Merrylands Bowling, Sporting & Recreation Club v P & H Property Services

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40520/00 DC 197/99 HODGSON JA YOUNG CJ in Eq ROLFE AJA

11 October 2001 Merrylands Bowling, Sporting and Recreation Club Ltd v P & H Property Services Pty Ltd CONTRACT - termination of contract - whether repudiation entitling appellant to rescind - admissibility of evidence - procedural fairness - assessment of damages - appeal allowed.

On 27 May 1997, the respondent entered into an agreement with the appellant to clean its premises. The essential obligations under the agreement were the performance of cleaning work. On 16 April 1998, the appellant's solicitors gave written notice to the respondent terminating the agreement.

The respondent commenced proceedings against the appellant alleging that the appellant terminated the agreement in breach of its express terms and that this constituted a wrongful repudiation by the appellant of its obligations under the agreement. The respondent also pleaded that the alleged wrongful termination of the agreement by the appellant entitled it to rescind the agreement, which it did. In its Grounds of Defence, the appellant pleaded that the respondent repudiated the agreement by failing to comply with its obligations and that this repudiation was accepted by the appellant when it terminated the agreement. The appellant also pleaded that the respondent breached an essential term of the agreement, which entitled the appellant to terminate.

The trial Judge did not permit the appellant to adduce evidence of the alleged breaches of the agreement by the respondent. This included rejecting a bundle of documents relevant to the issue of whether breaches had occurred, disallowing cross-examination of the principal director of the respondent, Mr Popov on the issue, and disallowing re-examination of the Chief Executive Officer of the appellant, Mr Folitarik, as to the Board's motivation for terminating the agreement, notwithstanding that this issue was raised by the respondent in cross-examination of Mr Folitarik. His Honour also made a ruling under s 68A of the District Court Act that having ruled on the admissibility of evidence relating to breach, the appellant was not permitted to ask further questions on that issue. In relation to damages, the respondent sought to establish damages at trial on a different basis from that pleaded, and his Honour allowed the respondent to tender a "Schedule of Damages".

The trial Judge found in favour of the respondent. The appellant appealed against this decision on a number of grounds.

HELD per Rolfe AJA (Hodgson JA & Young CJ in Eq agreeing): (i) The trial Judge made a number of significant errors such that there must be a new trial on all grounds. His Honour was clearly wrong in refusing to permit evidence of breaches to be given. A central matter in issue was whether there were breaches by the respondent sufficient in law to entitle the appellant to rescind the agreement. In these circumstances, the rejection of evidence to prove such breaches is inexplicable.

(a) His Honour erred in not allowing the appellant to tender the bundle of documents relating to evidence of breach. In rejecting this evidence, his Honour relied on the fact that there was no evidence before him, at that point in time, of a breach of the contract. It is a fundamental rule that where evidence is tendered, certainly in a non-jury case, which may go to a matter in issue, the trial Judge should admit the evidence, subject to relevance or to objection, and rule on its effect at the conclusion of the case.

(b) Mr Popov gave evidence that he never intended the respondent company to cease performing its obligations. The appellant was entitled to cross-examine in relation to the alleged breaches inconsistent with such an intention.

(c) The trial Judge erred in making a ruling under the District Court Act, s 68A. That ruling had the effect of preventing the real questions being litigated.

(d) If his Honour was minded to let the respondent, in cross-examination of Mr Folitarik, attempt to lead evidence of the reasons for termination of the agreement, procedural fairness demanded that he revoke his previous ruling preventing the appellants leading such evidence. Procedural fairness also required that he allow Mr Popov to be recalled for cross-examination on these issues and that he allow counsel for the appellant to re-examine Mr Folitarik. Mr Folitarik was precluded from giving evidence in re-examination which he was clearly entitled to give.

(e) Further, the rule in Browne v Dunn obliged counsel for the respondent to put the allegation that the appellant was seeking to terminate the contract, not because of any alleged breaches by the respondent, but so that it might enter into a contract with another contractor at a cheaper price to Mr Folitarik in precise terms. He failed to do this.

Per Rolfe AJA (Hodgson JA & Young CJ in Eq agreeing): (ii) The appellant was not obliged to pursue a cross-claim to plead its case as to breaches of the agreement by the respondent. This would only be necessary if it was seeking damages or equitable set-off.

Per Rolfe AJA (Hodgson JA & Young CJ in Eq agreeing): (iii) The trial Judge's refusal to allow the appellant to call evidence in reply to the respondent's evidence on damages amounted to procedural unfairness entitling the appellant to a new trial.

Per Hodgson JA (Young CJ in Eq agreeing): The "Schedule of Damages" was inadmissible. A director or other person familiar with the operations of a company may give evidence of matters within the person's knowledge, however they cannot give evidence as to the effect of documentary records, unless qualified by relevant expertise. The trial Judge used this document as evidence, not as submissions, which was a further significant error.

Per Rolfe AJA (Hodgson JA & Young CJ in Eq agreeing): (iv) The trial Judge gave no reasons for his assessment of damages. This is sufficient to vitiate his finding on damages and to justify the granting of a new trial. ORDERS (a) the appeal be allowed;

(b) the judgment and verdict of his Honour Judge Delaney of 23 June 2000 be set aside;

(c) there be a new trial on all issues before a Judge other than his Honour; and

(d) the respondent pay the appellant's costs of the original trial and of the appeal.

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40520/00 DC 197/99 HODGSON JA YOUNG CJ in Eq ROLFE AJA

11 October 2001 Merrylands Bowling, Sporting and Recreation Club Ltd v P & H Property Services Pty Ltd

1 HODGSON JA: I agree with Rolfe AJA, except possibly as to one matter. 2 Rolfe AJA did not consider whether or not the "Schedule of Damages", which became Exhibit F, was admissible. In my view, it was not. A director or other person familiar with the operations of a company can of course give evidence of matters within the person's knowledge, such as the number of employees who worked on a particular job and the practices adopted in keeping records, and matters of that nature. However, the person cannot give evidence as to the effect of documentary records, unless qualified by relevant expertise, such as accountancy: cf. Re Montecatini's Patent (1973) 47 ALJR 161 at 169. A document like Exhibit F may be handed up as written submissions; but unless the parties agree otherwise, the judge can then only use it to assist in dealing with the admissible evidence, in this case the primary records. As noted by Rolfe AJA, the primary juge used Exhibit F as evidence, not as submissions; and in my opinion, this was a further significant error. 3 I should also note one other submission made by Mr. Drummond to this Court. He sought to uphold the primary judge's decision to exclude evidence of breaches on the ground that the only relevant issue raised by the defence was whether or not there had been a breach or breaches of essential terms, and the primary judge correctly decided that the terms to which the alleged breaches related were not essential terms. I found this a most extraordinary submission. 4 First, as noted by Rolfe AJA, the relevant terms were essential terms, in at least one sense of the word, although I would accept that not every breach of them would give rise to a right of rescission. 5 Second, the submission wholly misconceives the effect of pleadings in general, and the pleadings in this case in particular. The relevant pleading was paragraph 5 of the Notice of Grounds of Defence: 5. In relation to paragraphs 6-9 of the Statement of Claim, the Defendant says that the Plaintiff repudiated the agreement which repudiation was accepted by the Defendant on 16 April 1998 when it terminated the agreement.

Particulars of Repudiation The plaintiff persistently failed and/or refused to comply with its obligations under Clause 2 and the Fourth Schedule of the Agreement, which were essential terms of the agreement, and notwithstanding many requests, both orally and in writing, for the plaintiff to comply. 6 The paragraph plainly alleges repudiation, constituted by persistent failure and/or refusal to comply with specified terms of the contract; and plainly, persistent failure and/or refusal of that kind may be found to amount to repudiation, whether or not the terms in question are "essential". The particulars also allege that the relevant terms were "essential terms of the agreement"; but even if this particular happened not to be made out, that would not of itself prevent the defence specified in the paragraph being established, much less prevent evidence being led in support of it. 7 Third, the primary judge's reasons plainly did not proceed on this basis. And fourth, in the absence of any prejudice to the party making such a technical submission, it is difficult in the extreme to see how, consistently with any proper exercise of discretion, the evidence would in any event have been excluded. 8 In many cases where a new trial is ordered, the costs of the first trial are left to abide the event of the new trial. In this case, whatever the result of the new trial, the appellant, bearing no responsibility for the wastage of costs involved in the first trial, should not be disadvantaged. This is one case where, in my opinion, the respondent bears sufficient responsibility for the wastage of costs to justify that it be ordered to pay the costs of the first trial, and not be given a suitors fund certificate in relation to the appeal. 9 YOUNG CJ in EQ: I agree with Rolfe AJA on all issues and commend his Honour for his restraint: I also agree with the additional remarks of Hodgson JA. 10 ROLFE AJA:

On 27 May 1997, the plaintiff/respondent, P & H Property Services Pty Ltd, then known as Anexitti Pty Ltd, ("the respondent"), which had at all material times carried on the business of cleaning premises, and for which Mr J S Drummond of Counsel appeared, entered into a written agreement with the defendant/appellant, Merrylands Bowling, Sporting and Recreation Club Ltd, ("the appellant"), for which Mr S G Finch of Senior Counsel and Ms K A Rees of Counsel appeared, to clean its premises for $139,854.36 per year. 11 On 16 April 1998, the appellant's solicitors gave written notice to the respondent terminating the agreement. The letter continued: "Given your consistent failure to perform notwithstanding our formal advice to you of 6 April and the earlier frequent notices provided to you by the Club, our client has no option but to take this action.

For your information detailed reports of 10, 13, 14 and 15 April concerning your company's failure to perform its obligations are attached.

Our client reserves its rights to claim damages against your company". 12 Paragraph 2 of the agreement provided: "In consideration of payment by the Client to the Contractors of the amount specified in the Second Schedule hereto, the Contractors hereby agree to clean the premises as defined in the Third Schedule hereto in accordance with the full service specifications as contained in the Fourth Schedule hereto;" 13 The Fourth Schedule set out the cleaning tasks which the respondent was obliged to perform on a daily and weekly basis. Thus, the essential obligations under the agreement were the performance of cleaning work. 14 Clause 3(a) provided: "Both the Contractors and the Client agree that the initial period of this agreement should be for a minimum period of twenty four (24) months ("the initial period") and thereafter either party shall be at liberty to terminate this agreement by serving on the other party one (1) calendar month's notice of its intention to do so PROVIDED HOWEVER that in the event that the contractors serve a written notice upon the client at least one (1) month prior to the expiration of the initial period requesting an extension of this agreement thence the parties hereto agree that the period of this agreement shall be extended by a further twenty four (24) months commencing from the date of the expiration of the initial period". 15 On 7 May 1999, the respondent commenced proceedings against the appellant in the District Court at Penrith by an Ordinary Statement of Claim. The substantive allegations were that, in breach of the express terms of the agreement, the appellant, on 16 April 1998, gave written notice to the respondent terminating it, which the respondent alleged constituted a wrongful repudiation by the appellant of its obligations under the agreement. In paragraph 9, the respondent pleaded that the actions of the appellant constituted "a breach of an essential term of the Agreement, thereby entitling it" to rescind the agreement, and, in paragraph 10, that on or about 20 April 1998, the respondent, "acting in accordance with the election arising from the wrongful termination by the Defendant of its obligations under this Agreement", rescinded it. 16 The respondent claimed damages in the Statement of Claim from 17 April 1998 to 28 May 1999 in the sum of $70,761.74, and for the period from 27 May 1999 to 26 May 2001 in the sum of $127,231.70, which were calculated by deducting from the annual contract price costs of $76,239. This was said to give a net yearly profit of $63,615.36 and a net daily profit of $174.29. The initial figure was calculated by multiplying that amount by the number of days from 16 April 1998 to 28 May 1999. The second figure was calculated by multiplying $174.29 by 730 days. 17 It was not an issue on the hearing of the appeal that this claim for damages remained the only way in which the respondent advised the appellant that it calculated its damages prior to the commencement of the hearing. 18 By its Notice of Grounds of Defence, the appellant pleaded, relevantly for present purposes: "5: In relation to paragraphs 6-9 of the Statement of Claim, the Defendant says that the Plaintiff repudiated the agreement which repudiation was accepted by the Defendant on 16 April 1998 when it terminated the agreement.

The Plaintiff persistently failed and/or refused to comply with its obligations under Clause 2 and the Fourth Schedule of the Agreement, which were essential terms of the agreement, and notwithstanding many requests, both orally and in writing, for the plaintiff to comply. ………………………………………………………………… 7. In answer to the whole of the Statement of Claim the Defendant states: (a) That pursuant to paragraph 2 of the agreement dated 28 May 1997 it was an essential term and condition of the agreement that the plaintiff would provide cleaning services of the Defendant's premises in accordance with the Schedule.

The Defendant relies upon the agreement as if fully pleaded herein.

(b) The Plaintiff failed to clean the Defendant's premises in accordance with Schedule 4 of the Agreement over a period of time from on or about 14 October 1997 up to and including 16 April 1998.

(c) During the period of time from 14 October 1997 to 16 April 1998 the Plaintiff informed the Defendant both orally and in writing of its failure to comply with the agreement.

(i) Meetings were held as between the Defendant and the Plaintiff, it's (sic) servants and/or agents on 7 January 1998, 20 January 1998, 10 January 1998, 5 February 1998, 12 March 1998.

(ii) Correspondence was sent by the Defendant to the Plaintiff inclusive of letters on 14 October 1997, 29 January 1998, 20 March 1998, 2 April 1998, & 16 April 1998.

(d) By the actions and omission of the Plaintiff and/or its servants or agents the Plaintiff breached an essential term of the agreement, as pleaded above, such breach entitling the Defendant to terminate the agreement.

The Defendant terminated the agreement by letter dated 16 April 1998.

(e) The Plaintiff failed to mitigate its damage". 19 It was obvious, if I may so with respect, from the pleadings, that the basic issue relating to the termination of the agreement was whether the appellant was entitled to give the notice of 16 April 1998, based upon the alleged repudiation by breach by the respondent in failing to comply with its obligations pursuant to Clause 2 and Schedule 4. There can be no doubt that these provisions of the agreement constituted essential terms. 20 The proceedings came on for hearing before Delaney DCJ on 29 May 2000 and were concluded on 30 May 2000. Mr Drummond appeared for the plaintiff and Ms Rees for the defendant. His Honour reserved his decision, which he gave on 22 June 2000. He found that there should be a verdict and judgment for the respondent in the sum of $189,591 and ordered the appellant to pay the respondent's costs. The appellant has appealed against this decision on a number of grounds. 21 I have come to the conclusion that the trial Judge made a number of significant errors such that there must be a new trial on all grounds and in circumstances in which the respondent must pay, not only the costs of the appeal, but also those at first instance.

The First Error 22 The first, and probably the most serious, error occurred when for some reason, which if I may say so with respect I find totally inexplicable, his Honour held that he would not permit evidence of the alleged breaches of contract by the respondent to be elicited. When one has regard to the fact that the central matter in issue was whether there were breaches by the respondent sufficient in law to entitle the appellant to terminate the agreement for breach, the rejection of evidence seeking to prove such breaches is astounding. One's astonishment in this regard is heightened by the fact that at p 6 of the transcript, in his evidence-in-chief, the principal director of the respondent, Mr Popov, gave the following evidence: "Q Now at any time did you have any intention up to 16 April 1998 of the plaintiff's company not continuing to honour its obligations under the contract? A Never". 23 Even if, which is not the case, evidence of breaches was inadmissible, the appellant was entitled to assume that the respondent had led this evidence for some valid forensic purpose. Ms Rees was entitled to cross-examine in relation to alleged breaches inconsistent with such an intention, at the very least, on the issue of credit. 24 Ms Rees, before commencing her cross-examination, advised his Honour that the appellant proposed to tender a bundle of documents, and suggested that it might be convenient to do so immediately, as she wished to ask Mr Popov to refer to some of them. She told his Honour that she had provided Mr Drummond with a copy of the proposed bundle. Save for the agreement, Mr Drummond said that he objected to the tender of the documents. His objection was that there were no provisions or machinery in the agreement for giving notices "or for the elevation process of a non-essential to an essential term". He continued: "The documents which I anticipate my friend is seeking to tender before you goes to that issue. We say it is not relevant to the issues at trial as it was never an agreed term of the contract that there would be any such machinery. Nor any agreement between the parties as evidenced by the written document that non-compliance or compliance with a notice would give any rights under the contract at all. These documents which my friends (sic) seeks (sic) are, save and except for the first which is the agreement your Honour, goes to an issue which cannot be an issue before your Honour. If my friend wishes to run the case that there's a total failure of consideration that is one matter, if she wants to show that it's a breach of a fundamental term that's another issue but these documents don't go to either of those your Honour". 25 This paragraph, if I may say so with respect, did not correctly set forth the law or the basis on which Ms Rees made the tender. 26 His Honour said he would look at the documents and, at transcript p 12D, Ms Rees said: "To assist you in that process they're essentially correspondence between the parties, diary notes kept by Mr Popov and other employees of the company. Various inspection reports that were prepared by the defendant company on the state of the premises that were being cleaned". 27 His Honour then asked Ms Rees to respond to Mr Drummond's objection, which she did in detail at transcript pp 12D-E. She pointed out the importance of cl 2 of the Agreement and the Fourth Schedule and continued: "Our submission will be that Clause 2 and the part that I have emphasised was a condition of this contract, it was a condition of the contract that the cleaners comply with the service requirements set out in the Fourth Schedule and that failure to do so which we say in part is evidenced by the documents in this bundle, which I seek to tender, evidences the failure to comply with those conditions". (my emphasis) 28 She then put forward an alternative basis, concluding: "Your Honour will have seen as you have gone through them that they are essentially business records coming from the diaries of employees of the plaintiff company, minutes of meetings of the defendant, correspondence between the parties and so on and in my respectful submission it is clearly relevant to whether the defendant can make out the grounds of entitlement to terminate". 29 Mr Drummond immediately responded that this did not make the documents admissible. He referred to the High Court's decision in Shevill and Anor v The Builders Licensing Board (1982) 149 CLR 620, and submitted that to terminate the agreement the appellant had to have one of two bases under that case: "… either a mere omission or breach does not give that right, it must be a breach which evinces an intention not to be bound and there is no such evidence at all which would take this case out of the class of where you get a right to damages, if there be a breach and you establish your loss, whatever that loss may be. But this is not a case like that your Honour". 30 It is to be remembered that this submission was made at a point where Ms Rees was seeking to tender evidence of breach, and in which she had said, in the passage I have cited, that the evidence in the documents constituted "in part" the evidence she would be seeking to tender. Mr Drummond's submission was asserting that there was no breach and he was opposing the tender of documents, which were being tendered for the purpose of proving in part that there was. 31 It would only be, in my opinion, in a very rare case that a Judge, on considering documentary material, particularly material said to be only "part" of that to be tendered on an issue, would find that it was inadmissible as not going to the matter in issue. This was not such a case. 32 The matter then took another strange twist when his Honour referred to the fact that there was no cross-claim. A cross-claim, of course, would only be necessary if the appellant was seeking damages against the respondent, which it was not. However, Mr Drummond took that point up and added that there was no equitable set-off. He continued: "… and we say your Honour that this evidence does not and cannot go to an issue at trial and the defendant either has to cross-claim us and say there is a total failure of consideration or a total - there is a breach of the fundamental - in other words as the High Court says: 'If it is an intention not to be bound there is nothing'." 33 This submission states the fundamental issue for decision. However, proof of it by the respondent was sought to be undertaken in the conventional way of showing various breaches, which established an intention by the respondent no longer to be bound. 34 There was then further argument about Shevill's case and, towards the end of her submissions, Ms Rees said that the legal issue was whether the appellant had the right to terminate the contract, and that "the documents which I have sought to tender are clearly relevant to that". 35 It would seem, with the greatest respect, that these submissions were correct. As I have said, a central issue in the proceedings was whether the appellant was entitled to terminate the agreement. It alleged that that entitlement flowed from breaches by the respondent. That was the case it had pleaded. That was the case which, in my respectful opinion, it was entitled to seek to prove. It is a fundamental rule that where evidence is tendered, certainly in a non-jury case, which may go to a matter in issue, the trial Judge should admit the evidence, subject to relevance or to objection, and rule on its effect at the conclusion of the case: Dubbo Base Hospital v Jones [1979] 1 NSWLR 269. (See also Part 3.1 of the Evidence Act 1995.) This requirement is the more compelling when the evidence sought to be tendered is only part of the evidence upon which the party making the tender seeks to rely. However, his Honour then gave a judgment in which he upheld Mr Drummond's submissions, which it is necessary to consider in some detail.

The Judgment on Admissibility 36 His Honour set out a short history of the proceedings and referred to cl 4 of the Agreement which related to payment. He also referred to cl 5, which appears to have nothing to do with the case. 37 He set out the terms of the letter of 16 April 1998 and certain of the terms of the Notice of Grounds of Defence, including the allegation of the respondent's persistent failure and/or refusal to comply with its obligations under cl 2 and the Fourth Schedule, which were essential terms of the agreement. He referred to cl 2 and the Fourth Schedule, and to Mr Drummond's objection to the tender of the bundle of documents "which I refer to generically as evidence of failure to comply with obligations under cl 2". This generic description shows, even in the absence of the documents, that they had relevance to the issue. He noted the submission that none of the documents were relevant, and considered certain of the statements in Shevill. 38 He quoted from the judgment of the Chief Justice at p 626, where his Honour said: "Such a contract may be repudiated if one party renounces his liabilities under it - if he evinces an intention no longer to be bound by the contract or shows that he intends to fulfil the contract only in a manner substantially inconsistent with his obligation and not in any other way. In such a case the innocent party is entitled to accept the repudiation, thereby discharging himself from further performance, and to sue for damages". 39 This was the very case the appellant was seeking to propound. Whether it succeeded would have depended on an evaluation of all the admissible evidence at the conclusion of the case. 40 Delaney DCJ continued: "The evidence before me, at this point of time in the trial, is that there was, in the course of the dealings between the plaintiff company and the defendant, no such conduct either orally or in writing or otherwise evincing an intention no longer to be bound by the contract. The notice of grounds of defence continue in stating various further clauses, a denial of the entitlement of the plaintiff to sue or recover damages and an allegation that it was an essential term of the agreement that the plaintiff would provide cleaning services and that there was a failure to clean the premises in accordance with Schedule 4 of the Agreement. It was alleged that the plaintiff informed the defendant, both orally and in writing, of its failure to comply with the Agreement. As I have said that is, at this stage, not the evidence in this case and the tender of the bundle of documents which is sought to be relied upon by the defendant is rejected". 41 If I may say so with great respect, this line of reasoning is obviously wrong. It will be remembered that at the point of the trial where this ruling was made the only evidence before his Honour was that of Mr Popov in chief in which, as I have noted, he had positively asserted the intention of the respondent to comply with the terms of the contract. The appellant, by its pleading, had undertaken the burden of proving breach entitling it to give the notice of termination. Ms Rees, very reasonably, had sought to tender certain documents upon which she wished to cross-examine Mr Popov relating to that issue. The documents were stated by her to be part only of the material upon which she wished to rely for breach. His Honour rejected the evidence, but relied upon the fact that in doing so there was no evidence before him "at this point of time in the trial" "evincing an intention no longer to be bound by the contract". 42 Put shortly, the astonishing situation was reached that his Honour was refusing to allow the appellant to tender evidence of breach, when such evidence was clearly relevant to the matters in issue on the pleadings, and justifying that refusal by saying that there was no evidence of breach before him. 43 Ms Rees, with commendable restraint, asked his Honour to consider a further portion of Shevill, which he did, and said having considered it he confirmed his initial decision. 44 Thereafter Ms Rees turned her cross-examination to another issue with which I shall deal subsequently but, at transcript p 24, she commenced to ask questions of Mr Popov about complaints being made by the appellant. Mr Popov agreed, without objection, that he first received a complaint in relation to the performance of the contract on about 26 September 1997. Thereafter he was asked a number of questions about complaints, to which Mr Drummond objected, which his Honour rejected, and it seemed to be accepted on appeal, that the rejection was on the basis that he had already held that evidence of complaints concerning alleged breaches was not admissible. 45 Nonetheless, Ms Rees continued and, at transcript pp 24-5, the following transpired: His Honour: "Are you going to continue to do this in the light of the rejection of those questions, are you?" Rees: "I propose to your Honour". His Honour: "Well I propose to disallow you from doing so. I make an order pursuant to s 68A of the District Courts (sic) Act that having ruled on the question of the admissibility of evidence in relation to those issues which I've already addressed that you be not permitted to ask questions that go to the same issue ad nauseum for the purpose of any particular other forensic requirement. I make that order for the purpose of the expeditious and speed (sic) disposition of the proceedings in accordance with s 68A". Rees: "May it please the Court. For the record might it be stated that the line of questioning which I wish to pursue was to take Mr Popov through the various complaints that were made and his response to them to indicate, we would submit, evidence that the plaintiff company had either breached a condition of the contract or substantially breached an intermediate term of the contract which would have entitled the defendant to terminate the contract". His Honour: "I note that's what you say the purpose was". 46 Section 68A provides that the Court may give directions, if it thinks fit, for the speedy determination of the real questions between the parties to a civil action. This ruling had the effect of preventing the real questions being litigated. 47 On 30 May 2000 Ms Rees advised his Honour that, in the light of the ruling he had made on 29 May 2000, she thought she should tell him that the bulk of the evidence she planned to adduce from five witnesses went to the substantial breach of the agreement. She explained that the reason was that the appellant's defence required such evidence to be adduced, and she requested his Honour to reconsider the view that he had taken and sought his leave to recall Mr Popov to allow her to cross-examine him about such matters. She also provided to his Honour several pages of written submissions, which appear at pp 249-250 of the Blue Appeal Book. They were compelling, in my opinion, in leading to the ultimate conclusion that such evidence was central to the defences of repudiation and breach of an essential term. Mr Drummond then addressed on Shevill's case. There was discussion between his Honour and Mr Drummond, transcript p 43, which proceeded on the basis that the appellant could not lead evidence of breach in the absence of a cross-claim. That led to Ms Rees submitting that whilst the appellant had a right to damages, it was not choosing to pursue that course, and that in the appellant's submission the conduct of the respondent in performing the contract, "either amounts to a breach of a condition set out in cl 2 and the Fourth Schedule or a substantial breach of an intermediate term similarly entitling the defendant to terminate". There was no substance in the suggestion that there had to be a cross-claim when the appellant was not seeking damages nor an equitable set-off. 48 She sought to point out that the common law provided a right to terminate and, if that was the course sought to be taken, whilst the appellant may have a right to damages, it was not one that it had to pursue. 49 However, by this stage, his Honour was obviously of the view that there should be a cross-claim before the appellant could seek to prove breach, a notion I find totally unacceptable in the circumstances of the case. Nonetheless, Mr Drummond continued to press the point and, at transcript p 46, said: "Your Honour, the defence as it's presently pleaded is not a defence really which is maintainable at law. As your Honour's rightly indicated where the defendant wishes to raise issues of this type it may be either by cross-claim because what they effectively seek to do in paragraph 5 of the defence is to plead a repudiation by the plaintiff which was of sufficient a breach to entitle rescission and that is a claim which rightly and properly should be brought by one of two ways. Either by a cross-claim as your Honour has rightly identified or by way of equitable set-off". 50 This submission, if I may say so with respect, was clearly wrong. The appellant was defending an assertion by the respondent that it had wrongfully terminated the contract. The basis for that defence was that the conduct of the respondent entitled it to terminate, such conduct being a breach of the contract. That, in my opinion, was a perfectly proper way to approach the matter, but the appellant was being precluded from proving breach, for the reasons to which I have referred earlier. 51 Nonetheless his Honour persisted in offering Ms Rees the opportunity to file a cross-claim, which she advised him she was instructed not to do. 52 After hearing these submissions, his Honour gave a further judgment in which he set them out. He concluded his reasons by stating that it was unnecessary for him to restate what he had said on the previous day, and he rejected the application.

Conclusions On These Rulings 53 In my opinion, his Honour was clearly wrong in refusing to permit evidence of breach to be given. First, it was expressly pleaded. Secondly, for the reasons I have already given, the initial basis for rejecting the tender of the documents could not possibly be sustained. Thirdly, the rejection of the questions asked of Mr Popov, notwithstanding his assertion in his evidence-in-chief, could not possibly be sustained. The evidence clearly went to issues of rescission, credit, and the calculation of damages to which the respondent was entitled, which may well depend on whether the agreement had been properly performed. 54 In his submissions before this Court, Mr Drummond conceded that if the first ruling was incorrect, there should be a new trial before another Judge. For all the reasons I have given, there cannot be the slightest doubt that the ruling was incorrect with the consequences Mr Drummond conceded.

The Refusal To Allow Mr Folitarik To Be Re-Examined 55 Mr V J Folitarik was, at all material times, employed as the appellant's Chief Executive Officer. He took up that position on 28 January 1998, having previously been employed by a number of clubs and, most recently before his employment with the appellant, by Wentworthville RSL Club. 56 He gave evidence about a meeting on 6 April 1998 with Mr Popov and certain directors of the appellant, but in the light of the previous ruling his Honour had made pursuant to s 68A, he was not asked any questions about the quality of the services provided by the respondent to the appellant. 57 The cross-examination of Mr Folitarik commenced with questions about the cleaning contractors at the Wentworthville RSL Club, to which there was objection on the ground of relevance. The question as to the name of those contractors was allowed, and it emerged it was an entity known as LPK Cleaning. 58 The cross-examination continued as to whether he was present when the appellant's Board resolved to accept a new cleaning contract from LPK Cleaning to clean its premises, which question was objected to on the grounds of relevance and allowed. 59 Mr Folitarik was questioned as to his knowledge that the appellant's Board wished to terminate the respondent's contract. He denied such knowledge. At pp 58 to 60 of the Black Appeal Book, he was cross-examined about a desire on the part of the appellant's Board to terminate the respondent's cleaning contract and, at p 59, he gave the following evidence: "Q. And on that date when there was presently in existence a binding and enforceable agreement between the Club and the plaintiff in these proceedings your Board in your presence resolved to adopt and accept the contract from LPK, that's correct isn't it? A. Correct. Q. And it was because of the acceptance of that contract you then had to start and bring about the termination of the existing contract with the plaintiff in these proceedings, correct? Objection. Relevance. Question allowed". 60 The transcript does not disclose the answer, if one was given, to the question. It was not suggested on the appeal that the question was answered, or that Mr Folitarik agreed with the proposition. 61 The transcript shows that Ms Rees objected on the basis that those questions and the line of questioning were irrelevant to any matters raised in the pleadings: "… in respect of which we've been allowed to adduce evidence and those in respect of which we have not been allowed to adduce evidence. It simply does not go to any issues in these proceedings". 62 The objection, if I may say so, was well taken in the way in which the trial Judge had allowed evidence to be adduced. He had, it will be remembered, precluded the appellant from leading any evidence to establish the reason for the termination of the contract. He had further made an order, in relation to such evidence, pursuant to s 68A. The allowance of evidence sought to be adduced by the respondent in relation to the reason for termination was contrary to those rulings. 63 Mr Drummond frankly conceded that one of the reasons that he was seeking to adduce the evidence was to establish that there was no valid basis for terminating the contract, but that the appellant was merely seeking to obtain the services of another, and a cheaper, contractor. 64 A moment's consideration would have indicated that Mr Drummond was raising the reason for termination, notwithstanding that he had objected successfully to the appellant's doing so, as to which the appellant had sought to lead evidence of poor performance of the agreement by the respondent. If his Honour was minded to allow Mr Drummond to attempt to lead evidence of some other reason, then procedural fairness demanded that he revoke his previous ruling preventing the appellant's leading evidence as to its reason for terminating the contract, and that he allow Mr Popov to be recalled for cross-examination on these issues. 65 But the matter was far worse than that. Before going to the further point, I should note that Mr Drummond never, in unequivocal and precise terms, put to Mr Folitarik that the appellant was seeking to terminate the contract with the respondent, not because of any alleged breaches by the respondent, but so that it might enter into a contract with another contractor at a cheaper price. Mr Drummond conceded, on the argument on appeal, that he had never put that specific question, although he also conceded that part of the thrust of his cross-examination was aimed at establishing that. In my opinion, Mr Drummond was obliged by the rule in Browne v Dunn to put the precise allegation he was making. 66 At the conclusion of his cross-examination, Mr Drummond put to Mr Folitarik that although he had received three quotations he recommended LPK Cleaning to the Board, which Mr Folitarik said he did, "only on price". Thereupon Mr Drummond tendered the quotation from LPK Cleaning, to which Ms Rees objected, but the document was admitted. 67 I said that the matter became worse. Ms Rees sought to re-examine to establish that Mr Folitarik had another reason for terminating the agreement with the respondent. In the light of his cross-examination, I can see no conceivable reason why this re-examination was not allowed. Nor can there be any doubt that Ms Rees made clear to his Honour why she was seeking to pursue it. 68 The first question in re-examination, Black Appeal Book pp 60-61, was: "Rees: Q. Mr Folitarik you referred in your cross-examination to the conversation that you had shortly after your appointment as CEO with Merrylands Bowling Club to a conversation that you had with Mr Gillard about the cleaners. Can you tell the Court, to the best of your recollection, what it was that Mr Gillard said to you about the cleaners? Objection. Question rejected."

69 The basis of the rejection is recorded thus: "Drummond: I object to that: he was not cross-examined about that at all. His Honour: Yes I reject the question. Rees: Might I be heard before you reject it? His Honour: You're saying that it arose out of cross-examination do you? Rees: I am saying that he was asked about when he joined the Club as CEO whether he was told about various rumours and so on about the cleaners, about firing the cleaners, and he was referred to a conversation with Mr Gillard when he became CEO. I am asking him what the terms of that conversation were. What is being put to this witness is clearly that he has sought to terminate the contract on improper grounds in order to put in these other cleaners and I propose to examine him on the reasons why these new cleaners were put in place on the instructions that he was given by the Board of Directors about the existing cleaners. His Honour: I reject the question". 70 As I have sought to explain, Mr Drummond had reopened, in his cross-examination of Mr Folitarik, the reason for termination of the agreement and, in my opinion, Ms Rees was perfectly entitled to re-examine on that matter. She pointed out, in the clearest possible terms, her basis for so doing and, bearing in mind Mr Drummond's concession in this Court that one of the reasons for his questioning was to establish an ulterior reason, she was even more entitled to do so. 71 A number of further questions were sought to be asked in re-examination as to the reason, all of which were rejected, one being: "Q. Is there any truth in the suggestion which has been put to you by Mr Drummond that you sought to terminate the contract with the existing cleaners in order to gain a saving to the Club by appointing the new cleaners?" 72 The situation, which thus arose, was that Mr Folitarik was precluded from giving evidence in re-examination which, in my opinion, he was clearly entitled to give. 73 Not only were his Honour's rulings incorrect, but, when his judgment is read, it is clear that they led to procedural unfairness. It may be that his Honour had overlooked his rejection of the evidence in re-examination. However, he said, Red Appeal Book p 23: "Mr Folitarik was called for the defendant. I found Mr Folitarik to be a witness who lacked objectivity. He sought to justify the decisions which he had made I find in a way which lacked candour. Where his evidence conflicted with that of Mr Popov as to any conversation which took place between the two, I have not the slightest hesitation in accepting the accuracy of Mr Popov's version of those facts when compared to that deposed to by Mr Folitarik. I find that Mr Folitarik was evasive. He prevaricated during the course of giving his evidence, and this was particularly so when he was being cross-examined by Mr Drummond about the actions he took after becoming CEO at Merrylands Bowling Club on 28 January 1998 to seek other quotes for the cleaning of the premises. I find, as Mr Drummond submitted, that what occurred here was that the new management team had decided that they wanted to have a new cleaner and took steps to obtain that new cleaner and then purported to terminate the plaintiff 's contract. I will refer to the minutes of the meetings referred to earlier in a moment". 74 In my respectful opinion, in the way in which the evidence was allowed to be given, his Honour was not entitled to make these findings against Mr Folitarik. It is a matter of significance to a witness that he is described as "evasive" and one who has "prevaricated". It is a matter of substantial procedural unfairness that these findings should be made against the witness when he has had no opportunity to answer the allegations made against him. At the risk of repetition, the substantial matter in issue was whether the appellant was entitled to terminate its contract with the respondent on the grounds of the respondent's breaches of the agreement. His Honour, for the reasons to which I have already referred, wrongly rejected evidence of any such breaches. 75 However, over objection, he allowed cross-examination of Mr Folitarik to seek to establish a reason, namely the desire to dispense with the services of the respondent. Mr Drummond had, accordingly, reopened the question of reasons for terminating the agreement and, as I have said, that should have allowed Ms Rees to pursue the matter with Mr Folitarik in re-examination and, indeed, to have had Mr Popov recalled for cross-examination on that issue. That was the significance and effect of reopening the question of the reasons for termination. However, not only did his Honour refuse to allow Mr Folitarik to be re-examined, but he then made quite damning criticisms of his evidence in circumstances where he had never been allowed to give an explanation, as in my opinion he should have been, of his conduct. 76 I consider that this denial of procedural fairness to the appellant entitles it to a new trial.

The Evidence Of Damages 77 I have set out the way in which the respondent pleaded its case for damages. It was based simply on a deduction from the agreed price of the costs of carrying out the agreement. That provided a profit element which was then spread over the period for which the respondent claimed it was entitled to damages. 78 When Mr Popov was called, he was asked questions to seek to establish damages on a quite different basis. He was, of course, a director of the respondent. He gave evidence about certain financial figures derived from the respondent's records, which showed quite clearly that damages were being pursued on a different basis. Ms Rees objected. The objection centred around a document entitled "Schedule of Damages", which became Ex F. It appears at pp 244 and 245 of the Blue Appeal Book. 79 On appeal, Mr Drummond sought to submit that the only reason that the document was placed before his Honour was to show figures which appeared from the respondent's primary records, and that the purpose of the Schedule was not to articulate a claim for damages. I cannot accept this explanation and his Honour certainly treated it as a document on the basis of which damages were sought. 80 The Schedule set out, in the first five paragraphs, uncontroversial matters including, in para 5, the annual contract sum of $139,854.36. 81 Paragraph 6 is headed "Calculation of Loss". Under that heading a number of figures relating to wages paid to all cleaning staff, the cost of labour per hour, the cost of materials and disposables, and the average cost of labour per hour, were set out. This involved calculations to work out, for example, superannuation, workers' compensation, and average cost of materials and disposables. 82 The document then set out, in para 8, that the cost of labour derived from it to clean the appellant's premises was $1,345.80 per week and, in para 9, that the yearly loss was a different contract sum of $145,351, from which one deducted the cost of labour and materials at the rate of $1,345.80 per week, giving a yearly loss of $75,369. That figure was then used to work out what was described as a total loss for the period from 16 April 1998 to 27 May 2001 of $239,146. 83 I shall leave aside an argument as to whether there had been produced to the appellant all the primary documents on which reliance was placed. Ms Rees objected to this evidence on the bases that, first, the necessary source documents had not been produced; secondly, this was a completely different method of calculating damages of which no notice had been given to the appellant before Mr Popov started to give his evidence, a fact which was not in issue; and, thirdly, because Mr Popov lacked the necessary expertise, required by s 79 of the Evidence Act, to give such evidence. 84 It must also be borne in mind that the Schedule had not been produced prior to the hearing. However, his Honour was entitled, in the exercise of his discretion, to allow such evidence to be given, and he allowed the Schedule of Damages to be tendered, it becoming Ex F. 85 Mr Popov was cross-examined at length about the Schedule and certain other figures. Ms Rees sought to tender employment records of the respondent, which were objected to by Mr Drummond. The matter was dealt with at some length. 86 The next problem, which arose, was when Ms Rees sought to call evidence from an accountant to counter this evidence given by Mr Popov. Prima facie, one would have thought that there could be no possible basis for his Honour's refusal to allow this evidence to be given, notwithstanding that an expert's report had not been served. After all, Ms Rees had no indication, prior to Mr Popov's giving his evidence, that the basis on which damages were to be claimed was conformably with Schedule F. 87 However, his Honour refused to allow the evidence to be given in a judgment which he commenced at p 69 of the revised Black Appeal Book. He noted: "Ms Rees although not specifically putting it in these terms, sought a dispensation of the Rules pursuant to Part 28 Rules 8 and 9 as to the requirement of and the fact of service of any experts (sic) reports as a prerequisite to the calling of an expert witness. It was submitted on behalf of the defendant that it was the fact of the late provision or lack of provision of adequate documentation which placed the defendant in a position where that course was necessary". 88 If I may say so, that was obviously the case. However, his Honour then said that it was necessary for the purpose of understanding his decision to refer to the history of the case, which he did, including reference to a number of status conferences and other matters. At p 71 he said: "All experts (sic) reports, that is by the plaintiff or the defendant were to be served by 31 March 2000, that being a direct order from the learned Registrar. It is now sought to call an expert in circumstances where that history occurred between the parties". 89 This statement was correct, at least in part, in the circumstances of the present case. Any such report from the respondent should have been served in sufficient time to enable it to be answered. 90 His Honour continued: "The documents as to the financial records are presently in evidence as Exhibit K and the interpretation by an officer of the company, Mr Popov, who had the obligations to keep and maintain such records is set out in Exhibit F. The request in those circumstances by the defendant to call an expert on issues which are those issues of an expert in the absence of having served an expert's report, particularly in the face of a specific order by the Registrar on 4 February when this matter was listed for hearing does not, in my view, provide a basis upon which, in the justice of the case so far as the parties are concerned to grant the application to have a witness who is an expert called without a report from that expert having been provided ". (my emphasis)

91 The illogicality of this line of reasoning is obvious. The appellant had no report to which to respond. Mr Drummond put the somewhat brave submission to this Court that the appellant should have served any expert's report upon which it wished to rely, even in the absence of any from the respondent, within the time stipulated by the Rules. However, it is very difficult to see how a report in response to a case, which was not articulated until the hearing, could have been prepared. His Honour's reasoning was that there had to be a report to answer a case which had never been put forward. 92 The situation may have been different if the respondent's pleaded case for damages conformed with what was said by Mr Popov. But it bore no relationship to that case. 93 In my opinion his Honour's refusal to allow Ms Rees to call evidence in reply amounted to substantial procedural unfairness entitling the appellant to a new trial.

His Honour's Calculation Of Damages 94 In his reasons for judgment, his Honour commenced to consider the amount of damages at Red Appeal Book p 26. He set out the way in which damages were claimed in the Statement of Claim and, at p 27, he made it clear that damages had been sought at the trial in accordance with Ex F. He said: "At the trial, based on that material, the plaintiff sought damages in accordance with Exhibit F. This, as I said, was strenuously opposed by Counsel for the defendant. It is appropriate that I should refer to the contents of Exhibit F, because Mr Drummond submitted that that was the basis upon which consideration should be given to damages in this case". 95 This statement by his Honour sits uneasily with Mr Drummond's submission in this Court that the schedule was only intended to show primary figures. 96 His Honour noted the calculations leading to the loss claimed, which he said, "was clearly a significant increase on the figure which was suggested" originally. 97 He referred to further evidence and, at p 29, he accepted a submission by Ms Rees that some aspects of Ex F were "not within the knowledge and belief of Mr Popov", and that "therefore there must be said to be some uncertainty particularly on the question of the costs of materials and disposables". 98 This led his Honour to consider that it was not appropriate to consider the matter solely on the basis of Ex F. 99 His Honour took into account the right of either party to terminate the renewed agreement on the giving of one month's notice, and he noted a submission by Mr Drummond about damages based on opportunity loss. He referred to a number of other matters relevant to the assessment of damages and, at pp 31-32, said that: "The costs to the parties of those matters which are referred to in Exhibit F for example, wages, costs per hour labour hour, costs of materials and disposables, notwithstanding the rise and fall clause as referred to in the contract itself, could not be said to more likely than not lead to the total losses claimed by the plaintiff. Accordingly, the assessment of loss can, as I said, be, in my view, only determined on the basis of a loss of the opportunity to secure profits during that period and in these circumstances I propose to assess the loss for that period in the total sum of $100,000". 100 His Honour gave no reasons for coming to this figure. That, in the circumstances of this case, was sufficient to vitiate this finding, and to justify the granting of a new trial. He had also awarded damages in the sum of $75,000 for an earlier period.

Costs 101 The final question is what order should be made in respect of the costs of the hearing at first instance. His Honour upheld a number of submissions made on behalf of the respondent. In my opinion, those to which I have referred should not have been upheld for the reasons I have sought to give and, in all these circumstances, I consider that the appropriate order for costs is that the respondent pay the appellant's costs of that hearing.

Orders Proposed 102 The orders I propose are that:

(b) the judgment and verdict of his Honour Judge Delaney of 23 June 2000 be set aside;

(c) there be a new trial on all issues before a Judge other than his Honour; and

(d) the respondent pay the appellant's costs of the original trial and of the appeal. ******

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