Victorian Civil and Administrative Tribunal|2000-12-31

Sensyn Australia Pty Ltd v United Colours on Collins Pty Ltd [2000] VCAT 2643 (31 December 2000)

Retail Tenancies List; Claim for Contribution and Indemnity by Managing Agent Against Air-conditioning Contractor; Wrongs Act 1958 Part IV; Jurisdiction of Tribunal; No Breach of Duty Demonstrated

1. Claim by third respondent against fifth respondent dismissed.

For the 3rd Respondent: Mr G. McArthur of Counsel, instructed by Phillips Fox

For the 5th Respondent: Mr G. Roberts of Counsel instructed by Jerrard & Stuk

1. Sensyn Australia Pty Ltd is the owner of premises at 230 Collins Street, Melbourne, known as "Qantas House". It signed a lease dated 23 January 1998 letting the ground floor and the first floor of those premises to United Colors on Collins Pty Ltd. Since the premises included a shop in a prime retail location in the Central Business District, the rent was substantial, namely $360,000 for the first year; $374,400 for the second year and increasing at 4 percent per annum thereafter.

2. On 27 August 1999 Sensyn filed an application in the Tribunal claiming against United Colors on Collins Pty Ltd and a Mr Champion, who had warranted United Colors' performance with respect to the fit-out, seeking payment of arrears of rent in the sum of $429,341.36 and damages relative to an alleged breach of warranty in connection wit the fit-out of the premises. Sensyn also claimed possession of the premises, mesne profit and other relief.

3. The tenant, United Colors, filed points of defence and counterclaim. By way of counterclaim the tenant claimed damages for breach of the terms of the lease and for misrepresentation, damages for misleading and deceptive conduct contrary to the Fair Trading Act 1985 and finally, the tenant alleged that it had suffered loss and damage by reason of unconscionable conduct by Sensyn. The nub of the tenant's complaint was that the premises were not available for occupation until 22 December 1998, rather than being available in July 1998 as the tenant had desired. This unavailability, according to the tenant, derived from four considerations. In the particulars to Clause 23 of the points of defence and counterclaim they are described as follows:

"1. The timber flooring was found to cover floors of many levels which necessitated the re-design of the floor structure and the carrying out of structural supporting works.

2. It was found that the Telstra cable ran vertically through the demised premises and required re-design of the first respondent's [the tenant's] fit-out.

3. The existing shopfront encroached onto the street area and was required to be brought back to the title boundary.

4. The mechanical ventilation/air-conditioning plant was inoperable and it required replacement."

4. By notice dated 15 November 1999 the tenant particularised the losses it claimed to have suffered. These included fit-out costs of $80,000; temporary fit-out costs of $10,335; freight costs $21,500; additional fares and travelling $5,000; loss of profits on sale in the sum of $393,964 for 1997/98 summer and 1998 winter stock; and an amount to be quantified for 1998/99 summer stock; losses on sales of 1998 winter stock $72,960.70; losses on sales of 1997/98 summer and winter stock from Sydney $69,600. A number of other claims of loss were "to be quantified". In addition to filing a reply to defence and counterclaim, the landlord filed claims against two additional parties, namely Knight Frank (Vic) Pty Ltd and Jones Lange Lasalle (Vic) Pty Ltd.

5. Sensyn said that Knight Frank was retained as managing agent for the premises under an assessment management agreement. The landlord said that under the terms of that agreement Knight Frank was obliged to produce preventive and maintenance schedules and institute programmed works on the services in the premises and to detect "in a timely manner any problem or deficiency in the technical services in and around the demised premises and to inform [Sensyn] of the existence of such a problem and/or deficiency as soon as practicable." According to Sensyn, Knight Frank breached that duty if the landlord were liable to the tenant.

6. Sensyn also noted that it was alleged to be responsible by the tenant for certain representation said to have been made on its behalf by Jones Lange Lasalle (apparently the letting agent). Sensyn said that if it were liable for those representations (which it denied) Jones Lange Lasalle was obliged to indemnify it.

7. The result then was that the landlord sought indemnity from Knight Frank and Jones Lange Lasalle should it be found liable to the tenant.

8. As a result of the claim made upon it by the landlord, Knight Frank (Vic) Pty Ltd obtained an order joining Conte Service Department Pty Ltd as a party to the proceeding. According to the claim made by Knight Frank upon Conte, between June 1995 and 21 April 1997 Conte was the air-conditioning and mechanical services contractor for the premises and was "responsible for and owed a duty to maintain the air-conditioning equipment that serviced the ground and first floors of 230 Collins Street". According to Knight Frank, Conte breached its duty by "decommissioning [the air-conditioning] equipment in March 1996 without making adequate provision for the equipment to be re-commissioned at a later date" and failed "to conduct adequate caretaker maintenance to the air-conditioning equipment whilst it was decommissioned" and failed "to provide adequate water treatment for the air-conditioning equipment leading to corrosion of the chiller pipes". As a result of these matters, Knight Frank sought an indemnity from Conte.

9. There were other interlocutory manouverings which it is unnecessary to narrate.

10. By terms of settlement made 11 September 2000 between all parties except Conte, those parties resolved their differences upon the following terms: Knight Frank would pay $270,000 representing "rental arrears" to Sensyn and Jones Lange Lasalle would pay the sum of $30,000 also representing rent arrears to Sensyn.

11. There were mutual releases by the parties to the terms and further, Sensyn, United Colors and the warrantor Mr Champion, would assign to Knight Frank "all of those rights and interests vesting in them necessary to enable Knight Frank to continue or commence any proceeding against Conte Service Department Pty Ltd ... arising from or in relation to any matter concerning the application, the counterclaim or the third party notice". At or about the same time, United Colors surrendered and the landlord Sensyn accepted the surrender of United Colours' tenancy in the premises. The settlement represented a compromise. Jones Lange Lasalle and Knight Frank stepped back from their denial of liability. The landlord settled for $300,000 a claim for rent which according to a calculation handed to me by Mr McArthur, Counsel for Knight Frank and not contradicted by Counsel for Conte, totalled $823,040.12.

12. Following this settlement it seems that Knight Frank intended to prosecute the whole of the claims which had been made in the names of itself and all other parties against Conte Services Department Pty Ltd alone. Witness statements were filed and served which canvassed the extent of United Colors' loss of profits. The matter stood fixed for hearing before me for seven days, commencing 7 December.

13. On 6 December, Counsel for Conte, Mr Roberts, made an application seeking either the striking out of the claim against his client or requiring that it be re-pleaded. His submission was that whatever jurisdiction the Tribunal might have had to entertain a claim against his client when there remained in existence an active dispute between landlord and tenant, the settlement of the claim as between landlord and tenant affected by the terms signed on 11 September divested the Tribunal's jurisdiction. In any event, he said, in so far as Knight Frank in the name of other parties , sought to continue to press a claim against Conte for damages, including loss of profits by the tenant, United Colors, such was not open on the pleadings, moreover, he submitted that issues of champerty, maintenance and public policy arose in so far as any claim was being pressed relative to the assignment of rights contained in the terms of settlement.

14. For reasons which I then gave, I declined to grant either of the heads of relief sought by Mr Roberts on behalf of Conte. I observed however that on the present state of the pleadings the only claim made against Conte was a claim for indemnity by Knight Frank. Since Knight Frank's liability had been quantified by the terms of settlement, I said I was unable to understand how, in the proceeding as then constituted, claims for loss of profits by United Colors could be pressed by any party or for anyone's benefit. Ultimately Mr McArthur who at that stage had announced appearance for all of the parties to the proceeding, with the exception of Conte, and Jones Lang Lasalle was disposed to concede that the claim that could be made by Knight Frank against Conte was limited to the amounts actually outlaid by Knight Frank. I noted that the claim filed against Conte failed distinctly to identify the claim for which indemnity was sought. I granted leave to Knight Frank to amend its pleading for the limited purpose of identifying precisely the liability for which indemnity was sought. An amended claim in those terms was filed later that day. I also invited Mr McArthur to consider whether in the circumstances he and his instructors could act and be on the record for both the applicant and a number of respondents.

15. When the matter was called on for hearing on 7 December Mr McArthur said that he conceded that no claim could be made by Knight Frank against Conte in the proceeding as constituted apart from a claim for indemnity for the $270,000 and related relief. On 7 December he announced an appearance for Knight Frank only.

16. It is appropriate now to say something as to the circumstances surrounding Knight Frank's claim against Conte.

17. Sensyn and an associated company Davinski Nominees Pty Ltd (which is related to Sensyn) are the owners of 234 and 230 Collins Street Melbourne. 234 Collins Street was formerly known as the "Sportsgirl Centre". 230 Collins Street is an 11 storey building. Levels two to 11 receive air-conditioning from a cooling tower on the roof. The ground and first floors which are retail space are air-conditioned from a separate system with a second cooling tower on the roof. Knight Frank is the managing agent for these buildings.

18. In September 1995 the then tenants of the retail space at 230 (ground and Level One) the Ministry of Finance and the RACV moved out. The air-conditioning appeared to be functioning satisfactorily at this stage. With these floors vacant the Knight Frank Centre Manager Mrs Valerie Maddocks, discussed with Mr David Pullen of Knight Frank "saving electricity and maintenance costs for the air-conditioning to [ground and first floors] by shutting it down until they were occupied again". It was intended to re-tenant those floors in due course. Mr Pullan was and is the National Director Facilities Management for Knight Frank.

19. By letter dated 15 November 1995 Mr Pullan on behalf of Knight Frank sent to Conte "the specification for maintenance of the services at [230/234 - 50 Collins Street Melbourne]". He "cordially invite[d] your company to tender for the preventive maintenance described therein commencing 1 January 1996". By letter dated 12 January 1996 Mr Pullan advised Conte that "your tender for the mechanical services maintenance has been successful". The appointment was for the period 1 February 1996 to 30 June 1997 on the basis of a "fixed price lump sum" for 230 Collins Street of $4,632. The specification set out in detail what preventive maintenance was required to be carried out by Conte and at what intervals. Conte took up the appointment and apparently performed the role as maintenance contractor until 30 June 1997. For the period commencing 1 July 1997 a different contractor, namely A.G. Coombs Servicing Pty Ltd was appointed.

20. Knight Frank commenced its duties as manager of 230 Collins Street Melbourne with effect from 1 July 1995. Its duties were set out in an asset management agreement between it and Sensyn. An appendix to that agreement imposed certain additional obligations on Knight Frank, one of which was at paragraph 5 of the appendix to:

"Produce all preventative and maintenance schedules and institute programmed works so far as practical in accordance with the manufacturers/suppliers recommendation or as otherwise approved by the building owner."

21. Apparently in performance of that obligation, Mr Pullan submitted a document styled "Report on the Technical Services at the Sportsgirl Centre by Knight Frank Hooker's Technical Operations Group" dated August 1995 to Mrs Maddocks, Knight Frank's Centre Manager and this report was over the signatures of Mr Pullan and Mr Darin Mallawarachchi. Mr Pullan is an electrical engineer who obtained his qualification in Britain in 1968 and who has served in a range of senior positions since that time. Mr Mallawarachchi is qualified as a mechanical engineer and is now in the employ of another large managing agency, Colliers Jardine. The purpose of the August 1995 report was amongst other things to describe the then condition of the technical services at the premises at 234 Collins Street and also 230 Collins Street. Air-conditioning engineering is a branch of mechanical rather than electrical engineering. Mr Pullan said that he left these matters to his assistant Mr Mallawarachchi and the passages in the 1995 report dealing with air-conditioning were written by Mr Mallawarachchi. Under the heading "2.2 230 Collins Street" the following text appears in the 1995 report:

No drawings or specifications of the mechanical services installation were available and the following description was developed from observation in accessible areas. The premises consist of 11 floors with a rooftop plant room. Level 2 through to Level 11 are air-conditioned using floor by floor fan coil units located in small plant rooms adjacent to corridors.

The air is supplied to occupied floors via ceiling diffusers and return air is drawn to the fan cool unit via ceiling grills in various locations. Outside air is drawn to the fan coil units through side wall grills in the plant rooms. Outside air economy cycle is not provided in the air-conditioning system. The central chillers provide the buildings' cooling requirements for Levels 3 to 11 and are located at roof plant room.

The cooling for Levels Ground, One and Two is provided by two Carrier package units installed on a platform type balcony located outside the building adjacent to Level 2 and connected to a rooftop cooling tower for heat rejection. Inspection of the fan coil unit plant room suggest that each air handling unit has two temperature zones serving the occupied space, each with separate cooling and heating coils which use chilled and heating hot water respectively, controlled by two dedicated thermostats.

The chilled water is circulated from a single refrigeration machine located in the rooftop plant room. The chiller is also connected to a single cooling tower on the roof which provides the primary means of heat rejection from the building. Heating hot water is fed from the boiler which is also located in the rooftop plant room.

The building exhaust system consists of a toilet exhaust fan and a kitchen exhaust fan.

The air-conditioning equipment is controlled by dedicated time clocks and by zone the thermostats. The Level 2 fan coil unit is controlled via the Sportsgirl Landis and Gyr DDC system.

The existing system can be considered as a typical commercial installation for its age and is suitable for open office accommodation but may not perform perfectly with heavily partitioned space.

However, a full tenancy with an average number of people and small number of electrical appliances such as computers, a photocopier and the like could be adequately served by the existing air-conditioning system when it is operating effectively and efficiently. The chiller in the rooftop plant room appears to be providing 100 percent of the balance of the building cooling load and is connected to a single cooling tower.

This indicates that there is little or no standby capacity in the plant and this equipment must be well maintained to ensure reasonable reliability and adequate performance under designed conditions. A simple fault such as a leak in the cooling tower or similar would mean no cooling at all on the typical floors until the problem was rectified.

During a site inspection, the following observations were made:

* dirty filters in all floor by floor fan coil units

* rubbish in all fan coil unit plant rooms and chiller plant room

* water treatment for cooling towers is carried out manually. There is no automatic byerside addition for water treatment and total bacteria count (TBC) records should be requested to confirm proper dosage

* there is evidence of excessive oil leak from the chiller

* bland housing of the wall pumps require cleaning and removal of light corrosion. There is evidence of water leak from pump plants

* poorly maintained Carrier package units on Level 2

* some light globes and mechanical switchboards have burnt out

* decomposed chilled water and heating hot water pump lagging."

22. Mr Simpson a consulting engineer with a special interest in air-conditioning who gave evidence for Knight Frank was critical of these passages of the report. He said there were "inconsistencies" and it was open to question whether particular comments related to the systems operating at Levels 2 to 11 or the independent system the subject of this proceeding, at Ground and Level 1.

23. By facsimile transmission dated 21 December 1995 Mr Mallawarachchi invited Conte Services confirming a telephone conversation to "submit a revised price to include mechanical services equipment ... on unoccupied floors at the above premises on a caretaker maintenance program".

24. A letter dated 12 January 1996 quoted $90 to decommission the system at Ground and Level 1, 230 Collins Street and $90 to recommission it, with a saving of $2,100 in maintenance costs. This appears to be the basis upon which the appointment of Conte by letter of 12 January 1996 was made.

25. The decommissioning took place in March 1996. Mr Jones, at that time an electrical mechanic employed by Conte, carried out the necessary step to isolate the system electrically. Mr Mann a refrigeration mechanic then employed by Conte carried out the mechanical elements of the decommissioning. These steps included the following:

(b) isolated the refrigerant gas in the compressor and condenser area;

(f) isolated the circulating pumps for the chilled water pipes;

(g) left the chilled water pipes full of water and under pressure.

26. Thereafter the premises remained vacant until United Colors signed a lease dated 1 January 1998. There were a number of disputes between landlord and tenant, including a a delay in the provision of a bank guarantee. According to the Centre Manager Mrs Maddocks,

"United Colors took possession at about the end of May 1998. In June 1998 the application for the fit-out was made to the Council by United Colors"

Mrs Maddocks expected the fit-out to "take about two months".

27. Meanwhile, nothing further had been done relative to the air-conditioning system since its decommissioning in March 1996. Mrs Maddocks said "in late June 1998" she was told that the system could not be restarted. Apparently it was an employee of A.G. Coombs the then air-conditioning maintenance contractor, Mr Tas Cooke who noted fit-out works being carried out on the premises. At some point he suggested to the centre management that the air-conditioning system should be tested with a view to re-commissioning it. On 23 June Mr Cooke carried out those steps. He discovered that

(a) there was a leak (though not a very serious one) in the chiller unit; and

(b) that chiller water was leaking from the pipes which moved it from the cooling tower in the roof to the ground floor.

Asked to report, A.G. Coombs forwarded a letter over the signature of its Contracts Development Officer Mr Ray Sherry dated 8 July 1998. The letter gave a quotation of $12,427 to carry out the works which in Coombs' view were "necessary to put the system back into operation". Mr Sherry continued:

"However we have strong reservations regarding the long-term viability of the system due to its age. The greatest concern is the condition of the chilled water pipes which are badly corroded, and a decision must be made to ascertain whether the pipes are to be changed or remain, the latter may condemn the system."

28. According to Mr Sherry, replacement of the chilled water pipes which "run the total length of the building" was a major job and "costing may outweigh the reinstatement of the existing equipment". Mr Sherry said alternative air-conditioning "by use of air coiled package units may be a better long-term option". A further letter dated 13 July 1998 said that replacement of the pipe work would be likely to cost $45,000. Mr Sherry observed

"This price plus our rectification work quoted at this stage seem to outweigh the cost of installing air cooled packaged air-conditioning systems, which would provide reliable long-term air-conditioning."

With this information Mrs Maddocks sent a facsimile transmission to Mr J. Toh of Windsberg developments, the landlord's representative domiciled in Singapore. She observed:

"The air-conditioning contractor and Knight Frank Facilities Management, both agree that the deterioration of the chilled water system is due solely to the natural ageing of he pipe. The normal service life of such pipe work is approximately 16 years."

She provided the landlord with three options. The first was a combination of the initial repair program suggested by Coombs and the replacement of the corroded pipes. This would cost $58,000. It had the advantage of being the "fastest option" but its disadvantages were - "future unreliability - no warranty on repairs - on-going maintenance costs - specifically designed for office use versus retail". Option B was replace existing cooling system with a new air cooled system, $60,000. Its advantages were - "defect liability period with no maintenance costs for 12 months - low on-going maintenance costs thereafter - high reliability - specifically designed to retail use versus office". Disadvantages were - "may not meet Council's noise requirements". The third option was engaging independent mechanical engineer to provide an assessment. Estimated cost $6,000. The advantage of this option according to Ms Maddocks was that it "may determine a good alternative long-term solution". Its disadvantage was - "additional cost - unacceptable time frames".

29. By this time Mr Mallawarachchi had moved to another role at Knight Frank. He had been replaced as Mr Pullan's assistant and the technical officer at Knight Frank principally concerned with air-conditioning at 230 Collins Street by Mr Peter Semmens who held trade rather than graduate qualifications in air-conditioning. Nevertheless, Mr Mullawarachchi it seems, retained some role with respect to the air-conditioner of this building when Mr Semmens was on leave. The owner it seemed adopted the third of the options suggested by Mrs Maddocks, despite its disadvantages. Mrs Maddocks or other Knight Frank officers had consultations with a well known engineering consultancy, C.M.P.S. and F. Pty Ltd (now apparently known as Aegis). C.M.P.S. and F. wrote a letter dated the 3rd of August 1998 quoting an upper limit in costings of $4,500 to carry out the investigation on the basis of nominated hourly rate. By facsimile transmission of 5 August these costings were submitted to Mr Toh in Singapore. Mr Toh had advised the adoption of Option 3 by facsimile transmission of 16 July. The options submitted by C.M.P.S. and F. were quite high cost. In the end Mr Jerry Wilson an architect with a consultancy known as Wilson Design Group was retained and instructed jointly by Knight Frank and their principals in Singapore. According to Mr Cooke of A.G. Coombs, the replacement air-conditioning system which was eventually arranged by Mr Wilson to be installed by A.G. Coombs "was commissioned on 22 December 1998. The cost was $99,000."

30. Whilst these events were occurring Sensyn was in dispute with United Colors on Collins leading to the institution of these proceedings. That this was a likely outcome was seen by Mrs Maddocks as early as 1 July 1998 when she concluded a memo to Mr Semmens and Mr Pullen "I will notify Brian Monger (Professional Indemnity) of the potential of this situation". Warren Saunders, Solicitor for the tenant had written a letter dated 17 July 1998 referring to the matters upon which the tenant ultimately relied in its counterclaim in this proceeding and requesting therefore an extension of the rent free period which existed from the 1st of January 1998 to the 1st of June 1998 until 1 September 1998.

31. As previously noted a challenge to jurisdiction was mounted the day before the principal hearing was scheduled to commence. I overruled the challenge to jurisdiction upon the basis, first, that the existence of jurisdiction was to be judged at the time that the proceedings were instituted. Leung v Hungry Jack's Pty Ltd (2000) V Conv R 54-614 and secondly, that the joinder of what one might describe as related disputes was to be regarded as justified by the Retail Tenancies Reform Act Sections 34 and 37 so long as there existed at the relevant time a dispute between landlord and tenant under or in relation to a retail premises lease. Based upon the considerations to which I referred in Sandra Newton v Opsymoulis (1998) V Conv R 58-529.

32. Mr Roberts in mounting the jurisdictional challenge had observed that the Fair Trading Act 1999 was not applicable because the dispute which remained unresolved was between Knight Frank, the landlord's agent and Conte. Whilst Conte was a supplier of services, Knight Frank was neither a purchaser nor a potential purchaser of those services. It contracted as agent for disclosed principal, namely Sensyn Pty Ltd and therefore in Mr Roberts' submission the dispute between Knight Frank and Conte could not be regarded as a "fair trading dispute" within the meaning of Section 107 of the Fair Trading Act. Mr McArthur was disposed to concede this point. In retrospect it may be that the ruling which I gave on 6 December failed to identify a key difference between the present proceeding and Opsymoulis' case. In Opsymoulis the claim against the estate agents which was permitted to be dealt with as part of the landlord tenant dispute was one in which the claims against the joined party were based upon breaches of duty allegedly owed directly to the claimant. That is, they could have been brought independently as claims under the Fair Trading Act 1985. In the present proceeding the claim for indemnity brought against Conte is said to be brought under the provisions of the Wrongs Act 1958 with respect not to any breach of duty owed by Conte to the claimant Knight Frank but rather with respect to a duty owed by Conte to Sensyn and allegedly breached by Conte. It may be that the ruling which I gave on 6 December failed to take account of this distinction and failed therefore to consider whether the words of Part IV of the Wrongs Act 1958 which grants the right of contribution in these circumstances can be regarded as applicable to the Tribunal. Part IV speaks of "actions", "writs" and "judgments". Section 23B which creates an entitlement to contribution in favour of "a person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage ...". The section does not in terms confine its operation to courts. In sub-section (6) it provides:

"References in this section to a person's liability in respect of any damage or references to any such liability which had been or could be established in an action brought against that person in Victoria ..."

33. "Action" is defined in Section 23A as including a proceeding commenced by way of counterclaim. By way of contrast Section 24 which deals with contribution between joint and several tort feasors, specially provides that the contribution "shall be such as may be found by the jury or by the court if the trial is without a jury to be just and equitable ...". There is nothing in any definition provision which would give the word "court" an extended meaning. Could it be that entitlement under Section 23B is available in the Tribunal but not under Section 24? Or is the proper view that the whole of Part IV is a bestowal of jurisdiction and in the absence of a clear intention on the part of Parliament to render this an "enabling enactment" for the purposes of the Victorian Civil and Administrative Tribunal Act 1998 means that no provision in Part IV of the Wrongs Act applies to the Tribunal? These are interesting questions. In light however of the view which I take as to the general merits of Knight Frank's claim here it is unnecessary to express any view on these difficult matters.

34. The gist of the amended claim made by Knight Frank appears in Paragraphs 6 to 8 of the amended claim filed on 6 December as follows:

"6. At all material times the third respondent ("Knight Frank") was the property manager of 230 Collins Street and responsible to Sensyn for the administration of the servicing of the air-conditioning and mechanical services.

7. Between June 1995 and 21 April 1997 Cone Services was:

7.1. The air-conditioning and mechanical services contractor for 230 Collins Street; and

7.2 Responsible for and owed a duty to the landlord to maintain the air-conditioning equipment that serviced the ground and first floors at 230 Collins Street ("the air-conditioning equipment").

8. During 30 June 1995 and 30 June 1997, Conte Services in breach of its duty, failed to maintain the air-conditioning equipment causing it to be inoperable during 1998

8.1 De-commissioning the equipment in March 1996 without making an adequate provision for the equipment to be recommissioned at a later date.

8.2 Failing to conduct adequate caretaker maintenance to the air-conditioning whilst it was de-commissioned.

8.3 Failing to provide adequate water treatment for the air-conditioning equipment, leading to corrosion of the chiller pipes.

Further particulars will be provided after the completion of discovery."

35. By way of further particulars given 7 June 2000 Knight Frank provided the following particulars under Paragraphs 7.2 and 8 respectively. These paragraphs were not amended on 6 December and so the particulars continue to stand even though they were not re-filed after the amendment of 6 December. The particulars are as follows:

"Under Paragraph 7.2 the third named respondent [that is Knight Frank], Mr Cassidy as managing agent to the landlord, engaged the fifth named respondent [Conte]. The fifth named respondent accordingly owed both the third named respondent and the applicant a duty to maintain the air-conditioning equipment between 30 June 1995 and 3 June 1997. This duty is in writing and is to be implied by operation of law.

Under particulars to Paragraph 8 in or about March 1996, the fifth named respondent de-commissioned the air-conditioning plant that fed the ground and first floors of 230 Collins Street ("the equipment") to save on operating costs whilst the premises was (sic) untenanted. The fifth named respondent also provided the quotation for re-commissioning the equipment. This quotation is in writing and may be inspected by appointment. The fifth named respondent simply pulled the fuses out of the circuit board serving the chiller on the roof and drained the cooling tower. It did not drain the chiller pipe, nor chemically treat the chiller pipes, leaving them to corrode. It also did not give advice as to systematically reviewing the equipment to ensure that it could be recommissioned on short notice. As a result, it was discovered in July 1998 that the chilled water pipes were seriously corroded, condemning the validity of the equipment which had to be replaced."

36. Mr McArthur said that the duty and breach were not specifically framed either in contract or tort and that the claim was made on both bases. In so far as the alleged duty or duties are based on contract, they must be duties owed to the landlord Sensyn. The proceeding was conducted on the basis that Knight Frank contracted as agent for disclosed principal, namely Sensyn.

37. No formal contract was entered into between Conte and Knight Frank. Mr McArthur presented his case on the footing that the terms of the retainer were to be found in the tender papers. Mr Roberts on behalf of Conte raised no objection to this view of events and it seems to me to be the correct one. The "extent of work" involved in the retainer is to be found described at Paragraph 1.20 of the tender document. It provides as follows:

Work to be carried out under the terms and conditions of this contract shall comprise:

- inspection of the nominated services as required by the schedule;

- servicing and maintenance of plant as required by the schedule;

- provision of a call finding service during normal working hours with a maximum response time of two hours;

- preparation and submission, within the specified time limits, of reports, recommendations and estimates.

Upon a request by the engineer the contractor shall, as soon as possible, and within the stipulated time, visit the site and determine the cause of any breakdown in services.

The contractor shall immediately take minimum action necessary to leave the plant in a safe condition. The cost of such action shall be charged at scheduled rates.

When the cause of the fault has been determined and is of a minor nature, the contractor shall report to the engineer for authority to proceed with repairs to return the plant to service. The cost of such work shall be charged at schedule rates.

When the cause of the fault is of a major nature, the contractor shall provide a report with recommendations, and cost estimates in writing for the repairs.

The after hours answering service provided by the contractor shall be either manned or shall provide the caller with phone numbers where service personnel can be contacted. A minimum of two phone numbers shall be provided."

38. Reference was also made in cross-examination of Mr Conte to the questionnaire which accompanied the tender documents. Question 27 is headed "Reporting" and states "show type of format and report that you propose for the following periods". There then follow provisions for description of daily, weekly, monthly, quarterly, six monthly and annual reports. The question adds "reports should include items noticed outside the scope of work of the contract where you believe this should be drawn to the attention of Knight Frank Hooker". A few lines thereafter there appears "reports must also note defects and recommendations for rectification". It was submitted by Mr Roberts and not denied by Mr McArthur or any of his witnesses that nowhere in the tender document is there any obligation distinctly placed on Conte to "dose" the system with corrosion inhibitor. I was referred to no authorities as to the implication of terms, whether by statute to give business efficacy to the contract or otherwise. No implied terms appear to be relied upon. In my view the passages which I have quoted represent the contractual liabilities to which Conte was subject in favour of Sensyn which are relevant to the decommissioning issue. Mr McArthur referred to no item in the very extensive schedule of inspection and service items contained in the tender documents upon which reliance was placed. In so far as Paragraph 7.2 of Knight Frank's claim seems to go beyond these quoted obligations and imposes a general absolute and unqualified duty "to maintain the air-conditioning equipment which serviced the ground and first floors of 230 Collins Street" I do not believe that Conte undertook any such wide and unqualified obligation by contract.

39. Is there any more extensive duty which is imposed on Conte by the law of tort and which is not to be found in the terms of its contract with Knight Frank as agent for Sensyn? The interaction of liability in contract and tort particularly where the tort is negligence has been a vexed question over the years. See the treatment of the issue by the late Professor Fleming in the Law of Torts (9th Edition 1998) pp 203-7. The learned author recites the competing views on this subject and concludes upon the authority of Henderson v Merit Syndicate [1994] UKHL 5; [1995] 2 AC 145; Bryan v Maloney (1995) 182 CLR 609, 619-20 that the view has been adopted now that a plaintiff is at liberty to choose between concurrent remedies in contract and tort rather than being confined to the one or the other. The learned author continues:

"Accordingly, in cases of concurrent liability, the plaintiff (regardless of his pleading) may claim the benefit of such more favourable tort rules as damages for inconvenience and distress, exemplary damages, rules or remoteness, contribution, and the statute of limitations. By the same token, he can no longer defeat a claim of contributory negligence `merely because of the ancient habiliments into which Counsel may have managed to put the action'.

The plaintiff is regulated exclusively to his contractual claim only when he must rely on a specific provision in the contract, as distinct from any duty of reasonable care implicit in a particular relationship. Nor can he, in deference to the primacy of private ordering, escape any provision in the contract excluding or limiting liability for acts performed thereunder, however he formulated his claim. This priority of contract over tort applies not only to exclusion causes and the like; it also precludes the imposition of a tort duty when the same duty has been rejected s an implied term of that particular contract." Op cit page 205

40. For this last proposition the Professor relies primarily upon a decision of the Judicial Committee of the Privy Counsel in Tai Hing v Liu Chong Hing Bank [1986] AC 80, 107.

41. In the Tai Hing case their Lordships had considered and rejected a contention that the contract between a bank and its customers imposed a contractual obligation on the customer to examine its bank statements and to accept them as accurately stating the debits be it not challenged within a stipulated time limit. Their Lordships then considered an argument by the bank that such an obligation even if not part of the contract between the parties was imposed by the Law of Torts. Lord Scarman speaking for the Board said:

"Their Lordships do not believe that there is anything to the advantage of the law's development in searching for a liability in tort where the parties own a contractual relationship. This is particularly so in a commercial relationship. Though it is possible as a matter of legal semantics to conduct an analysis of the rights and duties in hand and some contractual relationships including that of banker and customer either as a matter of contract law when the question will be what, if any, terms are to be implied or as a matter of tort law when the task will be to identify duty arising from the proximity and character of the relationship between the parties, their Lordships believe it to be correct in principle and necessary for the avoidance of confusion in the law to adhere to the contractual analysis on principle because it is a relationship in which the parties had, subject to a few exceptions, the right to determine their obligations to each other, and for the avoidance of confusion because different consequences do follow according to whether liability arises from contract or tort, eg. in the limitation of action. ... Their Lordships do not, however, accept that the parties' mutual obligations in tort can be any greater than those to be found expressly or by necessary implication in their contract." [1986] AC 80, 106

42. I did not understand Mr McArthur in the presentation of his case to place any distinct reliance or propound any particular duty which he said Conte owed to Knight Frank as distinct from Sensyn. The particular to paragraph 7.2 of Knight Frank's claim however alleges a duty owed directly to it. I heard no argument as to this alleged duty. Nevertheless as at present advised, in a commercial context where the responsibilities of the maintenance contractor had been established by tender papers formulated by the managing agent Knight Frank, I can see no justification in the absence of some special understanding going beyond that contract (as to which there was no evidence) for imposing any duty owed to the managing agent (or for that matter the landlord) more extensive than the duty expressly imposed by the contract with the managing agent as agent for the disclosed principal, the landlord.

43. There seemed to be two distinct types of breach of duty alleged against Conte. The first which is to be found in the particulars to Clause 8 in the claim, alleges in the substance that Count's acts and omissions in association with the decommissioning damaged the air-conditioning system. This duty is elaborated in the further and better particulars quoted alleging a failure to drain chiller pipes or chemically treat them. The second class of breach of duty is to be found in the witness statements and perhaps hinted at in the further and better particulars which includes the sentence "it [that is Conte] also did not give advice as to systematically reviewing the equipment to ensure that it could be recommissioned on short notice". In her witness statement, Mrs Maddocks said of the decommissioning

"I assumed that it [the air-conditioning system] had been turned off and left in a state so that it could be quickly turned back on when required when a new tenant was in occupation. I was not told by anyone that there was any corrosion in the piping for the system or any other problem with it that required rectification during the period it was turned off to enable it to be started again when a tenant was found. If I had been told of any need for such work I would have consulted with the directors of Sensyn and arranged for the work to be carried out so that the property was ready to be let. I was not told by anyone of any need to take any steps to protect the system during the period it was turned off. I assumed that Conte was a competent contractor and would have taken whatever steps were necessary when the system was turned off."

44. In cross-examination of Mr Conte, it was suggested that the quotation given by his company of $90 to recommission the system created a misapprehension in the offices of Knight Frank that no more was involved in recommissioning than reversing the steps which had been taken to decommission viz. reconnecting all electrical circuits and reinserting the refrigerant.

45. I turn now to the first of those classes of alleged breach of duty. Knight Frank relied upon the evidence of Mr I.C. Simpson a consulting engineer specialising in the design and contract administration of engineering building services which include air-conditioning services. Mr Simpson said he derived his expertise in this regard by involvement in supervising and checking on site building services, contractors and maintenance and service contracts for over 30 years. He relied upon the letter from A.G. Coombs of 8 July 1998 and 13 July 1998 from which I have already quoted and carried out an inspection. Some months after the new air-conditioning system had been installed at the premises and the corroded chilled water pipes had been disconnected and left open he concluded "it is my opinion and I assumed for my report that the system was in operating condition [at the time of decommissioning] and that deterioration occurred during the decommission period. After a correctly decommissioning, it would be the expectation that the plant would be routinely recommissioned." He said if the situation were otherwise the quotation of a $90 recommissioning fee by Conte was misleading.

46. Upon his inspection on 14 April 1999 he found:

"* Severely corroded chilled water lines both internally and externally (this was evident where chilled water pipes had been cut in removing old equipment).

* Deteriorating polystyrene installation evidently resulting in condensation on external surfaces of chilled water piping with consequent corrosion.

* New air handling plants and air-cooled refrigeration plant serving the lower levels in lieu of the original air handling plant. Original chilled water lines were cut and disused."

47. According to Mr Simpson "the chilled water piping has been slowly corroding both internally and externally over many years, but this has apparently not been readily evidenced and the system has continued to operate until decommissioning" . He noted that there was no particular point for dosing of corrosion inhibitors. By 1995 he said the use of corrosion inhibitors in these apparently closed systems was regarded as a necessary prudent practice. In his viva voce evidence he said this requirement was widely known amongst air-conditioning engineers by 1985. Mr Simpson said:

"In my opinion, it is industry common practice and it would be the practice of any prudent mechanical services contractor decommissioning equipment to run non-operational plant for, say, half an hour per month to maintain general operational condition. In combination with the use of corrosion inhibitor this would prevent further corrosion and assist the equipment to be restarted when required. I have been informed that Conte did not do this, did not take these steps or recommend that it be done. In my opinion if had been done [sic], the system should have been capable of operating after recommissioning to a similar standard to that prevailing prior to decommissioning."

48. Conte relied upon the evidence of Mr John Hurle, a consulting engineer in building services. According to Mr Hurle, this system was installed around 1965. The median servicing life for this form of system is 20 years, said Mr Hurle, relying upon the American Society of Heating, Refrigeration and Air-Conditioning Engineers published standards. He said that according to the Australian Institute of Refrigeration, Air-Conditioning and Heating Handbook for 1995, the maximum economic life for such a system is 25 years. The chilled water pipe work had a maximum life of 25 years. He concluded "it is obvious that the plant and equipment are obsolete. It is very difficult to obtain performance data or catalogues of this equipment and the suppliers who consider this equipment to be past the `use by date'". Mr Hurle said that the chilled water pipe work is "medium grade black steel". In his opinion it was perhaps a size too small for the flows which it was expected to take. In the result, this required greater velocity of circulation which promoted corrosion and erosion. These sort of difficulties were in his view worsened by the use of short radius elbows, the existence of pockets and crevices in the pipe work with a general lack of smooth contour which would tend to minimise turbulence and erosion. Oxygen tends to be introduced into the system and promote corrosion by the operation of the expansion or "make-up" tank which admits additional water when the volume of water within the system contracts. In Mr Hurle's opinion, corrosion "is more likely if the system is in operation with the periodic movement of water level in the expansion tank will occur if the system is switched `on' for daily use and `off' overnight. It is likely that the quantity of oxygen absorbed into the chilled water circuit is reduced when the chilled water circuit was switched `off' during the de-commission period. It is very unlikely that corrosion of the pipe work would be accelerated by this exposure to atmospheric oxygen when the chilled water flow had stopped and the expansion/contraction process had stopped."

49. Mr Hurle did not favour periodic running of the system because it would tend to stir up scale which had dropped out of suspension.

50. According to Mr Hurle, the recommissioning quote given by Conte was "misconceived". In his written report he described a proper recommissioning would require a full test and draining, flushing and pre-cleaning of the water treatment.

51. Mr Simpson did not accept that the ingress of oxygen would be minimised by the decommissioning. He said that in addition to oxygen coming from the expansion tank at the top of the system it could enter through the three-way valve at the base of the system.

52. Mr Conte said that in his view corrosion within the system would be slowed by the decommissioning or in any event certainly not accelerated.

53. It will be seen that none of the experts appeared to support the suggestion to be found in the further and better particulars that the pipes should remain drained during the decommissioning. Mr Simpson said that corrosion inhibitor should have been introduced.

54. Mr Hurle's conclusion that this system dated from 1965 remained uncontradicted. Mr Simpson said that alleged periods of economic or operational life were only approximations and different systems could serve for different periods. Mr Tas Cooke, the service mechanic from A.G. Coombs who attempted to recommission the system conceded that according to his understanding, 25 years was regarded as the outside limit of the life of an air-conditioning system of this type. Mr Simpson was generally critical of the faults that Mr Hurle found in the design of this system. One is inclined to agree with Mr Simpson because the system had a very long life indeed, which is scarcely consistent with its having fundamental design flaws as Mr Hurle's report might suggest. Nevertheless, as Mr Simpson himself observed, the non-galvanised iron pipes used for the chilled water must have been corroding for many years. Given that they had already been in commission for over 30 years at the time of their decommissioning it must have been a matter of touch and go as to precisely when the corrosion would become so serious as to render the system inoperative. To say that the system was still operating immediately prior to decommissioning does not exclude the possibility that its demise as an economic system was imminent.

55. Whilst I accept that leaving the chiller water "still" would not exclude entirely, further corrosion, it seems to me on balance, more likely, that Mr Hurle is correct that the decommissioning either slowed the rate of corrosion or failed to accelerate it. Mr Simpson stated that corrosion would "continue at a similar rate during the decommissioning period".

56. A.G. Coombs advised that it was possible to recommission the system. At first blush the cost of $12,427 seems very high indeed. It should be noted however that some $1,777 of that sum represented chemical treatment, something which had never been required by the contract which Conte had entered into. A further $2,500 represented a birdproof cage described as optional to protect the air handling units from further depradations by the pigeons. According to Mr Simpson and Mr Hurle, pigeons are far less likely to roost in or adjacent to air handling units of an operating system. The birdproof cage was in truth an option. The fact that the system had operated for over 30 years without one, indicates that it was not essential. The result then is to reduce the cost of recommissioning to a much more modest sum.

57. In my view it cannot be said that anything that was affirmatively done by Conte caused the system to deteriorate during recommissioning. Of course the air handling units became more vulnerable to attack by the pigeons when they were no longer operating. Mr Simpson candidly conceded that whilst this is obvious enough, in hindsight even a prudent contractor might fail to note these items. Moreover, as Mr Hurle observed, the items for replacement were probably at the end of their economic life anyway.

58. This leaves the omission to add corrosion inhibitors. Based upon the finding that I have made already that corrosion will be no more rapid and perhaps even slower under a decommissioned regime, there was no reason in my view for Conte to recommend the use of inhibitor dosing when it had not been provided for as part of the very detailed duties imposed upon them by the tender document.

59. This then brings me to what Mr Roberts rather derisively described as the "duty to warn".

60. It finds articulation only as one sentence in a set of further and better particulars and in the evidence of Mr Simpson and the evidence of Mrs Maddocks. Mr Simpson it will be recalled suggested that the system should be run monthly. In my view it was not incumbent upon Conte to give that advice. First, as Mr Hurle observed, to run the system from time to time might merely stir up scale which had dropped out of suspension, creating a danger of blockages, burnouts and so forth. He suggested the proper course would be to drain and flush at the time of recommissioning. In the context of a decommissioning which was undertaken to save money, it seems to me with respect, unrealistic and destructive of that objective to require the steps to be taken which would be necessary to run the system monthly. Moreover, given that it seems to be accepted that it was the corrosion of the chilled water pipes that ultimately "condemned" the system, it is not evident that running the system monthly would have prevented this occurring. Indeed if Mr Conte and Mr Hurle are correct, since it would tend to introduce more oxygen to the system, it might have accelerated corrosion. The most that the monthly running could have achieved is alerted Knight Frank and its principal, the landlord, earlier, to the problem which they had.

61. Does that or some more general duty to warn mean that since Conte did not issue a warning similar to the one to be found in the A.G. Coombs' letter of 8 July 1998, Conte is in breach of some duty to the landlord or for that matter to Knight Frank? I have already recited the provisions in the tender documents which to my mind set out the contractual obligations of Conte. No implied obligations have been relied upon in any submission made by Mr McArthur. There is nothing in the text of those obligations to require advice of the broader kind as to long-term viability and so forth which was furnished to the landlord in the second half of July 1998 by consultants specifically engaged for that purpose. In any event since Conte had been engaged by an engineering department whose deputy head held a degree in mechanical engineering and was particularly skilled in air-conditioning matters, namely Mr Mallawarachchi and had stipulated its own repair and maintenance schedule, there was no reason for Conte to suppose that it came under a duty either in contract or tort to furnish what might be described as "strategic" advice. The obligation to furnish advice if it is properly to be so described, to be found in Question 26 of the questionnaire attached to the tender document, extends in my view to particular items which would be discovered upon an inspection, not the blindingly obvious fact that the system in question had already gone five years beyond its likely lifespan and its future life was dubious to say the least. I conclude that no breach of duty has been demonstrated against Conte.

62. Even if a breach of duty had been shown, serious questions would arise as to whether Knight Frank and its principal had acted to mitigate their loss with sufficient solarity, given that Mrs Maddocks obviously perceived that by early July matters were so serious that a notification to indemnity insurers should be made. The rectification action taken thereafter could be described as at best undertaken at a leisurely pace, surprising for premises with a rental value of $30,000 a month.

63. Nor in my view does the giving of the "misconceived" quote as to recommissioning establish any relevant breach of duty for the purposes of this proceeding. Mr Roberts submitted that there might be a liability either in contract or perhaps in misleading or deceptive conduct under the Fair Trading Act or the Trade Practices Act if having given the quotation Conte failed to provide a recommissioning service for $90. As it turns out Conte was not invited to recommission at all. Of course if the system had been put back into operation, the full weight of the warning given by A.G. Coombs would have lain upon Knight Frank and the landlord. Mrs Maddocks wisely observed that a major malfunction thereafter would be likely to have exposed the landlord and Knight Frank as its managing agent to a potentially even larger liability than in the event arose. This was a sensible assessment. In truth of course the very same advice could properly have been given to Knight Frank and the landlord at the time the system was decommissioned by Conte. For the reasons already given however I am not persuaded that it was incumbent upon Conte to furnish that advice then or at any other time.

64. I have heard no submissions as to costs, accordingly I will reserve that question.

Civil and Administrative Tribunal Act 1998

Sensyn Australia Pty Ltd v United Colours on Collins Pty Ltd [2000] VCAT 2643

At a glance

Court

Decision date

Source

Judgment (135 paragraphs)

Sensyn Australia Pty Ltd v United Colours on Collins Pty Ltd [2000] VCAT 2643 (31 December 2000)

Parties

Legislation Cited (3)

Cases Cited (1)