Scott Carver Pty. Ltd. v. SAS Trustee Corporation (formerly State Authorities Superannuation Board) & Ors., Ace Ceramics Pty. Ltd. v. SAS Trustee Corporation (formerly State Authorities Superannuation Board), Rightway Roofing Pty. Ltd. v. SAS Trustee Corporation (formerly State Authorities Superannuation Board) & Ors. [2005] NSWCA 462 - NSWCA 2005 case summary

Scott Carver Pty. Ltd. v. SAS Trustee Corporation (formerly State Authorities Superannuation Board) & Ors., Ace Ceramics Pty. Ltd. v. SAS Trustee Corporation (formerly State Authorities Superannuation Board), Rightway Roofing Pty. Ltd. v. SAS Trustee Corporation (formerly State Authorities Superannuation Board) & Ors. [2005] NSWCA 462 - NSWCA 2005 case summary — Zoe

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Wednesday 21 December 2005 SCOTT CARVER PTY. LIMITED V. SAS TRUSTEE CORPORATION (formerly STATE AUTHORITIES SUPERANNUATION BOARD) & ORS ACE CERAMICS PTY. LIMITED V. SAS TRUSTEE CORPORATION (formerly STATE AUTHORITIES SUPERANNUATION BOARD) RIGHTWAY ROOFING PTY. LIMITED V. SAS TRUSTEE CORPORATION (formerly STATE AUTHORITIES SUPERANNUATION BOARD) & ORS. Judgment 1 HODGSON JA: The judgment appealed from was given in proceedings in which SAS Trustee Corporation (SAS) had sued Scott Carver Pty. Limited (Carver), Nubra Constructions Pty. Limited (Nubra), Rightway Roofing Pty. Limited (Rightway), Ace Ceramics Pty. Limited (Ace) and other parties for damages in connection with a building project undertaken for SAS at Chatswood, and in which a number of cross-claims had been brought. 2 Pursuant to reasons given on 28 November 2003, 12 May 2004 and 4 August 2004, Master Macready adopted in part a Referee's report dated 3 April 2003, and made orders which dealt separately with different claims by SAS, identified as the waterproofing claims, the paving claims, and the pergola steelworks claims. 3 In respect of the waterproofing claims, the Master ordered that judgment be entered for SAS against Carver, Nubra and Rightway for $450,957.50, and against Nubra and Rightway for a further $150,319.17; and found that, of the total sum of $601,276.77, Carver was liable to contribute 15%, Nubra 25.5%, and Rightway 59.5%. 4 In respect of the paving claims, the Master ordered that judgment be entered for SAS against Nubra and Ace in the sum of $85,854.14 ($53,608.00 plus interest of $32,246.14); and found that Nubra was liable to contribute 30% of this and Ace 70%. 5 In respect of the pergola steelworks claim, the Master ordered that judgment be entered for SAS for $104,843.32 against Nubra. 6 The Master otherwise dismissed the claims of SAS and the cross-claims. He made various costs orders, including an order that Nubra and Ace pay 7.5% of SAS's costs of the proceedings. 7 Carver, Ace and Rightway have each appealed from these orders. SAS and Nubra have put on cross-appeals. At the hearing of the appeal, Ace also filed a summons for leave to appeal, because the judgment against it was for less than $100,000.00. In my opinion, it is appropriate to grant that leave.

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CIRCUMSTANCES 8 In 1989, the Zenith Centre, an office development comprising two towers at 821 Pacific Highway, Chatswood, was owned by two companies, SAS (70%) and Pritpro Pty. Limited (30%). A decision was made to join the two towers by means of a glazed pavilion. Carver won the design competition for the work. 9 The project manager, Colin Ging & Partners Pty. Limited (Ging) confirmed Carver's appointment as architects on 19 January 1990, subject to execution of the Architect's Contract. Although this contract was not signed until September 1990, and not delivered by Carver to Ging until 22 March 1991, all terms had been agreed by February 1990 and (according to the Referee's report) the contract was probably on foot at this time. Carver's role in the design phase was to provide schematic design, detailed design and specifications for the contract. Nubra was the construction manager. 10 Site establishment for the construction commenced in July 1990. Carver provided "limited but still significant" services in the construction phase, although after 30 September 1991, Pritpro took over the role of quality control. Practical completion was achieved on about 21 November 1991. The total project expenditure was about $9.9 million. 11 The waterproofing claims were founded on water penetration of the pavilion due to a combination of factors. Carver had specified a membrane to prevent water penetration between glass panels of the pavilion structure and the hob on which they were placed. Part of that membrane had been cut away by mistake before installation of the glass; but the glass contractor, namely O'Brien Glass Industries Limited and O'Brien Glass Holdings Pty. Limited (collectively O'Brien), had gone ahead and installed the glass on the defective membrane. Carver devised remedial measures, but these were not adequately carried out by Rightway under Nubra's supervision. 12 The paving claims were founded on defects in the external paving. Ace was the paving contractor. Its contract was originally to include works associated with a concrete sub-bed; but these works were omitted before the contract was entered into, and they were performed by another contractor. After practical completion, on about 2 September 1992, a Deed of Guarantee was entered into between SAS and Ace, containing inter alia a promise by Ace to rectify defects notified to it during a ten-year period from the date of the deed. 13 On 4 July 1996, Pritpro transferred its 30% interest in the Zenith Centre to SAS, including any rights against any person engaged in the development of the centre. 14 On 13 June 1997, SAS commenced proceedings against Carver, Nubra, Rightway, Ace and other defendants including O'Brien. 15 In October 1998, SAS sold the Zenith Centre to a trust of which Perpetual Trustee Co. Limited was the trustee. This was not an arm's length sale, and SAS held a 50% interest in the trust which acquired the property. It was in fact part of a sale by SAS of six major properties, with a combined value in excess of $1 billion. The purchaser obtained a valuation of the property at $170 million, and this was the sale price. However, the parties agreed to certain deductions from the price, including $2,352,752.00 for rectification of the pavilion. No funds were expended by SAS on rectification before or after the sale, and there was no obligation under the contract of sale for SAS to undertake any rectification works. 16 SAS's claims were heard by a Referee, Mr. Geoffrey Markham, over thirteen days in April and May 2002. The claim against O'Brien was settled during the hearing, and Carver was a party to the agreement by which that claim was settled. 17 The Referee's report was filed on 3 April 2003. 18 In relation to the waterproofing claims, the Referee found Nubra and Rightway each liable for $375,442.00; and he would have found Carver also liable in respect of these claims but for a limitation clause in the Architect's Contract, which the Referee found protected Carver from these proceedings. However, the Referee also found that the terms of settlement with O'Brien meant that Carver would have been entitled to a 25% reduction in its liability in respect of the waterproofing claim. The Referee made findings as to the proportions which each should contribute: 70% and 30% as between Rightway and Nubra and, if Carver was also liable, Carver's proportion to be 20% less 25% due to the O'Brien settlement. 19 In relation to the paving claims, the Referee found there were defective works performed by Ace totalling $53,608.00, for which Nubra was also liable; but he found SAS was estopped from pursing its claims against Ace by reason of the Deed of Guarantee, because it did not give any notice requiring Ace to rectify the defects. The Referee found the appropriate proportions which Nubra and Ace should contribute if Ace were liable, to be 30% Nubra and 70% Ace. 20 The Referee dealt with a general submission that SAS should recover no damages, because it had not performed any rectification, because the defects did not result in any diminution in value of the property, and because SAS had sold the property. 21 He noted that the sale price was based on an October 1998 valuation prepared for the purchaser by JLW Advisory Services Pty. Limited (JLW). He went on to make the following comments and findings: 413. In preparing the valuation, JLW was not apprised of the defects in and around the pavilion, which I found to be surprising. It was, however, invited to inspect a schedule of proposed capital expenditure. The valuation report included the statements: "The property is presently in a good state of repair, having regard to its present age and its utilisation as a multi-tenanted commercial office complex.

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Submissions 32 Mr. Donaldson SC for Carver submitted that the fundamental principle in relation to the award of damages for breach of contract was that the plaintiff should be awarded such sum as would put it in the same position as if the contract had been performed (Amann at 116), and that other sub-rules were to be disregarded if they would produce disconformity with this principle (Rentokil Pty. Limited v. Channon (1990) 19 NSWLR 417 at 432). Although Bellgrove showed that quantification of damages for breach of contract for building work was the cost of rectification, that was subject to the requirement that rectification must be a reasonable course to adopt; and although the High Court there stated that it was immaterial that the plaintiff in that case may or may not do the rectification works, it did not say that it would have been immaterial if it had been actually found that the plaintiff would not have done them, or if the property had been sold. The same comment applied to the application of Bellgrove in Brewarrina Shire Council v. Beckhaus Civil Pty. Limited [2005] NSWCA 248 at [169]-[176] (and [1] and [230]). 33 Mr. Donaldson relied on statements in Central Coast Leagues Limited v. Gosford City Council (Giles CJ CommD, 9/6/98) at 215-7 and Hyder Consulting (Australia) Pty. Limited v. Wilh Wilhelmsen Agency Pty. Limited [2001] NSWCA 313 at [99] per Giles JA (and at [25] per Sheller JA) to the effect that, if it is found that the rectification work will not be carried out, the cost of the rectification work should not be included in the damages. 34 Mr. Donaldson submitted that Harris and De Cesare did not decide otherwise, although in both cases the cost of rectification was treated as the measure of damages, despite sale of the property with defects still unrectified. In Harris, the owner had subsequently rectified the defective work out of a moral not legal obligation; and in De Cesare, although no rectification had been undertaken before or after sale, and although there was no evidence of the effect of the defective work on the price for which the property had been sold, the Court inferred that the defect had depressed the value and therefore presumably the price of the property. In the present case, it was established that the defects did not affect the value of the property, so to give SAS damages after sale would give it a windfall. 35 Mr. Neil for Nubra submitted that SAS's decision to sell for an under-value, by agreeing to reduce the price, was the cause of any loss it suffered. Where this was done, as found by the Referee, in order to preserve the value of SAS's cause of action, it could not improve its position on damages. Mr. Neil also referred to Chocolate Factory Apartments Limited v. Westpoint Finance Pty. Limited [2005] NSWSC 784. 36 Mr. Kerr for Rightway submitted that the valuation report showed that there was nothing in relation to the pavilion that caused concern to the valuers, and nothing had in fact been done to rectify the defects over many years. The sale itself had been for commercial advantage, and involved no loss to SAS. 37 These submissions were supported by Mr. Gracie for Ace.

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Decision 38 I accept that Bellgrove does not require that damages for breach of contract by reason of defective building work must in all cases include the cost of rectification, so long as rectification would be a reasonable course to adopt. If by reason of subsequent events, the owner has suffered a different loss or no loss, then the underlying principle expressed by Deane J in Amann at 116 does mean that the damages must be measured by the loss actually suffered. 39 In Central Coast Leagues Club, orders made by the Land & Environment Court required more extensive work on the property than rectification of the defective work; and Giles CJ CommD held to the effect that the club's damages should not include the cost of work that would not be done because of the need to comply with the court orders. In Hyder, the owner had not carried out rectification in accordance with tenders it had obtained, but instead undertook a redevelopment of the premises in a way that meant the actual cost of rectification was less than the amount of tender; and Giles JA (Sheller JA agreeing) held that the actual cost of the rectification was the correct measure. 40 In my opinion, both results are correct; but in the course of his judgment in the latter case, Giles JA said at [99] that in Central Coast Leagues Club he had "held that, if it is found that rectification work will never be carried out, no damages should be awarded". I have some reservations about that proposition, if it is taken unqualified and out of context. 41 In De Cesare, property had been sold with defective work unrectified, and the owner did not intend to carry out rectification work; and it was not established by evidence that the price obtained was less than would have been obtained if the building work had been completed in accordance with the contract. Doyle CJ in the Full Court of the South Australian Supreme Court noted at 32 that the sale of the property did not suggest that it would be unreasonable to carry out the work, and that there was no reason to think that the defective work had no effect on the value of the property. Damages were awarded on the basis of the cost of rectification work, even though it was clear that the rectification work would not be carried out by plaintiff. 42 In my opinion, that case is to be explained on the basis that the circumstances were not sufficient to displace the cost of rectification as the measure of damages. It was found reasonable to undertake the rectification work, and it was appropriate to infer that the defects depreciated the value of the property; and there was nothing to suggest that the price obtained on sale was not affected by that depreciated value. Accordingly, the result is consistent with Amann, while not being consistent with the unqualified application of the proposition stated by Giles JA in Hyder. 43 It is also to be remembered that valuation is not an exact science, and indeed, the very notion of what a willing but not over-anxious purchaser would pay and a willing but not over-anxious seller would accept is a hypothetical construct and not a simple matter of fact. In those circumstances, the costs of rectification which it would be reasonable to undertake can often be a more reliable indication of the effect of defects on the value and sale price of a property, than evidence from valuers based on comparative sales or income stream, or even evidence as to negotiations at the time of an actual sale. In the present case, the Referee found that the defects did affect the value and utility of the works, as well as finding that it would be reasonable to rectify the defects, albeit that he also found, on the basis of valuation evidence based on income stream, that the defects did not affect the value of the property. 44 Another respect in which I would have reservations concerning the proposition stated by Giles JA is that it could be taken to suggest it can be a fact in issue in every case, where rectification work has not been carried out, whether rectification work will or will not be carried out in the future; whereas in my opinion generally that question would be one as to a future fact, which according to Malec v. J.C. Hutton Pty. Limited (1990) 169 CLR 638 should generally not be decided in an all or nothing manner on the balance of probabilities. Bellgrove establishes that damages can be recovered on the basis of cost of rectification where the owner may or may not carry out the rectification, so long as it would be reasonable to do so; and in my opinion that result will be displaced only if there are supervening circumstances that show with substantial certainty that this will not happen, as occurred in Central Coast Leagues Club and Hyder. 45 In the present case, what is said to displace the Bellgrove measure is the finding that the value of the property was not affected by the defects, coupled with the sale of the property. 46 The finding as to value was not challenged before the Master or before us, and must be accepted by this Court; although I must say that, having regard to the considerations set out above, I would not myself have reached such a conclusion on evidence of value based on income stream, particularly where the valuation evidence did not even address the question whether the defects made a difference to the value of the property. However, a finding that defects do not affect the value of the property does not of itself displace the Bellgrove measure: the example is sometimes given of the building of a folly on a property which does not increase the value of the property, but in respect of which the owner is entitled to have the contract performed and may recover the cost of rectifying defects, so long as it would be reasonable to expend that cost in having the defects rectified. A finding that defects do not affect the value of the property may go towards supporting a finding that it would be unreasonable to rectify the defects, but in the present case the Referee found that it would be reasonable to rectify the defects. 47 The sale of the property of itself does not displace the Bellgrove measure, as illustrated by De Cesare and Harris. If it were shown that the price received on a sale was unaffected by the defects, or that it was reduced by an amount less than the cost of rectification, this could displace the Bellgrove measure. But this was not shown in this case. On the contrary, the price was reduced by an amount in excess of the cost of rectification, by reason of the defects. The Referee found that this was done, in a sale not at arm's length, to preserve the value of the cause of action; but while I accept that such a consensual reduction could not give rise to damages claimable by SAS, I see no reason why it cannot prevent the sale from displacing the Bellgrove measure of damages. 48 For those reasons, in my opinion the Referee and the Master were correct to award damages on the basis of the cost of rectification.

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Decision 55 In my opinion, Item No.8 is to be construed as setting an outer limit to the period of liability, whether or not one has regard to its heading; and in my opinion, in any event, cl.8.5 does not prevent use of the heading for guidance if construction is doubtful. I agree with the Master that the selection of six years suggests that the parties did not intend to abridge the limitation period of liability for contract, but rather to remove indeterminacy concerning the period of liability for tort, for example in the case of pure economic loss. 56 There is force in the contention that an intention is disclosed that insurance be on foot for the same period as liability continues, and that the parties intended that the period of cover commence at about the time services commence; although the latter element could be considered doubtful because of the requirement that the terms of the insurance be agreed or as reasonably required by the client. In any event, the period of six years is correctly regarded as setting an end point to the duration of the policy, not as specifying the whole period during which the policy is to be in force. 57 There is some question whether the six years is to run from the conclusion of the services, as found by the Master, or from each breach of contract, so as to coincide precisely with the statutory limitation periods for contracts. It is not necessary to decide between those two alternatives, because in either case the limitation would not avail Carver. 58 In coming to this view, I do not rely on contra proferentem. In any event, I think contra proferentem is not necessarily applied against the party relying on the clause, but rather it is applied against the party (if any) who procured insertion of the clause in the contract. In a case concerning the effect of a standard clause in an insurance policy extending liability to some circumstance additional to the basic cover, in my opinion contra proferentem would apply, if at all, against the insurance company, even though it is the insured seeking to rely on the clause. In the present case, there is no evidence as to who procured the insertion of cl.4.1 to 4.4 into this contract. 59 So in my opinion, Carver fails on the limitation point.

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O'BRIEN SETTLEMENT 60 SAS challenges the Master's decision that Carver's liability should be reduced by 25%, because O'Brien was responsible to that extent for the damage the subject of the waterproofing claims. 61 The Master set out the factual basis for this issue as follows: 51 Relevant factual findings by the referee were adequately summarised by the plaintiff in submissions in the following manner: (a) The majority of the perimeter of the pavilion was constructed with a raised concrete hob which was above the external paving level (paragraph 56 of the Report); (b) Nubra experienced some difficulty in constructing the concrete hobs to the correct level (paragraph 63 of the Report); (c) Construction drawings prepared by Scott Carver provided for 2 layers of membrane to be laid over the hob. A sill glazing channel to support the glazing was then to be installed above the membrane layers (paragraph 63 of the Report); (d) Although two layers of membrane were laid by Rightway over the hob, prior to the installation of the sill glazing channel, the membrane was cut away and the sill glazing channel was installed directly on top of the concrete hob (paragraph 63 of the Report); (e) The sill glazing channel was installed by O'Brien. By laying the sill glazing channel directly on top of the concrete hob and by omitting the stainless steel flashing angle required by the construction drawings, O'Brien failed to follow the requirements of the drawings in breach of its contract with SAS (paragraphs 63 and 64 of the Report); (f) Because the sill glazing channel was installed out of sequence, to provide waterproofing to the Pavilion, following a meeting attended by a Rightway representative, a Sealex representative and a Nubra representative, a proposal for waterproofing the hob was developed by Rightway (in consultation with Sealex). The proposal was reviewed by Scott Carver who approved it in principle by sending a facsimile (incorporating a sketch) to that effect to Nubra (paragraph 65 of the Report); (g) The revised hob design approved by Scott Carver by way of facsimile was inadequate (paragraph 74(c) of the Report); (h) Nubra issued Rightway with a site instruction and sketch instructing Rightway to carry out the waterproofing in accordance with the revised hob design (thus varying the original design) (paragraph 67 of the Report); (i) Not only was the revised hob design inadequate, in its instruction to Rightway, Nubra specified too light an angle for the membrane pressure seal (paragraph 74(d) of the Report); (j) Rightway compounded matters by constructing the membrane pressure seal using too widely spaced and inappropriate pop rivet fixings instead of screw fixings (paragraph 74(e) of the Report). 62 He noted SAS's contention that O'Brien's breach was not an operative cause of SAS's loss, because the subsequent conduct of Carver, Nubra and Rightway negatived any causal connection between's O'Brien's breach and that loss. He referred to a number of cases, including Medlin v. State Government Insurance Commission (1995) 182 CLR 1; and he continued: 60 In this case, of course, the question is whether the subsequent negligence of the architects and the others involved was the very kind of thing which was likely to happen when a contractor charged with installing external windows in a building which obviously would have to be water proof, did so negligently. O'Brien created a situation which would cause there to be a breakdown in the waterproofing. That may or may not be able to be rectified by some other contractors but it clearly opened the way for there to be an ultimate problem if it was not able to be fixed or if it was sought to be fixed improperly.

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(b) Stone Flooring: · Ace Ceramics injected incorrect adhesive to the stone flooring following construction which caused the discolouration of the stone flooring. · Ace Ceramics laid tile stone cladding panels in such a manner that they were unable to move, leading to an unacceptable appearance. · Ace Ceramics failed to lay the stone cladding panels in such a way as to allow for sufficient movement capacity at the junction between the paving and the cladding. · Ace Ceramics selected an inappropriate proprietary joint in the stone paving. · Ace Ceramics installed proprietary joints for tile stone paving with insufficient capacity for building movements. · Ace Ceramics incorrectly installed tile proprietary joints in the stone paving. 70 By an amendment filed on 24 November 1998, SAS amended its claim against Ace so as to rely in addition on breaches of the Deed of Guarantee of 2 September 1992, and it gave different particulars of the breaches, as follows: Particulars The Paving and Concrete Works undertaken by Ace did not accord with the Specification in the following respects: (a) steel reinforcing mesh was not installed in the sub-beds and mortar beds in accordance with the Specification (see: section 6, parts 2.04(2) and 3.07); and/or (b) proprietary latex additives were not used in the sand-cement sub-bedding, mortar bedding and slurry coats in accordance with the Specification (see: section 6, parts 2.04(i) to (iv) inclusive); and/or (c) plastic slip sheets were not laid over the waterproof membrane in accordance with the Specification (see: section 6, parts 2.04(1) and 3.06); and/or (d) cement mortar was not used to bed the stone paving to the concrete hob at the perimeter of the pavilion in accordance with the Specification (see: section 15, part 2.05(3); detail 2 of drawing GD 73); and/or (e) the movement joints did not incorporate: (i) epoxy resin seals of the specified depth (see: Specification section 6, parts 2.06(ii), 2.07 (1) (i) & (ii); details 4 to 8 and 10 to 12 inclusive of drawing GD 30; details 9 to 12 inclusive of drawing GD 31); and/or (ii) foam backing rods of the specified diameter (see: Specification section 6, parts 2.06(ii), 207(1)(i) & (ii); details 4 to 8 and 10 to 12 inclusive of drawing GD 30; details 9 to 12 inclusive of drawing GD 31). 71 On 30 October 2000, solicitors for Ace wrote to the solicitors for SAS making a Calderbank offer to settle SAS's claim for $30,000.00 plus costs. The letter made the following points: Plaintiff's Pleadings and Evidence 1. There has been an extremely long period of time available to the plaintiff and its legal representatives in which to assess the merits of the present litigation. This has now allowed for an amendment of its original claim and the benefit of expert assessments and preparation of expert reports. Not only have many years passed since the defects allegedly first occurred (allegedly, we understand, some time in June 1993 - which we do not admit, other than for present purposes) but many years have also elapsed since the proceedings were originally commenced and the Statement of Claim amended (the latter on 23 November 1998).

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Our client's expert maintains that any identified problems in workmanship associated with sealant application and backing rod extrusions are no more than general maintenance items which could reasonably be expected after the 10 year period which has expired since its completion of those works. 72 SAS made a further amendment to its Statement of Claim on 15 March 2002, relevantly by adding further particulars of breach, as follows: 3. The Paving and Concrete Works undertaken by Ace were not done in a workmanlike manner. In particular: (a) expansion joints were sealed incorrectly and joint seals were poorly installed. (b) backing rods were poorly installed. (c) bounding angles overran and projected into intersecting joints. 73 The Referee made the following findings in relation to defects in the paving installation: 219. After the main technical evidence on the paving, I made the following preliminary statement: "Many of the external paving joints are less than optimal in width and in some areas the installation has been quite defective. I think in an overall sense it can be said that the original construction contained a significant number of defects. Some of the sealant failure, which is not as widespread as one would perhaps anticipate, is probably due to the lack of strain capacity in the specified sealant in relation to the joint width and the spacing of joints." My comment relating to sealant strain capacity has been qualified above in Paragraph 216. I can now confirm the above view for the reasons set out below in Table 1. In the main, Table 1 is derived from the Experts' "Joint Report on Paving Issues". Table 1 - Defects in Paving Installation Ref Description Evidence Referee's Comment/Finding The effect of the Experts' evidence was that generally the sealant was not applied so thinly that the backing rods were visible through the seals. (d) Sealant too thin Messrs Mursa and Poiner reported only isolated instances, whereas Mr Hartog claimed that about 10% of the joints had splits during his earlier pavement inspections which, from his photographs, were in 1998 and 1999, but they had now been covered over by repairs. This installation defect is established but only in isolated instances. Only a quite limited amount of sealant repair was obvious during the view, and there was no evidence indicating when this was done. (e) Excessive bubbles in sealant The Experts agreed that excessive air bubbles did occur in the sealant but that it was not widespread. This installation defect is established, however, it is not widespread. Where joint sealant failure has resulted from this defect, rectification of the sealant is necessary. (f) Backing rods of diameter less than the joint width The Experts agreed that this defect did occur in some joints, but not generally. This installation defect is established on some joints, however, it does not generally occur. Rectification is necessary. Mr Hartog was the only Expert to observe this defect which he said occurred in some instances where there was excessive sealant depth. He stated that the extent of this defect is unknown. Whilst this non-conformance is established, it seems likely that this occurrence has not caused failure of the sealed joint after about 10 years of services. (g) Omission of backing rods Mr Simpson's 29 January 1992 inspection recorded an instance of the omission of a backing rod. Rectification is not necessary. There was no evidence of joint failure where Mr Hartog observed this defect. Mr. Hartog's photographs illustrate sealant profiles which do not conform to the specified square cross-section. This installation defect is established where it occurs. (h) Irregularity of joint profile Messrs. Poiner and Mursa agreed that there was irregularity in width. Where joint sealant failure has resulted from this defect, rectification of the sealant is necessary. Mr. Poiner was not satisfied that the irregularity made the joints inadequate for their purposes. The effect of the Experts' evidence was that there was some irregularity in width. This installation defect is established in some loactions. (i) Irregular and excessively narrow joint widths Some excessively narrow joints were noted by Mr Mursa and observed at the view. Where joint sealant failure has resulted from this defect, rectification of the sealant is necessary. There was no persuasive evidence that excessively narrow joints were having a deleterious effect on the paving or surrounds. (j) Continuity of aluminium angles across intersecting joints The Experts all agreed that this defect occurs intermittently in the paving. This installation defect is established and it occurs intermittently. Rectification is necessary. (k) Discontinuity of aluminium angles at inappropriate locations The Experts all agreed that this defect occurs intermittently in the paving. This installation defect is established and it occurs intermittently. The defect has the potential to lock-up intersecting joints. Rectification is necessary. By a letter dated 21 October 1991, Ciba-Geigy informed its distributor Meury that problems with a sample supplied from the site indicated that the missing of the resin and hardener was insufficient. (l) Inadequate mixing of sealant There was no direct evidence indicating whether or not the joints from which the samples were taken was subsequently rectified. There is insufficient evidence to make a finding on this claim and, therefore, it must fail. Joint resealing was carried out early in 1992 and these joints may have been rectified at that time or earlier.

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CLAIM BY SAS FOR INDEMNITY COSTS 85 On 25 October 2000, the solicitors for SAS sent to the solicitors for Carver, for Nubra and for Rightway two documents. The first was an offer of compromise, in the following terms: To: The First Defendant, the Second Defendant and the Fourth Defendant. TAKE NOTICE that pursuant to Part 22 Division 1 of the Supreme Court Rules, the Plaintiff offers to compromise part of its claim in the proceedings namely in respect of the Membrane Works at the Zenith Centre (but, for the avoidance of doubt, not its claims in respect of the Glazing, Paving and Concrete Works and the External Steelwork at the Zenith Centre), as pleaded and particularised in: a) paragraphs 17 (particulars 10, 14, 15, 16, 17(iii), (iv) and 19) and 18(b) and (c); b) paragraphs 22 (particulars (a), (b), (c), (d), (e), (g) and (o) (in relation to the Membrane Works)) and 23; and c) paragraphs 24, 25, 26, 27, 28 and 29, of the Amended Statement of Claim on the following basis: 1. The Plaintiff is to be paid the amount of $300,000 within 14 days of acceptance of this Offer of Compromise. 2. The Plaintiffs costs of this action in respect of the Membrane Works at the Zenith Centre to the date of acceptance of this Offer of Compromise are to be paid to it on a party and party basis in such amount as is either agreed or assessed pursuant to Part 11 of the Legal Profession Act 1987 (NSW). 3. Acceptance of this Offer of Compromise does not affect the Plaintiffs other claims in the proceedings (particularly, its claims in the proceedings in respect of the Membrane Works, the Paving and Concrete Works and the External Steelwork at the Zenith Centre). 4. This offer is open for acceptance for 28 days after service of this Offer of Compromise. 86 The second was a Calderbank letter in the following terms: SAS Trustee Corporation v. Scott Carver Pty. Ltd. & Ors. - Proceedings No.55052 of 1998 You have received from us an Offer of Compromise dated 25 October 2000 in respect of the Membrane Works at the Zenith Centre.

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Decision 91 This case raises the question of how rules concerning offers of compromise apply where an offer is made by a plaintiff to a number of defendants who may all be liable to the plaintiff, but who are independent and at arm's length from each other. I note that Part 22 rule 9 of the Supreme Court rules provides as follows: 22.9 Multiple defendants (9) Where two or more defendants are alleged to be jointly or jointly and severally liable to the plaintiff in respect of a debt or damages and rights of contribution or indemnity appear to exist between the defendants, Part 52A rule 22 shall not apply to an offer unless - (a) in the case of an offer made by the plaintiff - the offer is made to all defendants, and is an offer to compromise the claim against all of them; (b) in the case of an offer made to the plaintiff - (i) the offer is to compromise the claim against all defendants; and (ii) where the offer is made by two or more defendants - by the terms of the offer the defendants who made the offer are jointly or jointly and severally liable to the plaintiff for the whole amount of the offer. 92 This indicates that the rules concerning offers of compromise do apply in such cases, and that it is not incumbent on a plaintiff to include in its offer any basis on which contribution issues between such defendants might be resolved. But it also suggests that issues concerning contribution as between defendants make it inappropriate for separate offers to be made to individual defendants, and that an offer to a number of defendants in such cases should be such as to contemplate acceptance by all defendants rather than by one and not others. 93 The application of the rules concerning offers of compromise could produce hardship on a defendant who did not accept a reasonable offer from a plaintiff because other defendants unreasonably refused to join in acceptance, or else required unreasonable terms as to contribution as a condition of joining in acceptance. However, it would be open to a defendant in that position to lead evidence of those difficulties when the question of costs arises, and an application is made for an order for indemnity costs against it. 94 Turning to the offer of compromise, in my opinion the question of whether it was sufficiently clear to base an order for indemnity costs is a matter of degree which the Master has resolved in a way not calling for appellate intervention. That is, in my opinion reasonable minds may differ on whether or not the error is sufficiently plain that a reasonable recipient of the letter would correct the error and treat the letter as expressing an offer as so corrected. 95 As regards the Calderbank letter, I have found that Carver is entitled to the benefit of a 25% reduction in the amount it is liable to pay to SAS by reason of the O'Brien settlement; and even if the correct application of the terms of that settlement left SAS with a judgment which was nominally for an unreduced amount, subject to a contractual obligation not to enforce it to the full, the question of the result of the case is to be determined as a matter of substance. Accordingly, SAS is not entitled to indemnity costs against Carver. 96 Where SAS has not achieved a better result against Carver, in my opinion it cannot rely on an offer made to all three to support an order for indemnity costs against the other two. In my opinion, this follows from the above discussion concerning offers made to multiple defendants, which should be appropriate to be accepted by all defendants, not just some of them.

[99]

Decision 104 Subject to what I say below in relation to Part 52A rule 33(2)(e), in my opinion Ace is not assisted by its Calderbank letter. Plainly some of the costs of SAS and of Ace incurred prior to the date of that letter concern matters on which SAS ultimately succeeded; and even if SAS's success depended on matters introduced by the subsequent amendment, the general rule is that later amendments are taken as relating back to the commencement of the proceedings. Unfortunately for Ace, it never made an offer which exceeded the amount recovered against it, so an order that recognises SAS's costs in respect of matters on which SAS ultimately succeeded, while also reflecting its failure on other matters, would not be inappropriate. 105 Furthermore, although an order which leaves Ace bearing its own costs concerning the 70% of the case that did not concern it, as well as the whole of its own costs of the 30% of the case that did concern it, notwithstanding failure of SAS on most of that case, as well as liable for one-quarter of SAS's costs of that 30%, seems harsh, I cannot say (apart from the effect of Part 52A rule 33(2)(e)) that it involves a discretionary error. 106 However, in my opinion the Master did make an error in applying Part 52A rule 33(2)(e). There was no appellable error in deciding that SAS had sufficient reason for including Ace in proceedings in the Supreme Court; but in my opinion that of itself did not make the rule inapplicable, but merely activated a discretion to award costs in favour of SAS. Since the object of the rule is to encourage litigants to initiate proceedings in the most appropriate court, the basic principle that costs follow the event would generally mean that the discretion would be exercised in favour of an award of costs to a successful plaintiff; but there is still a discretion to be exercised whether or not to award costs notwithstanding the rule. 107 In the present case, there are factors supporting the exercise of this discretion against SAS. It was not shown, in terms of Part 52A rule 33(3), that SAS ever had reasonable grounds for expecting that it would recover in excess of $75,000.00 (disregarding interest from May 1998). For the sake of obtaining an extra sum of about $7,000.00 from Ace, over and above what Nubra was liable for and ultimately paid, and what Ace had offered on 30 October 2000, SAS continued to include Ace in proceedings so as to cause it to incur costs not only in defending the majority of claims brought against it on which SAS failed, but also in being involved in the other 70% of the case which did not concern Ace. In those circumstances, in my opinion to award SAS costs, notwithstanding Part 52A rule 33(2)(e), simply because it was reasonable from SAS's point of view to add this small claim against Ace to its larger claims against the others, may not be a correct exercise of discretion. 108 Accordingly, the Master's failure to recognise the discretion was a material error justifying this Court's re-considering the matter. Substantially for the reasons I have given, I would not order Ace to pay any of SAS's costs.

[100]

CONCLUSION 109 For those reasons, I propose the following orders: 1. Appeal by Carver and cross-appeals by SAS and Nubra dismissed with costs. 2. Appeal by Ace allowed in part. 3. The Master's order that Ace pay 7.5% of SAS's costs of the proceedings set aside, and in lieu thereof no order as to the costs of the proceedings as between SAS and Ace. 4. No order as to the costs of Ace's appeal. 5. Appeal by Rightway dismissed with costs. 110 IPP JA: I have had the benefit of reading the reasons to be published by Hodgson JA and Bryson JA. 111 I agree with the orders proposed by Hodgson JA. Save in respect of the matters set out below I agree with the reasons of Hodgson JA. I agree with the last two paragraphs of the reasons of Bryson JA. 112 In Bellgrove v Eldridge (1954) 90 CLR 613 the High Court (Dixon CJ, Webb and Taylor JJ) was concerned with the proper measure of damage where a builder had substantially departed from the specifications and had constructed an unstable building with defective foundations. The Court said at 617: "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." 113 The Court (also at 618) expressed one qualification to this way of measuring loss in circumstances where a building has been erected otherwise than in accordance with the contract. The qualification was: "… not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt." 114 The builder in Bellgrove v Eldridge argued that, if the proprietor retained her judgment and it were to be satisfied, she might or might not demolish her existing house and re-erect another. The builder pointed out that if the proprietor did not demolish the existing house she would still have a house together with the cost of erecting another one. The Court (at 620) dealt with this argument by saying: "To our mind this circumstances is quite immaterial, and is but one variation of a feature which so often presents itself in the assessment of damages in cases where they must be assessed once and for all." 115 Bellgrove v Eldridge remains binding authority. I would reiterate that the the High Court in that case held: (a) The proprietor's loss is prima facie to be measured by ascertaining the amount required to rectify the defects complained of. (b) Subject to one qualification, the loss is not to be measured by comparing the value of the building that has been erected with a value it would have borne if erected in accordance with the contract. (c) The qualification is that, not only must the rectification work be necessary to produce conformity, but also, it must be a reasonable course to adopt. (d) Whether the proprietor demolishes the building and re-erects another, or does nothing and retains the judgment sum, is immaterial. 116 In Director of War Service Homes v Harris (1968) Qld Reports 275 Gibbs J (with whom the two other members of the Full Court of the Supreme Court of Queensland agreed) said at 278: "When the builder in breach of his contract delivered to the building owner a building that did not conform to the specifications, the owner became entitled to recover damages according to the measure approved in Bellgrove v Eldridge . If the owner subsequently sold the building, or gave it away, to a third person, that would not affect his accrued right against the builder to damages according to the same measure. The fact that the building had been sold might be one of the circumstances that would have to be considered in relation to the question whether it would be reasonable to effect the remedial work, but assuming that it would be reasonable to do the work the owner would still be entitled to recover as damages the cost of remedying the defects or deviations from the contract (assuming of course that the contract price had been paid). In assessing those damages it would not be relevant whether the owner was under a legal liability to remedy the defects, or whether he had a profit or a loss on the sale of the building, for the builder has no concern with the details of any contract that the owner might make with a third party." 117 Gibbs J emphasised that a subsequent sale by the owner of a defective building before remedying the defects is "nothing to do with the builder, whose liability to pay damages has already accrued" (at 279). 118 In my respectful view Gibbs J accurately stated the legal principles applicable. 119 It is true that in Bellgrove v Eldridge the High Court observed that the fact that the building had been sold might be one of the circumstances that would have to be considered in relation to the question whether it would be reasonable to carry out the remedial work. But the High Court said that, if it were reasonable to do the work, it would not be material, in assessing damages to which the proprietor would be entitled, whether the proprietor had made a profit or a loss on the sale of the building. The rationale expressed was, "the builder has no concern with the details of any contract that the owner might make with a third party". 120 In my view, the qualification expressed in Bellgrove v Eldridge at 618 (namely, that the rectification work must be a reasonable course to adopt), is aimed at determining whether the cost of remedying the defect is out of proportion to the achievement of the contractual objective. As Lord Jauncey said in Ruxley Electronics Ltd v Forsyth (1996) AC 344 (at 358): "[I]n taking reasonableness into account in determining the extent of loss, it is reasonableness in relation to the particular contract and not at large." 121 In my view (and with respect to those who have expressed contrary views), the details of any contract that the proprietor might make for the sale of the building defectively constructed is collateral to the issue of the proprietor's loss, or, as it used to be described, res inter alios acta. 122 Were this not to be the rule, the builder in breach of contract would obtain a windfall, depending on coincidence (the proprietor's whim in selling), that would not be deserved. 123 More extreme situations, consistent with Scott Carver's argument that a subsequent sale by the proprietor is relevant to loss, illustrate the possible consequences of such an approach. Assume that a building is constructed otherwise than in accordance with the contract and for that reason is defective. Assume that the proprietor sues the builder for damages based on the cost of rectifying the defect. Assume then, before judgment in the proprietor's case is delivered, the building burns down (through nobody's fault), is totally destroyed, and the proprietor constructs a new but entirely different building on the site. In these circumstances, on Scott Carver's argument (as Mr Donaldson SC rightly accepted), the proprietor would fail (even if - prior to the fire and its decision to re-build - it would have succeeded). In my view, that postulated result would be anomalous and contrary to Bellgrove v Eldridge. 124 The other issue with which I wish to deal is that referred to by Hodgson JA under the heading "Carver Limitation Issue". This issue depends on the construction of the following provisions of Part 4 of the Architect's Agreement: "4.1 professional indemnity insurance The architect shall effect insurance under a professional indemnity policy in the amount specified in item 7 of the schedule upon such terms and conditions, including extensions, exclusions and excesses (if any) as may be agreed between the client and the architect or, failing agreement, as shall be reasonably required by the client and the architect shall provide satisfactory evidence thereof to the project manager within (7) days thereof and thereafter shall provide such certificates of currency as may be requested in writing by the project manager from time to time.

[104]

ITEM NO. 8 PERIOD AFTER WHICH ARCHITECT'S LIABILITY CEASES (Clauses 4.2 and 4.3) 6 YEARS" 125 In my view the periods referred to in cl 4.2 and cl 4.3 (the 6 years referred to in Item 8) commence from the same date. This is to be inferred from the phrase "the period specified in Item 8" in both clauses. The question is: what is that date? 126 Clause 4.1 requires the architect to effect insurance under a "professional indemnity policy" in the terms and conditions "as may be agreed between the client and the architect" or, failing agreement, "as shall be reasonably required by the client". The architect would not be able to effect such a policy until an agreement under clause 4.1 had been arrived at or until the client had reasonably required the architect to effect insurance under such a policy. 127 It must follow, in my view, that the period of six years commences from the date of an agreement under cl 4.1 or from the date on which the client reasonably requires a policy of the kind referred to in cl 4.1 to be obtained. That is because before such date it would not be possible to know the terms of the policy the architect is required to effect. 128 No evidence was led as to the existence of such an agreement or that the "client" reasonably required a particular insurance policy to be effected. For that reason, in my view, the period of six years under Item 8 of the Schedule did not commence to run and Scott Carver is not able to place any reliance on Part 4. 129 BRYSON JA: I agree with the conclusions of Hodgson JA and with his Honour's reasons except that I would state the matter in Paras 31 to 48 in a different way. 130 It is an oversimplification to treat the transaction of October 1998 in which SAS sold the Zenith Centre to Perpetual Trustee Co. Ltd as a sale. It was a rearrangement of trust affairs, not an arms-length sale. The sums involved were huge and the amounts involved in this litigation, while significant sums in everyday terms, would have been so minimal in relation to the transaction overall as to have next to no claim for influence on the price. Other properties as well as Zenith Centre were involved and SAS continued to be interested after the transaction. The transaction was, I would not doubt, carefully based on valuation advice but it was not a test of the market. It is established by a finding which is not challenged and is not open to reconsideration by me that the unrepaired defects in the Zenith Centre did not influence its value. I am constrained to accept that this is so: I find this difficult because valuing principle suggests that hypothetical reasonable sellers and buyers would take repair costs into account in arriving at agreement on price, but I attribute their lack of influence to the scale of the transaction overall and the nature of the valuing process, in which the margin for reasonable differences of opinion is far wider than the repair costs. There were also limits on what the valuers were asked to consider. Accept it I must and I do. There is also a finding, not open to challenge, that it would be reasonable to carry out the repairs. I have no difficulty in understanding this, as the owner of an imperfectly repaired building would, in my understanding, act reasonably if he made good the imperfect repairs even if doing so did not improve the value of his building: it is better to have a building without water coming in than a building with water coming in, even if it is worth the same either way: especially better if someone else has to pay damages to cover the repair costs. 131 In my opinion the transaction spoken of as the sale of the building does not constitute a reason of any kind for concluding that SAS did not suffer a loss. The situation is much the same as if SAS had continued to own the building, left it unrepaired and decided to spend its damages on something else. The situation is quite unlike situations in which a building becomes useless or repairs would achieve nothing because of some supervening change in planning law or some administrative decision. Senior Counsel for Scott Carver contended that SAS would enjoy a windfall if it sold the building at a price unaffected by the need for repairs, received damages and did not carry out repairs. The reference to a windfall was unfortunate: it can readily be applied to the case of a builder whose liability for defective works is said to end when the owner sells the building at a good price. 132 In my opinion the Master disposed of this issue correctly in accordance with the authority of Bellgrove v Eldridge (1954) 90 CLR 613 at 617 and 619, and the argument of Scott Carver was an invitation to depart from that authority which I should not accept. **********

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