Management 3 Group Pty Ltd (In Liq) v Lenny's Commercial Kitchens Pty Ltd

THE COURT: 1 The first appellant, Management 3 Group Pty Ltd (In Liquidation) (M3G), was at the relevant time a building contractor. It went into administration on 7 April 2009, and on 21 May 2009 it was ordered to be wound up in insolvency. The second and third appellants are the joint and several liquidators of M3G. 2 The first respondent (Lenny's) was a manufacturer of kitchens and a supplier of kitchen items. The second respondent (Sino), at the relevant time, owned the Fortescue River Construction Camp (Site), which was a camp being constructed to accommodate workers who were constructing Sino's Magnetite Plant.

Facts 3 On 2 July 2008 M3G and Sino entered into a construction contract for M3G to construct the mining accommodation at the Site (Contract). On 12 August 2008 M3G entered into a purchase agreement with Lenny's for Lenny's to supply and install a kitchen, items for a wet mess, and an ice room at the Site. 4 This is an appeal against an order of a judge of this Court dismissing the appellant's claim against Sino's conversion of unaffixed goods which were described in the proceeding as the "additional goods" (Additional Goods). 5 The appellants' claim against Lenny's for a breach of s 440C of the Corporations Act 2001 (Cth) (Corporations Act) and for conversion of various kitchen goods (Kitchen Goods) also failed, but the appellants did not seek to reagitate their claim as against Lenny's. Lenny's is no longer a party to the appeal. Nothing more needs to be said about Lenny's involvement. 6 The Contract provided for M3G to supply and install the Additional Goods, which comprised laundry machines and wall vents, hot water units, fire extinguishers and carpets. M3G acquired the Additional Goods from suppliers other than Lenny's. 7 As at 7 April 2009, the date when M3G went into voluntary administration, some of the Additional Goods had not been affixed at the Site. Although there was a dispute as to the number of goods which remained unaffixed, the trial judge found that the Additional Goods comprised 37 laundry machines and wall vents, 16 hot water units, 40 fire extinguishers and 30% of the carpet. That finding is not challenged on the appeal. 8 Some time after 7 April 2009, Sino installed the Additional Goods at the Site. 9 The question before the primary judge and on appeal is whether M3G or Sino owned the Additional Goods as at 7 April 2009. If they were owned by M3G then Sino's actions constitute a conversion of the Additional Goods. If they were owned by Sino at that time there was no conversion. 10 The primary judge was of the opinion that Sino owned the Additional Goods at 7 April 2009. She held that title to the Additional Goods had passed to Sino pursuant to clause 42.2 of the Contract in circumstances where Sino had paid the full value of the Additional Goods prior to 7 April 2009, in December 2008. 11 The appellant contends that the primary judge was wrong to reach that conclusion, and that she should have found that as at 7 April 2009 M3G owned the Additional Goods, and that Sino had converted those goods to its own benefit. Sino, it argues, is therefore liable to M3G for the total value of those goods at the date of conversion, namely $236,000. 12 On 15 December 2009 Finkelstein J granted leave to Sino nunc pro tunc to install and use the Additional Goods upon Sino's undertaking that the damages sought by the appellants would be assessed by reference to the ownership of the goods on 7 April 2009, and by reference to the value of the Additional Goods in the place they were located and in the state they were in on that date. 13 The primary judge did not, because of her finding that Sino owned the Additional Goods, address the question of their value. She did however consider the value of other goods of the same kind that had been supplied by Lenny's and installed by Sino after M3G went into administration. In respect of those goods she was of the opinion that their value onsite was 40 to 50% of their invoice value. 14 Sino contends that the primary judge was right for the reasons she gave, but that if Sino is liable in conversion the value of the items is overstated at $236,000. It claims that the value of the Additional Goods at 7 April 2009 was between $95,001.93 and $118,752.41, which represents approximately 40 to 50% of their invoice value. 15 Sino argued in the alternative that if there was a conversion of the Additional Goods the damages payable were between $1,045.02 and $1,306.27. That argument relies on a further finding that the primary judge made, which was that on any understanding Sino had paid 98.9% of the value of the Additional Goods, and so at most Sino would have converted 1.1% of the value of the Additional Goods. 16 M3G's complaint on this appeal is that the primary judge was wrong to find that Sino had paid M3G an amount which included the full value of the Additional Goods prior to 7 April 2009. It argues that the evidence was against such a finding. It submits that the appropriate finding that should have been made was that Sino had not paid for any of the Additional Goods at the relevant time, and in those circumstances Sino was not entitled to deal with those goods in denial of M3G's interests in the goods as owner of the goods. 17 M3G contends that Sino could not by making a progress payment pursuant to the Contract become the owner of the Additional Goods: Egan v State Transport Authority (1982) 31 SASR 481; R J Grills Pty Ltd v Dellios [1988] VR 136. 18 Sino answered that contention by relying upon clause 42.2 of the Contract, which provided: Unfixed Plant and Material The Principal shall not be obliged to pay for any item of unfixed plant and materials which is not incorporated in the Works unless (a) that item is listed in Annexure Part A; (b) the Contractor provides the amount of additional security stated in Annexure Part A separately approved by the Principal under Clause 5.3; and (c) the Contractor establishes to the satisfaction of the Superintendent that the Contractor has paid for the item, the item is properly stored, labelled the sole and exclusive property of the Principal and is adequately protected and insured. Upon payment to the Contractor of the amount which includes the value of the item, and upon the release of any security, the item shall be the property of the Principal free of any lien or charge. Any additional security provided for any item of unfixed plant and materials shall be released in accordance with Clause 5.9. 19 M3G argued that clause 42.2 had no application and that Sino could not rely upon those parts of the clause which follow after paragraph (c). Clause 42.2 refers to items listed in Annexure Part A. It was contended by M3G that there were no items listed in Annexure Part A, and that therefore clause 42.2 had no effect or operation. It also argued that clause 42.2 only applied to allow the Principal to make payment for any item of unfixed plant and materials when all three conditions in paragraphs (a), (b) and (c) of clause 42.2 were met. 20 Sino on the other hand argued that it was entitled to rely upon the last two sentences of the clause without reference to the preceding paragraphs, and if it had made full payment for the Additional Goods it was entitled to the ownership of the goods and to deal with them as it liked. 21 Sino conceded before the primary judge and on appeal that it could only avoid being held liable in conversion if it was entitled to rely upon clause 42.2 in the manner for which it contended. It did not attempt to argue that there was a separate agreement whereby it acquired ownership of the Additional Goods. 22 The primary judge accepted that the language and structure of the clause supported the appellants' construction. However, she found that "a literal construction would… produce a result unlikely to have been intended by the parties." She further found at [162]: [162] On the applicants' construction, because there are no items of unfixed plant and material which satisfy the preconditions of its obligations to pay, the construction contract would make no provision at all for the transfer to the Principal of any unfixed plant and materials in respect of which it voluntarily paid the value. If the second paragraph of clause 42.2 does not apply to such unfixed items, the Principal could acquire no property in them pursuant to the terms of the construction contract even if it had paid the value and had released any security. It is, in my view, improbable that the parties intended that consequence or the relative rights of the parties under such transactions to be uncertain or left to be resolved by the general law or a separate agreement. 23 Her Honour said that notwithstanding that a literal construction would better accord with the appellant's interpretation, "the clause must be read in the context of the construction contract as a whole which, as a commercial contract, should be robustly construed in order to avoid irrational or unintended results": at [163]. 24 She concluded at [164]-[165]: [164] On that basis, in my opinion, the failure to specify any items in Annexure Part A Item 47 did not deprive clause 42.2 of all operation. The second paragraph is capable of independent application to unfixed items which are not subject to Sino's obligation to pay imposed by the first paragraph. On a robust construction, according to the applicable principles, paragraph 2 of clause 42.2 in my view extends to unfixed plant and equipment for which Sino was not obliged to pay. [165] The second paragraph assumes that, on payment to the Contractor, the item shall be the property of the Principal free of lien or charge. The application of clause 42.2 thus appears limited to unfixed plant and equipment in relation to which the Contractor can pass property to the Principal. 25 Her Honour found at [169] in relation to the construction of clause 42.2: [169] Therefore, on the better view, if Sino paid M3G an amount including the value of unfixed items such as the kitchen goods and such additional goods as were still unfixed (given there was no evidence that there was any security), in my opinion, property in such goods passed to Sino pursuant to clause 42.2 of the construction contract. 26 There was a dispute as to whether Sino had paid the full amount, which was decided adversely to M3G. Her Honour made the following finding at [184]: [184] I am satisfied that Sino, prior to 7 April 2010, paid M3G an amount which included the full value of the kitchen goods and the additional goods, and that title in those goods therefore passed to Sino pursuant to clause 42.2 of the construction contract. In my opinion, Sino paid M3G the full value of items 1 to 4 as at December 2008, save for $422,344.00. I accept Mr Stoney's evidence that the withheld amount did not relate to the kitchen goods or the additional goods and therefore did not detract from Sino's payment of the full value of those goods. 27 Mr Stoney assisted and was later nominated as the representative of the Superintendent under the Contract, Mr McFie. The primary judge described him at [8]: [8] … Together with CPMM's Project Director, Graham Harris, and its Project Director of Services, John Bonnette, Mr Stoney was the principal point of contact with M3G's representatives in relation to its performance of the construction contract. The primary judge described Mr Stoney as an impressive witness: at [132] and [135]. 28 Mr Stoney's evidence was that the Contract originally required Sino to make payments to M3G according to a payment schedule which related to milestone events. However, when it became obvious that M3G had cashflow problems, Mr Stoney negotiated with Mr Robertson of M3G for an amended payment schedule. That amended payment schedule was confirmed by Mr McAdam on 17 December 2008 (Amended Payment Schedule). 29 There was no dispute that items 1 to 4 of the Amended Payment Schedule included the Additional Goods. Mr Stoney's evidence was that: Items 1 to 4 of the Amended Payment Schedule included the supply of all the building modules required for the FRRCC [the Site] in a "fitted out" condition as manufactured, including the modules comprising the kitchen. The value of the modules was $8,446,892, as recorded in both the Price Schedule and the Amended Payment Schedule in Appendix A of the Contract. 30 He said that by 5 March 2009, save for $422,344.00 which was withheld, Sino had paid M3G for all of the works comprising Items 1 to 4 of the Amended Payment Schedule. He said that the amount withheld did not relate to the Kitchen Goods, but to the further fitout and installation works required to obtain shire approval of occupancy of the entire Site, including the accommodation units and the central buildings. 31 His evidence was that: The kitchen Assets had already been paid for by Sino and the only outstanding payments due to M3G related to further fit-out and installation works required in respect of those Assets in order to ensure the fitness for occupation of the accommodation units at the FRRCC. 32 Mr Stoney said that after 5 March 2009, on 3 April 2009, Sino paid Lenny's $93,500.00 at the request of M3G, which reduced the amount withheld to $337,344.00. Mr Stoney said that the amount withheld was less than the value of undelivered goods and incomplete installation and fitout works attributed to Items 1 to 4 of the Amended Payment Schedule, which he identified as follows: Loose Furniture $155,909 Gym Equipment $100,000 Televisions $ 9,200 Installation of kitchen equipment $ 63,380 Installation of coolroom and bar $ 5,750 Beer garden roof/ shade sails $ 46,875 TOTAL $381,114 33 M3G argued that the certificate issued by Mr Stoney was not in respect of any particular building or goods and it was irrelevant how Mr Stoney subjectively arrived at his assessment. It argued that there was no evidence before the primary judge as to the date that Mr Stoney certified M3G's interim progress claim, the amount of work still to be performed by M3G as at 19 December 2008, and whether or not Mr Stoney had over certified or under certified the amount of M3G's entitlement as at that date. 34 Therefore it contended it was not open to the primary judge to find that Sino had paid for all of the Additional Goods. 35 In the alternative, M3G argued that if Sino had paid the full value of the Additional Goods on 19 December 2008, that did not remain the case. It argued that the Amended Payment Schedule was never given contractual force by the parties as it remained subject to Sino's approval. Insofar as Mr Stoney acted in accordance with the Amended Payment Schedule it was because he wrongly believed that the Amended Payment Schedule bound him. 36 When Mr Stoney further certified on 5 March 2009 because of his erroneous belief he under certified the amount payable to M3G, and as a result if there previously had been a payment for all of the Additional Goods the under certification meant that they had no longer been paid for. 37 M3G argued that her Honour was wrong to conclude that if the Additional Goods had been paid for that action could not be retrospectively reversed by reason of any later miscalculations or rectifications. 38 There was an additional complication in this proceeding, and that relates to the question of damages, the quantum of which was a live issue before the primary judge and on appeal. In a claim for conversion the plaintiff's damages are to be assessed as at the date of the conversion by reference to the value of the property at that date: Associated Midland Corporation Ltd v Bank of New South Wales [1983] 1 NSWLR 533 at 550 per Mahoney JA. The only evidence led by the appellants as to the value of the Additional Goods in the place they were located and the state they were in on 7 April 2009 was the invoices that had issued when M3G had purchased the goods.