Renown Corporation Pty Ltd v SEMF Pty Ltd [2022] NSWCA 233 | Case summary

Judgment (9 paragraphs)

[1]

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

[2]

HEADNOTE [This headnote is not to be read as part of the judgment] The respondent SEMF Pty Ltd ("SEMF"), contracted the first appellant Renown Corporation Pty Ltd ("Renown"), to supply and install a software package. When installed, the system was defective in that it did not provide all the functionality promised. SEMF sued Renown for damages, claiming the costs of replacing the system with a new upgraded version that had become available (which the experts agreed was more efficient than rectifying the old system), the costs incurred in endeavouring to remediate the defects, and time wasted by employees in dealing with the defects. The primary judge awarded SEMF damages, relevantly including the costs of installing the new system, and an amount paid by SEMF as remuneration to one particular employee who was found to have been engaged specifically to work on solutions to the problems with the system. On appeal by Renown against the award of those damages: Held, per Brereton JA [2] (Meagher JA and Mitchelmore JA agreeing [1], [43]) dismissing the appeal, with costs: As to the timing for assessment of damages:

Date of assessment of damages

The starting point for the appellants' submissions was the following dictum of Wilson, Toohey and Gaudron JJ in Johnson v Perez: [4] "As a general rule, "damages for tort or for breach of contract are assessed as at the date of the breach" (Lord Wilberforce in Miliangos v George Frank (Textiles) Ltd [1976] AC 443 at 468). The rule will yield if, in the particular circumstances, some other date is necessary to provide adequate compensation: see, for example, Wenham v Ella (1972) 127 CLR 454; Dodd Properties (Kent) Ltd v Canterbury County Council [1980] 1 WLR 433; [1980] 1 All ER 928; County Personnel (Employment Agency) Ltd v Alan R Pulver & Co [1987] 1 WLR 916; [1987] 1 All ER 289. But, in the circumstances of the present appeals, there is no reason why an assessment of damages as at the date each action was dismissed for want of prosecution will not compensate the respondent adequately."
However, that passage itself shows that the rule is not an inflexible one, but must yield if in the particular circumstances some other approach is necessary to provide adequate compensation.
The primary judge dealt with this issue as follows: "[49] The defendants' primary submission rests on two propositions. First, they submit that there is no reason why the Court should depart from the usual principle that damages are to be assessed as at the date of breach: Johnson v Perez (1988) 166 CLR 351 at 367 per Wilson, Toohey and Gaudron JJ; [1988] HCA 64. In this case, that was said to be when the system went live in October 2015. Consequently, the damages should be assessed by reference to the costs of fixing the problems at that time, not by reference to the costs of software that was not available at that time. Second, they rely on the principle that damages must be proved with a degree of precision that reflects the proof that is reasonably available to the parties: State of New South Wales v Moss (2000) 54 NSWLR 536 at [72]; Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768 at [38]; Sabouni v Revelop Building and Developments Pty Ltd [2021] NSWSC 31 at [42] per Black J. In this case, SEMF has made no attempt to prove the costs of rectifying the problems with the Renown System in October 2015. [50] I do not accept the defendants' submissions. As Wilson, Toohey and Gaudron JJ recognised in Johnson v Perez, the principle that damages are to be assessed at the time of breach is not a universal principle to be applied in all cases but is a rule that yields "if, in the particular circumstances, some other date is necessary to provide adequate compensation" (ibid at 367). [51] Generally speaking, the purpose of an award of damages for breach of contract is, so far as money can do it, to place the injured party in the position that it would have been in if the breach had not occurred: Robinson v Harman (1848) 1 Exch 850; 154 ER 363; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at 285-6; [2009] HCA 8 at [13]; Clark v Macourt (2013) 253 CLR 1 at 30; [2013] HCA 56 at [106] per Keane J. In this case, that principle requires damages to be calculated by reference to the costs of giving SEMF an ERP system that complied with the contractual specifications: see Bellgrove v Eldridge (1954) 90 CLR 613 at 617 per Dixon CJ, Webb and Taylor JJ; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8 at [13]ff. It is not suggested in this case that SEMF delayed excessively in seeking relief so that in some way or another it failed to mitigate its loss. On the contrary, SEMF gave Renown an extended period of time in which to fix the problems. It was Renown who in effect concluded that it could not do so. Nor is it suggested that the Renown System is sufficiently close in functionality to the system for which SEMF contracted that it would be unreasonable for Renown to insist on performance strictly in accordance with the contract. There remain significant problems with the Renown System which have a real effect on SEMF's operations. Consequently, SEMF is entitled to recover the reasonable costs of fixing the remaining problems. Mr Shawver's evidence is that that is best done by replacing the existing system with one based on Dynamics SL 2018 and 2018 Web Apps."
In that passage, his Honour referred to Bellgrove v Eldridge [5] and Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [6] as supporting the calculation of damages by reference to the costs of giving SEMF a solution that complied with the contractual specifications. In the former, Dixon CJ, Webb and Taylor JJ rejected a submission that, in a claim for damages for breach of a construction contract in respect of defects, the measure of damages was the difference between the value of the building as is and the value it would have had but for the defects, and said: [7] "It is true that a difference in the values indicated may, in one sense, represent the respondent's financial loss. But it is not in any real sense so represented. In assessing damages in cases which are concerned with the sale of goods the measure, prima facie, to be applied where defective goods have been tendered and accepted, is the difference between the value of the goods at the time of delivery and the value they would have had if they had conformed to the contract. But in such cases the plaintiff sues for damages for a breach of warranty with respect to marketable commodities and this is in no real sense the position in cases such as the present. In the present case, the respondent was entitled to have a building erected upon her land in accordance with the contract and the plans and specifications which formed part of it, and her damage is the loss which she has sustained by the failure of the appellant to perform his obligation to her. This loss cannot be measured by comparing the value of the building which has been erected with the value it would have borne if erected in accordance with the contract; her loss can, prima facie, be measured only by ascertaining the amount required to rectify the defects complained of and so give to her the equivalent of a building on her land which is substantially in accordance with the contract. One or two illustrations are sufficient to show that the prima facie rule for assessing damages for a breach of warranty upon the sale of goods has no application to the present case. Departures from the plans and specifications forming part of a contract for the erection of a building may result in the completion of a building which, whilst differing in some particulars from that contracted for, is no less valuable. For instance, particular rooms in such a building may be finished in one colour instead of quite a different colour as specified. Is the owner in these circumstances without a remedy? In our opinion he is not; he is entitled to the reasonable cost of rectifying the departure or defect so far as that is possible. Subject to a qualification to which we shall refer presently the rule is, we think, correctly stated in Hudson on Building Contracts, 7th ed (1946), p 343. "The measure of the damages recoverable by the building owner for the breach of a building contract is, it is submitted, the difference between the contract price of the work or building contracted for and the cost of making the work or building conform to the contract, with the addition, in most cases, of the amount of profits or earnings lost by the breach". Ample support for this proposition is to be found in Thornton v Place (1832) 1 M & Rob 218 (174 ER 74); Chapel v Hickes (1833) 2 C & M 214 (149 ER 738) and H Dakin & Co Ltd v Lee (1916) 1 KB 566. (See also Pearson-Burleigh Ltd v Pioneer Grain Co (1933) 1 DLR 714 and cf Forrest v Scottish County Investment Co Ltd (1915) SC 115 and Hardwick v Lincoln (1946) NZLR 309). But the work necessary to remedy defects in a building and so produce conformity with the plans and specifications may, and frequently will, require the removal or demolition of some part of the structure. And it is obvious that the necessary remedial work may call for the removal or demolition of a more or less substantial part of the building. Indeed - and such was held to be the position in the present case - there may well be cases where the only practicable method of producing conformity with plans and specifications is by demolishing the whole of the building and erecting another in its place. In none of these cases is anything more done than that work which is required to achieve conformity and the cost of the work, whether it be necessary to replace only a small part, or a substantial part, or, indeed, the whole of the building is, subject to the qualification which we have already mentioned and to which we shall refer, together with any appropriate consequential damages, the extent of the building owner's loss."
In Tabcorp, French CJ, Gummow, Heydon, Crennan and Kiefel JJ said (footnotes omitted): [8] "The "ruling principle", confirmed in this court on numerous occasions, with respect to damages at common law for breach of contract is that stated by Parke B in Robinson v Harman: "The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed." Oliver J was correct to say in Radford v De Froberville that the words "the same situation, with respect to damages, as if the contract had been performed" do not mean "as good a financial position as if the contract had been performed" (emphasis added). In some circumstances putting the innocent party into "the same situation … as if the contract had been performed" will coincide with placing the party into the same financial situation. Thus, in the case of the supply of defective goods, the prima facie measure of damages is the difference in value between the contract goods and the goods supplied. But as Staughton LJ explained in Ruxley Electronics and Constructions Ltd v Forsyth such a measure of damages seeks only to reflect the financial consequences of a notional transaction whereby the buyer sells the defective goods on the market and purchases the contract goods. The buyer is thus placed in the "same situation … as if the contract had been performed", with the loss being the difference in market value. However, in cases where the contract is not for the sale of marketable commodities, selling the defective item and purchasing an item corresponding with the contract is not possible. In such cases, diminution in value damages will not restore the innocent party to the "same situation … as if the contract had been performed"."
Having referred to Bellgrove v Eldridge, their Honours continued: [9] "So here, the landlord was contractually entitled to the preservation of the premises without alterations not consented to; its measure of damages is the loss sustained by the failure of the tenant to perform that obligation; and that loss is the cost of restoring the premises to the condition in which they would have been if the obligation had not been breached."
These decisions of the High Court do not explicitly address the date of assessment of the costs of rectification. However, in his influential judgment in Radford v de Froberville, [10] which was referred to by the High Court in Tabcorp, Oliver J, taking as the starting point the rule stated by Parke B in Robinson v. Harman [11] that a party who sustains a loss by reason of a breach of contract is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed, turned to the date of assessment: "That answers, strictly, the only question which was adjourned to me, but I turn now to what may prove a very difficult question, as a matter of fact, and one which has been thrown up during the course of the argument before me and that is the date at which the damages should be assessed. In Wroth v. Tyler [1974] Ch. 30, damages under Lord Cairns' Act were assessed at the date of the hearing but the position with regard to damages at common law was left open. It is sometimes said that the ordinary rule is that damages for breach of contract fall to be assessed at the date of the breach. That, however, is not a universal principle and the rationale behind it appears to me to lie in the inquiry - at what date could the plaintiff reasonably have been expected to mitigate the damages by seeking an alternative to performance of the contractual obligation? In contracts for the sale of goods, for instance, where there is an available market, the date of non-delivery is generally the appropriate date because it is open to the plaintiff to mitigate by going into the market immediately. Where there is no readily available market a later date may be appropriate (see, for instance, Lesters Leather & Skin Co. Ltd. v. Home & Overseas Brokers Ltd. 64 T.L.R. 569, already referred to)." … Apart from Wroth v. Tyler I have not been referred to any authority which I find of very much assistance in approaching this problem. The older authorities in this area of the law were decided in times of relative financial stability in which the date of assessment made relatively little, if any, difference and the passage of time could be adequately compensated for by an award of interest. But that is not the position today and if the law is to bear any relation to reality it must keep pace with the era in which we live. Wroth v. Tyler establishes that, at least where damages are awarded in lieu of specific performance, an appropriate date of assessment may be the date of judgment, but if the function of an award is to put the plaintiff in as good a position as if the contract had been performed, I do not see why, in principle, the same should not equally apply in an appropriate case of the breach of a contract which cannot be specifically performed. The practical difference, no doubt, in most cases lies in the duty to mitigate, for it is difficult to see how, assuming that it is reasonable for a plaintiff to seek specific performance, he can be under a duty to mitigate by acquiring equivalent property until he knows whether or not the court is going to give him his decree. That, of course, does not apply where the contract is one which cannot, as here, be specifically performed. In such a case, the plaintiff's right to damages must be qualified by his duty to mitigate. The question then, as it seems to me, comes down to one of the reasonableness of the steps actually taken by the plaintiff, and, in my judgment, the proper approach is to assess the damages at the date of the hearing unless it can be said that the plaintiff ought reasonably to have mitigated by seeking an alternative performance at an earlier date, in which event the appropriate measure would seem to me to be the cost of the alternative performance at that date. … Secondly, once proceedings have been commenced and are defended, I do not think that the defendant can complain that it is unreasonable for the plaintiff to delay carrying out the work for himself before the damages have been assessed, more particularly where his right to any damages at all is being contested, for he may never recoup the cost. If, therefore, the proceedings are conducted with due expedition, there seems to me to be no injustice if, by reason of the time that it takes for them to come to trial, the result of inflation is to increase the pecuniary amount of the defendant's ultimate liability."
The field of construction contracts is closely analogous to contracts for the supply and installation of computer systems. [12] In East Ham Corp v Bernard Sunley, [13] the House of Lords accepted and applied as the normal measure of damages the cost of reinstatement, not at the date of the breach, but at the time when the defects were discovered. Lord Cohen said: [14] "There remains the question whether damages should be assessed by reference to the cost of building works at or shortly after the date of the breaches of contract alleged, which for convenience the parties have agreed to take as May, 1954, or the cost of building works in 1960 and 1961 when the claimants actually carried out the investigations and remedial works which they allege to have been necessary. As all your Lordships are agreed that the latter is the correct date I can state my reasons for concurring in this conclusion quite shortly. Dealing with this subject, the learned editors of Hudson's Building and Engineering Contracts, 8th ed. (1959) say at page 319 that there are in fact three possible bases of assessing damages, namely, (a) the cost of reinstatement; (b) the difference in cost to the builder of the actual work done and work specified; or (c) the diminution in value of the work due to the breach of contract. They go on: "There is no doubt that wherever it is reasonable for the employer to insist upon reinstatement the courts will treat the cost of reinstatement as the measure of damage." In the present case it could not be disputed that it was reasonable for the appellants to insist upon reinstatement and in these circumstances it necessarily follows that on the question of damage the trial judge arrived at the right conclusion. In the result I would allow the appeal with costs."
Lord Guest said (footnotes omitted): [15] "Passing now to the third question, which relates to the scale of damages to which the appellants should be entitled, my view is that the trial judge was right in holding that the damages should be assessed by reference to the cost of building works in 1960 and 1961. The test which he applied was that stated by Asquith L.J. in Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd.: "In cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach." In addition to the reasons given by Melford Stevenson J., I would only add that it must have been in the contemplation of the parties upon the view which I take of clause 24(f) that after the expiration of the defects liability period the contractors might be liable to make good defects which resulted from a breach of contract but which were not apparent till after the expiration of the defects liability period. The loss actually resulting from the breach would be the cost of making good the defects when they appeared."
Lord Upjohn said: [16] "Where the cost of reinstatement is the proper measure of damages it necessarily follows as a matter of common sense that in the ordinary case the cost must be assessed at the time when the defect is discovered and put right, and it is not suggested here that the building owner unreasonably delayed the work of repair after discovery of the defect. So prima facie the damages ought to be assessed as the actual cost of repair in 1960, i.e., £21,301."
Lord Pearson said: [17] "The third question is: In the event of the employers being entitled to damages, whether damages should be assessed by reference to the cost of building works at or shortly after the date of the breaches of contract alleged, or the cost of building works in 1960 and 1961 when the employers actually carried out the investigations and remedial works? The defects in the fixing of the stone panels, which formed the "cladding" of the building, did not come to light until some of the panels fell from the side of the building. Thereupon the investigations and remedial works were carried out with reasonable promptitude, and the actual cost of this work, done in the years 1960 and 1961, was £21,301 3s. 7d. If the defects had been discovered and the work had been done in about May, 1954, which was the date of handing over and has for convenience been taken to be the date of breach, the cost would have been only £16,774 0s. 11d. The loss actually caused to the employers by the contractors' breach of contract was the actual cost of the work done in 1960 and 1961, that is to say, £21,301 3s. 7d. Why should that not be the proper amount of damages to be recovered by the employers? The argument for giving the sum of £16,774 0s. 11d. as damages instead of £21,301 3s. 7d. is based on one of the findings which has been agreed to be implicit in the arbitrator's award. That finding is that a reasonable examination by the architect during such visits to the works as an architect might be fairly expected to make for the purpose of inspection from the commencement of the works up to and including his final inspection before issuing a final certificate would have disclosed the defects complained of. The argument is that in the ordinary course of things the architect would have discovered the defects in the fixing of the stone panels at or soon after the time when they were fixed, and the extra cost due to the delaying of the remedial work from 1954 to 1960-61 would not have been incurred, and the damages for the breach of contract, correctly assessed according to the established principles, should not include this extra cost. The main principles were stated in Hadley v. Baxendale by Alderson B., where he said: "Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it." It is the first limb of this sentence, the first so-called "rule," that is relevant here. It is not necessary for the party claiming the damages to show that the loss or damage in fact suffered was the necessary result of the breach, or even a probable result in the sense of being more likely to happen than not to happen. It is sufficient for him to show that it was liable to result. In Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. Asquith L.J., giving the judgment of the Court of Appeal, said: "Everyone, as a reasonable person, is taken to know the 'ordinary course of things' and consequently what loss is liable to result from a breach of contract in that ordinary course." Subsequently he explained what he meant by the words "liable to result." He said: "It is indeed enough … if the loss … is a 'serious possibility' or a 'real danger.' For short, we have used the word 'liable' to result. Possibly the colloquialism 'on the cards' indicates the shade of meaning with some approach to accuracy." This latter passage was perhaps primarily concerned with the second "rule" in Hadley v. Baxendale, but it contains the explanation of the phrase "liable to result," and in my view is applicable to a question arising under the first "rule." Applying those established principles to the present case, I have no doubt that an architect in his inspections during the progress of the work is liable to miss some defective work that has been immediately or quickly covered up. I suppose he should try to arrange his visits in such a way that he will be able to see any defective work while it is being done or before it is covered up, but, if so, it is not at all surprising and is very much "on the cards" that he will not always succeed in doing so, and consequently that some defects will remain undiscovered for a considerable time. I agree with the decision of Melford Stevenson J. that the damages should be assessed by reference to the cost of building works in 1960 and 1961, so that the proper amount is £21,301 3s. 7d."
In Imperial College of Science and Technology v Norman & Dawbarn, [18] the defendant architects had designed a building in 1956, and tiles began to fall from it in 1977. The plaintiffs were held entitled to recover the reasonable cost of remedial work undertaken in 1984 in order to reclad the building. In Brit Inns Ltd v BDW Trading Ltd, [19] the proper approach to a claim for reinstatement costs was stated to be: "[54] Where a claimant's property has suffered physical damage as a result of the breach of contract or negligence of a defendant, the claimant is entitled to recover against the defendant the reasonable cost of reinstatement: see East Ham Corporation v Bernard Sunley & Sons Ltd [1996] AC 406. In the ordinary case, the assessment of the reasonable cost does not require the remedial works to have actually been carried out by the time of the trial: see The Maersk Colombo [2001] 2 Lloyd's Rep 275. By extension, therefore, if the works have in fact been carried out, that will not in principle affect the assessment although, where the works are completed by the time of the trial, the actual costs will almost always be the starting point of any assessment of the reasonable costs of reinstatement."
In Cory & Son v Wingate Investments, [20] the contract specifications provided for concrete hard-standings, but the defendants instead provided a car park surfaced with tarmacadam. The plaintiffs were held to be entitled to the cost of replacing the surface with concrete hard-standings, at the date of the hearing, and notwithstanding that prices had risen steeply in the meantime: the claimants had felt unable to incur the considerable cost involved before they were assured of recovering it from the defendants, who denied liability until the door of the court. The Court of Appeal held that the true rule now was that the date of assessment of damages was to be determined by considering all the facts of the case, including the conduct of the defendants, and in that case the damages should be assessed as at the time of hearing. Walton J said: [21] "I now turn to the time for assessment. In good King George's golden days, when Britain really ruled the waves and the currency was stable, assessment as at the date of the breach was the obvious and doubtless theoretically correct solution. In any event the rule often related to foreign currencies, which were notoriously unstable and invariably depreciated against the strong pound sterling. How are the mighty fallen! But, cessante ratio cessat ipsa lex, and in modern times a more flexible rule has been adopted, instanced by Tito v Waddell (no. 2) [1977] Ch 106 at page 332; Radford v De Froberville [1977] 1 WLR 1262 7 BLR 35; Johnson v Agnew [1980] AC 367 and Dodd Properties (Kent) Limited v The City of Canterbury [1980] 1 WLR 433; 13 BLR 45. I think the true rule now is that the date of assessment of damages is one which must be judged by considering all the facts of the case including in particular the conduct of the defendants."
Ormrod LJ said that the question of the date at which the cost of re-surfacing the car park was to be assessed was an aspect of the duty to mitigate, so that if it would have been reasonable for the plaintiffs to do the work in 1972 or 1973 then the damages should be assessed in 1972 or 1973 pounds, but as they had acted reasonably throughout in not taking earlier action, the cost of rectification was rightly assessed as at the trial: [22] "Then we have to consider the time of assessment of the cost. The so-called general rule specifies that the cost is to be assessed at the time of the breach of contract; in this case that would be the summer of 1972. But this so-called general rule, as has been pointed out, particularly in the Dodd case, has been so far eroded in recent times, as Megaw LJ said in his judgment in that case, that little of practical reality remains of it. The general rule, like the rule that judgments must be expressed in sterling converted where necessary at the rate of exchange prevailing at the date of breach, is, I think, a survival from the days of stable money, when assessment at the date of breach represented a broadly fair approach in the great majority of cases. Like the sterling rule, its rationale has been extensively undermined by unstable money (see Miliangos v Geo Frank (Textiles) Limited [1976] AC 443). In my judgment this case turns wholly on the application of the second of the principles which govern the assessment of damages, namely, the plaintiffs' duty to mitigate their loss. … That brings me to the question of the date at which the cost of resurfacing the car park is to be assessed. Following Donaldson and Megaw LJJ in the Dodd case, I think this too is an aspect of the duty to mitigate. If it would have been reasonable for the plaintiffs to do this work in 1972 or 1973 then no doubt the damages should be assessed in 1972 or 1973 pounds; similarly if it can be shown that they ought to have gone to the Court earlier than they did, which was in 1974, then some later date might be appropriate. The learned judge held that the plaintiffs in this case had acted reasonably throughout. I entirely agree, for the reasons given by him and by my Lord."
Similarly in the New Zealand case of Bevan Investments v Blackhall & Struthers, [23] the cost of rectification as at the date of trial was allowed. In that case, the only practicable solution was to complete the building according to a modified design, called Scheme C. The Court of Appeal held that in those circumstances, the cost of so doing was the reasonable measure of damages (although to avoid an element of betterment credit should be given for the hypothetical additional cost of a proper initial design); and that the assessment should be computed at the date of trial, either because of the principle that damages were to be assessed by reference to the date when the reinstatement works could be reasonably carried out and, on the facts, it was reasonable to postpone the work until the issues of liability and damages were settled, or because such damage was not too remote in that it was foreseeable that the company might be unable to complete the works until a trial if the appellant failed to exercise the skill required of him. Richardson P said: [24] "As I have said, it seems to me that Beattie J, in effect, took as his starting point the actual costs of scheme C as at the date of trial and then considered whether or not there was any such unreasonable conduct on the part of Bevan Investments Ltd as would require the court to take some earlier date for the purpose of calculating costs. In principle this approach seems to me to be in accordance with the general basis on which damages for breach of contract are to be awarded. As at the date of trial the factual situation was that it would only be possible to give to Bevan Investments Ltd the equivalent in money of a properly designed building erected at 1968 prices by means of a judgment which would enable the work of completion to be carried out at 1972 prices."
From the cases to which I have referred the principle emerges that the proper measure of damages in a case such as the present is the reasonable costs of rectification, which will be the costs when they were actually incurred (if they have been incurred by the date of trial), so long as they are not unreasonable; or (if they have not been incurred already), the reasonable costs as proved as at the trial, unless it is established that by not conducting rectification works earlier the plaintiff has unreasonably failed to mitigate its loss.
Here, as the judge explained, SEMF allowed Renown an extended period of time to fix the problems, and it was Renown who ultimately in effect concluded that it could not do so. There is no suggestion that by deferring rectification, SEMF unreasonably failed to mitigate its damages; Renown eschewed any such contention. In those circumstances, the above-mentioned authorities make plain that the approach adopted here by the primary judge was correct. In the absence of any contention that SEMF had unreasonably delayed in rectification, the reasonable cost of rectification at the time of trial was the appropriate measure, and in circumstances where the only practical solution was to replace the Renown System with the 2018 Suite (as is discussed below), the reasonable cost of doing so was the proper measure.
The appellants' grounds of appeal also complained that: 1. the trial judge's finding that it was "unclear" whether the source code necessary to rectify the identified errors in the existing system was available to SEMF was contrary to the evidence adduced at trial (Ground 2); and 2. the trial judge erred in awarding damages to SEMF calculated on the basis of the cost of a replacement of the system as a whole rather than the cost of rectifying the specific errors as agreed jointly by the experts in circumstances where SEMF was in a position to but did not adduce evidence to quantify the costs of rectification of the specific errors (Ground 3).
These grounds involve a challenge to his Honour's finding that damages should be assessed on the basis of replacing the Renown System with the 2018 Suite. In this respect, his Honour said: "[52] Renown take issue with Mr Shawver's evidence. Its case is that the errors in the coding that apparently cause the problems could be fixed without upgrading the software platform and configuring the system from scratch. There are, however, difficulties with that submission. First, Mr Finn accepted that that could not be done without access to the source code for the Renown System. It is unclear whether that code is available. Whether it is available or not is something within Renown's knowledge, since it is its source code. It led no evidence that the code is available. Second, there is no evidence that Renown's solution is a practical one. The evidence is that Renown was unable to fix the problems and decided to withdraw support. It proposed two options. One was to outsource support to external contractors "with no involvement by Dialog". Renown recognised that that option had a number of problems. One problem (not mentioned by it) is that it appears that there is no other person or organisation in Australia with the necessary qualifications and experience to fix the remaining errors. Renown's second option was to replace the Renown System with a different system based on Dynamics NAV or Dynamics AX, which are cloud based systems. That option corresponds more closely to what is proposed by Mr Shawver. Third, in their report, Mr Bowling and Mr Finn accepted that the most efficient and cost-effective approach would be to replace the existing system. They said: "Despite the above [where they express the view that it is not necessary to upgrade the system to Dynamics SL 2018 and SL 2018 Web Apps], in our opinion, it would be more efficient and cost effective to upgrade to Microsoft Dynamics SL 2018 / SL 2018 Web Apps to avoid further cost by SEMF and DIALOG in resolving open issues, and especially as extended support for Microsoft Dynamics SL2011 ends July 13 2021.""
In written submissions, the appellant argued that the evidence indicated that rectification of the four identified defects in the Renown System was possible, and the costs capable of estimation. It was argued that his Honour erred in concluding that it was not possible to rectify the defects, short of replacing the whole system, in particular given that rectification could not be performed without access to the source code, and it was not clear whether it was available.
It is true that the joint report of the experts stated (emphasis added): "In each of these cases, the failures do not result a [sic] catastrophic failure of the system, and each is able to be rectified by correcting the report formulae the deployment of Crystal Reports in BP and web page code correction. Without inspection of the relevant reports and web page code, it is not possible to estimate the costs of these rectifications, but in any event they do not detriment the life span of the solution."
However Mr Shawver, having identified those problems, at a relatively high level, opined that it was not worthwhile digging deeper to diagnose all the causes of the defects, that it may never be possible to do so, and that it would be more efficient and cost-effective to replace the existing system. Moreover, as the primary judge recorded, all the experts agreed that "it would be more efficient and cost effective to upgrade to Microsoft Dynamics SL 2018 / SL 2018 Web Apps". Like the New Zealand case of Bevan Investments referred to above, [25] this was a case in which the most efficient and cost effective solution was to replace the defective system with a new one. In those circumstances, it was quite unnecessary for SEMF to adduce evidence of the cost of rectifying the identified defects, rather than of replacing the system. If Renown wished to show that rectification of the identified defects would have been a more economical option, it was open to it to have done so; but it did not. Unsurprisingly, in circumstances where their counsel conceded before us that "by the time of the trial in 2021, both experts agreed that because there was now not only a 2015 upgrade since the appellants put in their program but a 2018 upgrade, that the appropriate thing to do was to simply, from a practical point of view, start again with a Dynamics 2018 SL program", the appellant did not elaborate this ground in its oral submissions.
In those circumstances, the availability or otherwise of the source code was a side issue. However, having regard to the unchallenged evidence of Mr Shawver that, having examined SEMF's system, the Renown source code was not on it and he did not know where it was; [26] and to the evidence of Renown's experts that rectification may be possible "if" the source code was available, [27] but that they did not request access to the code (and implicitly that it was not provided to them), [28] I am unpersuaded that his Honour's conclusion that it was "unclear" whether it was available was incorrect. Mr Finn's evidence, on which the appellants rely for the contrary proposition, appears to relate to a different issue.

Betterment

In the course of argument, the primary judge had recognised that there might be a question of an allowance for betterment. His Honour said: [29] "HIS HONOUR: Yes, one thing that doesn't seem to have been addressed in anything I've read is well, subject to what anyone says to me. There do seem to be problems with the existing system which have to be corrected and the question is how best is that done and what's it going to cost. Now if it involves an upgrade to the 2018 version, there is going to be a serious question of whether allowance should be made for betterment. GREENWOOD: Not in our submission. HIS HONOUR: Yes all right, well anyway that's something you're going to have to convince me of, because it seems to me that if you had got what you originally contracted for, you would've got a system on 2011 platform which by now would be out of date and with all the issues that that would involve. If I were to assess damages by reference to a 2018 upgrade, it seems to me and in circumstances where you've been using the system, albeit unsatisfactorily, you're going to need to convince me."
Ultimately, however, his Honour made no such allowance, for the following reasons: "[55] In Tyco Australia Pty Ltd v Optus Networks Pty Ltd & Ors [2004] NSWCA 333 at [260]ff, Hodgson JA, in a passage referred to with approval by the Court of Appeal in Walker Group Constructions Pty Ltd v Tzaneros Investments Pty Ltd [2017] NSWCA 27 at [201], said that there were two circumstances in which an allowance for betterment would be made. The first is when a plaintiff chooses to acquire a more valuable asset than the one that is being replaced. The second is when "even if there is no alternative available to a plaintiff other than to acquire a more valuable asset, a plaintiff may have to give credit reflecting the greater value of this asset to the plaintiff, if there is a benefit to the plaintiff which is not remote in time or speculative, and which can be quantified": Tyco at [262]. [56] Applying these principles, and subject to one qualification, I have concluded that no allowance for betterment should be made in this case. This case plainly does not fall into the first of Hodgson JA's two categories. As I have explained, there is no other practical means of SEMF obtaining the contracted-for system. [57] In order to understand why this case does not fall into the second of Hodgson JA's categories, it is necessary to say something more about the position if the Renown System as delivered had met the contractual specifications. In that event, the problems that currently exist with the system would not have been present. On the other hand, SEMF would have paid an annual maintenance fee to Microsoft calculated at 18 percent of the cost of the original software. SEMF stopped paying that fee in 2016. That fee would have entitled SEMF to upgrade to more recent versions of the relevant software - specifically, Dynamics SL 2018 and SL 2018 Web Apps. It was not suggested that, absent the problems with the Renown System, that system could not have been migrated to updated versions of the relevant software. Consequently, if Renown had complied with the contract and SEMF had paid the maintenance fee, SEMF would have ended up with the Renown System running on Dynamics SL 2018 and SL 2018 Web Apps. SEMF accepts that in calculating damages it should give credit for the maintenance fees it has not paid. Allowing for that credit, there is no betterment since the award of damages will put SEMF in the position it would have been in if Renown had delivered the contracted-for system without the current faults or limitations."
Thus his Honour reasoned that, subject to payment of maintenance fees, SEMF would have been entitled to upgrade to the 2018 Suite in any event.
It is true that upgrading to the 2018 Suite brought enhancements and improvements to user experience and the interface. But they were enhancements and improvements to which SEMF would in any event have been contractually entitled. The appellants did not challenge the finding that SEMF would have been entitled to upgrade to the 2018 Suite, but submitted that, contrary to his Honour's finding, the Renown System would not have been capable of migration to the 2018 Suite. In oral argument, the submission was put thus: [30] "What's wrong with it is that it's not correct to say that if the respondent had simply paid the maintenance fee and upgraded to 2015 and 2018 they'd have a functioning system in 2021. That is because both experts say that significant work had to be done to the program. The information just doesn't simply migrate from 2011 to 2018, and as I said, so much is clear from p 652 of the blue book of the work that's got to be done, and both experts stated to that effect. … MARTIN: The part, the one that your Honour just read to me, "Consequently if Renown had complied with the contract" ‑ that is, that the four things that didn't work did work ‑ and SEMF had paid the maintenance fees to go to both 2015 and 2018, that Renown would have ended up with that for which it contracted. Our submission is what the experts say is that because Dynamics 2018 was so different from 2011, that significant work would have had to have been done in any event, so that Renown would have had its system functioning on 2018."
Reference was made to the evidence of Renown's expert witness Mr Bowling: [31] "…the Business Portal is not a technology that you can carry forward to 2015 and 18, and the open issues would still need to be resolved in that. Dynamics SL - Business Portal for Dynamics SL was replaced in 2015 with a new product called Dynamics SL web parts - Web Apps, sorry. And Web Apps contains web parts. And what you would then need to do is you would need to customise those pages. You'd have to produce a new product in Web Apps and, if the open issues with the Renown solution were resolved in Dynamics SL 2011 and Business Portal, it was perfectly acceptable to continue using that system indefinitely, and the decision to upgrade would be for other reasons, not for the purposes of resolving the issues with the Renown solution."
Reference was also made to the evidence of Renown's expert Mr Finn: [32] "Q. 196 is your caveat? A. Yes. Q. You say-- A. That's right. Q. "The caveat here is that where a third party has developed an add on to the solution, the add on will need to be tested and corrected for proper integration or function as part of the upgrade or may need recompiling to upgrade the code to a later version of the development language being used by Dynamics SL"? A. That's correct. Q. I didn't quite understand what you were seeking to convey there. A. It's so when, when you're doing an upgrade of Dynamics SL, quite often there are additional third party modules. For example, human resources, some people use payroll et cetera. That are built with the Dynamics SL tools but when you upgrade and this is specific, particularly true when you move from Dynamics SL 2011 to 2015. The underlying language platform alters. It goes from being visual basic to visual studio. In those cases, what you do is you take the source code and recompile them with the new environment and then normally they work. You cannot just take the existing executed form and drop it into a new environment, it won't work."
The point of Mr Bowling's evidence was that the upgrade did not of itself resolve open issues with the Renown System. It does not say that the Renown System could not be migrated to the 2018 Suite without further work or cost. Mr Finn's evidence was to the effect that while "add ons" would need to be tested and corrected as part of any upgrade, normally add-ons could be migrated: "what you do is you take the source code and recompile them with the new environment and then normally they work". Mr Shawver - SEMF's expert - assumed that the Renown System was capable of migration to the 2018 Suite, [33] and the contrary was not put to him.
It may be that SEMF saved the cost of work that would have been required to migrate the "add-ons" or "third party modules". Such a saving would attract the "avoided loss principle". That is a matter in respect of which Renown bore the onus of proof, as was explained in Ruthol Pty Ltd v Tricon (Australia) Pty Ltd: [34] "[40] If the innocent party does take action to mitigate the loss to it consequent on the guilty party's wrong, even if the action goes beyond reasonable action, in general the guilty party is entitled to an allowance for the benefit to the innocent party from that action (the avoided loss principle). This was the basis of the appellant's submission. … [44] The avoided loss principle only applies so far as the innocent party in fact gained a compensating advantage. The guilty party bears the burden of proving that loss had been avoided and the extent to which it had been avoided: The World Beauty (1970) P 144 at 154, 158; Simonius Vischer & Co v Holt & Thompson (1979) 2 NSWLR 322 at 361; Monroe Schneider Associates (Inc) v No. 1 Raberem Pty Ltd (1991) 35 FLR 1 at 17."
As the appellants conceded at the hearing of the appeal, there was no evidence of the work that would be involved, let alone of its cost. [35] Accordingly, even if in principle Renown was entitled to an allowance for the cost of work required to migrate the Renown System from the 2011 Suite to the 2018 Suite, it bore the onus of proving what if any saving was involved, and it failed to do so.

Renown Corporation Pty Ltd v SEMF Pty Ltd

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Judgment (9 paragraphs)

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Cases Cited (18)

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