Mikeon Projects Pty Ltd v Staffseal Pty Limited

Supreme Court of NSW|2022-02-17|Before: Ball J

The Supreme Court dismissed a builder's challenge to most of a referee's report in a construction dispute, but ordered the referee to provide a supplementary report to explain apparent discrepancies in the financial calculations. The Court confirmed that judges should generally accept referees' findings unless they contain errors of principle or are manifestly unreasonable, and should not simply re-agitate factual findings. The builder had challenged the referee's findings about payment rates for extra work on two apartment towers, but the Court found the referee had properly interpreted the contracts and assessed the evidence. However, because the builder identified an unexplained $198,000 discrepancy in the calculations, the Court sent that issue back to the referee to fix, with the builder to pay the referee's costs for the extra work.

Introduction

By a notice of motion filed on 20 August 2021, the plaintiff, Mikeon Projects Pty Ltd (Mikeon), seeks orders pursuant to Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 20.24 that (1) the Court reject certain paragraphs of a referee's report prepared by Mr Frank Hicks SC (the Referee) which was originally issued on 18 June 2021 and which was revised to correct a number of minor errors on 30 June 2021 (the Report); (2) the Court refer the matter back for further consideration by the Referee of the issues raised by the rejection of those paragraphs of the Report.

Background

The proceedings relevantly concern a project for the construction of two residential towers, known as Tower A and Tower B, in Auburn. Mikeon was the builder of the project. The defendant, Staffseal Pty Limited (Staffseal), was the subcontractor engaged by Mikeon to supply and install plasterboard walls and ceilings in the units of Tower B (the Internal Works) and subsequently to supply and install UBIQ cladding on the façade of the two towers (the External Works) and to complete the installation of plasterboard walls and ceilings in the units of Tower A that had been left uncompleted by another contractor (the Tower A Internal Works).
On 6 September 2017, the developer obtained a revised approval to increase the height of Tower A by three levels and the height of Tower B by two levels.
Various issues were raised by the parties in a Further Amended Technology and Construction List Statement and an Amended Technology and Construction List Cross-Claim Statement, including claims concerning amounts payable for the work that Staffseal had performed and whether Mikeon had validly terminated the contract or contracts by which the work was and was to be performed, all of which were referred to the Referee. Critical to the resolution of the issues raised by the notice of motion were the terms on which Staffseal had agreed to supply and install plasterboard walls and ceilings in units on the additional levels of Tower A and Tower B (Additional Internal Works) and cladding on the exterior of the additional levels (Additional External Works).
It was common ground that Staffseal had agreed to undertake the Internal Works for a fixed price of $2,503,800 (excluding GST), which was subsequently increased by $163,800 (excluding GST). It was also common ground that Mikeon had agreed to pay Staffseal a rate per square metre for the External Work. Before the Referee, Mikeon had submitted that the agreed rate was $42/m2. Although there was an issue before the Referee concerning that figure, the Referee accepted Mikeon's contention. No challenge is made to that conclusion. Moreover, it is accepted that Staffseal had completed 75 percent of the Internal Works before the contract was terminated, following what Staffseal alleged and the Referee accepted was a breach by Mikeon.
In relation to the Additional External Works, the Referee found that the parties agreed that the works would be carried out on the basis of an hourly labour rate of $45 per hour. Mikeon challenges that finding. It contended before the Referee that the rate was the same as the rate for the External Works - that is, $42/m2.
In relation to the Additional Internal Works, the Referee found that the parties had entered into an agreement on 6 August 2018 by which Mikeon agreed to pay Staffseal $1,100,000 including GST for the Additional Internal Works and for the balance of the Tower A Internal Works. Mikeon challenges that finding. It accepts that the parties reached an agreement in relation to the Internal Works and the Additional Internal Works. However, it contends that the Referee should have found that the agreement covered both past and prospective work.
Mikeon also takes issue with the Referee's calculation of the amount owing by it.

Relevant legal principles

The principles concerning the Court's discretion to adopt, vary or reject a report are not in dispute. They were summarised by McDougall J in Chocolate Factory Apartments v Westpoint Finance & Ors [2005] NSWSC 784 (Chocolate Factory) at [7] and quoted with approval by Ward CJ in Eq in Waterwood Hotel Management Pty Ltd v KOP International Pty Ltd [2020] NSWSC 709 (Waterwood) at [40].
Relevantly, the Court must exercise its discretion in a manner consistent with the purpose of the rules. The purpose of Pt 20 of the UCPR is to provide a form of partial resolution of the dispute as an alternative to orthodox litigation. Accordingly, a referee's findings of fact should generally not be re-agitated, and the Court should tend toward accepting a report that demonstrates a thorough, scientific, approach by the referee. On the other hand, a report that contains errors of principle or which demonstrates patent misapprehension of evidence or manifest unreasonableness on the part of the referee will ordinarily be rejected. A suggestion that the referee has made a factual error is not sufficient to justify rejection of the report. What is critical is whether the referee reached a decision that no reasonable tribunal of fact could have reached. If the Court determines that the referee's reasons are flawed, the Court may decline to adopt the report, or examine the evidence to determine whether the costs of further proceedings before the referee is justified: Waterwood at [40] per Ward CJ in Eq, quoting McDougall J in Chocolate Factory at [7]. In exercising its discretion, the Court may determine that it is appropriate to adopt (or reject) only part of a report: UCPR r 20.24(1)(a); Waterwood at [41].

Additional External Works

Essentially, Mikeon makes two points concerning the Referee's findings in relation to the Additional External Works. First, it submits that the findings rely on evidence that was not admitted or was admitted for a limited purpose only. Second, it submits that the findings were perverse because, on the conclusions the Referee reached, Staffseal was entitled to be paid approximately the same amount for the cladding for the additional levels (five levels altogether) as it was entitled to be paid for the original levels (26 levels altogether). According to Mikeon, that conclusion at least required some explanation, but it was not an issue addressed by the Referee at all.
The Referee observed that Mr Alex Ribalko, the sole director and shareholder of Staffseal, and Mr Vasilios (Bill) Biniares, the General Manager of Mikeon, gave conflicting evidence concerning the conversations in which the relevant agreement was reached. The Referee chose to accept Mr Ribalko's version of events "as it is consistent with the contemporaneous documents": Report [129]. Those documents included: 1. most invoices issued by Staffseal which were based on an hourly rate of $45 per hour; 2. a payment schedule issued by Mikeon in respect of one invoice which allowed a claim based on a daily rate of $45 per hour; 3. two invoices issued by Staffseal dated 9 August 2018 and 26 August 2018 which were based on an hourly rate. Mikeon rejected those claims and set out its reasons for doing so. Those reasons did not include an allegation that the invoices had been prepared on an incorrect basis.
The Referee also referred to the fact that Mikeon had not objected to other invoices issued by Staffseal that were based on an hourly rate of $45 per hour.
The Referee accepted that the invoices accurately recorded the hours worked. He said this at Report [157]: I accept that the invoices as submitted on the basis of a day labour rate of $45/hr were based on timesheets prepared contemporaneously and "signed off" by relevant representatives of [Mikeon], in accordance with the practice described by Mr Ribalko. The assertions of Mr Biniares as to other reasons why the timesheets would be prepared or "signed off" were unpersuasive, particularly as the practice was only implemented when Staffseal started to do work that was covered by the arrangements for payment on the basis of the day labour rate of $45 per/hr. (Footnotes omitted)
So far as the invoices were concerned, Mikeon submits that they were only admitted as evidence of the amount claimed by Staffseal. So far as the timesheets were concerned, Mikeon submits that critical evidence of Mr Ribalko was either not read or was rejected. Mr Ribalko had given the following affidavit evidence in relation to the timesheets: 20. The recording and signing of timesheets only became necessary when the parties had agreed to day labour rates for the following works:- a. Tower A internal gyprocking for the whole building including the extended levels 14, 15 and 16; and b. Tower B for the internal gyprocking for the extended levels 14, and 15; c. UBIQ external cladding for Tower A levels 14, 15 and 16; d. UBIQ external cladding for Tower B levels 14 and 15; e. Other variations in relation to internal gyprocking for Tower B from ground to level 13. 21. At the beginning of each day's work Mikeon would count the day labour Staffseal workers on to site and would organise where those workers were required. Mikeon were very careful to ensure that the correct amount of day Labour workers were on site, and signed in by way of timesheet, because they were aware that they were being charged by Staffseal on an hourly basis for these workers. 22. During the Auburn project I had Mr Guohua Lin and Mr David Chao working as foremen for Staffseal. I instructed them to supervise and check the accuracy of the timesheets for the day labour workers. These timesheets and the corresponding invoice are found commencing at page 42 of Exhibit AR-1 to my first affidavit. 23. Each day the Mikeon site foreman would fill out the time sheets recording the following:- a. The date; b. The number of workers on site; c. The start time; d. The finish time; e. The hours each man worked on that particular day; f. The total number of hours worked collectively on that day; g. Executed the "sign off' column of the timesheet; and h. Provided any comments that needed to be made in relation to that day's work. 24. The pro forma of those time sheets was prepared by me and made available to the Mikeon foreman. 25. Each day the foreman acting for Staffseal would check with the Mikeon site foreman to ensure the timesheets were accurate. The time sheets were held by the Staffseal foreman. 26. Approximately every 14 work days the Staffseal foreman handed the completed timesheets to me. I used these timesheets to calculate the hours worked and the charges made by Staffseal to Mikeon and I prepared and issued to Mikeon the invoices. Paragraph 21 was not pressed and paragraph 25 was rejected by the Referee.
Mikeon submits that it follows that the Referee was not entitled to rely on the invoices to establish the terms of the agreement and on the timesheets to establish the hours worked.
I do not accept either of those propositions.
There may be a question of whether the ruling on the use to which the invoices could be put should have been amended in the light of the affidavit evidence that was admitted and the cross-examination of the witnesses. Leaving that point aside, I do not think the Referee made any error in the way he approached the matter.
So far as the invoices were concerned, what was critical was that they had been prepared on the basis of an hourly rate and Mikeon did not at the time object to them for that reason. The Referee's reasoning does not involve using the invoices as evidence of something other than the basis on which they were admitted. What was important was that Staffseal had made claims on an hourly basis (which was proved by the invoices) and Mikeon had not objected to the claims on that basis.
As to the timesheets, the statement in Report [157] does not involve the Referee relying on evidence that was not admitted. The paragraphs of Mr Ribalko's affidavit still set out a system by which the invoices were prepared. Mr Biniares conceded in cross-examination that those invoices were checked by a member Mikeon's staff who was on site. Accordingly, the Referee was entitled to reach the conclusion that he did.
As to the submission based on perversity, it too must be rejected. The submission may have had more force if there was evidence that the parties appreciated that the result of changing the method of calculation from a fee per square metre to a fee based on hours worked would substantially increase the price. But it is not suggested that they did. All that could be said is that the result of changing the method of calculation was to increase the price very substantially. But nothing turns on that. That fact may demonstrate that Mikeon struck a bad deal for the Additional External Works. Alternatively, it may indicate that Staffseal had, in fact, struck a bad deal for the original External Works. It may demonstrate that the costs of installing cladding on the upper levels was very much greater than the average costs of installing cladding on levels 1 to 13. Unless evidence and submissions were put to the Referee on those matters, I can see no reason why it was necessary for him to deal specifically with the differences in price.

The Additional Internal Works and Tower A Internal Works

The Referee stated that it was common ground that the parties originally agreed that Staffseal would be paid $45 per hour for the Additional Internal Works and Tower A Internal Works. According to Mikeon, that statement was not entirely accurate. However, nothing turns on whether it was or not. It is common ground that a dispute arose between the parties concerning the Additional Internal Works and Tower A Internal Works and that that dispute was resolved by an agreement reached at a meeting held on 6 August 2018. The agreement was reduced to a handwritten document at that time which both Mr Biniares and Mr Ribalko signed. The primary task of the Referee was to interpret that document by reference to what a reasonable businessperson would have understood its terms to mean having regard to the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]. That is what the Referee did. He explained his conclusions in these terms: 183. The discussions on 6 August 2018 produced a signed handwritten document. It notes the present arrangements and the proposed lump sum for the additional Internal Works, being $600,000 plus GST for the additional thirty-one (31) units created by the new levels and $400,000 plus GST for the completion of the Tower A works left incomplete by the previous subcontractor, TML. It further states: This is an agreement between Staffseal P/L and [Mikeon] as a lump sum figure being for all day labour works to complete the extra 31 units (between Tower A and Tower B), and Tower A from Ground Floor to Level 13 inclusive. 184. Without reference to the discussions and findings I have otherwise made, I would have concluded that the agreement only related to the works yet to be performed as at 6 August 2018. 185. In my opinion, the phrase "to complete" would ordinarily refer to the state of affairs as they stood on 6 August 2018 and the agreement would be construed, using the well-established principles, as changing the arrangements for works yet to be done rather than retrospectively changing the arrangements as they had been made and performed to that date. 186. In my opinion, it would take clear words to reflect an agreement to the effect that the lump sum price noted applied to all works that had been completed, as well as the works "to complete" as at 6 August 2018 such that, as is now contended by [Mikeon], the effect of the agreement was that whatever amounts had already been paid to Staffseal were included in the lump sum price of $1.1M, including GST, and that the lump sum price was therefore, and in fact, part-paid as at 6 August 2018. (Footnotes omitted)
Notwithstanding that conclusion, the Referee did consider the evidence concerning what occurred at the meeting on 6 August 2018. The Referee pointed out that Mr Biniares and Mr Ribalko had at different times both given conflicting accounts of what occurred at the meeting. Nonetheless, the Referee generally preferred the evidence given by Mr Ribalko and gave reasons for doing so. The Referee placed considerable emphasis on the fact that Mr Mark Merhis, a representative of the developer, was present at the meeting, but was not called by Mikeon to give evidence. The Referee concluded that it was "reasonable to draw the usual Jones v Dunkel inference that his testimony would not have assisted [Mikeon]": Report [205].
The Referee did observe that Mr Ribalko prepared a document described as "Meeting minutes" which he sent to Mr Biniares by email on 14 August 2018. Mr Biniares did not respond to that email. Those minutes relevantly record the following: 2. Mark [Mr Merhis] has expressed that the "Day Labour" cost has exceeded his expectation and doubted the day labour time record is genuine. … 7. Mark [Mr Merhis] has then made an offer and said "I give you another 2400 hours day labour plus all previous day labour for Auburn Project to be completed for $1,000,000 + GST, if you accept that I can pay you up to 50% today (by cheque) and the balance in the next 2 weeks or so, or if you choose not to accept the offer and making trouble on the job site, the ANZ bank may holding back their money [sic] and nobody gets paid, you can liquidate me if you like" (on the Tuesday 31 July Staffseal workers walked out the job, then return to work the next day after phone call later on the day to agree for a meeting on Friday to discuss payment issue). 8. The "Day Labour rate" was calculated $1,000,000/(total day labour hours up to claim 10 ending 21 July)+ 2400 hours = $1,000,000/(26549 hrs + 2400 hrs) = (rounding to) $34.50/hr/man. 9. Alex [Mr Ribalko] and David [Mr Chao, another representative of Staffseal] was not willing to accept the offer at first, then due to the immediate payment offer Alex and David have no choice but to accept the offer.
Mikeon submits that the minutes cannot be reconciled with Mr Ribalko's account of the meeting and that the Referee made an error by failing to take account of them.
Mikeon also places a great deal of emphasis in its submissions on the following evidence given by Mr Biniares in relation to the meeting on 6 August 2018, which it says was not challenged: I said: "We have 31 extra units, a supply and install arrangement would be $22,800 per unit or $709,800.00 ex GST altogether. However, Merhis is supplying the materials, so we need to reduce this rate for Staffseal. I propose $600,000.00 for Staffseal to complete labour only to those 31 extra units? And $400,000.00 ex GST for the incomplete units as part of the TML scope of works?" Mr Ribalko said: "Okay. That sounds reasonable." I said: "Okay. Six hundred thousand plus GST for the extra 31 units and four hundred thousand plus GST for TML's scope of works?" Mikeon points out in its submissions that the figure of $22,800 per unit equates to the fixed price agreed for the Internal Works, which involved 117 units; and that is said to support Mikeon's interpretation of the agreement reached on 6 August 2018.
I do not accept Mikeon's submissions. I accept that the file note was a relevant piece of evidence. As I have said, the Referee did refer to it. Having done so, he set out his reasons for the conclusions he reached which focussed on the words of the written agreement, depended on findings concerning whose evidence he accepted, took account of what was inherently plausible and also took account of the fact that Mr Merhis was not called. The file note was not so critical that the Referee needed to deal with it specifically. The file note appears to have been prepared after the meeting. The agreement was recorded in another document. Moreover, the file note itself was unclear since the reference in para 7 to "all previous day labour" may be read as a reference to all previous day labour for which Staffseal had not been paid. It did not necessarily refer to all previous day labour, whether paid for or not.
As to Mr Biniares' account of the conversation, although Staffseal may not have taken specific issue with it, it was inconsistent with the version of the meeting given by Mr Ribalko, which the Referee generally preferred. Moreover, as I have said, the Referee rightly focussed on the words of the signed agreement. Finally, Mr Biniares account of the conversation is itself unclear. The account is consistent with Staffseal's case that what was agreed was that it would be paid $600,000 for the Additional Internal Works and a further $400,000 for the Tower A Internal Works which was still outstanding.

The Referee's calculations

Mikeon submits that the Referee made errors in calculating the amount due to Staffseal. It provided supplementary submissions dated 18 February 2022 setting out how it says the amount is to be calculated. In supplementary submissions in response, Staffseal did not accept Mikeon's calculations. It did not provide calculations of its own. Instead, it submitted that the calculations were the third attempt by Mikeon to demonstrate that the Report contains calculation errors and each attempt has produced a different figure. It submitted that the Court should either accept the Referee's calculations or refer the matter back to the Referee. If the Court chose to adopt the latter course, it submitted that in the first instance at least Mikeon should bear the Referee's costs.
Mikeon's supplementary submissions do identify an apparent discrepancy in the Report. The submissions point out that the Referee concluded that Staffseal was to be entitled to the payment of the following amounts (Report [239]): a. $50,000, including GST, for the Harris Park Project; b. $248,040, plus GST, for the works performed under the Auburn Contract; c. $684,394.44, including GST, for the Additional External Works; d. $34,050, plus GST, for the additional works for column encasement for the External Works; e. $45,000, plus GST, for the additional works for material handling for the External Works. The Referee also concluded (Report [238]) that Mikeon was entitled to a refund of $11,614.02 inclusive of GST for the External Works. Adding GST where necessary and adding the figures together, the total amount owing is $1,082,579.42.
On the other hand, Mikeon calculates the total amount payable to Staffseal in accordance with the Referee's conclusions as being $5,733,102.37. The Referee also recorded that Mikeon had paid $3,921,588.70 and that pursuant to the agreement reached on 6 August 2018 Staffseal had released unpaid invoices totalling $927,326.08 (incl GST). On that basis, it is said that Mikeon had underpaid $884,187.59 (incl GST), making a difference of $198,391.83. According to Mikeon, that difference is unexplained.
I accept that, on the figures contained in the supplementary submissions and the Report, it is not possible to explain the difference. It may be that it lies in the fact that some figures in the Report include GST and others do not. But that is not obvious.
I accept that the best course therefore is to refer this issue back to the Referee. However, I agree with Staffseal's submission that, in the first instance, Mikeon should pay the Referee's costs. Mikeon does not point to any error on the part of the Referee. The most that can be said at the moment is that based on Mikeon's own calculations there appears to be a discrepancy. The question whether Staffseal should reimburse Mikeon for all or part of those costs can be considered once the Referee delivers his supplementary report.

Orders

Accordingly, the orders of the Court are: 1. Direct that within 28 days of the date of this judgment or such further time as the Court allows, the Referee provide to the Court a supplementary report (a) addressing the issues raised by the plaintiff's supplementary submissions to the Court dated 18 February 2022 and (b) stating what adjustment, if any, needs to be made to the figures summarised in paragraph [239] of the Referee's report dated 18 June 2021 in the light of those submissions; 2. Direct that by 4.00 pm on 2 March 2022 the plaintiff provide to the Referee a copy of this judgment and its submissions to the Court in relation to the notice of motion filed on 20 August 2021; 3. Direct that the plaintiff pay the Referee's costs of and incidental to the supplementary report; 4. Stand the matter over for directions to 1 April 2022.

Amendments 01 March 2022 - Typographical error in 12(a) - reference to Mikeon changed to Staffseal DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 March 2022

Outcomedefendant

Disposition:

Orders made: (1) Referee to provide supplementary report within 28 days addressing calculation issues; (2) Plaintiff to provide copy of judgment and submissions to Referee by 2 March 2022; (3) Plaintiff to pay Referee's costs of supplementary report; (4) Matter stood over to 1 April 2022 for directions. Challenges to substantive findings on Additional External Works and Additional Internal Works dismissed.

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