Eighth issue: damages for delay in completion
93On the referee's findings as adopted (the effect of which adoption is, as I have said, to estop the parties from contending to the contrary of those findings), the (correctly adjusted) date for practical completion was 26 June 2007. The date of practical completion was 9 July 2007. Thus, Walton achieved practical completion some 13 days later than it should have done.
94Before I look at the various ways in which Illawarra formulated its claim for damages for delay, I shall deal with two preliminary arguments.
The effect of cl 35.6
95It will be recalled that the printed version of cl 35.6 (under which Walton was liable for liquidated damages at the rate stated in the annexure for delay in achieving practical completion) was deleted, and that an amended cl 35.6, which dealt only with the position as between Walton and its subcontractors, was inserted.
96Mr Gracie submitted that cl 35.6 (as it had been reworded) should be read as operating not only as between Walton and its subcontractors but also as between Walton and Illawarra. He relied on the concluding subparagraph, under which liquidated damages received by Walton from its subcontractors should "be held in trust... for Illawarra until Illawarra is entitled to receive them". He submitted that those words showed an intention that Illawarra should be entitled to receive, and Walton to pay, liquidated damages at the rates specified in cl 35.6 to apply between Walton and its subcontractors. That entitlement operated, he submitted, to cap or limit the amount of damages payable for any unjustified delay in achieving practical completion.
97I do not accept that submission. I do accept that, as Mr Gracie submitted, it is very difficult to see what work cl 35.6 was intended to perform unless there were intended to be back to back rights, or some correlative rights, to liquidated damages. But in circumstances where the express contractual provision giving Illawarra an entitlement to liquidated damages against Walton was deleted, it is expecting far too much of the substituted form of cl 35.6 to read it as going beyond its plain terms and covering that which, in the ordinary way, would have been dealt with by the printed but deleted form of cl 35.6. I accept that the parties to a contract should be taken to have intended that no part of the words they used would be redundant. But, as Lord Hoffmann said in Beaufort Developments at 274:
...the argument from redundancy is seldom an entirely secure one. The fact is that even in legal documents (or, some might say, especially in legal documents) people often use superfluous words... In the case of a contract which has been periodically renegotiated, amended and added to over many years, it is unreasonable to expect that there will be no redundancies or loose ends.
98In this case, the parties, it appears without legal advice, amended the terms of the standard form of contract on which they based the wording of their bargain. Although Mr Kam is or was a solicitor, it does not appear that he was involved in the drafting exercise. That appears to have been carried out between Ms Indyk and representatives of Walton. Thus, whilst it is regrettable that the redrafting exercise appears to have produced an orphaned provision relating to damages as between Walton and its subcontractors, that does not justify the court in reading that orphaned provision as having an operation a wider than its words fairly permit.
99It may be accepted that the substituted form of cl 35.6 was intended to replace what was deleted (this is apparent from the way in which the deletion was carried out). But that does not mean that the substituted form of cl 35.6 should be read as doing the same work as the clause that it replaced. On the contrary, it seems to me, the way in which the parties filled in the item of the schedule that refers both to cl 35.6 and to the topic of liquidated damages (by inserting "$0. Refer to amended cl 35.6") is a powerful indication that the parties did not intend any amount to be payable by Walton to Illawarra by way of liquidated damages.
100Thus, I conclude, whatever cl 35.6 does mean, it does not have the effect that Illawarra is not entitled to general damages for delay in achieving practical completion.
The effect of the Superintendent's certification
101Illawarra submitted that, whatever the referee might have decided (and whatever the court might have concluded, by adopting this aspect of the referee's report), the question of the extent of the delay in achieving practical completion was to be answered by reference to the Superintendent's determination of the number of days of extension of time to which Walton was entitled. For the reasons I have given earlier, I do not accept that submission.
The parties' submissions on quantification of damage
102Illawarra had leased the hotel to two associated entities, known as Vosava Pty Limited and Gamone Pty Limited. That lease was made well after the contract between Illawarra and Walton was signed. There is nothing in the evidence, at least as the parties referred to it in their submissions, to show that the lease that was granted had been in the contemplation of Walton and Illawarra when they negotiated and made their contract. Under the lease, the lessees paid a fixed or base rent and a turnover rent. Illawarra's claim for damages was based only on loss of the turnover rent. It relied on Mr Krochmalik's evidence to quantify this.
103Walton submitted that Illawarra was not entitled to any damages for the period of delay in question (that is, for the 13 trading days from the adjusted date for practical completion, 26 June 2007, to the date of practical completion, 9 July 2007). It based that submission on the proposition that the referee had found, first, that the period from 26 June until 6 July was one for which Walton was entitled to extensions of time by reason of delays attributable to Illawarra or the Superintendent; and, secondly, that Walton was not responsible for the delay in certification of practical completion from 6 to 9 July 2007.
104As to loss based on turnover rent, Walton criticized aspects of Mr Krochmalik's analysis: in particular, a determination of the lost daily turnover rent calculated by reference to a time when trading had stabilized, about a year after the delays in question.
105More fundamentally, Walton submitted that the claim was too remote. It noted that, according to Mr James (whose evidence on this point was said to be supported by the evidence of Illawarra's values, Mr Robertson), the terms of the lease that dealt with turnover rent were "uncommercial".
106To meet that submission, Illawarra relied alternatively on what it says was the loss that it would have suffered had it operated the hotel itself (as calculated by Mr Krochmalik) or, alternatively, the loss of the market rental for the hotel (as assessed by Mr Robertson).
Decision
107I do not accept the proposition that Illawarra is not entitled to damages for delay in achieving practical completion because the actual days of delay were (or should be taken to have been) covered by extensions of time. The reality, on the facts and on the referee's findings as adopted, is that practical completion was achieved some nine contractual working days, and more relevantly some 13 trading days, later than it should have been. Illawarra was deprived of the benefit of those 13 trading days. To my mind, it does not matter that the actual days were (or should be regarded as having been) covered by extensions of time.
108For essentially the same reasons, I do not accept Walton's criticism of Mr Krochmalik's methodology in so far as Mr Krochmalik used trading figures from a period in the future when trading had stabilized. The effect of the delay in achieving practical completion was that the "ramp-up" period, during which trade would have increased until it stabilized into a normal seasonal pattern, was delayed.
109Again for essentially the same reasons, I do not think that anything turns on the selection of particular trading days, although it might have been preferable for some annual average figure (once trading had stabilized) to have been used.
110However, the fundamental point that Walton takes cannot be disposed of so easily. The essentially unchallenged evidence of Mr James is that the turnover rent provisions in the lease between Illawarra and its related entities were uncommercial. The turnover rent was based on gross turnover and not net turnover; it was a fixed percentage of gross turnover. The impact of the "payout ratio" and tax on gambling revenues was such that, as Mr James said, the lessees "lost money on every dollar put into a gambling machine; the more successful the gaming operations, the more money [the lessees] lose". Even leaving taxes out of consideration, the payout ratio (89%) and turnover rent (15% of gross revenue) meant that the lessees were required to pay out $1.04 for every dollar gambled.
111Mr Robertson made the same point, although in different terms. He said that the turnover provision, read in conjunction with the definition of "turnover rent", would not be found in any arms' length lease. He said that the definition of "gaming revenue" was not consistent with any provision that would be found in a lease negotiated at arms' length. On figures given by Mr Robertson, the turnover rent actually payable under the lease would be about nine times greater than that which would be payable under a lease (of the same hotel) negotiated at arms' length. Mr Robertson said that "no prospective arms' length lessee would have agreed to these terms, despite the prospect of renovations being undertaken to the premises and the potential for significantly increased trading".
112I do not think that this problem can be overcome by ignoring the arrangements that Illawarra put in place (no doubt, for good commercial reasons) with its related entities, and by assessing damages on some hypothetical scenario, or on a basis that Illawarra might have (but did not) put in place. The question, after all, is "what (not too remote) loss has Illawarra suffered by the delay in practical completion?". It is not "what (not too remote) loss might Illawarra have suffered, had it put in place different arrangements to derive income from the hotel, by the delay in practical completion?".
113I have no doubt that, in principle, loss of the value of the opportunity to derive income from the hotel business is recoverable. The parties knew (or, at the least, must be taken to have known) that the hotel was a functioning trading business, and that it was being renovated to make it more attractive to patrons, and thus to maximize the value of its trade. They knew (or must be taken to have known) that Illawarra intended to derive income from the trading activities of the hotel. It is not necessary that they should have had in contemplation "the precise details of the events giving rise to the loss". It is enough "that they contemplate the kind or type of loss or damage suffered". See McHugh JA in Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 311 at 365-366. In this case, the kind of loss that the parties would (or should) have contemplated was loss of the opportunity to derive income from the operations of the hotel either directly, that is, operated by Illawarra, or through arrangements made at arms' length and on commercial terms.
114In those circumstances, I think, Walton should be taken to have accepted the risk of loss in the event of delay (for which it was not entitled to any extension of time) in achieving practical completion. But it does not follow that Walton should be taken to have accepted the risk of loss calculated on the basis that Illawarra had entered into uncommercial arrangements with related entities so as, in effect, to reap a greater return from the trading operations of the hotel than might have been achieved by any arrangement made at arms' length.
115On this point, I think, assistance can be gained from the decision in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528. The plaintiff carried on business as a launderer and dyer. It bought a boiler from the defendant for use in its business. The defendant knew the nature of the plaintiff's business, and knew that the plaintiff proposed to put the boiler to immediate use in that business. The defendant delayed in delivering the boiler. Unknown to the defendant, the plaintiff had the opportunity to make specially lucrative contracts with the government, and proposed to use the boiler to enable it to fulfill those contracts. The Court of Appeal held that the plaintiff could recover damages for loss of ordinary business profits arising from delay in delivery of the boiler, but not for loss of the profits that would have arisen from the particularly lucrative contracts. The defendant did not know of the prospect that there would be such contracts, or of the terms on which they would be made.
116In this context, it is important to bear in mind that the test of remoteness, in a claim for damages for breach of contract, is not based on reasonable forseeability. McHugh JA made that point in Alexander at 365. As his Honour said, in relation to the decision in Victoria Laundry , "it was surely reasonably foreseeable as a serious possibility... that a launderer and dyer might have special contracts with a lucrative profit margin". But, his Honour said, its losses "arising from those circumstances were not recoverable".
117Applying those considerations to the present case, I think it could be said that losses arising from the inability to earn income from the trading operations of the hotel must have been in the contemplation of the parties as a consequence of unjustified delay in achieving practical completion. But losses arising from a specially lucrative arrangement made to maximize the profits of Illawarra as landlord at the expense of Vosava and Gamone as lessees should not be taken to have been in the contemplation of the parties. To put it in a positive way: the parties should be taken to have contemplated that delay would cause loss of income based on the ordinary commercial operations of the hotel, but no more.
118Bearing those principles in mind, I think that the appropriate way to assess loss from flowing in delay from completion is to proceed on the basis that the parties had in contemplation that Illawarra might either lease the hotel out, or operate the hotel itself. It is inherent in Illawarra's submissions that the court should proceed on the former basis. However, I think, the court should also take into account that, in the former circumstance, the parties would have had in contemplation that the rental payable would be a rental calculated at a reasonable, or market, or arms' length rate. Accepting (as again as inherent in Illawarra's submissions) that the parties may well have contemplated that the rent would be composed partly of a base rent and partly of a turnover rent, the question then becomes: what would be a reasonable, or market, or arms' length quantification of the turnover rent component?
119Alternatively, it may be enough to say, based on what McHugh JA said in Alexander , that it is not necessary to descend to that level of detail, and that the question is simply: what measure of loss, or range of losses, should the parties have had in contemplation when they made their bargain?
120Mr Robertson's analysis gives the best evidence of what a market turnover rent would be (or of the likely extent of the turnover component of a composite market rent).
121Mr Robertson worked on an a basis of an assumed gaming turnover of $1,500,000.00 quarterly, which he said was "an approximate figure obtained from the quarterly CMS gaming invoice". He said that a turnover rent should be based on the net gaming turnover (i.e., after allowing for the payment of winnings, which Mr Robertson quantified at 89% of turnover). That resulted in what he called "a net clearance figure" of $165,000.00 quarterly, or $12,692.00 weekly. At 15%, that produced a turnover rent of $1,904.00 weekly.
122It was the disparity between that figure and the equivalent figure of $17,732.00 per week produced, on the equivalent turnover, by the formula in the lease, that led Mr Robertson to express the view that "no prospective arms' length lessee would have agreed to these terms, despite the prospect of renovations...".
123In round figures, a turnover rent of $1,903.00 per week (Mr Robertson's figure; perhaps he rounded down) can be said to be a little less than $300.00 per day. I propose to fix an amount of $4,000.00 for the 13 days in question. I acknowledge that this is somewhat higher than the arithmetical working-out of the figures that I have set out, but the assessment of damages is not a precise science.
124I have not overlooked the fact that Mr Robertson assessed a market rental for the hotel (by reference to maintainable average weekly turnover, and maintainable annual net operating profit or EBITDA), at $825,000.00 per annum once the renovations had been completed. That included, as I understand it, a turnover rent of 15% but based on net turnover (i.e., after allowing for payouts), and thus a substantially higher base rent.
125Since the claim is only for loss of turnover rent (presumably, on the basis that the base rent was payable in any event), it is not appropriate to rework Mr Robertson's calculations of turnover rent in some way by taking account of his opinion as to average annual rental. In short, since the claim that is put is one for loss of turnover rent, the question is really: what is the reasonable, or market, or arms' length, turnover rent to be taken into account as the basis for calculation of loss?
126If, contrary to what I have said, it is correct to calculate damages on the basis of the loss of the turnover rent that was actually payable under the lease that Illawarra had negotiated with its related entities, then I would accept Mr Krochmalik's calculation of that loss (for a period of 13 days) on the basis of his calculation of "equilibrium" turnover rent. That calculation produced a weekly figure of $12,456.50, with a daily figure of $1,779.50. Thus, for the 13 days in question, the loss on this basis would be $23,133.50.
127However, as I have said, I assess this part of the loss at the figure of $4,000.00.
128Illawarra also claimed the cost of two additional site visits undertaken by Ms Indyk. It said that those visits would not have been undertaken had Walton achieved practical completion by the extended date for practical completion. The total amount claimed is $980.00. Walton submitted that this claim should be disregarded, on " de minimis " principles.
129Since the claim is pressed, it should be allowed. An obvious consequence of unjustified delay in achieving practical completion is that more site visits will be required, so that the Superintendent can check on the progress of the works and assure herself that everything is being done in accordance with the contract.
130Since the quantification of the claim was not challenged, I propose to allow $980.00 by way of damages for this aspect of the claim.
131In summary, I allow $4,980.00 to Illawarra as damages for Walton's delay in achieving practical completion.