter, that it was necessary to adjourn it from time to time. The result is that although the taking of evidence commenced in November 2001, it was not completed until September 2002. The Magistrate delivered his reasons on 9 May 2003 observing that the progress of this litigation has been continuously slow.

7. During the course of this prolonged hearing the basis and nature of the jurisdiction being exercised was altered. The Leases (Commercial and Retail) Act 2001 (ACT) (‘the Leases Act’) commenced operation on 1 July, 2002, some 10 months before the Magistrates Court delivered its decision in this case and whilst evidence was still being taken. The Leases Act repealed the Tenancy Act and abolished the Tenancy Tribunal. The transitional provisions in Part 16 of the Leases Act provide that the Magistrates Court had jurisdiction to hear and determine applications that had been made under the Tenancy Act. Section 160(2) of the Leases Act provided that ‘This Act applies to the dispute as if the dispute were an application under this Act’. Steps taken in a proceeding before the Tribunal and evidence given before the Tribunal were to be treated as steps taken and evidence received before the Magistrates Court: s 160(3) and (4) of the Leases Act. The result was that the Magistrates Court had jurisdiction to finalise the hearing and to give judgment in relation to it, providing that there had been a ‘dispute’ properly before the Tribunal. On the other hand, if the Tribunal did not have jurisdiction, then s 160 of the Act would not confer any greater jurisdiction upon the Magistrates Court than the Tribunal formerly had.

8. We note, however, that the effect of these transitional provisions was to ‘convert’ the proceedings before the Tribunal into proceedings before the Magistrates Court. One result of this is that the relevant jurisdiction to appeal to this Court was afforded by s 155 of the Leases Act, rather than the more restrictive provisions of the Tenancy Act.

9. Consequently, the jurisdiction of the Magistrates Court to determine the dispute depended upon whether the Tribunal had jurisdiction to do so. It is accepted by both parties that for the Tribunal to have jurisdiction on the facts of this case, it was necessary that the leased premises be ‘retail premises’ as defined in s 3 of the Tenancy Act, being: … premises that are used, or are intended to be used, wholly or predominantly for carrying on a business involving – (a) the sale or hire of goods by retail (b) the provision of services by retail.

10. The relevant facts as found by the Tenancy Tribunal in relation to this issue were as follows: The evidence before me establishes that the applicant sells computer hardware and software and provides computer related services. The evidence establishes that members of the public not only make a resort to the premises to have their computer needs met and services provided but indeed do so. I am satisfied on the evidence that sale of goods are predominantly to government agencies and businesses and that the evidence establishes that a number of government agencies have joined together to secure goods and services from the applicant. Goods are sold to end users to meet their personal and business requirements. I am satisfied that there is no component of wholesale.

11. Given these undisputed findings both parties accept, and properly so, that if the word ‘retail’ bears the meaning of ‘the sale or provision of goods and services to the ultimate consumer(s)’ then the business conducted by the respondent met the requirements of pars (a) and (b) of the definition of ‘retail premises’ and that the premises were ‘retail premises’.

12. However, notwithstanding that the appellant did not choose to make any submissions to the Tribunal on jurisdiction, and notwithstanding that the issue was not raised again before the Magistrates Court, the appellant has argued before both the primary Judge and before this Court that the word ‘retail’ does not bear this meaning. The appellant argues that the word ‘retail’ should be understood as meaning ‘sales of goods in comparatively small quantities to ultimate consumers who are ordinary members of the public’.

13. The primary Judge dealt with this argument as follows: It seems to me that these findings [by the Court that there was jurisdiction] are amply justified by the evidence before him… This evidence was not subject to any cross-examination at the time because the appellant did not appear at the hearing on jurisdiction … … There was clear evidence that there was no element of wholesale sale. The evidence was that most sales were to a group of Commonwealth government agencies, although other businesses and members of the public also purchased goods and services. The evidence was that the client would deal with the Canberra office, and then a computer would be custom built for the client at the tenant’s premises in Melbourne. The manufacturing occurred in Melbourne. The computer would be shipped to Canberra, where configuration and further fine-tuning as well as servicing when required, would occur. Although the bulk of the sales were not to individual members of the public, they were all to end users (there being no wholesale). In considering whether sales to end users other than members of the public could amount to retail sales, the issue in [Actionco v Pty Ltd v Pioneer Plasterboard Pty Ltd [2002] ACTSC 92], Crispin J cited the decision of the Full Court of the Federal Court in Collector of Customs v Chemark Services Pty Ltd (1993) 114 ALR 531 in which Spender, Einfeld and Lee JJ said at 537 – ‘The weight of authority seems to us to support a conclusion that the words ‘retail sale’ have generally acquired a specialised meaning of a sale to an ultimate consumer. We do not think that the usage of the term limits such consumers to ordinary members of the public. The fact that in the present case almost all of the goods imported by the respondent were directly sold to professional horticulturalists and not ordinary gardeners as ultimate consumers is, in our opinion, irrelevant. Professionals can still be described as ultimate consumers. ... Likewise, although more often than not a retail sale will be both a sale to the ultimate consumer and a sale of goods in a quantity not larger than necessary to satisfy the ordinary non-professional purchaser, some sales in larger quantities will also be retail.’ This understanding of the meaning of the term retail was well established in law at the time of the enactment of the Tenancy Tribunal Act, and it seems to me that it follows that the mere fact that sales are to other corporate entities does not mean that premises cease to be retail premises, so long as those entities are end users, rather than on sellers. A sale to an on seller would be a wholesale rather than a retail sale.

14. The appellant has renewed the same submissions before us as were made to the primary Judge. The appellant relies upon the decision of the NSW Court of Appeal in Woolworths Ltd v Campbells Cash and Carry Pty Ltd (1996) 92 LGERA 244 at 248, 258‑259. Properly read that decision does not help the appellant. It does not assert that the ordinary meaning of the word ‘retail’ is that which the appellant proposes. The Court of Appeal was interpreting the word ‘retail’ in the context of a particular statute which distinguished between ‘wholesale sales’ and ‘retail sales’. That is not an issue that directly arises under the Tenancy Act.

15. The appellant asserted that the Tenancy Act distinguished between ‘retail’ and ‘commercial’ businesses. That is true, but it does so because the definition of ‘commercial premises’ excludes ‘retail premises’. In ordinary parlance ‘retail’ premises would be considered part of the larger category of ‘commercial’ premises. The fact that they are excluded by definition from that larger category in the Tenancy Act says nothing, by itself, about the proper interpretation of the word ‘retail’ within that Act.

16. The appellant then referred to s 5(1)(a) of the Tenancy Act and submitted that the mischief to which the Act was directed was the protection of ‘small’ tenants and, for that reason, the word ‘retail’ should not be read as referring to large or bulk sales. That provision limits the application of the Act to ‘retail premises … other than [retail] premises with a lettable area greater than 1000m2 that are leased to a corporation that is not eligible to be incorporated as a proprietary limited company under the Corporations Act’. Eligibility for incorporation as a proprietary limited company was based upon restrictions in the constitution of the company relating to the transferability of its shares, the number of its shareholders and to raising money from the public: see s 116 of the Corporations Act, 1989 (Cth). Such eligibility was not related to the size of the corporation as such, nor to the extent or nature of its business. A proprietary limited company could be established as a wholly owned subsidiary of a major public corporation. In this case both the appellant and the respondent were proprietary limited companies. The appellant is probably correct in submitting that the Tenancy Act was primarily directed to the protection of smaller tenants, but the Act was broadly drafted and clearly extended to persons who would not ordinarily be considered within that category. In any event, we do not think that the ‘mischief’ of the Tenancy Act requires that the word ‘retail’ be read in other than its usual and ordinary meaning.

17. In ordinary parlance in Australia today (and in 1994) the word ‘retail’ means the sale of goods to ultimate consumers. It may be that this meaning is closer to the meaning adopted in the United States than to the English meaning, at least as reflected in the differing dictionary definitions (see Collector of Customs v Chemark Services Pty Ltd (1993) 42 FCR 585 (Chemark) at 589. To the extent that there is any difference then it seems to us that it is the United States meaning that has come to be accepted as the usual and ordinary meaning in this country. That meaning is not limited by the size of the seller, or by the wealth or size of the purchaser, or by the size of any particular purchase. Mr Sexton SC, in his submissions accepted as much. He was correct to do so. True it is, as is noted in the Macquarie Dictionary, that retail sales usually involve relatively small quantities. However, in Australia that is a factual description of what is ‘usual’; it is not a definitional requirement.

18. In the Tenancy Act the word ‘retail’ is used to refer to ‘services’ as well as ‘goods’. This reinforces our view that the word ‘retail’ refers to the relationship between the provider of the goods or services and the consumer thereof, rather than the extent or nature of those goods or services or the size or identity of the consumer to whom they are provided.

19. The approach we take is consistent with that taken by the Full Federal Court in Chemark at 591. In that case the Court referred to the words ‘retail sale’ as having acquired the ‘specialised meaning’ of ‘sale to the ultimate consumer’. As already noted, we would see this as the ordinary meaning, rather than as a specialised one. Nevertheless, the meaning identified by that Court in 1993 is obviously of some importance in construing a 1994 law made in the Australian Capital Territory at a time when appeals from this Court were to the Full Federal Court.

20. For these reasons we agree with the conclusion by the Tenancy Tribunal that it had jurisdiction to hear the dispute. We agree with the conclusions of the primary Judge that the Magistrates Court had jurisdiction to make the orders that it did and with his reasons for doing so. Breach of the Lease

21. The central issue before the Magistrates Court concerned the proper interpretation of cl 9.2 of the lease. It does not appear from the evidence or the ultimate findings of the Magistrates Court or, indeed, from the submissions made to the primary Judge or before us, that either party has directed their attention to the wording and interpretation of the lease itself. Their submissions seem to have been primarily directed to the consequential issue of the assessment of damages. The problem, of course, is that that issue cannot be resolved without first interpreting the lease. In the result it would appear that neither the Magistrate nor the primary Judge was properly assisted in the interpretation of the lease. Indeed, the failure of the parties in their submissions before us to direct their attention to the essential issue of the proper interpretation of the lease has increased the difficulties we have had in wading through the volumes of material that have been put before us in an attempt to identify something that may be relevant.

22. The respondent argued that the appellant was required to install an air-conditioning system that was sufficient for the use to which the respondent intended to put the premises once they were constructed. Consequently, it called evidence to prove its damages based upon that intended use.

23. The appellant, on the other hand, argued that it had engaged an appropriate expert to determine what air-conditioning was required and that this discharged its obligations. Alternatively, it argued that its obligations were to provide air-conditioning in terms of the ‘industry standard’ in relation to the fit out plan referred to in cl 9 of the lease. It argued that it had done so, or at least, that any breaches were relatively minor and could be corrected. Much of the appellant’s case would seem to have been directed to an argument that the respondent’s occupation of the building was different from that contemplated in the plan.

24. The conclusion reached by the Magistrate was consistent with the respondent’s position, although in order to reach that conclusion the Magistrate had to deal with the interpretation of the lease. The Magistrate found that the relevant term in cl 9.2 of the lease was ‘imprecise’ and contained ‘no objective standard against which compliance may be readily measured’. The Magistrates Court held that it could look at extrinsic facts and circumstances for the purpose of determining what the objective mutual intention of the parties had been. The Magistrates Court identified the following extrinsic facts and circumstances: In the present case there were a number of facts and circumstances known to the parties which assist in interpreting the parties’ intention when they referred in clause 9.2 to air conditioning ‘sufficient’ to heat and cool the premises. It was known to the parties that the applicant is a large information technology company whose business involves the use of computers and other associated electrical equipment and it was further known that the applicant intended to expand its operations in Canberra after obtaining a large government contract. It was a common ground between the parties that the works to be undertaken in the premises were for the purpose of enabling the applicant to conduct its business in the premises. Against such a background, I have no doubt that the parties intended that the air conditioning infrastructure to be supplied was to be sufficient for Ipex’s actual use of the premises as known to the parties. That is, it was to be sufficient to adequately heat and cool the leased area taking into account the number of people and the quantity of equipment Ipex was to employ in the premises, and deployed in such a way as to accommodate the applicant’s fit-out.

25. The Magistrates Court held that the test of such sufficiency was an objective requirement to provide an air-conditioning system (and an electrical system capable of operating that air-conditioning system) that a reasonable person in the position of the parties would regard as sufficient in relation to the purposes for which the respondent was proposing to use the extension. The system had to be sufficient for the respondent’s actual use of the premises ‘as known to the parties’. In relation to that use the Magistrates Court found not only that the parties had each agreed to the ‘internal fitout plan’: (‘Plan C’), but also that the parties ‘knew the nature of the business undertaken by [the respondent] in the premises’ and that the extrinsic material provided a ‘guide to the number of people to be employed in the premises’, a general guide to the amount of electrical equipment to be employed together with general information as to how the extension was to be internally set out.

26. On the face of it this analysis directed attention to what was objectively known to both parties: see Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd & Ors [2004] HCA 52 at [35]ff. However, the Magistrate took a further step. Apparently on the basis of the expert evidence that an expert would not simply rely upon the detail in the agreed plan, but would inquire as to the actual use of the premises intended by the prospective tenant, the Magistrates Court also implied a term into the lease requiring the appellant to make inquiries of the respondent in order to ascertain what use the appellant actually intended to make of the premises: I am satisfied that a term should be implied into the present agreement obliging each of the parties to do that which is reasonably necessary to enable the other party to have the benefit of the agreement or to achieve the objects of the contract. In the instant case this obligation encompassed an obligation on the part of the [appellant] to make reasonable enquiries of the [respondent] of the use to which the premises were to be put, the number of people and the number and type of equipment to be employed and the way in which they were to be deployed in the premises if there was any doubt about these matters.

27. In the result the Magistrates Court interpreted cl 9.2 as imposing an obligation upon the appellant to inquire of the respondent as to what use the respondent actually intended to make of the premises and then to construct an air-conditioning system consistent with those requirements: In summary, I am satisfied that in order to meet its obligation under clause 9.2 of the lease to provide reverse cycle air conditioning sufficient to heat and cool the premises the respondent had to install such a system that a reasonable person in the position of the parties would consider sufficient and in order to bring about this end each party had an obligation to co-operate with the other in seeking and providing such information as would allow the other party to comply with its obligations.

28. The Magistrates Court then proceeded to consider whether the appellant had breached cl 9.2 of the lease, as so interpreted. Although the learned Magistrate considered the issue at some length, there would not appear to have been any dispute that the system as installed was totally inadequate for the actual use to which the respondent had put the premises. When the respondent discovered that the system was inadequate for its purposes, the respondent engaged a contractor to advise as to what rectification work was required. In a report dated June 2001 that contractor (represented by Mr Nathwani, who gave expert evidence to the Magistrates Court) identified a number of problems with the air-conditioning system. Initially those problems were said to be able to be identified from Plan C, although it was clear from the evidence that the basis for the calculations was not limited to that plan, but included what was observed from a ‘walk through’ of the premises as actually used by the respondent and by asking the respondent questions in relation to that use. The cost of those works was estimated as $150,000 - $200,000. The Magistrate quoted from part of the contractor’s report: Major areas of concern have been identified with the existing air conditioning systems. They included the following apparent deficiencies: · Insufficient capacities of the air conditioning equipment. · Inadequate zoning. · Poor air distribution. · Poor maintenance. · Inadequate automatic zone temperature control. · Lack of minimum fresh air to meet Code requirements. · Lack of appropriate return air path to the air handling systems. · Lack of make up air to compensate for exhaust systems. In our opinion, the above reflects a potential OH&S hazard and measures should be taken immediately to rectify the situation’ The report concludes with the following summary: The existing air conditioning systems are of the ‘low budget’ type with: · Low reliability and durability. · On/ off type control. · Inefficiency in operation to provide a balance between initial capital cost and ongoing operating costs Design deficiencies include the following · Insufficient capacities to handle the specific heat loadings. · Inefficient air distribution to provide even air movement in the occupied space. · Insufficient fresh air to comply with the BCA requirements. In order to rectify the ongoing problems with the existing mechanical services we recommend the review of the design criteria and building performance, and redesign the existing mechanical services, based upon the following principles and guides. · Adequate capacities. · Adequate zoning. · Efficient operation. · Reliable and durable systems. · Compliance with BCA and relevant Australian Standards, in particular AS 1668.2. The work would include: · Re-using existing air conditioning systems with possible upgrading where necessary · Provision of new air conditioning systems to supplement deficiencies in capacities, fresh air, and zoning requirements. · Modification to existing ducting and new ducting plus air distribution fittings to improve air distribution efficiency. · Re-commissioning of complete installation. Indicative cost for the above suggested work is between $150,000 and $200,000.

29. Not surprisingly, the actual works carried out in 2002 to repair and correct the air-conditioning system and commissioned by the respondent were based upon even more extensive information provided by the respondent as to its actual use of the premises. The cost of those actual works was $245,811.50. This is the amount that was awarded by the Magistrates Court for the cost of rectification work.

30. On appeal, the primary Judge would seem to have adopted the same approach to the interpretation of cl 9.2 of the lease as had been adopted by the Magistrate. His Honour proceeded on the basis that the relevant requirements for the air conditioning system were to be found within Plan C, but that that the appellant was required to make further inquiries as to the respondent’s expected operations. In particular, the primary Judge accepted that the determination by the Magistrates Court as to the meaning of cl 9.2 was not limited merely to the objective interpretation of Plan C: Having determined, correctly in my view, that the lease required the landlord to construct the premises with air-conditioning and electrical systems sufficient to meet the needs of the tenant as identified by Plan C, and as otherwise known to the landlord or to a reasonable person in the position of the landlord….

31. The primary Judge then dealt with the issue of whether the air-conditioning system met the requirements of cl 9.2. The primary Judge noted that, on this interpretation of cl 9.2 it was common ground that there was a deficiency in the air-conditioning but that there was an issue as to the extent of any deficiency.

32. The primary Judge dealt with the dispute as to the extent of any deficiency as follows: The Magistrate, having determined that he preferred the expert evidence of Mr Nathwani, accepted [the sum of $245,811.50] as an appropriate figure for the rectification costs of the inadequate air-conditioning and electrical works. He referred to evidence by [the expert called by the appellant] Mr Rowling to the effect that the problems could have been resolved by minor works only, saying (AB 93) – ‘I find that little weight can be given to the evidence of Mr Rowlings on the issue whether the proposed minor works would have alleviated the deficiencies in the system as the minor works proposal remained, at best, hypothetical and never moved to the stage of specification and design.’ As the Magistrate had found that Mr Rowling’s reports were based on assumptions of adequacy of the existing system that he found to be inconsistent with other evidence, it seems to me that this was an entirely appropriate finding. The evidence established that the system as installed and claimed for complied with the requirements of Plan C. This was the evidence of [the expert called by the respondent] Mr Nathwani both in his affidavit (AB 1744) and in his oral evidence. Mr Rowling gave evidence that the system installed in May 2002 met the present needs of the tenant but were not referable to Plan C. Mr Nathwani rejected this, stating that ‘it is designed for what should have gone in, in the first place’ (AB 511). The Magistrate, it seems to me, was quite entitled to accept this evidence. It is well-established that a party is entitled to recover the cost of rectifying defective works, particularly when, as here, the landlord was given adequate opportunity to perform the works themselves, but declined to do so. It is well-established that the measure of damages in the case of defective building work is that the successful plaintiff is “entitled to the reasonable cost of rectifying the departure or defect so far as that is possible” (Bellgrove v Eldridge (1954) 90 CLR 613 per Dixon CJ, Webb and Taylor JJ at 617). It seems to me that there was ample evidence before the Magistrate for him to conclude, as he did, that the cost as outlined by Mr Nathwani was reasonable. Indeed, in cross-examination Mr Nathwani pointed out how careful attention was paid to re-using existing infrastructure in order to achieve the required capacity but to minimise costs (AB 588). I am satisfied from the evidence that the rectification works were undertaken carefully and reasonably, and that the cost was appropriate. It is properly the basis of the award of damages. The air-conditioning system as now installed, of course remains the property of the landlord, and the capital value of the landlord’s premises would now reflect the fact that the building is adequately air-conditioned.

33. Consequently the primary Judge dismissed the appeal.

34. As can be seen it was essential to the reasoning of both the Magistrate and the primary Judge that there was a duty upon the appellant to make inquiries of the respondent. In order to reach that conclusion it was first necessary to interpret the words of the lease. The relevant clause provided that the appellant would ‘construct and/or install in a good and workmanlike manner and in accordance with the requirements of the Building Act of the Territory … reverse cycle air-conditioning with sufficient capacity and infrastructure to heat and cool the entire Premises.’

35. The meaning of that clause was uncertain in at least two respects. It was not clear what the parties intended in referring to ‘heat and cool’ and it was not clear what the parties intended in referring to ‘the entire premises’. In that regard the words are relevantly ‘ambiguous or susceptible of more than one meaning’: see Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 (Codelfa) at 352: The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed. It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification. Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties’ presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.

36. Consequently, given the ambiguity inherent in the relevant obligations, the Magistrates Court was entitled to look to the surrounding circumstances in order to identify what the clause meant. As the above discussion shows, the Court did so. It referred to Plan C being the ‘interior design’ that the parties had agreed. It also referred to the objective information that both parties can be taken to have understood from their previous history and dealing. It could also have referred to any other information that was mutually known by the parties and which may have assisted the Court in interpreting cl 9.2. One piece of such information that could be identified was the reference in some of the correspondence between the parties to a requirement that up to 150 persons might be accommodated in the extension and the reference in that correspondence to the need for the ‘entire proposed fitout area [to be] adequately heated and cooled’.

37. The only other information that was identified was information that was apparently agreed by both parties, although that agreement does not seem to be recorded in either the transcript or the reasons. Both parties informed us that the parties were agreed that there was an accepted ‘industry standard’ for the provision of air-conditioning and that both parties accepted that that standard was applicable to determine the ‘sufficiency’ of the air-conditioning required by cl 9.2. That ‘industry standard’ is reflected in the relevant Australian Standard which, in turn, is applied by the Building Code. The industry standard is nevertheless applicable even where (as may occur in some respects in relation to cl 9.2) the Building Code does not make specific provision. By reason of that ‘industry standard’ it was accepted by the parties that a relevant contractor, provided with an interior design plan, could determine the air-conditioning requirements for the premises if built in accordance with that plan. In particular the parties were agreed that there are ‘default’ standards that are applicable in areas where insufficient information is provided to enable some more accurate standard to be identified.

38. It is clear from Codelfa that the surrounding circumstances are not looked at for the purpose of rewriting the contract, but rather for the purpose of interpreting the written provisions within it. Taking account of the surrounding circumstances known to both parties, including the agreement that there was an industry standard which was to be imported into cl 9.2, it would seem to be clear that the relevant obligation under that clause was to provide an air-conditioning system which was adequate in accordance with the relevant ‘industry standards’ to heat and cool the premises as described in Plan C.

39. So understood it is clear in our view that there was no obligation upon the appellant to make any further inquiries of the respondent to ascertain what actual use of the premises was intended. The requirements, such as they were, were specified in Plan C (as understood in light of the background information known to both parties as to the business conducted by the respondent and as set out in the Magistrate’s reasons) and in the industry standards which both parties accepted were applicable. There was nothing in any of the extrinsic material known to both parties which suggested that it was the mutual intention of both of them that the subjective intention of the respondent as to the use to which the premises should be put, otherwise than as revealed in Plan C, was the relevant use for the purposes of determining the extent of the appellant’s obligations under cl 9.2.

40. It was not necessary to imply a term into the lease requiring the appellant to make further inquiries as to the actual intended use of the premises by the respondent so as to give ‘business efficacy’ to the lease. Given the nature of a contract as a mutual agreement, it would be a peculiar result if ‘business efficacy’ had the consequence that the subjective intention of one party to the contract was to determine the contractual obligation of the other, at least in the absence of a clear understanding to that effect. In our view both the Magistrate and the primary Judge were in error in implying into the lease a term requiring that the air‑conditioning system meet the actual requirements of the respondent.

41. The parties are agreed that the air-conditioning system was not adequate for the purpose of cl 9.2 as understood in the manner set out in par [38] above. In particular, the appellant agrees that the air-conditioning system did not meet the requirements of cl 9.2 as properly interpreted. Unfortunately, it would not appear that there is any accepted evidence as to what air-conditioning plant and associated infrastructure was necessary to comply with the obligation imposed by cl 9.2 as we have interpreted it.

42. The witness Mr Huxtable was the person who did the initial design of the air-conditioning system. He gave evidence that he determined the requirements for the air-conditioning system by looking at Plan C and by applying the relevant industry standards to it. In our view this approach, assuming it was done in a proper and workmanlike manner, was the correct one. The difficulty with Mr Huxtable’s evidence is that there was no evidence that he had made the relevant calculations correctly or, indeed, at all. On the other hand, there was at least some evidence that he had misinterpreted Plan C. For example, he interpreted the ‘Help Area’ in Plan C as only having a compactus within it and claimed to have assessed the air-conditioning requirements on that basis. Given the description of the area in Plan C, it seems to us to be reasonably clear that the area was intended to be used by persons handling product inquiries and the like. We note that Mr Rowling (also called by the appellant) interpreted Plan C in this way. It also seems to us to be reasonably clear from Plan C that there would be 30 workers in that area and that each of them would use their own computer. Mr Huxtable did not design an air-conditioning system sufficient to meet this requirement. It was consequently deficient for the purposes of the lease.

43. We also note that Mr Huxtable did design part of the air-conditioning system on the basis that there would be 160 computers in the area ‘Technical Service and Integration Laboratory Area’. This was information provided to him by the respondent after the lease had been executed. It was, of course, perfectly sensible for that information to be taken into account if the appellant was willing to do so. However, assuming that the requirement was greater than what was required under the lease, the appellant would not have been obliged to do so.

44. There was also evidence that Mr Huxtable was instructed to design the air-conditioning system to meet a price specified by the appellant whether or not that design complied with the industry standards. In particular, he was instructed that there was to be no improvement in the electricity services to the building. Given the price constraints imposed on him he made no heat load calculations, no design drawings and no sketches. As he said, ‘the price didn’t allow for it’. Given these concessions it seems to us to be plain that the evidence of Mr Huxtable could not be relied upon to establish that the air-conditioning system as installed met the requirements of cl 9.2 of the lease, or as to the extent of any deficiency.

45. What Mr Huxtable’s evidence does show is that neither he, nor the appellant, made any real attempt to comply with cl 9.2 of the lease. Save for taking account of the requirement for 160 computers in a particular area, it is clear from his evidence that the air-conditioning system was built to a price and standard determined by the commercial requirements of the landlord.

46. Evidence was also given by Mr Rowling for the appellant and by Mr Nathwani for the respondent. In accordance with a suggestion from the Magistrate, these witnesses met for the purpose of seeking to agree as to the extent of any deficiency in the air-conditioning system. The relevant agreement is contained in Exhibit 27, being the Minutes of an agreement reached between the respective contractors based upon the relevant ‘industry standard’. The agreement, such as it was, was an agreement to disagree.

47. The relevant experts agreed that the air-conditioning system as installed by the appellant had insufficient capacity in 4 of the 10 ‘zones’ within the new premises. The experts also agreed that there was sufficient capacity in 4 of the zones. However, even in the areas where they reached agreement that the air-conditioning was deficient, they were unable to agree as to the extent of any deficiency.

48. One of the areas in dispute between these experts involved the question whether or not Plan C provided for 15 or 30 workers within an area described as the ‘Help Desk’. That issue has been discussed above.

49. However, it is plain from the evidence of both Mr Nathwani and Mr Rowling that both of them made detailed calculations on the basis of the actual operation of the business premises and other matters not referred to in Plan C as at the time of their calculations. Mr Rowling, for example, made various discounts in his calculations by reason of the presence of various trees outside windows – a presence that is neither contemplated nor required by Plan C or by the lease. Similarly there was a dispute as to whether the ‘Carrier’ or the ‘AIRAH’ figures for heat loss through a ceiling should be used. There was no evidence that purported to relate that dispute to the requirements of the industry standard as evidenced by the Australian Standard.

50. In relation to the differences between Mr Nathwani and Mr Rowling the Magistrate found that he was unable to prefer one to the other based upon qualifications or experience. The Magistrate ultimately preferred the evidence of Mr Nathwani on the basis that that evidence was more consistent with the evidence given by the employees of the respondent as to their actual experience of the operation of the air-conditioning system. However, the evidence of those employees could only be relevant if it was the actual use of the premises by the respondent that was relevant to the issues before the Magistrate. It was not. What was relevant was the provision of an air-conditioning system in accordance with industry standards adequate to heat and cool the premises described in Plan C. That was a different analysis. Neither Mr Nathwani nor Mr Rowling addressed that issue.

51. The importance of this is its impact upon the damages suffered by the respondent as a result of the breach of the lease by the appellant. The respondent’s claim for damages included the cost of the rectification works it commissioned. As is made clear in Bellgrove v Eldridge (1954) 90 CLR 613, a person may be entitled to recover the costs of rectification where the rectification is a reasonable course to adopt and the rectification is necessary to achieve conformity with the contract (see at 618). The Magistrates Court held that the air-conditioning system was not adequate for the purpose; nor was the electrical system. It held that the rectification work was relevantly necessary.

52. There are several problems with this analysis. Most obviously, the error made by the Court in identifying the correct meaning of cl 9.2 had the effect that the Magistrates Court did not identify whether the rectification ‘was necessary in order to achieve conformity with the contract’. Further, it would seem clear from the report of the contractor given to the respondent in June 2001 that some of the issues considered by the contractor as requiring rectification (e.g. ‘durability’ and ‘running costs’) did not have anything to do with cl 9.2 of the lease even on the interpretation adopted by the Magistrate.

53. The consequence is that the assessment of damages in relation to the rectification work actually undertaken cannot be sustained. At the very least it proceeded on a false understanding of the contract. The respondent was not entitled to damages on the basis of the actual cost of the ‘rectification’ where such rectification was to bring the air-conditioning system up to the standard required to meet the actual operation of the respondent’s business. What was required was an assessment of what changes were necessary to provide air-conditioning in accordance with industry standards for the premises as described in Plan C having regard to such further information as was known to both parties. There is no evidence as to what rectification work was necessary to meet this standard or what it would have cost. On the other hand, the appellant accepts that it breached the lease.

54. The appeal must be allowed. The respondent says that the proper order is for the matter to be remitted back to the Magistrates Court so that it may be permitted to call further evidence as to what its damages were in accordance with cl 9.2 as properly interpreted. The appellant says that the respondent has had the opportunity to prove its case and should not now be permitted to start again on a different basis. We agree. This being the case we are in as good a position as the Magistrate would be to determine the appropriate award of damages on the evidence that was before the Magistrates Court. We also note the unduly prolonged course that this litigation has already taken. In the circumstances it is appropriate course is for this Court to attempt to assess the damages on the basis of the evidence that was before the Magistrates Court.

55. In relation to the insufficiency of the air-conditioning system, the Magistrate allowed $245,811.50 for the cost of rectification and $32,277.70 for loss of the value of the lease until it was rectified.

56. The rectification cost of $245,811.50 was based upon an affidavit by Mr Nathwani sworn on 31 May 2002. It is clear from that affidavit and from his other evidence, that the air-conditioning system actually designed and installed was one sufficient to meet the actual requirements of the respondent’s business as opposed to that sufficient to comply with Plan C.

57. In the absence of any evidence directed to the actual amount of the loss properly calculated, it is necessary for us to take a broad axe approach and attempt to estimate the damages as best we can in light of the evidence that was before the Magistrates Court (see Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 83, 125, 153).

58. In light of Mr Huxtable’s evidence as to how he performed his task and what instructions he was given, it would seem clear that there was no satisfactory basis for the appellant to have assumed that the air-conditioning system would comply with the contractual requirements. It is agreed that it did not. Given the inadequacy of the appellant’s response to its obligations under cl 9.2 of the lease, it is probable that the air-conditioning system as designed and installed by Mr Huxtable was significantly deficient. It is probable that a significant upgrade in that system was required in order to comply with cl 9.2.

59. On the other hand, it is also likely that the system as commissioned by the respondent at a cost of $245,811.50 exceeded the requirements under cl 9.2 of the lease. In particular, the actual ‘load’ in some of the areas where default ‘loads’ may have been appropriate is significantly higher than those defaults. We refer, for example, to the areas described on Plan C as ‘Project Areas’.

60. There are some circumstances where a party is entitled to recover the full cost of rectification work even if the rectification exceeds the requirements of the contract (see Hyder Consulting (Australia) Pty Ltd v Wilh Wilhelmsen Agency Pty Ltd [2001] NSWCA 313 (14 November 2001). However, that is not this case. As already discussed, the respondent commissioned the works to meet its actual requirements. It did so on the basis of its apparent understanding that those works were the minimum necessary to comply with the contract. That was based upon its misunderstanding of the contract. It is not entitled to recover damages based on its own misunderstanding. It is appropriate to allow, as part of the damages, no more than the amount that the respondent would reasonably have spent if it had undertaken reasonable rectification work so as to bring the air-conditioning system up to the standard required by the lease.

61. Some elements of the actual rectification cost would seem to have been reasonably necessary in any event. For example, one element of that rectification cost was an amount of about $60,000 for the cost of upgrading electrical services. It is plain from the evidence of Mr Huxtable that the electricity system was likely to need upgrading if there was any significant increase in the heat loads that he estimated or assumed. This would also seem to have been the approach Mr Nathwani. There was expert evidence that suggested that it would be sensible to take a conservative approach in estimating electrical requirements. That evidence was accepted by the Magistrate. On the other hand, the appellant did called one expert who gave evidence that it may not have been necessary to take such a conservative approach given the prior history of the relationship between the parties. Even on this evidence, the cost of the necessary electrical upgrade would have been $10,000. It would seem to us likely that an electrical upgrade significantly greater than this was likely to be required if the air-conditioning system had been properly designed to take account of the obligations imposed by cl 9.2 of the lease. In any event, given the circumstances, in our view, it would have been reasonable for the respondent to have sought to rectify the breaches of the lease by making a significant upgrade to the electrical system.

62. Taking a broad axe approach we are satisfied that the cost of reasonable rectification of the air-conditioning system so as to comply with cl 9.2 of the lease was likely to have been at least $100,000. It is possible, of course, that it could have been considerably more than that. However, in the absence of any further or better evidence dealing with the issue that is the best estimate of the cost that we can make.

63. We note that the effect of this determination is that the appellant may have been required to spend more for the fitout of the premises than it apparently expected. On the other hand, it has obtained a windfall in that the respondent has spent some $240,000 for air-conditioning plant and associated infrastructure which, being fixtures, are the property of the appellant, but for which the appellant will only have to pay $100,000.

64. The other aspect of the damages arising from the insufficiency of the air-conditioning system was the amount allowed by the Magistrate for the reduced value of the lease until the rectification works were completed. That involved a ‘broad axe’ assessment by the Magistrate, based upon expert evidence, of the effect upon the market rent of the inadequate air-conditioning. Although the Magistrate was proceeding upon the basis that the air-conditioning system was more deficient than we have, nevertheless it does not seem to us that the difference was likely to be significant in terms of the rent actually payable. We would not be disposed to interfere with that assessment.

65. The Magistrate also allowed an amount of $2,463.60 for the purchase by the respondent of heaters and air-conditioners for the purpose of heating and cooling its staff at the premises until repairs could be effected. It may be that some part of this cost was more properly related to the difference between the actual requirements of the respondent and the requirements under cl 9.2 of the lease, but given the relatively small amount involved we would not be disposed to interfere with that assessment.

66. Finally the Magistrate allowed a separate amount of $11,512.00 for stamp duty. The issue in relation to stamp duty arose from cl 3.1(r) of the lease which provided: The Lessee will from time to time and at all times during the continuance of this Lease pay where permitted by law, all stamp duty … of and incidental to the … stamping and registration of the Lease.

67. Acting on the belief that cl 3.1(r) meant that it was liable to do so, the respondent paid the relevant stamp duty. However, s 138 of the Duties Act, 1999 (ACT) provides that the person liable to pay the duty is the lessor. Clause 29 of the Commercial and Retail Leases Code of Practice provided that ‘stamp duty … shall not be passed from one party to another’. Clause 29 of the Code was applicable if the relevant lease was a ‘retail lease’ under the Tenancy Act. For the reasons given above in relation to the appellant’s argument as to jurisdiction, the appellant says that this lease was not a ‘retail lease’. The dispute is described in the reasons of the primary Judge as follows: There was also a claim in relation to the cost of stamp duty. The lease provided that the tenant should pay the stamp duty on the lease, being an amount assessed and paid by it of $11,512. This provision in the lease was contrary to the provisions of s 138 of the Duties Act 1999 and s 29 of the Commercial and Retail Leases Code of Practice, which both provide that this cost should be borne by the landlord and not the tenant. The Magistrate found, correctly it seems to me, that this money was recoverable by the tenant from the landlord on the principle in David Securities Pty Limited v Commonwealth Bank of Australia (1992) 175 CLR 353. The Magistrate noted in his reasons that the landlord at the hearing did not dispute the effect of the statutory provisions, particularly the Code, but sought the use of a discretion to not grant the award, which would not, it seems to me, have been appropriate. On the appeal the landlord conceded that, if I decided that the Tribunal had jurisdiction to enter into this dispute, it would follow that this lease was a lease to which the Code applied, and it would follow that the duty should have been paid by the landlord. I have so decided, and it follows that the Magistrate was correct in awarding this sum.

68. Given that the argument put by the appellant is ultimately the same as that put by it in relation to jurisdiction, the appellant has accepted that our decision on that question will also dispose of the argument in relation to stamp duty. We affirm that the amount of $11,512.00 allowed by the Magistrate for stamp duty should stand.

69. Consequently, in lieu of the judgment in favour of the respondent of $292,275.00 there should be judgment in favour of the respondent in the sum of $146,253.30.

70. This leaves the question of costs in the proceedings before the Tenancy Tribunal and subsequently before the Magistrates Court. Under s 154 of the Leases Act the parties to the proceedings before the Magistrate (and the Tenancy Tribunal) ‘bear their own costs unless the Magistrates Court or Supreme Court makes an order about costs’. In this case on 18 August, 2003 the Magistrate made an order that the appellant bear the respondent’s costs of the proceeding ‘on a party/party basis taxed at 2/3 of the Supreme Court Scale with disbursements in full.’ The reason why the Magistrates Court departed from the usual rule was its view that the appellant had adopted an unreasonable approach both in the litigation and, more generally, in the dispute. The Magistrate’s reasons for awarding costs were not directly related to the success of the respondent in the proceedings. This was a necessary consequence of s 154 of the Leases Act. It is not clear to us that the Magistrate’s view on the question of costs is affected in any way by our judgment on this appeal. Put another way, it is not apparent that the Magistrate’s reasons for that cost order are affected by any error. Nor would it appear that the Notices of Appeal either before the primary Judge or before us, raise in any way the question of the correctness of the costs orders made by the Magistrate, particularly given that those orders are not dependent upon the success or otherwise of the other issues that were appealed to this Court.

71. On the other hand, it would appear from the Magistrate’s reasons in relation to costs that offers were made by the parties in an attempt to settle these proceedings. The Magistrate found that none of those offers were reasonable and did not take them into account. It may be that that issue will require reconsideration in light of these reasons. For these reasons the appropriate course is to grant leave to the parties to file further written submissions not exceeding 10 pages in length (including any attachments) as to whether there were any offers made by the parties to settle the issues between them, or any other matter which should be taken into account in determining whether our reasons herein have the effect that the Magistrate’s orders for costs should be reconsidered.

72. Different considerations apply in relation to the costs of the appeals before this Court and before the primary Judge. On each of those occasions significant time and resources were spent on grounds of appeal relating to jurisdiction. In our view that ground of appeal had no real prospects of success, notwithstanding the time spent on it. The appellant did not put any submissions to the Tenancy Tribunal in relation to that ground and did not even raise the issue before the Magistrates Court. If it had done so then the futility of the argument put to the primary Judge and to us may have been more obvious.

73. It is true that the appellant has ultimately been successful in part of its appeal, but even then many of its submissions and most of the material that was put before the Court were directed to other issues and questions which were not relevant. We also note that orders were made by the primary Judge dismissing a cross appeal brought by the current respondent. In all the circumstances we are of the view that the appropriate order as to the costs of the appeal and of the appeal and cross appeal before the primary Judge is that each party should bear its own costs.

74. Having regard to the above, the order of the Court is as follows: (a) appeal be allowed; (b) the order made by the primary Judge on 19 March 2004 be set aside and in lieu thereof it is ordered that the appeal from the orders of the Magistrates Court made on 9 May 2003 is allowed for the purpose of setting aside the sum of $292,275.00 and substituting in lieu thereof the sum of $146,253.30; (c) the parties have liberty to file within 7 days of the delivery of these reasons written submissions as to whether any offers of settlement made by the parties to settle the issues between them or any other matters should be taken into account in determining whether the reasons of the Court of Appeal herein have the effect that the Magistrate’s orders for costs made on 9 May 2003 should be reconsidered; (d) each party to bear its own costs of this appeal and of the appeal and the cross appeal before the primary Judge. I certify that the preceding seventy-four (74) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Associate:

Date: 15 February 2005

Counsel for the Appellant: Mr J Sexton SC with Mr R Arthur

Solicitor for the Appellant: Macphillamy’s

Counsel for the Respondent: Mr S Tilmouth QC with Mr N Adams

Solicitor for the Respondent: Bradley Allen

Date of hearing: 8 November 2004

Date of judgment: 15 February 2005

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