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[2009] NSWSC 1299
Supreme Court of NSW
2009-11-11
Ward J
Original judgment source is linked above.
CITATION : Wabbits Pty Limited v Godfrey [2009] NSWSC 1299
JURISDICTION : Equity Division Corporations List
DECISION : Adminstrator's decision reversed. Proof of debt admitted in part.
CATCHWORDS : CORPORATIONS - application to reverse rejection by Deed of Company Administrator of proof of debt - proof of debt claiming damages for breach of building contract under Bellgrove v Eldridge (1954) 90 CLR 613 and claim in respect of Local Court judgment - whether administrator erred in rejecting building contract damages claim - whether administrator rejected or erred in failing to adjudicate Local Court judgment claim - held that proof of debt should be admitted in part. - INSURANCE - subrogation - administrator asserted that insurer not subrogated to insured's rights as insured had not fulfilled conditions of policy - held that insurer subrogated even had it not been strictly obliged to pay out claim as payment made in good faith - King v Victoria Insurance Co Limited [1896] AC 250 applied.
Corporations Act 2001 (Cth) LEGISLATION CITED : Corporations Regulations 2001 (Cth). Home Building Act 1989 (NSW)
ASIC v Forestview Nominees Pty Limited (2006) 236 ALR 652 Bellgrove v Eldridge (1954) 90 CLR 613 Bull v Lee (No 2) [2009] NSWCA 362 Director of War Services Homes v Harris [1968] Qd R 275 Gange v Sullivan (1966) 116 CLR 418 Hyder Consulting (Australia) Pty Limited v Wilh Wilhelmsen Agency Pty Limited (2002) 18 BCL 122 Johnston v McGrath [2008] NSWSC 639 King v Victoria Insurance Co Limited [1896] AC 250 CASES CITED : Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 R & N Holdings Pty Limited v Mark Fraser Cooper [2008] NSWSC 225 Re Equity Funds of Australia Limited (1976) 2 ACLR 238 Sydney Turf Club v Crowley [1971] 1 NSWLR 724 Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 33 Ventura v Svirac [1961] WAR 63 Westpac Banking Corporation v Totterdell (1998) 20 WAR 150 Woodward Pty Limited v Kelleher [1989] NSWCA 82 Yeomans v Walker (1986) 5 NSWLR 378
TEXTS CITED : Goff & Jones The Law of Restitution Meagher, Gummow & Lehane Equity Doctrines and Remedies,
Wabbits Pty Limited (First Plaintiff) PARTIES : Vero Insurance Limited (Second Plaintiff) Murray Roderick Godfrey (First Defendant) Scarfone Building (Subject to Deed of Company Arrangement) Pty Limited (Second Defendant)
COUNSEL : A J Grant (Plaintiffs) J Tomaras (Defendants)
SOLICITORS : Mills Oakley (Plaintiffs) JT Law (Defendants)
3577/08 WABBITS PTY LIMITED V MURRAY RODERICK GODFREY JUDGMENT 1 These are proceedings brought by the plaintiffs pursuant to s 1321 of the Corporations Act 2001 (Cth) following the rejection by the first defendant (Mr Godfrey), as Deed Administrator of the second defendant (Scarfone Building Pty Limited (Subject to Deed of Company Arrangement)), of a Proof of Debt lodged by the first plaintiff (Wabbits Pty Limited) on 19 February 2007. 2 That Proof of Debt (CB Vol 1 p 40) as lodged was for a total sum of $971,000, comprised of two separate claims. The first, referred to as the "building contract claim", is a claim "as set out in Supreme Court proceedings" for damages for breach of a building contract entered into between Wabbits and Scarfone in November 2002 in respect of the construction of a residential building at Hunters Hill (that claim being quantified in the Proof of Debt at $950,000). The second, referred to as the "Local Court judgment claim", is for a judgment debt obtained by Wabbits against Scarfone in May 2006 (which the Proof of Debt quantified at $21,000). 3 After lodgement of the Proof of Debt, Wabbits made a claim on an insurance policy held by it pursuant to the Home Building Act 1989 (NSW) with the second plaintiff (Vero Insurance Limited (formerly Royal & Sun Alliance Insurance Limited)). Vero accepted the claim and has paid out the full amount for which Wabbits was insured under that policy (being $199,500, after taking into account a $500 excess under the policy). As part of the agreement pursuant to which Vero accepted the policy claim, Wabbits assigned to Vero its rights against Scarfone in respect of the building contract. Vero joins in these proceedings as the second plaintiff on the basis that it is subrogated to the rights of Wabbits against Scarfone and as assignee of those rights. 4 After months of correspondence between Mr Godfrey and Mills Oakley (the solicitors acting for the plaintiffs in these proceedings), in which Mr Godfrey asserted that he had insufficient information in relation to Wabbits' claim, almost 16 months after the Proof of Debt was initially lodged with him Mr Godfrey served a Notice of Rejection of the Proof of Debt. This Notice, dated 12 June 2008, was served under cover of a letter dated 16 June 2008 but not received by Mills Oakley until 23 June 2008. (It is not disputed that the proceedings have been brought within time.) 5 Under the Notice of Rejection (CB Vol 3 p 881), Mr Godfrey formally rejected the building contract claim but purported to reserve his decision on the Local Court judgment claim, stating that it was "under consideration". However, since then he appears to have given no further consideration to the formal adjudication of that claim. 6 The building contract claim was rejected on the stated grounds that: A. The insurance claim made against Vero Insurance Pty Limited by Wabbits Pty Limited is in breach of the policy; and B. Insufficient information has been provided to show that the claim related to the building contract in question. 7 No reasons were given by Mr Godfrey in his correspondence for the failure on his part either to admit or to reject the Local Court judgment claim. Mr Godfrey said in the witness box that he could not admit this part of the Proof of Debt "to any extent" until he had determined whether Wabbits was in fact a debtor of the company and whether, when taking into account the off-setting claim under the judgment, Wabbits remained as a net debtor or net creditor (T 153.16). In saying this, Mr Godfrey had had regard to the view of the director of Scarfone (Mr Peter Scarfone) but hastened to add that "based on the information" it was also his own view that it was likely that Wabbits was a debtor of the company. However, Mr Godfrey did not deny Wabbits' entitlement to the judgment debt and, having earlier given evidence to the effect that it was his understanding (erroneous as this in fact turned out to be) that any claim Scarfone had against Wabbits had been settled, ultimately appeared to concede that he had not actually turned his mind to whether there was any off-setting claim to the Local Court judgment debt (T 156.3). Certainly no such claim was pursued in these proceedings. 8 In these proceedings, which were commenced by the plaintiffs by originating process filed on 3 July 2008, the plaintiffs appeal against the rejection of Wabbits' Proof of Debt and, insofar as it may be held that there has been no rejection as such of that part of the Proof of Debt comprised by the Local Court judgment claim, the plaintiffs contend that Mr Godfrey's conduct amounts to an omission to make a decision or to act in relation to the Proof of Debt in respect of that claim and should be reversed on the grounds that the discretion of the Deed Administrator has not been exercised in good faith or has been exercised in a way in which no reasonable deed administrator could have acted (Yeomans v Walker (1986) 5 NSWLR 378 at 383) or has otherwise miscarried (Re Equity Funds of Australia Limited (1976) 2 ACLR 238). 9 Accordingly, the plaintiffs seek an order reversing the decision of Mr Godfrey to reject the Proof of Debt dated 19 February 2007. 10 As to the building contract claim, Counsel for the plaintiffs, Mr Grant, did not press at the hearing for the admission of the Proof of Debt in the amount originally claimed. Rather, he contended that the Proof of Debt (insofar as it relates to the building contract claim) should be admitted for the sum of $588,102.66. Since then, the plaintiffs have conceded that this claim should be reduced by a further $313,236.00. 11 As to the Local Court judgment claim, there was in evidence before me a Certificate of Judgment (CB Vol 1 p 42) certifying the entry of judgment in the Local Court in the sum of $18,615.15 plus interest at the rate of 9% per annum. Interest at the judgment rate from 18 May 2006 to the date of appointment of Mr Godfrey as voluntary administrator of Scarfone (30 November 2007) has been calculated at $945.55. There is also a claim for a $43 fee for issue of the Certificate of Judgment. The total claim in respect of the Local Court judgment for which the plaintiffs now contend is therefore $19,603.70. 12 Mr Godfrey has complained (both in his correspondence and in the written submissions filed on his behalf) that, being in a position where there was an unfunded administration, he should not have been expected to spend the time which would have been necessary to assess or review the factual material put forward in support of Wabbits' claim. (Nor, in these proceedings, does he consider that he should have been "asked to provide an opinion on a 12 volume court book together with various affidavits … which indicated varying figures as to the Proof of Debt", which it was submitted was oppressive.) 13 It was (extraordinarily in light of the task of this Court on an appeal of this kind) further submitted on Mr Godfrey's behalf that "the court in dealing with this matter ought not trouble itself with the 12 volume court book which would place an intolerable burden on any administrator and court" (my emphasis). It was submitted that the court ought determine the matter on what was said to be a far simpler basis, namely Mr Godfrey's assertion (not raised when he rejected the Proof of Debt) that he had acted properly in refusing a proof of debt for an unliquidated claim for proceedings not intended to be prosecuted. It seems to me that this submission fundamentally misconceives the task which is before me on this appeal (which is to approach the matter as a hearing de novo). Nor does there seem to me to be any basis from which I could infer that (absent the status of the second defendant as being a company under a deed of company arrangement) neither of the plaintiffs would have pursued the building contract claim in other proceedings, as it would have been open for one or both or them to do. The position of the plaintiffs, as indicated to Mr Godfrey back in August 2007, was that such proceedings would not be necessary if the Proof of Debt were to be admitted. They are, in effect, now being pursued in the context of this application. 14 It is not in terms disputed that each of Wabbits and Vero is a person aggrieved (in the context considered in Westpac Banking Corporation v Totterdell (1998) 20 WAR 150; ASIC v Forestview Nominees Pty Limited (2006) 236 ALR 652), although the position asserted by Mr Godfrey seems to be that the second plaintiff (Vero) has no claim (having, it is said, invalidly admitted the claim by Wabbits under the policy) or that its claim, at most, could be for the amount paid out under the policy (it being asserted that there is no demonstrable intention on the part of Wabbits to pursue the building contract claim in separate proceedings). In written submissions served by Mr Godfrey's solicitor, Mr Tomaras, who appeared on the hearing for Mr Godfrey, it is said that it follows, in light of the settlement reached between Wabbits and Vero in respect of Wabbits' insurance claim, that: Absent the payment of $199,500, Wabbits and the owner [by which I understand there to be a reference to Mr and/or Mrs Kalyk] are of the view that there is no point in proceeding the [sic] against Mr Scarfone and/or [Scarfone Building Pty Limited] subject to deed of company arrangement and that on balance the proceedings ought not continue. The claims are choses in action; they are claims upon which damages would have to be assessed and determined. They are claims also for unliquidated damages, for which the plaintiffs through the affidavit of Francis Kalyk have indicated that they do not at any time intend to prosecute, nor that they inform that they propose to fund the liquidator to prosecute them. 15 In other words, the basis on which it seems to have been suggested that there were not any "rights" against Scarfone which could have been the subject of the assignment to Vero is that Wabbits did not pursue its earlier proceedings against the company. (I note that those proceedings were discontinued by consent on the basis that Wabbits was free later to pursue such a claim against Scarfone, though not Mr Scarfone personally.) 16 The submissions served on behalf of Mr Godfrey (if not the tenor of his correspondence and the conduct of the case on his part) appear to accept that, in circumstances where there is an appeal against the act of the administrator in rejecting a Proof of Debt, the proceedings before the court essentially involve a hearing de novo (as explained in Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 at 340-1 per Brennan and Dawson JJ), in which the onus is on the party claiming to be a creditor to prove that the debt should properly be admitted to proof. 17 In Tanning Research v O'Brien, it was said that: In such a proceeding, a liquidator who defends his decision to reject a Proof of Debt is no longer acting in a quasi-judicial capacity; he is cast in the role of an adversary, defending the assets available for distribution against a liability which, according to the view he formed when acting quasi-judicially, is not legally enforceable. The liquidator may defend those assets against the creditor's claim on any ground on which the company might have defended the claim had it been sued by the creditor. If the liquidator relies on those special defences which allow him to go behind a judgment, an account stated, a covenant or an estoppel in order to ascertain the true liability of the company, he is none the less in the role of an adversary. The issue in the proceeding is whether the liability referred to in the Proof of Debt is a true liability of the company enforceable against it. The issue is contested between the putative creditor on the one hand and the liquidator on the other; the liquidator is a party litigant. And none the less so though the liquidator is required to act fairly in conducting the litigation. 18 In R & N Holdings Pty Limited v Mark Fraser Cooper [2008] NSWSC 225 at [3] Barrett J, dealing with an appeal under s 1321 of the Corporations Act against the rejection of a proof of debt, noted the court's function under s 1321 to "confirm, reverse or modify" the relevant decision. His Honour said: The section does not distinguish between different types of decisions. It is available as a means of reviewing the exercise of a liquidator's discretion or a decision on a matter of business judgment. In cases of that kind, the court's main concern is to see whether the liquidator acted unreasonably or in bad faith. But in cases such as the present, where the decision under challenge is a decision with respect to the admission of Proof of Debt, the court takes a different approach [that being the approach in Tanning ]. 19 Further, in Johnston v McGrath (2008) 67 ACSR 169 at 175 [26], Barrett J said that, on appeal under s 1321 of the Corporations Act, a plaintiff must present a case which identifies an alleged debt or liability corresponding with that originally sought to be conveyed by the proof of debt but that a plaintiff is not confined strictly to each and every allegation and proposition by which the plaintiff originally sought to advance the proof of debt. 20 Hence, the fact that the plaintiffs no longer press each of the claims to which reference is made generally in the Proof of Debt (such as the misleading and deceptive conduct claim or the claim for damages for defective works which were part of the 2006 Supreme Court proceedings) is not a matter which precludes the court from considering whether other parts of the claim covered by the Proof are enforceable and should have been admitted. In Johnson, his Honour said that: As long as the claim remains the original claim, some change in the explanation of the way in which it is said to be a true liability of the company enforceable against it is permitted. 21 After the hearing, as a matter of procedural fairness, I invited further submissions from both parties in relation to two issues (the treatment of PC items or allowances and of retention monies) in circumstances where it seemed to me that there was an inconsistency in the plaintiffs' calculations but on which attention had not directly been focussed in the argument before me. Mr Grant has since advised that the plaintiffs accept that there is an inconsistency in respect of the accounting treatment adopted by Mr Parks in relation to the PC allowances, as a result of which the additional cost to complete for which the plaintiffs contend is now reduced to $274,866.66. (I note that I have not, in light of Bull v Lee (No 2) [2009] NSWCA 362 and the authorities referred to therein, had regard to any further submissions going beyond the particular matters on which I had invited those submissions.) Issues 22 The issues before me are:
(i) on the building contract claim, have the plaintiffs established that Scarfone was in breach of the building contract and, if so, what is the quantum of the damages recoverable for that breach? and
(ii) on the Local Court judgment claim, has Mr Godfrey by his conduct rejected that claim and, if not, has he acted unreasonably or not in good faith or otherwise in a way in which no reasonable administrator would have acted, such as to amount to a miscarriage of his discretion as administrator? 23 In light of the matters raised by Mr Godfrey at the time of rejection of the Proof of Debt, and thereafter, it is also necessary briefly to address the contention that Vero is not entitled to be subrogated to the rights of Wabbits if, as contended, Vero was not obliged to accept Wabbits' insurance claim. 24 In summary, for the reasons set out below I am of the view that the Proof of Debt should be admitted but for a lesser amount than that for which the plaintiffs ultimately contended. Factual background · Building contract 25 On or about 8 November 2002, Wabbits entered into a building contract with Scarfone for the construction of a new four storey residence in Hunters Hill. The contract price was stated to be $1,594,100, inclusive of GST. The contract did, however, allow for adjustment to the contract price, under clause 21, for prime cost items and provisional sum items. Additionally, clause 17 of the contract provided that deemed or agreed variations of the contract would bear a price as agreed, or, if not agreed, as assessed. 26 The contract contained an Addendum, which noted various matters for which the builder acknowledged it had allowed or should allow. There was a signed "Builder's Checklist" in which it was acknowledged that the builder's lump sum price was $1,594,100 and allowed for "all works reasonable or necessary to complete the works in the scope of works whether or not specifically defined or shown" and that the builder had allowed for PC items and provisional sums as per the PC Schedule. 27 The contract also contained a schedule headed "PC Items". The evidence before me was that a "PC Item", in the terminology used in contracts of this kind, or "Prime Cost Item" is an item for which a monetary allowance is included in the contract but which, depending on the actual amount spent for that item, may result in an adjustment of the contract price in favour of either the builder or the owner depending on whether less or more is paid for the item than that specified as the PC item sum. 28 The evidence before me from two quantity surveyors (Mr Lim Kok Lim and Mr Gregory Brandtman) was consistent and to the effect that, ordinarily, a PC (Prime Cost) item is an item comprised of contract materials (such as carpet, door handles and the like) and a Provisional Sum item or allowance is an item comprising both the material and the labour included in the supply or installation of the material. However, in outcome the difference between the two kinds of item is not material in that both can produce an adjustment to the contract price. 29 Clause 21.6 of the contract provided that, for each prime cost item and provisional sum item, if the actual price were to be less than the allowance, then the difference was to be deducted from the contract price and, if the actual price were to be more than the allowance, then the total of the difference was to be added to the contract price. Any adjustment to the contract price for a prime cost item or provisional sum item is due and payable with the next progress payment unless a different time is agreed. 30 Clause 15 of the Special Conditions to the contract dealt with progress payments. Scarfone acknowledged that the owner might require each progress claim to be assessed by a quantity surveyor under that clause. There was to be deducted from each progress claim an amount equal to 10% of the claim as security for the building's obligations up to a total retention amount of 5% of the contract sum as adjusted; the security reducing to 2 ½% on practical completion. 31 Under the building contract, the building works were required to reach the stage of practical completion by a specified date. It seems not to be disputed that this date was 46 weeks after the contract period commenced. In fact, in the signed contract there was no deletion made to the alterative options of "weeks/days" in the definition of contract period, ie following the handwritten figure "46". However, as there was no suggestion by either party that the agreed period for practical completion was to be 46 days and as the initial building programme prepared by Scarfone contemplated that the works would reach practical completion on 25 October 2003, which was the date 46 weeks from commencement of the works on 3 December 2002, I consider that the parties have by their conduct acted on the basis that there was a 46 week contract period. 32 The contract expressly included various statutory warranties required by the Home Building Act, including a warranty pursuant to s 18B(a) of the Act that the works would be performed in a proper and workmanlike manner and s 18B(d) that the works would be done with due diligence and within the time stipulated within the building contract. 33 In the proceedings before me no issue was taken by the administrator as to the validity of the termination of the building contract for failure to reach practical completion within the contract period (extended, as the case may be, by acceptance of subsequent building works programmes) or for the alleged breach of statutory warranties incorporated into the contract. Mr Godfrey accepted that he had not pursued on behalf of the company any claim that the contract had not been validly terminated and that for all practical purposes the contract had been terminated on 21 February 2004 (T.130). · Insurance policy 34 A Home Owners Warranty Insurance policy was issued in favour of Wabbits by Vero on 27 November 2002. Under that policy, clause 26 provided that, unless Wabbits had reasonable grounds to refuse access, it was obliged to give Vero, its nominated builder and Wabbits' builder reasonable access to inspect, rectify or complete the work and clause 28 provided that Wabbits must not make any attempt to rectify any work which was, or might be, subject to a claim without Vero's consent. Clause 24, on which the administrator places great weight, provided that Vero "must not" pay out any claim if Wabbits had failed to comply fully with clauses 25, 26, 27 and 28. Whatever the position in relation to clause 26 (which arguably would only not have been complied with if access had in fact been refused, which presumably was not the case), the retrospective nature of Wabbits' claim on the insurance policy means that the completion of the works (unless perhaps retrospectively consented to by Vero) would seem to have been not in compliance with clause 28. However, there was no suggestion that Vero had raised any issue in this regard. · Progress of building works 35 Pursuant to the building contract, Scarfone made a number of progress claims. The first eight progress claims, made between December 2002 and October 2003, were paid in full. 36 On or about 19 July 2003, Scarfone provided a second programme which provided for practical completion on 20 December 2003. Subsequent building programmes were provided in each of August, September and October 2003, in each case specifying later dates for practical completion (up to 13 February 2004 in the case of the fifth programme). On 28 January 2004 and 30 January 2004, further programmes of work were provided by Scarfone, the last of which specified 28 March 2004 as the date for practical completion. 37 Dissatisfaction as to the progress of the building works was evident from towards the end of 2003, as outlined in the respective affidavits of Mr and Mrs Kalyk. Progress claims 9, 10 and 11 were made by Scarfone in December 2003, January 2004 and February 2004 respectively. From late 2003, Wabbits exercised its right under special condition 15 of the building contract to have those progress claims reviewed by a quantity surveyor. Mr Gregory Brandtman, of Mitchell Brandtman Quantity Surveyors, was appointed to do so and he inspected the site for that purpose in each of the months December 2003 to February 2004. He recommended against payment in full of each of progress claims 9 and 10 but recommended payment of a lesser sum in relation to each of those claims and that lesser sum was paid by Wabbits. Mr Brandtman recommended against any payment for progress claim 11, which was submitted by Scarfone on 15 February 2004. Mr Brandtman took photos of the site as at 16 January 2004, on which reliance was placed in due course by Vero's loss assessor (as being a contemporaneous independent assessment of the state of the works shortly prior to termination of the contract). · Termination of the building contract 38 Wabbits, having (at least implicitly, by not having earlier moved to terminate the contract) accepted various revised practical completion dates, ultimately terminated the building contract by notice on 21 February 2004. Wabbits contends that Scarfone breached the term of the building contract requiring practical completion to be achieved no more than 46 weeks after the contract period and that it had breached the statutory warranties incorporated into the building contract. 39 While Wabbits also contended that it had entered into the contract in reliance on representations made by Scarfone's principal, Mr Peter Scarfone, in meetings with Wabbits' directors and shareholders (Mr and Mrs Kalyk) (some of which representations were said to have been made in the presence of a building consultant engaged by Scarfone, Mr Terry Daly), it is accepted that the Proof of Debt was limited to the claim for damages referable to the additional cost to complete the contract works as itemised in the schedule to the claim made in the 2006 Supreme Court proceedings. No claim was made in these proceedings for the admission of any part of the Proof of Debt in respect of the other claims which had previously been raised against Scarfone. 40 Some evidence was given by Mr Kalyk, in his affidavit in these proceedings, as to a conversation with Mr Daly in which the latter expressed his opinion that Mr Kalyk would be justified in terminating the building contract. Whether that would have bound Scarfone (as to which I have some doubt) is a matter which was not raised in these proceedings. Neither the administrator's rejection of the Proof of Debt nor his defence of the claim against the company in these proceedings was based on any assertion that the building contract had been wrongfully terminated. · Completion of the works 41 Evidence was given by both Mr and Mrs Kalyk as to the state of the building works at the time of termination of the contract and as to the subsequent completion of the works. In particular, I note that Mrs Kalyk deposed to attempts made by her to obtain quotations for the works to be finished and the difficulty she encountered in that regard. She also deposed that she had managed the completion of the works on the basis of her understanding that "every cent" was to come out of her "own pocket". From that (and from other evidence in her affidavit as to attempts to secure supplies of material at lesser cost, even before the contract was terminated) I infer that Mrs Kalyk had been careful to contain or limit the expenditure necessary for the completion of the building works. There was no cross-examination or Mrs Kalyk on this aspect of the matter (she being cross-examined only as to her understanding of various matters recorded in the documents relating to this claim, a matter which she said she had left to her husband as he is legally qualified). 42 There was nevertheless a live dispute as to the additional cost to complete the works, having regard to the difficulty asserted by the administrator in satisfying himself that the works were those which were required in accordance with the contract and as to the calculation of the PC items. A recurring refrain from Mr Godfrey was the assertion that no-one could relate any of the documents supplied to him to the contract or the underlying contract works (see, for example, at T.110). 43 Wabbits, which prior to termination of the contract had paid some suppliers direct, subsequently engaged another builder to complete the works. St George Bank Limited financed the completion of the construction and it engaged an independent quantity surveyor, Mr Lim Kok Lim of Hugh B Gage Quantity Surveyors, to review claims for payments in relation to the completion of the works. Mr Lim first attended the site in March 2004. Mr Lim prepared a construction budget report for completion of the works and made ten separate progress valuations through to the completion of the works. · Subsequent events 44 By summons dated 21 February 2006, Wabbits commenced proceedings against both Scarfone and Mr Peter Scarfone claiming damages for beach of contract (by reference to defective works and incomplete works) and for misleading and deceptive conduct. A cross-summons was filed in April 2006 by the defendants in those proceedings, claiming the balance of moneys due under the contract and asserting wrongful termination of the contract. The amount claimed in the cross-summons was $350,491.92. In due course, those proceedings were disposed of by agreement between the parties.
45 On 30 November 2006, Mr Godfrey was appointed as the voluntary administrator of Scarfone. That appointment had the effect, under the Corporations Act, of staying the proceedings which had been brought by Wabbits against Scarfone and Mr Peter Scarfone (as was apparently pointed out at some stage to the plaintiffs' lawyers in a communication to which reference was made in Mr Godfrey's subsequent letter dated 30 August 2007). 46 A first Proof of Debt was provided to Mr Godfrey as the company's administrator on 19 December 2006. This was in the sum of $930,000 (CB 1 p 39). 47 On 8 February 2007, Wabbits made a claim on Vero under its home warranty policy, the maximum cover under which was $200,000, less an excess per claim of $500. 48 A second Proof of Debt (for $971,000) was then lodged on 19 February 2007. The circumstances in which a second Proof of Debt was lodged in an increased amount were not before me. However, it is the second Proof of Debt which was the subject of Mr Godfrey's Notice of Rejection and which is the subject of the appeal in these proceedings. 49 On 20 February 2007, a Deed of Company Arrangement was approved by the creditors of Scarfone on the recommendation of Mr Godfrey. According to the minutes of that meeting (Exhibit 2 Tab 3), Mr Godfrey advised the creditors that the assets of Scarfone consisted of two pre-appointment "debts", a sum of $900,000 said to be owing by another company, Ridgecliff Pty Limited, and a sum of $300,000 said to be owing by Wabbits. Under the Deed of Company Arrangement, the creditors accepted a proposal in which their claims as creditors of Scarfone would be satisfied on the basis, amongst other things, that the legal costs to pursue actions against Ridgecliff and/or Wabbits would be paid by the director (Mr Peter Scarfone) and that 25% of the net proceeds of a successful action against Ridgecliff and/or Wabbits would be contributed to a Deed Fund (CB 1 p 33). According to Mr Godfrey, Mr Scarfone is seeking litigation funding for this purpose. 50 Mr Godfrey was formally appointed as the Deed Administrator under the Deed executed on 13 March 2007. In the witness box he gave evidence that no steps have yet been taken in relation to the prosecution of proceedings for a claim in respect of either of the two pre-appointment debts and, despite having asserted in late May 2008 that he would shortly be effectuating the Deed of Company Arrangement, he tells this Court that he has no idea when the Deed of Company Arrangement might be effectuated.
51 In February 2007, Mr Stephen Parks, then a building consultant employed by Vero, assessed and made a recommendation in relation to Wabbits' claim on its insurance policy with Vero. 52 Mr Parks first inspected the site on or about 12 February 2007. He formed the opinion that the contract works had been completed generally in accordance with the copies of the building plans and without significant defects. The focus during his inspection was entirely on the incomplete works. In his report in these proceedings, he says that, based on the photographs taken by Mitchell Brandtman in early 2004, he observed that the works were at "a stage of completion approaching lock up with notable exceptions of several doors and windows not installed and that extensive landscaping and the swimming pool were only in the early stages". 53 Mr Parks reported to Vero on 5 March 2007, recommending at that stage that Vero not accept the claim. As Mr Parks explained in his first expert report (Exhibit A) in these proceedings, at the time that he initially reviewed the claim he had considered that the bundle of invoices and receipts provided by Wabbits were "random and disorganised" and contained insufficient information to enable him accurately to substantiate Wabbits' claim as to the costs to complete. Mr Parks had at that stage noted that there were conflicting opinions (presumably between Wabbits and Scarfone) as to what the builder had been paid to date and what amount remained outstanding on the contract. 54 In or about May 2007, Wabbits and Vero reached an agreement to compromise Wabbits' claim under its insurance policy. (Mr Kalyk gave evidence that there had been some negotiation with the insurer in relation to the claim - as to the application of the excess, a matter on which Mr Kalyk says he conceded. Hence, it could not be said that there had been an unhesitating acceptance by Vero of the claim as pressed on behalf of Wabbits.) 55 A Deed was signed on 28 May 2007 by Mrs Kalyk on behalf of Wabbits and on 5 June 2007 by Vero, under which payment was accepted of $199,500 in full and final settlement of all claims against Vero under the insurance policy. Vero's entitlement to subrogate to the rights of Wabbits against Scarfone was acknowledged. In further consideration for the payment by Vero, Wabbits assigned to Vero, by a document signed on 25 June 2007 pursuant to the deed, all rights in respect of the Scarfone contract.
56 Provision was made in that deed for further steps to be taken, as between Wabbits and Vero, depending on what findings, if any, might be made in any proceedings brought against Scarfone by Vero pursuant to its rights of subrogation (or assignment) from Wabbits, although Vero did not appear to be obliged to commence any such proceedings. Mr and Mrs Kalyk were both cross-examined as to the effect of the Deed provisions in this regard, although no submissions were ultimately made on behalf of Mr Godfrey as to this aspect of the matter. 57 As at June 2007, therefore, the position was that Vero had accepted Wabbits' claim under the policy and had paid Wabbits the sum of $199,500. An operations manager from Vero (Mr Leach), who had general oversight of the claim by Wabbits, gave evidence in these proceedings and confirmed the payment. Mr Leach was unable to shed light on what further material, if any, was provided to Vero in the time between Mr Parks' recommendation and when Vero accepted the claim. His evidence was that, depending on the value of the claim, it was ordinarily the claims specialist who made such a decision and in this case that particular claims specialist had since left the company. Nevertheless, Mr Leach was very clear in his view that it was the role of the claims specialist and Vero staff to make the decision whether to accept or reject the claim, not that of the assessor (T51.19) and that there were circumstances in which a decision would be made contrary to an assessor's recommendation.
58 It seems that the Supreme Court proceedings which were then on foot between Wabbits and Scarfone had been in abeyance to some extent during the period after the appointment of the administrator. On 9 August 2007, Mills Oakley sought information from Mr Godfrey as to the matter; in particular, seeking to ascertain if the administrator was admitting the Proof of Debt in order to determine whether the existing proceedings should be pursued. That confirmation was not provided. 59 On 24 August 2007, whether based on a view as to the likelihood that leave would be given for the continuation of proceedings against a company under external administration or by reference to the advice apparently obtained on the prospects of the claim against Mr Scarfone or otherwise, the proceedings brought by Wabbits against Scarfone in the Technology and Construction List of this Court were discontinued by consent, as was the cross-claim, (without prejudice to either party's rights to bring fresh proceedings) and the claim against Mr Scarfone personally was dismissed.
· Consideration by Administrator of Proof of Debt 60 On 27 August 2007, a formal request was made by Mills Oakley for adjudication of the proof of debt within 28 days in accordance with Regulation 5.6.53 of the Corporations Regulations 2001 (Cth). 61 In these proceedings, Mr Godfrey relies on the correspondence passing between him and the solicitors for the plaintiffs from 2007 as providing the basis of his reasons for not admitting the Proof of Debt. A consideration of the communications which passed between the parties in relation to the claims asserted in the Proof of Debt is therefore relevant when assessing the reasonableness of his conduct (a matter relevant both to a review of the exercise of his discretion in relation to the undetermined Local Government judgment claim and, potentially, on any costs application which may be made in these proceedings). 62 Mr Godfrey, in the witness box, said that it was clear to him right from the beginning that there were no funds in relation to the administration and that the exercise of providing further information was pointless (T 135.31). However, he did not raise this (at least in writing) until after he had sought (and Wabbits' solicitors, no doubt at some cost to their clients, had provided) a substantial amount of information (the amount and detail of which Mr Godfrey was at pains to downplay in the witness box) in relation to the claim. It was put to Mr Godfrey, and I understand that I was invited to draw the inference, that Mr Godfrey's conduct was intended simply to delay the process of a final adjudication of the Proof of Debt to the advantage of Mr Scarfone (who claims to be a substantial creditor of the company and who, as Mr Godfrey accepted, would not, at least while the Deed of Company Arrangement has not been effectuated, face any potential liability of the kind to which he might be exposed, as a director or otherwise, if a liquidator were to be appointed to wind up the company) (T 141). Mr Godfrey denied this. Mr Godfrey maintained that he had not, even to the date of the hearing, been provided with sufficient information properly to consider the claim but that had such information been provided to him then he would have adjudicated upon the Proof of Debt (T 148).
63 Turning to the relevant correspondence, at first, by letter dated 30 August 2007, Mr Godfrey advised that no documentation had been lodged by Wabbits in support of its Proof of Debt and requested copies of documentation in support of Proof of Debt. (In fact, the day after the formal Proof of Debt dated 19 February 2007 was lodged (ie on 20 February 2007), Wabbits' then solicitors, Massey Bailey, had forwarded by facsimile transmission to Mr Godfrey a copy of the Local Court Judgment on which the claim of $21,000 was based so that it was not correct to suggest that no information of at least that part of the claim had been provided.) 64 By letter dated 13 December 2007, Mills Oakley provided to Mr Godfrey some documentation, including a copy of the Deed between Wabbits and Vero, the assignment of rights document, the building contract, Wabbits' Supreme Court summons, and the Vero insurance policy, as well as copies of invoices said to evidence completion costs. An explanation of the legal basis on which Vero claimed to be entitled to exercise Wabbits' rights was also provided. 65 In response, by letter dated 3 January 2008, Mr Godfrey sent a letter to Mills Oakley, noting that the invoices were not supported by various things: a Scott Schedule; photos and/or video at the date of termination of the contracted works; expert's report on the state of the contracted works against the contract as at date of termination; report by a quantity surveyor in relation to the costs required to complete the building; comparative quotes by at least three builders on the specification of the contracted works to be completed; and "any basis to support the contention that the expenses were incurred on contracted works". Mr Godfrey's letter noted that until receipt of the above information he was unable to admit any part of the claim or to adjudicate on it further. 66 Relevantly, in light of the first of the stated bases on which the Proof of Debt was ultimately rejected, Mr Godfrey's letter sought an explanation from Mills Oakley as to "how the terms of the [insurance] policy have been complied so as not to invalidate the claim". 67 Mr Godfrey has taken the view (which he maintained staunchly in the witness box) that there had been non-compliance by Wabbits with certain "critical terms" (clauses 26 and 28) of the insurance policy and that this invalidated the claim. (Indeed he went so far as to suggest that the insurance policy had thereby "come to an end" - T 116.42.) Thus, he contends that Vero should not have admitted the claim. I address this contention later but for the moment suffice it to note that I consider it to be untenable. (To like effect, I cannot see how the suggestion put to Mr Leach in the witness box that Vero was pursuing a claim which it did not have to do, and could simply have asked for a refund of its moneys once the Proof of Debt was rejected, assists Mr Godfrey's position on this appeal against his rejection of the Proof.) 68 Mr Godfrey seemed to go so far as to suggest that Vero was contractually bound not to admit the claim (T 117.4), this logically giving rise to the rather surprising proposition that an insured might have a claim for breach of contract against its insurer for admitting rather than rejecting the insured's claim. 69 Had it been necessary to determine this issue (which it is not in light of my findings in relation to the insurer's conduct in accepting the claim), the question would have arisen as to whether it was open to Vero to act otherwise than in accordance with clause 23 of the policy or, in the language sometimes used, to waive the benefit of the conditions contained in clauses 26 and 28 of the policy. The proposition that a party may choose not to insist upon compliance with a condition of a subsisting contract if that condition is for that party's sole benefit was recognised in Gange v Sullivan (1966) 116 CLR 418 at 430 per Barwick CJ; Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 543, per Gibbs CJ. (I note the High Court's recent expression of caution regarding the use of the word "waive" in this and other contexts, Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 251 ALR 322 at 334 [52].) 70 By letter dated 2 April 2008, Mills Oakley responded to each of the numbered paragraphs of the letter of 3 January 2008 providing further information (including two reports from Mitchell Brandtman, an Occupation Certificate, and Quantity Surveyors reports) or in the case of others explaining why there was no document (so it was that there could be no Scott Schedule as the claim was for a failure to complete works, the unfinished nature of those works not being in dispute). 71 In response, Mr Godfrey again asserted, by letter dated 4 April 2008 to Mills Oakley, that the claim under the insurance policy was invalid and there could be no subrogation. He also stated that he had not received evidence that the costs claimed by Wabbits were "in addition to the contract". He relied upon the reports by Mr Brandtman as verifying the works by the company "as completed in accordance with the contract". He invited Vero or Wabbits to provide the requested information stating that "Unless I am provided with evidence that the costs claimed by Wabbits were for contracted works not completed by the Company I have no basis upon which to admit a claim". (I interpose to note that there was no evidence to suggest that the claim was for works wholly outside the scope of the building contract and I find it difficult to believe that the independent experts engaged by Vero and St George Bank Limited, respectively, to assess the claim would not have raised such an issue had any "rorting" of the kind Mr Godfrey considers rife in the building industry - T 111.40 - been apparent in this case.) 72 By letter dated 9 April 2008, Mills Oakley responded to the issues raised by Mr Godfrey and again formally requested a decision in relation to the Proof of Debt. 73 On 26 May 2008, Mr Godfrey sent a letter to Mills Oakley stating that as they had not provided any further information in support of the claim he was unable to admit "any part of the claim". He advised that no dividend would be paid to creditors in the Deed of Company Arrangement and that he was without funds. He said, "I therefore do not propose to take any further action with respect to your clients [sic] claim". He concluded by stating, "I will shortly be effectuating a Deed and consequently any further correspondence would be fruitless". As I read this letter, it is fairly clearly indicating to the reader that even if any further information was provided Mr Godfrey was still not going to take any further action. Mr Godfrey does not accept that this is what he had conveyed (T 135). 74 On 29 May 2008, Mills Oakley forwarded a letter pointing to the information which had been provided by letters dated 13 December 2007, 2 April 2008 and 9 April 2008 and requesting a clear statement as to whether the Proof had been adjudicated and whether the Proof was accepted or rejected. The letter contained the comment, "we are perplexed as to why, in circumstances where you say there will be no Dividend and you are without funds, you do not simply admit our client's Proof given the supporting documentation", a comment to which Mr Godfrey seems to have taken offence and to have seen as tantamount to bullying (see, for example, T 136.29; T 136.38; T 137). 75 Mr Godfrey wrote again on 2 June 2008, advising that "Without evidence that the costs in respect of work claimed to have been done relate to the contracted work there can be no claim". He again referred to "the breach of the policy which appears on its face to void any claim even if the works do in some manner refer to the contract", noted that he was "without funds", and said "I do not propose to take any further action with respect to your clients claim." 76 On 10 June 2008, Mills Oakley responded to that letter (and a telephone conversation with Mr Godfrey about which there was no evidence), reiterating their view that the claim on the indemnity was valid and as to the irrelevance of that issue to the determination of Scarfone's liability to Wabbits. The letter stated "We note your comment that you will not consider such a document in light of your views concerning the above insurance issue. Notwithstanding this, a document of this nature is presently being prepared and will be provided to you in due course" (my emphasis). Remarkably, even faced with this letter in the witness box, Mr Godfrey stood by the assertion in his affidavit that, by their letter of 10 June 2008 Mills Oakley had advised that they "did not intend to provide further evidence in support of the claim" and said that the reason for his subsequent rejection of the Proof of Debt was the realisation that no further information would be provided (T 147). In fact, what Mills Oakley said was quite the opposite. Admittedly, they insisted that Mr Godfrey adjudicate on the claim by 5.00 pm on 17 June 2008 but it is manifestly incorrect to assert that they had said they would not be providing Mr Godfrey with any further information. 77 On 11 June 2008, Mr Godfrey hand-wrote (on the 10 June letter) an instruction to a senior associate working in his office to prepare a rejection of Proof of Debt. Mr Godfrey, in the witness box, denied that he had only acted to issue a Notice of Rejection when faced with the prospect of a personal costs order being sought against him and denied that anything could be read into the timing of the instruction in that regard. He seemed to suggest that this instruction was in advance of any decision being made to reject the debt. However, if so, there does seem to be a remarkable coincidence of timing, since Mr Godfrey's position up to then was asserted to be that he did not propose to take any further action in relation to the claim. A mere day after receipt of the 10 June letter (and notwithstanding his assertion that without funds he did not propose to take any further action) Mr Godfrey proceeded to instruct his staff to prepare a rejection of the Proof. 78 Given that Mr Godfrey had taken the position up to then that he required further information in order to adjudicate the claim (and that he was in a situation where there were no funds and seemed at least from his evidence to be unwilling to incur costs unless necessary), it seems to me unlikely that he would have asked for a Notice of Rejection to be prepared by his staff had he not by then already decided to reject the claim. Therefore, I find it difficult to accept his evidence that the decision to reject the Proof of Debt was one not made until 16 June 2008 (or, having regard to the clear statement to the contrary in the 10 June letter, that it was then only made because he realised he would not be provided with any further information). 79 Mr Godfrey then adopted the position in July 2008 that any proceeding with respect to the rejection of the Proof of Debt would be without commercial merit (as, unless recovery actions were successful, there was no prospect of a dividend in the matter), a position which he seems steadfastly to have maintained up to the time of the hearing but which could only be relevant (if at all) to a costs issue in relation to any proposal for compromise of the claim.
Subrogation 80 Before turning to the two issues for determination which I have enumerated above, I address the first basis on which Mr Godfrey rejected the Proof of Debt. 81 Mr Godfrey appears to have formed the view (whether with or without the benefit of legal advice is unclear to me) that if the claim by Wabbits against Vero was invalid, because Wabbits had failed to comply with certain conditions of the policy, then the policy of insurance was thereby at an end and that there could be no subrogation to the claim of Wabbits by Vero by virtue of the policy of insurance (T 116.42). He did so notwithstanding that there is no doubt that Vero had itself accepted the claim and had paid out its maximum liability under the policy. There was no evidence that Vero had not done so in good faith and, by reference to the documentation of the settlement of the claim, it seems clear that it did so with the benefit of its own legal advice. 82 No authority was cited by Mr Godfrey (or, for that matter, by Mr Tomaras on his behalf) for the proposition that an insurer must show that it is in fact liable under an insurance policy before it can be subrogated to the rights of the insured. That is not surprising. The difficulty in locating any such authority was adverted to as far back as 1896, when their Lordships in the Privy Council addressed such a proposition (which they described as both novel and startling) and opined that the reason for the silence in the then reported cases on this issue was probably that "the kind of defence raised … has not commended itself to lawyers" (King v Victoria Insurance Co Limited [1896] AC 250 at 256). 83 In the Victoria Insurance case, it was contended that Victoria Insurance was not entitled to be subrogated to the rights of its insured, the Bank of Australia, (though it had paid out on the Bank's claim and taken an assignment of the Bank's rights, allowing Victoria Insurance to sue in its own name) on the basis that the payment was a voluntary one because the claim did not fall within the scope of the insurance cover. The Privy Council rejected this argument in forceful terms, Lord Hobhouse delivering their Lordships' judgment (at 254-255): To their Lordships it seems a very startling proposition to say that when insurers and insured have settled a claim of loss between themselves, a third party who caused the loss may insist on ripping up the settlement, and on putting in a plea for the insurers which they did not think it right to put in for themselves; and all for the purpose of availing himself of a highly technical rule of law which has no bearing upon his own wrongful act. It is not alleged that there was anything but perfect good faith in the claim made by the bank and satisfied by the insurance company. It is not alleged that the question of negligence has not been as fully and fairly tried in this action as it could have been in an action by the bank; or that the government has been in any way prejudiced by the form of the action. But it is claimed as a matter of positive law that, in order to sue for damage done to insured goods, insurers must shew that if they had disputed their liability the claim of the insured must have been made good against them. If that be good law, the consequence would be that insurers could never admit a claim on which dispute might be raised except at the risk of finding themselves involved in the very dispute they have tried to avoid, by persons who have no interest in that dispute, but who are sued as being the authors of the loss. The proposition is, as their Lordships believe, as novel as it is startling … 84 Assuming, for the sake of argument, that Victoria Insurance had not been obliged to pay out the Bank's claim, their Lordships said (at 255): Still if, on a claim being made, the insurers treat it as within the contract, by what right can a stranger say that it is not so? The payment would not be made if no policy existed; and it seems to their Lordships an extravagant thing to say that a payment made under such circumstances is a voluntary payment made by a stranger, and that it would be at least an excess of refinement to hold that it is not a payment on the policy, carrying with it the legal incidents of such a payment. Such settlements of claims between the parties concerned ought not to be reopened for a by-purpose at the instance of parties not concerned. To hold otherwise would convert rules of law framed for the purpose of checking speculations in law-suits into instruments for promoting law-suits which the parties interested are wise enough to avoid by agreement. 85 In Sydney Turf Club v Crowley [1971] 1 NSWLR 724 at 730, Jacobs JA, with whom Mason and Manning JJA agreed, referred to Victoria Insurance as supporting the proposition that: If an insured claimed to be indemnified by one insurer and that insurer disclaims liability, but honestly and by way of ex gratia payment with reservation of his rights pays the amount of the claim, then he is entitled to be subrogated to the rights of the insured against the real insurer. 86 I have not found anything to suggest that the proposition as stated in Victoria Insurance and adopted in the Sydney Turf Club case does not remain good law. 87 In Goff & Jones, The Law of Restitution, 5th ed, at p 130 the case was referred to in support of the proposition that: It is then enough that the plaintiff has simply intervened to discharge what he conceives to be a moral duty. If an insurer acknowledges liability to the assured because it thinks it proper to do so, it should not be open to a third party to object that the insurer must show that it is in fact liable under the policy before it can be subrogated to the assured.
88 To similar effect is the commentary found in Meagher, Gummow & Lehane's Equity: Doctrines & Remedies, 4th ed, at [9-210]: A payment made by an insurer reasonably and in good faith and accepted by the insured, but not in truth within the four corners of the policy, will still be regarded as a payment on the policy and as giving rise to the doctrine of subrogation: King v Victoria Insurance Co Limited [1896] AC 250. This is consistent with the view that subrogation arises to give effect to the equities between the parties upon payment rather than in working out strict contractual rights… What is required on any basis is the contract of indemnity plus a payment which if not called for is at least bona fide and reasonable. This approach is consistent with the remarks of Barwick CJ in State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Limited (1969) 123 CLR 228 at 240: It is settled law that an insurer who has paid the amount of a loss under a policy of indemnity is entitled to the benefit of all the rights of the insured in the subject matter of the loss and by subrogation may enforce them. This right of subrogation is inherent in the contract of indemnity. It has been put that it exists as a contingent right from the inception of the insurance. For my part, with respect, I do not find the description "contingent right" appropriate and satisfying. The right of subrogation as it seems to me does not depend for its existence as a right upon the occurrence of a loss under the policy. Its exercise is of course dependent upon the payment of the loss but as a right it exists from the moment of the making of the contract of indemnity. There is therefore no reason why a breach or threatened breach of the right could not be restrained by the insurer before the loss has occurred, though an occasion for such a course will probably be rare. 89 Much weight was placed by the administrator on the fact that Mr Parks had initially recommended against acceptance by Vero of the claim. He did so, it seems, because of conflicting opinions at that stage as to the value of the contract works and his belief that this would be resolved in the then subsisting court proceedings. Mr Parks explained logically the basis on which he was subsequently satisfied as to the claimed costs (having reviewed the material he received from Mr Brandtman and his discussions with Mr Lim). There seems no reason for me not to accept that evidence.
90 Mr Leach was very clear that all a loss assessor such as Mr Parks is called upon to do is make a recommendation, not to make a decision, as such, whether to accept or reject the claim. (Mr Parks' subsequent evidence suggests that with hindsight there was a proper basis to accept the claim.)
91 It was not suggested to Mr Leach in cross-examination that the compromise Vero had reached with Wabbits was other than one made in good faith (and had there been such an accusation I have little doubt that it would have been made, since Mr Godfrey was quick to attribute lack of bona fides to others in relation to the claim and the proceedings themselves). Insofar as it seemed to be suggested that it was unreasonable or irrational, in light of the recommendation made initially by Mr Parks, for the insurer to reject it, this does not take into account any commercial considerations which may have been relevant to the insurer (such as, perhaps, seeking to avoid unnecessary costs of a dispute with the insured or even the possibility that the insurer may have felt a moral duty to accept the claim, to borrow the words of Goff & Jones). 92 It would, in my view, be difficult to contend that there was no proper basis for an insurer to compromise, for the maximum sum payable under the policy, a claim which on the material provided to it appeared likely considerably to exceed that sum, particularly as there may have been sensible costs reasons to deal with the claim in such a way. (And the suggestion that Vero should have simply accepted Mr Godfrey's decision as determinative and proceeded simply to claim a refund of the moneys it had paid out cannot be seriously put in light of the correspondence I have summarised above.) 93 Accordingly, I find that the first reason stated for the administrator's decision to reject the claim was one which has no foundation as a matter of law and that the administrator's conduct in rejecting the claim (had it been solely on that basis) would (in the absence of anything to suggest a lack of good faith on the part of the insurer) have been one which no reasonable administrator could have made. 94 Further, whatever the position in relation to subrogation, there was no suggestion that the rights of action by Wabbits against Scarfone had not been validly assigned, yet Mr Godfrey accepts that he did not consider the effect of that assignment when rejecting the Proof of Debt on the first stated basis, ie that there had been no valid claim on the policy (T 152). When taken in cross-examination to the fact that there had been an assignment of rights, Mr Godfrey asserted that there was nothing to assign ("you can't assign something you don't have" T 118; see also T 151). However, there is no evidence that there was any release by Wabbits of its rights against Scarfone and, indeed, the basis on which, by consent, the previous proceedings in this Court were discontinued expressly preserved the possibility of a claim against Scarfone. 95 As to the asserted defence based on an alleged indication that the claim would not be pursued, I cannot accept either that there is a factual basis for this assertion or that it precludes the plaintiffs from pursuing in these proceedings an appeal against rejection of the Proof of Debt. 96 I turn then to the issues I have enumerated for determination.
(i) Building contract claim · Breach 97 There seems no doubt on the material before me that Scarfone was in breach of its obligation under the contract to complete the works within the contract period as initially specified. The works were not subsequently completed in accordance with any of the accepted revised building programmes. It was not suggested on behalf of Scarfone that Wabbits' conduct in allowing further time for practical completion precluded it from contending, in February 2004, that there was a breach of contract on the basis of the continuing failure to complete the works. 98 Further, Wabbits points to the alleged breaches by Scarfone of the building warranties, at least one of which (s 18B(d)) seems clearly to have been established. There does not seem to be any basis on which Scarfone asserts that there was not a breach of the statutory warranty for completion within the stipulated period. 99 There might have been a question as to whether Wabbits could terminate the contract in reliance on those breaches without first having given a formal notice under the termination provisions of the contract, but this was not argued by the administrator. As I understand it, the plaintiffs submitted that failure to complete within the stipulated period was breach of an essential term of the contract entitling Wabbits to terminate for repudiation. The administrator did not contend otherwise (though, as I have noted, in the proceedings which were discontinued it seems that the company was asserting by way of cross-claim damages for alleged wrongful repudiation of the contract). Although time was not expressly made of the essence in relation to completion, it was not suggested on behalf of Scarfone in the proceedings before me that completion within the contract period was not a matter of the essence of this contract or that I should not treat the ongoing failure to complete as a repudiation of Scarfone's obligations under the contract.
100 I find that there was a breach of the building contract by Scarfone by reason of its failure to complete construction within the contract period (as implicitly extended, if in fact it was extended at all, by the parties' conduct in adopting revised building programmes from time to time). The question then is what damages are recoverable for that breach of contract. · Quantum 101 Reliance is placed by the plaintiffs on Bellgrove v Eldridge (1954) 90 CLR 613 at 617-618 for the proposition that, in an action for breach of contract brought by a building owner against a builder, the proper measure of damages is the cost, in excess of any amount of the contract price unpaid, of reasonable and necessary work to make the building to conform to the contract, together with any consequential losses served by the breach (the plaintiffs also referring to Ventura v Svirac [1961] WAR 63 and Director of War Services Homes v Harris [1968] Qd R 275). 102 In Bellgrove, Dixon CJ, Webb and Taylor JJ said: 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. 103 Their Honours accepted that the measure of the damages recoverable by the building owner for the breach of a building contract was the difference between the contract price of the work or building contracted for and the cost of making the work or building conform to the contract with the addition in most cases of the amount of profits or earnings lost by the breach. The qualification to which that rule is subject, according to their Honours, was not only must the work undertaken be necessary to produce conformity to the contract but also that it must be a reasonable course to adopt. We prefer, however, to think that the building owner's right to undertake remedial works at the expense of a builder is not subject to any limit other than is to be found in the expressions "necessary" and "reasonable". … As to what remedial work is both "necessary" and "reasonable" in any particular case is a question of fact. 104 Here, it cannot be suggested that it was not reasonable for Wabbits to procure the completion of what were incomplete construction works for the Kalyk residence and there is nothing to suggest that it did so in an unreasonable fashion (notwithstanding the opinion apparently held by Mr Godfrey that there is "major rorting" rife in the building industry (conduct which he presumably was not suggesting was engaged in by Scarfone). There was nothing to support a suggestion of the kind asserted by Mr Godfrey in the witness box (but not put to any of the witnesses) that the cost of completion of the building works might have been in some way artificially increased on this site in order to obtain a lower price on another site (nor would that make any sense if, as it appears, this is a one-off residential construction contract). 105 Nor did Mr Godfrey explain the basis for his assertions as to the practice in the building industry in this regard. It certainly was not put to the witnesses that the scope of the original contract works had in some way been expanded (after the termination of the contact) to include items which would not have fallen within the works required to achieve practical completion of the works under the Scarfone contract and it is inconsistent with the evidence of both the Kalyks and the quantity surveyors in this regard. 106 In Hyder Consulting (Australia) Pty Limited v Wilh Wilhelmsen Agency Pty Limited (2002) 18 BCL 122 at 140 [99] Giles JA, with whom Sheller JA agreed, said that where work has been carried out and the actual cost is known this provides sound evidence of the reasonable cost of the work to make the building conform to the contract and should ordinarily provide the basis for damages.
107 In Hyder, Giles JA said: Neither Bellgrove v Eldridge … nor the other cases cited supported damages based on the theoretical cost of reconstruction of the pavement when the actual cost of reconstruction of the pavement was known, and the actual cost was powerful evidence of an alternative method of calculating rectification costs. 108 His Honour referred to what was said in Bellgrove at 620 and then went on: This does not mean that a theoretical reasonable cost is to be preferred over the actual cost where the actual cost is known and can be taken as the reasonable cost. If the rectification work has not been carried out, then a theoretical reasonable cost must be found and, because damages must be assessed once and for all, must be awarded even though the rectification work might not be carried out. … But if the rectification work has been carried out and the actual cost is known, that provides sound evidence of the reasonable cost and should ordinarily provide the basis for damages. 109 In determining damages as required under Bellgrove v Eldridge, account must be made for any amount of the contract price which remains unpaid to the builder, irrespective of whether the builder would be able to recover that amount. In Woodward Pty Limited v Kelleher [1989] NSWCA 82, Gleeson CJ (with whom Samuels and Priestley JJA agreed), dealt with this subject at some length: In Bellgrove the High Court cited with approval the following statement in Hudson on Building Contracts 7th Ed (1946) at 343: "The measure of the damages recoverable by the building owner for the breach of a building contract is, it is submitted, the difference between the contract price of the work or building contracted for and the cost of making the work or building conform to the contract, with the addition, in most cases, of the amount of profits or earnings lost by the breach."
The corollary of that proposition was stated in H Dakin and Company Limited v Lee [1916] 1 KB 566. In that case the matter was considered from the point of view of the builder, who had performed work which was defective, but not so defective as to produce the result that he could not recover anything for his services. He was held to be entitled to recover the unpaid balance of the contract price, less the cost of rectifying the defects.
In many cases, perhaps most, cases of a claim for damages for breach of a building contract made by a proprietor against a builder on the basis of defective work, there will be no doubt that the unpaid balance of any contract price is recoverable by the builder from the proprietor subject always, of course, to the possibility that it might be exceeded by the proprietor's claim for damages. Whether or not it is technically accurate to describe what is involved as a set-off, there is no conceptual difficulty involved in such a case in deducting the unpaid balance of the contract price from the cost of rectification and consequential damages. There may, however, be, for a number of possible reasons, cases in which the unpaid balance of the contract price could not be recovered in an action brought by the builder. For example, the contract may have been repudiated by the builder. The building work may be so radically defective as to disentitle the builder to sue. The building contract may, for one reason or another, be void. Or, as in the present case, the building contract may be unenforceable at the suit of the builder.
The ultimate object of the rule as to damages earlier quoted is simply to apply to the particular case of a building contract the general principle of measurement of damages for breach of contract established in Hadley v Baxendale (1854) 9 EX 341 which is that the injured party is entitled to be indemnified against any loss likely to arise in the usual course of things from the breach, and also such other loss as was in the contemplation of the parties at the time of the contract as the likely result of the breach of it. Where a builder contracts to construct a building of a certain kind and to a certain standard of workmanship, and fails to do so, prima facie the loss sustained by the proprietor is the difference between what it will cost him to have the promised work carried out by somebody else and the price he agreed to pay to have it done by the builder in question. If, for some reason or other, the builder could not have enforced the contract against the proprietor, that does not mean that the proprietor was entitled to have the building erected for nothing. (my emphasis)
110 Strictly speaking, the calculation as stated in Hudson (which must refer to the total amount expended to bring the works into conformity with the contract - ie the amount expended under the original contract plus the cost of the rectification works) automatically takes into account the unpaid contract balance. It is only when the cost of the rectification works alone is treated as the quantum of damages that it becomes necessary to deduct the unpaid contract balance. 111 In other words, the calculation can be, and is, performed in two ways, both of which reach the same mathematical result. First, it can be approached by calculating the total amount expended to bring the works into conformity with the original contract (ie the amounts paid under the original contract ($x) and in respect of rectification works ($y)) and subtracting from that the original contract price ($z). Alternatively, it can be approached by calculating the cost of the rectification works ($y) and subtracting from that the unpaid contract balance ($z - $x). The approaches are mathematically the same: x + y - z = y - (z - x). 112 Mr Parks gave three reports in relation to the proceedings. He was criticised for having reached varying views as to the cost to complete. His initial views were based on what he described as a bundle of invoices and receipts and Scarfone's progress claim 11. Subsequently, however, Mr Parks spoke with Mr Lim (the quantity surveyor engaged by St George Bank) and was provided with a copy of Mr Brandtman's progress recommendations 9, 10 and 11, which he saw as a broadly contemporaneous expert assessment of the works and their value as at that stage. Mr Parks explained the difference between the final sum certified by him, from that referred to in his original report, as being due to the basis of the instructions which he had previously been given. Having considered the additional material, and addressed the criticisms made of his earlier assessments by Mr Godfrey in the latter's first affidavit in these proceedings, Mr Parks expressed the view that the cost to complete, over and above the unpaid contract price, was $588,102.66. (As noted above, the plaintiffs have since conceded a mathematical error in the calculation of this amount. However, that does not in my view detract from the force of his evidence as to the reasonable cost of the works required to complete the contract works.)
113 In considering the proper quantum of the damages claimed for breach of the building contract, Mr Godfrey in essence raised two issues, those being the treatment of the retention sum (for which provision is made in the contract) and the treatment (and quantum) of the PC item allowances. In relation to the latter, although there was cross-examination as to precisely what was comprised in the PC items, the substance of the challenge by Mr Godfrey to that component of the claim seemed to be his criticism of the accounting of those amounts in the damages calculation (a matter which appears now largely to be conceded by the plaintiffs).
Calculations on which Mr Parks based his certification of the cost to complete 114 At the hearing before me, the plaintiffs based their claim for damages (then for $588,102.66) in respect of the building contract claim on the conclusion reached by Mr Parks in his Second Supplementary Report. It seems to me that this is the appropriate place to start in analysing the respective contentions of the parties, even though there has since been an acknowledgment that the calculations comprised in this report are in part mathematically in error. 115 Mr Parks reached his final sum after accepting the calculations contained in the table in paragraph 59 of Mr Kalyk's affidavit of 17 June 2009, subject only to the exclusion of the "paid to suppliers directly" figure of $217,835 (which he accepted involved double counting). 116 The Kalyk Table is in the following form: Description Amount Contract Sum $1,466,618.00 Adjust PC items: - Deduct PC allowance in contract (page 438 of FGK 1) $ 313,236.00 - Add PC costs incurred by Scarfone as per Progress claim 11 $ 22,400.00 Adjusted Contract Sum $1,175,782.00
Less: $1,056,530.20 - paid to Scarfone ($960,482 ex GST) - paid to suppliers directly $ 217,835.00 Add PC costs overruns as assessed $ 244,795.00 Costs expended to complete the works (paras 29 - 41 above) $ 952,149.46 Total paid as against Contract Sum $1,981,719.66
Wabbits claim for overpayment $ 805,937.66
117 The issue in relation to the retention moneys relates to the calculation of the "paid to Scarfone" figure, namely whether it contains money retained by Wabbits and not in fact paid to Scarfone and whether it ought to do so. The issue in relation to the PC allowances, which has now effectively been conceded, relates to the deduction of the amount of $313,236 from the contract sum.
· Retention moneys 118 In Ventura v Svirac, the Supreme Court of Western Australia gave consideration to the manner in which retention moneys should be treated on a claim such as the present. There, Hale J (with whom Jackson SPJ and Virtue J concurred) held that in a claim by an owner against a building contractor for breach of contract, including a claim for damages for defects in completion and items properly classed as maintenance, retention moneys (held as security against maintenance work still to be done) should be deducted from the total damages claimed: When a building owner sues his contractor for damages for failure to complete the contract work he must give credit for what the work would have cost him if properly performed.
and that it was not necessary for the contractor to plead a set off or counter claim in order to obtain credit for the unpaid balance of the contract price. I have referred above to the manner in which the unpaid balance of the contract price was taken into account in Woodward . 119 As I understand it, Mr Parks accepts (as did each of Mr Lim and Mr Brandtman) that in order to determine what sum would have been payable had the contract been completed, retention moneys are not to be deducted from the contract price. This is because the sums which are able to be retained from progress payments under the contract are retained as security for performance of the contractual obligations (and hence when assuming completion of the contract works one would assume that any defects were remedied).
120 Accordingly, the adjusted contract price for the purposes of the exercise before me is one which assumes that the owner does not on completion retain any moneys provided by way of retention moneys out of the contract price. In other words, the adjusted contract price must be one which assumes that the builder would receive at the end of the completion of the contract works the full amount of the (adjusted) contract price without any retention by the owner. It follows from this that there should be no deduction from the sum notionally treated as paid or payable on completion to Scarfone for moneys retained out of progress payments prior to completion. As I understood it from Mr Godfrey's fervent nodding at the back of the courtroom when I ventured that opinion during oral submissions, Mr Godfrey accepts that this the appropriate approach. 121 How then was this issue treated in Mr Parks' calculations? 122 The "Adjusted Contract Sum" appearing in the Kalyk Table is the "Contract Sum" minus the "PC allowance" and plus the "PC Costs incurred by Scarfone" (ie $1,466,618 - $313,236 + $22,400 = $1,175,782).
123 The Contract Sum of $1,466,618 in the Kalyk Table is derived from the Progress Valuation 11 produced by Mitchell Brandtman (CB p 3163). That Contract Sum is derived in the following way: Proposed Expenditure $1,449,182.00 Variations to Contract ($ 115,893.00) Sub Total $1,333,289.00 GST Applicable $ 133,329.00 ADJUSTED EXPENDITURE VALUE $1,466,618.00
124 The "Proposed Expenditure" figure reflects the original Contract Price excluding GST ($1,449,181.82 - CB p 2746) rounded up to the nearest dollar. 125 It is unclear whether the "Variations to Contract" figure relates solely to deemed or agreed variations falling within Clause 17 of the Contract. In Progress Claim 11, Scarfone listed "Variations as per Schedule" in the positive sum of $186,509, which would suggest that some of the variations to which Scarfone's and Mitchell Brandtman's respective figures relate were not finally agreed by the time the contract was terminated. 126 Mitchell Brandtman's "Variations to Contract" figure is the sum of the figures listed in the Trade Total column appearing in the Variation Progress Claim Summary for Claim Number 11 (Court Book pp 3167-3168). The figures in the Trade Total column are divided into two categories: Contractor Variations and Owner Direct Payments. The Contractor Variations are, for the most part, positive sums apparently referable to alterations to the building works. (For example, Trade Number 6 is described as "Extend games room by 300mm in width including kitchen area and reduced patio" and bears the Trade Total $12,180.) On the other hand, the Owner Direct Payments are all negative sums, which prima facie would seem likely to be referable to goods or services paid directly by Wabbits or the Kalyks. (For example, Trade Number 27 is described as "Sandstone Supplies" and bears the Trade Total $-64,990.) 127 Mr Brandtman was not cross-examined as to how the variations sum in his last Progress Valuation was derived. Mr Parks says in his Second Supplementary report that the Owner Direct Payments overlap with the "paid to suppliers directly" figure of $217,835. Mr Parks appears to be correct (and the plaintiffs have accepted this) in saying that adopting the Mitchell Brandtman Total "Adjusted Expenditure Value" as well as the "paid to suppliers directly" figure results in double counting. The subtraction of direct payments to suppliers from the Contract Price/Contract Sum accounts for much, though not all, of the discrepancy between the adjusted Contract Price figures adopted in the respective parties' calculations. 128 The calculation of the "Total paid as against Contract Sum figure" is confusingly represented by the table. The table may seem to suggest that the "paid to Scarfone" and "paid to suppliers directly" amounts are being subtracted from the "Adjusted Contract Sum". That is not the case. In fact, the "Total Paid as against Contract Sum" is the sum of the "paid to Scarfone" figure, the "paid to suppliers directly" figure and the "Costs expended to complete the works" figure, less the "Add PC costs overruns as assessed" figure ($1,056,530.20 + $217,835 + $952,149.46 - $244,795 = $1,981,719.66).
129 The "paid to Scarfone" figure of $960,482 ex GST (and $1,056,530.20 inclusive of GST) is found for the first time in Mr Kalyk's affidavit of 17 June 2009. There is no explanation given as to why this figure exceeds that found in Progress Claim 11. This is a matter recognised in the Further Submissions served by the defendants. In his first two reports, Mr Parks used figures based on Progress Claim 11 (ie $979,284 GST inclusive - CB p 3142). He does not explain in his Second Supplementary Report why he accepts Mr Kalyk's figure nor was there any explanation proffered during the course of cross-examination in relation to the increase. 130 The $960,482 figure seems to derive from the Mitchell Brandtman Progress Valuation 11 (Court Book p 3164). It appears beside the words "Loss: Progress Certification (incl Retention)". However, this figure reflects not only the monies which had been paid to Scarfone, but also retention monies not in fact paid to Scarfone. The mathematical difference between $979,284 and $1,056,530.20 (ie $77,246.20) in my view makes this clear. In his affidavit of 17 June 2009, Mr Kalyk asserts at paragraph 25 that the value of the retention monies is $70,224, relying upon the Mitchell Brandtman Progress Valuations 10 and 11. If this figure is multiplied by 110% (so as to include notional GST) one arrives at a figure of $77,246.4 (almost exactly the discrepancy between the varying figures used in the different reports to reflect the total amount paid to Scarfone). 131 I accept the defendants' submissions that there is no reason for money which Wabbits/the Kalyks retained (by way of the retention provisions under the contract) out of the progress claims and which was not paid to Scarfone to be treated as money which has been paid to Scarfone for the purpose of calculating damages. 132 In the further submissions served on behalf of the plaintiffs, it is said that the discrepancy between the two figures ($1,056,530.20 in the Second Supplementary Report as compared with $979,284.00 in the 21 November 2008 report of Mr Parks - ie $77,246.20), is not accounted for by the inclusion of the retention moneys in the larger figure. Mr Grant submits that the figure of $960,482 is a certification of the value of the works (including retention) and that the difference between the sums is not attributable to the inclusion of retention monies. Mathematically, that seems improbable. However, if it is indeed the case that Mr Brandtman's figure is simply a valuation of the works (including retention) and is not referable to the amount paid to Scarfone, then it is not relevant to the calculations to be performed. As the decision in Bellgrove makes clear, the value of the incomplete or defective works is not the basis from which damages are to be calculated. The amount paid to the builder in breach is the proper basis for the calculation as it is used to calculate either the unpaid balance of the contract price or the total amount paid to bring the works into conformity with the contract, depending upon which approach to the test is adopted. The actual value of the incomplete works is not relevant to that calculation. 133 It is then submitted for the plaintiffs that, because Wabbits would have been entitled to retain those moneys as security for builder's obligations which have been breached, Wabbits would be contractually entitled to retain those moneys and, conversely, Scarfone should not be given credit for those moneys. However, that submission seems to me to fly in the face of the logic underlying the treatment of retention moneys in Ventura. While Wabbits had a contractual right during the course of the contract to 'retain' money out of the progress claims as security, in determining the total amount paid to bring the works into conformity with the contract, amounts should not be included which are referable to sums which have not, as a matter of fact, been paid. 134 Accordingly, I consider that the plaintiffs' claim needs to be reduced in this regard by the sum of $77,246.20.
· Mathematical treatment of PC allowances 135 The "PC Costs overruns" figure of $244,795 is derived from Mr Parks' Supplementary Report (CB pp 3789-3790). The basis for this figure would appear to be contained in the table on pages 3786-3788 of the Court Book, in which Mr Parks lists the PC items and their allowances under the Contract in the "Original contract PC Schedule" column, lists the costs referable to similar items in the "Similar item from Hugh B Gage (HBG) cost to complete" column, occasionally comments upon or adjusts those costs in the "Comment" column, and presents the difference between the original PC allowance and the adjusted costs of the similar HBG items in the final "Opinion of the estimated adjustment required to the PC schedule in original contract" column. The sum of the figures in this final column is $244,795.60 (ie the "PC Costs overruns" figure). 136 Accordingly this figure represents the extent to which Mr Parks considers that the PC Costs have exceeded the allowance in the original contract ($313,236). Although Mr Parks does not include such a figure in his report, the logical corollary of this would be that the total PC Costs are in the order of $558,031.60 (being $244,795.60 plus $313,236). 137 The label "Deduct PC allowance in contract (page 438 of FGK 1)" for the figure of $313,236 in the Kalyk Table is confusing. Page 438 of FGK 1 (CB p 3146) is the final page of Scarfone's Progress Claim 11, headed "PC List". It contains some, but not all, of the Prime Cost items listed in the Contract. Further, the sum of the figures set out in the first column (which is untitled, but which appears to be list of prices inclusive of GST) seems to be $194,560 and not $313,236. That said, $313,236 is the correct sum of the prices allowed in respect of PC Items in the original Contract (CB pp 2786-2787). 138 The "Add PC costs incurred by Scarfone as per Progress claim 11" figure does not reflect the actual claim by Scarfone. In Progress Claim 11, Scarfone appears to assert a claim for $49,502 in respect of PC Items (CB pp 3143, 3146). The $22,400 figure is derived on the basis of the factual assertions contained in paragraph 51 of Mr Kalyk's 17 June 2009 affidavit. There was no evidence adduced for the defendants in response to those factual assertions.
139 The "Costs expended to complete the works" figure is the sum of Hugh B Gage's evaluations of 9 March 2005 and 28 April 2004. Though Mr Godfrey complains about these figures, Mr Parks' explanation in his Second Supplementary Report as to why these do not constitute double counting seems reasonable to me.
140 It did not seem to me that there was any clear reason for the PC Allowances to be deducted from the Contract Price. Under the contract, the PC Allowances form part of the contract price, subject to adjustment to the contract price if the actual price of a PC Item is greater than or less than the allowance for it in the contract. In the absence of any adjustment where there is an actual price, I would have thought the Contract Price ought to remain the same. 141 There could be an argument that, where most PC items had not been purchased as at termination, the actual price for those items should be treated as being notionally zero and so the full allowance in respect of those items ought to be deducted from the contract price. However, if that were to be the case, then in calculating the amount of expenditure required to complete the building works, no amounts referable to PC Items should be included. That is not how the Kalyk Table approaches this. As discussed, the PC Costs overruns figure represents Mr Parks' opinion of the maximum amount referable to PC Costs minus the PC Allowance in the original contract (ie it is $313,236 less than the maximum amount Mr Parks' considers was spent on PC Items). Accordingly, on Mr Parks' view, the "Total paid as against Contract Sum" figure includes up to $313,236 referable to PC Items. 142 As submitted by the defendants (and conceded now by the plaintiffs) either the PC Allowance should be excluded from the calculation entirely, or it should form part of the Contract Price. Both methods would arrive mathematically at the same result. As this seems now to be agreed, I need say nothing further as to this. · Other issues in relation to PC items 143 As a further matter in relation to PC cost items, I should note that some of the cross-examination in relation to the cost to complete of those items identified as PC items in the contract seemed to be directed not so much to the correct mathematical treatment of those items but rather as to how they were to be quantified (the relevance of this, as I understand it, being as to whether there should be an adjustment to the contract price in respect of some or all of those items). The administrator did not accept that the experts retained on behalf, first, of St George Bank, and then in these proceedings by the plaintiffs, have properly carried out an assessment of the actual cost of the PC items so as to be able to make an appropriate adjustment to the contract price. (This is the issue to which I assume Mr Godfrey was alluding in his correspondence when he repeatedly referred to information as to works "in addition to the contracted works or in accordance with the contracted works".)
144 The basis on which Mr Godfrey said that he was not in a position, and did not have enough information, to admit the building contract claim seems to have largely related to this issue. In other words, he was not satisfied that the invoices or material provided to him substantiated that the works had been in accordance with the contract works. What I understood him to mean by this was that, while the contract works provided for the construction of a building in accordance with plans and specifications they included various PC items or otherwise and that he could not be satisfied on the invoices submitted to him that the works in question had not been works carried out over and beyond works for which Scarfone would be liable under the contract. Mr Godfrey made a somewhat impassioned speech as to the existence of "massive overruns" which he says was rife within the building industry. 145 It seems to me, from the correspondence I have reviewed and from the tenor of his evidence, that in all likelihood Mr Godfrey approached the Proof of Debt at the outset with a jaundiced view (whether or not that was influenced by Mr Scarfone I do not know), coloured by his belief that "rorting" is rife in relation to the completion of contracts such as this. Nothing of that kind was put to Mr or Mrs Kalyk in cross-examination and it is inconsistent with the assessment of the independent experts as to the reasonableness of the additional costs to complete. 146 In cross-examination of Mr Brandtman, for example, Mr Tomaras pointed to item 12 of the addendum to the building contract for works to a value of $312,978 (T 85.38) to be varied and treated as PC items (covering six categories of works). He also referred to a further 33 items of PC allowances for an amount of $330,236 (presumably $313,236). Mr Parks, however, convincingly explained that the PC allowances in the building contract addendum (and the builder's checklist) were not PC items at all, as those were matters which the owner could elect to deal with in a different way but, absent such an election, would not result in a variation of the contract price. 147 There was cross-examination to similar effect of Mr Lim in relation to the PC cost issue. I should say that I found both the quantity surveyors and Mr Parks to be careful and concise in their evidence. The apparent criticism of the fact that some items were included both as PC items and as part of the overall contract price, was not substantiated in my view. The quantity surveyors did not accept that where an item was included by way of description in the table of PC items (such as the swimming pool) that necessarily meant that all costs in relation to the pool fell within a PC item. As I understand it, for example, there might be some aspect of the pool construction costs which should be treated as a PC item but there would be other pool works included within the contract price without adjustment. 148 Broadly, as I understand it, a distinction was drawn by the plaintiffs' experts between costs in relation to materials and costs in relation to labour. In the absence of evidence from any builder or expert on the part of the defendants (and particularly in the absence of any evidence from Mr Peter Scarfone, who may have been able to shed light on the composition of PC items), I accept the balanced evidence of Mr Brandtman, Mr Lim and Mr Parks in this regard and do not accept that any further deduction in relation to PC items is warranted.
149 Insofar as it was suggested by Mr Godfrey that evidence of the state of construction as at 16 January 2004 was insufficient, in that he assumed there would have been a substantial amount of work carried out the following month, I note that in circumstances where the very dispute between the parties was as to the lack of progress in the works that seems to me to be an unsafe assumption to make. It seems to me that if the administrator had wished to make a submission to that effect then evidence should have been adduced from the builder as to what remained to be done after the termination of the contract. Again there was no cross-examination of Mr or Mrs Kalyk on that issue. 150 Further, I do not accept that it was impossible, on the basis of the material ultimately put before Mr Godfrey, for him to review carefully the invoices and reports (particularly as he was in a position to obtain instructions from the builder in relation thereto) and to form a view on whether the works were reasonably necessary and within the contracted scope of works. The reason that no attempt was made to do that seems rather to have been because Mr Godfrey considered it would have taken an inordinate amount of time, there were no funds to do so and he considered it a matter for the owner to satisfy him of the claim (T113.5) (and, it would seem, to do so by providing the evidence to support the claim in precisely the form he considered easiest to review). · Conclusion as to quantum of building claim 151 As now conceded by the plaintiffs, in determining the Adjusted Contract Sum, the PC Allowance should not be deducted. This has the effect of reducing the quantum of the claim by $313,236. 152 I can see no logical reason why monies retained and not paid to Scarfone should be treated as monies which have been paid to Scarfone or monies which should be taken into account in the calculation of the damages. The "paid to Scarfone" figure should be reduced to $979,284.
153 Once those issues are addressed, the claim is be reduced by $390,482 (being $313,236 + $77,246). The amount of the damages for which the Proof of Debt should be admitted in this regard is therefore $197,620 (being $588,102 - $390,482).
General Comments 154 It was asserted by Mr Godfrey in the witness box that he was not going to be "bullied" into accepting a Proof of Debt or compromising claim of one dollar more or one dollar less than he considered was warranted. That, he considered, would be reprehensible. However, there is nothing on the evidence which would lead properly to the conclusion that Mr Godfrey was being in any way "bullied" by Mills Oakley. What was happening was simply that Mr Godfrey was being pressed to turn his mind to the adjudication of a claim in respect of which he had, over a considerable period of time, continued to request a large amount of information (even though he says he was of the view right from the beginning that such a task would be pointless) and where a great deal of information (whether he considered it satisfactory or not), had been provided to him no doubt at some cost to the plaintiffs. 155 It was submitted for the plaintiffs, in effect, that I should infer that Mr Godfrey was simply seeking to delay the adjudication of the claim and was behaving unreasonably in continually demanding the provision of further information when he had no intention of considering it. While I accept that such an inference would not be unwarranted, there are also criticisms which can be made as to the way in which the plaintiffs have sought to quantify their claim. 156 That said, Mr Godfrey's position in relation to the subrogation claim (totally unsupported by any authority) seems to me to be consistent with behaviour of someone seeking to find any reason to reject a claimed debt. Whatever the position as between Wabbits and Vero, the acceptance of the insurance claim does not affect Wabbits' underlying claim against Scarfone and it was that which was the subject of the Proof of Debt. It could not seriously be suggested that, in accepting payment under the home insurance policy Wabbits and in discontinuing proceedings (which the administrator had already pointed out could not be maintained without leave), this had in some way operated to release Wabbits' claims for breach of contract against Scarfone. 157 Even if the insurer had (and there is no evidence to suggest this is the case) compromised a claim for which it may ultimately not have been held liable (which on the authorities would not of itself preclude it from being subrogated to the rights of the insured, the issue then seemingly being whether it had so compromised that claim in good faith), this could not have invalidated the assignment of rights (to which Mr Godfrey conceded he had not had regard when rejecting the Proof of Debt). The submissions put on behalf of Mr Godfrey on the subrogation point thus have a distinct air of unreality to them. 158 Mr Godfrey, who so stridently expressed his opinion in the correspondence and in the witness box on the invalidity of the insurance claim, did not take into account matters such as the fact that there was a judgment debt against the company, or as to whether it was open to the insurer not to insist upon compliance with conditions of a policy which operated for its own benefit (as clause 26 and 28 surely must have been characterised). In any event, for the reasons outlined above, Mr Godfrey's view (perhaps taking into account Mr Scarfone's own view of the matter) as to what the insurer should or should not have done is not a relevant matter when he was considering the adjudication of the proof of debt.
159 Mr and Mrs Kalyk each gave evidence in the proceedings as did Mr Leach, Mr Lim, Mr Brandtman and Mr Parks. They were not seriously challenged in any way. Evidence for the defendant was given by Mr Godfrey who, in contrast, was argumentative, demonstrated a tendency to try to argue his case and was defensive in his responses to questions going to his own conduct of the claim (see, by way of an illustration of this, T 104.6, T 110, T 116.20, T 119.13, T 121.38, T 136, T 156.38-T 157.5). Neither Mr Peter Scarfone nor his consultant, Mr Terry Daly, gave evidence in the proceedings.
160 Some of Mr Godfrey's correspondence (particularly his letter of 25 November 2008 to Mills Oakley, referring to his previous "attempt to point out to you the folly in your arguments") and the assertion, at the conclusion of his affidavit (read only as part of the material to which Mr Parks had regard when preparing his third report), that Mr Parks had manifested what was described, variously, as "incredible bias", "substantial bias" and "bias", seemed to me extraordinary to say the least. Mr Godfrey accused Wabbits (or perhaps its lawyers) of lack of bona fides in the responses to his requests for information. He says that he was of the view that Mr Parks' report had "clearly been manufactured to achieve a result". He opined that the current proceeding to object to his adjudication on the Proof of Debt of Wabbits "would therefore appear to be completely baseless" and in breach of "your" (by whom I can assume he is referring to Mills Oakley's) obligations to the court. These are serious allegations to be made and none was put to Mr Parks in the witness box. 161 The unrestrained and emotional tone of the responses by Mr Godfrey, contrasted with the courteous manner in which Mills Oakley corresponded with him, do not reflect well in my view on someone who accepts that, at the time he was considering the Proof of Debt, he was in the position of a quasi-judicial officer. Mr Godfrey ultimately conceded that he had rejected the Proof without carefully reviewing all the material provided to him, apparently because this would have taken too long. This is in my view relevant to take into account when considering his overall conduct and the basis on which he dealt with the second (albeit minor) part of the Proof of Debt.
Local Court judgment claim 162 As to the Local Court judgment debt, no issue was raised in these proceedings (or in the correspondence between the parties) as to the underlying debt the subject of that claim. I can only assume, therefore, that there is no contest as to the existence of that underlying claim. Further, Mr Godfrey has asserted in his correspondence on a number of occasions that he has no (or insufficient) information to adjudicate the Proof of Debt, he does not seem to have been referring to this part of that Proof (since, in the absence of any suggestion that he was seeking to go behind the judgment, what more would he need to satisfy himself of the claim?). 163 In the witness box, Mr Godfrey justified his lack of any decision on this part of the claim by reference to a belief he apparently shared with Mr Scarfone that there was a set-off or counter claim in the company's favour. However, no steps have been taken in relation to the prosecution of any such claim and it was not put in issue before me on these proceedings. 164 Ultimately, Mr Godfrey conceded that in circumstances where there was a judgment debt which had been entered against Scarfone and where it was his understanding that the claim by Scarfone against Wabbits had been settled, the consequence might well be that there was no basis not to accept the Local Court judgment debt. Mr Godfrey accepted that he had not actually set his mind to the issue (T 156). 165 What then is the position in relation to that part of the Proof of Debt? Strictly speaking, I do not consider that there has been a rejection of this part of the claim, as such. The initial Notice of Rejection clearly stated it as being under consideration. While I doubt very much, in light of Mr Godfrey's evidence, that in fact any real consideration was given to this aspect of the Proof of Debt whether before or after the service of the Notice of Rejection, I do not accept that this means it should now be deemed to have been rejected. Rather, it seems to me to be a situation in which the discretion of the administrator has miscarried - he not having apparently turned his mind to an issue which he had said was "under consideration" for some considerable time. 166 In Yeomans, Hodgson J, as his Honour then was, said at 383: In my view, the general approach of the court in a case like this [where proceedings were brought to injunction the sale of land by a liquidator] is that it should not interfere with a decision made by a liquidator unless either there is fraud, or it can be said that the discretion has not been exercised bona fide, or it can be said that the liquidator has acted in a way in which no reasonable liquidator could have acted…
167 In circumstances where there is no challenge to the claim underlying the entry of the judgment debt, and the question whether any set-off could have been maintained against that debt has not been pursued in these proceedings, I am of the view that no administrator acting reasonably could have failed to admit at least this part of the Proof of Debt.
168 I therefore find the conduct of the administrator, in not considering this claim for a period of over two years, and in the manner in which he dealt with the overall claim, coupled with Mr Godfrey's acceptance that there is presently no claim on foot which is being asserted as any set off or counter claim to the judgment debt (which he has not in any way sought to go behind), means that Mr Godfrey's exercise of discretion has been one which no reasonable administrator in his position would have made.
Conclusion 169 I am satisfied that the decision of Mr Godfrey to reject the Proof of Debt lodged by Wabbits on 19 February 2007 should be reversed and that the administrator should have admitted the Proof of Debt for the sum of $217,223.70 in total. 170 I propose to make the following orders:
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Wabbits Pty Limited
Godfrey
(1954) 90 CLR 613
(2006) 236 ALR 652
(1966) 116 CLR 418
(1982) 149 CLR 537
(1990) 169 CLR 33
(1998) 20 WAR 150
(1986) 5 NSWLR 378
(1990) 169 CLR 332
(2008) 251 ALR 322
(1969) 123 CLR 228