Roluke Pty Ltd & Anor v Lamaro Consultants Pty Ltd & Anor

CATCHWORDS: DAMAGES - negligent design of waterproof concrete slab by an engineer - measure of damages for breach of contract - whether terms of contract required a waterproof slab that would last for the life of the building or one that included a membrane requiring periodic repairs - whether primary Judge's findings of fact on life expectancy of membrane and repairs to slabs were correct - whether owners of building entitled to damages for diminution in value of building where repairs had been satisfactorily completed

Auburn Municipal Council v ARC Engineering Pty Ltd [1973] 1 NSWLR 513 Bellgrove v Eldridge [1954] HCA 36; 90 CLR 613 Beregold Pty Ltd v Mitsopoulos (Supreme Court of New South Wales, 10 November 1992, unreported) Bevan Investments Ltd v Blackhall and Struthers (No 2) [1978] 2 NZLR 97 CASES CITED: Brown Falconer Group Pty Ltd v South Parklands Hockey & Tennis Centre Inc [2005] SASC 75 Costa v The Public Trustee of NSW [2008] NSWCA 223 Fox v Percy [2003] HCA 22; 214 CLR 118 Haines v Bendall [1991] HCA 15; 172 CLR 60 Skinner v Frappell [2008] NSWCA 296 State Rail Authority of New South Wales v Brown [2006] NSWCA 220

TEXTS CITED: A. Hudson and M. Lawrence, The Law of Building and Engineering Contracts : and of the Duties and Liabilities of Architects, Engineers and Surveyors, 7th ed, (1946) Sweet and Maxwell at 343

Roluke Pty Ltd (First Appellant) PARTIES: Scotts Motors Artamon Pty Limited (Second Appellant) Lamaro Consultants Pty Ltd (First Respondent) Anthony Vincent Lamaro (Second Respondent)

Mr J Glissan QC (Appellants) Mr J S Drummond (Appellants) COUNSEL: Mr D Fagan SC (Respondents) Mr M D Loewenstein (Respondents)

Booth & Boorman (Appellants) SOLICITORS: Curwoods Lawyers (Respondents)

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT DATE OF DECISION: 17 April 2007, 18 May 2007, 29 June 2007

LOWER COURT MEDIUM NEUTRAL CITATION: Roluke Pty Ltd & Anor v Lamaro Consultants Pty Ltd & Anor [2007] NSWSC 671

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40492/07

BASTEN JA CAMPBELL JA SACKVILLE AJA

27 November 2008 ROLUKE PTY LIMITED & ANOR v LAMARO CONSULTANTS PTY LTD & ANOR Judgment

1 BASTEN JA: I agree with the orders and directions proposed by Sackville AJA and with his Honour's reasons. 2 CAMPBELL JA: I agree with Sackville AJA. 3 SACKVILLE AJA: In these proceedings, the appellants (the plaintiffs below) sued the respondents (the defendants in the Court below) in contract and tort, alleging breach of a duty to exercise reasonable skill and diligence as consulting structural engineers. The second respondent ("Mr Lamaro") was a director and the principal officer of the first respondent ("Lamaro Consultants"). For the most part it is not necessary to distinguish between them for the purposes of the appeal. 4 The alleged breaches by the respondents related to the design of concrete slabs in a building used to service motor vehicles, including the slab on the top of the building (level 3). Because of design defects, the slabs were not waterproof and required substantial remedial work. The respondents ultimately did not dispute that they were liable in contract and tort to the appellants. 5 The primary Judge assessed the appellants' damages at $912,245. This award included certain agreed components for past losses. It also included a component for the future expenses the appellant would incur in respect of periodic remedial works required during the life of the building. The damages awarded for this component of loss were based on findings made by the primary Judge as to the frequency with which the remedial works would be required over a period of some decades. 6 The appellants appeal against the assessment of damages. They contend that his Honour erred in assessing damages in two major respects. First, his Honour misapprehended the nature of the contractual obligation undertaken by the respondents and thus assessed damages on a wrong basis. Secondly, he made incorrect findings of fact concerning the life span of the remedial works necessary to correct the defects in the slabs and on other matters relevant to the assessment of damages. The appellants seek a judgment in their favour in the sum of $2,450,153, or such lesser sum as the Court considers appropriate. 7 The respondents have filed a notice of contention which supports the primary judgment on the additional ground that his Honour erred in admitting into evidence four affidavits. These related to a discussion involving Mr Lamaro, the appellants' architect, Mr Ezzy, and other persons, which took place on or about 25 November 1998, after the respondents had agreed to undertake engineering design work for the appellants. The respondents submit that the evidence was irrelevant to any issue in the proceedings and, contrary to the appellants' submissions, should not be taken into account in assessing the quantum of damages. 8 The respondents also seek leave to cross-appeal against so much of the decision of the trial Judge as relates to the issue of costs. The respondents contend that the trial Judge erred in principle by ordering them to pay two thirds of the appellants' costs of the proceedings. In particular, the respondents argue that his Honour failed to take proper account of a pre-trial "Calderbank" offer they made to settle the appellants' claim for $1,000,000. That offer, as events turned out, was for a sum greater than the verdict obtained by the appellants at the trial. 9 The respondents indicated in their submissions that the application for leave to cross-appeal will not proceed if the appellants succeed on the appeal. Success on the appeal will presumably mean that the appellants will obtain judgment for an amount in excess of $1 million plus costs, the amount of the Calderbank offer. COURSE OF EVENTS 10 The following account, insofar as it deals with the facts, is largely taken from the judgment of the primary Judge. Plans for a new building 11 In 1994, the second appellant ("Scotts") purchased a business known as Hornsby Honda which carried on business at premises at 154 Pacific Highway, Hornsby. Scotts sold new and second-hand Honda motor vehicles. Servicing of the vehicles occurred on other premises. 12 In 1997, the first appellant ("Roluke") purchased a neighbouring lot at 156 Pacific Highway, Hornsby ("the Premises"). Roluke intended to construct a motor vehicle service centre to be operated by Scotts. Roluke and Scotts at all material times have been related companies. 13 In February 1998 Roluke engaged Ian and Nola Ezzy Pty Ltd ("Ezzy") as architects to prepare a design for the building and to complete Development Application ("DA") drawings and documentation for submission to Hornsby Shire Council ("the Council"). Mr Ezzy was the representative of the architects who undertook the design work. 14 In June 1998, Roluke engaged a Mr Sherrard as a consulting engineer in order to prepare engineering plans and specifications for the building. Shortly thereafter a Mr Musgrove was retained by Roluke to construct the building in accordance with the engineering plans prepared by Mr Sherrard and approved by the Council.

15 On 25 June 1998 Ezzy, on behalf of Roluke, lodged a DA with the Council. The DA provided for the construction of a three storey building on the Premises. Level 1 comprised an area to detail and prepare new cars for sale; level 2 comprised a 12-bay motor vehicle service centre and other facilities; and level 3 was to be a carpark which was to service levels 1 and 2 of the building, as well as the car saleyard next door. Each level of the building was to be connected by a circular driveway to enable the movement of vehicles from floor to floor. Level 3 was designed without a roof and therefore was exposed to the weather. The plans submitted to Council referred to a "steel trowel finish" on the level 3 slab, but provided no further engineering details. 16 On 7 September 1998, Mr Ezzy provided Roluke with architectural drawings in support of the building application ("BA"), together with specifications for the building. The specifications included a section headed "Roofing", which stated (cl 5) as follows: "BUILT-UP ROOFING All concrete roofs to have falls in structual slap (sic) patent built up roof membrane and stamped concrete topping slab with integral colour". 17 About this time, a hydraulic engineer, Mr Frost, prepared drawings in support of the building application. The drawing for level 3 was prepared in accordance with the architect's specifications and incorporated an on-site water detention system ("OSD") with a volume of 20,812 cubic metres. The drawing also provided for the concrete slab to be overlaid with a polyurethane membrane and a concrete topping slab. Level 3 was to drain to a central pit from which the accumulated water would be transported to the Council's stormwater system through pits and pipes. 18 The primary Judge found that the function of the topping slab was to protect the membrane from damage from moving vehicles. To perform that function, the topping slab required a thickness of up to 100mm and sufficient reinforcing to withstand the weights and forces applied by vehicles travelling across its surface. 19 On 26 September 1998, the Council issued its consent to the DA. Clause 22.1 of the consent provided that the site drainage system was to be constructed so as to provide an OSD on level 3 of the building. Engagement of Mr Lamaro 20 On 22 October 1998, the Council advised the builder (Mr Musgrove) that an inspection of the Premises had disclosed that building work had commenced without the prior approval of the Council. The letter warned that unless all works associated with the erection of the building ceased, legal action would be instituted. At this stage, Roluke had not lodged with the Council any engineering plans or specifications for the construction of levels 2 and 3 of the building, although some plans had been previously prepared by Mr Sherrard, apparently for the lower levels of the building. 21 On 29 October 1998 Mr Scharrer, a director of each of the appellants, attended a meeting on site with Mr Musgrove and Mr Lamaro. During the meeting Mr Lamaro was provided with both Mr Ezzy's architectural plans and the engineering plans prepared by Mr Sherrard. Mr Lamaro thereupon became aware that Mr Ezzy had specified a membrane and topping slab in the specification and understood that he was being asked to prepare a design that reflected Mr Ezzy's specification. 22 Following the meeting, Roluke terminated Mr Sherrard's engagement and invited Mr Lamaro to provide a proposal for an engineering design. 23 On 29 October 1998 Mr Lamaro submitted a fee quotation to Scotts that included a description of the services he was proposing to provide. The letter included the following: "SCOPE OF ENGINEERING DESIGN SERVICES * Design and Draw the following, as shown on preliminary Architects drawing: … * Design of columns as shown on Architects Drawing * Design of lowest level car parking slab on ground, plus driveway ramp * Design of upper level workshop slabs and beams, and circular ramp * Design of level 2 mezzanine slabs and beams * Design of Ground Floor slab and beams, including all set down areas, etc … * We will liaise with yourself and your Architect, during the design and construction stage * We will provide the Architect with Structural Information eg. Column Sizes, and locations, slab thicknesses and set downs, beams, etc sufficient to produce the working drawing on time. … DESIGN FEES To carrying out structural design and drawings of the works noted above, so that builders may price and construct the works Our fees will be ……………………………….$6,000.00 VARIATIONS Any additional design work not shown on the drawing on which the above fee is based, and any revisions to engineering details already designed, or drawn and made necessary by later changes to the Architects drawings, will be charged out at the Minimum Time Charge Rate, less 10% SITE INSPECTIONS FEES DURING CONSTRUCTION Site inspections and Meetings will be carried out as requested by either yourself, the architect, or the builder, during the construction of the above works. To carrying out site inspections, etc, of the above works, our fees will be: Consultants time………………………….$280.00 per visit." 24 On 2 November 1998 Mr Lamaro agreed to change the fee per visit to $250. Mr Scharrer then accepted Mr Lamaro's proposal. On the same day, Messrs Lamaro, Ezzy and Musgrove attended a site meeting. Mr Lamaro was provided with the geotechnical report, previous engineering details and architectural plans. 25 By 10 November 1998 Mr Lamaro had prepared plans for fittings, retaining walls and the level 1 basement slab. The meeting of 25 November 1998 26 The primary Judge found, on the basis of evidence admitted over objection and contrary to the evidence of Mr Lamaro, that on or about 25 November 1998 a meeting took place at Mr Ezzy's offices, attended by Messrs Ezzy, Lamaro, Musgrove and Frost. Mr Ezzy, whose evidence was accepted by his Honour, said that he had called the meeting to expedite the final structural designs to enable structural engineering details to be submitted to the Council for approval. Mr Ezzy's account of the conversation was as follows: Ezzy As you know the purpose of this meeting is mainly to get structural details for council approval, unless we have them we cannot legally go ahead. We have already got a Stop Work Order. The reason that Michael Frost is here is because the roof slab has been designed by him as a detention basin, and it will have to be certified at completion of the job. Vince [Lamaro] is here because he needs to give us structural details so the Council can approve them and the job can progress. We need to discuss the final design of the roof slab. It has to have various functions, which include the parking of cars, traffic and pedestrians and vehicles, detention of the storm water and the enclosing of the workshop below. I have designed it to have a waterproof membrane with a topping slab.

Lamaro There are various structural engineering solutions such as flat slab, conventional slab, and post and pre tension slabs. I can design an extra thick slab that will adequately meet all these functions including waterproofing and we will need not [sic] a topping slab or membrane. I think that is the best way to proceed.

Frost That would be unusual in my experience but it is up to Vince [Lamaro].

Ezzy Can you produce the drawings as soon as possible so that I can submit them to Council.

Lamaro Yes." (Emphasis added.) 27 Mr Musgrove, whose evidence his Honour also accepted, gave a similar account:

Lamaro There are three options. One, a waterproof membrane; two, pre-stressed concrete and three, we can use a thicker slab. I have achieved waterproofing by using an appropriately thick slab on other projects and I can tell you that it works. That is a better method than using the membrane. Musgrove What about the membrane if it is in the specifications. Lamaro This is a roof slab. On a hot day cars may damage the membrane so the thicker slab is the better option. In concrete terms, we increase the strength of the concrete and the thickness of the slab, this will give us a waterproof slab". (Emphasis added.)

Mr Lamaro's Drawings 28 By 22 December 1998 Mr Lamaro had prepared a number of drawings. These included plans 8, 9 and 10 containing design details for the level 3 slab, reinforcement and beams. The design for the level 3 slab did not incorporate a topping slab. 29 On 5 March 1999, Mr Lamaro received amended architectural plans from Mr Ezzy. On the same day, Mr Lamaro advised Scotts in writing that all internal beams, slabs, columns and footings would have to be redesigned. In particular, he considered that drawings 8, 9 and 10 had to be totally redrawn. Mr Lamaro's letter proposed extra design fees of $6,600 and included the following statement: "… by varying the designs so that there are only longitudinal beams and no transverse beams, at the 2 main floors, i.e. Level 2 and Level 3, I believe that cost savings well in excess of the above extra design fee can be achieved, in formwork, concrete & reinforcements, as well as time".

Mr Lamaro's proposal was accepted by Mr Scharrer. 30 On 8 March 1999, Mr Frost sent to Mr Lamaro amended hydraulic services drawings which provided for level 3 to function as an OSD. 31 By 24 March 1999, Mr Lamaro had redesigned the structural drawings, and had prepared plans 4A to 10A for levels 2 and 3, which were lodged with the Council. Plan 8A for level 3 incorporated neither a membrane nor a topping slab (although Mr Lamaro in his evidence at first asserted that plan 8A was intended to incorporate a topping slab). The primary Judge found that Mr Lamaro was aware from plans that had been prepared by the hydraulic engineer that level 3 required an OSD, yet had prepared engineering plans that failed to provide for an OSD. Mr Lamaro's design was for a 250mm concrete slab, the top being flush with the grate. The finished level at the grate was RL193.600 and at the perimeter was RL193.730. 32 The primary Judge also found that the probable explanation for Mr Lamaro's design in plans 8 and 8A was to give effect to the suggestion he made at the meeting of 25 November 1998. That involved designing a thicker slab which would be waterproof without a membrane and topping slab. Damage and remedial work 33 Construction of the building on the Premises took place during 1999. The building was completed and occupied by late January 2000. Level 3 was constructed in accordance with plan 8A and thus had neither a membrane nor a topping slab. 34 By May 2000, cracks had appeared in the level 2 and level 3 slabs. The cracks extended in an east-west direction across the slab and permitted penetration of rainwater. The consequent accumulation of water on level 2 created the risk of injury to the appellant's employees working in the service centre due to the floors becoming slippery and to the possibility of electrocution while using electric power tools. Vehicles located on level 1 suffered damage to paint work from water which had gathered impurities as it passed through the level 2 and 3 slabs. 35 The primary Judge accepted the opinion of experts called for both parties that a slab could be properly designed to be waterproof without the incorporation of a membrane and topping slab. However, a properly designed slab would be one that included adequate F72 reinforcement in accordance with the appropriate standard (AS3600-1994), was subject to minimal restraint by columns and walls, was post-stressed and contained an appropriate water-proofing additive. The designs provided by Mr Lamaro were defective because: (i) they provided for significantly less reinforcement than required by the standard;

(ii) the difference between the dimension of the beams and the dimensions of the slabs was so great as to result in differential shrinkage, thereby contributing to cracking;

(iii) the design was restrained by columns and perimeter walls;

(v) there was no concrete additive. 36 In May 2001, Roluke installed a waterproof membrane on level 3 at a cost of $52,152. The membrane subsequently failed and water recommenced penetrating the slabs. 37 In October 2003, Roluke caused the cracks to be repaired and installed what was intended to be a more durable membrane on level 3 at a cost of $103,943.40. Shortly thereafter this membrane also failed and water again penetrated the level 3 slab, entering the service centre below.

THE PROCEEDINGS 38 The appellants commenced proceedings on 26 May 2003 in the Technology & Construction List of the Supreme Court against the respondents. The summons filed on that date sought an order that the respondents pay $910,000 in damages plus interest. 39 The appellants filed an amended summons on 16 February 2004 claiming $1,765,733 in damages, including the cost of constructing a roof and damages for diminution in the value of the building. The respondents denied liability. 40 On 16 September 2005, the respondents made a Calderbank offer to settle the proceedings for $1,000,000 plus costs. The offer was expressed to remain open until 26 September 2005. On the latter date, the appellants offered to settle for $1,600,000 plus costs. The respondents did not accept that offer. 41 The hearing commenced on 7 November 2005. The appellants filed a further amended summons ("FAS") in which the claim for damages for rectification to the building was amended to $2,335,792 and included a claim for $100,000 in respect of the diminution of the value of the building. 42 The FAS pleaded that a contract had come into existence as the result of Mr Scharrer, on behalf of the appellants, accepting Lamaro Consultants' quotation of 29 October 1998. The FAS pleaded that Lamaro Consultants breached the contract in a variety of ways, in particular by failing to supply engineering plans and specifications which included a waterproof membrane to prevent water collected on the level 3 OSD penetrating to levels below and a concrete additive to the slab. No reference was made in the pleading to the discussions that had taken place on 25 November 1998. The Application for leave to amend 43 The trial was adjourned part-heard on 11 November 2005. When the hearing resumed on 11 April 2006 (the sixth hearing day), the appellants sought leave to file a second further amended summons ("2FAS"). The 2FAS alleged at the meeting of 25 November 1998, Mr Lamaro represented to Ezzy that Larmaro Consultants possessed the requisite qualifications to prepare drawings and specifications to permit the construction of level 3 so that it would act as an OSD and would be waterproof, yet would not require the incorporation of a waterproof membrane and concrete topping slab. The 2FAS also alleged that, in reliance on the representations, Ezzy agreed to vary the specifications by deleting the requirement for the level 3 slab to include a waterproof membrane and stamped concrete topping slab. 44 The 2FAS pleaded that by reason of the representations made by Mr Lamaro, the contract between the appellants and Lamaro Consultants was varied, such that Lamaro Consultants agreed to provide engineering drawings and specifications to cause the building to be constructed in accordance with the varied specifications of the architect. The particulars alleged various breaches of the contract "as varied". 45 On 12 April 2006, the primary Judge delivered a judgment in which he refused leave to the appellants to file the 2FAS. His Honour noted that the appellants had contended that the purpose of the amendments was to "make more specific the allegations of the [matters] already raised on the existing pleadings by specifically alleging the circumstances in which the terms relied upon came to be agreed". 46 The primary Judge pointed out that the appellants had been given leave to file the FAS at the commencement of the hearing. Thereafter the case had proceeded and evidence had been led on the basis of that pleading. The evidence had included the accounts given by Messrs. Ezzy, Musgrove and others of the discussions held on or about 25 November 1998 with Mr Lamaro. The evidence had been objected to, but had been admitted subject to relevance and subject to further argument. 47 The appellants had argued on the application for leave to file the 2FAS that the FAS had been intended to allege a contractual term requiring the level 3 slab to be designed without a membrane. They contended that the evidence as to the discussions of 25 November 1998 went to this issue and that the proposed amendments merely made more specific allegations about matters already in issue between the parties. The respondents countered by submitting that the amendments sought to mount an entirely new contractual case that they were not prepared to meet. 48 The primary Judge was not persuaded that the interests of justice required him to grant leave to file the 2FAS. He considered it significant that the appellants themselves suggested that the amendments were not intended to raise any new issues. In these circumstances, he was not satisfied that the refusal of the application would prejudice the appellants in the overall conduct of their case. In any event, the determinative factor was that the case had proceeded on the basis that the objection as to relevance of the evidence as to the events of 25 November 1998 would await argument and determination at the end of the trial, on the basis of the FAS. Accordingly, his Honour dismissed the appellants' motion. There has been no appeal or application for leave to appeal from this judgment. Admissibility of evidence of 25 November 1998 meeting 49 After a further adjournment, the trial resumed on 30 October 2006. On 31 October 2006 (the tenth day of the hearing), the primary Judge delivered an ex tempore judgment on the admissibility of the evidence relating to the terms of the conversation of 25 November 1998. 50 His Honour noted that the particulars of breach pleaded by the appellants included a failure by the respondent to provide plans and specifications to permit the installation of a waterproof membrane and topping slab and failing to incorporate a waterproof membrane and topping slab so as to ensure that the concrete slabs for levels 2 and 3 were waterproof. His Honour observed that there was force in the respondents' submission that, on the pleadings, the appellants were asserting "no more and no less" than a contractual obligation to design a building which incorporated a membrane and topping slab in the appropriate parts of the structure. 51 Nonetheless, the primary Judge considered that the events of 25 November 1998 were relevant to a number of issues in the proceedings: "Without being exhaustive, they include matters going to the performance by the [respondents] of their obligations under the agreement, whatever they may later be found to be. Secondly, going to such requirements, if any, of the architects made from time to time with which [they] were bound to comply and, alternatively, about which [they] had some discussion. Thirdly, this evidence seems to be relevant for consideration of the question of the skill and care with which the [respondents] performed the agreement. Finally … it also is relevant to the circumstances in which the plans, as they developed to their final form, came into existence".

Accordingly, his Honour ruled that the evidence should be admitted. The Post-Hearing Judgments 52 The hearing concluded on 2 November 2006, the twelfth day of the trial. The primary judge delivered judgment on 17 April 2007. The primary Judge recorded in his judgment that Mr Lamaro conceded that the evidence established that his designs of the levels 2 and 3 slabs were defective. His Honour continued: "[Mr Lamaro] accepted that the amount of reinforcement detailed in the drawings for these slabs was less than that required under the relevant standard, Australian Standard 3600-1994 (concrete construction), with the result that cracking occurred through which water penetrated to level 1 of the building. It was common ground that the design for the level 3 slab did not allow for the incorporation of a membrane and a topping slab. Mr Lamaro conceded that, in failing to provide a suitable design for a waterproof slab, the defendants were in breach of the agreement and in breach of their duty of care to the plaintiffs."

He indicated in that judgment that he proposed to award the appellants damages, including the following heads of damage: Past damages: $285,719.00 Repair of cracks to level 2 slab: $ 17,383.00 Costs of installation of membrane and $248,449.00 asphalt screed: Business loss during repairs to $ 46,536.00 level 2 slab Business loss during installation $ 82,214.00 of membrane and asphalt screed to level 3 slab"

The primary Judge directed the parties to arrange to relist the proceedings in order to settle outstanding issues as to damages and interest, and to hear submissions on costs. 53 On 18 May 2007, his Honour delivered another ex tempore judgment in which he noted that the parties had prepared an "Amended Schedule of Damages" recording their agreement as to the quantum of items in respect of which damages were to be awarded. On the basis of this document, his Honour awarded damages in favour of the appellants in a total sum of $912,245 and entered judgment accordingly. 54 On 29 June 2007, the primary Judge gave judgment on costs. It was common ground that the respondents were to pay the appellants' costs of the proceedings on a party and party basis until 17 September 2005. However, the respondents sought an order that the appellants pay their costs on an indemnity basis from that date until the date of judgment, by reason of the Calderbank offer made on that date. As I have noted, the appellants did not accept the Calderbank offer made by the respondents. 55 Despite the appellants recovering less than the respondents' offer, the primary Judge held that the appellants had not acted unreasonably in rejecting the offer of settlement. Accordingly, his Honour declined to make the costs orders sought by the respondents. Nonetheless, he considered it appropriate that the costs order should reflect both the appellants' ultimate success in establishing liability and the respondents' success in confining the damages award to amounts substantially less than that claimed. On this basis, he ordered the respondents to pay two thirds of the appellants' costs on the ordinary basis.

THE PRIMARY JUDGMENT ON DAMAGES 56 The primary Judge noted Mr Lamaro's concession that: "in failing to provide for sufficient reinforcement in the slabs and in failing to provide for the incorporation of a membrane and topping slab on level 3"

he had breached his contractual and tortious duty of care to the appellants. In any event, the evidence supported a finding that the defective condition of the level 2 and level 3 slabs was due to faulty design. This was due to Mr Lamaro's failure: "to exercise due skill and care in the performance of the contract, and to negligence in performance of the design work as identified by [the experts]." 57 The appellants (plaintiffs) had contended that the contract with Lamaro Consultants was to produce a result, namely to provide drawings for the construction of a waterproof building without a membrane and topping slab. The measure of damages was said to be the cost of providing a building which conformed to the contract. Such a building would require the construction of a steel roof over level 3. On this basis, the claim amounted to about $2.3 million, including the cost of past repairs. 58 The respondents (defendants) contended that the contract was for the provision of professional services for the design of waterproof slabs. The measure of damages was the amount required to put the appellants in the same position as if they had not sustained the injury for which damages had been claimed. On this basis, the appellants were entitled to the costs of installation of a membrane, the costs of past and future repairs and compensations for business interruption. The respondents submitted that the appropriate award was $539,000. 59 For the purpose of identifying the proper measure of damages, the primary Judge distinguished between a contract to produce a result and a contract to exercise due skill and diligence in the performance of work. In his opinion, the contractual terms, set out in Mr Lamaro's letter of 29 October 1998 ([21] above) showed that: "the contract was one for professional services which required Mr Lamaro to exercise due skill and diligence in performing structural design work which, initially, included the design of level 3 as a slab which was made waterproof by the incorporation of a membrane and topping slab." 60 The primary Judge rejected a submission that the effect of the meeting of 25 November 1998 was to change the contract to one whereby Mr Lamaro was to produce a result, namely the construction of a waterproof building without a membrane and topping slab. In his Honour's view, the effect of the meeting was that the method by which the roof slab was to be made waterproof was changed. The change involved elimination of the membrane and topping slab. Mr Lamaro undertook to provide a design which reflected the change. His Honour held that the change did not involve a variation to the contract. Even if there had been a "notional variation" of the specifications to delete the requirement for a membrane and topping slab, that could not convert the contract into one to produce a result. 61 The measure of damages was therefore the amount which represented fair and adequate compensation for the loss or injury sustained by the appellants by reason of the respondents' wrongful conduct. According to the primary Judge, the parties in this case contemplated that the levels 2 and 3 slabs would be designed to be waterproof, while the specifications showed that the method contemplated for level 3 was a slab with a patent membrane and a topping slab. The cost of the rectification work for which Mr Lamaro was liable was therefore the cost of what was reasonable and necessary to give effect to the parties' expectations. The choice was between the "roof option" or a level 3 slab with a membrane and topping slab. 62 The primary Judge accepted the respondents' expert's recommendation that the cracks in the slab be repaired, followed by "the application of a single layer torch-on sheet membrane with an over-laid asphalt screed". In his view, this was consistent with the method originally contemplated by the parties and was reasonable. A steel roof was neither necessary nor reasonable and was substantially different from that which Mr Lamaro agreed to design. 63 His Honour accepted evidence that the appropriate membrane for installation on level 3 was an "Emerclad" membrane protected by a 50 mm thick screed. Ordinarily such a membrane would have a life of about seven years, but if applied to a slab without reinforcement it could be expected to have a life of about five years. Had the level 3 slab been built as originally contemplated it would have been waterproof for about ten years, after which the appellants would have been put to the cost of repair and replacement. 64 In these circumstances, in his Honour's view, it was "reasonable to include in the award an amount for the costs of installation of the Emerclad membrane and asphalt screed, and an amount for the costs of one replacement thereof. Support for the conclusion that allowance should be made for one replacement only is the evidence that the life expectancy of the specified membrane was about 10 years, and also Mr Smee's evidence that after that time it is probable that the plaintiffs would have been put to the costs of repair and replacement. Allowance of one replacement which provides for sound membrane cover on level 3 for at least 10 years is, therefore, appropriate." 65 His Honour then calculated the damages under a number of heads of loss in the manner previously set out ([50] above). The summary of heads of damage prepared by his Honour did not specifically refer to the cost of repair of the cracks in the level 3 slab. However, earlier in the judgment, his Honour allowed $52,600 as the reasonable cost of the repairs. He did so on the basis of evidence from the respondents' expert civil engineer, Mr Smee, that: "it would be sufficient to repair the cracks in each slab once only and no repetition was justified." 66 The primary Judge noted the experts' agreement that the present value of the cost of one replacement of the Emerclad membrane was $271,486. However, that amount incorporated an unadjusted sum of $52,600 for a second set of repairs to cracks in the concrete which his Honour was not prepared to allow. Accordingly, the damages under this head had to be recalculated and he indicated his intention to give the parties the opportunity to agree on the recalculation. Similarly, while there was agreement between the parties on two elements of the appellants' claim for business loss, another element required further consideration. 67 Finally, his Honour rejected the appellants' claim for $200,000, being the difference between the value of the building had it been constructed in accordance with the contract (said to be $3.65 million) and its value once rectified (said to be $3.45 million). The latter was lower, so the appellants argued at the trial, because the fact that the slab had been defective would be known in the market place. 68 The primary Judge saw no reason, as a matter of principle, why a plaintiff's claim in respect of a defectively designed structure, should be limited to the cost of repairs, if the evidence shows that the premises would have lost market value notwithstanding that the building had been satisfactorily repaired. However, his Honour considered that the evidence of the appellants' expert supporting the claim lacked any probative weight. 69 Having read the expert's report, his Honour was: "unable to ascertain the grounds upon which the figure of $3,450,000 was calculated, including any connection between it and what were assumed to be satisfactorily repaired cracks and faults."

His Honour pointed out that there had been no attempt to take into account the evidence that the cracks could be rectified or to demonstrate that the space available for business use would be reduced. Nor was there any evidence to support the contention that knowledge of the existence of the cracks on the market place would adversely affect the building's value at the valuation date or in the future. Thus the appellants had failed to discharge their onus of proof on this issue. ISSUES ON THE APPEAL 70 The appellants challenged the primary Judge's assessment of damages on four grounds:

(i) The conversation of 25 November 1998 altered the operation of the respondents' contractual obligations so as to require them to design waterproof slabs that did not require a membrane or topping slab. Damages should therefore have been assessed on the basis that the respondents had undertaken to design slabs that would have a life co-extensive with that of the building (that is, slabs that are waterproof but do not incorporate a membrane and topping slab in the design).

(ii) The primary Judge erred in finding that the life expectancy of the membrane referred to in the specifications was 10 years. On the evidence, the primary Judge should have found that the life expectancy was at least 20 years and damages assessed accordingly.

(iii) The primary Judge erred in finding that the cracks in the slabs required repair only once during the life of the building. His Honour should have found that the repair work could be expected to last only ten years. Damages should have been assessed on this basis.

(iv) The primary Judge should have awarded damages for diminution in the value of the building attributable to the defective design (even allowing for repairs). 71 As has been noted in ([5] above), the respondents' notice of contention seeks to have this Court affirm the decision of the primary Judge on the ground that, in view of the decision not to grant leave to the appellants to rely on the 2FAS, his Honour should not have admitted evidence of the conversation of 25 November 1998. 72 The respondents also filed a summons seeking leave to appeal against the costs orders made by the primary Judge. They contended that the primary Judge erred in ordering the respondents to pay two thirds of the appellants' costs. Rather, he should have declined to make any order in favour of the appellants after the respondents made their Calderbank offer by letter dated 16 September 2005, which the appellants rejected. CONTRACTUAL OBLIGATIONS Appellants' submissions 73 Mr Glissan QC, who appeared with Mr Drummond for the appellants, accepted that, as the primary Judge held, there was a distinction between a contract to achieve a result and a contract to exercise reasonable professional skill in designing a structure (or performing other work). Moreover, Mr Glissan acknowledged that in view of the primary Judge's refusal to allow the appellants to amend their pleadings, it was not open to them to contend that the terms of the contract constituted by acceptance of Mr Lamaro's fee quotation of 29 October 1998 had been varied by the conversation of 25 November 1998. He attempted to overcome this difficulty by submitting that the respondents' retainer at all times required them to give advice concerning the specifications and to design the building in accordance with the specifications as varied from time to time in conformity with the advice. The specifications were effectively amended in the November conversation to delete the original requirement for a membrane and topping slab. 74 On this basis, so Mr Glissan argued, the respondents' contractual obligations remained unaltered, but the content of the obligations changed. Following the November meeting, the expectation of the parties was that slabs would be designed without a membrane and topping slab and would have the qualities associated with such slabs. That is, the slabs could be expected to last for the life of the building (about sixty years) without replacement or substantial repairs. 75 In oral argument, Mr Glissan characterised the respondents' contractual obligation as to produce a result, namely a waterproof structure on level 3 without the necessity for a roof. The respondents were to give advice as to how to achieve that result. The only thing that changed in consequence of the November meeting was the means by which the result was to be achieved. Instead of the result (a waterproof slab) taking the form of a slab with a membrane and a topping slab, it was now to take the form of a slab without the membrane and topping slab. Respondents' submissions 76 The respondents submitted that the primary Judge correctly concluded that the contract constituted by acceptance of Mr Lamaro's quotation of 29 October 1998 was an agreement to provide professional services. The appellants' submissions amounted to an attempt to rewrite the contract without the necessary pleading alleging that the contract had been amended. So understood, the damages by reason of the respondents' were to be confined to the amount required to make good level 3 in accordance with the expectation that it was to be designed with a membrane and topping slab and so would require maintenance from time to time. REASONING Principles 77 As has been noted, his Honour distinguished between a contract to exercise skill and judgment in designing a structure, on the one hand, and a contract to achieve a result. The primary Judge quoted extensively from the judgment of Hutley JA in Auburn Municipal Council v ARC Engineering Pty Ltd [1973] 1 NSWLR 513 ("Auburn"), which elaborates on the distinction between the two classes of cases. The primary Judge characterised the question as being whether the contract in the present case was one to produce a result or to perform design work. Both parties seemed to accept the dichotomy adopted by the primary Judge. 78 The settled principle governing the assessment of damages for breach of contract is that the injured party should receive compensation in a sum which, so far as money can, will put that party in the same position as he or she would have been in had the contract been performed: Haines v Bendall [1991] HCA 15; 172 CLR 60 at 63 per Mason CJ, Dawson, Toohey and Gaudron JJ. The difficulty lies in applying the general principle to the infinitely various circumstances of individual cases. 79 Hutley JA in Auburn, directed attention to the decision of the High Court in Bellgrove v Eldridge [1954] HCA 36; 90 CLR 613. In that case, the issue was the measure of damages where a builder had departed from the specifications and constructed an unstable building. The builder claimed that the quantum of damages was limited to the difference between the value of the land and building as it stood, and the value of the land and building had the building had been erected in accordance with the specifications. The owner claimed a greater amount, being the cost of rectifying the building so as to give her the equivalent of a building erected in accordance with the contractual specifications. 80 The High Court held (at 617-618) that the owner's contention was correct, notwithstanding that the remedial works included demolishing and reconstructing part of the building. The High Court applied (at 616) a rule derived from Hudson on Building Contracts (7th ed 1946) 343: "The measure of the damages recoverable by the building owner for the breach of a building contract is … 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".

Their Honours added (at 618) a qualification to the rule, namely that: "not only must the work undertaken be necessary to produce conformity, but … it must be a reasonable course to adopt".

They pointed out that whether remedial work is necessary in any given case is a question of fact: at 619. 81 Auburn was a design case. Engineers prepared plans for a council building to be erected on a former rubbish tip. The footings designed by the engineers were unsatisfactory and serious defects developed in the buildings. The principal building had to be demolished and rebuilt with proper footings. The trial Judge found that the engineers had breached their contract with the council by failing to design footings with appropriate piles. 82 At the trial, the council conceded that the damages, while including the cost of demolition and rebuilding (including piles), had to be reduced to allow for the additional cost that would have been incurred had the building been designed and erected with piles in the first place. On the appeal, the council sought to withdraw the concession in order to argue that the test applied in Bellgrove v Eldridge required the council to be compensated for the entirety of the cost of redesign and reconstruction of the building, without deduction for the additional cost of the piles. 83 Moffitt AP, with whom Hardie JA agreed on this point, considered (at 522) that it was unnecessary to address the submission because, in his view, the council could not recover the cost of erecting the piles in any event. To allow the council the cost of the piles would result in it being better off than if the design contract had been performed (at 523): "If the design initially had been a proper design, the council would have had initially to pay the builders for the greater cost of providing piles. They never had to pay such moneys. To provide the total cost of now constructing piles as part of their damage would be to give to them that which they have not lost." 84 Moffitt AP noted that the question of whether the measure of damages referred to in Bellgrove v Eldridge was the correct principle to be applied had not been argued at trial or on appeal. Hardie JA, in concurring with Moffitt AP, expressed "serious reservations" as to whether the trial Judge had correctly applied Bellgrove v Eldridge, but was content to proceed on the basis that it was the controlling authority. 85 Hutley JA in Auburn considered that it was in the interests of justice to allow the council to withdraw its concession at trial. However, he also thought that the "whole basis" on which the parties had approached the assessment of damages at trial was wrong. This was because (at 530) the contract alleged and proved was: "a contract, not to produce a certain ultimate result but a contract to apply due care, skill and diligence in the exercise of the profession of [an engineer]".

By contrast, the contract in Bellgrave v Eldridge was one to produce a certain result, namely a building erected in accordance with particular plans and specifications. 86 According to Hutley JA (at 531): "It is in the character of the contract that was made that the proper measure of damages for the breach of contract has to be found, and the contract to exercise proper professional skill in designing a structure is radically different from a contract to achieve a result. It is of the very nature of contracts of professional employment that they are not contracts to achieve a result. The doctor does not promise that he will get a patient well. The lawyer does not promise that he will recover damages, and, similarly, the consultant engineer does not ordinarily promise that he will design a structure which will produce a result desired by the client. He may do so, but this is most unusual and did not occur here." 87 His Honour recognised (at 531) that the damages for a failure to exercise professional skill might be assessed by inquiring what as to the costs involved in getting to a desired result, for example by allowing for the cost of an adequate reinforcing beam: "However, the fact that in a number of cases the same methods of proof may be resorted to does not mean that in the two cases there is an identical measure of damages. The two measures of damage diverge where it is necessary to destroy the structure erected and replace it by another structure. The designer cannot be called upon to do anything more than exercise his skill to produce a correct design and pay damages for the consequence of his neglect. He cannot be called upon to give the client the structure designed." 88 Hutley JA expressed the view that once there had to be a new design and a new structure, "the effects of the original breach are exhausted". Thus (at 533): "the engineer whose negligent design caused the erection of useless structures cannot be held liable to erect proper structures. His negligence is exhausted when it is necessary to dispense with his design."

For these reasons, his Honour rejected the Council's claim for the cost of redesign and of installing piles. 89 In Beregold Pty Ltd v Mitsopoulos (Supreme Court of New South Wales, 10 November 1992, unreported), Cole J applied the approach of Hutley JA to a case involving a defective design of a concrete slab. The slab was designed to be 200 mm thick, but should have been 350 mm to carry the load specified in the contract. Cole J held that the plaintiff should receive the cost of rectifying the slab (being $825,000, an amount greater than the original cost of installing the 200 mm thick slab). However, he held that the referee had correctly reduced the compensation by an amount equal to the difference between the cost of the 200 mm slab ($390,000) and the cost of installing a 350 mm slab at the outset ($710,000). 90 Cole J explained (at 3) the relevant principles as follows: "Loss flowing from negligent engineering design may fall into at least three categories. First, simple repairs may be required not involving any work which initially should have been specified had there been proper design. Second, work may involve performance of structural work which should have been included in the initial design, and would have involved additional original construction cost, had there been proper design. Third, work may involve both the above categories. In the first category, loss is the total repair cost. However, in the second and third category, in determining actual loss suffered, regard must be had to the additional construction cost which would have been incurred had there been no negligence in the initial design. Failure to deduct the omitted initial additional construction cost from the present cost of performing that and other work would be to inflate the loss beyond that actually suffered." 91 The New Zealand Court of Appeal has been critical of the approach taken by Hutley JA in Auburn: Bevan Investments Ltd v Blackhall and Struthers (No 2) [1978] 2 NZLR 97. Richmond P said (at 108) that, in his opinion, Hutley JA had approached the assessment of damages: "on the assumption that the only possible measure of damages, in a case involving a completely useless building, was to be fixed by such an amount as would put the owner of the building back into the position in which he was at the time when he was induced by the negligence of the engineer to embark upon a futile enterprise. In effect this was an application of the principle of restitutio in integrum." 92 Richmond P preferred an approach which looked to the contract itself and entitled the plaintiff to be placed, so far as money can do it, in the same position he would have been had the contract been performed. According to his Honour, this requires the plaintiff to establish what the position would have been had the engineer in fact exercised reasonable care and skill. Auburn could be explained as a case where the plaintiff, had the engineer done his job properly, would have proceeded to let a contract on the basis of a properly prepared design, at a higher cost. For a similar approach see Brown Falconer Group Pty Ltd v South Parklands Hockey & Tennis Centre Inc [2005] SASC 75 at [38]-[44] per Duggan J (with whom Besanko and White JJ agreed). 93 Neither the appellants nor the respondents canvassed in argument whether the judgment of Hutley JA in Auburn is to be explained as it was in Bevan Investments, or whether Hutley JA intended to suggest that the measure of damages for breach of contract for a defective design is different from that applied to, say, a contract by a builder to erect a building in accordance with specifications. In the absence of argument, it is not appropriate to attempt to resolve that question. 94 It is, however, important to observe that the assessment of damages in a case of a defective design cannot be resolved simply by characterising a particular contract as one to achieve a result or as one to exercise professional skill in designing a structure. In a sense all contracts are to achieve a result, even if the result is a design for a structure that is the product of reasonable professional skill and care. The terms of a particular design contract may require the designer to achieve a specific result. In any event, damages for breach of contract cannot be properly assessed unless the precise nature of the contractual obligations and the breach have been ascertained. As Hutley JA recognised in Auburn, the measure of damages for failure to exercise professional skill in a particular case may be "the costs involved in getting to a particular result". Everything must depend on the terms of the contract and the circumstances of the case. The contractual obligation in this case 95 In the present case, Mr Lamaro submitted his quotation on 29 October 1998. By that time he had received the architect's drawings for the building. He was also made aware that the specifications required: "falls in structural slab, patent built up roof membrane and stamped concrete topping slab." 96 According to the quotation accepted by the appellant, Mr Lamaro (or Lamaro Consultants) was to design and draw specified elements of the proposed building "as shown on preliminary Architects [sic] drawing". The architect's drawing plainly had to be understood in conjunction with the specifications of which Mr Lamaro was made aware. Otherwise, it would have been impossible to know what the architect had in mind for certain elements of the building. These elements included the "Level 3 carpark slab" which the drawing merely said was to have a "steel trowel finish". Recourse to the specifications was required to know that the architect provided that the level 3 slab should have a membrane and concrete topping slab. 97 Subject to the overriding qualification ("as shown on preliminary Architects drawings") Mr Lamaro undertook to design and draw the levels 2 and 3 slabs and beams. The task was to be performed with some urgency. This is clear not only from the circumstance that the Council had issued a stop work order, but from the reference in the letter to producing the "working drawing on time". 98 The terms of the contract required Mr Lamaro to exercise reasonable professional skill and judgment in designing waterproof slabs in accordance with the specifications, which referred to a membrane and topping slab. What Lamaro Consultants undertook to do was to design level 2 and 3 slabs that were waterproof by reason of having a membrane and concrete topping slab (doubtless supported by other appropriate design features). Professional skill and judgment would have been involved in determining the appropriate membrane and the precise characteristics of the topping slab. But if Mr Lamaro had performed his design task with reasonable professional skill and care he would have designed waterproof level 2 and 3 slabs incorporating a membrane and a topping slab. The expectation of the parties, based on these contractual arrangements, could only have been that the appellants' building would have a waterproof level 3 slab that would, in the ordinary course, require repairs to or replacement of the membrane and topping slab at intervals throughout the life of the building. 99 It was no part of the contractual arrangement entered into between the parties in early November 1998 that Mr Lamaro should design, or give advice in relation to, a level 3 slab that would be made waterproof by some means other than that specified by the architect - that is, otherwise than by the use of a membrane and a concrete topping slab. The appellants bargained for and were entitled to receive a design, prepared with reasonable professional skill and care, for a slab waterproofed by means of a membrane and concrete topping slab. Had such a design been prepared, presumably the appellants would have installed a slab with those qualities. It was common ground that a slab with a membrane and a concrete topping slab would not have had an indefinite life, but would have required repair and renewal at periodic intervals throughout the life of the building. 100 To award damages to the appellant on the basis that Mr Lamaro had promised to use reasonable skill and care to design a waterproof slab with quite different characteristics, in particular an indefinite life, would be to over-compensate the appellants. In the words of Moffitt AP in Auburn, to award damages calculated by reference to the cost of installing a waterproof slab with an indefinite life would be to give the appellants what they have not lost. 101 The conversation that occurred on 25 November 1998 may well have constituted a fresh contract between the parties, or a variation of the existing contract. But the appellants were precluded from conducting their case on the basis that Mr Lamaro had undertaken new and different obligations by reason of a new contract or a variation to the existing contract. 102 The appellants' first argument must be rejected. LIFE EXPECTANCY OF THE MEMBRANE 103 The appellants challenged the finding of the primary Judge that "the life expectancy of the specified membrane was about 10 years". The significance of this finding is that it underpinned his Honour's conclusion that he should allow for one replacement only of the Emerclad membrane and asphalt screed to be installed as part of the rectification process. His Honour reasoned that, in view of the specified membrane's life expectancy of ten years and the Emerclad membrane's likely life of five years, allowance should be made for "sound membrane cover on level 3 for at least 10 years". 104 The appellants submitted that it was not clear what evidence the primary Judge had relied on to make the finding that the membrane specified by the architect had a life expectancy of ten years. They contended that the evidence, particularly that of Mr Smee, the expert civil engineer called by the respondents, supported a finding that the life expectancy of the membrane specified by the architect was twenty years. 105 The architect's specifications did not identify the type of membrane that was to be applied to the level 3 slab. This is not surprising as the architect presumably left that decision to the engineer. However, as the appellants submitted, the evidence indicated that the life span of a membrane depends upon a variety of factors, including the number of layers, the method of application and the type of protective topping screed employed. 106 When Mr Smee's evidence is read as a whole, it supports the proposition that a "good quality membrane" could be expected to have a life of about 20 years. At one point in his evidence, Mr Smee said that a "torch-on bituminous membrane, with a protective layer" could be expected to "last probably better than ten years", but he was rather vague about how much longer it would be likely to last without replacement. Later, however, he was pressed on the life expectancy of the membrane, on the basis that a "slip layer" would be inserted between the membrane and the topping slab in accordance with usual practice. His evidence was as follows (Black 318-319): "Q. I am asking you the question in relation to a topping slab with a slip sheet over a good quality membrane?

A. Well, a slip layer or sheet will improve the life because, without a slip sheet you will have failure possibility at the joint or cracks in the slab over, and the topping slab will assist in protecting the membrane against damage.

Q. But, what I am suggesting to you, Mr Smee, is if you have a concrete topping slab over a slip sheet with a good quality membrane, the expected life of that membrane is much greater than ten years; isn't it?

A. Well, I am not sure what sort of guarantee you will get; I don't think you will get in excess of, probably, ten years.

Q. I am suggesting you will get 20 or 30 years out of it?

Q. But that is the whole purpose. Isn't the purpose of these topping slabs with slip sheets to make it, because of the cost of replacement, a permanent fixture?

A. It is to give it a longer life. 'Permanent' is a word that --

Q. If this slab was properly constructed with the correct amount of reinforcement in it on level 3 and a membrane of good quality was laid with a slip sheet and a stamped topping slab, you would expect that membrane and that topping slab to be there for the life of the building; wouldn't you?

A. No, I have said what I would expect. I would expect 20 years out of it . I think I used the word 'hope' to get 20 years out of it. Anything over that is a bonus. You may well get something extra." 107 Later, Mr Smee was asked as to how one would ensure that a concrete slab, which expands and contracts under thermal effects can be kept waterproof. He answered (Black 320): "You either replace or repair the membrane every twenty year period, I guess." 108 Mr Fagan SC, who appeared with Mr Loewenstein for the respondents, accepted in oral argument that it was unclear how his Honour had come to select ten years as the expected life of the membrane. Mr Fagan did not point to any evidence, other than that given by Mr Smee, that supported his Honour's finding that the expected life of the membrane specified by the architect was ten years. Nor did Mr Fagan suggest that his Honour assumed or should have assumed that the membrane would be other than of good quality, installed in accordance with the usual practice. 109 No question of credit or of resolving conflicting evidence arises in relation to this issue. When Mr Smee's evidence is read as a whole, his Honour erred in finding that the expected life of the membrane specified by the architect was ten years. The preferable view on the evidence was that the life to be expected from a good quality membrane, properly installed, was no less than twenty years. 110 The assessment of damages was therefore in error, insofar as it was based on the finding that the expected life of the membrane specified by the architect was ten years. Damages should be re-assessed in this Court on the basis that the expected life was twenty years. REPAIRS TO CRACKS IN SLABS 111 The appellants challenged the primary Judge's finding that the cracks in the level 2 and 3 slabs would need to be repaired on one occasion only and that, once repaired, the slabs would remain intact for the life of the building. The significance of the challenge is that his Honour's award of damages allowed for the cost of only one set of repairs to the cracks in each of the slabs. If the challenge to the finding succeeds and this Court finds (as the appellants urged) that each slab would require repairs every ten years or so, the assessment of damages under this head will have been shown to be erroneous. The award of damages under this head ($52,600.00 for repaired cracks in the level 3 slab and $17,383.00 for repair of cracks in the Level 2 slab) would then have to be increased to allow for the cost of additional repairs to each of the slabs during the life of the building. The appellants said that the amount that should be awarded in respect of future repairs of cracks in the level 3 slab is $118,086.00, while the amount that should be awarded for the level 2 slab is $29,025.00. 112 The appellants accepted that the primary Judge based his finding on the evidence of Mr Smee. In his report of 10 October 2006, Mr Smee expressed the view that an item in a schedule of claims covering repairs to cracks in the slab should be allowed only once: "Even … if the whole membrane is replaced, properly repaired cracks will not require a repeat repair after 7 to 10 years, particularly where they are protected from sun, weather and wear by a membrane and asphalt." 113 The appellants also appeared to accept that the primary Judge's finding should be set aside only if it can be regarded as "glaringly improbable" or "contrary to compelling inferences": Fox v Percy [2003] HCA 22; 214 CLR 118 at [28]-[29] (128) per Gleeson CJ, Gummow and Kirby JJ. It is not clear why the appellants accepted this burden. The impugned finding was not based on an assessment of the credit of Mr Smee or any other witness. Nor did it rest on an evaluation of Mr Smee's demeanour in the witness box. 114 The parties did not debate the proper approach to a challenge to a finding of fact by an appellate court determining an appeal by way of rehearing: see Costa v The Public Trustee of NSW [2008] NSWCA 223 at [14]-[19] per Hodgson JA; [31]-[51] per Ipp JA; [58]-[97] per Basten JA; Skinner v Frappell [2008] NSWCA 296 at [4]-[17] per Basten JA. The finding of fact made by the primary Judge as to the likely life of the membrane depended upon evidence which was not challenged on the basis of credit or reliability, but which requires some interpretation. Assuming that the challenge to the factual finding cannot succeed unless error on the part of the primary Judge is established (see Costa at [16] per Hodgson JA; cf Basten JA at [86], [90], [95], [97]), it is not necessary for the appellant to show that there was no evidence to support the primary Judge's finding. It is enough on an issue such as the expected life of the membrane, for the appellate court to be satisfied, after paying due deference to the reasoning of the primary Judge and to the advantages enjoyed by him in interpreting the evidence of Mr Smee, that his Honour should have reached a different conclusion on the evidence before him. As the High Court made clear in Fox v Percy, an appellate court must conduct a "real review of the trial", within the constraints marked out by the appellate process: at [25] per Gleeson CJ, Gummow and Kirby JJ. The constraints include the "natural limitations" that exist where an appellate court proceeds wholly or substantially on the record: at [23]. However, in a case such as the present, if the appellate court is satisfied that the trial Judge should have reached a different conclusion on the evidence, it must correct the finding. 115 The appellants submitted that the primary Judge had failed to give due weight to certain matters: · Mr Smee conceded his lack of expertise in relation to the questions of the frequency of repairs to the Level 3 slab; · Mr Smee accepted that the method of repairing cracks should be as suggested by Caps Beta Pty Ltd and that company was only prepared to provide a warranty for ten years; · a conclave of experts attended by the appellants' expert, Mr Bersten, and an expert nominated by the respondents (not Mr Smee) had accepted that the cracks would require regular repairs over time; · Mr Smee's report on this issue was served belatedly on 27 October 2006, after the conclave of experts was held and well into the trial; and · the respondents did not put to Mr Bersten that the cracks to level 3 only had to be repaired on a single occasion. 116 Contrary to the appellants' submissions, Mr Smee gave oral evidence in November 2005 about the likely life of repairs to the cracks in the concrete slabs well before he prepared his written report on this particular issue. His oral evidence was to the same effect as the opinion he later expressed in his written report. Moreover, in his oral evidence Mr Smee supported his opinion by citing data suggesting that the rate of differential shrinkage (which is the principal cause of cracking of a concrete slab) decreases dramatically within a period of two years or so from the laying of the slab. He also expressed the opinion that cracking would be inhibited by the application of a membrane and a topping, as recommended by the experts. Mr Smee's evidence, to which he adhered in cross-examination, provided ample support for his Honour's finding. 117 Mr Smee did not acknowledge in his evidence that he lacked expertise in this area. The passage relied on by the appellants to establish lack of expertise merely show that Mr Smee did not claim "intimate knowledge" of particular membranes and topping sheets. 118 Nor is it correct to say, as the appellants did, that the expected life of repairs to cracks in a slab, carried out in a particular way, must coincide with the warranty period given by the contractor who is likely to carry out the repair work. There are many reasons why a contractor may not be prepared to offer a warranty covering the full expected life of a product or procedure. The evidence did not explore the basis on which the contractor offered only a ten year warranty. 119 The other matters relied on by the appellants do not establish error on his Honour's part. He was not bound by the results of the conclave in which, in any event, Mr Smee did not take part. Mr Bersten participated in the conclave to which I have referred, but he does not appear to have given direct evidence that cracks in the slabs would need to be repaired regularly over the life of the building. The absence of any cross-examination of Mr Bersten on this point did not make it erroneous for the primary Judge to accept Mr Smee's evidence: cf State Rail Authority of New South Wales v Brown [2006] NSWCA 220 at [9] per Giles JA (with whom Santow JA agreed). DIMINUTION IN VALUE 120 The appellants submitted that his Honour erred in not accepting the evidence of Mr Rennie, a registered valuer, that the value of the building, following completion of the rectification works, would be $200,000 less than a building which had never had the defects in the first place. Mr Glissan pointed out that Mr Rennie's evidence had been admitted without objection and that he had not been cross-examined. Mr Glissan contended that in these circumstances it was not open to his Honour to reject Mr Rennie's opinion. 121 Mr Rennie expressed the opinion in a supplementary report prepared on 23 July 2004, that the value of the building "without cracks and faults was $3.65 million", while the value of the building "assuming the satisfactory completion of the necessary repairs of the cracks and faults" was $3.45 million. As his Honour noted, the only apparent reasoning process in Mr Rennie's report that supports the differential valuations was the following paragraph in his report: "Assuming a fully leased position or a sale and leaseback and considering both valuation bases above which confirm value levels ranging from $3.2m up to $3.8m plus with the advantages of the roof top carpark I adopt the high range say $3,650,000 i.e. without cracks and faults. Alternatively assuming satisfactory repair or on a vacant possession basis the high yield range is applicable plus some incentives, fees and rental loss over say a 3 to 6 letting up period must be allowed. On this basis an approximate value of $3,450,000 is supported." 122 This paragraph merely reformulates the assertion recorded elsewhere in the report that a satisfactorily repaired building would be worth less than a building that had never been in need of repairs. As the primary Judge observed, Mr Rennie did not support his valuation by reference to examples of repaired buildings that had suffered a diminution in value notwithstanding that the repairs had been satisfactorily carried out. Nor did he explain why potential buyers of the premises would be likely to pay less because the particular building had defects, notwithstanding that the defects had been satisfactorily repaired. Indeed, the report did not suggest that in Mr Rennie's experience potential buyers of a commercial building of this kind would be concerned with any issue relating to defects in a building other than the obvious question of whether they had been satisfactorily repaired. 123 It is difficult to see how Mr Rennie's opinion on this point was admissible, had objection been taken. His report disclosed no reasoning process supporting his opinion and thus did not demonstrate that the opinion was the product of Mr Rennie's "specialised knowledge based on [his] training, study or experience": Evidence Act 1995 (NSW) s 79; HG v The Queen [1999] HCA 2; 197 CLR 414 at [39]-[44] per Gleeson CJ. 124 Once Mr Rennie's report was admitted into evidence, his Honour was not bound to accept the opinion expressed in it, if that opinion was not supported by any reasoning process or by other evidence lending weight to it. In my opinion, it was open to his Honour to conclude, as he did, that Mr Rennie's opinion was of no probative value on the issue and that the appellants had not discharged the onus resting on them. 125 The appellants' submission that his Honour erred in not accepting Mr Rennie's opinion fails. NOTICE OF CONTENTION 126 The respondents' notice of contention challenged the decision of the primary Judge to admit into evidence a number of affidavits relating to the conversation that occurred on 25 November 1998. The notice of contention has significance for the appeal only if the appellants succeed in their first argument, relating to a construction of the contract entered into in early November 1998. 127 Since the appellants have not succeeded on that argument, there is no need to consider the notice of contention. COSTS 128 The respondents' summons for leave to appeal with respect to costs challenges his Honour's costs orders on the basis that he should have held that the appellants' failure to accept the Calderbank offer to settle the claim for $1,000,000 plus costs was unreasonable. 129 Mr Fagan made it clear that the application for leave to appeal against the costs orders would only be maintained if the grounds relied on by the appellants failed. Since the appellants have succeeded in one of their challenges it appears to be unnecessary to consider the question of costs. If this is incorrect, for example because the adjustment to damages awarded by the primary Judge ($912,245.00) will not bring the award above $1,000,000 and the respondents wish to pursue their challenge to the costs orders, the Court should be notified so that it can then resolve any outstanding costs issues. CONCLUSION 130 The only grounds of appeal that have been upheld are those relating to the life of a properly applied membrane and topping slab. That will require the award of damages to be increased. The Court was told that the parties had agreed on the adjustments that should be made to the award of damages if the appeal was upheld. However, although the Court was supplied with certain figures, it is not clear that they cover the adjustment that is required to give effect to the particular grounds that have been upheld. Accordingly, the appropriate course is to give the parties an opportunity to agree on short minutes of order giving effect to the judgment. 131 I propose the following orders:

The parties file agreed short minutes of order within 14 days giving effect to the judgment herein and dealing with the costs of the appeal and of the trial.

In the absence of agreement, the appellants serve and file short minutes of order within 14 days (including orders relating to the costs of the appeal and the costs of the trial), together with a brief outline of submissions supporting the proposed orders.

If the appellants serve and file draft short minutes of order in accordance with Order 3, the respondents, within a further seven days, file and serve short minutes of order (including orders relating to the costs of the appeal and the costs of the trial), together with a brief outline of submissions supporting the proposed orders.

If the respondents wish to proceed with the summons for leave to appeal against the costs orders made by the primary Judge, the outline of submissions referred to in Order 4 should notify the Court of that intention. **********

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